48434 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 411, 412, 413, 422, and 

489 

[CMS–1390–F; CMS–1531–IFC1; CMS–1531– 

IFC2; CMS–1385–F4] 

RIN 0938–AP15; RIN 0938–AO35; RIN 0938– 

AO65 

Medicare Program; Changes to the 

Hospital Inpatient Prospective 

Payment Systems and Fiscal Year 2009 

Rates; Payments for Graduate Medical 

Education in Certain Emergency 

Situations; Changes to Disclosure of 

Physician Ownership in Hospitals and 

Physician Self-Referral Rules; Updates 

to the Long-Term Care Prospective 

Payment System; Updates to Certain 

IPPS-Excluded Hospitals; and 

Collection of Information Regarding 

Financial Relationships Between 

Hospitals 

AGENCY: Centers for Medicare and 

Medicaid Services (CMS), HHS. 

ACTION: Final rules. 

SUMMARY: We are revising the Medicare 

hospital inpatient prospective payment 

systems (IPPS) for operating and capitalrelated costs to implement changes 

arising from our continuing experience 

with these systems, and to implement 

certain provisions made by the Deficit 

Reduction Act of 2005, the Medicare 

Improvements and Extension Act, 

Division B, Title I of the Tax Relief and 

Health Care Act of 2006, the TMA, 

Abstinence Education, and QI Programs 

Extension Act of 2007, and the Medicare 

Improvements for Patients and 

Providers Act of 2008. In addition, in 

the Addendum to this final rule, we 

describe the changes to the amounts and 

factors used to determine the rates for 

Medicare hospital inpatient services for 

operating costs and capital-related costs. 

These changes are generally applicable 

to discharges occurring on or after 

October 1, 2008. We also are setting 

forth the update to the rate-of-increase 

limits for certain hospitals and hospital 

units excluded from the IPPS that are 

paid on a reasonable cost basis subject 

to these limits. The updated rate-ofincrease limits are effective for cost 

reporting periods beginning on or after 

October 1, 2008. 

In addition to the changes for 

hospitals paid under the IPPS, this 

document contains revisions to the 

patient classifications and relative 

weights used under the long-term care 

hospital prospective payment system 

(LTCH PPS). This document also 

contains policy changes relating to the 

requirements for furnishing hospital 

emergency services under the 

Emergency Medical Treatment and 

Labor Act of 1986 (EMTALA). 

In this document, we are responding 

to public comments and finalizing the 

policies contained in two interim final 

rules relating to payments for Medicare 

graduate medical education to affiliated 

teaching hospitals in certain emergency 

situations. 

We are revising the regulatory 

requirements relating to disclosure to 

patients of physician ownership or 

investment interests in hospitals and 

responding to public comments on a 

collection of information regarding 

financial relationships between 

hospitals and physicians. In addition, 

we are responding to public comments 

on proposals made in two separate 

rulemakings related to policies on 

physician self-referrals and finalizing 

these policies. 

DATES: Effective Dates: This final rule is 

effective on October 1, 2008, with the 

following exceptions: Amendments to 

§§ 412.230, 412.232, and 412.234 are 

effective on September 2, 2008. 

Amendments to §§ 411.357(a)(5)(ii), 

(b)(4)(ii), (1)(3)(i) and (ii), and 

(p)(1)(i)(A) and (B) and the definition of 

entity in § 411.351 are effective on 

October 1, 2009. 

Applicability Dates: The provisions of 

§ 412.78 relating to payments to SCHs 

are applicable for cost reporting periods 

beginning on or after January 1, 2009. 

Our process for allowing certain 

hospitals to opt out of decisions made 

on behalf of hospitals (as discussed in 

section III.I.7. of this preamble) are 

applicable on August 19, 2008. 

FOR FURTHER INFORMATION CONTACT: Gay 

Burton, (410) 786–4487, Operating 

Prospective Payment, MS–DRGs, Wage 

Index, New Medical Service and 

Technology Add-On Payments, Hospital 

Geographic Reclassifications, and 

Postacute Care Transfer Issues. 

Tzvi Hefter, (410) 786–4487, Capital 

Prospective Payment, Excluded 

Hospitals, Direct and Indirect Graduate 

Medical Education, MS–LTC–DRGs, 

EMTALA, Hospital Emergency Services, 

and Hospital-within-Hospital Issues. 

Siddhartha Mazumdar, (410) 786– 

6673, Rural Community Hospital 

Demonstration Program Issues. 

Sheila Blackstock, (410) 786–3502, 

Quality Data for Annual Payment 

Update Issues. 

Thomas Valuck, (410) 786–7479, 

Hospital Value-Based Purchasing and 

Readmissions to Hospital Issues. 

Rebecca Paul, (410) 786–0852, 

Collection of Managed Care Encounter 

Data Issues. 

Jacqueline Proctor, (410) 786–8852, 

Disclosure of Physician Ownership in 

Hospitals and Financial Relationships 

between Hospitals and Physicians 

Issues. 

Lisa Ohrin, (410) 786–4565, and Don 

Romano, (410) 786–1401, Physician 

Self-Referral Issues. 

SUPPLEMENTARY INFORMATION: 

Electronic Access 

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also available from the Federal Register 

online database through GPO Access, a 

service of the U.S. Government Printing 

Office. Free public access is available on 

a Wide Area Information Server (WAIS) 

through the Internet and via 

asynchronous dial-in. Internet users can 

access the database by using the World 

Wide Web, (the Superintendent of 

Documents’ home page address is 

http://www.gpoaccess.gov/), by using 

local WAIS client software, or by telnet 

to swais.access.gpo.gov, then login as 

guest (no password required). Dial-in 

users should use communications 

software and modem to call (202) 512– 

1661; type swais, then login as guest (no 

password required). 

Acronyms 

AARP American Association of Retired 

Persons 

AAHKS American Association of Hip and 

Knee Surgeons 

AAMC Association of American Medical 

Colleges 

ACGME Accreditation Council for Graduate 

Medical Education 

AF Artrial fibrillation 

AHA American Hospital Association 

AICD Automatic implantable cardioverter 

defibrillator 

AHIMA American Health Information 

Management Association 

AHIC American Health Information 

Community 

AHRQ Agency for Healthcare Research and 

Quality 

AMA American Medical Association 

AMGA American Medical Group 

Association 

AMI Acute myocardial infarction 

AOA American Osteopathic Association 

APR DRG All Patient Refined Diagnosis 

Related Group System 

ASC Ambulatory surgical center 

ASITN American Society of Interventional 

and Therapeutic Neuroradiology 

BBA Balanced Budget Act of 1997, Public 

Law 105–33 

BBRA Medicare, Medicaid, and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget Refinement Act 

of 1999, Public Law 106–113 

BIPA Medicare, Medicaid, and SCHIP [State 

Children’s Health Insurance Program] 

Benefits Improvement and Protection Act 

of 2000, Public Law 106–554 


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BLS Bureau of Labor Statistics 

CAH Critical access hospital 

CARE [Medicare] Continuity Assessment 

Record & Evaluation [Instrument] 

CART CMS Abstraction & Reporting Tool 

CBSAs Core-based statistical areas 

CC Complication or comorbidity 

CCR Cost-to-charge ratio 

CDAC [Medicare] Clinical Data Abstraction 

Center 

CDAD Clostridium difficile-associated 

disease 

CIPI Capital input price index 

CMI Case-mix index 

CMS Centers for Medicare & Medicaid 

Services 

CMSA Consolidated Metropolitan 

Statistical Area 

COBRA Consolidated Omnibus 

Reconciliation Act of 1985, Public Law 99–

272 

CoP [Hospital] condition of participation 

CPI Consumer price index 

CY Calendar year 

DFRR Disclosure of financial relationship 

report 

DRA Deficit Reduction Act of 2005, Public 

Law 109–171 

DRG Diagnosis-related group 

DSH Disproportionate share hospital 

DVT Deep vein thrombosis 

ECI Employment cost index 

EMR Electronic medical record 

EMTALA Emergency Medical Treatment 

and Labor Act of 1986, Public Law 99–272 

ESRD End-stage renal disease 

FAH Federation of Hospitals 

FDA Food and Drug Administration 

FHA Federal Health Architecture 

FIPS Federal information processing 

standards 

FQHC Federally qualified health center 

FTE Full-time equivalent 

FY Fiscal year 

GAAP Generally Accepted Accounting 

Principles 

GAF Geographic Adjustment Factor 

GME Graduate medical education 

HACs Hospital-acquired conditions 

HCAHPS Hospital Consumer Assessment of 

Healthcare Providers and Systems 

HCFA Health Care Financing 

Administration 

HCRIS Hospital Cost Report Information 

System 

HHA Home health agency 

HHS Department of Health and Human 

Services 

HIC Health insurance card 

HIPAA Health Insurance Portability and 

Accountability Act of 1996, Public Law 

104–191 

HIPC Health Information Policy Council 

HIS Health information system 

HIT Health information technology 

HMO Health maintenance organization 

HPMP Hospital Payment Monitoring 

Program 

HSA Health savings account 

HSCRC [Maryland] Health Services Cost 

Review Commission 

HSRV Hospital-specific relative value 

HSRVcc Hospital-specific relative value 

cost center 

HQA Hospital Quality Alliance 

HQI Hospital Quality Initiative 

HWH Hospital-within-a hospital 

ICD–9–CM International Classification of 

Diseases, Ninth Revision, Clinical 

Modification 

ICD–10–PCS International Classification of 

Diseases, Tenth Edition, Procedure Coding 

System 

ICR Information collection requirement 

IHS Indian Health Service 

IME Indirect medical education 

IOM Institute of Medicine 

IPF Inpatient psychiatric facility 

IPPS [Acute care hospital] inpatient 

prospective payment system 

IRF Inpatient rehabilitation facility 

LAMCs Large area metropolitan counties 

LTC–DRG Long-term care diagnosis-related 

group 

LTCH Long-term care hospital 

MA Medicare Advantage 

MAC Medicare Administrative Contractor 

MCC Major complication or comorbidity 

MCE Medicare Code Editor 

MCO Managed care organization 

MCV Major cardiovascular condition 

MDC Major diagnostic category 

MDH Medicare-dependent, small rural 

hospital 

MedPAC Medicare Payment Advisory 

Commission 

MedPAR Medicare Provider Analysis and 

Review File 

MEI Medicare Economic Index 

MGCRB Medicare Geographic Classification 

Review Board 

MIEA–TRHCA Medicare Improvements and 

Extension Act, Division B of the Tax Relief 

and Health Care Act of 2006, Public Law 

109–432 

MIPPA Medicare Improvements for Patients 

and Providers Act of 2008, Public Law 

110–275 

MMA Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003, Public Law 108–173 

MMSEA Medicare, Medicaid, and SCHIP 

Extension Act of 2007, Public Law 110–173 

MPN Medicare provider number 

MRHFP Medicare Rural Hospital Flexibility 

Program 

MRSA Methicillin-resistant Staphylococcus 

aureus 

MSA Metropolitan Statistical Area 

MS–DRG Medicare severity diagnosisrelated group 

MS–LTC–DRG Medicare severity long-term 

care diagnosis-related group 

NAICS North American Industrial 

Classification System 

NCD National coverage determination 

NCHS National Center for Health Statistics 

NCQA National Committee for Quality 

Assurance 

NCVHS National Committee on Vital and 

Health Statistics 

NECMA New England County Metropolitan 

Areas 

NQF National Quality Forum 

NTIS National Technical Information 

Service 

NVHRI National Voluntary Hospital 

Reporting Initiative 

OES Occupational employment statistics 

OIG Office of the Inspector General 

OMB Executive Office of Management and 

Budget 

O.R. Operating room 

OSCAR Online Survey Certification and 

Reporting [System] 

PE Pulmonary embolism 

PMS As Primary metropolitan statistical 

areas 

POA Present on admission 

PPI Producer price index 

PPS Prospective payment system 

PRM Provider Reimbursement Manual 

ProPAC Prospective Payment Assessment 

Commission 

PRRB Provider Reimbursement Review 

Board 

PSF Provider-Specific File 

PS&R Provider Statistical and 

Reimbursement (System) 

QIG Quality Improvement Group, CMS 

QIO Quality Improvement Organization 

RAPS Risk Adjustment Processing System 

RCE Reasonable compensation equivalent 

RHC Rural health clinic 

RHQDAPU Reporting hospital quality data 

for annual payment update 

RNHCI Religious nonmedical health care 

institution 

RRC Rural referral center 

RUCAs Rural-urban commuting area codes 

RY Rate year 

SAF Standard Analytic File 

SCH Sole community hospital 

SFY State fiscal year 

SIC Standard Industrial Classification 

SNF Skilled nursing facility 

SOCs Standard occupational classifications 

SOM State Operations Manual 

TEFRA Tax Equity and Fiscal 

Responsibility Act of 1982, Public Law 97–

248 

TMA TMA [Transitional Medical 

Assistance], Abstinence Education, and QI 

[Qualifying Individuals] Programs 

Extension Act of 2007, Public Law. 110–09 

TJA Total joint arthroplasty 

UHDDS Uniform hospital discharge data set 

VAP Ventilator-associated pneumonia 

VBP Value-based purchasing 

Table of Contents 

I. Background 

A. Summary 

1. Acute Care Hospital Inpatient 

Prospective Payment System (IPPS) 

2. Hospitals and Hospital Units Excluded 

From the IPPS 

a. Inpatient Rehabilitation Facilities (IRFs) 

b. Long-Term Care Hospitals (LTCHs) 

c. Inpatient Psychiatric Facilities (IPFs) 

3. Critical Access Hospitals (CAHs) 

4. Payments for Graduate Medical 

Education (GME) 

B. Provisions of the Deficit Reduction Act 

of 2005 (DRA) 

C. Provisions of the Medicare 

Improvements and Extension Act Under 

Division B, Title I of the Tax Relief and 

Health Care Act of 2006 (MIEA–TRHCA) 

D. Provision of the TMA, Abstinence 

Education, and QI Programs Extension 

Act of 2007 

E. Issuance of a Notice of Proposed 

Rulemaking 

1. Proposed Changes to MS–DRG 

Classifications and Recalibrations of 

Relative Weights 

2. Proposed Changes to the Hospital Wage 

Index 


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3. Other Decisions and Proposed Changes 

to the IPPS for Operating Costs and GME 

Costs 

4. Proposed Changes to the IPPS for 

Capital-Related Costs 

5. Proposed Changes to the Payment Rates 

for Excluded Hospitals and Hospital 

Units 

6. Proposed Changes Relating to Disclosure 

of Physician Ownership in Hospitals 

7. Proposed Changes and Solicitation of 

Comments on Physician Self-Referral 

Provisions 

8. Proposed Collection of Information 

Regarding Financial Relationships 

Between Hospitals and Physicians 

9. Determining Proposed Prospective 

Payment Operating and Capital Rates 

and Rate-of-Increase Limits 

10. Impact Analysis 

11. Recommendation of Update Factors for 

Operating Cost Rates of Payment for 

Inpatient Hospital Services 

12. Disclosure of Financial Relationships 

Report (DFRR) Form 

13. Discussion of Medicare Payment 

Advisory Commission Recommendations 

F. Public Comments Received on the FY 

2009 IPPS Proposed Rule and Issues in 

Related Rules 

1. Comments on the FY 2009 IPPS 

Proposed Rule 

2. Comments on Phase-Out of the Capital 

Teaching Adjustment Under the IPPS 

Included in the FY 2008 IPPS Final Rule 

With Comment Period 

3. Comments on Policy Revisions Related 

to Payment to Medicare GME Affiliated 

Hospitals in Certain Declared Emergency 

Areas Included in Two Interim Final 

Rules With Comment Period 

4. Comments on Proposed Policy Revisions 

Related to Physician Self-Referrals 

Included in the CY 2008 Physician Fee 

Schedule Proposed Rule 

G. Provisions of the Medicare 

Improvements for Patients and Providers 

Act of 2008 

II. Changes to Medicare Severity DRG (MS–

DRG) Classifications and Relative 

Weights 

A. Background 

B. MS–DRG Reclassifications 

1. General 

2. Yearly Review for Making MS–DRG 

Changes 

C. Adoption of the MS–DRGs in FY 2008 

D. MS–DRG Documentation and Coding 

Adjustment, Including the Applicability 

to the Hospital-Specific Rates and the 

Puerto Rico-Specific Standardized 

Amount 

1. MS–DRG Documentation and Coding 

Adjustment 

2. Application of the Documentation and 

Coding Adjustment to the HospitalSpecific Rates 

3. Application of the Documentation and 

Coding Adjustment to the Puerto RicoSpecific Standardized Amount 

4. Potential Additional Payment 

Adjustments in FYs 2010 Through 2012 

E. Refinement of the MS–DRG Relative 

Weight Calculation 

1. Background 

2. Summary of RTI’s Report on Charge 

Compression 

3. Summary of RAND’s Study of 

Alternative Relative Weight 

Methodologies 

4. Refining the Medicare Cost Report 

5. Timeline for Revising the Medicare Cost 

Report 

6. Revenue Codes Used in the MedPAR 

File 

F. Preventable Hospital-Acquired 

Conditions (HACs), Including Infections 

1. General Background 

2. Statutory Authority 

3. Public Input 

4. Collaborative Process 

5. Selection Criteria for HACs 

6. HACs Selected During FY 2008 IPPS 

Rulemaking and Changes to Certain 

Codes 

a. Foreign Object Retained After Surgery 

b. Pressure Ulcers: Changes in Code 

Assignments 

7. Candidate HACs 

a. Manifestations of Poor Glycemic Control 

b. Surgical Site Infections 

c. Deep Vein Thrombosis (DVT)/ 

Pulmonary Embolism (PE) 

d. Delirium 

e. Ventilator-Associated Pneumonia (VAP) 

f. Staphylococcus aureus Septicemia 

g. Clostridium difficile-Associated Disease 

(CDAD) 

h. Legionnaires’ Disease 

i. Iatrogenic Pneumothorax 

j. Methicillin-resistant Staphylococcus 

aureus (MRSA) 

8. Present on Admission Indicator 

Reporting (POA) 

9. Enhancement and Future Issues 

a. Risk-Adjustment of Payments Related to 

HACs 

b. Risk-Based Measurement of HACs 

c. Use of POA Information 

d. Transition to ICD–10 

e. Healthcare-Associated Conditions in 

Other Payment Settings 

f. Relationship to NQF’s Serious Reportable 

Adverse Events 

g. Additional Potential Candidate HACs, 

Suggested Through Comment 

10. HAC Coding 

a. Foreign Object Retained After Surgery 

b. MRSA 

c. POA 

11. HACs Selected for Implementation on 

October 1, 2008 

G. Changes to Specific MS–DRG 

Classifications 

1. Pre-MDCs: Artificial Heart Devices 

2. MDC 1 (Diseases and Disorders of the 

Nervous System) 

a. Transferred Stroke Patients Receiving 

Tissue Plasminogen Activator (tPA) 

b. Intractable Epilepsy With Video 

Electroencephalogram (EEG) 

3. MDC 5 (Diseases and Disorders of the 

Circulatory System) 

a. Automatic Implantable CardioverterDefibrillators (AICD) Lead and Generator 

Procedures 

b. Left Atrial Appendage Device 

4. MDC 8 (Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue): Hip and Knee Replacements and 

Revisions 

a. Brief History of Development of Hip and 

Knee Replacement Codes 

b. Prior Recommendations of the AAHKS 

c. Adoption of MS-DRGs for Hip and Knee 

Replacements for FY 2008 and AAHKS’

Recommendations 

d. AAHKS’ Recommendations for FY 2009 

e. CMS’ Response to AAHKS’

Recommendations 

f. Conclusion 

5. MDC 18 (Infections and Parasitic 

Diseases (Systemic or Unspecified Sites): 

Severe Sepsis 

6. MDC 21 (Injuries, Poisonings and Toxic 

Effects of Drugs): Traumatic 

Compartment Syndrome 

7. Medicare Code Editor (MCE) Changes 

a. List of Unacceptable Principal Diagnoses 

in MCE 

b. Diagnoses Allowed for Males Only Edit 

c. Limited Coverage Edit 

8. Surgical Hierarchies 

9. CC Exclusions List 

a. Background 

b. CC Exclusions List for FY 2009 

10. Review of Procedure Codes in MS–

DRGs 981, 982, and 983; 984, 985, and 

986; and 987, 988, and 989 

a. Moving Procedure Codes From MS–

DRGs 981 Through 983 or MS–DRGs 987 

Through 989 to MDCs 

b. Reassignment of Procedures Among MS–

DRGs 981 Through 983, 984 Through 

986, and 987 Through 989 

c. Adding Diagnosis or Procedure Codes to 

MDCs 

11. Changes to the ICD–9–CM Coding 

System 

12. Other MS–DRG Issues 

a. Heart Transplants or Implants of Heart 

Assist System and Liver Transplants 

b. New Codes for Pressure Ulcers 

c. Coronary Artery Stents 

d. TherOx (Downstream(r) System) 

e. Spinal Disc Devices 

f. Spinal Fusion 

g. Special Treatment for Hospitals With 

High Percentages of ESRD Discharges 

H. Recalibration of MS–DRG Weights 

I. Medicare Severity Long-Term Care 

Diagnosis Related Group (MS–LTC–DRG) 

Reclassifications and Relative Weights 

for LTCHs for FY 2009 

1. Background 

2. Changes in the MS–LTC–DRG 

Classifications 

a. Background 

b. Patient Classifications Into MS–LTC–

DRGs 

3. Development of the FY 2009 MS–LTC–

DRG Relative Weights 

a. General Overview of Development of the 

MS–LTC–DRG Relative Weights 

b. Data 

c. Hospital-Specific Relative Value (HSRV) 

Methodology 

d. Treatment of Severity Levels in 

Developing Relative Weights 

e. Low-Volume MS–LTC–DRGs 

4. Steps for Determining the FY 2009 MS–

LTC–DRG Relative Weights 

5. Other Comments 

J. Add-On Payments for New Services and 

Technologies 

1. Background 

2. Public Input Before Publication of a 

Notice of Proposed Rulemaking on AddOn Payments 


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3. FY 2009 Status of Technologies 

Approved for FY 2008 Add-On Payments 

4. FY 2009 Applications for New 

Technology Add-On Payments 

a. CardioWestTM Temporary Total 

Artificial Heart System (CardioWestTM

TAH-t) 

b. Emphasys Medical Zephyr

Endobronchial Valve (Zephyr EBV) 

c. Oxiplex

d. TherOx Downstream System 

5. Regulatory Changes 

III. Changes to the Hospital Wage Index 

A. Background 

B. Requirements of Section 106 of the 

MIEA–TRHCA 

1. Wage Index Study Required Under the 

MIEA–TRHCA 

a. Legislative Requirement 

b. MedPAC’s Recommendations 

c. CMS Contract for Impact Analysis and 

Study of Wage Index Reform 

d. Public Comments Received on the 

MedPAC Recommendations and the 

CMS/Acumen Wage Index Study and 

Analysis 

e. Impact Analysis of Using MedPAC’s 

Recommended Wage Index 

2. CMS Proposals and Final Policy Changes 

in Response to Requirements Under 

Section 106(b) of the MIEA–TRHCA 

a. Proposed and Final Revision of the 

Reclassification Average Hourly Wage 

Comparison Criteria 

b. Within-State Budget Neutrality 

Adjustment for the Rural and Imputed 

Floors 

c. Within-State Budget Neutrality 

Adjustment for Geographic 

Reclassification 

C. Core-Based Statistical Areas for the 

Hospital Wage Index 

D. Occupational Mix Adjustment to the FY 

2009 Wage Index 

1. Development of Data for the FY 2009 

Occupational Mix Adjustment 

2. Calculation of the Occupational Mix 

Adjustment for FY 2009 

3. 2007–2008 Occupational Mix Survey for 

the FY 2010 Wage Index 

E. Worksheet S–3 Wage Data for the FY 

2009 Wage Index 

1. Included Categories of Costs 

2. Excluded Categories of Costs 

3. Use of Wage Index Data by Providers 

Other Than Acute Care Hospitals Under 

the IPPS 

F. Verification of Worksheet S–3 Wage 

Data 

1. Wage Data for Multicampus Hospitals 

2. New Orleans’ Post-Katrina Wage Index 

G. Method for Computing the FY 2009 

Unadjusted Wage Index 

H. Analysis and Implementation of the 

Occupational Mix Adjustment and the 

FY 2009 Occupational Mix Adjusted 

Wage Index 

I. Revisions to the Wage Index Based on 

Hospital Redesignations 

1. General 

2. Effects of Reclassification/Redesignation 

3. FY 2009 MGCRB Reclassifications 

4. FY 2008 Policy Clarifications and 

Revisions 

5. Redesignations of Hospitals Under 

Section 1886(d)(8)(B) of the Act 

6. Reclassifications Under Section 

1886(d)(8)(B) of the Act 

7. Reclassifications Under Section 508 of 

Public Law 108–173 

J. FY 2009 Wage Index Adjustment Based 

on Commuting Patterns of Hospital 

Employees 

K. Process for Requests for Wage Index 

Data Corrections 

L. Labor-Related Share for the Wage Index 

for FY 2009 

IV. Other Decisions and Changes to the IPPS 

for Operating Costs and GME Costs 

A. Changes to the Postacute Care Transfer 

Policy 

1. Background 

2. Policy Change Relating to Transfers to 

Home With a Written Plan for the 

Provision of Home Health Services 

3. Evaluation of MS–DRGs Under Postacute 

Care Transfer Policy for FY 2009 

B. Reporting of Hospital Quality Data for 

Annual Hospital Payment Update 1. 

Background 

a. Overview 

b. Voluntary Hospital Quality Data 

Reporting 

c. Hospital Quality Data Reporting Under 

Section 501(b) of Public Law 108–173 

d. Hospital Quality Data Reporting Under 

Section 5001(a) of Public Law 109–171 

2. Quality Measures for the FY 2010 

Payment Determination and Subsequent 

Years 

a. Quality Measures for the FY 2010 

Payment Determination 

b. Possible New Quality Measures, 

Measure Sets, and Program 

Requirements for the FY 2011 Payment 

Determination and Subsequent Years 

c. Considerations in Expanding and 

Updating Quality Measures Under the 

RHQDAPU Program 

3. Form and Manner and Timing of Quality 

Data Submission 

4. RHQDAPU Program Procedures for FY 

2009 and FY 2010 

a. RHQDAPU Program Procedures for FY 

2009 

b. RHQDAPU Program Procedures for FY 

2010 

5. HCAHPS Requirements for FY 2009 and 

FY 2010 

a. FY 2009 HCAHPS Requirements 

b. FY 2010 HCAHPS Requirements 

6. Chart Validation Requirements for FY 

2009 and FY 2010 

a. Chart Validation Requirements for FY 

2009 

b. Chart Validation Requirements for FY 

2010 

c. Chart Validation Methods and 

Requirements Under Consideration for 

FY 2011 and Subsequent Years 

7. Data Attestation Requirements for FY 

2009 and FY 2010 

a. Data Attestation Requirements for FY 

2009 

b. Data Attestation Requirements for FY 

2010 

8. Public Display Requirements 

9. Reconsideration and Appeal Procedures 

10. RHQDAPU Program Withdrawal 

Deadlines for FY 2009 and FY 2010 

11. Requirements for New Hospitals 

12. Electronic Medical Records 

13. RHQDAPU Data Infrastructure 

C. Medicare Hospital Value-Based 

Purchasing (VBP) Plan 

1. Medicare Hospital VBP Plan Report to 

Congress 

2. Testing and Further Development of the 

Medicare Hospital VBP Plan 

D. Sole Community Hospitals (SCHs) and 

Medicare-Dependent, Small Rural 

Hospitals (MDHs) 

1. Background 

2. Rebasing of Payments to SCHs 

3. Volume Decrease Adjustment for SCHs 

and MDHs: Data Sources for Determining 

Core Staff Values 

E. Rural Referral Centers (RRCs) 

1. Case-Mix Index 

2. Discharges 

F. Indirect Medical Education (IME) 

Adjustment 

1. Background 

2. IME Adjustment Factor for FY 2009 

G. Payments for Direct Graduate Medical 

Education (GME) 

1. Background 

2. Medicare GME Affiliation Provisions for 

Teaching Hospitals in Certain Emergency 

Situations 

a. Legislative Authority 

b. Regulatory Changes Issued in 2006 to 

Address Certain Emergency Situations 

c. Additional Regulatory Changes Issued in 

2007 To Address Certain Emergency 

Situations 

d. Public Comments Received on the April 

12, 2006 and November 27, 2007 Interim 

Final Rules With Comment Period 

e. Provisions of the Final Rule 

f. Technical Correction 

H. Payments to Medicare Advantage 

Organizations: Collection of Risk 

Adjustment Data 

I. Hospital Emergency Services Under 

EMTALA 

1. Background 

2. EMTALA Technical Advisory Group 

(TAG) Recommendations 

3. Changes Relating to Applicability of 

EMTALA Requirements to Hospital 

Inpatients 

4. Changes to the EMTALA Physician OnCall Requirements 

a. Relocation of Regulatory Provisions 

b. Shared/Community Call 

5. Technical Change to Regulations 

J. Application of Incentives To Reduce 

Avoidable Readmissions to Hospitals 

1. Overview 

2. Measurement 

3. Shared Accountability 

4. VBP Incentives 

5. Direct Payment Adjustment 

6. Performance-Based Payment Adjustment 

7. Public Reporting of Readmission Rates 

8. Potential Unintended Consequences of 

VBP Incentives 

K. Rural Community Hospital 

Demonstration Program 

V. Changes to the IPPS for Capital-Related 

Costs 

A. Background 

1. Exception Payments 

2. New Hospitals 

3. Hospitals Located in Puerto Rico 

B. Revisions to the Capital IPPS Based on 

Data on Hospital Medicare Capital 

Margins 


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1. Elimination of the Large Add-On 

Payment Adjustment 

2. Changes to the Capital IME Adjustment 

a. Background and Changes Made for FY 

2008 

b. Public Comments Received on Phase 

Out of Capital IPPS Teaching 

Adjustment Provisions Included in the 

FY 2008 IPPS Final Rule With Comment 

Period and on the FY 2009 IPPS 

Proposed Rule 

VI. Changes for Hospitals and Hospital Units 

Excluded From the IPPS 

A. Payments to Excluded Hospitals and 

Hospital Units 

B. IRF PPS 

C. LTCH PPS 

D. IPF PPS 

E. Determining LTCH Cost-to-Charge Ratios 

(CCRs) Under the LTCH PPS 

F. Change to the Regulations Governing 

Hospitals-Within-Hospitals 

G. Report of Adjustment (Exceptions) 

Payments 

VII. Disclosure Required of Certain Hospitals 

and Critical Access Hospitals (CAHs) 

Regarding Physician Ownership 

VIII. Physician Self-Referral Provisions 

A. General Overview 

1. Statutory Framework and Regulatory 

History 

2. Physician Self-Referral Provisions 

Finalized in this FY 2009 IPPS Final 

Rule 

B. ‘‘Stand in the Shoes’’ Provisions 

1. Background 

a. Regulatory History of the Physician 

‘‘Stand in the Shoes’’ Rules 

b. Summary of Proposed Revisions to the 

Physician ‘‘Stand in the Shoes’’ Rules 

c. Summary of Proposed DHS Entity 

‘‘Stand in the Shoes’’ Rules 

2. Physician ‘‘Stand in the Shoes’’

Provisions 

3. DHS Entity ‘‘Stand in the Shoes’’

Provisions 

4. Application of the Physician ‘‘Stand in 

the Shoes’’ and the DHS Entity ‘‘Stand in 

the Shoes’’ Provisions (‘‘Conventions’’) 

5. Definitions: ‘‘Physician’’ and ‘‘Physician 

Organization’’

C. Period of Disallowance 

D. Alternative Method for Compliance 

With Signature Requirements in Certain 

Exceptions 

E. Percentage-Based Compensation 

Formulae 

F. Unit of Service (Per Click) Payments in 

Lease Arrangements 

1. General Support for Proposal 

2. Authority 

3. Hospitals as Risk-Averse and Access to 

Care 

4. Evidence of Overutilization: Therapeutic 

Versus Diagnostic 

5. Per-Click Payments as Best Measure of 

Fair Market Value 

6. Lithotripsy as Not DHS 

7. Time-Based Rental Arrangements 

8. Physician Entities as Lessors 

9. Physicians and Physician Entities as 

Lessees 

G. Services Provided ‘‘Under 

Arrangements’’ (Services Performed by 

an Entity Other Than the Entity That 

Submits the Claim) 

1. Support for Proposal 

2. MedPAC Approach 

3. Authority for Proposal 

4. Community Benefit and Access to Care 

5. Hospitals as Risk-Averse 

6. Proposal Based on Anecdotal Evidence 

7. Cardiac Catheterization 

8. Therapeutic Versus Diagnostic 

9. Professional Fee Greater Than 

Incremental Return for Technical 

Component 

10. Existing Exceptions Are Sufficient 

Potection 

11. Suggested Changes to Definitions 

12. Cause Claim To Be Submitted 

13. Physician-Owned Implant Companies 

14. Procedures Must Be Done in a Hospital 

Setting Because the ASC Does Not Pay 

Enough 

15. Lithotripsy as Not DHS 

16. Procedures That Are DHS Only When 

Furnished in a Hospital 

17. Exceptions 

18. Personally Performed Services 

19. Outpatient Services Treated Differently 

Than Inpatient Services 

20. Sleep Centers 

21. Dialysis 

22. Effective Date 

H. Exceptions for Obstetrical Malpractice 

Insurance Subsidies 

I. Ownership or Investment Interest in 

Retirement Plans 

J. Burden of Proof 

IX. Financial Relationships Between 

Hospitals and Physicians 

X. MedPAC Recommendations 

XI. Other Required Information 

A. Requests for Data From the Public 

B. Collection of Information Requirements 

1. Legislative Requirement for Solicitation 

of Comments 

2. Requirements in Regulatory Text 

a. ICRs Regarding Physician Reporting 

Requirements 

b. ICRs Regarding Risk Adjustment Data 

c. ICRs Regarding Basic Commitments of 

Providers 

3. Associated Information Collections Not 

Specified in Regulatory Text 

a. Present on Admission (POA) Indicator 

Reporting 

b. Add-On Payments for New Services and 

Technologies 

c. Reporting of Hospital Quality Data for 

Annual Hospital Payment Update 

d. Occupational Mix Adjustment to the FY 

2009 Index (Hospital Wage Index 

Occupational Mix Survey) 

C. Waiver of Proposed Rulemaking, Waiver 

of Delay in Effective Date, and 

Retroactive Effective Date 

1. Requirements for Waivers and 

Retroactive Rulemaking 

2. FY 2008 Puerto Rico—Specific Rates 

3. Rebasing of Payments to SCHs 

4. Technical Change to Regulations 

Governing Payments to Hospitals With 

High Percentage of ESRD Discharges 

Regulation Text 

Addendum—Schedule of Standardized 

Amounts, Update Factors, and Rate-ofIncrease Percentages Effective With Cost 

Reporting Periods Beginning on or After 

October 1, 2008 

I. Summary and Background 

II. Changes to the Prospective Payment Rates 

for Hospital Inpatient Operating Costs for 

FY 2009 

A. Calculation of the Tentative Adjusted 

Standardized Amount 

B. Tentative Adjustments for Area Wage 

Levels and Cost-of-Living 

C. MS–DRG Relative Weights 

D. Calculation of the Prospective Payment 

Rates 

III. Changes to Payment Rates for Acute Care 

Hospital Inpatient Capital-Related Costs 

for FY 2009 

A. Determination of Federal Hospital 

Inpatient Capital-Related Prospective 

Payment Rate Update 

B. Calculation of the Inpatient CapitalRelated Prospective Payments for FY 

2009 

C. Capital Input Price Index 

IV. Changes to Payment Rates for Excluded 

Hospitals and Hospital Units: Rate-ofIncrease Percentages 

V. Tables 

Table 1A.—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor 

(69.7 Percent Labor Share/30.3 Percent 

Nonlabor Share If Wage Index Is Greater 

Than 1) 

Table 1B.—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor 

(62 Percent Labor Share/38 Percent 

Nonlabor Share If Wage Index Is Less 

Than or Equal to 1) 

Table 1C.—Adjusted Operating 

Standardized Amounts for Puerto Rico, 

Labor/Nonlabor 

Table 1D.—Capital Standard Federal 

Payment Rate 

Table 2.—Hospital Case-Mix Indexes for 

Discharges Occurring in Federal Fiscal 

Year 2007; Hospital Average Hourly 

Wages for Federal Fiscal Years 2007 

(2003 Wage Data), 2008 (2004 Wage 

Data), and 2009 (2005 Wage Data); and 

3-Year Average of Hospital Average 

Hourly Wages 

Table 3A.—FY 2009 and 3-Year Average 

Hourly Wage for Urban Areas by CBSA 

Table 3B.—FY 2009 and 3-Year Average 

Hourly Wage for Rural Areas by CBSA 

Table 4J.—Out-Migration Wage 

Adjustment—FY 2009 

Table 5.—List of Medicare Severity 

Diagnosis-Related Groups (MS–DRGs), 

Relative Weighting Factors, and 

Geometric and Arithmetic Mean Length 

of Stay 

Table 6A.—New Diagnosis Codes 

Table 6B.—New Procedure Codes 

Table 6C.—Invalid Diagnosis Codes 

Table 6D.—Invalid Procedure Codes 

Table 6E.—Revised Diagnosis Code Titles 

Table 6F.—Revised Procedure Code Titles 

Table 6G.—Additions to the CC Exclusions 

List (Available through the Internet on 

the CMS Web site at: http:// 

www.cms.hhs.gov/AcuteInpatientPPS/) 


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Table 6H.—Deletions from the CC 

Exclusions List (Available through the 

Internet on the CMS Web site at: http:// 

www.cms.hhs.gov/AcuteInpatientPPS/) 

Table 6I.—Complete List of Complication 

and Comorbidity (CC) Exclusions 

(Available only through the Internet on 

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

hhs.gov/AcuteInpatientPPS/) 

Table 6J.—Major Complication and 

Comorbidity (MCC) List (Available 

Through the Internet on the CMS Web 

site at: 

http://www.cms.hhs.gov/ 

AcuteInpatientPPS/) 

Table 6K.—Complication and Comorbidity 

(CC) List (Available Through the Internet 

on the CMS Web site at: http:// 

www.cms.hhs.gov/AcuteInpatientPPS/) 

Table 7A.—Medicare Prospective Payment 

System Selected Percentile Lengths of 

Stay: FY 2007 MedPAR Update—March 

2008 GROUPER V25.0 MS–DRGs 

Table 7B.—Medicare Prospective Payment 

System Selected Percentile Lengths of 

Stay: FY 2007 MedPAR Update—March 

2008 GROUPER V26.0 MS–DRGs 

Table 8A.—Statewide Average Operating 

Cost-to-Charge Ratios—July 2008 

Table 8B.—Statewide Average Capital 

Cost-to-Charge Ratios—July 2008 

Table 8C.—Statewide Average Total Costto-Charge Ratios for LTCHs—July 2008 

Table 9A.—Hospital Reclassifications and 

Redesignations—FY 2009 

Table 9B.—Hospitals Redesignated as 

Rural Under Section 1886(d)(8)(E) of the 

Act—FY 2009 

Table 10.—Tentative Geometric Mean Plus 

the Lesser of .75 of the National Adjusted 

Operating Standardized Payment 

Amount (Increased To Reflect the 

Difference Between Costs and Charges) 

or .75 of One Standard Deviation of 

Mean Charges by Medicare Severity 

Diagnosis-Related Groups (MS–DRGs)—

July 2008 

Table 11.—FY 2009 MS–LTC–DRGs, 

Relative Weights, Geometric Average 

Length of Stay, and Short-Stay Outlier 

(SSO) Threshold 

Appendix A: Regulatory Impact Analysis 

I. Overall Impact 

II. Objectives 

III. Limitations of Our Analysis 

IV. Hospitals Included in and Excluded 

From the IPPS 

V. Effects on Excluded Hospitals and 

Hospital Units 

VI. Quantitative Effects of the Policy 

Changes Under the IPPS for Operating 

Costs 

A. Basis and Methodology of Estimates 

B. Analysis of Table I 

C. Effects of the Changes to the MS–DRG 

Reclassifications and Relative Cost-Based 

Weights (Column 2) 

D. Effects of Wage Index Changes (Column 

3) 

E. Combined Effects of MS–DRG and Wage 

Index Changes (Column 4) 

F. Effects of MGCRB Reclassifications 

(Column 5) 

G. Effects of the Rural Floor and Imputed 

Rural Floor, Including the Transition To 

Apply Budget Neutrality at the State 

Level (Column 6) 

H. Effects of the Wage Index Adjustment 

for Out-Migration (Column 7) 

I. Effects of All Changes With CMI 

Adjustment Prior to Estimated Growth 

(Column 8) 

J. Effects of All Changes With CMI 

Adjustment and Estimated Growth 

(Column 9) 

K. Effects of Policy on Payment 

Adjustments for Low-Volume Hospitals 

L. Impact Analysis of Table II 

VII. Effects of Other Policy Changes 

A. Effects of Policy on HACs, Including 

Infections 

B. Effects of MS–LTC–DRG 

Reclassifications and Relative Weights 

for LTCHs 

C. Effects of Policy Change Relating to New 

Medical Service and Technology AddOn Payments 

D. Effects of Requirements for Hospital 

Reporting of Quality Data for Annual 

Hospital Payment Update 

E. Effects of Policy Change to Methodology 

for Computing Core Staffing Factors for 

Volume Decrease Adjustment for SCHs 

and MDHs 

F. Impact of the Policy Revisions Related 

to Payment to Hospitals for Direct 

Graduate Medical Education (GME) 

G. Effects of Clarification of Policy for 

Collection of Risk Adjustment Data From 

MA Organizations 

H. Effects of Policy Changes Relating to 

Hospital Emergency Services Under 

EMTALA 

I. Effects of Implementation of Rural 

Community Hospital Demonstration 

Program 

J. Effects of Policy Changes Relating to 

Payments to Hospitals-Within-Hospitals 

K. Effects of Policy Changes Relating to 

Requirements for Disclosure of Physician 

Ownership in Hospitals 

L. Effects of Policy Changes Relating to 

Physician Self-Referral Provisions 

M. Effects of Changes Relating to Reporting 

of Financial Relationships Between 

Hospitals and Physicians 

VIII. Effects of Changes in the Capital IPPS 

A. General Considerations 

B. Results 

IX. Alternatives Considered 

X. Overall Conclusion 

XI. Accounting Statement 

XII. Executive Order 12866 

Appendix B: Recommendation of Update 

Factors for Operating Cost Rates of 

Payment for Inpatient Hospital Services 

I. Background 

II. Inpatient Hospital Update for FY 2009 

III. Secretary’s Final Recommendation 

IV. MedPAC Recommendation for 

Assessing Payment Adequacy and 

Updating Payments in Traditional 

Medicare 

I. Background 

A. Summary 

1. Acute Care Hospital Inpatient 

Prospective Payment System (IPPS) 

Section 1886(d) of the Social Security 

Act (the Act) sets forth a system of 

payment for the operating costs of acute 

care hospital inpatient stays under 

Medicare Part A (Hospital Insurance) 

based on prospectively set rates. Section 

1886(g) of the Act requires the Secretary 

to pay for the capital-related costs of 

hospital inpatient stays under a 

prospective payment system (PPS). 

Under these PPSs, Medicare payment 

for hospital inpatient operating and 

capital-related costs is made at 

predetermined, specific rates for each 

hospital discharge. Discharges are 

classified according to a list of 

diagnosis-related groups (DRGs). 

The base payment rate is comprised of 

a standardized amount that is divided 

into a labor-related share and a 

nonlabor-related share. The laborrelated share is adjusted by the wage 

index applicable to the area where the 

hospital is located. If the hospital is 

located in Alaska or Hawaii, the 

nonlabor-related share is adjusted by a 

cost-of-living adjustment factor. This 

base payment rate is multiplied by the 

DRG relative weight. 

If the hospital treats a high percentage 

of low-income patients, it receives a 

percentage add-on payment applied to 

the DRG-adjusted base payment rate. 

This add-on payment, known as the 

disproportionate share hospital (DSH) 

adjustment, provides for a percentage 

increase in Medicare payments to 

hospitals that qualify under either of 

two statutory formulas designed to 

identify hospitals that serve a 

disproportionate share of low-income 

patients. For qualifying hospitals, the 

amount of this adjustment may vary 

based on the outcome of the statutory 

calculations. 

If the hospital is an approved teaching 

hospital, it receives a percentage add-on 

payment for each case paid under the 

IPPS, known as the indirect medical 

education (IME) adjustment. This 

percentage varies, depending on the 

ratio of residents to beds. 

Additional payments may be made for 

cases that involve new technologies or 

medical services that have been 

approved for special add-on payments. 

To qualify, a new technology or medical 

service must demonstrate that it is a 

substantial clinical improvement over 

technologies or services otherwise 

available, and that, absent an add-on 

payment, it would be inadequately paid 

under the regular DRG payment. 

The costs incurred by the hospital for 

a case are evaluated to determine 

whether the hospital is eligible for an 

additional payment as an outlier case. 

This additional payment is designed to 

protect the hospital from large financial 

losses due to unusually expensive cases. 

Any outlier payment due is added to the 

DRG-adjusted base payment rate, plus 


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any DSH, IME, and new technology or 

medical service add-on adjustments. 

Although payments to most hospitals 

under the IPPS are made on the basis of 

the standardized amounts, some 

categories of hospitals are paid in whole 

or in part based on their hospitalspecific rate based on their costs in a 

base year. For example, sole community 

hospitals (SCHs) receive the higher of a 

hospital-specific rate based on their 

costs in a base year (the higher of FY 

1982, FY 1987, or FY 1996) or the IPPS 

rate based on the standardized amount. 

(We note that, as discussed in section 

IV.D.2. of this preamble, effective for 

cost reporting periods beginning on or 

after January 1, 2009, an SCH’s hospitalspecific rate will be based on their costs 

per discharge in FY 2006 if greater than 

the hospital-specific rates based on its 

costs in FY 1982, FY 1987, or FY 1996, 

or the IPPS rate based on the 

standardized amount.) Until FY 2007, a 

Medicare-dependent, small rural 

hospital (MDH) has received the IPPS 

rate plus 50 percent of the difference 

between the IPPS rate and its hospitalspecific rate if the hospital-specific rate 

based on their costs in a base year (the 

higher of FY 1982, FY 1987, or FY 2002) 

is higher than the IPPS rate. As 

discussed below, for discharges 

occurring on or after October 1, 2007, 

but before October 1, 2011, an MDH will 

receive the IPPS rate plus 75 percent of 

the difference between the IPPS rate and 

its hospital-specific rate, if the hospitalspecific rate is higher than the IPPS rate. 

SCHs are the sole source of care in their 

areas, and MDHs are a major source of 

care for Medicare beneficiaries in their 

areas. Both of these categories of 

hospitals are afforded this special 

payment protection in order to maintain 

access to services for beneficiaries. 

Section 1886(g) of the Act requires the 

Secretary to pay for the capital-related 

costs of inpatient hospital services ‘‘in 

accordance with a prospective payment 

system established by the Secretary.’’

The basic methodology for determining 

capital prospective payments is set forth 

in our regulations at 42 CFR 412.308 

and 412.312. Under the capital IPPS, 

payments are adjusted by the same DRG 

for the case as they are under the 

operating IPPS. Capital IPPS payments 

are also adjusted for IME and DSH, 

similar to the adjustments made under 

the operating IPPS. However, as 

discussed in section V.B.2. of this 

preamble, the capital IME adjustment 

will be reduced by 50 percent in FY 

2009 (as established in the FY 2008 

IPPS final rule with comment period). 

In addition, hospitals may receive 

outlier payments for those cases that 

have unusually high costs. 

The existing regulations governing 

payments to hospitals under the IPPS 

are located in 42 CFR Part 412, subparts 

A through M. 

2. Hospitals and Hospital Units 

Excluded From the IPPS 

Under section 1886(d)(1)(B) of the 

Act, as amended, certain specialty 

hospitals and hospital units are 

excluded from the IPPS. These hospitals 

and units are: rehabilitation hospitals 

and units; long-term care hospitals 

(LTCHs); psychiatric hospitals and 

units; children’s hospitals; and cancer 

hospitals. Religious nonmedical health 

care institutions (RNHCIs) are also 

excluded from the IPPS. Various 

sections of the Balanced Budget Act of 

1997 (Pub. L. 105–33), the Medicare, 

Medicaid and SCHIP [State Children’s 

Health Insurance Program] Balanced 

Budget Refinement Act of 1999 (Pub. L. 

106–113), and the Medicare, Medicaid, 

and SCHIP Benefits Improvement and 

Protection Act of 2000 (Pub. L. 106–554) 

provide for the implementation of PPSs 

for rehabilitation hospitals and units 

(referred to as inpatient rehabilitation 

facilities (IRFs)), LTCHs, and psychiatric 

hospitals and units (referred to as 

inpatient psychiatric facilities (IPFs)), as 

discussed below. Children’s hospitals, 

cancer hospitals, and RNHCIs continue 

to be paid solely under a reasonable 

cost-based system. 

The existing regulations governing 

payments to excluded hospitals and 

hospital units are located in 42 CFR 

parts 412 and 413. 

a. Inpatient Rehabilitation Facilities 

(IRFs) 

Under section 1886(j) of the Act, as 

amended, rehabilitation hospitals and 

units (IRFs) have been transitioned from 

payment based on a blend of reasonable 

cost reimbursement subject to a 

hospital-specific annual limit under 

section 1886(b) of the Act and the 

adjusted facility Federal prospective 

payment rate for cost reporting periods 

beginning on or after January 1, 2002 

through September 30, 2002, to payment 

at 100 percent of the Federal rate 

effective for cost reporting periods 

beginning on or after October 1, 2002. 

IRFs subject to the blend were also 

permitted to elect payment based on 100 

percent of the Federal rate. The existing 

regulations governing payments under 

the IRF PPS are located in 42 CFR Part 

412, Subpart P. 

b. Long-Term Care Hospitals (LTCHs) 

Under the authority of sections 123(a) 

and (c) of Public Law 106–113 and 

section 307(b)(1) of Public Law 106–

554, the LTCH PPS was effective for a 

LTCH’s first cost reporting period 

beginning on or after October 1, 2002. 

LTCHs that do not meet the definition 

of ‘‘new’’ under § 412.23(e)(4) are paid, 

during a 5-year transition period, a 

LTCH prospective payment that is 

comprised of an increasing proportion 

of the LTCH Federal rate and a 

decreasing proportion based on 

reasonable cost principles. Those 

LTCHs that did not meet the definition 

of ‘‘new’’ under § 412.23(e)(4) could 

elect to be paid based on 100 percent of 

the Federal prospective payment rate 

instead of a blended payment in any 

year during the 5-year transition. For 

cost reporting periods beginning on or 

after October 1, 2006, all LTCHs are 

paid 100 percent of the Federal rate. The 

existing regulations governing payment 

under the LTCH PPS are located in 42 

CFR part 412, subpart O. 

c. Inpatient Psychiatric Facilities (IPFs) 

Under the authority of sections 124(a) 

and (c) of Public Law 106–113, inpatient 

psychiatric facilities (IPFs) (formerly 

psychiatric hospitals and psychiatric 

units of acute care hospitals) are paid 

under the IPF PPS. For cost reporting 

periods beginning on or after January 1, 

2008, all IPFs are paid 100 percent of 

the Federal per diem payment amount 

established under the IPF PPS. (For cost 

reporting periods beginning on or after 

January 1, 2005, and ending on or before 

December 31, 2007, some IPFs received 

transitioned payments for inpatient 

hospital services based on a blend of 

reasonable cost-based payment and a 

Federal per diem payment rate.) The 

existing regulations governing payment 

under the IPF PPS are located in 42 CFR 

412, Subpart N. 

3. Critical Access Hospitals (CAHs) 

Under sections 1814, 1820, and 

1834(g) of the Act, payments are made 

to critical access hospitals (CAHs) (that 

is, rural hospitals or facilities that meet 

certain statutory requirements) for 

inpatient and outpatient services are 

based on 101 percent of reasonable cost. 

Reasonable cost is determined under the 

provisions of section 1861(v)(1)(A) of 

the Act and existing regulations under 

42 CFR parts 413 and 415. 

4. Payments for Graduate Medical 

Education (GME) 

Under section 1886(a)(4) of the Act, 

costs of approved educational activities 

are excluded from the operating costs of 

inpatient hospital services. Hospitals 

with approved graduate medical 

education (GME) programs are paid for 

the direct costs of GME in accordance 

with section 1886(h) of the Act. The 

amount of payment for direct GME costs 


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for a cost reporting period is based on 

the hospital’s number of residents in 

that period and the hospital’s costs per 

resident in a base year. The existing 

regulations governing payments to the 

various types of hospitals are located in 

42 CFR part 413. 

B. Provisions of the Deficit Reduction 

Act of 2005 (DRA) 

Section 5001(b) of the Deficit 

Reduction Act of 2005 (DRA), Public 

Law 109–171, requires the Secretary to 

develop a plan to implement, beginning 

with FY 2009, a value-based purchasing 

plan for section 1886(d) hospitals 

defined in the Act. In section IV.C. of 

the preamble of this proposed rule, we 

discuss the report to Congress on the 

Medicare value-based purchasing plan 

and the current testing of the plan. 

C. Provisions of the Medicare 

Improvements and Extension Act Under 

Division B, Title I of the Tax Relief and 

Health Care Act of 2006 (MIEA–TRHCA) 

Section 106(b)(2) of the MIEA–

TRHCA instructed the Secretary of 

Health and Human Services to include 

in the FY 2009 IPPS proposed rule one 

or more proposals to revise the wage 

index adjustment applied under section 

1886(d)(3)(E) of the Act for purposes of 

the IPPS. The Secretary was also 

instructed to consider MedPAC’s 

recommendations on the Medicare wage 

index classification system in 

developing these proposals. In section 

III. of the preamble of this final rule, we 

summarize Acumen’s comparative and 

impact analysis of the MedPAC and 

CMS wage indices. 

D. Provision of the TMA, Abstinence 

Education, and QI Programs Extension 

Act of 2007 

Section 7 of the TMA [Transitional 

Medical Assistance], Abstinence 

Education, and QI [Qualifying 

Individuals] Programs Extension Act of 

2007 (Pub. L. 110–90) provides for a 0.9 

percent prospective documentation and 

coding adjustment in the determination 

of standardized amounts under the IPPS 

(except for MDHs, SCHs, and Puerto 

Rico hospitals) for discharges occurring 

during FY 2009. The prospective 

documentation and coding adjustment 

was established in FY 2008 in response 

to the implementation of an MS–DRG 

system under the IPPS that resulted in 

changes in coding and classification that 

did not reflect real changes in case-mix 

under section 1886(d) of the Act. We 

discuss our implementation of this 

provision in section II.D. of the 

preamble of this final rule and in the 

Addendum and in Appendix A to this 

final rule. 

E. Issuance of a Notice of Proposed 

Rulemaking 

On April 30, 2008, we issued in the 

Federal Register (73 FR 23528) a notice 

of proposed rulemaking that set forth 

proposed changes to the Medicare IPPS 

for operating costs and for capitalrelated costs in FY 2009. We also set 

forth proposed changes relating to 

payments for GME and IME costs and 

payments to certain hospitals and units 

that continue to be excluded from the 

IPPS and paid on a reasonable cost basis 

that would be effective for discharges 

occurring on or after October 1, 2008. In 

addition, we presented proposed 

changes relating to disclosure to 

patients of physician ownership and 

investment interests in hospitals, 

proposed changes to our physician selfreferral regulations, and a solicitation of 

public comments on a proposed 

collection of information regarding 

financial relationships between 

hospitals and physicians. 

Below is a summary of the major 

changes that we proposed to make: 

1. Proposed Changes to MS–DRG 

Classifications and Recalibrations of 

Relative Weights In section II. of the 

Preamble to the Proposed Rule, We 

Included—

• Proposed changes to MS–DRG 

reclassifications based on our yearly 

review. 

• Proposed application of the 

documentation and coding adjustment 

to hospital-specific rates resulting from 

implementation of the MS–DRG system. 

• Proposed changes to address the 

RTI reporting recommendations on 

charge compression. 

• Proposed recalibrations of the MS–

DRG relative weights. 

We also proposed to refine the 

hospital cost reports so that charges for 

relatively inexpensive medical supplies 

are reported separately from the costs 

and charges for more expensive medical 

devices. This proposal would be applied 

to the determination of both the IPPS 

and the OPPS relative weights as well 

as the calculation of the ambulatory 

surgical center payment rates. 

We presented a listing and discussion 

of additional hospital-acquired 

conditions (HACs), including infections, 

that were proposed to be subject to the 

statutorily required quality adjustment 

in MS–DRG payments for FY 2009. 

We presented our evaluation and 

analysis of the FY 2009 applicants for 

add-on payments for high-cost new 

medical services and technologies 

(including public input, as directed by 

Pub. L. 108–173, obtained in a town hall 

meeting). 

We proposed the annual update of the 

MS–LTC–DRG classifications and 

relative weights for use under the LTCH 

PPS for FY 2009. 

2. Proposed Changes to the Hospital 

Wage Index 

In section III. of the preamble to the 

proposed rule, we proposed revisions to 

the wage index and the annual update 

of the wage data. Specific issues 

addressed include the following: 

• Proposed wage index reform 

changes in response to 

recommendations made to Congress as a 

result of the wage index study required 

under Public Law 109–432. We 

discussed changes related to 

reclassifications criteria, application of 

budget neutrality in reclassifications, 

and the rural floor and imputed floor 

budget neutrality at the State level. 

• Changes to the CBSA designations. 

• The methodology for computing the 

proposed FY 2009 wage index. 

• The proposed FY 2009 wage index 

update, using wage data from cost 

reporting periods that began during FY 

2005. 

• Analysis and implementation of the 

proposed FY 2009 occupational mix 

adjustment to the wage index. 

• Proposed revisions to the wage 

index based on hospital redesignations 

and reclassifications. 

• The proposed adjustment to the 

wage index for FY 2009 based on 

commuting patterns of hospital 

employees who reside in a county and 

work in a different area with a higher 

wage index. 

• The timetable for reviewing and 

verifying the wage data used to compute 

the proposed FY 2009 wage index. 

• The proposed labor-related share 

for the FY 2009 wage index, including 

the labor-related share for Puerto Rico. 

3. Other Decisions and Proposed 

Changes to the IPPS for Operating Costs 

and GME Costs 

In section IV. of the preamble to the 

proposed rule, we discussed a number 

of the provisions of the regulations in 42 

CFR Parts 412, 413, and 489, including 

the following: 

• Proposed changes to the postacute 

care transfer policy as it relates to 

transfers to home with the provision of 

home health services. 

• The reporting of hospital quality 

data as a condition for receiving the full 

annual payment update increase. 

• Proposed changes in the collection 

of Medicare Advantage (MA) encounter 

data that are used for computing the risk 

payment adjustment made to MA 

organizations. 

• Discussion of the report to Congress 

on the Medicare value-based purchasing 


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plan and current testing and further 

development of the plan. 

• Proposed changes to the 

methodology for determining core staff 

values for the volume decrease payment 

adjustment for SCHs and MDHs. 

• The proposed updated national and 

regional case-mix values and discharges 

for purposes of determining RRC status. 

• The statutorily required IME 

adjustment factor for FY 2009 and 

technical changes to the GME payment 

policies. 

• Proposed changes to policies on 

hospital emergency services under 

EMTALA to address EMTALA 

Technical Advisory Group (TAG) 

recommendations. 

• Solicitation of public comments on 

Medicare policies relating to incentives 

for avoidable readmissions to hospitals. 

• Discussion of the fifth year of 

implementation of the Rural 

Community Hospital Demonstration 

Program. 

4. Proposed Changes to the IPPS for 

Capital-Related Costs 

In section V. of the preamble to the 

proposed rule, we discussed the 

payment policy requirements for 

capital-related costs and capital 

payments to hospitals. We 

acknowledged the public comments that 

we received on the phase-out of the 

capital teaching adjustment included in 

the FY 2008 IPPS final rule with 

comment period, and again solicited 

public comments on this phase-out. 

5. Proposed Changes to the Payment 

Rates for Excluded Hospitals and 

Hospital Unit 

In section VI. of the preamble to the 

proposed rule, we discussed proposed 

changes to payments to excluded 

hospitals and hospital units, proposed 

changes for determining LTCH CCRs 

under the LTCH PPS, and proposed 

changes to the regulations on hospitalswithin-hospitals. 

6. Proposed Changes Relating to 

Disclosure of Physician Ownership in 

Hospitals 

In section VII. of the preamble of the 

proposed rule, we presented proposed 

changes to the regulations relating to the 

disclosure to patients of physician 

ownership or investment interests in 

hospitals. 

7. Proposed Changes and Solicitation of 

Comments on Physician Self-Referral 

Provisions 

In section VIII. of the preamble of the 

proposed rule, we proposed changes to 

the physician self-referral regulations 

relating to the ‘‘Stand in Shoes’’

provision and the period of 

disallowance for claims submitted in 

violation of the prohibition. In addition, 

we solicited public comments regarding 

physician-owned implant companies 

and gainsharing arrangements. 

8. Proposed Collection of Information 

Regarding Financial Relationships 

Between Hospitals and Physicians 

In section IX. of the preamble of the 

proposed rule, we solicited public 

comments on our proposed collection of 

information regarding financial 

relationships between hospitals and 

physicians. 

9. Determining Proposed Prospective 

Payment Operating and Capital Rates 

and Rate-of-Increase Limits 

In the Addendum to the proposed 

rule, we set forth proposed changes to 

the amounts and factors for determining 

the FY 2009 prospective payment rates 

for operating costs and capital-related 

costs. We also established the proposed 

threshold amounts for outlier cases. In 

addition, we addressed the proposed 

update factors for determining the rateof-increase limits for cost reporting 

periods beginning in FY 2009 for 

hospitals and hospital units excluded 

from the PPS. 

10. Impact Analysis 

In Appendix A of the proposed rule, 

we set forth an analysis of the impact 

that the proposed changes would have 

on affected hospitals. 

11. Recommendation of Update Factors 

for Operating Cost Rates of Payment for 

Inpatient Hospital Services 

In Appendix B of the proposed rule, 

as required by sections 1886(e)(4) and 

(e)(5) of the Act, we provided our 

recommendations of the appropriate 

percentage changes for FY 2009 for the 

following: 

• A single average standardized 

amount for all areas for hospital 

inpatient services paid under the IPPS 

for operating costs (and hospital-specific 

rates applicable to SCHs and MDHs). 

• Target rate-of-increase limits to the 

allowable operating costs of hospital 

inpatient services furnished by hospitals 

and hospital units excluded from the 

IPPS. 

12. Disclosure of Financial 

Relationships Report (DFRR) Form 

In Appendix C of the proposed rule, 

we presented the reporting form that we 

proposed to use for the proposed 

collection of information on financial 

relationships between hospitals and 

physicians discussed in section IX. of 

the preamble of the proposed rule. 

13. Discussion of Medicare Payment 

Advisory Commission 

Recommendations 

Under section 1805(b) of the Act, 

MedPAC is required to submit a report 

to Congress, no later than March 1 of 

each year, in which MedPAC reviews 

and makes recommendations on 

Medicare payment policies. MedPAC’s 

March 2008 recommendations 

concerning hospital inpatient payment 

policies address the update factor for 

inpatient hospital operating costs and 

capital-related costs under the IPPS and 

for hospitals and distinct part hospital 

units excluded from the IPPS. We 

addressed these recommendations in 

Appendix B of the proposed rule. For 

further information relating specifically 

to the MedPAC March 2008 reports or 

to obtain a copy of the reports, contact 

MedPAC at (202) 220–3700 or visit 

MedPAC’s Web site at: http:// 

www.medpac.gov. 

F. Public Comments Received on the FY 

2009 IPPS Proposed Rule and Issues in 

Related Rules 

1. Comments on the FY 2009 IPPS 

Proposed Rule 

We received over 1,100 timely pieces 

of correspondence in response to the FY 

2009 IPPS proposed rule issued in the 

Federal Register on April 30, 2008. 

These public comments addressed 

issues on multiple topics in the 

proposed rule. We present a summary of 

the public comments and our responses 

to them in the applicable subject-matter 

sections of this final rule. 

2. Comments on Phase-Out of the 

Capital Teaching Adjustment Under the 

IPPS Included in the FY 2008 IPPS 

Final Rule With Comment Period 

In the FY 2008 IPPS final rule with 

comment period, we solicited public 

comments on our policy changes related 

to phase-out of the capital teaching 

adjustment to the capital payment 

update under the IPPS (72 FR 47401). 

We received approximately 90 timely 

pieces of correspondence in response to 

our solicitation. In section V. of the 

preamble of the FY 2009 IPPS proposed 

rule, we acknowledged receipt of those 

public comments and again solicited 

public comments on the phase-out. We 

received numerous pieces of timely 

correspondence in response to the 

second solicitation. In section V. of this 

final rule, we summarize the public 

comments received on both the FY 2008 

IPPS final rule with comment period 

and the FY 2009 IPPS proposed rule and 

present our responses. 


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1Medicare Payment Advisory Commission: 

Report to the Congress, Physician-Owned Specialty 

Hospitals, March 2005, page viii. 

3. Comments on Policy Revisions 

Related to Payment to Medicare GME 

Affiliated Hospitals in Certain Declared 

Emergency Areas Included in Two 

Interim Final Rules With Comment 

Period 

We have issued two interim final 

rules with comment periods in the 

Federal Register that modified the GME 

regulations as they apply to Medicare 

GME affiliated groups to provide for 

greater flexibility in training residents in 

approved residency programs during 

times of disasters: On April 12, 2006 (71 

FR 18654) and on November 27, 2007 

(72 FR 66892). We received a number of 

timely pieces of correspondence in 

response to these interim final rules 

with comment period. In section IV.G. 

of the preamble of this final rule, we 

summarize and address these public 

comments. 

4. Comments on Proposed Policy 

Revisions Related to Physician SelfReferrals Included in the CY 2008 

Physician Fee Schedule Proposed Rule 

On July 12, 2007, we issued in the 

Federal Register proposed revisions to 

physician payment policies under the 

CY 2008 Physician Fee Schedule (72 FR 

38121). Among these proposed changes 

were a number of proposed changes 

relating to physician self-referral issues 

that we have not finalized: Burden of 

proof; obstetrical malpractice insurance 

subsidies; ownership or investment 

interest in retirement plans; units of 

service (per click) payments in space 

and equipment leases; ‘‘set in advance’’

percentage-based compensation 

arrangements; alternative criteria for 

satisfying certain exceptions; and 

services provided under arrangement. In 

section VIII. of the preamble to this final 

rule, we are addressing the public 

comments that we received on these 

proposed revisions, presenting our 

responses to the public comments, and 

finalizing these policies. 

G. Provisions of the Medicare 

Improvements for Patients and 

Providers Act of 2008 

After publication of the FY 2009 IPPS 

proposed rule, the Medicare 

Improvements for Patients and 

Providers Act of 2008, Public Law 110–

275, was enacted on July 15, 2008. 

Public Law 110–275 contains several 

provisions that impact payments under 

the IPPS for FY 2009, which we discuss 

or are implementing in this final rule: 

• Section 122 of Public Law 110–275 

provides that, for cost reporting periods 

beginning on or after January 1, 2009, 

SCHs will be paid based on an FY 2006 

hospital-specific rate (that is, based on 

their updated costs per discharge from 

their 12-month cost reporting period 

beginning during Federal fiscal year 

2007), if this results in the greatest 

payment to the SCH. Therefore, effective 

with cost reporting periods beginning 

January 1, 2009, SCHs will be paid 

based on the rate that results in the 

greatest aggregate payment using either 

the Federal rate or their hospitalspecific rate based on their cost per 

discharge for 1982, 1987, 1996, or 2006. 

We address this provision under section 

IV.D.2. of the preamble of this final rule. 

• Section 124 of Public Law 110–275 

extends, through FY 2009, wage index 

reclassifications for hospitals 

reclassified under section 508 of Public 

Law 108–173 (the MMA) and certain 

special hospital exceptions extended 

under the Medicare and Medicaid 

SCHIP Extension Act (MMSEA) of 2007 

(Pub. L. 110–173). We discuss this 

provision in section III.I.7. and various 

other sections of this final rule. We note 

that because of the timing of enactment 

of Public Law 110–275, we are not able 

to recompute the FY 2009 wage index 

values for any hospital that would be 

reclassified under the section 508 

provisions in time for inclusion in this 

final rule. We will issue the final FY 

2009 wage index values and other 

related tables, as specified in the 

Addendum to this final rule, in a 

separate Federal Register notice 

implementing this extension that will be 

published subsequent to this final rule. 

II. Changes to Medicare Severity 

Diagnosis-Related Group (MS–DRG) 

Classifications and Relative Weights 

A. Background 

Section 1886(d) of the Act specifies 

that the Secretary shall establish a 

classification system (referred to as 

DRGs) for inpatient discharges and 

adjust payments under the IPPS based 

on appropriate weighting factors 

assigned to each DRG. Therefore, under 

the IPPS, we pay for inpatient hospital 

services on a rate per discharge basis 

that varies according to the DRG to 

which a beneficiary’s stay is assigned. 

The formula used to calculate payment 

for a specific case multiplies an 

individual hospital’s payment rate per 

case by the weight of the DRG to which 

the case is assigned. Each DRG weight 

represents the average resources 

required to care for cases in that 

particular DRG, relative to the average 

resources used to treat cases in all 

DRGs. 

Congress recognized that it would be 

necessary to recalculate the DRG 

relative weights periodically to account 

for changes in resource consumption. 

Accordingly, section 1886(d)(4)(C) of 

the Act requires that the Secretary 

adjust the DRG classifications and 

relative weights at least annually. These 

adjustments are made to reflect changes 

in treatment patterns, technology, and 

any other factors that may change the 

relative use of hospital resources. 

B. MS–DRG Reclassifications 

1. General 

As discussed in the preamble to the 

FY 2008 IPPS final rule with comment 

period (72 FR 47138), we focused our 

efforts in FY 2008 on making significant 

reforms to the IPPS consistent with the 

recommendations made by MedPAC in 

its ‘‘Report to the Congress, PhysicianOwned Specialty Hospitals’’ in March 

2005. MedPAC recommended that the 

Secretary refine the entire DRG system 

by taking severity of illness into account 

and applying hospital-specific relative 

value (HSRV) weights to DRGs.1 We 

began this reform process by adopting 

cost-based weights over a 3-year 

transition period beginning in FY 2007 

and making interim changes to the DRG 

system for FY 2007 by creating 20 new 

CMS DRGs and modifying 32 other 

DRGs across 13 different clinical areas 

involving nearly 1.7 million cases. As 

described in more detail below, these 

refinements were intermediate steps 

towards comprehensive reform of both 

the relative weights and the DRG system 

that is occurring as we undertook 

further study. For FY 2008, we adopted 

745 new Medicare Severity DRGs (MS–

DRGs) to replace the CMS DRGs. We 

refer readers to section II.D. of the FY 

2008 IPPS final rule with comment 

period for a full detailed discussion of 

how the MS–DRG system, based on 

severity levels of illness, was 

established (72 FR 47141). 

Currently, cases are classified into 

MS–DRGs for payment under the IPPS 

based on the following information 

reported by the hospital: the principal 

diagnosis, up to eight additional 

diagnoses, and up to six procedures 

performed during the stay. In a small 

number of MS–DRGs, classification is 

also based on the age, sex, and discharge 

status of the patient. The diagnosis and 

procedure information is reported by 

the hospital using codes from the 

International Classification of Diseases, 

Ninth Revision, Clinical Modification 

(ICD–9–CM). 

Comment: Several commenters 

expressed concern that only nine 

diagnosis codes and six procedure codes 

are used by Medicare to process each 


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claim under the IPPS. The commenters 

stated that the implementation of new 

initiatives, such as the MS–DRG system, 

Present on Admission (POA) reporting, 

and the hospital-acquired condition 

(HAC) payment provision, depend on 

the capturing of all of the patient’s 

diagnoses and procedures in order to 

fully represent the patient’s severity of 

illness, complexity of care, and quality 

of care provided. In addition, the 

commenters stated that the adoption of 

‘‘component’’ codes, such as the new 

ICD–9–CM codes for pressure ulcer 

stages, requires multiple diagnosis fields 

to represent a single diagnosis. The 

commenters recommended that CMS 

modify its systems so that the number 

of diagnoses codes processed would 

increase from 9 to 25 and the number 

of procedure codes processed would 

increase from 6 to 25. The commenters 

stated that hospitals submit claims to 

CMS in electronic format, and that the 

HIPAA compliant electronic transaction 

standard, HIPAA 837i, allows up to 25 

diagnoses and 25 procedures. The 

commenters stated that CMS does not 

require its fiscal intermediaries (or 

MAC) to process codes beyond the first 

nine diagnosis codes and six procedure 

codes. The commenters indicated that 

complex classification systems such as 

the proposed MS–DRGs could use the 

information in these additional codes to 

improve patient classification. 

Response: The commenters are correct 

that CMS does not process codes 

submitted electronically on the 837i 

electronic format beyond the first nine 

diagnosis codes and first six procedure 

codes. While HIPAA requires CMS to 

accept up to 25 ICD–9–CM diagnosis 

and procedure codes on the HIPAA 837i 

electronic format, it does not require 

that CMS process that number of 

diagnosis and procedure codes. We 

agree with the commenters that there is 

value in retaining additional data on 

patient conditions that would result 

from expanding Medicare’s data system 

so it can accommodate additional 

diagnosis and procedure codes. We have 

been considering this issue while we 

contemplate refinements to our DRG 

system to better recognize patient 

severity of illness. However, extensive 

lead time is required to allow for 

modifications to our internal and 

contractors’ electronic systems in order 

to process and store this additional 

information. We are unable to currently 

move forward with this 

recommendation without carefully 

evaluating implementation issues. 

However, we will continue to carefully 

evaluate this request to expand the 

process capacity of our systems. 

The process of developing the MS–

DRGs was begun by dividing all 

possible principal diagnoses into 

mutually exclusive principal diagnosis 

areas, referred to as Major Diagnostic 

Categories (MDCs). The MDCs were 

formulated by physician panels to 

ensure that the DRGs would be 

clinically coherent. The diagnoses in 

each MDC correspond to a single organ 

system or etiology and, in general, are 

associated with a particular medical 

specialty. Thus, in order to maintain the 

requirement of clinical coherence, no 

final MS–DRG could contain patients in 

different MDCs. For example, MDC 6 is 

Diseases and Disorders of the Digestive 

System. This approach is used because 

clinical care is generally organized in 

accordance with the organ system 

affected. However, some MDCs are not 

constructed on this basis because they 

involve multiple organ systems (for 

example, MDC 22 (Burns)). For FY 2008, 

cases are assigned to one of 745 MS–

DRGs in 25 MDCs. The table below lists 

the 25 MDCs. 

Major Diagnostic Categories (MDCs) 

1 ............................. Diseases and Disorders of the Nervous System. 

2 ............................. Diseases and Disorders of the Eye. 

3 ............................. Diseases and Disorders of the Ear, Nose, Mouth, and Throat. 

4 ............................. Diseases and Disorders of the Respiratory System. 

5 ............................. Diseases and Disorders of the Circulatory System. 

6 ............................. Diseases and Disorders of the Digestive System. 

7 ............................. Diseases and Disorders of the Hepatobiliary System and Pancreas. 

8 ............................. Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 

9 ............................. Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast. 

10 ........................... Endocrine, Nutritional and Metabolic Diseases and Disorders. 

11 ........................... Diseases and Disorders of the Kidney and Urinary Tract. 

12 ........................... Diseases and Disorders of the Male Reproductive System. 

13 ........................... Diseases and Disorders of the Female Reproductive System. 

14 ........................... Pregnancy, Childbirth, and the Puerperium. 

15 ........................... Newborns and Other Neonates with Conditions Originating in the Perinatal Period. 

16 ........................... Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 

17 ........................... Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 

18 ........................... Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 

19 ........................... Mental Diseases and Disorders. 

20 ........................... Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders. 

21 ........................... Injuries, Poisonings, and Toxic Effects of Drugs. 

22 ........................... Burns. 

23 ........................... Factors Influencing Health Status and Other Contacts with Health Services. 

24 ........................... Multiple Significant Trauma. 

25 ........................... Human Immunodeficiency Virus Infections. 

In general, cases are assigned to an 

MDC based on the patient’s principal 

diagnosis before assignment to an MS–

DRG. However, under the most recent 

version of the Medicare GROUPER 

(Version 26.0), there are 9 MS–DRGs to 

which cases are directly assigned on the 

basis of ICD–9–CM procedure codes. 

These MS–DRGs are for heart transplant 

or implant of heart assist systems; liver 

and/or intestinal transplants; bone 

marrow transplants; lung transplants; 

simultaneous pancreas/kidney 

transplants; pancreas transplants; and 

tracheostomies. Cases are assigned to 

these MS–DRGs before they are 

classified to an MDC. The table below 

lists the nine current pre-MDCs. 


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Pre-Major Diagnostic Categories (Pre-MDCs) 

MS–DRG 103 ........ Heart Transplant or Implant of Heart Assist System. 

MS–DRG 480 ........ Liver Transplant and/or Intestinal Transplant. 

MS–DRG 481 ........ Bone Marrow Transplant. 

MS–DRG 482 ........ Tracheostomy for Face, Mouth, and Neck Diagnoses. 

MS–DRG 495 ........ Lung Transplant. 

MS–DRG 512 ........ Simultaneous Pancreas/Kidney Transplant. 

MS–DRG 513 ........ Pancreas Transplant. 

MS–DRG 541 ........ ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck 

Diagnosis with Major O.R. 

MS–DRG 542 ........ Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis 

without Major O.R. 

Comment: One commenter noted that 

the MS–DRG titles for four MS–DRGs 

have changed in Table 5 (which lists all 

of the MS–DRGs) in the Addendum to 

the proposed rule: MS–DRG 154 (Other 

Ear, Nose, Mouth and Throat Diagnoses 

with MCC); MS–DRG 155 (Other Ear, 

Nose, Mouth and Throat Diagnoses with 

CC); MS–DRG 156 (Other Ear, Nose, 

Mouth and Throat Diagnoses without 

CC/MCC); MS–DRG 250 (Percutaneous 

Cardiovascular Procedure without 

Coronary Artery Stent with MCC); and 

MS–DRG 251 (Percutaneous 

Cardiovascular Procedure without 

Coronary Artery Stent without MCC). 

The commenter stated that the current 

titles for these MS–DRGs are: MS–DRG 

154 (Nasal Trauma and Deformity with 

MCC); MS–DRG 155 (Nasal Trauma and 

Deformity with CC); MS–DRG 156 

(Nasal Trauma and Deformity without 

CC/MCC); MS–DRG 250 (Percutaneous 

Cardiovascular Procedure without 

Coronary Artery Stent or AMI with 

MCC); and MS–DRG 251 (Percutaneous 

Cardiovascular Procedure without 

Coronary Artery Stent or AMI without 

MCC). The commenter inquired if these 

changes were discussed in the MS–

DRGs section of the proposed rule. 

Response: The commenter is correct 

in that we changed these MS–DRG titles 

to better reflect the modification we 

made when we adopted the MS–DRGs 

for FY 2008. Specifically, CMS DRGs 72 

(Nasal Trauma & Deformity) and 73 and 

74 (Other Ear, Nose, Mouth and Throat 

Diagnoses Age > 17, Age 0–17, 

respectively) were consolidated to 

create MS–DRGs 154, 155, 156 (72 FR 

47156). There are other ear, nose, 

mouth, and throat diagnoses in addition 

to nasal trauma and deformity assigned 

to these MS–DRGs so we expanded the 

titles for MS–DRGs 154, 155, and 156. 

For MS–DRGs 250 and 251, ‘‘or AMI’’

was removed from the titles because 

these descriptors that were applicable in 

the CMS DRGs are no longer applicable 

in the MS–DRGs. We are making these 

corrections in this final rule. 

In addition to these changes to the 

MS–DRG titles, we are also amending 

one other MS–DRG title. Due to the 

creation, after the proposed rule was 

published, of 6 new ICD–9–CM 

diagnosis codes for various types of 

fevers, we are revising the title for MS–

DRG 864 from ‘‘Fever of Unknown 

Origin’’ to ‘‘Fever’’. 

Once the MDCs were defined, each 

MDC was evaluated to identify those 

additional patient characteristics that 

would have a consistent effect on 

hospital resource consumption. Because 

the presence of a surgical procedure that 

required the use of the operating room 

would have a significant effect on the 

type of hospital resources used by a 

patient, most MDCs were initially 

divided into surgical DRGs and medical 

DRGs. Surgical DRGs are based on a 

hierarchy that orders operating room 

(O.R.) procedures or groups of O.R. 

procedures by resource intensity. 

Medical DRGs generally are 

differentiated on the basis of diagnosis 

and age (0 to 17 years of age or greater 

than 17 years of age). Some surgical and 

medical DRGs are further differentiated 

based on the presence or absence of a 

complication or comorbidity (CC) or a 

major complication or comorbidity 

(MCC). 

Generally, nonsurgical procedures 

and minor surgical procedures that are 

not usually performed in an operating 

room are not treated as O.R. procedures. 

However, there are a few non-O.R. 

procedures that do affect MS–DRG 

assignment for certain principal 

diagnoses. An example is extracorporeal 

shock wave lithotripsy for patients with 

a principal diagnosis of urinary stones. 

Lithotripsy procedures are not routinely 

performed in an operating room. 

Therefore, lithotripsy codes are not 

classified as O.R. procedures. However, 

our clinical advisors believe that 

patients with urinary stones who 

undergo extracorporeal shock wave 

lithotripsy should be considered similar 

to other patients who undergo O.R. 

procedures. Therefore, we treat this 

group of patients similar to patients 

undergoing O.R. procedures. 

Once the medical and surgical classes 

for an MDC were formed, each diagnosis 

class was evaluated to determine if 

complications or comorbidities would 

consistently affect hospital resource 

consumption. Each diagnosis was 

categorized into one of three severity 

levels. These three levels include a 

major complication or comorbidity 

(MCC), a complication or comorbidity 

(CC), or a non-CC. Physician panels 

classified each diagnosis code based on 

a highly iterative process involving a 

combination of statistical results from 

test data as well as clinical judgment. As 

stated earlier, we refer readers to section 

II.D. of the FY 2008 IPPS final rule with 

comment period for a full detailed 

discussion of how the MS–DRG system 

was established based on severity levels 

of illness (72 FR 47141). 

A patient’s diagnosis, procedure, 

discharge status, and demographic 

information is entered into the Medicare 

claims processing systems and subjected 

to a series of automated screens called 

the Medicare Code Editor (MCE). The 

MCE screens are designed to identify 

cases that require further review before 

classification into an MS–DRG. 

After patient information is screened 

through the MCE and any further 

development of the claim is conducted, 

the cases are classified into the 

appropriate MS–DRG by the Medicare 

GROUPER software program. The 

GROUPER program was developed as a 

means of classifying each case into an 

MS–DRG on the basis of the diagnosis 

and procedure codes and, for a limited 

number of MS–DRGs, demographic 

information (that is, sex, age, and 

discharge status). 

After cases are screened through the 

MCE and assigned to an MS–DRG by the 

GROUPER, the PRICER software 

calculates a base MS–DRG payment. 

The PRICER calculates the payment for 

each case covered by the IPPS based on 

the MS–DRG relative weight and 

additional factors associated with each 

hospital, such as IME and DSH payment 

adjustments. These additional factors 

increase the payment amount to 


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hospitals above the base MS–DRG 

payment. 

The records for all Medicare hospital 

inpatient discharges are maintained in 

the Medicare Provider Analysis and 

Review (MedPAR) file. The data in this 

file are used to evaluate possible MS–

DRG classification changes and to 

recalibrate the MS–DRG weights. 

However, in the FY 2000 IPPS final rule 

(64 FR 41500), we discussed a process 

for considering non-MedPAR data in the 

recalibration process. In order for us to 

consider using particular non-MedPAR 

data, we must have sufficient time to 

evaluate and test the data. The time 

necessary to do so depends upon the 

nature and quality of the non-MedPAR 

data submitted. Generally, however, a 

significant sample of the non-MedPAR 

data should be submitted by midOctober for consideration in 

conjunction with the next year’s 

proposed rule. This date allows us time 

to test the data and make a preliminary 

assessment as to the feasibility of using 

the data. Subsequently, a complete 

database should be submitted by early 

December for consideration in 

conjunction with the next year’s 

proposed rule. 

As we indicated above, for FY 2008, 

we made significant improvement in the 

DRG system to recognize severity of 

illness and resource usage by adopting 

MS–DRGs that were reflected in the FY 

2008 GROUPER, Version 25.0, and were 

effective for discharges occurring on or 

after October 1, 2007. The changes we 

proposed for FY 2009 (and are adopting 

in this final rule) will be reflected in the 

FY 2009 GROUPER, Version 26.0, and 

will be effective for discharges occurring 

on or after October 1, 2008. As noted in 

the FY 2009 IPPS proposed rule (73 FR 

23538), our DRG analysis for the FY 

2009 proposed rule was based on data 

from the September 2007 update of the 

FY 2007 MedPAR file, which contains 

hospital bills received through 

September 30, 2007, for discharges 

through September 30, 2007. For this 

final rule, our analysis is based on more 

recent data from the March 2008 update 

of the FY 2007 MedPAR file, which 

contains hospital bills received through 

March 31, 2008, for discharges 

occurring in FY 2007. 

2. Yearly Review for Making MS–DRG 

Changes 

Many of the changes to the MS–DRG 

classifications we make annually are the 

result of specific issues brought to our 

attention by interested parties. We 

encourage individuals with comments 

about MS–DRG classifications to submit 

these in a timely manner so they can be 

carefully considered for possible 

inclusion in the annual proposed rule 

and, if included, may be subjected to 

public review and comment. Therefore, 

similar to the timetable for interested 

parties to submit non-MedPAR data for 

consideration in the MS–DRG 

recalibration process, comments about 

MS–DRG classification issues should be 

submitted no later than early December 

in order to be considered and possibly 

included in the next annual proposed 

rule updating the IPPS. 

The actual process of forming the 

MS–DRGs was, and will likely continue 

to be, highly iterative, involving a 

combination of statistical results from 

test data combined with clinical 

judgment. In the FY 2008 IPPS final rule 

(72 FR 47140 through 47189), we 

described in detail the process we used 

to develop the MS–DRGs that we 

adopted for FY 2008. In addition, in 

deciding whether to make further 

modification to the MS–DRGs for 

particular circumstances brought to our 

attention, we considered whether the 

resource consumption and clinical 

characteristics of the patients with a 

given set of conditions are significantly 

different than the remaining patients in 

the MS–DRG. We evaluated patient care 

costs using average charges and lengths 

of stay as proxies for costs and relied on 

the judgment of our medical advisors to 

decide whether patients are clinically 

distinct or similar to other patients in 

the MS–DRG. In evaluating resource 

costs, we considered both the absolute 

and percentage differences in average 

charges between the cases we selected 

for review and the remainder of cases in 

the MS–DRG. We also considered 

variation in charges within these 

groups; that is, whether observed 

average differences were consistent 

across patients or attributable to cases 

that were extreme in terms of charges or 

length of stay, or both. Further, we 

considered the number of patients who 

will have a given set of characteristics 

and generally preferred not to create a 

new MS–DRG unless it would include 

a substantial number of cases. 

C. Adoption of the MS–DRGs in FY 2008 

In the FY 2006, FY 2007, and FY 2008 

IPPS final rules, we discussed a number 

of recommendations made by MedPAC 

regarding revisions to the DRG system 

used under the IPPS (70 FR 47473 

through 47482; 71 FR 47881 through 

47939; and 72 FR 47140 through 47189). 

As we noted in the FY 2006 IPPS final 

rule, we had insufficient time to 

complete a thorough evaluation of these 

recommendations for full 

implementation in FY 2006. However, 

we did adopt severity-weighted cardiac 

DRGs in FY 2006 to address public 

comments on this issue and the specific 

concerns of MedPAC regarding cardiac 

surgery DRGs. We also indicated that we 

planned to further consider all of 

MedPAC’s recommendations and 

thoroughly analyze options and their 

impacts on the various types of 

hospitals in the FY 2007 IPPS proposed 

rule. 

For FY 2007, we began this process. 

In the FY 2007 IPPS proposed rule, we 

proposed to adopt Consolidated 

Severity DRGs (CS DRGs) for FY 2008 (if 

not earlier). However, based on public 

comments received on the FY 2007 IPPS 

proposed rule, we decided not to adopt 

the CS DRGs (71 FR 47906 through 

47912). Rather, we decided to make 

interim changes to the existing DRGs for 

FY 2007 by creating 20 new DRGs 

involving 13 different clinical areas that 

would significantly improve the CMS 

DRG system’s recognition of severity of 

illness. We also modified 32 DRGs to 

better capture differences in severity. 

The new and revised DRGs were 

selected from 40 existing CMS DRGs 

that contained 1,666,476 cases and 

represented a number of body systems. 

In creating these 20 new DRGs, we 

deleted 8 existing DRGs and modified 

32 existing DRGs. We indicated that 

these interim steps for FY 2007 were 

being taken as a prelude to more 

comprehensive changes to better 

account for severity in the DRG system 

by FY 2008. 

In the FY 2007 IPPS final rule (71 FR 

47898), we indicated our intent to 

pursue further DRG reform through two 

initiatives. First, we announced that we 

were in the process of engaging a 

contractor to assist us with evaluating 

alternative DRG systems that were 

raised as potential alternatives to the 

CMS DRGs in the public comments. 

Second, we indicated our intent to 

review over 13,000 ICD–9–CM diagnosis 

codes as part of making further 

refinements to the current CMS DRGs to 

better recognize severity of illness based 

on the work that CMS (then HCFA) did 

in the mid-1990s in connection with 

adopting severity DRGs. We describe 

below the progress we have made on 

these two initiatives, our actions for FY 

2008, and our proposals for FY 2009 

based on our continued analysis of 

reform of the DRG system. We note that 

the adoption of the MS–DRGs to better 

recognize severity of illness has 

implications for the outlier threshold, 

the application of the postacute care 

transfer policy, the measurement of real 

case-mix versus apparent case-mix, and 

the IME and DSH payment adjustments. 

We discuss these implications for FY 

2009 in other sections of this preamble 

and in the Addendum to this final rule. 


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In the FY 2007 IPPS proposed rule, 

we discussed MedPAC’s 

recommendations to move to a costbased HSRV weighting methodology 

using HSRVs beginning with the FY 

2007 IPPS proposed rule for 

determining the DRG relative weights. 

Although we proposed to adopt the 

HSRV weighting methodology for FY 

2007, we decided not to adopt the 

proposed methodology in the final rule 

after considering the public comments 

we received on the proposal. Instead, in 

the FY 2007 IPPS final rule, we adopted 

a cost-based weighting methodology 

without the HSRV portion of the 

proposed methodology. The cost-based 

weights are being adopted over a 3-year 

transition period in 1⁄3 increments 

between FY 2007 and FY 2009. In 

addition, in the FY 2007 IPPS final rule, 

we indicated our intent to further study 

the HSRV-based methodology as well as 

other issues brought to our attention 

related to the cost-based weighting 

methodology adopted in the FY 2007 

final rule. There was significant concern 

in the public comments that our costbased weighting methodology does not 

adequately account for charge 

compression—the practice of applying a 

higher percentage charge markup over 

costs to lower cost items and services 

and a lower percentage charge markup 

over costs to higher cost items and 

services. Further, public commenters 

expressed concern about potential 

inconsistencies between how costs and 

charges are reported on the Medicare 

cost reports and charges on the 

Medicare claims. In the FY 2007 IPPS 

final rule, we used costs and charges 

from the cost report to determine 

departmental level cost-to-charge ratios 

(CCRs) which we then applied to 

charges on the Medicare claims to 

determine the cost-based weights. The 

commenters were concerned about 

potential distortions to the cost-based 

weights that would result from 

inconsistent reporting between the cost 

reports and the Medicare claims. After 

publication of the FY 2007 IPPS final 

rule, we entered into a contract with RTI 

International (RTI) to study both charge 

compression and to what extent our 

methodology for calculating DRG 

relative weights is affected by 

inconsistencies between how hospitals 

report costs and charges on the cost 

reports and how hospitals report 

charges on individual claims. Further, 

as part of its study of alternative DRG 

systems, the RAND Corporation 

analyzed the HSRV cost-weighting 

methodology. We refer readers to 

section II.E. of the preamble of this final 

rule for discussion of the issue of charge 

compression and the HSRV costweighting methodology for FY 2009. 

We believe that revisions to the DRG 

system to better recognize severity of 

illness and changes to the relative 

weights based on costs rather than 

charges are improving the accuracy of 

the payment rates in the IPPS. We agree 

with MedPAC that these refinements 

should be pursued. Although we 

continue to caution that any prospective 

payment system based on grouping 

cases will always present some 

opportunities for providers to specialize 

in cases they believe have higher 

margins, we believe that the changes we 

have adopted and the continuing 

reforms we are making in this final rule 

for FY 2009 will improve payment 

accuracy and reduce financial 

incentives to create specialty hospitals. 

We refer readers to section II.D. of the 

FY 2008 IPPS final rule with comment 

period for a full discussion of how the 

MS–DRG system was established based 

on severity levels of illness (72 FR 

47141). 

D. MS–DRG Documentation and Coding 

Adjustment, Including the Applicability 

to the Hospital-Specific Rates and the 

Puerto Rico-Specific Standardized 

Amount 

1. MS–DRG Documentation and Coding 

Adjustment 

As stated above, we adopted the new 

MS–DRG patient classification system 

for the IPPS, effective October 1, 2007, 

to better recognize severity of illness in 

Medicare payment rates. Adoption of 

the MS–DRGs resulted in the expansion 

of the number of DRGs from 538 in FY 

2007 to 745 in FY 2008. By increasing 

the number of DRGs and more fully 

taking into account severity of illness in 

Medicare payment rates, the MS–DRGs 

encourage hospitals to improve their 

documentation and coding of patient 

diagnoses. In the FY 2008 IPPS final 

rule with comment period (72 FR 47175 

through 47186), which appeared in the 

Federal Register on August 22, 2007, we 

indicated that we believe the adoption 

of the MS–DRGs had the potential to 

lead to increases in aggregate payments 

without a corresponding increase in 

actual patient severity of illness due to 

the incentives for improved 

documentation and coding. In that final 

rule with comment period, using the 

Secretary’s authority under section 

1886(d)(3)(A)(vi) of the Act to maintain 

budget neutrality by adjusting the 

standardized amount to eliminate the 

effect of changes in coding or 

classification that do not reflect real 

changes in case-mix, we established 

prospective documentation and coding 

adjustments of ¥1.2 percent for FY 

2008, ¥1.8 percent for FY 2009, and 

¥1.8 percent for FY 2010. 

On September 29, 2007, the TMA, 

Abstinence Education, and QI Programs 

Extension Act of 2007, Public Law 110– 

90, was enacted. Section 7 of Public 

Law 110–90 included a provision that 

reduces the documentation and coding 

adjustment for the MS–DRG system that 

we adopted in the FY 2008 IPPS final 

rule with comment period to ¥0.6 

percent for FY 2008 and ¥0.9 percent 

for FY 2009. To comply with section 7 

of Public Law 110–90, in a final rule 

that appeared in the Federal Register on 

November 27, 2007 (72 FR 66886), we 

changed the IPPS documentation and 

coding adjustment for FY 2008 to ¥0.6 

percent, and revised the FY 2008 

payment rates, factors, and thresholds 

accordingly, with these revisions 

effective October 1, 2007. 

For FY 2009, Public Law 110–90 

requires a documentation and coding 

adjustment of ¥0.9 percent instead of 

the ¥1.8 percent adjustment established 

in the FY 2008 IPPS final rule with 

comment period. As required by statute, 

we are applying a documentation and 

coding adjustment of ¥0.9 percent to 

the FY 2009 IPPS national standardized 

amount. The documentation and coding 

adjustments established in the FY 2008 

IPPS final rule with comment period, as 

amended by Public Law 110–90, are 

cumulative. As a result, the ¥0.9 

percent documentation and coding 

adjustment in FY 2009 is in addition to 

the ¥0.6 percent adjustment in FY 

2008, yielding a combined effect of 

¥1.5 percent. 

Comment: A number of commenters 

disagreed with the need for the 

documentation and coding adjustment 

and reiterated concerns about the 

documentation and coding adjustment 

expressed in prior comments on the FY 

2008 IPPS proposed rule. Several of the 

commenters recommended that CMS 

not apply the documentation and 

coding adjustment to the national 

standardized amount in FY 2009. 

Response: The FY 2008 IPPS final 

rule (72 FR 47175 through 47186) 

established a documentation and coding 

adjustment for FY 2008, FY 2009, and 

FY 2010. The establishment of the 

documentation and coding adjustment 

was subject to notice and comment 

rulemaking. When we established the 

documentation and coding adjustment 

in the FY 2008 IPPS final rule with 

comment period, we considered 

concerns about the adjustment 

expressed by commenters on the FY 

2008 IPPS proposed rule and provided 

responses to those public comments in 

the corresponding rule. Subsequently, 


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Congress enacted Public Law 110–90, 

which mandated that the 

documentation and coding adjustments 

established in the FY 2008 IPPS final 

rule with comment period be changed to 

¥0.6 percent for FY 2008 and ¥0.9 

percent for FY 2009. As required by law, 

we are applying the statutorily specified 

documentation and coding adjustment 

to the FY 2009 national standardized 

amount. 

Comment: One commenter stated that 

Public Law 110–90 requires an 

adjustment of ¥0.9 percent for FY 2009, 

not a cumulative adjustment of ¥1.5 

percent for FY 2009. 

Response: The documentation and 

coding adjustments established in the 

FY 2008 IPPS final rule with comment 

period are cumulative. That final rule 

indicated that CMS believes that a ¥4.8 

percent adjustment for documentation 

and coding is necessary (72 FR 47816). 

Rather than implement the full 

adjustment in 1 year, the final rule 

phased it in over 3 years: ¥1.2 percent 

in FY 2008, ¥1.8 percent in FY 2009, 

and ¥1.8 percent in FY 2010, for a total 

of ¥4.8 percent. Public Law 110–90 

requires that in implementing the FY 

2008 IPPS final rule with comment 

period, we substitute 0.6 percent for the 

1.2 percent FY 2008 documentation and 

coding adjustment established in that 

final rule and 0.9 percent for the 1.8 

percent FY 2009 documentation and 

coding adjustment established in that 

final rule. Public Law 110–90 did not 

make any change to the cumulative 

nature of the documentation and coding 

adjustments established in the FY 2008 

IPPS final rule with comment period. 

Therefore, consistent with Public Law 

110–90, we applied a ¥0.6 percent 

adjustment to the national standardized 

amount in FY 2008, and we are 

applying a ¥0.9 percent documentation 

and coding adjustment to the national 

standardized amount in FY 2009, which 

results in a cumulative effect of ¥1.5 

percent by FY 2009. 

Comment: Several commenters 

suggested that the documentation and 

coding adjustment is intended to 

address inappropriate upcoding, where 

a hospital’s coding is not justified by the 

medical record. The commenters 

suggested that CMS undertake studies to 

identify inappropriate coding by 

individual providers. 

Response: As we stated in the FY 

2008 IPPS final rule with comment 

period, we do not believe there is 

anything inappropriate, unethical, or 

otherwise wrong with hospitals taking 

full advantage of coding opportunities 

to maximize Medicare payment as long 

as the coding is fully and properly 

supported by documentation in the 

medical record. 

The documentation and coding 

adjustment was developed based on the 

recognition that the MS–DRGs, by better 

accounting for severity of illness in 

Medicare payment rates, would 

encourage hospitals to ensure they had 

fully and accurately documented and 

coded all patient diagnoses and 

procedures consistent with the medical 

record in order to garner the maximum 

IPPS payment available under the MS–

DRG system. For example, under the 

previous CMS DRGs, ‘‘congestive heart 

failure, unspecified’’ (code 428.0) was a 

CC. Under the MS–DRGs, this 

unspecified code has been made a nonCC, while more specific heart failure 

codes have been made CCs or MCCs. 

Because of this, hospitals have a 

financial incentive under the MS–DRG 

system, which they did not have under 

the previous CMS DRG system, to 

ensure that they code the type of heart 

failure a patient has as precisely as 

possible, consistent with the medical 

record. 

The statute requires that DRG 

recalibration be budget neutral. Due to 

the standard 2-year lag in claims data, 

when we recalibrated the MS–DRGs in 

FY 2008, the calculations were based on 

FY 2006 claims data that reflected 

coding under the prior CMS DRG 

system. As a result, the claims data 

upon which the DRG recalibrations 

were performed in FY 2008 did not 

reflect any improvements in 

documentation and coding encouraged 

by the MS–DRG system. Thus, our 

actuaries determined that a separate 

adjustment for documentation and 

coding improvements would be needed 

in order to ensure that the 

implementation of the MS–DRG system 

was budget neutral. This determination 

led to the establishment of the 

documentation and coding adjustment 

established in the FY 2008 IPPS final 

rule with comment period and amended 

by Public Law 110–90. 

As with any other DRG system, there 

is potential under the MS–DRG system 

for an individual provider to 

inappropriately code and bill for 

services. The MS–DRG documentation 

and coding adjustment was not 

developed to address such program 

integrity issues. Rather, the program 

integrity safeguards in place to address 

inappropriate billing under the CMS 

DRG system remain in place under the 

MS–DRG system. 

2. Application of the Documentation 

and Coding Adjustment to the HospitalSpecific Rates 

Under section 1886(d)(5)(D)(i) of the 

Act, SCHs are paid based on whichever 

of the following rates yields the greatest 

aggregate payment: The Federal national 

rate; the updated hospital-specific rate 

based on FY 1982 costs per discharge; 

the updated hospital-specific rate based 

on FY 1987 costs per discharge; or the 

updated hospital-specific rate based on 

FY 1996 costs per discharge. Under 

section 1886(d)(5)(G) of the Act, MDHs 

are paid based on the Federal national 

rate or, if higher, the Federal national 

rate plus 75 percent of the difference 

between the Federal national rate and 

the updated hospital-specific rate based 

on the greater of either the FY 1982, 

1987, or 2002 costs per discharge. In the 

FY 2008 IPPS final rule with comment 

period, we established a policy of 

applying the documentation and coding 

adjustment to the hospital-specific rates. 

In that rule, we indicated that because 

SCHs and MDHs use the same DRG 

system as all other hospitals, we believe 

they should be equally subject to the 

budget neutrality adjustment that we are 

applying for adoption of the MS–DRGs 

to all other hospitals. In establishing 

this policy, section 1886(d)(3)(A)(vi) of 

the Act provides the authority to adjust 

‘‘the standardized amount’’ to eliminate 

the effect of changes in coding or 

classification that do not reflect real 

change in case-mix. However, in a final 

rule that appeared in the Federal 

Register on November 27, 2007 (72 FR 

66886), we rescinded the application of 

the documentation and coding 

adjustment to the hospital-specific rates 

retroactive to October 1, 2007. In that 

final rule, we indicated that, while we 

still believe it would be appropriate to 

apply the documentation and coding 

adjustment to the hospital-specific rates, 

upon further review, we decided that 

application of the documentation and 

coding adjustment to the hospitalspecific rates is not consistent with the 

plain meaning of section 

1886(d)(3)(A)(vi) of the Act, which only 

mentions adjusting ‘‘the standardized 

amount’’ and does not mention 

adjusting the hospital-specific rates. 

In the FY 2009 IPPS proposed rule, 

we indicated that we continue to have 

concerns about this issue. Because 

hospitals paid based on the hospitalspecific rate use the same MS–DRG 

system as other hospitals, we believe 

they have the potential to realize 

increased payments from coding 

improvements that do not reflect real 

increases in patients’ severity of illness. 

In section 1886(d)(3)(A)(vi) of the Act, 


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Congress stipulated that hospitals paid 

based on the standardized amount 

should not receive additional payments 

based on the effect of documentation 

and coding changes that do not reflect 

real changes in case-mix. Similarly, we 

believe that hospitals paid based on the 

hospital-specific rate should not have 

the potential to realize increased 

payments due to documentation and 

coding improvements that do not reflect 

real increases in patients’ severity of 

illness. While we continue to believe 

that section 1886(d)(3)(A)(vi) of the Act 

does not provide explicit authority for 

application of the documentation and 

coding adjustment to the hospitalspecific rates, we believe that we have 

the authority to apply the 

documentation and coding adjustment 

to the hospital-specific rates using our 

special exceptions and adjustment 

authority under section 1886(d)(5)(I)(i) 

of the Act. The special exceptions and 

adjustment authority authorizes us to 

provide ‘‘for such other exceptions and 

adjustments to [IPPS] payment amounts 

* * * as the Secretary deems 

appropriate.’’ In light of this authority, 

for the FY 2010 rulemaking, we plan to 

examine our FY 2008 claims data for 

hospitals paid based on the hospitalspecific rate. In the FY 2009 IPPS 

proposed rule, we stated that if we find 

evidence of significant increases in casemix for patients treated in these 

hospitals, we would consider proposing 

application of the documentation and 

coding adjustments to the FY 2010 

hospital-specific rates under our 

authority in section 1886(d)(5)(I)(i) of 

the Act. As noted previously, the 

documentation and coding adjustments 

established in the FY 2008 IPPS final 

rule with comment period are 

cumulative. For example, the ¥0.9 

percent documentation and coding 

adjustment to the national standardized 

amount in FY 2009 is in addition to the 

¥0.6 percent adjustment made in FY 

2008, yielding a combined effect of 

¥1.5 percent in FY 2009. Given the 

cumulative nature of the documentation 

and coding adjustments, if we were to 

propose to apply the documentation and 

coding adjustment to the FY 2010 

hospital-specific rates, it may involve 

applying the FY 2008 and FY 2009 

documentation and coding adjustments 

(¥1.5 percent combined) plus the FY 

2010 documentation and coding 

adjustment, discussed in the FY 2008 

IPPS final rule with comment period, to 

the FY 2010 hospital-specific rates. 

Comment: A number of commenters 

opposed application of the 

documentation and coding adjustment 

to the hospital-specific rates. MedPAC 

supported application of a 

documentation and coding adjustment 

to the prospective payment rates and the 

hospital-specific rates for all IPPS 

hospitals that are paid based on their 

reported case-mix. Another commenter 

supported application of a 

documentation and coding adjustment 

to the hospital-specific rates if analysis 

of FY 2008 claims data supports a 

positive adjustment and recommended a 

transition be considered if the data 

support a negative adjustment. 

Response: We appreciate the 

comments received. We did not propose 

to apply the documentation and coding 

adjustment to the hospital-specific rates 

for FY 2009. Instead, as we indicated in 

the proposed rule and reiterated above, 

we intend to consider whether such a 

proposal is warranted for FY 2010. To 

gather information to evaluate these 

considerations, we plan to perform 

analyses on FY 2008 claims data to 

examine whether there has been a 

significant increase in case-mix for 

hospitals paid based on the hospitalspecific rate. If we find that application 

of the documentation and coding 

adjustment to the hospital-specific rates 

for FY 2010 is warranted, we would 

include a proposal in the FY 2010 IPPS 

proposed rule, which would be open for 

public comment at that time. 

3. Application of the Documentation 

and Coding Adjustment to the Puerto 

Rico-Specific Standardized Amount 

Puerto Rico hospitals are paid based 

on 75 percent of the national 

standardized amount and 25 percent of 

the Puerto Rico-specific standardized 

amount. As noted previously, the 

documentation and coding adjustment 

we adopted in the FY 2008 IPPS final 

rule with comment period relied upon 

our authority under section 

1886(d)(3)(A)(vi) of the Act, which 

provides the authority to adjust ‘‘the 

standardized amounts computed under 

this paragraph’’ to eliminate the effect of 

changes in coding or classification that 

do not reflect real changes in case-mix. 

Section 1886(d)(3)(A)(vi) of the Act 

applies to the national standardized 

amounts computed under section 

1886(d)(3) of the Act, but does not apply 

to the Puerto Rico-specific standardized 

amount computed under section 

1886(d)(9)(C) of the Act. In calculating 

the FY 2008 payment rates, we made an 

inadvertent error and applied the FY 

2008 ¥0.6 percent documentation and 

coding adjustment to the Puerto Ricospecific standardized amount, relying 

on our authority under section 

1886(d)(3)(A)(vi) of the Act. However, 

section 1886(d)(3)(A)(vi) of the Act 

authorizes application of a 

documentation and coding adjustment 

to the national standardized amount and 

does not apply to the Puerto Ricospecific standardized amount. In this 

final rule, we are correcting this 

inadvertent error by removing the ¥0.6 

percent documentation and coding 

adjustment from the FY 2008 Puerto 

Rico-specific rates. The revised FY 2008 

Puerto Rico-specific operating 

standardized amounts are: $1,471.10 for 

the labor share and $901.64 for the 

nonlabor share for a hospital with a 

wage index greater than 1 and $1,392.80 

for the labor share and $979.94 for the 

non-labor share for a hospital with a 

wage index less than or equal to 1. The 

revised FY 2008 Puerto Rico capital 

payment rate is $202.89 (as discussed in 

section III.A.6.b. of the Addendum to 

this final rule). These revised rates are 

effective October 1, 2007, for FY 2008. 

While section 1886(d)(3)(A)(vi) of the 

Act is not applicable to the Puerto Ricospecific standardized amount, we 

believe that we have the authority to 

apply the documentation and coding 

adjustment to the Puerto Rico-specific 

standardized amount using our special 

exceptions and adjustment authority 

under section 1886(d)(5)(I)(i) of the Act. 

Similar to SCHs and MDHs that are paid 

based on the hospital-specific rate, 

discussed in section II.D.2. of this 

preamble, we believe that Puerto Rico 

hospitals that are paid based on the 

Puerto Rico-specific standardized 

amount should not have the potential to 

realize increased payments due to 

documentation and coding 

improvements that do not reflect real 

increases in patients’ severity of illness. 

Consistent with the approach described 

for SCHs and MDHs in section II.D.2. of 

the preamble of this final rule, for the 

FY 2010 rulemaking, we plan to 

examine our FY 2008 claims data for 

hospitals in Puerto Rico. As we 

indicated in the FY 2009 proposed rule, 

if we find evidence of significant 

increases in case-mix for patients 

treated in these hospitals, we would 

consider proposing application of the 

documentation and coding adjustments 

to the FY 2010 Puerto Rico-specific 

standardized amount under our 

authority in section 1886(d)(5)(I)(i) of 

the Act. As noted previously, the 

documentation and coding adjustments 

established in the FY 2008 IPPS final 

rule with comment period are 

cumulative. Given the cumulative 

nature of the documentation and coding 

adjustments, if we were to propose to 

apply the documentation and coding 

adjustment to the FY 2010 Puerto Ricospecific standardized amount, it may 

involve applying the FY 2008 and FY 


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2009 documentation and coding 

adjustments (¥1.5 percent combined) 

plus the FY 2010 documentation and 

coding adjustment, discussed in the FY 

2008 IPPS final rule with comment 

period, to the FY 2010 Puerto Ricospecific standardized amount. 

Comment: Some commenters opposed 

application of the documentation and 

coding adjustment to the Puerto Ricospecific standardized amount. MedPAC 

supported application of a 

documentation and coding adjustment 

to the prospective payment rates and the 

hospital-specific rates for all IPPS 

hospitals that are paid based on their 

reported case-mix. 

Response: We appreciate the 

comments. We did not propose to apply 

the documentation and coding 

adjustment to the Puerto Rico-specific 

standardized amount for FY 2009. 

Instead, as we indicated in the proposed 

rule, we intend to consider whether 

such a proposal is warranted for FY 

2010. To gather information to evaluate 

these considerations, we plan to 

perform analyses on FY 2008 claims 

data to examine whether there has been 

a significant increase in case-mix for 

hospitals in Puerto Rico. If we find that 

application of the documentation and 

coding adjustment to the Puerto Ricospecific standardized amount for FY 

2010 is warranted, we would include a 

proposal in the FY 2010 proposed rule, 

which would be open for public 

comment at that time. 

4. Potential Additional Payment 

Adjustments in FYs 2010 Through 2012 

Section 7 of Public Law 110–90 also 

provides for payment adjustments in 

FYs 2010 through 2012 based upon a 

retrospective evaluation of claims data 

from the implementation of the MS–

DRG system. If, based on this 

retrospective evaluation, the Secretary 

finds that in FY 2008 and FY 2009, the 

actual amount of change in case-mix 

that does not reflect real change in 

underlying patient severity differs from 

the statutorily mandated documentation 

and coding adjustments implemented in 

those years, the law requires the 

Secretary to adjust payments for 

discharges occurring in FYs 2010 

through 2012 to offset the estimated 

amount of increase or decrease in 

aggregate payments that occurred in FY 

2008 and FY 2009 as a result of that 

difference, in addition to making an 

appropriate adjustment to the 

standardized amount under section 

1886(d)(3)(A)(vi) of the Act. 

In order to implement these 

requirements of section 7 of Public Law 

110–90, we are planning a thorough 

retrospective evaluation of our claims 

data. Results of this evaluation would be 

used by our actuaries to determine any 

necessary payment adjustments in FYs 

2010 through 2012 to ensure the budget 

neutrality of the MS–DRG 

implementation for FY 2008 and FY 

2009, as required by law. In the FY 2009 

IPPS proposed rule, we described our 

preliminary analysis plans to provide 

the opportunity for public input. 

In the proposed rule, we indicated 

that we intend to measure and 

corroborate the extent of the overall 

national average changes in case-mix for 

FY 2008 and FY 2009. We expect part 

of this overall national average change 

would be attributable to underlying 

changes in actual patient severity and 

part would be attributable to 

documentation and coding 

improvements under the MS–DRG 

system. In order to separate the two 

effects, we plan to isolate the effect of 

shifts in cases among base DRGs from 

the effect of shifts in the types of cases 

within base DRGs. The shifts among 

base DRGs are the result of changes in 

principal diagnoses while the shifts 

within base DRGs are the result of 

changes in secondary diagnoses. 

Because we expect most of the 

documentation and coding 

improvements under the MS–DRG 

system will occur in the secondary 

diagnoses, we believe that the shifts 

among base DRGs are less likely to be 

the result of the MS–DRG system and 

the shifts within base DRGs are more 

likely to be the result of the MS–DRG 

system. We also anticipate evaluating 

data to identify the specific MS–DRGs 

and diagnoses that contributed 

significantly to the improved 

documentation and coding payment 

effect and to quantify their impact. This 

step would entail analysis of the 

secondary diagnoses driving the shifts 

in severity within specific base DRGs. 

In the proposed rule, we also stated 

that, while we believe that the data 

analysis plan described previously will 

produce an appropriate estimate of the 

extent of case-mix changes resulting 

from documentation and coding 

improvements, we may also decide, if 

feasible, to use historical data from our 

Hospital Payment Monitoring Program 

(HPMP) to corroborate the within-base 

DRG shift analysis. The HPMP is 

supported by the Medicare Clinical Data 

Abstraction Center (CDAC). From 1998 

to 2007, the CDAC obtained medical 

records for a sample of discharges as 

part of our hospital monitoring 

activities. These data were collected on 

a random sample of between 30,000 to 

50,000 hospital discharges per year. The 

historical CDAC data could be used to 

develop an upper bound estimate of the 

trend in real case-mix growth (that is, 

real change in underlying patient 

severity) prior to implementation of the 

MS–DRGs. 

In the FY 2009 IPPS proposed rule, 

we solicited public comments on the 

analysis plans described above, as well 

as suggestions on other possible 

approaches for conducting a 

retrospective analysis to identify the 

amount of case-mix changes that 

occurred in FY 2008 and FY 2009 that 

did not reflect real increases in patients’

severity of illness. 

Comment: A few commenters, 

including MedPAC, expressed support 

for the analytic approach described in 

the proposed rule. A number of other 

commenters expressed concerns about 

certain aspects of the approach and/or 

suggested alternate analyses or study 

designs. In addition, one commenter 

recommended that any determination or 

retrospective evaluation by the actuaries 

of the impact of the MS–DRGs on casemix be open to public scrutiny prior to 

the implementation of final payment 

adjustments for FY 2010 through FY 

2012. 

Response: We thank the commenters 

for their comments. We will take all of 

the comments into consideration as we 

continue development of our analysis 

plans. Our analysis, findings, and any 

resulting proposals to adjust payments 

for discharges occurring in FYs 2010 

through 2012 to offset the estimated 

amount of increase or decrease in 

aggregate payments that occurred in FY 

2008 and FY 2009 will be discussed in 

future years’ proposed rules, which will 

be open for public comment. 

Comment: One commenter expressed 

concern about the impact that an 

adjustment to the FY 2010 through FY 

2012 payment rates could have on small 

rural hospitals. The commenter stated 

that if CMS finds that there was an 

increase in aggregate payments in FY 

2008 or FY 2009 that requires an 

offsetting adjustment to the FY 2010 

through FY 2012 payment rates, CMS 

should consider a transition period 

before fully implementing such ad 

adjustment. 

Response: If our analysis suggests that 

an adjustment to the FY 2010 through 

FY 2012 payment rates is necessary, a 

proposal would be made in a future 

proposed rule and the public would 

have an opportunity to comment on the 

proposal at that time. 

E. Refinement of the MS–DRG Relative 

Weight Calculation 

1. Background 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47188), we 


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continued to implement significant 

revisions to Medicare’s inpatient 

hospital rates by basing relative weights 

on hospitals’ estimated costs rather than 

on charges. We continued our 3-year 

transition from charge-based relative 

weights to cost-based relative weights. 

Beginning in FY 2007, we implemented 

relative weights based on cost report 

data instead of based on charge 

information. We had initially proposed 

to develop cost-based relative weights 

using the hospital-specific relative value 

cost center (HSRVcc) methodology as 

recommended by MedPAC. However, 

after considering concerns raised in the 

public comments, we modified 

MedPAC’s methodology to exclude the 

hospital-specific relative weight feature. 

Instead, we developed national CCRs 

based on distinct hospital departments 

and engaged a contractor to evaluate the 

HSRVcc methodology for future 

consideration. To mitigate payment 

instability due to the adoption of costbased relative weights, we decided to 

transition cost-based weights over 3 

years by blending them with chargebased weights beginning in FY 2007. In 

FY 2008, we continued our transition by 

blending the relative weights with onethird charge-based weights and twothirds cost-based weights. 

Also, in FY 2008, we adopted 

severity-based MS–DRGs, which 

increased the number of DRGs from 538 

to 745. Many commenters raised 

concerns as to how the transition from 

charge-based weights to cost-based 

weights would continue with the 

introduction of new MS–DRGs. We 

decided to implement a 2-year 

transition for the MS–DRGs to coincide 

with the remainder of the transition to 

cost-based relative weights. In FY 2008, 

50 percent of the relative weight for 

each DRG was based on the CMS DRG 

relative weight and 50 percent was 

based on the MS–DRG relative weight. 

We refer readers to the FY 2007 IPPS 

final rule (71 FR 47882) for more detail 

on our final policy for calculating the 

cost-based DRG relative weights and to 

the FY 2008 IPPS final rule with 

comment period (72 FR 47199) for 

information on how we blended relative 

weights based on the CMS DRGs and 

MS–DRGs. 

As we transitioned to cost-based 

relative weights, some commenters 

raised concerns about potential bias in 

the weights due to ‘‘charge 

compression,’’ which is the practice of 

applying a higher percentage charge 

markup over costs to lower cost items 

and services, and a lower percentage 

charge markup over costs to higher cost 

items and services. As a result, the costbased weights would undervalue high 

cost items and overvalue low cost items 

if a single CCR is applied to items of 

widely varying costs in the same cost 

center. To address this concern, in 

August 2006, we awarded a contract to 

RTI to study the effects of charge 

compression in calculating the relative 

weights and to consider methods to 

reduce the variation in the CCRs across 

services within cost centers. RTI issued 

an interim draft report in March 2007 

which was posted on the CMS Web site 

with its findings on charge compression. 

In that report, RTI found that a number 

of factors contribute to charge 

compression and affect the accuracy of 

the relative weights. RTI found 

inconsistent matching of charges in the 

Medicare cost report and their 

corresponding charges in the MedPAR 

claims for certain cost centers. In 

addition, there was inconsistent 

reporting of costs and charges among 

hospitals. For example, some hospitals 

would report costs and charges for 

devices and medical supplies in the 

Medical Supplies Charged to Patients 

cost center, while other hospitals would 

report those costs and charges in their 

related ancillary departments such as 

Operating Room or Radiology. RTI also 

found evidence that certain revenue 

codes within the same cost center had 

significantly different markup rates. For 

example, within the Medicare Supplies 

Charged to Patients cost center, revenue 

codes for devices, implantables, and 

prosthetics had different markup rates 

than the other medical supplies in that 

cost center. RTI’s findings demonstrated 

that charge compression exists in 

several CCRs, most notably in the 

Medical Supplies and Equipment CCR. 

RTI offered short-term, medium-term, 

and long-term recommendations to 

mitigate the effects of charge 

compression. RTI’s short-term 

recommendations included expanding 

the distinct hospital CCRs to 19 by 

disaggregating the ‘‘Emergency Room’’

and ‘‘Blood and Blood Products’’ from 

the Other Services cost center and by 

estimating regression-based CCRs to 

disaggregate Medical Supplies, Drugs, 

and Radiology cost centers. RTI 

recommended, for the medium-term, to 

expand the MedPAR file to include 

separate fields that disaggregate several 

existing charge departments. In 

addition, RTI recommended improving 

hospital cost reporting instructions so 

that hospitals can properly report costs 

in the appropriate cost centers. RTI’s 

long-term recommendations included 

adding new cost centers to the Medicare 

cost report, such as adding a ‘‘Devices, 

Implants and Prosthetics’’ line under 

‘‘Medical Supplies Charged to Patients’’

and a ‘‘CT Scanning and MRI’’

subscripted line under ‘‘RadiologyDiagnostics’’. 

Among RTI’s short-term 

recommendations, for FY 2008, we 

expanded the number of distinct 

hospital department CCRs from 13 to 15 

by disaggregating ‘‘Emergency Room’’

and ‘‘Blood and Blood Products’’ from 

the Other Services cost center as these 

lines already exist on the hospital cost 

report. Furthermore, in an effort to 

improve consistency between costs and 

their corresponding charges in the 

MedPAR file, we moved the costs for 

cases involving electroencephalography 

(EEG) from the Cardiology cost center to 

the Laboratory cost center group which 

corresponds with the EEG MedPAR 

claims categorized under the Laboratory 

charges. We also agreed with RTI’s 

recommendations to revise the Medicare 

cost report and the MedPAR file as a 

long-term solution for charge 

compression. We stated that, in the 

upcoming year, we would consider 

additional lines to the cost report and 

additional revenue codes for the 

MedPAR file. 

Despite receiving public comments in 

support of the regression-based CCRs as 

a means to immediately resolve the 

problem of charge compression, 

particularly within the Medical 

Supplies and Equipment CCR, we did 

not adopt RTI’s short-term 

recommendation to create four 

additional regression-based CCRs for 

several reasons. We were concerned that 

RTI’s analysis was limited to charges on 

hospital inpatient claims, while 

typically hospital cost report CCRs 

combine both inpatient and outpatient 

services. Further, because both the IPPS 

and OPPS rely on cost-based weights, 

we preferred to introduce any 

methodological adjustments to both 

payment systems at the same time. We 

have since expanded RTI’s analysis of 

charge compression to incorporate 

outpatient services. RTI has been 

evaluating the cost estimation process 

for the OPPS cost-based weights, 

including a reassessment of the 

regression-based CCR models using both 

outpatient and inpatient charge data. 

Because the RTI report was not available 

until after the conclusion of our 

proposed rule development process, we 

were unable to include a summary of 

the report in the FY 2009 IPPS proposed 

rule. The IPPS-related chapters of RTI’s 

interim report were posted on the CMS 

Web site on April 22, 2008, for a 60-day 

comment period, and we welcomed 

comments on the report. In this final 

rule, we are providing a summary of 

RTI’s findings and the public comments 


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we received in section II.E.2. of the 

preamble of this final rule. 

2. Summary of RTI’s Report on Charge 

Compression 

As stated earlier, subsequent to the 

release of the FY 2009 IPPS proposed 

rule, we posted on April 22, 2008, an 

interim report discussing RTI’s research 

findings for the IPPS MS–DRG relative 

weights to be available during the 

public comment period on the FY 2009 

IPPS proposed rule. This report can be 

found on RTI’s Web site at: http:// 

www.rti.org/reports/cms/HHSM-500- 

2005-0029I/PDF/Refining_Cost_to_

Charge_Ratios_200804.pdf. The IPPSspecific chapters, which were separately 

displayed in the April 2008 interim 

report, as well as the more recent OPPS 

chapters, are included in the July 2008 

RTI final report entitled, ‘‘Refining Costto-Charge Ratios for Calculating APC 

and DRG Relative Payment Weights,’’

that became available at the time of the 

development of this final rule. The RTI 

final report can be found on RTI’s Web 

site at: http://www.rti.org/reports/cms/

HHSM-500-2005-0029I/PDF/Refining_

Cost_to_Charge_Ratios_200807_

Final.pdf. 

RTI’s final report distinguished 

between two types of research findings 

and recommendations: Those pertaining 

to the accounting or cost report data and 

those related to statistical regression 

analysis. Because the OPPS uses a 

hospital-specific CCR methodology, 

employs detailed cost report data, and 

estimates costs at the claim level, CMS 

asked RTI to closely evaluate the 

accounting component of the OPPS 

cost-based weight methodology. In 

reviewing the cost report data for 

nonstandard cost centers used in the 

crosswalk, RTI discovered some 

problems concerning the classification 

of nonstandard cost centers that impact 

both the IPPS and the OPPS. RTI 

reclassified nonstandard cost centers by 

reading providers’ cost center labels. 

Standard cost centers are preprinted in 

the CMS-approved cost report software, 

while nonstandard cost centers are 

identified and updated periodically 

through analysis of frequently used 

labels. Under the IPPS, the line 

reassignments only slightly impact the 

15 national aggregate CCRs used in the 

relative weight calculation. However, 

improved cost report data for CT 

Scanning, MRI, Nuclear Medicine, 

Therapeutic Radiology, and Cardiac 

Catheterization through line 

reassignments allowed for the reduction 

in aggregation bias by expanding the 

number of national CCRs available to 

separately capture these and other 

services. Importantly, RTI found that, 

under the IPPS and the OPPS, this 

improvement to the cost reporting data 

reduces some of the sources of 

aggregation bias without having to use 

regression-based adjustments. 

In general, with respect to the 

regression-based adjustments, RTI 

confirmed the findings of its March 

2007 report that regression models are a 

valid approach for diagnosing potential 

aggregation bias within selected services 

for the IPPS and found that regression 

models are equally valid for setting 

payments under the OPPS. RTI also 

suggested that regression-based CCRs 

could provide a short-term correction 

until accounting data could be refined 

to support more accurate CCR estimates 

under both the IPPS and the OPPS. RTI 

again found aggregation bias in devices, 

drugs, and radiology and, using 

combined outpatient and inpatient 

claims, expanded the number of 

recommended regression-adjusted CCRs 

to create seven regression-adjusted CCRs 

for Devices, IV Solutions, Cardiac 

Catheterization, CT Scanning, MRI, 

Therapeutic Radiology, and Nuclear 

Medicine. 

In almost all cases, RTI observed that 

potential distortions from aggregation 

bias and incorrect cost reporting in the 

OPPS relative weights were 

proportionally much greater than for 

MS–DRGs for both accounting-based 

and statistical adjustments because 

OPPS groups are small and generally 

price a single service. HCRIS line 

reassignments by themselves had little 

effect on most inpatient weights. 

However, just as the overall impacts on 

MS–DRGs were more moderate because 

MS–DRGs experienced offsetting effects 

in cost estimation among numerous 

revenue codes in an episode, a given 

hospital outpatient visit might include 

more than one service, leading to 

offsetting effects in cost estimation for 

services provided in the outpatient 

episode as a whole. 

Notwithstanding likely offsetting 

effects at the provider-level, RTI 

asserted that, while some averaging is 

appropriate for a prospective payment 

system, extreme distortions in payments 

for individual services bias perceptions 

of service profitability and may lead 

hospitals to inappropriately set their 

charge structure. RTI noted that this 

may not be true for ‘‘core’’ hospital 

services, such as oncology, but has a 

greater impact in evolving areas with 

greater potential for provider-induced 

demand, such as specialized imaging 

services. RTI also noted that cost-based 

weights are only one component of a 

final prospective payment rate. There 

are other rate adjustments (wage index, 

IME, and DSH) to payments derived 

from the revised cost-based weights and 

the cumulative effect of these 

components may not improve the ability 

of final payment to reflect resource cost. 

With regard to APCs and MS–DRGs that 

contain substantial device costs, RTI 

cautioned that other prospective 

payment system adjustments (wage 

index, IME, and DSH) largely offset the 

effects of charge compression among 

hospitals that receive these adjustments. 

RTI endorsed short-term regressionbased adjustments, but also concluded 

that more refined and accurate 

accounting data are the preferred longterm solution to mitigate charge 

compression and related bias in hospital 

cost-based weights. 

As a result of this research, RTI made 

11 recommendations. The first set of 

recommendations is more applicable to 

the OPPS because it uses more granular 

HCRIS data and concentrates on shortterm accounting changes to current cost 

report data. This set includes a 

recommendation that CMS immediately 

implement a review of HCRIS cost 

center assignments based on text 

searches of providers’ line descriptions 

and reassign lines appropriately. The 

second set addresses short-term 

regression-based and other statistical 

adjustments. The third set focuses on 

clarifying existing cost report 

instructions to instruct providers to use 

all applicable standard cost centers, 

adding new standard cost centers (for 

Devices, CT Scans, MRIs, Cardiac 

Catheterization, and Infusion Drugs), 

and creating new charge category 

summaries in the MedPAR to match the 

new cost centers on the cost report. 

Specifically, the new MedPAR groups 

would be for Intermediate Care (revenue 

codes 0206 and 0214), Devices (revenue 

codes 0274, 0275, 0276 and 0278), IV 

Solutions (revenue code 0258), CT 

Scanning (revenue codes 035x), Nuclear 

Medicine (revenue codes 034x, possibly 

combined with 0404), and Therapeutic 

Radiology (revenue codes 033x). RTI 

also recommends educating hospitals 

through industry-led educational 

initiatives directed at methods for 

capital cost finding, specifically 

encouraging providers to use direct 

assignment of equipment depreciation 

and lease costs wherever possible, or at 

least to allocate moveable equipment 

depreciation based on the dollar value 

of assigned depreciation costs. Lastly, 

although not directly the focus of its 

study, RTI mentions the problem of 

nursing cost compression in the relative 

weights, and notes that cost 

compression within inpatient nursing 

services is a significant source of 

distortion in the various IPPS’ relative 


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weights, possibly more so than any of 

the factors studied by RTI. RTI suggests 

that it may be best for hospitals to agree 

to expand charge coding conventions for 

inpatient nursing, which would foster 

increased use of patient-specific nursing 

incremental charge codes in addition to 

baseline unit-specific per-diem charges. 

Comment: One commenter agreed 

with the enhancements made by RTI (in 

the portion of the RTI report that was 

made available to the public in the April 

2008 report) to the model for 

disaggregating CCRs in the Medical 

Supplies cost center, but was 

‘‘disappointed’’ that CMS did not post 

the complete report, including the 

impact of charge ‘‘decompression’’ on 

the APC weights under the OPPS, and 

urged CMS to release the full report as 

soon as possible to allow a 

comprehensive review of the findings 

applicable to both the IPPS and the 

OPPS. 

Response: Because the final RTI 

report was not scheduled to be 

completed before July 2008, we were 

unable to make the complete report, 

including sections focusing on the 

OPPS, available to the public in April 

2008. Because we wanted to give the 

public the benefit of a 60-day comment 

period on the IPPS sections of the RTI 

report that would generally coincide 

with the 60-day comment period on the 

FY 2009 IPPS proposed rule, we chose 

to make available in April 2008 those 

sections of the RTI report that 

specifically dealt with the IPPS MS–

DRG relative weights. We note that on 

July 3, 2008, we included on the CMS 

Web site the link to the complete RTI 

report: http://www.rti.org/reports/cms/ 

HHSM-500-2005-0029I/PDF/

Refining_Cost_to_

Charge_Ratios_200807_Final.pdf. 

Comment: One commenter 

recommended that, for purposes of 

calculating the relative weights for FY 

2009, CMS adopt RTI’s recommendation 

to reassign cost center lines based on the 

provider’s entered text description to 

correct errors in the assignment of costs 

and charges by hospitals in nonstandard 

cost centers on the cost report. The 

commenter also suggested that CMS 

adopt RTI’s recommendation that, in the 

MedPAR file, intermediate care charges 

should be reclassified from the Intensive 

Care Unit cost center to the Routine cost 

center to correct a mismatch between 

where the intermediate care charges are 

assigned on the cost report (that is, in 

the Routine cost center) and where the 

charges are grouped in MedPAR (that is, 

with intensive care unit charges). 

Response: The commenter’s 

recommendations are important and are 

consistent with existing Medicare 

policy. Currently, the MedPAR file 

incorrectly groups intermediate care 

charges with intensive care unit charges; 

intermediate care charges and costs are, 

in fact, to be included in the General 

Routine (that is, Adults and Pediatrics) 

cost center on the cost report, in 

accordance with section 2202.7.II.B. of 

the PRM–1. However, in its July 2008 

report, RTI found that HCRIS line 

reassignments by themselves had little 

effect on most inpatient weights (page 

8). The impact of adopting these 

recommendations would likely be more 

pronounced if we were adopting 

regression-based CCRs for purposes of 

calculating the relative weights for FY 

2009. However, because we are not 

using regression-based CCRs for FY 

2009, we do not believe it is necessary 

to adopt the commenter’s 

recommendations for the MS–DRG 

relative weights at this time, but will 

consider them for future rulemaking. 

Comment: One commenter 

commended CMS for proposing to break 

out the existing line on the cost report 

for Medical Supplies Charged to 

Patients into two lines, one for costly 

devices and implants and the other for 

low-cost supplies, and for undertaking a 

comprehensive review of the cost 

report. However, the commenter 

observed that RTI’s 2008 report 

demonstrates that additional lines are 

also needed to further break out drugs, 

radiology (CT scans and MRI scans) and 

cardiac catheterization because 

hospitals apply varying markups within 

these cost centers as well. 

Response: We acknowledge, as RTI 

has found, that charge compression 

occurs in several cost centers that exist 

on the Medicare cost report. However, 

as we stated in the proposed rule, we 

proposed to focus on the CCR for 

Medical Supplies and Equipment 

because RTI found that the largest 

impact on the MS–DRG relative weights 

could result from correcting charge 

compression for devices and implants. 

We note that in the CY 2009 OPPS/ 

ASC proposed rule (73 FR 41490), we 

are proposing to break the single 

standard Drugs Charged to Patient cost 

center, Line 56, into two standard cost 

centers, Drugs with High Overhead Cost 

Charged to Patients and Drugs with Low 

Overhead Cost Charged to Patients, to 

reduce the reallocation of pharmacy 

overhead cost from expensive to 

inexpensive drugs and biologicals. We 

use the term ‘‘pharmacy overhead’’ here 

to refer to overhead and related 

expenses such as pharmacy services and 

handling costs. This proposal is 

consistent with RTI’s recommendation 

for creating a new cost center with a 

CCR that would be used to adjust 

charges to costs for drugs requiring 

detail coding. In the CY 2009 OPPS/ 

ASC proposed rule, we note that 

comments on the proposed changes to 

the cost report for drugs should address 

any impact on both the inpatient and 

outpatient payment systems because 

both systems rely upon the Medicare 

hospital cost report for cost estimation. 

Furthermore, in that proposed rule, we 

specifically invited public comment on 

the appropriateness of creating standard 

cost centers for Computed Tomography 

(CT) Scanning, Magnetic Resonance 

Imaging (MRI), and Cardiac 

Catheterization, rather than continuing 

the established nonstandard cost centers 

for these services (73 FR 41431). 

3. Summary of RAND’s Study of 

Alternative Relative Weight 

Methodologies 

A second reason that we did not 

implement regression-based CCRs at the 

time of the FY 2008 IPPS final rule with 

comment period was our inability to 

investigate how regression-based CCRs 

would interact with the implementation 

of MS–DRGs. In the FY 2008 final rule 

with comment period (72 FR 47197), we 

stated that we engaged RAND as the 

contractor to evaluate the HSRV 

methodology in conjunction with 

regression-based CCRs and we would 

consider their analysis as we prepared 

for the FY 2009 IPPS rulemaking 

process. We stated that we would 

analyze how the relative weights would 

change if we were to adopt regressionbased CCRs and an HSRV methodology 

using fully-phased in MS–DRGs. We 

stated that we would consider the 

results of the second phase of the RAND 

study as we prepared for the FY 2009 

IPPS rulemaking process. We had 

intended to include a detailed 

discussion of RAND’s study in the FY 

2009 IPPS proposed rule. However, due 

to some delays in releasing identifiable 

data to the contractor under revised data 

security rules, the report on this second 

stage of RAND’s analysis was not 

completed in time for the development 

of the proposed rule. Therefore, we 

continued to have the same concerns 

with respect to uncertainty about how 

regression-based CCRs would interact 

with the MS–DRGs or an HSRV 

methodology, and we did not propose to 

adopt the regression-based CCRs or an 

HSRV methodology in the FY 2009 IPPS 

proposed rule. Nevertheless, we 

welcomed public comments on our 

proposals not to adopt regression-based 

CCRs or an HSRV methodology at that 

time or in the future. The RAND report 

on regression-based CCRs and the HSRV 

methodology was finalized at the 

conclusion of our proposed rule 


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development process and was posted on 

the CMS Web site on April 22, 2008, for 

a 60-day comment period. Although we 

were unable to include a discussion of 

the results of the RAND study in the 

proposed rule, we welcomed public 

comment on the report. We are 

providing a summary of the report and 

the public comments we received 

below. 

RAND evaluated six different 

methods that could be used to establish 

relative weights: CMS’ current relative 

weight methodology and five 

alternatives. In particular, RAND 

examined: 

• How the relative weights differ 

across the alternative methodologies. 

• How well each relative weight 

methodology explained variation in 

costs. 

• Payment accuracy under each 

relative weight methodology and 

current facility-level adjustments. 

• Payment implications of 

alternatives to the current methodology 

for establishing relative weights. 

RAND examined alternative relative 

weight methodologies including either 

our current methodology of 15 national 

CCRs or 19 CCRs that are disaggregated 

using the regression-based methodology, 

or hospital-specific CCRs for 15 cost 

center groupings. The expansion from 

15 to 19 cost center groupings is 

intended to reduce charge compression 

in the relative weights introduced by 

combining services with different rates 

of charge markups into a single cost 

center for purposes of estimating cost. 

The hospital-specific CCRs are intended 

to account for differences in overall 

charging practices across hospitals (that 

is, smaller nonteaching hospitals tend 

not to have as much variation in rates 

of markup as larger teaching hospitals). 

In addition, RAND analyzed our 

standardization methodologies that 

account for systematic cost differences 

across hospitals. The purpose of 

standardization is to eliminate 

systematic facility-specific differences 

in cost so that these cost differences do 

not influence the relative weights. The 

three standardization methodologies 

analyzed by RAND include the 

‘‘hospital payment factor’’ methodology 

currently used by CMS, where a 

hospital’s wage index factor, and IME 

and/or DSH factor are divided out of its 

estimated DRG cost; the HSRV 

methodology that standardizes the cost 

for a given discharge by the hospital’s 

own costliness rather than by the effect 

of the systematic cost differences across 

groups of hospitals; and the HSRVcc 

methodology, which removes hospitallevel cost variation by calculating 

hospital-specific charge-based relative 

values for each DRG at the cost center 

level and standardizing them for 

differences in case mix. Under the 

HSRVcc methodology, a national 

average charge-based relative weight is 

calculated for each cost center. 

RAND conducted two different types 

of analyses to evaluate 5 alternative 

relative weight methodologies that 

varied use of 19 national CCRs and 15 

hospital-specific CCRs, and HSRV and 

HSRVcc standardization methodologies 

along with components of the current 

relative weight methodology using 15 

national CCRs and hospital payment 

factor standardization. The first type of 

analysis compared the five alternative 

relative weight methodologies to CMS’

current relative weight methodology 

and compared average payment under 

each relative weight methodology across 

different types of hospitals. The second 

analysis examined the relative payment 

accuracy of the relative weight 

methodologies. RAND used the costs 

under 15 hospital-specific CCRs as its 

hospital cost baseline. RAND noted that 

the choice for its baseline may affect the 

results of the analysis because relative 

weight methodologies that are similar to 

the 15 hospital-specific CCR 

methodology may be assessed more 

favorably because they are likely to have 

similar costs, while relative weight 

methodologies that are different from 

the 15 hospital-specific CCR 

methodology may not be as favorable. 

The payment accuracy analysis used a 

regression technique to evaluate how 

well the relative weight methodologies 

explained variation in costs and how 

well the hospital payments under the 

relative weight methodologies matched 

the costs per discharge. Finally, RAND 

examined payment-to-cost ratios among 

different types of hospitals. 

Overall, RAND found that none of the 

alternative methods of calculating the 

relative weights represented a marked 

improvement in payment accuracy over 

the current method, and there was little 

difference across methods in their 

ability to predict cost at either the 

discharge-level or the hospital-level. In 

their regression analysis, RAND found 

that after controlling for hospital 

payment factors, the relative weights are 

compressed. However, RAND also 

found that the hospital payment factors 

increase more rapidly than cost, so 

while the relative weights are 

compressed, these payment factors 

offset the compression so that total 

payment increases more rapidly than 

cost. 

RAND does not believe the regressionbased charge compression adjustments 

significantly improve payment 

accuracy. RAND found that relative 

weights using the 19 national 

disaggregated regression-based CCRs 

result in significant redistributions in 

payments among hospital groupings. 

With regard to standardization 

methodologies, while RAND found that 

there is no clear advantage to the HSRV 

method or the HSRVcc method of 

standardizing cost compared to the 

current hospital payment factor 

standardization method, its analysis did 

reveal significant limitations of CMS’

current hospital payment factor 

standardization method. The current 

standardization method has a larger 

impact on the relative weights and 

payment accuracy than any of the other 

alternatives that RAND analyzed 

because the method ‘‘over-standardizes’’

by removing more variability for 

hospitals receiving a payment factor 

than can be empirically supported as 

being cost-related (particularly for IME 

and DSH). RAND found that instead of 

increasing proportionately with cost, the 

payment factors CMS currently uses 

(some of which are statutory), increase 

more rapidly than cost, thereby 

reducing payment accuracy. Further 

analysis is needed to isolate the costrelated component of the IPPS payment 

adjustments (some of which has already 

been done by MedPAC), use them to 

standardize cost, and revise the analysis 

of payment accuracy to reflect only the 

cost-related component. Generally, 

RAND believes it is premature to 

consider further refinements in the 

relative weight methodology until data 

from FY 2008 or later that reflect coding 

improvement and other behavioral 

changes that are likely to occur as 

hospitals adopt the MS–DRGs can be 

evaluated. 

Comment: A number of commenters 

submitted comments on RAND’s report. 

Some commenters supported RAND’s 

methodology and findings. These 

commenters agreed with RAND’s 

findings that regression-based CCRs 

would not have a material impact on 

payment accuracy. These commenters 

also agreed with RAND that CMS 

should wait until FY 2008 data are 

available to consider further refinements 

to the relative weight methodology. 

Some commenters disagreed with 

RAND’s methodology and findings that 

the regression-based CCRs offer no 

improvement in payment accuracy. 

RAND found that regression-based CCRs 

result in significant redistributions in 

payment within hospital groups with 

increases in payments concentrated to 

the cardiac and orthopedic surgical 

DRGs. RAND’s payment to cost ratio 

analysis, which measures payment 

equity across groups of hospitals, found 

that adopting regression-based CCRs led 


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to significant reductions in payment to 

cost ratio for rural hospitals. 

Commenters also indicated their belief 

that the payment-to-cost analysis is not 

the appropriate analysis to use because, 

in the hospital prospective payment 

system, costs at the DRG level are not 

precisely known. Furthermore, the 

commenters asserted RAND’s analysis 

was flawed because, in its payment-tocost analysis, RAND compared payment 

rates adjusted for charge compression 

with regression-based CCRs to payment 

rates unadjusted for charge 

compression. The commenters stated 

that when they compared payments 

adjusted for charge compression with 

regression-based CCRs to payment rates 

adjusted for charge compression, they 

found that regression-based CCRs 

improved payment accuracy. In 

addition, the commenters cited that 

RAND acknowledged that its choice for 

the baseline in comparing payment rates 

‘‘may affect the results and conclusions 

of our analysis’’. 

Response: We appreciate the 

comments on the RAND report. Given 

the move to the MS–DRGs and the 

concerns surrounding documentation 

and coding and the most appropriate 

approach to improving payment 

accuracy, we generally agree with 

RAND’s recommendation that it would 

be premature to revise the relative 

weights methodology until additional 

data from FY 2008 are available. With 

respect to the comments on RAND’s 

analysis related to the regression-based 

CCRs, we understand the commenters’

reasons for disputing RAND’s choice to 

use a relative weight methodology that 

does not incorporate regression-based 

CCRs as its baseline for hospital costs. 

In RAND’s payment-to-cost analysis, 

RAND used the relative weight 

methodology with 15 hospital-specific 

CCRs to determine the hospital costs 

baseline. RAND noted that, while it 

believes its choice of cost measure is 

appropriate, it recognizes that ‘‘the 

choice may affect the results of the 

analysis because relative weight 

methods that use the hospital-specific 

CCRs may be assessed more favorably 

than would have been the case had we 

used a different cost measure. Similarly, 

the use of 15 rather than 19 cost center 

CCRs may favor the relative weight 

methods that do not account for charge 

compression.’’ If a single method 

existed that clearly yielded the best 

measure of cost, it seems unlikely that 

a study to evaluate five alternative 

methods of calculating cost for the MS–

DRG relative weights would have been 

necessary. We believe that it was within 

RAND’s discretion to decide how best to 

conduct its payment analyses, and 

while there may be benefits and 

drawbacks to alternative approaches 

(including whether to use a baseline 

that adjusts for charge compression), 

RAND’s choice is defensible. 

Accordingly, RAND’s finding that 

regression-based CCRs do not improve 

payment accuracy cannot be summarily 

dismissed. 

Comment: Many commenters opposed 

the HSRV methodology for 

standardization. The commenters cited 

RAND’s findings that the HSRV 

methodology inappropriately 

compresses the relative weights. They 

believed that the methodology only 

improves the accuracy of the relative 

weights under the unlikely situations 

where all hospitals have identical mix 

of patients and costs structures, or if all 

hospitals have identical costs across all 

cost centers or if all hospitals have the 

same case-mix and the costs differ by a 

constant factor across all DRGs and all 

cost centers. The commenters agreed 

with RAND that it would be premature 

to consider further refinements to the 

methodology for setting relative 

weights, including the HSRV method of 

standardization, until data from FY 

2008 or later can be evaluated. 

Response: We appreciate the 

comments on the HSRV methodology, 

and we understand that many 

commenters continue to oppose to the 

HSRV methodology. In FY 2007, we did 

not adopt the HSRV methodology after 

consideration of concerns raised by 

commenters’ opposition to the 

methodology. Instead, in the FY 2007 

IPPS final rule (71 FR 47897), we stated 

that we would undertake further 

analysis to study the payment impacts 

of the HSRV methodology with 

regression-based CCRs under the MS–

DRGs. We engaged RAND as our 

contractor to conduct this analysis, and 

in its report, RAND observed that 

relative weights that were based on 

hospital-specific CCRs with 15 cost 

centers that were standardized using the 

current standardization methodology 

would warrant further consideration as 

an improvement over the current 

relative weights. RAND did not find the 

HSRV or HSRVcc standardization 

methods to be preferable to the hospital 

payment factor method. However, 

RAND also cautioned that its results 

reveal some significant limitations of 

the current hospital payment factor 

method. Specifically, current IME and 

DSH payment adjustments increase 

more quickly than their cost, and when 

used for standardization, compress the 

relative weights. We agree with RAND 

that our current standardization process 

requires additional analysis, and 

therefore, we are not changing our 

current method of standardizing for FY 

2009. We will continue to consider 

various options for improving payment 

accuracy. 

Comment: One commenter supported 

RAND’s finding that CMS should revise 

its hospital payment factor method for 

standardizing claims charges to remove 

the effects of hospital-specific factors 

(that is, wage index, IME, and DSH) that 

affect cost estimates. The commenter 

recommended that CMS could improve 

its standardization process by removing 

the effects of these factors by using 

empirical estimates rather than using 

current policy adjustments. The 

commenter noted that MedPAC and 

CMS have done empirical estimates of 

these factors in the past. 

Response: One of the issues that the 

RAND report specifically addressed was 

standardization methods that account 

for systematic cost differences across 

hospitals. These methods include what 

RAND called the hospital payment 

factor method, which is CMS’ current 

approach to standardizing claims 

charges, the HSRV methodology, and 

the HSRVcc methodology. Although 

RAND’s results do not indicate that the 

HSRV or HSRVcc standardization 

method is clearly preferable to the 

hospital payment factor method, RAND 

found that the current hospital payment 

factor standardization method has 

significant limitations. Specifically, 

RAND found that the hospital payment 

factor method ‘‘over-standardizes’’ by 

using a hospital payment factor that is 

larger than can be empirically supported 

as being cost-related (particularly for 

IME and DSH) and that has a larger 

impact on the relative weights and 

payment accuracy than other elements 

of the cost-based methodology. 

However, RAND cautions that ‘‘reestimating’’ these payment factors 

‘‘raises important policy issues that 

warrant additional analyses’’ (page 49), 

particularly to ‘‘determine the 

analytically justified-levels using the 

MS–DRGs’’ (page 110). In addition, we 

note that RTI, in its July 2008 final 

report, also observed that the 

adjustment factors under the IPPS (the 

wage index, IME, and DSH adjustments) 

complicate the determination of cost 

and these factors ‘‘within the rate 

calculation may offset the effects of 

understated weights due to charge 

compression’’ (page 109). We 

understand that MedPAC has done 

analysis of what the empiricallyjustified levels of the IME and DSH 

adjustment should be. We cannot 

propose to change the IME and DSH 

factors used for actual payment under 

the IPPS because these factors are 


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required by statute. After further 

studying the issue, we may consider 

proposing various options for improving 

payment accuracy when standardizing 

charges as part of the relative weights 

calculation. 

Comment: Many commenters 

continued to oppose adoption of the 

regression-based CCRs, asserting that 

the charge compression issue is not 

urgent enough to warrant the use of 

substitute data for real cost and charge 

information. The commenters indicated 

that many hospitals believe that most 

increases or decreases in the MS–DRG 

relative weights will have a minimal 

dollar impact on their bottom line. They 

further stated that the RAND report 

asserts that the regression-based CCR 

adjustments would not materially 

impact payment accuracy. The 

commenters also agreed with CMS’

position at the time of the proposed rule 

that there had not been sufficient time 

to evaluate the impact of a regressionbased approach on inpatient or 

outpatient services, and on the MS–

DRGs. The commenters further believed 

that calculating regression-based CCRs 

is ‘‘excessively complicated,’’ is difficult 

to validate, and may be flawed to the 

extent that the regressions would be 

based on data in which the mismatch 

between MedPAR charges and cost 

report costs and charges has not been 

corrected. The commenters believed 

that more accurate and uniform 

reporting and improvements to the cost 

report is the best approach to improving 

payment accuracy. 

A number of commenters objected to 

the regression-based approach to break 

out the one CCR for all radiology 

services that CMS is currently using. 

The commenters noted that the RTI 

estimates suggest that hospitals mark up 

CT services on average by more than 

1800 percent over cost (CCR 0.054), 

while routine radiology services are 

marked up by an average of more than 

300 percent over cost. The commenters 

believed that this vast difference in the 

markup practices of hospitals seems 

implausible and, therefore, would result 

in significant payment distortions if 

CMS were to adopt RTI’s disaggregated 

radiology CCRs or some related 

adjustment to the radiology CCR, for 

Medicare ratesetting. The commenters 

asserted that use of RTI’s CCRs would 

significantly reduce payment for 

imaging-intensive DRGs in the inpatient 

setting for trauma services, but the 

impact on payments under the OPPS 

and the Medicare physician fee 

schedule (MPFS) imaging services 

capped by OPPS payments would be 

even more dramatic. The commenters 

believed that the CCRs for advanced 

imaging may reflect a misallocation of 

capital costs on the cost report. They 

further stated that this could indicate 

that many hospitals are reporting CT 

and MRI machines as fixed equipment 

and allocate the related capital costs as 

part of the facility’s Building and 

Fixtures overhead cost center instead of 

reporting the capital costs directly in the 

Radiology cost center, resulting in RTI’s 

estimate of the costs and CCRs for CT 

and MRI equipment to be too low. The 

commenters argued that, regardless of 

the reason for the low CCRs, the use of 

RTI’s CCRs could result in aberrant 

payments for radiology services, where 

payments to a hospital for outpatient xrays might be higher than the payment 

for a similar CT scan, and where the 

physician fee schedule rates for the 

technical component cost of the CT scan 

may also be less than the cost of these 

scans estimated by CMS, providing a 

disincentive for hospitals and 

physicians to provide these services. In 

concluding that RTI’s analysis of the 

CCRs for imaging services is flawed, 

several commenters urged CMS to more 

carefully analyze CCRs for radiology 

before proposing any measures to 

change these CCRs. The commenters 

believed that if the underreported 

capital costs are considered, it is likely 

that the CCRs for CT scanning and MRI 

services would be approximately equal 

to the overall radiology CCR and no 

adjustment would be needed. 

A significant number of commenters 

supported applying the regression-based 

CCRs as a temporary solution to address 

charge compression. The commenters 

believed that because CMS’ proposed 

changes to the cost report would not 

have an impact on the relative weights 

until FY 2012, implementation of 

regression-based CCRs is necessary in 

the interim. The commenters cited what 

they believed is ample evidence, 

particularly from the RTI report and 

from MedPAC, that regression-based 

CCRs are appropriate as a short-term 

solution. 

While several commenters agreed on 

the use of regression-based CCRs as a 

short-term solution to charge 

compression, many commenters gave 

varied suggestions as to how to 

implement these regression-based CCRs. 

The commenters suggested that CMS 

implement a 3-year phase-in of 

regression-based CCRs beginning in FY 

2009 to mitigate any distributional 

impacts on hospitals. The commenters 

asked CMS to consider using a 

regression analysis for 25 percent of the 

estimated cost of medical supplies in FY 

2009, then 50 percent in FY 2010, and 

75 percent in FY 2011. The commenters 

further stated that once the data from 

the new cost centers for supplies and 

devices are available, the regression 

adjustments could be phased out, or 

remain in use even after FY 2012, 

should the data from the new cost 

centers still be incomplete at that time. 

Furthermore, the commenters believed 

that this transition would remove the 

need for a transition period to separate 

CCRs for medical devices and medical 

supplies once the cost report data are 

available. 

Some commenters supported 

adoption of regression-based CCRs 

except for those within the radiology 

category. Other commenters suggested 

that CMS only implement regressionbased CCRs for medical supplies and 

devices because the proposed changes 

to the cost report focused on the 

medical supplies and devices. They 

argued that CMS’ proposed cost report 

changes for medical supplies and 

devices signifies that CMS believes it is 

most important to address charge 

compression in the medical supplies 

group. 

One commenter recommended that, 

based on the findings in RTI’s 2008 

report, CMS should implement a total of 

22 regression-based CCRs. (In its March 

2007 report, RTI recommended that 

CMS expand the number of CCRs from 

15 to 19 with the use of statistical 

adjustments to disaggregate medical 

devices from medical supplies, IV 

solutions and other drugs from drugs 

and CT scanning and MRI from 

radiology. In the interim RTI report 

posted on the CMS Web site on April 

22, 2008, RTI increased the potential 

regression-based CCRs from 19 to 23 

national CCRs after evaluating OPPS 

data with IPPS data.) The commenter 

believed that CMS should expand the 

number of CCRs from 15 to 22 with 

disaggregated CCRs for medical 

supplies, medical devices, IV solutions, 

other drugs and detail coded drugs, CT 

scans, MRI, therapeutic radiation and 

nuclear medicine. The commenter 

recommended implementing these 

regression-based CCRs to ensure 

payment equity across these types of 

services. Because of limited time to 

develop the final rule, the commenter 

recognized that it would be difficult for 

CMS to implement revised regression 

estimates. To account for this, the 

commenter recommended what the 

commenter believed is a relatively 

simple ratio technique, similar to RTI’s 

methodology, to implement regressionbased CCRs for the FY 2009 IPPS final 

rule. The commenter believed that CMS 

could use more detailed charge 

information from the Standard Analytic 

File (SAF) and the regression-based 

estimates from RTI’s 2008 report to 


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calculate national CCRs for the 

subgroups within drugs, supplies and 

radiology. The commenter stated that 

CMS would then compare those CCRs 

under RTI’s regression-based estimates 

to the RTI-estimated national CCR for 

the broader category. To further clarify 

its recommendation, the commenter 

stated that, for example, if CMS were to 

disaggregate the supplies CCR, CMS 

would create regression-based CCRs for 

medical supplies and medical devices 

based on RTI’s regression-based CCRs 

for those subgroups. Then a ratio would 

be calculated comparing those CCRs to 

the original RTI-estimated national CCR 

for the broader supplies category. Those 

ratios would then be multiplied by their 

own national overall CCR for the 

broader supplies category to obtain 

national CCRs for the subgroup that 

reflect updated cost and charge data. 

Response: In the FY 2009 IPPS 

proposed rule (73 FR 23543), we stated 

several reasons why we did not propose 

to adopt any regression-based CCRs for 

FY 2009. Specifically, because a number 

of commenters on the FY 2008 proposed 

rule objected to the adoption of the 

regression-based CCRs, and because, at 

the time the FY 2009 IPPS proposed 

rule was under development, we did not 

yet have the results of the RTI study 

analyzing the effects of charge 

compression on inpatient and 

outpatient charges as well as the results 

of the RAND study analyzing how the 

relative weights would change if we 

were to adopt regression CCRs while 

simultaneously adopting the HSRV 

methodology using fully phased in MS–

DRGs, we did not propose to adopt 

regression-based CCRs in the FY 2009 

IPPS proposed rule. However, we did 

solicit public comments on our proposal 

not to adopt regression-based CCRs in 

the FY 2009 IPPS proposed rule. 

Consequently, as was the case during 

the FY 2008 IPPS proposed rule 

comment period, we received numerous 

public comments both against and in 

favor of adopting regression-based 

CCRs. Once again, we have considered 

all of the public comments we received. 

We have also considered the findings of 

the RAND report, and note that RAND 

believes that it may be premature to 

consider further refinements in the 

relative weight methodology until data 

using MS–DRGs from FY 2008 or later 

can be evaluated (page 108). Also 

noteworthy is RAND’s belief that 

regression-based CCRs may not improve 

payment accuracy, and that it is equally 

if not more important to consider 

revisions to the current IPPS hospital 

payment factor standardization method 

in order to improve payment accuracy. 

We appreciate the recognition by one 

commenter that the time in which CMS 

must develop the final rule is limited, 

and the consideration given by this 

commenter in recommending a 

relatively simple approach to 

implementing the regression-based 

CCRs for FY 2009. Nevertheless, we 

agree with the commenters that believe 

that the best approach at this time to 

addressing charge compression is to 

focus on improving the accuracy of 

hospital cost reporting, coupled with 

long-term changes to the cost report 

discussed below so that CMS can 

continue to rely on hospital’s reported 

cost and charge data. With respect to the 

CCR for radiology services, we note that 

the 2008 RTI report found that 

significant improvements and 

refinements to the radiology CCR can be 

achieved without using regression-based 

CCRs, simply by reallocating the costs 

and charges from nonstandard cost 

centers on the cost report and using 

increased charge detail from the SAF to 

supplement the radiology charges in the 

MedPAR. Therefore, as we stated in the 

FY 2009 IPPS proposed rule (73 FR 

XXXXX), we believe that ultimately, 

improved and more precise cost 

reporting is the best way to minimize 

charge compression and improve the 

accuracy of the cost weights. 

Accordingly, we are not adopting 

regression-based CCRs for the 

calculation of the FY 2009 IPPS relative 

weights. 

We received public comments on the 

FY 2008 IPPS proposed rule raising 

concerns on the accuracy of using 

regression-based CCR estimates to 

determine the relative weights rather 

than on the Medicare cost report. The 

commenters noted that regression-based 

CCRs would not fix the underlying 

mismatch of hospital reporting of costs 

and charges. Instead, the commenters 

suggested that the impact of charge 

compression might be mitigated through 

an educational initiative that would 

encourage hospitals to improve their 

cost reporting. The commenters 

recommended that hospitals be 

educated to report costs and charges in 

a way that is consistent with how 

charges are grouped in the MedPAR file. 

In an effort to achieve this goal, hospital 

associations have launched an 

educational campaign to encourage 

consistent reporting, which would 

result in consistent groupings of the cost 

centers used to establish the cost-based 

relative weights. The commenters 

requested that CMS communicate to the 

fiscal intermediaries/MACs that such 

action is appropriate. In the FY 2008 

IPPS final rule with comment period, 

we stated that we were supportive of the 

educational initiative of the industry, 

and we encouraged hospitals to report 

costs and charges consistently with how 

the data are used to determine relative 

weights (72 FR 47196). We would also 

like to affirm that the longstanding 

Medicare principles of cost 

apportionment in the regulations at 42 

CFR 413.53 convey that, under the 

departmental method of apportionment, 

the cost of each ancillary department is 

to be apportioned separately rather than 

being combined with another ancillary 

department (for example, combining the 

cost of Medical Supplies Charged to 

Patients with the costs of Operating 

Room or any other ancillary cost center). 

(We note that, effective for cost 

reporting periods starting on or after 

January 1, 1979, the departmental 

method of apportionment replaced the 

combination method of apportionment 

where all the ancillary departments 

were apportioned in the aggregate 

(Section 2200.3 of the PRM–I).) 

Furthermore, longstanding Medicare 

cost reporting policy has been that 

hospitals must include the cost and 

charges of separately ‘‘chargeable 

medical supplies’’ in the Medical 

Supplies Charged to Patients cost center 

(line 55 of Worksheet A), rather than in 

the Operating Room, Emergency Room, 

or other ancillary cost centers. Routine 

services, which can include ‘‘minor 

medical and surgical supplies’’ (Section 

2202.6 of the PRM–1), and items for 

which a separate charge is not 

customarily made, may be directly 

assigned through the hospital’s 

accounting system to the department in 

which they were used, or they may be 

included in the Central Services and 

Supply cost center (line 15 of Worksheet 

A). Conversely, the separately 

chargeable medical supplies should be 

assigned to the Medical Supplies 

Charged to Patients cost center on line 

55. 

We note that not only is accurate cost 

reporting important for IPPS hospitals to 

ensure that accurate relative weights are 

computed, but hospitals that are still 

paid on the basis of cost, such as CAHs 

and cancer hospitals, and SCHs and 

MDHs must adhere to Medicare cost 

reporting principles as well. 

The CY 2008 OPPS/ASC final rule 

with comment period (72 FR 66600 

through 66601) also discussed the issue 

of charge compression and regressionbased CCRs, and noted that RTI is 

currently evaluating the cost estimation 

process underpinning the OPPS costbased weights, including a reassessment 

of the regression models using both 

outpatient and inpatient charges, rather 

than inpatient charges only. In 


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responding to comments in the CY 2008 

OPPS/ASC final rule with comment 

period, we emphasized that we ‘‘fully 

support’’ the educational initiatives of 

the industry and that we would 

‘‘examine whether the educational 

activities being undertaken by the 

hospital community to improve cost 

reporting accuracy under the IPPS 

would help to mitigate charge 

compression under the OPPS, either as 

an adjunct to the application of 

regression-based CCRs or in lieu of such 

an adjustment’’ (72 FR 66601). However, 

as we stated in the FY 2008 IPPS final 

rule with comment period, we would 

consider the results of the RAND study 

before considering whether to adopt 

regression-based CCRs, and in the CY 

2008 OPPS/ASC final rule with 

comment period (72 FR 66601), we 

stated that we would determine whether 

refinements should be proposed after 

reviewing the results of the RTI study. 

On February 29, 2008, we issued 

Transmittal 321, Change Request 5928, 

to inform the fiscal intermediaries/ 

MACs of the hospital associations’

initiative to encourage hospitals to 

modify their cost reporting practices 

with respect to costs and charges in a 

manner that is consistent with how 

charges are grouped in the MedPAR file. 

We noted that the hospital cost reports 

submitted for FY 2008 may have costs 

and charges grouped differently than in 

prior years, which is allowable as long 

as the costs and charges are properly 

matched and the Medicare cost 

reporting instructions are followed. 

Furthermore, we recommended that 

fiscal intermediaries/MACs remain 

vigilant to ensure that the costs of items 

and services are not moved from one 

cost center to another without moving 

their corresponding charges. Due to a 

time lag in submittal of cost reporting 

data, the impact of changes in providers’

cost reporting practices occurring 

during FY 2008 would be reflected in 

the FY 2011 IPPS relative weights. 

Comment: One commenter urged 

CMS to audit cost reports closely to 

ensure initial and ongoing compliance 

with the new reporting requirements. 

Several commenters who, over the 

course of the past year, have supported 

an educational initiative to encourage 

hospitals to prepare their Medicare cost 

reports such that Medicare charges, total 

charges, and total costs are aligned with 

each other, and with the current 

categories in the MedPAR file, 

continued to believe that this 

educational initiative is an important 

effort. These commenters appreciated 

CMS’ efforts to inform the fiscal 

intermediaries/MACs of this 

educational initiative and to work with 

hospitals to ensure proper cost reporting 

(in Transmittal 321, Change Request 

5928, issued February 29, 2008). 

However, the commenters expressed 

concern that this transmittal did not 

address the need by some hospitals to 

elect a cost-estimated approach to 

ensure that costs and charges for 

supplies are aligned. The commenters 

urged CMS to instruct fiscal 

intermediaries/MACs not to reverse or 

undo reporting that relies on estimation 

approaches to achieve this alignment, 

provided that hospitals submit adequate 

documentation of their methodology. 

Response: We agree that audit and 

compliance measures are important, and 

we will work within the audit budget to 

determine whether hospitals properly 

follow payment policies and the cost 

reporting instructions. With respect to 

Transmittal 321, Change Request 5928, 

CMS did remind fiscal intermediaries/ 

MACs that ‘‘providers may submit cost 

reports with cost and charges grouped 

differently than in prior years, as long 

as the cost and charges are properly 

matched and Medicare cost reporting 

instructions are followed. Medicare 

contractors shall not propose 

adjustments that regroup costs and 

charges merely to be consistent with 

previous year’s reporting if the costs and 

charges are properly grouped on the asfiled cost report.’’ However, Medicare 

payment is governed by longstanding 

principles contained in §§ 413.20 and 

413.24 which we cannot instruct the 

fiscal intermediaries/MACs to overlook. 

In accordance with § 413.20, the 

principles of cost reimbursement 

require that providers maintain 

sufficient financial records and 

statistical data for proper determination 

of costs payable under the program. 

Furthermore, § 413.24(a) specifies that 

providers receiving payment on the 

basis of reimbursable cost must provide 

adequate cost data. This must be based 

on their financial and statistical records 

which must be capable of verification by 

qualified auditors. In addition, 

§ 413.24(c) states that adequate cost 

information must be obtained from the 

provider’s records to support payments 

made for services furnished to 

beneficiaries. The requirement of 

adequacy of data implies that the data 

be accurate and in sufficient detail to 

accomplish the purpose for which the 

data are intended. Adequate data 

capable of being audited are consistent 

with good business concepts and 

effective and efficient management of 

any organization. Furthermore, we note 

that these cost reimbursement 

principles continue to apply even under 

the IPPS. Specifically, § 412.53 states, 

‘‘All hospitals participating in the 

prospective payment systems must meet 

the recordkeeping and cost reporting 

requirements of §§ 413.20 and 413.24 of 

this chapter.’’ Therefore, CMS cannot 

instruct the Medicare contractors to 

disregard these longstanding policies 

when auditing and settling cost reports. 

4. Refining the Medicare Cost Report 

In developing the FY 2009 IPPS 

proposed rule, we considered whether 

there were concrete steps we could take 

to mitigate the bias introduced by 

charge compression in both the IPPS 

and OPPS relative weights in a way that 

balances hospitals’ desire to focus on 

improving the cost reporting process 

through educational initiatives with 

device industry interest in adopting 

regression-adjusted CCRs. Although RTI 

recommended adopting regressionbased CCRs, particularly for medical 

supplies and devices, as a short-term 

solution to address charge compression, 

RTI also recommended refinements to 

the cost report as a long-term solution. 

RTI’s draft interim March 2007 report 

discussed a number of options that 

could improve the accuracy and 

precision of the CCRs currently being 

derived from the Medicare cost report 

and also reduce the need for 

statistically-based adjustments. As 

mentioned in the FY 2008 IPPS final 

rule with comment period (72 FR 

47193), we believe that RTI and many 

of the public commenters on the FY 

2008 IPPS proposed rule concluded 

that, ultimately, improved and more 

precise cost reporting is the best way to 

minimize charge compression and 

improve the accuracy of cost weights. 

Therefore, in the FY 2009 IPPS 

proposed rule (73 FR 23544), we 

proposed to begin making cost report 

changes geared to improving the 

accuracy of the IPPS and OPPS relative 

weights. However, we also received 

comments last year asking that we 

proceed cautiously with changing the 

Medicare cost report to avoid 

unintended consequences for hospitals 

that are paid on a cost basis (such as 

CAHs, cancer hospitals, and, to some 

extent, SCHs and MDHs), and to 

consider the administrative burden 

associated with adapting to new cost 

reporting forms and instructions. 

Accordingly, we proposed to focus in 

the FY 2009 proposed rule on the CCR 

for Medical Supplies and Equipment 

because RTI found that the largest 

impact on the relative weights could 

result from correcting charge 

compression for devices and implants. 

When examining markup differences 

within the Medical Supplies Charged to 

Patients cost center, RTI found that its 


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‘‘regression results provide solid 

evidence that if there were distinct cost 

centers for items, cost ratios for devices 

and implants would average about 17 

points higher than the ratios for other 

medical supplies’’ (January 2007 RTI 

report, page 59). This suggests that 

much of the charge compression within 

the Medical Supplies CCR results from 

inclusion of medical devices that have 

significantly different markups than the 

other supplies in that CCR. 

Furthermore, in the FY 2007 IPPS final 

rule and FY 2008 IPPS final rule with 

comment period, the Medical Supplies 

and Equipment CCR received significant 

attention by the public commenters. 

Although we proposed to make 

improvements to mitigate the effects of 

charge compression only on the Medical 

Supplies and Equipment CCR as a first 

step, we invited public comments as to 

whether to make other changes to the 

Medicare cost report to refine other 

CCRs. In addition, we indicated that we 

were open to making further 

refinements to other CCRs in the future. 

Therefore, in the FY 2009 IPPS 

proposed rule, we proposed to add only 

one cost center to the cost report, such 

that, in general, the costs and charges 

for relatively inexpensive medical 

supplies would be reported separately 

from the costs and charges of more 

expensive devices (such as pacemakers 

and other implantable devices). We 

indicated that we would consider public 

comments submitted on the proposed 

rule for purposes of both the IPPS and 

the OPPS relative weights and, by 

extension, the calculation of the 

ambulatory surgical center (ASC) 

payment rates (73 FR XXXXX). 

Under the IPPS for FY 2007 and FY 

2008, the aggregate CCR for chargeable 

medical supplies and equipment was 

computed based on line 55 for Medical 

Supplies Charged to Patients and lines 

66 and 67 for DME Rented and DME 

Sold, respectively. To compute the 15 

national CCRs used in developing the 

cost-based weights under the IPPS 

(explained in more detail under section 

II.H. of the preamble of the proposed 

rule and this final rule), we take the 

costs and charges for the 15 cost groups 

from Worksheet C, Part I of the 

Medicare cost report for all hospital 

patients and multiply each of these 15 

CCRs by the Medicare charges on 

Worksheet D–4 for those same cost 

centers to impute the Medicare cost for 

each of the 15 cost groups. Under this 

proposal, the goal would be to split the 

current CCR for Medical Supplies and 

Equipment into one CCR for medical 

supplies, and another CCR for devices 

and DME Rented and DME Sold. 

In considering how to instruct 

hospitals on what to report in the cost 

center for medical supplies and the cost 

center for devices, we looked at the 

existing criteria for the type of device 

that qualifies for payment as a 

transitional pass-through device 

category in the OPPS. (There are no 

such existing criteria for devices under 

the IPPS.) The provisions of the 

regulations under § 419.66(b) state that 

for a medical device to be eligible for 

pass-through payment under the OPPS, 

the medical device must meet the 

following criteria: 

a. If required by the FDA, the device 

must have received FDA approval or 

clearance (except for a device that has 

received an FDA investigational device 

exemption (IDE) and has been classified 

as a Category B device by the FDA in 

accordance with §§ 405.203 through 

405.207 and 405.211 through 405.215 of 

the regulations) or another appropriate 

FDA exemption. 

b. The device is determined to be 

reasonable and necessary for the 

diagnosis or treatment of an illness or 

injury or to improve the functioning of 

a malformed body part (as required by 

section 1862(a)(1)(A) of the Act). 

c. The device is an integral and 

subordinate part of the service 

furnished, is used for one patient only, 

comes in contact with human tissues, 

and is surgically implanted or inserted 

whether or not it remains with the 

patient when the patient is released 

from the hospital. 

d. The device is not any of the 

following: 

• Equipment, an instrument, 

apparatus, implement, or item of this 

type for which depreciation and 

financing expenses are recovered as 

depreciable assets as defined in Chapter 

1 of the Medicare Provider 

Reimbursement Manual (CMS Pub. 

15–1). 

• A material or supply furnished 

incident to a service (for example, a 

suture, customized surgical kit, or clip, 

other than a radiological site marker). 

• Material that may be used to replace 

human skin (for example, a biological or 

synthetic material). 

These requirements are the OPPS 

criteria used to define a device for passthrough payment purposes and do not 

include additional criteria that are used 

under the OPPS to determine if a 

candidate device is new and represents 

a substantial clinical improvement, two 

other requirements for qualifying for 

pass-through payment. 

For purposes of applying the 

eligibility criteria, we interpret ‘‘surgical 

insertion or implantation’’ to include 

devices that are surgically inserted or 

implanted via a natural or surgically 

created orifice as well as those devices 

that are inserted or implanted via a 

surgically created incision (70 FR 

68630). 

In proposing to modify the cost report 

to have one cost center for medical 

supplies and one cost center for devices, 

we proposed that hospitals would 

determine what should be reported in 

the Medical Supplies cost center and 

what should be reported in the Medical 

Devices cost center using criteria 

consistent with those listed above that 

are included under § 419.66(b), with 

some modification. Specifically, for 

purposes of the cost reporting 

instructions, we proposed that an item 

would be reported in the device cost 

center if it meets the following criteria: 

a. If required by the FDA, the device 

must have received FDA approval or 

clearance (except for a device that has 

received an FDA investigational device 

exemption (IDE) and has been classified 

as a Category B device by the FDA in 

accordance with §§ 405.203 through 

405.207 and 405.211 through 405.215 of 

the regulations) or another appropriate 

FDA exemption. 

b. The device is reasonable and 

necessary for the diagnosis or treatment 

of an illness or injury or to improve the 

functioning of a malformed body part 

(as required by section 1862(a)(1)(A) of 

the Act). 

c. The device is an integral and 

subordinate part of the service 

furnished, is used for one patient only, 

comes in contact with human tissue, is 

surgically implanted or inserted through 

a natural or surgically created orifice or 

surgical incision in the body, and 

remains in the patient when the patient 

is discharged from the hospital. 

d. The device is not any of the 

following: 

• Equipment, an instrument, 

apparatus, implement, or item of this 

type for which depreciation and 

financing expenses are recovered as 

depreciable assets as defined in Chapter 

1 of the Medicare Provider 

Reimbursement Manual (CMS Pub. 

15–1). 

• A material or supply furnished 

incident to a service (for example, a 

surgical staple, a suture, customized 

surgical kit, or clip, other than a 

radiological site marker). 

• Material that may be used to replace 

human skin (for example, a biological or 

synthetic material). 

• A medical device that is used 

during a procedure or service and does 

not remain in the patient when the 

patient is released from the hospital. 

We proposed to select the existing 

criteria for what type of device qualifies 


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for payment as a transitional passthrough device under the OPPS as a 

basis for instructing hospitals on what 

to report in the cost center for Medical 

Supplies Charged to Patients or the cost 

center for Medical Devices Charged to 

Patients because these criteria are 

concrete and already familiar to the 

hospital community. However, the key 

difference between the existing criteria 

for devices that are eligible for passthrough payment under the OPPS in the 

regulations at § 419.66(b) and our 

proposed criteria stated above to be 

used for cost reporting purposes is that 

the device that is implanted remains in 

the patient when the patient is 

discharged from the hospital. 

Essentially, we proposed to instruct 

hospitals to report only implantable 

devices that remain in the patient at 

discharge in the cost center for devices. 

All other devices and nonroutine 

supplies which are separately 

chargeable would be reported in the 

medical supplies cost center. We believe 

that defining a device for cost reporting 

purposes based on criteria that specify 

implantation and adding that the device 

must remain in the patient upon 

discharge would have the benefit of 

capturing virtually all costly 

implantable devices (for example, 

implantable cardioverter defibrillators 

(ICDs), pacemakers, and cochlear 

implants) for which charge compression 

is a significant concern. 

However, we acknowledge that a 

definition of device based on whether 

an item is implantable and remains in 

the patient could, in some cases, 

include items that are relatively 

inexpensive (for example, urinary 

catheters, fiducial markers, vascular 

catheters, and drainage tubes), and 

which many would consider to be 

supplies. Thus, some modest amount of 

charge compression could still be 

present in the cost center for devices if 

the hospital does not have a uniform 

markup policy. In addition, requiring as 

a cost reporting criterion that the device 

is to remain in the patient at discharge 

could exclude certain technologies that 

are moderately expensive (for example, 

cryoablation probes, angioplasty 

catheters, and cardiac echocardiography 

catheters, which do not remain in the 

patient upon discharge). Therefore, 

some charge compression could 

continue for these technologies. We 

believe this limited presence of charge 

compression is acceptable, given that 

the proposed definition of device for 

cost reporting purposes would isolate 

virtually all of the expensive items, 

allowing them to be separately reported 

from most inexpensive supplies. 

The criteria we proposed above for 

instructing hospitals as to what to report 

in the device cost center specify that a 

device is not a material or supply 

furnished incident to a service (for 

example, a surgical staple, a suture, 

customized surgical kit, or clip, other 

than a radiological site marker) 

(emphasis added). We understand that 

hospitals may sometimes receive 

surgical kits from device manufacturers 

that consist of a high-cost primary 

implantable device, external supplies 

required for operation of the device, and 

other disposable surgical supplies 

required for successful device 

implantation. Often the device and the 

attending supplies are included on a 

single invoice from the manufacturer, 

making it difficult for the hospital to 

determine the cost of each item in the 

kit. In addition, manufacturers 

sometimes include with the primary 

device other free or ‘‘bonus’’ items or 

supplies that are not an integral and 

necessary part of the device (that is, not 

actually required for the safe surgical 

implantation and subsequent operation 

of that device). (We note that 

arrangements involving free or bonus 

items or supplies may implicate the 

Federal anti-kickback statute, depending 

on the circumstances.) One option is for 

the hospital to split the total combined 

charge on the invoice in a manner that 

the hospital believes best identifies the 

cost of the device alone. However, 

because it may be difficult for hospitals 

to determine the respective costs of the 

actual device and the attending supplies 

(whether they are required for the safe 

surgical implantation and subsequent 

operation of that device or not), we 

solicited comments with respect to how 

supplies, disposable or otherwise, that 

are part of surgical kits should be 

reported. We are distinguishing between 

such supplies that are an integral and 

necessary part of the primary device 

(that is, required for the safe surgical 

implantation and subsequent operation 

of that device) from other supplies that 

are not directly related to the 

implantation of that device, but may be 

included by the device manufacturer 

with or without charge as ‘‘perks’’ along 

with the kit. If it is difficult to break out 

the costs and charges of these lower cost 

items that are an integral and necessary 

part of the primary device, we would 

consider allowing hospitals to report the 

costs and charges of these lower cost 

supplies along with the costs and 

charges of the more expensive primary 

device in the cost report cost center for 

implantable devices. However, to the 

extent that device manufacturers could 

be encouraged to refine their invoicing 

practices to break out the charges and 

costs for the lower cost supplies and the 

higher cost primary device separately, 

so that hospitals need not ‘‘guesstimate’’

the cost of the device, this would 

facilitate more accurate cost reporting 

and, therefore, the calculation of more 

accurate cost-based weights. Under 

either scenario, even for an aggregated 

invoice that contains an expensive 

device, we believe that RTI’s findings of 

significant differences in supply CCRs 

for hospitals with a greater percentage of 

charges in device revenue codes 

demonstrate that breaking the Medical 

Supplies Charged to Patients cost center 

into two cost centers and using 

appropriate revenue codes for devices, 

and crosswalking those costs to the 

proposed new ‘‘Implantable Devices 

Charged to Patients’’ cost center, will 

result in an increase in estimated device 

costs. 

In summary, we proposed to modify 

the cost report to have one cost center 

for ‘‘Medical Supplies Charged to 

Patients’’ and one cost center for 

‘‘Implantable Devices Charged to 

Patients.’’ We proposed to instruct 

hospitals to report only devices that 

meet the four criteria listed above 

(specifically including that the device is 

implantable and remains in the patient 

at discharge) in the proposed new cost 

center for Implantable Devices Charged 

to Patients. All other devices and 

nonchargeable supplies would be 

reported in the Medical Supplies cost 

center. This would allow for two 

distinct CCRs, one for medical supplies 

and one for implantable devices and 

DME rented and DME sold. 

Comment: Many commenters 

supported the proposed cost reporting 

refinements to address charge 

compression in the medical supplies 

and devices CCR. However, most 

commenters stated that they preferred a 

more ‘‘comprehensive’’ approach to 

reforming the cost report, expressing 

concern that CMS is taking a 

‘‘piecemeal’’ approach which does not 

address the underlying problem of using 

an ‘‘antiquated’’ cost reporting 

instrument to collect cost data that 

neither suits the needs of CMS in 

calculating the relative weights, nor 

does it fit with the current accounting 

practices of hospitals. One commenter 

stated generally that the cost report and 

MedPAR data sources were never 

intended to be integrated, which affects 

the accuracy of the DRG recalibration. 

The commenter wanted CMS to improve 

the accuracy of the cost report by 

incorporating a new schedule to 

‘‘continue the reporting of revenue by 

UB revenue code by cost report line’’

and to calculate a weighted CCR by UB 


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revenue code. The commenter believed 

this is a ‘‘major area of reform’’ to the 

cost report that would ‘‘greatly enhance 

the accuracy of costing data’’ not only 

for inpatient and outpatient PPS 

hospitals, but also for CAHs and 

children’s and cancer hospitals. 

Nevertheless, these commenters 

supported CMS’ proposal to split the 

‘‘Medical Supplies Charged to Patients’’

cost center into one cost center for 

‘‘Medical Supplies Charged to Patients,’’

and one for ‘‘Implantable Devices 

Charged to Patients’’ as a short-term 

approach, believing that this measure 

may help address charge compression in 

the relative weights of MS–DRGs that 

include medical supplies and devices. 

Another commenter encouraged CMS to 

complete a thorough review of charge 

compression and then separately 

propose rules that would provide 

hospitals with adequate notice to make 

the necessary changes, with 

implementation of those changes 

occurring no earlier than FY 2010. One 

commenter qualified its support for 

CMS’ proposal on the contingency that 

CMS commits to working with the 

hospital industry to address the larger 

issues surrounding the cost reports as a 

data collection tool. Another commenter 

added that it did not oppose CMS’

proposal, but stated that its ‘‘comments 

should not be viewed as an 

endorsement to adding additional cost 

centers in the future’’ and that CMS 

should ‘‘proceed with extreme caution 

with any additional incremental 

changes.’’ Other commenters were 

disappointed in what they characterized 

as ‘‘CMS’ failure to work with the 

hospital field from the outset on such an 

important endeavor.’’ Another 

commenter suggested that CMS may 

want to use its database to run further 

analyses on charge compression because 

the majority of hospitals submitting 

clinical and financial data to the 

commenter have cost accounting 

systems. The commenters generally 

urged CMS to provide adequate notice 

to hospitals before making any changes 

to the cost report because hospitals will 

need to make significant revisions to 

their accounting and billing systems 

before the start of their fiscal years. 

One commenter supported CMS’

proposal for using the existing 

requirements for determining which 

devices qualify for pass-through 

payment under the OPPS, and whether 

a device is implantable and remains in 

the patient upon discharge, as the 

criteria for determining what types of 

implantable devices would be reported 

in the proposed new cost center. The 

commenter believed that the proposed 

criteria are objective and most 

accurately describe the type of medical 

devices that are most impacted by 

charge compression. However, a large 

number of commenters opposed CMS’

proposed criteria for distinguishing 

between low-cost supplies and high-cost 

devices for reporting in the proposed 

new cost report cost centers. Rather than 

using CMS’ proposed criteria which are 

based on the existing requirements for 

determining which devices qualify for 

pass-through payment under the OPPS, 

and whether a device is implantable and 

remains in the patient upon discharge, 

in addition to use of existing revenue 

codes, most commenters preferred that 

the cost report cost centers be defined 

exclusively based on the use of existing 

revenue codes and associated 

definitions. The commenters pointed 

out that using existing revenue codes 

and definitions as they have been 

currently established by the National 

Uniform Billing Committee (NUBC) 

makes sense, as these definitions have 

been in place for some time and are 

used across all payers, not just by CMS. 

The commenters believed that 

introduction of exceptions by CMS to 

what hospitals may include in certain 

revenue codes can be disruptive to 

hospitals’ billing and accounting 

systems. Furthermore, they added, this 

method is consistent with the analytic 

approach and revenue centers used by 

RTI to develop the regression-based 

CCRs for medical devices. Accordingly, 

the commenters recommended that the 

proposed new cost centers on the cost 

report for ‘‘Medical Supplies Charged to 

Patients’’ and ‘‘Implantable Devices 

Charged to Patients’’ be defined 

exclusively on the following revenue 

code criteria: Specifically, revenue 

codes 0275 (Pacemaker), 0276 

(Intraocular lens), 0278 (other implants), 

and 0624 (FDA investigational devices) 

would be used in the proposed new cost 

center for high-cost devices. The 

commenters noted that revenue code 

0624 generally consists of higher cost 

implants, but indicated that this 

revenue code could be refined at a later 

point by the NUBC to provide a revenue 

code that could be reported when the 

FDA investigational device does not 

include implants. According to the 

commenters, all other revenue codes in 

the device/supply category (in 027x and 

062x) would be reported in the lower 

cost medical supplies cost center on the 

cost report. The commenters 

acknowledged that distinguishing 

between low-cost supplies and high-cost 

devices through exclusive use of the 

existing revenue codes will not 

thoroughly separate low and high-cost 

items, and therefore, some amount of 

charge compression will remain in the 

proposed new ‘‘Implantable Devices 

Charged to Patients CCR.’’ Nevertheless, 

the commenters believed that use of 

existing revenue codes and definitions 

represents the most administratively 

simple and least burdensome approach 

to addressing charge compression; the 

incremental improvements of a more 

refined approach do not warrant more 

wholesale changes. One commenter, 

however, did recommend that CMS 

request new revenue codes from the 

NUBC as needed to identify all devices 

that would be reported in the new 

implantable devices cost center under 

the revised cost report definition of 

implantable device so as to minimize 

exclusion of innovative technologies 

and mitigate the impact of charge 

compression. 

Response: In the FY 2009 IPPS 

proposed rule (73 FR 23546), we stated 

that we have begun a comprehensive 

review of the Medicare hospital cost 

report, and our proposal to split the 

current cost center for Medical Supplies 

Charged to Patients into one line for 

‘‘Medical Supplies Charged to Patients’’

and another line for ‘‘Implantable 

Devices Charged to Patients’’ is part of 

that initiative to update and revise the 

cost report. Under the effort to update 

the cost report and eliminate outdated 

requirements in conjunction with the 

PRA, changes to the cost report form 

and cost report instructions would be 

made available to the public for 

comment. Thus, the commenters would 

have an opportunity to suggest the more 

comprehensive reforms that they are 

advocating, and would similarly be able 

to make suggestions for ensuring that 

these reforms are made in a manner that 

is not disruptive to hospitals’ billing 

and accounting systems, and are within 

the guidelines of GAAP, Medicare 

principles of reimbursement, and sound 

accounting practices. However, we note 

that while the commenters on the FY 

2009 IPPS proposed rule appear to be 

advocating a more comprehensive and 

thorough approach to reforming the cost 

report, the public comments we 

received on the FY 2008 proposed rule 

urged us to proceed cautiously with 

changing the Medicare cost report to 

avoid unintended consequences for 

hospitals that are paid on a cost basis 

(such as CAHs, cancer hospitals, and, to 

some extent, SCHs and MDHs), and to 

consider the administrative burden 

associated with adapting to new cost 

report forms and instructions (73 FR 

23544 and 72 FR 47193). We explained 

that because of these comments on the 

FY 2008 IPPS proposed rule, we 


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decided to start out slowly with 

modifying the cost report to improve the 

data used in calculating the cost-based 

weights. Specifically, we chose to focus 

initially on the cost center for Medical 

Supplies Charged to Patients, because 

RTI found that the largest impact on the 

DRG relative weights could result from 

correcting charge compression for 

devices and implants. We are willing to 

work with and consider comments from 

finance and cost report experts from the 

hospital community as we work to 

improve and modify the hospital cost 

report. As noted above, in the CY 2009 

OPPS/ASC proposed rule (73 FR 

XXXXX), we also are proposing to break 

the single standard pharmacy cost 

center 5600 into two standard cost 

centers, Drugs with High Overhead Cost 

Charged to Patients and Drugs with Low 

Overhead Cost Charged to Patients, and 

we are specifically inviting public 

comment on the appropriateness of 

creating standard cost centers for 

Computed Tomography (CT) Scanning, 

Magnetic Resonance Imaging (MRI), and 

Cardiac Catheterization, rather than 

continuing the established nonstandard 

cost centers for these services. Proposed 

changes to the cost report will impact 

both IPPS and OPPS, and public 

comments should address both systems. 

We have considered the comments in 

favor of finalizing our proposal to split 

the current cost center for Medical 

Supplies Charged to Patients into one 

line for ‘‘Medical Supplies Charged to 

Patients’’ and another line for 

‘‘Implantable Devices Charged to 

Patients,’’ and the comments 

recommending that these cost centers be 

defined based solely on existing revenue 

codes. Although we believed that 

adopting the existing criteria for 

determining whether a device is eligible 

for pass-through payment under the 

OPPS to identify devices for the 

‘‘Implantable Devices Charged to 

Patients’’ cost center was a reasonable 

proposal because the criteria are 

concrete and already familiar to the 

hospital community, we understand 

that hospitals are already familiar with 

the definitions of the existing revenue 

codes as well because they have been in 

place for some time. In addition, 

identifying devices based only on the 

existing revenue code definitions is 

more straightforward than also 

incorporating the criteria for devices 

that qualify for OPPS pass-through 

payment. Therefore, we agree with the 

commenters that use of the existing 

revenue code definitions is the simplest 

and least burdensome approach for 

hospitals to implement that would 

concretely, although not completely, 

address charge compression. 

Accordingly, in this final rule, we are 

finalizing our proposed policy to split 

the current cost center for Medical 

Supplies Charged to Patients into one 

line for ‘‘Medical Supplies Charged to 

Patients’’ and another line for 

‘‘Implantable Devices Charged to 

Patients.’’ However, when determining 

what should be reported in these 

respective cost centers, rather than 

finalize our proposed policy to use 

existing criteria for determining which 

devices qualify for OPPS pass-through 

payment, with the modification that the 

implantable device must remain in the 

patient at discharge, we are instead 

adopting the commenters’

recommendation that hospitals should 

use revenue codes established by the 

NUBC to determine what should be 

reported in the ‘‘Medical Supplies 

Charged to Patients’’ and the 

‘‘Implantable Devices Charged to 

Patients’’ cost centers. We note that use 

of the existing revenue codes will still 

generally result in implantable devices 

being reported in the ‘‘Implantable 

Devices Charged to Patients’’ cost center 

because revenue codes 0275 

(Pacemaker), 0276 (Intraocular lens), 

0278 (other implants), and 0624 (FDA 

investigational devices) for the most 

part, generally would be used for 

reporting higher cost implants. 

However, use of the existing NUBC 

definitions would not require that the 

implantable device remain in the 

patient when the patient is discharged; 

therefore, in this respect, the policy we 

are finalizing differs from the one we 

proposed. 

In the FY 2009 IPPS proposed rule (73 

FR 23547), in an effort to improve the 

match between the costs and charges 

included on the cost report and the 

charges in the MedPAR file, we 

recommended that certain revenue 

codes be used for items reported in the 

new ‘‘Medical Supplies Charged to 

Patients’’ cost center and the new 

‘‘Implantable Devices Charged to 

Patients’’ cost center, respectively. 

These recommendations were similar to 

the commenters’ suggested method for 

use of existing revenue codes in 

determining whether an item should be 

reported in the proposed new supply or 

device cost center in the cost report. In 

this final rule, we are finalizing our 

policy to create a cost center for 

implantable devices. Under this policy, 

charges reported with revenue codes 

0275 (Pacemaker), 0276 (Intraocular 

Lens), 0278 (Other Implants), and 0624 

(Investigational Device (IDE)) would 

correspond to implantable devices 

reported in the new ‘‘Implantable 

Devices Charged to Patients’’ cost 

center. Items for which a hospital may 

have previously used revenue code 0270 

(General Classification), but actually are 

an implantable device, should instead 

be billed with an implantable device 

revenue code. Conversely, items and 

supplies that are not implantable would 

be reported in the new ‘‘Medical 

Supplies Charged to Patients’’ cost 

center on the cost report. We would 

expect these items and supplies to be 

billed with revenue codes 0270 (general 

classifications), 0271 (nonsterile 

supply), 0272 (sterile supply), and 0273 

(take-home supplies). In the proposed 

rule, we indicated that revenue code 

0274 (Prosthetic/Orthotic Devices) and 

revenue code 0277 (Oxygen—Take 

Home) might be associated with the cost 

centers for Durable Medical Equipment 

(DME)-Rented and DME-Sold on the 

cost report. We received comments that 

indicated that all other (not 

implantable) supply revenue codes, 

including 0274, 0277, 0621, and 0622, 

should be associated with the new 

‘‘Medical Supplies Charged to Patients’’

cost center. For the purpose of this final 

policy, we are most concerned with 

identifying the revenue code costs and 

charges that define the new 

‘‘Implantable Devices Charged to 

Patients’’ cost center. With the 

exception of the present proposal, CMS 

typically does not specify a revenue 

code-to-cost center crosswalk that 

hospitals must adopt to prepare their 

cost report. Beyond the supply revenue 

codes we identified above for ‘‘Medical 

Supplies Charged to Patients,’’ we 

assume hospitals will include other 

appropriate supply revenue codes in 

this new cost center, which may or may 

not include 0621, 0622, 0274, and 0277. 

Hospitals must continue to report 

ICD–9–CM codes and charges with an 

appropriate UB revenue code consistent 

with NUBC requirements. When 

reporting the appropriate revenue codes 

for services, hospitals should choose the 

most precise revenue code, or subcode 

if appropriate. As NUBC guidelines 

dictate: ‘‘It is recommended that 

providers use the more detailed 

subcategory when applicable/available 

rather than revenue codes that end in 

‘‘0’’ (General) or ‘‘9’’ (Other).’’

Furthermore, hospitals are required to 

follow the Medicare cost apportionment 

regulations at 42 CFR 413.53(a)(1), 

which convey that, under the 

departmental method of apportionment, 

the cost of each ancillary department is 

to be apportioned separately rather than 

being combined with another 

department. In order to comply with the 

requirements of this regulation, 


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hospitals must follow the Medicare 

payment policies in section 2302.8 of 

the PRM–I and the PRM–II in order to 

ensure that their ancillary costs and 

charges are reported in the appropriate 

cost centers on the cost report. We rely 

on hospitals to fully comply with the 

revenue code reporting instructions and 

Medicare cost apportionment policies. 

In general, proper reporting would 

dictate that if an item is reported as an 

implantable device on the cost report, it 

is an item for which the NUBC would 

require use of revenue code 0275 

(Pacemaker), 0276 (Intraocular Lens), 

0278 (Other Implants), or 0624 

(Investigational Device). Likewise, items 

reported as Medical Supplies should 

receive an appropriate revenue code 

indicative of supplies. We did indicate 

in the proposed rule that we might 

consider requesting additional revenue 

codes from the NUBC, but we note that 

because the majority of commenters 

have requested that they be allowed to 

use existing revenue codes to 

distinguish between the low cost 

supplies and high cost devices, we may 

wait and see what the results of that 

approach are before we request the 

creation of additional codes from the 

NUBC. 

We would also like to caution that, as 

the commenters themselves 

acknowledged, the use of existing 

revenue code definitions to crosswalk 

devices and supplies to the device cost 

center and supplies cost center, 

respectively, will not separate high and 

low cost items as thoroughly as would 

the use of the proposed criteria for 

implantable devices that remain in the 

patient at discharge. Therefore, some 

degree of charge compression will 

remain in the medical devices cost 

center. Furthermore, this methodology, 

and the accuracy of the relative weights, 

is heavily dependent upon hospitals’

reporting practices. While CMS is 

responsible for issuing cost reporting 

instructions that are clear, hospitals are 

responsible for ensuring that their cost 

reporting and billing practices are 

consistent and conform to Medicare 

policy. 

Comment: A few commenters, who 

supported the proposal that only 

devices that are implantable and that 

remain in the patient at discharge 

should be reported in the new 

‘‘Implantable Devices Charged to 

Patients’’ cost center, also expressed 

concern that there are instances where 

these criteria are too narrow. One 

commenter mentioned various types of 

implantable devices that do not remain 

in the patient at discharge, including 

atherectomy and thrombectomy 

catheters, laser sheaths for removal of 

pacemaker and defibrillator leads, and 

thrombolysis catheters. Two 

commenters mentioned one product, an 

external fixation device that is used to 

treat trauma of the upper and lower 

extremities and to assist in the treatment 

of severe fractures, and noted that this 

device is commonly removed from 

patients prior to discharge. The 

commenters believed that if this device 

is not assigned to a revenue code for an 

‘‘implantable device,’’ the true implant 

costs for many of these discharges may 

not be recognized. One of the 

commenters asked that CMS consider 

exempting external fixation devices 

from the proposed ‘‘implantable device’’

standard, or provide another 

appropriate mechanism to ensure 

accurate cost reporting for this device. 

The other commenter also supported the 

creation of the devices cost center based 

on the use of existing revenue codes and 

associated definitions established by the 

NUBC. Another commenter stated that 

CMS’ proposed definition of device as 

one that must remain in the patient at 

discharge could result in inconsistent 

billing and reporting because whether a 

device remains in the patient could 

depend on the particular patient’s 

length of stay. The commenter used the 

example of an implantable port for 

medication delivery, where one patient 

is well enough to be discharged from the 

hospital but needs the port at home for 

extended IV therapy. Another patient 

with the same implantable medication 

port, however, may have additional 

complications and need to stay in the 

hospital longer, but may ultimately 

improve to the extent where he or she 

is discharged without the port. The 

commenter observed that, as a result, 

there could be a device that would 

qualify as an implant for some patients 

but not for others. 

Response: In the FY 2009 IPPS 

proposed rule (73 FR 23545), we 

acknowledged that a definition of a 

device based on whether it is 

implantable and remains in the patient 

at discharge could, in some cases, 

include some relatively inexpensive 

items, and could also exclude some 

expensive items. Therefore, some charge 

compression could continue for these 

technologies. We also acknowledge the 

point of one of the commenters that 

depending upon a patient’s severity of 

the illness and length of stay, a device 

may or may not qualify as an 

implantable device based on our 

proposed criteria. However, we note 

that, in response to the many comments 

we received as summarized previously, 

we have decided not to finalize our 

proposed definition of a device, which 

was based on the existing OPPS criteria 

for identifying devices that qualify for 

pass-through payment, with the 

additional requirement that the device 

must remain in the patient at discharge. 

Instead, as suggested by the vast 

majority of commenters, we are 

finalizing a policy that would 

distinguish between supplies and 

devices based on the existing revenue 

codes and definitions. Therefore, while 

the device must still be implantable to 

map to the new implantable device cost 

center, our final policy no longer 

includes the requirement that the device 

remain in the patient at discharge. We 

expect hospitals to follow the revenue 

code definitions in assigning the costs 

and charges of devices. 

Comment: Commenters asked CMS to 

provide a contingency plan if the 

medical device CCR is substantially 

lower than the regression-based device 

CCR estimate or the current supplies 

CCR, once the data become available. 

Response: We agree that we will need 

to evaluate the medical supply and 

device CCRs once the data become 

available for FY 2012 ratesetting. At that 

point and forward, we will continue to 

analyze the cost report data. However, 

we point out that we do not believe it 

is appropriate to ‘‘pick and choose’’

between CCRs; rather, the determining 

factor should be payment accuracy, 

regardless of whether one method 

increases or decreases payment for 

devices. 

Comment: One commenter supported 

CMS’ proposal to split the medical 

supplies cost center. However, the 

commenter stated that CMS’ proposal 

could result in the relative weight for 

MS–DRG 001 (Heart Transplant or 

Implant of Heart Assist with MCCs) 

being reduced because the weight for 

MS–DRG 001 is not ‘‘device-driven’’

due to the presence of a large number 

of hospitalizations with relatively low 

device costs (heart transplant and 

combined heart-lung transplant), which 

could weaken the effect of the proposed 

cost center changes with respect to the 

relative weight for MS–DRG 001. To 

remedy this, the commenter requested, 

in part, that CMS create a cost center on 

the cost report that would enable CMS 

to capture more accurate data on 

LVADs. In addition, the commenter 

noted that CMS should remain open to 

cost centers that capture devices in the 

$500–$2,500 range (Class I implantable 

devices), and separate cost centers for 

devices in the $2,500–$100,000 range 

(Class II implantable devices). The 

commenter stated that it would 

continue to monitor CMS’ policy 

changes in the coming years and will 

provide input to the CMS regarding the 


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‘‘impact to hospitals that provide 

lifesaving LVAD therapy to Medicare 

beneficiaries.’’

Response: We do not believe it is 

appropriate at this time to create a new 

cost center, or further refine the device 

cost center based on cost categories, so 

as to capture data more accurately for 

LVADs. Instead, as an initial step, we 

believe it would be better to finalize the 

broader proposal of creating one cost 

center for supplies, and a cost center for 

implantable devices, which would 

include LVADs. We are receptive to the 

commenter’s input to CMS regarding the 

impact to hospitals that provide LVAD 

therapy as part of our own monitoring 

and analyses of the cost-based relative 

weights, and if appropriate, we may 

consider further refining the 

implantable devices cost center in the 

future. 

Comment: A number of commenters 

focused on the section of the 2007 RTI 

report that highlighted the problem of 

nursing care cost compression. The 

report found that nursing care 

represents about 41 percent of hospitals’

costs, and these costs are allocated as 

fixed daily room rates, despite 

substantial evidence that daily nursing 

care hours and costs vary substantially 

among patients. As a result, the current 

DRG relative weights do not reflect 

differences in nursing care, leading to 

payment inaccuracy. One commenter 

noted that this creates a ‘‘perverse 

incentive for hospitals to cut nursing 

staff as reimbursement is not matched to 

the average amount of nursing time and 

costs within each DRG as are the 

ancillary services.’’ Some commenters 

reiterated their comments submitted on 

the FY 2008 IPPS proposed rule, 

recommending that CMS study adoption 

of Nursing Intensity Weights (NIWs), 

which is in use in the New York State 

Medicaid program. The commenters 

suggested that unbundling nursing care 

from current routine and intensive care 

daily rates and billing for nursing using 

the 023X revenue code for actual daily 

nursing time (nursing intensity) 

expended for individual patients 

provides a reasonable solution to the 

problem of nursing cost compression. 

Specifically, the commenters urged 

CMS to reconsider its proposal for FY 

2009 and explore ways to: 

(a) Implement the recommendations 

of the RTI report to unbundle nursing 

care from current accommodation (room 

and board) revenue codes using the 

023X Nursing Incremental Charge UB04 

revenue code. 

(b) Modify the Medicare cost report to 

separate out nursing costs and hours of 

care to allow construction of a nursing 

cost to charge ratio within the existing 

routine and intensive care cost centers. 

(c) Develop a method to evaluate 

nursing performance by case mix within 

the new severity adjusted DRGs using 

the unbundled 023X nursing hours and 

costs data. 

(d) Incorporate the inpatient nursing 

performance measure into the emerging 

value-based purchasing effort in the 

coming fiscal years to identify low 

performing hospitals relative to the 

mean nursing intensity within MS–DRG 

and high cost hospitals. 

The commenters believed that 

accomplishing these four 

recommendations will ‘‘improve overall 

payment accuracy, lead to a better 

understanding of how nursing care 

hours and costs are allocated to 

individual patients and by DRG within 

and across hospitals, identify hospital 

nursing performance, and inform policy 

makers on the state of inpatient nursing 

care in the United States.’’

Response: The commenters raised 

similar concerns in response to the FY 

2008 IPPS proposed rule. In response to 

those comments, we acknowledged 

RTI’s finding in its January 2007 report 

that ‘‘because intensity of nursing is 

likely correlated with DRG assignment, 

this could be a significant source of bias 

in DRG weights,’’ and agreed that this 

issue should be studied further. We 

appreciate that the commenters have 

also given more thought to methods of 

addressing nursing cost compression, 

but we note that the initiation and 

eventual success of much of these 

efforts lie within the hospital 

community. In its July 2008 report, RTI 

states that, ‘‘the best long-term solution 

would be for the industry to agree to 

expand charge coding conventions for 

inpatient nursing, which would foster 

increased use of patient-specific nursing 

incremental charge codes in addition to 

baseline unit-specific per-diem charges. 

Additional detail in revenue codes 

would permit inpatient charges to be 

converted by CCRs in the same way as 

charges for ancillary service use are 

converted, to more accurately aggregate 

costs at the level of the system payment 

unit.’’ (page 118) Therefore, whether the 

preferred method would be to separate 

charges for nursing care from the 

accommodation revenue codes using the 

existing 023X (Incremental Nursing 

Care) revenue codes, or some other 

approach, we believe the hospital 

community must take the initiative to 

decide upon a uniform method of 

reporting nursing charges in such a 

manner that reflects the varying nursing 

intensity in caring for individual 

patients. 

The commenters requested that the 

cost report be modified to separate 

nursing costs and hours of care to allow 

for the calculation of CCRs for routine 

care and intensive care, and we believe 

this could possibly be a long-term goal. 

We note that RTI observes that given the 

inconsistent use of patient-level nursing 

acuity data systems, ‘‘it is difficult to 

imagine an administratively feasible 

way to incorporate nursing acuity 

measures into standard Medicare 

reporting as a long-term solution for 

reducing nursing cost compression’’

(page 118). However, we encourage the 

nursing community, the hospital 

industry, and others to consider 

researching ideas for how nursing 

intensity can be recognized in the cost 

weights. 

Comment: Several commenters 

responded to our solicitation for 

comments on how to report supplies 

that are part of surgical kits. The 

commenters generally did not support 

our proposal to require hospitals to 

separate the costs of supplies from 

devices within surgical kits. Some 

commenters recommended using the 

existing revenue codes so as not to 

increase the documentation burdens for 

hospitals. That is, the costs and charges 

of the kit should be reported consistent 

with the use of the revenue code, such 

that, for example, if the kit is billed with 

revenue code 0278 (Other Implants), it 

would be reported in the new 

‘‘Implantable Devices Charged to 

Patients’’ cost center. These commenters 

acknowledged that this approach will 

not separate all low cost items, but will 

still reduce charge compression. 

Another commenter stated that 

‘‘unbundling’’ the device from the 

surgical kit would increase 

administrative costs for hospitals and 

vendors, and that more medical errors 

would likely result, which surgical 

packs were designed to reduce. Another 

commenter noted the terms CMS used 

in describing the supplies that are part 

of surgical kits, such as ‘‘integral to’’ or 

‘‘unrelated to,’’ and ‘‘free’’ or ‘‘bonus’’

items. The commenter recommended 

that CMS consider clarifying these terms 

via an issuance such as a transmittal or 

an MLN Matters article rather than the 

Federal Register because all healthcare 

providers do not read it, and that CMS’

clarification provide ‘‘rationale that is 

vital to understanding underlying 

compliance concerns associated with 

supply charge practices.’’ This 

commenter further recommended that 

as a long-term solution, CMS and the 

NUBC develop a revenue code called 

‘‘Integrated Supplies’’ specifically to 

report supplies in customized kits, 

packs, and trays. This new revenue code 


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would capture all of the routine 

supplies that are part of the package in 

one charge, except for the charge for the 

implantable device, which would be 

itemized separately on the invoice The 

commenter noted that most hospitals’

chargemaster software allows multiple 

charges to be linked together as part of 

a ‘‘panel master.’’ Therefore, the 

Integrated Supplies revenue code could 

be linked with the various revenue 

codes used for implantable devices 

(0275, 0276, and 0278), without 

requiring vendors and hospitals to 

itemize every single supply in a kit 

separately on an invoice or the 

chargemaster. 

One commenter stressed the value 

that packaging such items together has 

for hospitals, arguing that the kits 

reduce labor hours associated with the 

procedure, and that ‘‘hospitals do not 

purchase these packages for what CMS 

refers to as ‘bonus’ items, but for the 

efficiencies gained though the packaging 

of the items.’’ The commenter did not 

believe such kits should be considered 

a violation of the anti-kickback statute. 

Response: In the FY 2009 IPPS 

proposed rule (73 FR 23545), we 

discussed how hospitals could 

accurately report the costs of an 

expensive device and the costs of less 

expensive supplies needed to implant 

that device on the cost report, given that 

often the device and the supplies are 

included on a single invoice from the 

manufacturer, making it difficult for the 

hospital to determine the cost of each 

item in the kit. We suggested that one 

option is for the hospital to split the 

total combined charge on the invoice in 

a manner that the hospital believes best 

identifies the cost of the device alone. 

However, because it may be difficult for 

hospitals to determine the respective 

costs of the actual device and the 

attending supplies (whether they are 

required for the safe surgical 

implantation and subsequent operation 

of that device or not), we solicited 

comments with respect to how supplies, 

disposable or otherwise, that are part of 

surgical kits should be reported. We 

distinguished between such supplies 

that are an integral and necessary part 

of the primary device (that is, required 

for the safe surgical implantation and 

subsequent operation of that device) 

from other supplies that are not directly 

related to the implantation of that 

device, but may be included by the 

device manufacturer with or without 

charge as ‘‘perks’’ along with the kit. We 

stated that if it is difficult to break out 

the costs and charges of these lower cost 

items that are an integral and necessary 

part of the primary device, we would 

consider allowing hospitals to report the 

costs and charges of these lower cost 

supplies along with the costs and 

charges of the more expensive primary 

device in the cost report cost center for 

implantable devices. However, we 

stated that to the extent that device 

manufacturers could be encouraged to 

refine their invoicing practices to break 

out the charges and costs for the lower 

cost supplies and the higher cost 

primary device separately, so that 

hospitals need not ‘‘guesstimate’’ the 

cost of the device, this would facilitate 

more accurate cost reporting and, 

therefore, the calculation of more 

accurate cost-based weights. 

We have considered the public 

comments which essentially 

recommended that hospitals should not 

attempt to break out the costs of the 

expensive device from the attending 

supplies, but instead, that hospitals 

report the entire kit based on the single 

revenue code used for the device in the 

kit. We still believe that device 

manufacturers could make a better effort 

at refining their invoices to separately 

break out the charges and costs of the 

high-cost device from the low-cost 

supplies because this would likely lead 

to more accurate cost reporting and a 

further mitigation of charge 

compression. Certainly, if the supplies 

that are included in the kit are not 

integral to and necessary for the safe, 

surgical implementation of the device, 

we believe that it would be best for 

hospitals to report those costs and 

charges separately from the costs and 

charges for the implantable device. 

Nevertheless, because commenters are 

generally satisfied with an approach for 

reporting the costs and charges of the 

entire kit based on the revenue code that 

is used for the device in that kit, we will 

accept the commenters’

recommendation and permit hospitals 

to follow this approach in reporting the 

costs and charges of surgical kits. As we 

noted in the proposed rule, even for an 

aggregated invoice that contains an 

expensive device, we believe that RTI’s 

findings of significant differences in 

supply CCRs for hospitals with a greater 

percentage of charges in device revenue 

codes demonstrate that breaking the 

Medical Supplies Charged to Patients 

cost center into two cost centers, using 

appropriate revenue codes for devices, 

and mapping those costs to the new 

‘‘Implantable Devices Charged to 

Patients’’ cost center, will result in an 

increase in estimated device costs that 

could lead to more accurate payment for 

those costs. However, we do appreciate 

the acknowledgement from the 

commenter that it is important for the 

industry to understand the rationale for 

compliance requirements and the 

recommendation of the commenter that 

a new revenue code for Integrated 

Supplies be created as a long-term 

solution for capturing costs and charges 

of incidental supplies, and we may 

consider this as part of other changes 

that may or may not require NUBC 

approval. 

With respect to the commenter that 

argued that such kits should not be 

considered a violation of the antikickback statute, we note that we did 

not state that surgical kits should 

necessarily be considered a violation of 

the anti-kickback statute. The 

commenter made the point that 

hospitals do not purchase the kits for 

the value of the ‘‘bonus items,’’ but 

rather because of the increased 

efficiencies that result from packaging 

all the items necessary for a particular 

surgical procedure together. However, 

we point out that the IPPS proposed 

rule refers specifically to ‘‘free or 

‘bonus’ items that are not an integral 

and necessary part of the device (that is, 

not actually required for the safe 

surgical implantation and subsequent 

operation of that device)’’ (73 FR 23545, 

emphasis added). Therefore, the 

parenthetical sentence in the proposed 

rule that follows the reference to ‘‘free’’

or ‘‘bonus’’ items refers to those free or 

bonus items that are not an integral and 

necessary part of the device 

implantation procedure and subsequent 

operation of that device. Specifically, 

we stated that ‘‘arrangements involving 

free or bonus items or supplies may 

implicate the Federal anti-kickback 

statute, depending on the 

circumstances’’ (73 FR 23545, emphasis 

added). That is, hospitals should be 

aware that, depending on the 

circumstances, kits that include other 

items that are unrelated to the safe 

implantation or operation of a device 

could possibly implicate the Federal 

anti-kickback statute. 

Comment: One commenter advised 

that many hospitals do not report some 

charges in the Medical/Surgical 

Supplies revenue codes when they 

consider those items to be part of 

hospital room and board (that is, blood 

transfusion administration). The 

commenter stated that hospitals seek 

guidance from CMS to avoid 

discrepancies in reporting, and 

recommended that CMS define what is 

included in ‘‘room and board’’ to further 

standardize billing practices and 

promote consistency and continuity 

across all hospitals. 

Response: CMS’ longstanding policy 

with respect to what constitutes a 

routine service (sometimes called ‘‘room 

and board’’) as compared to an ancillary 


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service is discussed in the regulations at 

§ 413.53(b) and in the PRM–I under 

Section 2202.6 (Routine Services) and 

Section 2202.8 (Ancillary Services). If 

an item is not specifically enumerated 

as a routine item or service in Section 

2202.6, or an ancillary item or service in 

Section 2202.8, then the rules in Section 

2203 of the PRM–I apply. This section 

requires that the common or established 

practice of providers of the same class 

in the same State should be followed. If 

there is no common or established 

classification of an item or service as 

routine or ancillary among providers of 

the same class in the same State, a 

provider’s customary charging practice 

is recognized so long as it is consistently 

followed for all patients and does not 

result in an inequitable apportionment 

of cost to the program. 

With respect to blood transfusion/ 

administration, to which the commenter 

refers, this service should not be billed 

under the Medical/Surgical Supplies 

code, regardless of the hospital’s 

accounting system. ‘‘Blood Transfusion/ 

Administration’’ is a service rather than 

an item, and the blood itself is also not 

treated as a medical supply item. The 

cost report includes a standard cost 

center for ‘‘Blood Storing, Processing, 

and Transfusion’’ (Line 47 of Worksheet 

A, under the ‘‘Ancillary Service Cost 

Centers’’), and there is a UB revenue 

code 0391 for Blood Administration, in 

addition to revenue codes in the 038X 

category for various blood products. 

However, the revenue codes for 

Medical/Surgical Supplies fall within 

another category, 027x. Because blood 

transfusion and blood products are not 

specifically mentioned in the definition 

of ‘‘routine services’’ in the PRM–1 

under Section 2202.6, or in the 

definition of ‘‘ancillary services’’ in 

Section 2202.8, the commenter is asking 

whether it is appropriate not to bill a 

separate ancillary charge for the 

transfusions occurring in the routine 

cost centers, but to consider that the 

charge is encompassed in the routine 

Room and Board Charge under one of 

the Room and Board UB revenue codes. 

In accordance with PRM–I, Section 

2202.8, if the provider does not impose 

a separate charge in addition to a 

routine service charge, the service is 

considered not to be ‘‘ancillary’’. As 

mentioned above, under PRM–I, Section 

2203, the provider must consider the 

established practice of the same class of 

providers in the same State as to 

whether to include blood transfusion in 

the routine service charge (for both 

Medicare and non-Medicare patients). 

For blood transfused in the Operating 

Room, Emergency Room, or other 

ancillary cost centers, providers should 

be billing a separate charge (just as for 

implantable devices in case of 

Implantable Devices Charged to 

Patients) under UB revenue code 0391 

(Blood Administration), and the cost 

and charges should be reported on Line 

47 of the cost report. 

Comment: A few commenters 

indicated that, with the changes that 

CMS is proposing to the reporting of 

costs and charges of medical devices on 

the cost report, the quality of the cost 

data that CMS will be collecting will 

improve. Accordingly, they stated that, 

the CCR for the new ‘‘Implantable 

Devices Charges to Patients’’ cost center 

will improve to the extent that applying 

it to the reported charges for devices 

from the cost report will generate an 

actual device cost and that this actual 

device cost should be an accurate 

reflection of the hospital’s device 

acquisition cost. Therefore, the 

commenter suggested that this cost 

should be determined and incorporated 

into the process for calculating the 

relative weights, and that CMS should 

use the actual cost in the relative weight 

calculation rather than an imputed cost 

estimated by applying a national CCR to 

claims charge data, in instances where 

the imputed cost is lower than the cost 

reported by the hospital on its cost 

report. 

Response: While we are optimistic 

that the addition of a new cost report 

line for implantable devices should 

certainly allow for the collection of 

more accurate cost data, we do not 

believe we can use this aggregate actual 

cost amount for setting relative weights. 

The costs and charges for all 

implantable devices for the hospital 

across all payers are collected and 

aggregated on the cost report. However, 

the cost of a specific device cannot be 

determined from this aggregated 

information. We have to estimate the 

cost of devices for each MS–DRG in 

each claim in order to estimate an 

average imputed cost for the entire MS–

DRG, including device costs. Different 

MS–DRGs will include different kinds 

of devices, each with a different cost. 

We also do not believe it is appropriate 

to use the actual cost in the relative 

weight calculation rather than the 

imputed cost in instances where the 

imputed cost is lower than the cost 

reported by the hospital on its cost 

report, as the commenter suggested. 

We also solicited comments on 

alternative approaches that could be 

used in conjunction with or in lieu of 

the four proposed criteria for 

distinguishing between what should be 

reported in the new cost centers for 

Implantable Devices and Medical 

Supplies, respectively. Another option 

we considered would distinguish 

between high-cost and low-cost items 

based on a cost threshold. Under this 

methodology, we would also have one 

cost center for Medical Supplies and 

one cost center for Devices, but we 

would instruct hospitals to report items 

that are not movable equipment or a 

capital expense but are above a certain 

cost threshold in the cost center for 

Devices. Items costing below that 

threshold would be reported in the cost 

center for Medical Supplies. 

Establishing a cost threshold for cost 

reporting purposes would directly 

address the problem of charge 

compression and would enable 

hospitals to easily determine whether an 

item should be reported in the supply 

or the device cost center. A cost 

threshold would also potentially allow 

a broader variety of expensive, single 

use devices that do not remain in the 

patient at discharge to be reported in the 

device cost center (such as specialized 

catheters or ablation probes). While we 

have a number of concerns with the cost 

threshold approach, we nevertheless 

solicited public comments on whether 

such an approach would be worthwhile 

to pursue. Specifically, we are 

concerned that establishing a single cost 

threshold for pricing devices could 

possibly be inaccurate across hospitals. 

Establishing a threshold would require 

identifying a cost at which hospitals 

would begin applying reduced markup 

policies. Currently, we do not have data 

from which to derive a threshold. We 

have anecdotal reports that hospitals 

change their markup thresholds 

between $15,000 and $20,000 in 

acquisition costs. Recent research on 

this issue indicated that hospitals with 

average inpatient discharges in DRGs 

with supply charges greater than 

$15,000, $20,000, and $30,000 have 

higher supply CCRs (Advamed March 

2006). 

Furthermore, although a cost 

threshold directly addresses charge 

compression, it may not eliminate all 

charge compression from the device cost 

center because a fixed cost threshold 

may not accurately capture differential 

markup policies for an individual 

hospital. At the same time, we also are 

concerned that establishing a cost 

threshold may interfere with the pricing 

practices of device manufacturers in 

that the prices for certain devices or 

surgical kits could be inflated to ensure 

that the devices met the cost threshold. 

We believe our proposed approach of 

identifying a group of items that are 

relatively expensive based on the 

existing criteria for OPPS device passthrough payment status, rather than 

adopting a cost threshold, would not 


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influence pricing by the device 

industry. In addition, if a cost threshold 

were adopted to distinguish between 

high-cost devices and low-cost supplies 

on the cost report, we would need to 

periodically reassess the threshold for 

changes in markup policies and price 

inflation over time. 

Comment: Several commenters 

addressed the use of a cost threshold to 

determine whether an item should be 

categorized in the medical device cost 

center of the cost report. Some 

commenters believed that establishing a 

cost threshold to determine whether an 

item should be reported as a device or 

a supply would be inappropriate 

because it is difficult to ensure that 

charges are properly reported because 

there would not be any specific revenue 

codes for these high-cost and low-cost 

items. Further, commenters disagreed 

about what the threshold should be. (In 

the proposed rule, we had discussed 

that we have anecdotal evidence that 

inpatient discharges in DRGs with 

supply charges greater than $15,000, 

$20,000 and $30,000 have higher supply 

CCRs.) However, the commenters stated 

that if CMS used a cost threshold, it 

should be set lower at a range of $1,000 

to $2,000. Another commenter 

recommended that CMS set a cost 

threshold at $4,000, so its 

nonimplantable device could qualify as 

a device for cost reporting purposes. 

Response: In the proposed rule, we 

proposed to instruct hospitals to report 

only devices that met our criteria 

(including that a device is implantable 

and remains in the patient upon 

discharge) in the new cost center for 

‘‘Implantable Devices Charged to 

Patients’’ and to report all other devices 

and supplies in the new ‘‘Medical 

Supplies Charged to Patients’’ cost 

center. However, we also solicited 

comments on alternative approaches 

that could be used in conjunction with 

or in lieu of our proposed criteria to 

distinguish between the new cost center 

for Implantable Devices and the new 

cost center for Medical Supplies. One 

alternative could have been that 

hospitals report items above a certain 

cost threshold in the Medical Devices 

cost center while items costing below 

the threshold would be reported in the 

Medical Supplies cost center. The few 

commenters on this proposal were 

generally opposed to establishing a cost 

threshold to differentiate between 

medical devices and medical supplies. 

As discussed in our proposed rule (73 

FR 23546), we continue to be concerned 

that a cost threshold may affect pricing 

practices of device manufacturers where 

prices of certain devices could be 

inflated to ensure the item met the 

threshold to be classified as a device. 

Further, we believe it would be difficult 

to establish a cost threshold because we 

currently have no empirical data from 

which to establish one, and the 

commenters disagreed with the 

anecdotal evidence we presented that a 

potential cost threshold for devices 

could be between $15,000 and $20,000. 

Therefore, the policy that we are 

finalizing in this final rule does not 

include a cost threshold to determine 

whether items should be reported as a 

medical device or a medical supply. 

Another option for distinguishing 

between high-cost and low-cost items 

for purposes of the cost report would be 

to divide the Medical Supplies Charged 

to Patients cost center based on markup 

policies by placing items with lower 

than average markups in a separate cost 

center. This approach would center on 

documentation requirements for 

differential charging practices that 

would lead hospitals to distinguish 

between the reporting of supplies and 

devices on different cost report lines. 

That is, because charge compression 

results from the different markup 

policies that hospitals apply to the 

supplies and devices they use based on 

the estimated costs of those supplies 

and devices, isolating supplies and 

devices with different markup policies 

mitigates aggregation in markup policies 

that cause charge compression and is 

specific to a hospital’s internal 

accounting and pricing practices. If 

requested by the fiscal intermediaries/ 

MACs at audit, hospitals could be 

required to submit documentation of 

their markup policies to justify the way 

they have reported relatively 

inexpensive supplies on one line and 

more expensive devices on the other 

line. We believe that it should not be too 

difficult for hospitals to document their 

markup practices because, as was 

pointed out by many commenters since 

the implementation of cost-based 

weights, the source of charge 

compression is varying markup 

practices. Greater knowledge of the 

specifics of hospital markup practices 

may allow ultimately for development 

of standard cost reporting instructions 

that instruct hospitals to report an item 

as a device or a supply based on the 

type of markup applied to that item. 

This option related to markup practices, 

the proposal to define devices based on 

four specific criteria, and the third 

alternative that would establish a cost 

threshold for purposes of distinguishing 

between high-cost and low-cost items 

could be utilized separately or in some 

combination for purposes of cost report 

modification. Again, in the proposed 

rule, we solicited comments on these 

alternative approaches. We also 

expressed interest in other 

recommendations for appropriate cost 

reporting improvements that address 

charge compression. 

Comment: One commenter supported 

the use of the markup threshold to 

separate medical supplies from medical 

devices because, according to the 

commenter, it would be the most 

accurate way to mitigate charge 

compression as the source of charge 

compression is hospitals’ varying 

markup practices. However, the 

commenter noted that establishing a 

markup threshold would require 

additional documentation from 

hospitals that could be burdensome. 

Other commenters believed that a 

markup threshold would likely separate 

medical devices that were very 

expensive or very inexpensive, but 

would not address medical devices that 

are moderately priced. The commenters 

who opposed a markup threshold noted 

that because there is great variability in 

markup practices among hospitals, it 

would be difficult to apply a national 

markup threshold. The commenters also 

noted that urban hospitals compared to 

rural hospitals would have very 

different charging practices. 

Response: In the FY 2009 IPPS 

proposed rule, we listed several reasons 

why adopting a policy where high and 

low cost items would be divided based 

on markup policy could be appropriate 

(73 FR 23546). We also stated that this 

option would focus on documentation 

requirements, although we did not 

believe these documentation 

requirements would be too difficult. 

However, the commenters believed that 

this approach is too burdensome, and 

that it would be difficult to apply a 

national markup threshold given the 

varying markup practices among 

hospitals. Therefore, because most 

commenters approved of a revenue 

code-based approach to distinguishing 

between high-cost and low-cost items, 

we are not adopting a policy based on 

markup practices at this time. 

5. Timeline for Revising the Medicare 

Cost Report 

As mentioned in the FY 2008 IPPS 

final rule with comment period (72 FR 

47198), we have begun a comprehensive 

review of the Medicare hospital cost 

report, and the finalized policy to split 

the current cost center for Medical 

Supplies Charged to Patients into one 

line for ‘‘Medical Supplies Charged to 

Patients’’ and another line for 

‘‘Implantable Devices Charged to 

Patients,’’ as part of our initiative to 

update and revise the hospital cost 


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report. Under an effort initiated by CMS 

to update the Medicare hospital cost 

report to eliminate outdated 

requirements in conjunction with the 

PRA, we plan to propose the actual 

changes to the cost reporting form, the 

attending cost reporting software, and 

the cost report instructions in Chapter 

36 of the Medicare PRM, Part II. We 

expect the proposed revision to the 

Medicare hospital cost report to be 

issued sometime after publication of 

this final rule. Because we are finalizing 

our proposal to create one cost center 

for ‘‘Medical Supplies Charged to 

Patients’’ and one cost center for 

‘‘Implantable Devices Charged to 

Patients’’ in this final rule, the cost 

report forms and instructions should 

reflect those changes. In the FY 2009 

IPPS proposed rule (73 FR 23547), we 

stated that we expect the revised cost 

report would be available for hospitals 

to use when submitting cost reports 

during FY 2009 (that is, for cost 

reporting periods beginning on or after 

October 1, 2008). We now believe the 

revised cost report may not be available 

until cost reporting periods starting after 

the Spring of 2009. Because there is 

approximately a 3-year lag between the 

availability of cost report data for IPPS 

and OPPS ratesetting purposes in a 

given fiscal year, we may be able to 

derive two distinct CCRs, one for 

medical supplies and one for devices, 

for use in calculating the FY 2012 or FY 

2013 IPPS relative weights and the CY 

2012 or CY 2013 OPPS relative weights. 

Comment: Commenters generally 

expressed concern with the timeframe 

in which we proposed to implement the 

cost report changes. One commenter 

questioned hospitals’ ability to quickly 

change their chargemaster to ensure that 

revenue codes are always reported in 

MedPAR consistently with the cost 

centers in which they are reported on 

the cost report. The commenter 

cautioned that initial calculations of the 

relative weights may not be accurate if 

hospitals do not have sufficient time to 

adapt to the new reporting 

requirements. Another commenter did 

not believe that the time between 

issuance of the final rule and October 1, 

2008, is enough time for hospitals to 

make the changes to their processes and 

systems necessary to conform to the 

new cost reporting procedures. The 

commenter pointed out that hospital 

employees may need to be retrained, 

and new cost reporting technology may 

need to be purchased, all of which is 

costly to hospitals operating on tight 

margins. The commenter requested that 

CMS provide no less than 6 months lead 

time, but preferably 1 year, before 

implementing any changes to the cost 

report, asserting that an ‘‘overlyaggressive’’ timeframe in which to 

implement changes to the cost report 

may lead to inaccurate data, which runs 

counter to CMS’ goal of improving the 

accuracy of its CCR data. 

Response: We are sympathetic to the 

commenter’s concerns, but we note that, 

thus far, we have not proposed to 

implement drastic changes to the cost 

report and cost reporting procedures 

that warrant overhaul of hospitals’

current accounting systems. As we 

stated in the FY 2009 IPPS proposed 

rule (73 FR 23543), longstanding 

Medicare policy has been that, under 

the departmental method of 

apportionment, the cost of each 

ancillary department is to be 

apportioned separately rather than being 

combined with another ancillary 

department. Hospitals must include the 

cost and charges of separately 

‘‘chargeable medical supplies’’ in the 

Medical Supplies Charged to Patients 

cost center (line 55 of Worksheet A), 

rather than in the Operating Room, 

Emergency Room, or other ancillary cost 

centers. Routine services, which can 

include ‘‘minor medical and surgical 

supplies’’ (Section 2202.6 of the PRM, 

Part 1), and items for which a separate 

charge is not customarily made, may be 

directly assigned through the hospital’s 

accounting system to the department in 

which they were used, or they may be 

included in the Central Services and 

Supply cost center (line 15 of Worksheet 

A). Conversely, the separately 

chargeable medical supplies should be 

assigned to the Medical Supplies 

Charged to Patients cost center on line 

55. Our proposal to split the existing 

Medical Supplies Charged to Patients 

cost center into two cost centers, one 

specifically for ‘‘Implantable Devices 

Charged to Patients,’’ is simply a 

refinement of what should be hospitals’

existing cost reporting practices, 

wherein, rather than reporting all 

separately chargeable supplies and 

devices in one cost center, the devices 

would be reported in a separate, new 

cost center. We do not view this as a 

significant shift in cost reporting policy. 

Further, our adoption of the 

commenters’ suggested method of 

separating supplies and devices based 

on existing revenue codes and NUBC 

definitions, with which all hospitals are 

already familiar, should minimize the 

disruption to hospitals’ accounting and 

billing systems. Lastly, we note that, 

although participation in the hospital 

associations’ educational initiatives has 

been voluntary, efforts have certainly 

been made by the hospital community 

over the past year to increase awareness 

and improve the accuracy of hospitals’

cost reporting practices. Also, with 

respect to the commenter that 

questioned hospitals’ ability to quickly 

change their chargemaster to ensure that 

revenue codes are always reported in 

the MedPACR file consistently with the 

cost centers in which they are reported 

on the cost report, as we stated in 

response to a previous comment, 

hospitals must use the billing codes as 

directed by the NUBC, regardless of the 

cost center in which the cost is reported 

on the cost report. Hospitals must 

continue to report ICD–9–CM codes and 

charges with an appropriate UB revenue 

code, consistent with NUBC 

requirements. When reporting the 

appropriate revenue code for services, 

hospitals should choose the most 

precise revenue code, or subcode if 

appropriate. As NUBC guidelines 

dictate: ‘‘It is recommended that 

providers use the more detailed 

subcategory when applicable/available 

rather than revenue codes that end in 

‘‘0’’ (General) or ‘‘9’’ (Other).’’

Furthermore, with respect to the cost 

report, hospitals are required to follow 

the Medicare cost apportionment 

regulations at 42 CFR 413.53(a)(1) 

which convey that, under the 

departmental method of apportionment, 

the cost of each ancillary department is 

to be apportioned separately rather than 

combined with another department. In 

order to comply with the requirements 

of this regulation, hospitals must follow 

the Medicare payment policies in 

Section 2302/8 of the PRM–I and the 

PRM–II in order to ensure that their 

ancillary costs and charges are reported 

in the appropriate cost centers on the 

cost report. We rely on hospitals to fully 

comply with the revenue code reporting 

instructions and Medicare cost 

apportionment policies. 

Therefore, we do not believe that it is 

necessary to significantly delay 

availability of the revised cost reporting 

form beyond the date that we proposed; 

that is, for cost reporting periods 

starting after the Spring of 2009. In 

practice, hospitals need not have 

modified their systems (to the extent 

necessary) by the Spring of 2009, but 

rather, by the time they are completing 

and submitting cost reports for cost 

reporting periods beginning after the 

Spring of 2009. Further, as we have 

stated previously, no change to the 

actual cost reporting form will be 

undertaken without first going through 

notice and comment procedures in 

accordance with the PRA. 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48469 

6. Revenue Codes Used in the MedPAR 

File 

An important first step in RTI’s study 

(as explained in its March 2007 report) 

was determining how well the cost 

report charges used to compute CCRs 

matched to the charges in the MedPAR 

file. This match (or lack thereof) directly 

affects the accuracy of the DRG cost 

estimates because MedPAR charges are 

multiplied by CCRs to estimate cost. RTI 

found inconsistent reporting between 

the cost reports and the claims data for 

charges in several ancillary departments 

(Medical Supplies, Operating Room, 

Cardiology, and Radiology). For 

example, the data suggested that some 

hospitals often include costs and 

charges for devices and other medical 

supplies within the Medicare cost report 

cost centers for Operating Room, 

Radiology, or Cardiology, while other 

hospitals include them in the Medical 

Supplies Charged to Patients cost 

center. While the educational initiative 

undertaken by the national hospital 

associations is encouraging hospitals to 

consistently report costs and charges for 

devices and other medical supplies only 

in the Medical Supplies Charged to 

Patients cost center, equal attention 

must be paid to the way in which 

charges are grouped by hospitals in the 

MedPAR file. Several commenters on 

the FY 2008 IPPS proposed rule 

supported RTI’s recommendation of 

including additional fields in the 

MedPAR file to disaggregate certain cost 

centers. One commenter stated that the 

assignment of revenue codes and 

charges to revenue centers in the 

MedPAR file should be reviewed and 

changed to better reflect hospital 

accounting practices as reflected on the 

cost report (72 FR 47198). 

In an effort to improve the match 

between the costs and charges included 

on the cost report and the charges in the 

MedPAR file, in the FY 2009 IPPS 

proposed rule, we recommended that 

certain revenue codes be used for items 

reported in the proposed Medical 

Supplies Charged to Patients cost center 

and the proposed Implantable Devices 

Charged to Patients cost center, 

respectively. Specifically, under the 

proposal to create a cost center for 

implantable devices that remain in the 

patient upon discharge, revenue codes 

0275 (Pacemaker), 0276 (Intraocular 

Lens), and 0278 (Other Implants) would 

correspond to implantable devices 

reported in the proposed Implantable 

Devices Charged to Patients cost center. 

Items for which a hospital may have 

previously used revenue code 0270 

(General Classification), but actually 

meet the proposed definition of an 

implantable device that remains in the 

patient upon discharge should instead 

be billed with the 0278 revenue code. 

Conversely, relatively inexpensive items 

and supplies that are not implantable 

and do not remain in the patient at 

discharge would be reported in the 

proposed Medical Supplies Charged to 

Patients cost center on the cost report, 

and should be billed with revenue codes 

0271 (nonsterile supply), 0272 (sterile 

supply), and 0273 (take-home supplies), 

as appropriate. Revenue code 0274 

(Prosthetic/Orthotic devices) and 

revenue code 0277 (Oxygen—Take 

Home) should be associated with the 

costs reported on lines 66 and 67 for 

DME-Rented and DME-Sold on the cost 

report. Charges associated with supplies 

used incident to radiology or to other 

diagnostic services (revenue codes 0621 

and 0622 respectively) should match 

those items used incident to those 

services on the Medical Supplies 

Charged to Patients cost center of the 

cost report, because, under this 

proposal, supplies furnished incident to 

a service would be reported in the 

Medical Supplies Charged to Patients 

cost center. (We refer readers to item b. 

as listed under the proposed definition 

of a device in section II.E.4. of the 

preamble of this final rule.) A revenue 

code of 0623 for surgical dressings 

would similarly be associated with the 

costs and charges of items reported in 

the proposed Medical Supplies Charged 

to Patients cost center, while a revenue 

code of 0624 for FDA investigational 

device, if that device does not remain in 

the patient upon discharge, could be 

associated with items reported on the 

Medical Supplies Charged to Patients 

cost center as well. 

In general, proper reporting would 

dictate that if an item is reported as an 

implantable device on the cost report, it 

is an item for which the NUBC would 

require use of revenue code 0275 

(Pacemaker), 0276 (Intraocular Lens), 

0278 (Other Implants), or 0624 

(Investigational Device). Likewise, items 

reported as Medical Supplies Charged to 

Patients should receive an appropriate 

revenue code indicative of supplies. We 

understand that many of these revenue 

codes have been in existence for many 

years and have been added for purposes 

unrelated to the goal of refining the 

calculation of cost-based weights. 

Accordingly, in the proposed rule, we 

acknowledged that additional 

instructions relating to the appropriate 

use of these revenue codes may need to 

be issued. In addition, CMS or the 

hospital associations, or both, may need 

to request new revenue codes from the 

NUBC. In either case, we do not believe 

either action should delay use of the 

new Medical Supplies and Implantable 

Devices CCRs in setting payment rates. 

However, in light of our proposal to 

create two separate cost centers for 

Medical Supplies Charged to Patients 

and Implantable Devices Charged to 

Patients, respectively, we solicited 

comments on how the existing revenue 

codes or additional revenue codes could 

best be used in conjunction with the 

revised cost centers on the cost report. 

Comment: Two commenters 

supported CMS’ efforts to better match 

costs and charges and reduce charge 

compression, but remained concerned 

about ‘‘three key problems’’ that result 

from using two different data sources 

(MedPAR and the cost report) to 

calculate relative weights: 

• First, the method used by CMS to 

group hospital charges for the MedPAR 

files differs from that used by hospitals 

to group Medicare charges, total 

charges, and overall costs on the cost 

report. 

• Second, hospitals group their 

Medicare charges, total charges, and 

overall costs in different departments on 

their cost reports for various reasons. 

• Third, hospitals across the country 

complete their cost reports in different 

ways, as allowed by CMS. In addition, 

interpretations of Medicare allowable 

costs vary from one fiscal intermediary/ 

MAC to another. 

The commenters were concerned that 

CMS’ proposal might require hospitals 

to manually track a patient bill through 

several departments of the hospital to 

obtain information about implantable 

devices used, an effort that is difficult 

and inefficient. The commenters also 

stated that the combined use of hospitalspecific charges and a national CCR 

result in a distortion of the MS–DRG 

relative weights and a shifting of 

Medicare payments among hospitals, 

not based on resource utilization, but 

rather on a mathematical calculation. 

One commenter recommended that 

CMS continue to collaborate with the 

workgroup heading up the educational 

initiative to develop a mechanism for 

determining the cost of implantable 

devices. 

Response: The commenters are correct 

that hospitals do have some flexibility 

in how they report and group charges, 

but we note that hospitals must 

separately apportion the costs of each 

ancillary department and not combine 

them with other ancillary departments 

(Section 2200.3 of the PRM–I). Further, 

hospitals must include costs and 

charges of separately chargeable medical 

supplies in the cost center for Medical 

Supplies Charged to Patients (Section 

2202.6 of the PRM–I), and effective for 


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48470 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

cost reporting periods beginning after 

the Spring of 2009, hospitals must 

include separately chargeable 

implantable medical devices in the new 

‘‘Implantable Devices Charged to 

Patients’’ cost center. Further, because 

we are finalizing the policy that the 

existing revenue codes and definitions 

are to be used to determine whether an 

item is reported as a supply or an 

implantable device on the cost report, 

hospitals must ensure that they choose 

the most appropriate revenue codes in 

the 027x and 062x series to report 

supplies and implantable devices and 

subsequently matched to the 

appropriate cost center. As evidenced in 

the preceding comment summary, the 

vast majority of commenters believe that 

this is the least administratively 

burdensome approach for hospitals, and 

therefore, we are optimistic that the 

commenters’ hospitals also have the 

capability to adapt to more careful cost 

reporting practices that are aligned with 

Medicare policy and the method used 

by CMS to group costs and charges in 

the relative weight calculation. We also 

do not believe that the use of hospitalspecific charges together with national 

average CCRs redistributes Medicare 

payments among hospitals merely based 

on a mathematical calculation. As we 

stated in the FY 2008 IPPS final rule 

with comment period (72 FR 47197), 

‘‘on the contrary, a system that improves 

payment accuracy and moderates the 

influence of individual hospital 

reporting practices on a national 

payment system is not one which 

haphazardly redistributes payments. We 

note that, in a report issued in July 

2006, the GAO found that CMS’ system 

of national CCRs shows promise to 

improve payment accuracy because it 

reduces the impact that individual 

hospital-reporting practices has on the 

DRG relative weights (GAO–06–880, 

‘‘CMS’s Proposed Approach to Set 

Hospital Inpatient Payments Appears 

Promising’’).’’

Comment: One commenter 

recommended that CMS revise the 

MedPAR file to be consistent with the 

23 revenue center groups identified by 

the RTI report. The commenter believed 

this is a feasible long-term step because 

the MedPAR file is derived from a larger 

claims data set that has more detailed 

charge information that can be matched 

to the 23 revenue centers analyzed by 

RTI. 

Response: In RTI’s 2008 report, RTI 

recommended, as a medium-term goal, 

that CMS expand the MedPAR file to 

include separate fields that disaggregate 

several existing charge departments. RTI 

recommended that the new fields 

should include those used to compute 

the statistically disaggregated CCRs. To 

expand MedPAR, we would have to get 

detailed charge information from the 

Standard Analytic File. We agree that 

more detailed charge information on the 

MedPAR file would allow us to create 

more refined CCRs to mitigate charge 

compression. As we indicated in the FY 

2008 final rule with comment period (72 

FR 47198), we will consider suggestions 

for modifying the MedPAR in 

conjunction with other competing 

priorities we have for our information 

systems. 

Comment: One commenter 

recommended that CMS update its 

device-dependent MS–DRG tables with 

a crosswalk to the specific Level II 

HCPCS device codes used in the 

associated surgical procedures. The 

commenter stated that although 

inpatient claims do not report HCPCS 

codes, most hospital chargemasters list 

device charges with the associated 

HCPCS codes and UB revenue center. 

The commenter further stated that when 

a device HCPCS code is entered on an 

inpatient claim, the HCPCS code is 

repressed but the device UB revenue 

code is shown on the claim along with 

the corresponding charge. The 

commenter believed the development of 

a HCPCS code to MS–DRG crosswalk 

would help providers validate that 

device charges are being uniformly 

captured on patients’ claims, regardless 

of their inpatient or outpatient status. 

The commenter believed this crosswalk 

could also support development of a 

claim edit for both inpatient and 

outpatient claims based on the reporting 

of specific UB revenue codes and device 

HCPCS codes that would result in 

payment of a device-dependent MS–

DRG or device-dependent APC. 

Response: As the commenter noted, 

unlike the OPPS, payments under the 

IPPS are not based on HCPCS codes. 

The IPPS also differs from the OPPS in 

that under the IPPS, the costs of 

individual services, even those using 

expensive devices, are components of 

the costs of a much larger group of 

services provided to a particular patient, 

and therefore, larger payment groups 

using more claims insure against bias in 

an MS–DRG weight despite possible 

errors in reporting the charge for an 

expensive device. Further, adoption of 

such a claim edit policy could require 

burdensome changes in coding practices 

by some hospitals. Therefore, we are not 

adopting the commenter’s 

recommendation. 

Comment: One commenter urged 

CMS to undertake an analysis of the FY 

2007 fourth quarter MedPAR claims to 

determine whether documentation and 

coding-related payment increases are 

evident, and whether they are peculiar 

to most hospitals or only to a subset of 

hospitals. The commenter asked that if 

CMS observes that only a subset of 

hospitals are driving the documentation 

and coding-related increases, CMS hold 

the blend of the CMS DRG and the MS–

DRG relative weights at 50/50 for FY 

2009. Another commenter 

recommended that, in FY 2009, CMS 

continue to blend the CMS DRG and 

MS–DRG relative weights at 50/50 

because the FY 2007 MedPAR claims 

that are used to calculate the FY 2009 

relative weights do not reflect the 

significant changes that were made to 

the IPPS in FY 2008 (that is, the move 

to MS–DRGs and the revised CC list). 

The commenter believed that delaying 

full implementation of the MS–DRG 

weights until FY 2010 would allow use 

of the FY 2008 MedPAR claims data, 

which would reflect a full year of 

services coded under the new MS–DRGs 

and CC list. The commenters argued 

that this will, in turn, help improve the 

accuracy and consistency of the costbased MS–DRG relative weights. 

Response: Because of the limited time 

we had available to address the public 

comments as well as analyze the FY 

2007 fourth quarter MedPAR data, we 

were unable to perform an indepth 

analysis of where documentation and 

coding-related payment increases were 

most evident. However, we did perform 

some analysis, which did not show any 

obvious trends in subsets of hospitals. 

Furthermore, use of the FY 2007 

MedPAR claims to set the FY 2009 MS–

DRG relative weights represents the 

most recent and best data available from 

which to do so. Therefore, because we 

did not propose to delay the full 

implementation of the MS–DRGs and 

their attending relative weights in FY 

2009, we are finalizing the transition to 

100 percent MS–DRGs in FY 2009. 

Comment: One commenter expressed 

concern about the effect that a new CCR 

for Medical Devices might have on its 

Medicaid reimbursement because 

Medicaid does not pay for devices and 

the CCR for Medical Supplies and 

Equipment would be diluted. 

Response: The cost-based relative 

weights were developed solely using 

Medicare data. We are concerned that 

non-Medicare payers may be using our 

payment systems and rates without 

making refinements to address the 

needs of their own populations. We 

encourage non-Medicare payers to adapt 

the MS–DRGs and the relative weight 

methodology to better serve their needs. 

Comment: Numerous commenters 

asked that CMS make changes to the 

cost report or other changes to resolve 

concerns with charge compression in 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48471 

2 Institute of Medicine: To Err Is Human: Building 

a Safer Health System, November 1999. Available 

at: http://www.iom.edu/Object.File/Master/4/117/ 

ToErr-8pager.pdf. 

3Centers for Disease Control and Prevention: 

Press Release, March 2000. Available at: http:// 

www.cdc.gov/od/oc/media/pressrel/r2k0306b.htm. 

4 Klevens et al. Estimating Health Care-Associated 

Infections and Deaths in U.S. Hospitals, 2002. 

Public Health Reports. March–April 2007. Volume 

122. 

5 2007 Leapfrog Group Hospital Survey. The 

Leapfrog Group 2007. Available at: http:// 

www.leapfroggroup.org/media/file/ 

Leapfrog_hospital_acquired_infections_release.pdf. 

6 1.6 Million Admission Analysis, MedMined, 

Inc. September 2006. 

hospital OPPS weights for pharmacy 

services, radiology services, 

radiopharmaceuticals, drugs and 

biologicals, and other services paid 

under the OPPS. 

Response: These comments are out of 

the scope of this final rule because we 

proposed only to change the cost report 

to address charge compression for 

devices under both the IPPS and the 

OPPS. The CY 2009 OPPS/ASC 

proposed rule was published in the 

Federal Register on July 18, 2008 (73 FR 

41416), and public comments on the 

effects of charge compression on the 

OPPS weights for items and services 

other than devices should be made in 

response to that proposed rule. The 

comment period for the OPPS/ASC 

proposed rule closes at 5 p.m. E.S.T. on 

September 2, 2008. 

F. Preventable Hospital-Acquired 

Conditions (HACs), Including Infections 

1. General Background 

In its landmark 1999 report ‘‘To Err is 

Human: Building a Safer Health 

System,’’ the Institute of Medicine 

found that medical errors, particularly 

hospital-acquired conditions (HACs) 

caused by medical errors, are a leading 

cause of morbidity and mortality in the 

United States. The report noted that the 

number of Americans who die each year 

as a result of medical errors that occur 

in hospitals may be as high as 98,000. 

The cost burden of HACs is also high. 

Total national costs of these errors due 

to lost productivity, disability, and 

health care costs were estimated at $17 

to $29 billion.2 In 2000, the CDC 

estimated that hospital-acquired 

infections added nearly $5 billion to 

U.S. health care costs every year.3 A 

2007 study found that, in 2002, 1.7 

million hospital-acquired infections 

were associated with 99,000 deaths.4

Research has also shown that hospitals 

are not following recommended 

guidelines to avoid preventable 

hospital-acquired infections. A 2007 

Leapfrog Group survey of 1,256 

hospitals found that 87 percent of those 

hospitals do not follow 

recommendations to prevent many of 

the most common hospital-acquired 

infections.5 The costs associated with 

hospital-acquired infections are 

particularly burdensome for Medicare, 

as Medicare covers a greater portion of 

patients with hospital-acquired 

infections than other payers. One study 

found that the payer mix for patients 

without infections was 37 percent 

Medicare, 28 percent commercial, 21 

percent other, and 14 percent Medicaid, 

while the payer mix for patients with 

hospital-acquired infections was 57 

percent Medicare, 17 percent 

commercial, 15 percent other, and 11 

percent Medicaid.6

As one approach to combating HACs, 

including infections, in 2005 Congress 

authorized CMS to adjust Medicare IPPS 

hospital payments to encourage the 

prevention of these conditions. The 

preventable HAC provision at section 

1886(d)(4)(D) of the Act is part of an 

array of Medicare value-based 

purchasing (VBP) tools that CMS is 

using to promote increased quality and 

efficiency of care. Those tools include 

measuring performance, using payment 

incentives, publicly reporting 

performance results, applying national 

and local coverage policy decisions, 

enforcing conditions of participation, 

and providing direct support for 

providers through Quality Improvement 

Organization (QIO) activities. CMS’

application of VBP tools through 

various initiatives, such as this HAC 

provision, is transforming Medicare 

from a passive payer to an active 

purchaser of higher value health care 

services. We are applying these 

strategies for inpatient hospital care and 

across the continuum of care for 

Medicare beneficiaries. 

Additionally, the President’s FY 2009 

Budget outlines another approach for 

addressing serious preventable adverse 

events (‘‘never events’’), including 

HACs (see section II.F.9. below for a 

discussion regarding which HACs are 

included in the list of Serious 

Reportable Adverse Events). The 

President’s Budget proposal would: (1) 

Prohibit hospitals from billing the 

Medicare program for ‘‘never events’’

and prohibit Medicare payment for 

these events and (2) require hospitals to 

report any occurrence of these events or 

receive a reduced annual payment 

update. 

Medicare’s IPPS encourages hospitals 

to treat patients efficiently. Hospitals 

receive the same DRG payment for stays 

that vary in length and in the services 

provided, which gives hospitals an 

incentive to avoid unnecessary costs in 

the delivery of care. In some cases, 

complications acquired in the hospital 

do not generate higher payments than 

the hospital would otherwise receive for 

uncomplicated cases paid under the 

same DRG. To this extent, the IPPS 

encourages hospitals to avoid 

complications. However, complications, 

such as infections acquired in the 

hospital, can generate higher Medicare 

payments in two ways. First, the 

treatment of complications can increase 

the cost of a hospital stay enough to 

generate an outlier payment. However, 

the outlier payment methodology 

requires that a hospital experience a 

large loss on an outlier case, which 

serves as an incentive for hospitals to 

prevent outliers. Second, under the MS–

DRGs that took effect in FY 2008, there 

are currently 258 sets of MS–DRGs that 

are split into 2 or 3 subgroups based on 

the presence or absence of a 

complicating condition (CC) or a major 

complicating condition (MCC). If a 

condition acquired during a hospital 

stay is one of the conditions on the CC 

or MCC list, the hospital currently 

receives a higher payment under the 

MS–DRGs (prior to the October 1, 2008 

effective date of the HAC payment 

provision). Medicare will continue to 

assign a discharge to a higher paying 

MS–DRG if the selected condition is 

present on admission. (We refer readers 

to section II.D. of the FY 2008 IPPS final 

rule with comment period for a 

discussion of DRG reforms (72 FR 

47141).) The following is an example of 

how an MS–DRG may be paid under the 

HAC provision: 


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7Medicare Payment for Selected Adverse Events: 

Building the Business Case for Investing in Patient 

Safety. Health Affairs. Zhan et al. September 2006. 

Service: MS–DRG assignment * (examples below with 

CC/MCC indicate a single secondary diagnosis only) 

Present on 

admission 

(status of 

secondary 

diagnosis) 

Median 

payment 

Principal Diagnosis: 

• Intracranial hemorrhage or cerebral infarction (stroke) without CC/MCC—MS–DRG 066 .......................... ........................ $5,347.98 

Principal Diagnosis: 

• Intracranial hemorrhage or cerebral infarction (stroke) with CC—MS–DRG 065 ........................................ Y 6,177.43 

Example Secondary Diagnosis: 

• Dislocation of patella-open due to a fall (code 836.4 (CC)) 

Principal Diagnosis: 

• Intracranial hemorrhage or cerebral infarction (stroke) with CC—MS–DRG 065 ........................................ N 5,347.98 

Example Secondary Diagnosis: 

• Dislocation of patella-open due to a fall (code 836.4 (CC)) 

Principal Diagnosis: 

• Intracranial hemorrhage or cerebral infarction (stroke) with MCC—MS–DRG 064 ..................................... Y 8,030.28 

Example Secondary Diagnosis: 

• Stage III pressure ulcer (code 707.23 (MCC)) 

Principal Diagnosis: 

• Intracranial hemorrhage or cerebral infarction (stroke) with MCC—MS–DRG 064 ..................................... N 5,347.98 

Example Secondary Diagnosis: 

• Stage III pressure ulcer (code 707.23 (MCC)) 

* Operating amounts for a hospital whose wage index is equal to the national average. Based on FY 2008 wage index. 

This example illustrates a payment 

scenario in which the CC/MCC indicates 

a single secondary diagnosis only. It is 

atypical for a hospitalized Medicare 

beneficiary to have only one secondary 

diagnosis.7

2. Statutory Authority 

Section 1886(d)(4)(D) of the Act 

required the Secretary to select at least 

two conditions by October 1, 2007, that 

are: (a) High cost, high volume, or both; 

(b) assigned to a higher paying MS–DRG 

when present as a secondary diagnosis; 

and (c) could reasonably have been 

prevented through the application of 

evidence-based guidelines. Beginning 

October 1, 2008, Medicare can no longer 

assign an inpatient hospital discharge to 

a higher paying MS–DRG if a selected 

HAC is not present on admission. That 

is, the case will be paid as though the 

secondary diagnosis were not present. 

Medicare will continue to assign a 

discharge to a higher paying MS–DRG if 

the selected condition is present on 

admission. However, if any nonselected 

CC/MCC appears on the claim, the claim 

will be paid at the higher MS–DRG rate; 

to cause a lower MS–DRG payment, all 

CCs/MCCs on the claim must be 

selected conditions for the HAC 

payment provision. Section 

1886(d)(4)(D) of the Act provides that 

the list of conditions can be revised 

from time to time, as long as the list 

contains at least two conditions. 

Beginning October 1, 2007, we required 

hospitals to begin submitting 

information on Medicare claims 

specifying whether diagnoses were 

present on admission (POA). 

The POA indicator reporting 

requirement and the HAC payment 

provision apply to IPPS hospitals only. 

At this time, non-IPPS hospitals, 

including CAHs, LTCHs, IRFs, IPFs, 

cancer hospitals, children’s inpatient 

hospitals, and hospitals in Maryland 

operating under waivers, are exempt 

from POA reporting and the HAC 

payment provision. Throughout this 

section, ‘‘hospital’’ refers to IPPS 

hospitals. 

3. Public Input 

In the FY 2007 IPPS proposed rule (71 

FR 24100), we sought public input 

regarding conditions with evidencebased prevention guidelines that should 

be selected in implementing section 

1886(d)(4)(D) of the Act. The public 

comments we received were 

summarized in the FY 2007 IPPS final 

rule (71 FR 48051 through 48053). In the 

FY 2008 IPPS proposed rule (72 FR 

24716), we sought formal public 

comment on conditions that we 

proposed to select. In the FY 2008 IPPS 

final rule with comment period (72 FR 

47200 through 47218), we summarized 

the public comments we received on the 

FY 2008 IPPS proposed rule, presented 

our responses, selected eight conditions 

to which the HAC provision will apply, 

and noted that we would be seeking 

comments on additional HAC 

candidates in the FY 2009 IPPS 

proposed rule. 

In the FY 2009 IPPS proposed rule (73 

FR 23547), we proposed several 

candidate HACs in addition to 

proposing refinements to the previously 

selected HACs. In this FY 2009 IPPS 

final rule, we summarize the public 

comments we received on the FY 2009 

IPPS proposed rule, present our 

responses, select additional conditions 

to which the HAC payment provision 

will apply, and note that we will be 

seeking comments on additional HAC 

candidates in the FY 2010 IPPS 

proposed rule. 

4. Collaborative Process 

CMS experts worked closely with 

public health and infectious disease 

professionals from the CDC to identify 

the candidate preventable HACs, review 

comments, and select HACs. CMS and 

CDC staff also collaborated on the 

process for hospitals to submit a POA 

indicator for each diagnosis listed on 

IPPS hospital Medicare claims and on 

the payment implications of the various 

POA reporting options. 

On December 17, 2007, CMS and CDC 

hosted a jointly-sponsored HAC and 

POA Listening Session to receive input 

from interested organizations and 

individuals. The agenda, presentations, 

audio file, and written transcript of the 

listening session are available on the 

CMS Web site at: http:// 

www.cms.hhs.gov/HospitalAcqCond/ 

07_EducationalResources.asp. CMS and 

CDC also received verbal comments 


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8For the HAC section of this FY 2009 IPPS final 

rule, the DRG analysis is based on data from the 

September 2007 update of the FY 2007 MedPAR file, which contains hospital bills received through 

September 30, 2007. 

during the listening session and 

subsequently received numerous 

written comments. 

Comment: Several commenters 

recommended that CMS develop an 

advisory panel of clinicians and 

scientists to provide the agency with 

guidance on which conditions are 

appropriate for inclusion under this 

policy. 

Response: We are committed to 

working with stakeholders as we refine 

and make additions to the HAC list each 

year. We intend to engage the public 

through rulemaking as discussed in 

section II.F.3. of this preamble and other 

mechanisms similar to those discussed 

above. 

5. Selection Criteria for HACs 

In selecting proposed candidate 

conditions and finalizing conditions as 

HACs, CMS and CDC staff evaluated 

each condition against the criteria 

established by section 1886(d)(4)(D)(iv) 

of the Act. 

• Cost or Volume—Medicare data 8

must support that the selected 

conditions are high cost, high volume, 

or both. We have not yet analyzed 

Medicare claims data indicating which 

secondary diagnoses were POA because 

POA indicator reporting began only 

recently; therefore, the currently 

available data for candidate conditions 

includes all secondary diagnoses. 

• Complicating Condition (CC) or 

Major Complicating Condition (MCC)—

Selected conditions must be represented 

by ICD–9–CM diagnosis codes that 

clearly identify the condition, are 

designated as a CC or an MCC, and 

result in the assignment of the case to 

an MS–DRG that has a higher payment 

when the code is reported as a 

secondary diagnosis. That is, selected 

conditions must be a CC or an MCC that 

would, in the absence of this provision, 

result in assignment to a higher paying 

MS–DRG. 

• Evidence-Based Guidelines—

Selected conditions must be considered 

reasonably preventable through the 

application of evidence-based 

guidelines. By reviewing guidelines 

from professional organizations, 

academic institutions, and entities such 

as the Healthcare Infection Control 

Practices Advisory Committee 

(HICPAC), we evaluated whether 

guidelines are available that hospitals 

should follow to prevent the condition 

from occurring in the hospital. 

• Reasonably Preventable—Selected 

conditions must be considered 

reasonably preventable through the 

application of evidence-based 

guidelines. 

6. HACs Selected During FY 2008 IPPS 

Rulemaking and Changes to Certain 

Codes 

The conditions that were selected for 

the HAC payment provision through the 

FY 2008 IPPS final rule with comment 

period are listed below. The HAC 

payment provision implications for 

these selected HACs will take effect on 

October 1, 2008. We refer readers to 

section II.F.6. of the FY 2008 IPPS final 

rule with comment period (72 FR 47202 

through 47218) for a detailed analysis 

supporting the selection of each of these 

HACs. 

Selected HAC Medicare data 

(FY 2007) 

CC/MCC 

(ICD–9–CM codes) 

Selected evidence-based 

guidelines 

Foreign Object Retained After 

Surgery.

• 750 cases * ............................

• $63,631/hospital stay.** 

998.4 (CC) or 998.7 (CC) ......... NQF Serious Reportable Adverse Event. 

NQF’s Safe Practices for Better 

Healthcare available at the Web site: 

http://www.ahrq.gov/qual/nqfpract.htm. 

Air Embolism ............................. • 57 cases ................................

• $71,636/hospital stay. 

999.1 (MCC) ............................. NQF Serious Reportable Adverse Event. 

NQF’s Safe Practices for Better 

Healthcare available at the Web site: 

http://www.ahrq.gov/qual/nqfpract.htm. 

Blood Incompatibility ................. • 24 cases ................................

• $50,455/hospital stay. 

999.6 (CC) ................................ NQF Serious Reportable Adverse Event. 

NQF’s Safe Practices for Better 

Healthcare available at the Web site: 

http://www.ahrq.gov/qual/nqfpract.htm. 

Pressure Ulcer Stages III & IV .. • 257,412 cases *** ..................

• $43,180/hospital stay. 

707.23 (MCC) or 707.24 (MCC) NQF Serious Reportable Adverse Event. 

Available at the Web site: http://www.

ncbi.nlm.nih.gov/books/bv.fcgi?rid=

hstat2.chapter.4409. 

Falls and Trauma: .....................

—Fracture. 

—Dislocation. 

—Intracranial Injury. 

—Crushing Injury. 

—Burn. 

—Electric Shock. 

• 193,566 cases .......................

• $33,894/hospital stay. 

Codes within these ranges on 

the CC/MCC list: 800–829, 

830–839, 850–854, 925–929, 

940–949, 991–994.

NQF Serious Reportable Adverse Events 

address falls, electric shock, and 

burns. 

NQF’s Safe Practices for Better 

Healthcare available at the Web site: 

http://www.ahrq.gov/qual/nqfpract.htm. 

Catheter-Associated Urinary 

Tract Infection (UTI).

• 12,185 cases .........................

• $44,043/hospital stay. 

996.64 (CC) ..............................

Also excludes the following 

from acting as a CC/MCC: 

112.2 (CC), 590.10 (CC), 

590.11 (MCC), 590.2 (MCC), 

590.3 (CC), 590.80 (CC), 

590.81 (CC), 595.0 (CC), 

597.0 (CC), 599.0 (CC). 

Available at the Web site: http:// 

www.cdc.gov/ncidod/dhqp/gl_catheter_

assoc.html. 

Vascular Catheter-Associated 

Infection.

• 29,536 cases .........................

• $103,027/hospital stay. 

999.31 (CC) .............................. Available at the Web site: http:// 

www.cdc.gov/ncidod/dhqp/gl_

intravascular.html. 


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Selected HAC Medicare data 

(FY 2007) 

CC/MCC 

(ICD–9–CM codes) 

Selected evidence-based 

guidelines 

Surgical Site Infection-Mediastinitis After Coronary Artery 

Bypass Graft (CABG).

• 69 cases ................................

• $299,237/hospital stay. 

519.2 (MCC) .............................

And one of the following procedure codes: 36.10–36.19. 

Available at the Web site: http:// 

www.cdc.gov/ncidod/dhqp/gl_

surgicalsite.html. 

* A case represents a patient discharge identified from the MedPAR database that met the associated HAC diagnosis/procedure criteria (a secondary diagnosis on the HAC list and, where appropriate, a procedure code described in conjunction with a specific HAC). 

** Standardized charge is the total charge for a patient discharge record based on the CMS standardization file. The average standardized 

charge for the HAC is the average charge for all patient discharge records that met the associated HAC criteria. 

*** The number of cases of pressure ulcers reflects CC/MCC assignments for codes 707.00 through 707.07 and 707.09, which are currently 

being reported. New MCC codes 707.23 and 707.24 will be implemented on October 1, 2008. 

In the FY 2009 IPPS proposed rule (73 

FR 23552), we sought public comments 

on the following refinements to two of 

the previously selected HACs: 

a. Foreign Object Retained After Surgery 

In the FY 2009 IPPS proposed rule (73 

FR 23552), we solicited public 

comments regarding the inclusion of 

ICD–9–CM diagnosis code 998.7 (Acute 

reaction to foreign substance 

accidentally left during a procedure) to 

more accurately and completely identify 

foreign object retained after surgery as 

an HAC. 

Comment: Commenters universally 

supported the addition of ICD–9–CM 

code 998.7 to identify foreign object 

retained after surgery as an HAC. The 

commenters also reiterated their support 

for recognizing foreign object retained 

after surgery as an HAC. 

Response: We appreciate the 

commenters’ support. We refer readers 

to a more detailed discussion of HAC 

coding for foreign object retained after 

surgery in section II.F.10.a. of this 

preamble. 

After consideration of the public 

comments received, we are finalizing 

our proposal to include diagnosis code 

998.7 as an additional code to code 

998.4 selected in FY 2008 to identify 

foreign object retained after surgery as 

an HAC under the HAC payment 

provision. 

FOREIGN OBJECT RETAINED AFTER

SURGERY

ICD–9–CM 

codes Code descriptor 

998.4 ........... Foreign body accidentally left 

during a procedure. 

998.7 ........... Acute reaction to foreign substance accidentally left during a procedure. 

b. Pressure Ulcers 

In the FY 2009 IPPS proposed rule (73 

FR 23552), we proposed that, beginning 

October 1, 2008, the codes used to make 

MS–DRG adjustments for pressure 

ulcers under the HAC provision would 

include proposed MCC codes 707.23 

and 707.24 (pressure ulcer stages III and 

IV). 

Comment: Commenters supported the 

creation of the new ICD–9–CM codes 

707.23 and 707.24 to capture the stage 

of the pressure ulcer and supported the 

use of these codes to identify pressure 

ulcer stages III and IV as HACs. 

However, some commenters expressed 

concern about the proposal to classify 

ICD–9–CM codes 707.23 and 707.24 as 

MCCs and to remove the CC/MCC 

classifications from the existing 

pressure site codes. 

Response: We appreciate the 

commenters support for using codes 

707.23 and 707.24 to identify pressure 

ulcer stages III and IV as HACs. 

In response to the commenters’

concerns regarding the CC/MCC 

classification for these codes, we refer 

readers to section II.G.12. of this 

preamble where we address specific 

concerns about the creation of new 

codes for identifying pressure ulcers. 

After consideration of public 

comments received, we are adopting as 

final our proposal that, beginning 

October 1, 2008, the codes used to 

identify pressure ulcer stages III and IV 

as HACs include the following MCC 

codes: 

PRESSURE ULCERS

ICD–9–CM 

codes Code descriptor 

707.23 ......... Pressure ulcer, stage III. 

707.24 ......... Pressure ulcer, stage IV. 

7. Candidate HACs 

CMS and CDC have diligently worked 

together and with other stakeholders to 

identify and select candidates for the 

HAC payment provision. The additional 

candidate HACs selected in this FY 

2009 IPPS final rule will have payment 

implications beginning October 1, 2008. 

As in the FY 2009 IPPS proposed rule, 

we present in this final rule the 

statutory criteria for each HAC 

candidate in tabular format. Each table 

contains the following: 

• HAC Candidate—We sought public 

comment on all HAC candidates. 

• Medicare Data—We sought public 

comment on the statutory criterion of 

high cost, high volume, or both as it 

applies to each HAC candidate. 

• CC/MCC—We sought public 

comment on the statutory criterion that 

an ICD–9–CM diagnosis code(s) clearly 

identifies the HAC candidate. 

• Selected Evidence-Based 

Guidelines—We sought public comment 

on whether guidelines are available that 

hospitals should follow to prevent the 

condition from occurring in the 

hospital. 

• Reasonably Preventable—We 

sought public comment on whether 

each condition could be considered 

reasonably preventable through the 

application of evidence-based 

guidelines. 

Comment: Many commenters 

recommended various general standards 

for determining which conditions could 

reasonably have been prevented through 

the application of evidence-based 

guidelines. The majority of commenters 

favored a zero, or near zero, standard for 

those conditions to be considered 

reasonably preventable when evidencebased guidelines are followed. 

Response: We did not propose and 

did not specifically seek public 

comments on a general standard for 

reasonably preventable through the 

application of evidence-based 

guidelines in the FY 2009 IPPS 

proposed rule, and we are not setting a 

general standard in this final rule. We 

further note that the statute does not 

require that a condition be ‘‘always 

preventable’’ in order to qualify as an 

HAC, but rather that it be ‘‘reasonably 

preventable,’’ which necessarily implies 

something less than 100 percent. 

After consideration of the public 

comments received and in light of the 

three statutory criteria, we are finalizing 

several additional conditions for the 

HAC payment provision. The additional 

conditions are defined by specific codes 

within the broad categories of 

manifestations of poor glycemic control, 

surgical site infections, and deep vein 

thrombosis/pulmonary embolism, as 

discussed below. 


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9The Diabetes Control and Complications Trial. 

New England Journal of Medicine, 1993, Vol. 329, 

pp. 977–986. 

a. Manifestations of Poor Glycemic 

Control 

Hyperglycemia and hypoglycemia are 

extremely common laboratory findings 

in hospitalized patients and can be 

complicating features of underlying 

diseases and some therapies. However, 

we believe that extreme manifestations 

of poor glycemic control are reasonably 

preventable through the application of 

evidence-based guidelines and sound 

medical practice while in the hospital 

setting; specifically, we believe that they 

are preventable through the use of 

routine serum glucose measurement and 

control which are basic elements of 

good hospital care. 

We originally proposed the diagnosis 

codes representing four extreme 

manifestations of poor glycemic control 

as HACs, but we are not finalizing the 

following codes representing diabetic 

coma because the codes are nonspecific 

and more precise, specific codes are 

available to describe the condition: (1) 

Diabetes with coma, type II or 

unspecified type, not stated as 

controlled (250.30); (2) diabetes with 

coma, type I, not stated as controlled 

(250.31); (3) diabetes with coma, type II 

or unspecified type, uncontrolled 

(250.32); and (4) diabetes with coma, 

type I, uncontrolled (250.33). 

Comment: Commenters generally 

considered all of the manifestations of 

poor glycemic control together. The 

majority of commenters agreed that 

these extreme manifestations of poor 

glycemic control are reasonably 

preventable through the application of 

evidence-based guidelines. In support of 

selecting this condition, one commenter 

provided additional evidence-based 

guidelines addressing glycemic control. 

Response: We agree with commenters 

that extreme manifestations of poor 

glycemic control are reasonably 

preventable through the application of 

evidence-based guidelines. We are 

including the additional evidence-based 

guidelines submitted by a commenter in 

the chart for manifestations of poor 

glycemic control below. 

Comment: Of the proposed codes 

representing the manifestations of poor 

glycemic control, hypoglycemic coma 

received the most attention from 

commenters. Many commenters 

considered hypoglycemic coma to be a 

strong candidate because it is included 

in the NQF’s list of Serious Reportable 

Adverse Events. 

Response: We agree with commenters 

that hypoglycemic coma is reasonably 

preventable through the application of 

evidence-based guidelines. 

Comment: Although the majority of 

commenters supported the selection of 

diabetic ketoacidosis, nonketotic 

hyperosmolar coma, and hypoglycemic 

coma as HACs, CMS received a small 

number of comments opposing the 

selection of codes from the 

manifestations of poor glycemic control 

category. Some commenters expressed 

that recent studies demonstrate that 

tight glycemic control in septic patients 

leads to poorer outcomes. One 

commenter identified the diabetic 

patient population as high risk, citing an 

estimate that any person with insulintreated diabetes will experience 0.5 to 

1.0 severe hypoglycemic events 

annually, which appears to not 

necessarily be within the control of 

caregivers.9

Response: We have addressed the 

commenters’ concerns about tight 

glycemic control and hypoglycemic 

events by selecting specific, narrow 

codes representing extreme 

manifestations as HACs. For example, 

the commenter’s concern about the 

preventability of all hypoglycemic 

events is addressed by selecting as an 

HAC only the code representing 

hypoglycemic coma (251.0), an extreme 

manifestation. We further note that the 

statute does not require that a condition 

be ‘‘always preventable’’ in order to 

qualify as an HAC, but rather that it be 

‘‘reasonably preventable,’’ which 

necessarily implies something less than 

100 percent. 

Comment: Commenters supported 

adding the following four secondary 

diabetes diagnosis codes: (1) ICD–9–CM 

code 249.10 (Secondary diabetes 

mellitus with ketoacidosis, not stated as 

uncontrolled, or unspecified); (2) ICD–

9–CM code 249.11 (Secondary diabetes 

mellitus with ketoacidosis, 

uncontrolled); (3) ICD–9–CM code 

249.20 (Secondary diabetes mellitus 

with hyperosmolarity, not stated as 

uncontrolled, or unspecified); and (4) 

ICD–9–CM code 249.21 (Secondary 

diabetes mellitus with hyperosmolarity, 

uncontrolled). These new secondary 

diabetes codes will be effective on 

October 1, 2008. 

Response: We agree with commenters 

that the secondary diabetes codes 

should be included to capture the full 

range of extreme manifestations of poor 

glycemic control as HACs. The 

secondary diabetes codes are clinically 

similar to the proposed codes and 

including these codes more accurately 

captures the range of manifestations of 

poor glycemic control. 

We are finalizing manifestations of 

poor glycemic control as an HAC 

because we have determined after 

considering the comments received that 

these conditions meet the statutory 

criteria. The following chart includes 

the codes that describe manifestations of 

the poor glycemic control as an HAC: 


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10Baker, F.G.: Efficacy of prophylactic antibiotic 

therapy in spinal surgery: A meta-analysis. 

Neurosurgery. 51(2): 391–400 (2002). 

MANIFESTATIONS OF POOR GLYCEMIC

CONTROL

ICD–9–CM 

code Code descriptor 

249.10 ......... Secondary diabetes mellitus 

with ketoacidosis, not stated 

as uncontrolled, or unspecified. 

249.11 ......... Secondary diabetes mellitus 

with ketoacidosis, uncontrolled. 

249.20 ......... Secondary diabetes mellitus 

with hyperosmolarity, not 

stated as uncontrolled, or 

unspecified. 

249.21 ......... Secondary diabetes mellitus 

with hyperosmolarity, uncontrolled. 

250.10 ......... Diabetes with ketoacidosis, 

type II or unspecified type, 

not stated as uncontrolled. 

250.11 ......... Diabetes with ketoacidosis, 

type I [juvenile type], not 

stated as uncontrolled. 

250.12 ......... Diabetes with ketoacidosis, 

type II or unspecified type, 

uncontrolled. 

250.13 ......... Diabetes with ketoacidosis, 

type I [juvenile type], uncontrolled. 

250.20 ......... Diabetes with hyperosmolarity, 

type II or unspecified type, 

not stated as uncontrolled. 

250.21 ......... Diabetes with hyperosmolarity, 

type I [juvenile type], not 

stated as uncontrolled. 

250.22 ......... Diabetes with hyperosmolarity, 

type II or unspecified type, 

uncontrolled. 

250.23 ......... Diabetes with hyperosmolarity, 

type I [juvenile type], uncontrolled. 

251.0 ........... Hypoglycemic coma. 

b. Surgical Site Infections 

In the FY 2009 IPPS proposed rule (73 

FR 23553), we requested public 

comments on the applicability of each 

of the statutory criteria to surgical site 

infections following certain procedures. 

We were particularly interested in 

receiving comments on the degree of 

preventability of these infections. We 

also requested, and received, public 

comment on additional surgical 

procedures that would qualify for the 

HAC provision by meeting all of the 

statutory criteria. 

Comment: Numerous commenters 

raised issues regarding the applicability 

of each statutory criterion to surgical 

site infections generally, especially with 

regard to degree of preventability. 

Commenters raised concerns that 

patient characteristics and other factors 

can put patients at risk for surgical site 

infections regardless of the application 

of evidence-based guidelines. 

Commenters asserted that elective 

procedures have a tendency to be shortstay admissions or outpatient 

procedures, and if a surgical site 

infection presents after discharge, this 

HAC would not be captured under the 

inpatient provision. 

Response: We agree that the risk of a 

typical patient undergoing a procedure 

is a factor in determining whether these 

conditions are reasonably preventable 

(see discussion of risk adjustment in 

section II.F.9. of this preamble), but we 

do not agree that the average length of 

stay following the procedure or the 

ability to perform the procedure at an 

alternative site are determinative factors 

for selecting HACs. 

Comment: Some commenters 

emphasized that certain procedures 

typically thought of as elective by 

clinicians are not necessarily elective by 

patients. Two commenters noted that 

even if total knee replacement is 

considered nonemergent and therefore 

elective from a clinician’s perspective, a 

patient may consider the surgery critical 

and urgent to avoid pain and 

immobility. 

Response: We agree with the 

commenters that procedures typically 

thought of as elective based on urgency 

are not necessarily viewed as elective 

from the perspective of the patient’s 

quality of life. Given lack of consensus 

regarding the classification of 

procedures as elective, we have 

discontinued referring to this broad 

category of surgical site infections as 

‘‘following elective procedures.’’

Comment: Many commenters asserted 

that surgical site infections following 

total knee replacement could be 

considered reasonably preventable, 

however those commenters questioned 

why CMS proposed this HAC because 

the candidate codes are CCs, and total 

knee replacement procedures typically 

map to MS–DRGs that only split to 

MCCs. 

Response: We are unable to select this 

condition as an HAC because, as 

commenters noted, surgical site 

infection is a CC that does not trigger 

the higher paying MCC MS–DRG 

payment for total knee replacement 

procedures; thus, it does not meet the 

second statutory criterion. If a change to 

the MS–DRGs results in total knee 

replacement procedures mapping to 

MS–DRGs that split to CCs in the future, 

we could reconsider adding surgical site 

infections following total knee 

replacement as an HAC. In addition, we 

will be reviewing other ICD–9–CM MCC 

codes relevant to total knee 

replacement, and we will consider 

proposing those codes as future HAC 

candidates. 

Comment: Commenters addressed the 

discrepancy between the proposed CC 

code (Other postoperative infection) and 

the MS–DRG split only to MCC for total 

knee replacement and suggested that 

CMS review and consider adding other 

procedures that map to MS–DRGs that 

split by CC. One commenter referenced 

a 2002 meta-analysis finding that 

antibiotic prophylaxis is successful in 

significantly reducing the rates of 

postoperative spinal infections.10

Response: We agree with the 

commenters’ recommendations and 

considered additional orthopedic 

procedures. We identified the following 

MS–DRGs that split by CC: 

• MS–DRGs 453, 454, and 455 

(Combined Anterior/Posterior Spinal 

Fusion with MCC, CC and without CC/ 

MCC); 

• MS–DRGs 471, 472, and 473 

(Cervical Spinal Fusion, with MCC, CC 

and without CC/MCC); 

• MS–DRGs 507 and 508 (Major 

Shoulder or Elbow Joint Procedures, 

with CC/MCC and without CC/MCC). 

In response to commenters’

suggestions, we are selecting certain 

orthopedic procedures that fall within 

the MS–DRGs listed above in the HAC 

surgical site infection category. The 

category of surgical site infection 

following certain orthopedic surgeries 

includes selected procedures that are 

often elective and that involve the 

repair, replacement, or fusion of various 

joints including the shoulder, elbow, 

and spine. In future rulemaking, we will 

work with stakeholders to identify 

additional procedures, orthopedic and 

other types, for which surgical site 

infections can be considered reasonably 

preventable through the application of 

evidence-based guidelines. 

The following chart includes the 

codes that describe surgical site 

infection following certain orthopedic 

procedures as an HAC: 

SURGICAL SITE INFECTION FOLLOWING

CERTAIN ORTHOPEDIC PROCEDURES

ICD–9–CM 

code Code descriptor 

996.67 ......... Infection and inflammatory reaction due to other orthopedic device and implant 

graft. 

—OR—

998.59 ......... Other postoperative infection. 

—AND—

81.01 ........... Atlas-axis fusion. 

81.02 ........... Other cervical fusion anterior. 

81.03 ........... Other cervical fusion posterior. 

81.04 ........... Dorsal/dorsolum fusion anterior. 


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11Morgan, J.P.: Cardiac Rhythm Management, 

Market Model, August 31, 2007. 

12 Darouiche, R.O.: Treatment of Infections 

Associated with Surgical Implants, New England 

Journal of Medicine, 350:1422–9 (2004). 

13Bratzler, D. et al.: Antimicrobial Prophylaxis 

for Surgery: An Advisory Statement from the 

National Surgical Infection Prevention Project, 

American Journal of Surgery, 189:395–404 (2005). 

14 Da Costa, A et al.: Antibiotic Prophylaxis for 

Permanent Pacemaker Implantation: A MetaAnalysis, Circulation; 97:1796–1801 (1998). 

15 Klug, D. et al.: Risk Factors Related to Infection 

of Implanted Pacemakers and CardioverterSURGICAL SITE INFECTION FOLLOWING

CERTAIN ORTHOPEDIC PROCEDURES—Continued 

ICD–9–CM 

code Code descriptor 

81.05 ........... Dorsal/dorsolum fusion posterior. 

81.06 ........... Lumbar/lumbosac fusion anterior. 

81.07 ........... Lumbar/lumbosac fusion lateral. 

81.08 ........... Lumbar/lumbosac fusion posterior. 

81.23 ........... Arthrodesis of shoulder. 

81.24 ........... Arthrodesis of elbow. 

81.31 ........... Refusion of atlas-axis. 

81.32 ........... Refusion of other cervical 

spine anterior. 

81.33 ........... Refusion of other cervical 

spine posterior. 

81.34 ........... Refusion of dorsal spine anterior. 

81.35 ........... Refusion of dorsal spine posterior. 

81.36 ........... Refusion of lumbar spine anterior. 

81.37 ........... Refusion of lumbar spine lateral. 

81.38 ........... Refusion of lumbar spine posterior. 

81.83 ........... Shoulder arthroplast NEC. 

81.85 ........... Elbow arthroplast NEC. 

We proposed surgical site infections 

following ligation and stripping of 

varicose veins as an HAC, but we are 

not finalizing this procedure because 

these MS–DRGs do not currently split 

into severity levels based on the 

presence of a CC, and the surgical site 

infection code is a CC. Thus, surgical 

site infection following ligation and 

stripping of varicose veins does not 

currently meet the second statutory 

HAC selection criterion of triggering the 

higher-paying MS–DRG. 

We solicited comments on each of the 

statutory criteria as they apply to 

surgical site infections following 

laparoscopic bypass and 

gastroenterostomy. Laparoscopic 

gastroenterostomy (44.38) includes 

several different types of gastric bypass 

procedures, all of which are done using 

a laparoscope to avoid surgically 

opening the abdomen (laparotomy). 

Gastroenterostomy (44.39) is a general 

term that describes surgically 

connecting the stomach to another area 

of the intestine. 

Comment: Some commenters pointed 

out that the 208 cases cited in the FY 

2009 IPPS proposed rule (73 FR 23553) 

is a relatively small number of cases, 

which may not meet the statutory 

criterion of high cost, high volume, or 

both. 

Response: As noted in the FY 2009 

IPPS proposed rule, the average cost of 

a case with a surgical site infection 

following laparoscopic gastric bypass 

and gastroenterostomy is $180,142 per 

hospital stay, which we consider high 

cost. Thus, this condition meets the 

high cost statutory criterion. 

Comment: Many stakeholders from 

provider organizations, including 

medical specialty societies, cited that 

the population undergoing bariatric 

surgery for obesity is a high risk 

population per se; thus, the condition 

may not be considered reasonably 

preventable through the application of 

evidence-based guidelines. Commenters 

noted that these patients commonly 

have conditions, such as diabetes and 

hypertension, in addition to obesity, 

which are well-known risk factors for 

infections and other post-operative 

complications. 

Response: We recognize that patients 

undergoing this procedure may 

typically be high risk; however, (1) 

selecting this procedure as an HAC will 

have the positive effect of encouraging 

attention to risk assessment prior to 

surgery and (2) conditions such as 

complicated forms of diabetes, 

hypertensive heart and kidney disease, 

and a body mass index of 40 or higher 

are CCs or MCCs under the IPPS 

payment system that, when present on 

the claim, will continue to trigger the 

higher-paying MS–DRG. Thus, the usual 

presence of additional CC/MCCs on 

claims for these procedures serves as an 

‘‘inherent risk adjuster’’ to payment for 

typical bariatric surgery cases for obese 

patients. We further note that the statute 

does not require that a condition be 

‘‘always preventable’’ in order to qualify 

as an HAC, but rather that it be 

‘‘reasonably preventable,’’ which 

necessarily implies something less than 

100 percent. 

Comment: One commenter noted that 

gastroenterostomy is routinely used to 

bypass a damaged or obstructed 

duodenum in high risk populations 

such as cancer patients. 

Response: In 2007, CMS issued 

Change Request (CR) 5477 regarding the 

proper use of ICD–9–CM codes for 

bariatric surgery for morbid obesity, 

available on the Web site at: http://www.

cms.hhs.gov/Transmittals/downloads/

R1233CP.pdf. This CR addresses the 

comment above by focusing on only 

those procedures with a primary 

diagnosis of obesity (278.01). Further, as 

referenced in CR 5477, bariatric surgery 

for obesity contains the following 

procedures: (1) Laparoscopic gastric 

bypass (44.38), (2) gastroenterostomy 

(44.39), and (3) laparoscopic gastric 

restrictive procedure (44.95). 

Laparoscopic gastric restrictive 

procedure (44.95) refers to the 

laparoscopic placement of a restrictive 

band around the stomach to reduce the 

effective size. By adopting the coding 

scheme laid out in CR 5477, we are 

finalizing not only 44.38 and 44.39, but 

also 44.95, as procedures within the 

HAC category of surgical site infections 

following bariatric surgery for obesity. 

The addition of Laparoscopic gastric 

restrictive procedure (44.95) more 

completely and accurately captures the 

range of surgical site infection following 

bariatric surgery for obesity as an HAC. 

The following chart includes the 

codes that describe surgical site 

infection following bariatric surgery for 

obesity as an HAC: 

SURGICAL SITE INFECTION FOLLOWING

BARIATRIC SURGERY FOR OBESITY

ICD–9–CM 

code Code descriptor 

278.01* ........ Morbid obesity. 

—AND—

998.59 ......... Other postoperative infection. 

—AND—

44.38 ........... Laparoscopic gastroenterostomy. 

—OR—

44.39 ........... Other gastroenterostomy. 

—OR—

44.95 ........... Laparoscopic gastric restrictive procedure. 

*As principal diagnosis. 

In the FY 2009 IPPS proposed rule, 

we requested, and received, public 

comment on additional surgical 

procedures that would meet the 

statutory criteria for a surgical site 

infection HAC. 

Comment: A commenter 

recommended that CMS add surgical 

site infection following implantation of 

cardiac devices as an HAC. The 

commenter noted a recent estimate of 

approximately 300,000 pacemaker 

implants performed in 2007.11 In 

addition, the commenter referenced that 

the estimated rate of infection following 

cardiac device implantation is 4 percent 

and that the cost to treat each 

pacemaker infection is approximately 

$25,000.12 Further, the commenter cited 

evidence-based guidelines for 

preventing these infections.13 14 15


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Defibrillators: Results of a Large Prospective Study, 

Circulation, 116:1349–55 (2007). 

Response: We agree with the 

commenter that surgical site infection 

following certain cardiac device 

procedures is a strong candidate HAC. 

The condition is high cost and high 

volume, triggers a higher-paying MS–

DRG, and may be considered reasonably 

preventable through the application of 

evidence-based guidelines. We did not 

propose this specific condition in the 

FY 2009 IPPS proposed rule; however, 

we expect to propose surgical site 

infection following certain cardiac 

device procedures, as well as surgical 

site infections following other types of 

device procedures, as future candidate 

HACs. 

We are selecting surgical site 

infections following certain orthopedic 

procedures, and bariatric surgery for 

obesity. These procedures will join 

mediastinitis following coronary artery 

bypass graft (CABG), which was 

selected in the FY 2008 IPPS final rule 

with comment period, as surgical site 

infection HACs. We look forward to 

working with stakeholders to identify 

additional procedures, such as device 

procedures, in which surgical site 

infections can be considered reasonably 

preventable through the application of 

evidence-based guidelines. 


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c. Deep Vein Thrombosis (DVT)/ 

Pulmonary Embolism (PE) 

In the FY 2009 IPPS proposed rule, 

we proposed DVT/PE as a candidate 

HAC. We solicited comments on each of 

the statutory criteria, with particular 

focus on the degree to which DVT can 

be diagnosed on hospital admission and 

can be considered reasonably 

preventable. DVT occurs when a blood 

clot forms in the deep veins of an 

extremity, usually the leg, and causes 

pain, swelling, and inflammation. PE 

occurs when a clot or piece of a clot 

migrates from its original site to the 

lungs, causing the death of lung tissue, 

which can be fatal. 


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16Hospital Compare available at the Web site: 

http://www.hospitalcompare.hhs.gov. Reviewed 

July 8, 2008. 

Comment: The majority of 

commenters emphasized the inability to 

determine whether DVT was present on 

admission. The commenters were 

concerned about the lack of a standard 

clinical definition and diagnostic 

criteria, as well as difficulty in 

identifying at-risk patients. One 

commenter suggested that nearly half of 

all DVT/PEs are asymptomatic on 

admission. One commenter explained 

that obtaining the most accurate results 

would require expensive diagnostic 

testing of all patients, implying that this 

strategy would not be cost-effective and 

would, therefore, be unreasonable. 

Response: The commenters’ concerns 

about the ability to diagnose DVT do not 

preclude DVT/PE from being selected as 

an HAC, as the attending physician 

determines whether the condition was 

present on admission (‘‘Y’’ POA 

reporting option) or whether presence 

on admission cannot be determined 

based on clinical judgment (‘‘W’’ POA 

reporting option). Hospitals will 

continue to be paid the higher MS–DRG 

amount for HACs coded as ‘‘Y’’ or ‘‘W’’

(we refer readers to section II.F.8. of this 

preamble). 

Comment: Regarding the 

preventability of DVT/PE, one 

commenter cited reduction of DVT/PE 

occurrence through mentoring and 

onsite consultation as a particularly 

effective intervention strategy. 

Response: We agree that the 

occurrence of DVT/PE can be 

significantly reduced through the use of 

intervention strategies, including 

mentoring and onsite consultation. 

Comment: A large proportion of 

commenters underscored the 

importance of considering risk factors in 

weighing the degree of preventability. 

Commenters noted that common risk 

factors, some of which cannot be 

modified, include clotting disorders, 

obesity, hypercoagulable state, cancer, 

HIV, or rheumatoid arthritis. 

Response: We agree with commenters 

that the risk factors of a typical patient 

are important to consider when 

weighing the degree of preventability as 

it applies to DVT/PE (discussion of risk 

adjustment in section II.F.9. of this 

preamble). Selecting DVT/PE for these 

procedures as an HAC will have the 

positive effect of encouraging attention 

to risk assessment prior to surgery. 

Further, conditions such as clotting 

disorders, obesity, hypercoagulable 

state, cancer, HIV, and rheumatoid 

arthritis are CCs or MCCs under the 

IPPS payment system that, when 

present on the claim, will continue to 

trigger the higher-paying MS–DRG. 

Thus, the usual presence of additional 

CC/MCCs on claims for these 

procedures serves as an ‘‘inherent risk 

adjuster’’ to payment for total knee 

replacement and hip replacement cases. 

Comment: Although no commenters 

submitted quantitative data to establish 

a rate of preventability, many 

commenters noted that adherence to 

evidence-based pharmacologic and 

nonpharmacologic interventions will 

not prevent all DVTs. One commenter 

suggested that DVT/PE should only be 

considered for the HAC payment 

provision when a patient did not receive 

proper prophylaxis. 

Response: The fact that prophylaxis 

will not prevent every occurrence of 

DVT/PE does not preclude its selection 

as a reasonably preventable HAC. 

Further, as discussed in section IV.B. of 

this preamble, the Reporting Hospital 

Quality Data for the Annual Payment 

Update program includes a process of 

care measure regarding venous 

thromboembolism (VTE) prophylaxis 

within 24 hours prior to or after surgery. 

An analysis of publicly available data 

on Hospital Compare indicates that the 

national rate for the VTE prophylaxis 

measure for the third quarter of 2007 is 

approximately 82 percent.16 We have 

concluded from these data that a 

significant number of patients are not 

receiving the recommended evidencebased prophylaxis. We further note that 

the statute does not require that a 

condition be ‘‘always preventable’’ in 

order to qualify as an HAC, but rather 

that it be ‘‘reasonably preventable,’’

which necessarily implies something 

less than 100 percent. 

Comment: Commenters also noted 

that, in some cases, anticoagulation 

prophylaxis may be contraindicated 

based on individual patient factors, 

including an increased risk of bleeding 

in postoperative patients. 

Response: We agree with commenters 

that, in some cases, anticoagulation 

prophylaxis may be contraindicated. 

However, we do not view this as 

precluding the selection of DVT/PE as 

an HAC, as evidence-based 

interventions beyond pharmacologic 

prophylaxis, such as mechanical 

prophylaxis and early movement, 

should also be applied. 

Comment: Some commenters 

supported DVT/PE as reasonably 

preventable through the application of 

evidence-based guidelines for certain 

subpopulations, specifically following 

certain orthopedic procedures. 

Response: We agree with commenters 

that DVT/PE is reasonably preventable 

in specific subpopulations, and we are 

therefore selecting DVT/PE following 

certain orthopedic surgeries, specifically 

certain hip and knee replacement 

surgeries, as HACs. Total knee 

replacement is a surgery performed to 

replace the entire knee joint with an 

artificial internal prosthesis because the 

native knee joint is no longer able to 

function, because it is very painful, or 

both, usually due to advanced 

osteoarthritis, and total hip replacement 

is the analogous operation involving the 

hip joint. Our decision may be 

construed as only applying to the MCC 

PE, rather than DVT/PE, following 

certain hip and knee replacement 

surgeries as HACs because of coding 

considerations. The MS–DRGs that 

these procedures typically map to do 

not currently split based on CCs, and 

DVT is a CC. 

The following chart includes the 

codes that describe DVT/PE following 

certain orthopedic surgeries as an HAC: 

Selected HAC Medicare data 

(FY 2007) 

CC/MCC 

(ICD–9–CM codes) 

Selected evidence-based 

guidelines 

Deep Vein Thrombosis (DVT)/ 

Pulmonary Embolism (PE) 

—Total Knee Replacement. 

—Hip Replacement. 

• 4,250 cases ...........................

• $58,625/hospital stay. 

DVT: 453.40–453.42 (CC) OR 

PE: 415.11 (MCC) or 415.19 

(MCC) AND 

Total Knee Replacement: 

(81.54) OR 

Hip Replacement: (00.85–

00.87, 81.51–81.52).

Available on the Web site: http:// 

www.chestjournal.org/cgi/reprint/126/ 

3_suppl/172S. 

Available on the Web site: http:// 

orthoinfo.aaos.org/ 

topic.cfm?topic=A00219. 


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DEEP VEIN THROMBOSIS (DVT)/ 

PULMONARY EMBOLISM (PE) 

ICD–9–CM 

codes Code descriptors 

00.85 ........... Resurfacing hip, total, acetabulum and femoral head. 

00.86 ........... Resurfacing hip, partial, femoral head. 

00.87 ........... Resurfacing hip, partial, acetabulum. 

81.51 ........... Total hip replacement. 

81.52 ........... Partial hip replacement. 

81.54 ........... Total knee replacement. 

415.11 ......... Iatrogenic pulmonary embolism and infarction. 

415.19 ......... Other pulmonary embolism 

and infarction—other. 

453.40 ......... Venous embolism and thrombosis of unspecified deep 

vessels of lower extremity. 

453.41 ......... Venous embolism and thrombosis of deep vessels of 

proximal lower extremity. 

DEEP VEIN THROMBOSIS (DVT)/PULMONARY EMBOLISM (PE)—Continued 

ICD–9–CM 

codes Code descriptors 

453.42 ......... Venous embolism and thrombosis of deep vessels of 

distal lower extremity. 

d. Delirium 

Delirium is a relatively abrupt 

deterioration in a patient’s ability to 

sustain attention, learn, or reason. 

Delirium is strongly associated with 

aging and treatment of illnesses that are 

associated with hospitalizations. 

Delirium affects nearly half of hospital 

patient days for individuals age 65 and 

older, and approximately three-quarters 

of elderly individuals in intensive care 

units have delirium. About 14 to 24 

percent of hospitalized elderly 

individuals have delirium at the time of 

admission. Having delirium is a very 

serious risk factor, with 1-year mortality 

of 35 to 40 percent, a rate as high as 

those associated with heart attacks and 

sepsis. The adverse effects of delirium 

routinely last for months. Delirium is a 

clinical diagnosis, commonly assisted 

by screening tests such as the Confusion 

Assessment Method. The clinician must 

establish that the onset has been abrupt 

and that the deficits affect the ability to 

maintain attention, maintain orderly 

thinking, and learn from new 

information. Delirium is substantially 

under-recognized and is regularly 

conflated with dementia. Because of the 

high rate of mortality and incidence 

noted above, we proposed delirium as a 

candidate HAC, and provided the 

following information for consideration: 

HAC candidate Medicare data 

(FY 2007) 

CC/MCC 

(ICD–9–CM code) 

Selected evidence-based 

guidelines 

Delirium ..................................... • 480 cases ..............................

• $23,290/hospital stay. 

293.1 (CC) ................................ Available on the Web site: http:// 

www.ahrq.gov/clinic/ptsafety/ 

chap28.htm. 

We solicited comments on each of the 

statutory criteria, with particular focus 

on the degree to which delirium can be 

considered reasonably preventable 

through the application of evidencebased guidelines. 

Comment: Most commenters strongly 

opposed placing delirium on the HAC 

list. Citing a study mentioned in the FY 

2009 IPPS proposed rule (73 FR 23555), 

commenters emphasized that the ability 

to prevent only 30 to 40 percent of all 

delirium cases through the application 

of evidence-based guidelines does not, 

in their opinion, meet that statutory 

criterion. Many commenters stated that 

evidence-based guidelines, such as 

reducing certain medications, 

reorienting patients, assuring sleep and 

sensory input, and improving patient 

nutrition and hydration, were more 

appropriately used as process rather 

than outcome measures. 

A number of commenters stated that 

it is difficult to define and diagnose a 

condition that varies in degree, such as 

delirium. They stated that symptoms of 

delirium may be intermittent. In 

addition, the commenters indicated that 

it may be difficult to differentiate 

between delirium and intensive care 

unit psychosis resulting from preadmission hypoxia. Many commenters 

noted that delirium may be caused by 

many factors unrelated to clinical 

treatment. For example, commenters 

stated that delirium is a common 

symptom in Alzheimer’s patients, who 

are likely to become disoriented in 

unfamiliar hospital surroundings. One 

commenter also noted that the diagnosis 

is difficult to make if a patient is 

intoxicated. 

In addition to those commenters who 

expressed blanket support for selecting 

all candidate HACs, a few commenters 

explicitly supported inclusion of 

delirium as an HAC. One commenter 

suggested that delirium resulting from 

medication error could be reasonably 

prevented by implementation of 

computerized physician order entry 

systems. Another commenter suggested 

that prevention based on the six factors 

in the Confusion Assessment Model 

would improve intake assessment and 

health care quality. 

Response: After consideration of the 

public comments received, we have 

decided not to select delirium as an 

HAC in this final rule. We will continue 

to monitor the evidence-based 

guidelines surrounding prevention of 

delirium. If evidence warrants, we may 

consider proposing delirium as an HAC 

in the future. Although we are not 

selecting delirium as an HAC, we would 

like to recognize two additional ICD–9–

CM codes 292.81 (CC) and 293.0 (CC) 

that the commenters suggested to 

identify delirium and note that their 

input will be taken into account in any 

future reconsideration. 

DELIRIUM

ICD–9–CM 

codes Code descriptors 

292.81 ......... Drug-induced delirium. 

293.0 ........... Delirium due to conditions 

classified elsewhere. 

293.1 ........... Subacute delirium. 

e. Ventilator-Associated Pneumonia 

(VAP) 

VAP is a serious hospital-acquired 

infection associated with high mortality, 

significantly increased length of stay, 

and high cost. It is typically caused by 

the aspiration of contaminated gastric or 

oropharyngeal secretions. The presence 

of an endotracheal tube facilitates both 

the contamination of secretions and 

aspiration. We presented the following 

information in the FY 2009 IPPS 

proposed rule for consideration: 


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HAC candidate Medicare data 

(FY 2007) 

CC/MCC 

(ICD–9–CM code) 

Selected evidence-based 

guidelines 

Ventilator-Associated Pneumonia (VAP).• 30,867 cases .........................

• $135,795/hospital stay. 

997.31 (CC) .............................. Available on the Web site: http:// 

www.rcjournal.com/cpgs/ 

09.03.0869.html. 

VENTILATOR-ASSOCIATED PNEUMONIA

ICD–9–CM 

code Code descriptor 

997.31 ......... Ventilator-associated pneumonia. 

The CDC recently updated the ICD–9–

CM coding guidelines for proper use of 

code 997.31, which goes into effect on 

October 1, 2008. The ICD–9–CM Official 

Coding Guidelines are available at: 

http://www.cdc.gov/nchs/datawh/ 

ftpserv/ftpICD9/ftpICD9.htm. 

We solicited comments on each of the 

statutory criteria, with particular focus 

on the degree to which evidence-based 

guidelines can reasonably prevent VAP. 

Comment: The majority of 

commenters addressed whether or not 

VAP could be considered reasonably 

preventable through the application of 

evidence-based guidelines. Citing 

literature mentioned in the IPPS FY 

2009 proposed rule, commenters noted 

that VAP is only preventable 40 percent 

of the time, which, in their opinion, 

does not meet the statutory requirement 

for reasonably preventable through the 

application of evidence-based 

guidelines. (The proposed rule 

referenced the American Association of 

Respiratory Care (AARC) EvidenceBased Clinical Practice Guidelines as 

one example of an existing evidencebased standard designed to prevent 

VAP.) A few commenters questioned the 

narrow focus of the AARC’s guidelines. 

In addition to problems related to its 

preventability, many commenters also 

argued that VAP may be difficult to 

diagnose based on shortfalls associated 

with clinical definitions and diagnostic 

tests. The commenters stated that 

clinical cultures are not predictive for 

pneumonia, radiographic evidence of 

pneumonia is difficult to standardize, 

and vaccines do not protect against 

infection during the current hospital 

stay. The commenters pointed out that 

no standard definition of VAP exists—

the definition is constructed of 

nonspecific clinical signs common to 

many complications; thus, because of its 

imprecise definition, selection of VAP 

as an HAC could be especially 

susceptible to unintended 

consequences. One commenter stated 

that the flexibility inherent to VAP’s 

imprecise definitions coupled with 

threat of nonpayment created a 

‘‘perverse incentive’’ to diagnose VAP as 

another condition. Commenters noted 

that patient risk factors may also impact 

the risk of developing VAP. For 

example, burn patients are especially 

susceptible to infections. 

While some commenters indicated 

that VAP is a serious condition and 

could be a good candidate HAC in the 

future, the many commenters argued 

that current evidence and technology 

are not well-enough developed at this 

time to meet the statutory requirement 

of reasonably preventable through the 

application of evidence-based 

guidelines. One commenter pointed out 

that the Institute for Healthcare 

Improvement and the Joint Commission 

are currently evaluating alternative 

standards for VAP prevention. 

Response: In light of the public 

comments that we received, we are not 

selecting VAP as an HAC. We will work 

in partnership with the CDC and closely 

monitor the evolving literature 

addressing the prevention of VAP 

through the application of evidencebased guidelines. If evidence warrants, 

we may consider proposing VAP as an 

HAC in the future. 

f. Staphylococcus aureus Septicemia 

Staphylococcus aureus is a bacterium 

that lives on multiple anatomic sites in 

most people. It usually does not cause 

physical illness, but it can cause a 

variety of infections ranging from 

superficial boils to cellulitis to 

pneumonia to life-threatening 

bloodstream infections (septicemia). It 

typically becomes pathogenic by 

infecting normally sterile tissue through 

traumatized tissue, such as cuts or 

abrasions, or at the time of invasive 

procedures and can be both an early 

and/or late complication of trauma or 

surgery. Staphylococcus aureus 

septicemia can also be a late effect of an 

injury or a surgical procedure. Risk 

factors for developing Staphylococcus 

aureus septicemia include advanced 

age, debilitated state, 

immunocompromised status, and 

history of an invasive medical 

procedure. 

In the IPPS FY 2009 proposed rule, 

we presented the following information 

for consideration: 

HAC candidate Medicare data 

(FY 2007) CC/MCC (ICD–9–CM codes) Selected evidence-based guidelines 

Staphylococcus aureus Septicemia.• 27,737 cases .........................

• $84,976/hospital stay. 

038.11(MCC) or 038.12 (MCC) Available on the Web site: http://www.

cdc.gov/ncidod/dhqp/gl_isolation.html. 

Also excludes the following 

from acting as CC/MCC: 

995.91 (MCC) 995.92 (MCC) 

998.59 (CC).

Available on the Web site: http://www.

cdc.gov/ncidod/dhqp/gl_

intravascular.html (Intravascular catheter-associated Staphylococcus aureus 

Septicemia only). 

STAPHYLOCOCCUS AUREUS

SEPTICEMIA

ICD–9–CM 

codes Code descriptors 

038.11 ......... Staphylococcus aureus septicemia. 

038.12 ......... Methicillin-resistant Staphylococcus aureus septicemia. 

995.91 ......... Sepsis. 

STAPHYLOCOCCUS AUREUS

SEPTICEMIA—Continued 

ICD–9–CM 

codes Code descriptors 

995.92 ......... Severe sepsis. 

998.59 ......... Other postoperative infection. 

We solicited comments on each of the 

statutory criteria, with particular focus 

on the degree to which this condition 

can be considered reasonably 

preventable through the application of 

evidence-based guidelines. 

Comment: Many commenters 

described difficulty in determining 

whether an infection was present upon 

admission, as the development of 


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infection while in a hospital may not 

necessarily indicate that the infection 

was hospital-acquired. The commenters 

suggested that Staphylococcus aureus 

septicemia may also result from 

permanent tunneled and nontunneled 

catheters used in cancer patients or 

through dialysis shunts. The 

commenters asserted that the risk of 

infection may be higher for different 

subpopulations of patients. 

A large number of commenters 

suggested that the CDC’s guidelines 

specific to vascular catheter-associated 

infections do not extend to 

Staphylococcus aureus septicemia 

generally. However, because the 

majority of Staphylococcus aureus 

septicemia events are related to 

catheters and skin lesions, commenters 

also argued that the previously selected 

HAC, vascular catheter-associated 

infections, will already capture the vast 

majority of preventable Staphylococcus 

aureus septicemia events. According to 

the commenters, adopting 

Staphylococcus aureus septicemia as an 

additional condition would yield little 

quality improvement but could cause 

expensive and unnecessary treatments 

for both hospitals and patients. 

Response: In light of these public 

comments, we are not selecting 

Staphylococcus aureus septicemia as an 

HAC in this final rule. If evidence 

warrants, we may consider proposing 

Staphylococcus aureus septicemia as an 

HAC in the future. We note that several 

commenters recognized that 

Staphylococcus aureus septicemia cases 

are being addressed through the 

vascular catheter-associated infection 

HAC that was selected in the FY 2008 

IPPS final rule with comment period. 

g. Clostridium difficile-Associated 

Disease (CDAD) 

Clostridium difficile is a bacterium 

that colonizes the gastrointestinal (GI) 

tract of a certain number of healthy 

people as well as being present on 

numerous environmental surfaces. 

Under conditions where the normal 

flora of the gastrointestinal tract is 

altered, Clostridium difficile can 

flourish and release large enough 

amounts of a toxin to cause severe 

diarrhea or even life-threatening colitis. 

Risk factors for CDAD include the 

prolonged use of broad spectrum 

antibiotics, gastrointestinal surgery, 

prolonged nasogastric tube insertion, 

and repeated enemas. CDAD can be 

acquired in the hospital or in the 

community. Its spores can live outside 

of the body for months and thus can be 

spread to other patients in the absence 

of meticulous hand washing by care 

providers and others who contact the 

infected patient. 

In the IPPS FY 2009 proposed rule, 

we presented the following information 

for consideration: 

HAC candidate Medicare data 

(FY 2007) CC/MCC (ICD–9–CM code) Selected evidence-based guidelines 

Clostridium difficile-Associated 

Disease (CDAD).

• 96,336 cases .........................

• $59,153/hospital stay. 

008.45 (CC) .............................. Available on the Web site: http:// 

www.cdc.gov/ncidod/dhqp/gl_isolation.html. 

Available on the Web site: http:// 

www.cdc.gov/ncidod/dhqp/id_

CdiffFAQ_HCP.html#9. 

Clostridium difficile-ASSOCIATED

DISEASE

ICD–9–CM 

code Code descriptor 

008.45 ......... Clostridium difficile. 

We solicited comments on each of the 

statutory criteria, with particular focus 

on the degree to which CDAD can be 

reasonably prevented through the 

application of evidence-based 

guidelines. 

Comment: The majority of 

commenters addressed preventability 

and the inability to distinguish between 

community-acquired and hospitalacquired infections without culturing 

each patient to determine strain or type 

of infection. The commenters 

emphasized that CDAD is a known 

adverse side effect of appropriate broad 

spectrum antibiotic use. One commenter 

suggested establishing a unique ICD–9–

CM code to identify cases of CDAD that 

occur other than as a side effect of broad 

spectrum treatment to distinguish 

situations of patient-to-patient 

transmission of Clostridium difficile that 

are more likely to be considered 

reasonably preventable. Commenters 

further asserted that the appropriate use 

of proton pump inhibitors and H2 

blockers is also associated with CDAD 

infections and outbreaks. Many 

commenters stated that no specific 

evidence-based prevention guidelines 

are currently available, rather the CDC 

guidelines apply to patient-to-patient 

transmissions generally and do not 

apply to CDAD specifically. Many 

commenters addressed the difficulty of 

distinguishing between communityacquired and hospital-acquired 

infection as a barrier to adopting CDAD 

as an HAC. 

Response: In light of these public 

comments, we are not selecting CDAD 

as an HAC in this final rule. However, 

we continue to receive strong support 

from consumers and purchasers to 

include CDAD as an HAC, and we will 

continue to consult with the CDC 

regarding the evidence-based prevention 

guidelines and coding for CDAD. If 

evidence warrants, we may consider 

proposing CDAD as an HAC in the 

future. 

h. Legionnaires’ Disease 

Legionnaires’ Disease is a type of 

pneumonia caused by the bacterium 

Legionella pneumophila. It is contracted 

by inhaling contaminated water vapor 

or droplets. It is not spread person-toperson. The bacterium thrives in warm 

aquatic environments and infections 

have been linked to large industrial 

water systems, including hospital water 

systems such as air conditioning cooling 

towers and potable water plumbing 

systems. 

In the FY 2009 IPPS proposed rule, 

we presented the following information 

for consideration: 

HAC candidate Medicare data (FY 2007) CC/MCC (ICD–9–CM code) Selected evidence-based 

guidelines 

Legionnaires’ Disease .................... • 351 cases ..................................

• $86,014/hospital stay ................

482.84 (MCC) ............................... Available at the Web site: http:// 

www.cdc.gov/ncidod/dbmd/ 

diseaseinfo/legionellosis_g.htm. 


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17Accidental Iatrogenic Pneumothorax in 

Hospitalized Patients. Zhan et al., Medical Care 

44(2):182–6, 2006 Feb. 

HAC candidate Medicare data (FY 2007) CC/MCC (ICD–9–CM code) Selected evidence-based 

guidelines 

Available at the Web site: http:// 

www.legionella.org/. 

LEGIONNAIRES’ DISEASE

ICD–9–CM 

code Code descriptor 

482.84 ......... Legionnaires’ disease. 

We requested public comment 

regarding the applicability of each of the 

statutory criteria to Legionnaires’

Disease, particularly addressing the 

degree of preventability of this 

condition through the application of 

evidence-based guidelines and the 

degree to which hospital-acquired 

Legionnaires’ Disease can be 

distinguished from community-acquired 

cases. We also sought comments on 

additional water-borne pathogens that 

would qualify for the HAC provision by 

meeting the statutory criteria. 

Comment: Many commenters noted 

that Legionnaries’ Disease is not a high 

volume condition and questioned 

whether it should be prioritized as an 

HAC. In addition, the commenters 

emphasized that CDC’s Environmental 

Infection Control Guidelines recognize 

that the mere presence of the bacterium 

Legionella in the water supply is not 

necessarily associated with 

Legionnaires’ Disease, and that without 

evidence of a dose-response 

relationship, surveillance and treatment 

is not recommended. The commenters 

stated that even when decontamination 

efforts are pursued, there is no 

guarantee that treatment will ensure 

Legionella can be completely eradicated 

from hospital water intakes without 

damaging infrastructures. In addition, 

many commenters expressed concern 

regarding the unintended consequence 

of increasing the use of costly sterile 

water in hospitals. 

When addressing the degree to which 

hospital-acquired Legionnaires’ Disease 

can be distinguished from communityacquired cases, the commenters noted 

that the epidemiologic strain causing 

the disease is widespread in the 

community. 

Response: In light of these public 

comments, we are not selecting 

Legionnaires’ Disease as an HAC in this 

final rule. Although we are not selecting 

Legionnaires’ Disease as an HAC in this 

final rule, we will continue to consult 

with the CDC about the evidence-based 

prevention guidelines. If evidence 

warrants, we may consider 

Legionnaires’ Disease and other waterborne pathogens suggested by 

commenters and noted in section II.F.9. 

of this preamble (Enhancement and 

Future Issues) as HACs in the future. 

i. Iatrogenic Pneumothorax 

Iatrogenic pneumothorax refers to the 

accidental introduction of air into the 

pleural space, which is the space 

between the lung and the chest wall, by 

medical treatment or procedure. When 

air is introduced into this space, it 

partially or completely collapses the 

lung. Iatrogenic pneumothorax can 

occur during any procedure where there 

is the possibility of air entering the 

pleural space, including needle biopsy 

of the lung, thoracentesis, central 

venous catheter placement, pleural 

biopsy, tracheostomy, and liver biopsy. 

Iatrogenic pneumothorax can also occur 

secondary to positive pressure 

mechanical ventilation when an air sac 

in the lung ruptures, allowing air into 

the pleural space. In the FY 2009 IPPS 

proposed rule, we presented the 

following information for consideration: 

HAC candidate Medicare data 

(FY 2007) 

CC/MCC 

(ICD–9–CM code) Selected evidence-based guidelines 

Iatrogenic Pneumothorax .......... • 22,665 cases .........................

• $75,089/hospital stay. 

512.1 (CC) ................................ Available at the Web site: http:// 

www.ncbi.nlm.nih.gov/pubmed/

1485006. 

IATROGENIC PNEUMOTHORAX

ICD–9–CM 

code Code descriptor 

512.1 ........... Iatrogenic pneumothorax. 

We solicited public comment on the 

applicability of each of the statutory 

criteria to this condition. We were 

particularly interested in receiving 

comments on the degree to which 

iatrogenic pneumothorax could be 

considered reasonably preventable 

through the application of evidencebased guidelines. 

Comment: Most commenters opposed 

the selection of iatrogenic 

pneumothorax as an HAC. They 

indicated that the evidence-based 

guidelines often acknowledge that 

iatrogenic pneumothorax is a known, 

relatively common risk for certain 

procedures. Further, with regard to 

evidence-based guidelines, many 

commenters opposed designation of this 

condition as an HAC due to a lack of 

consensus within the medical 

community regarding its 

preventability.17 Some commenters 

offered suggestions to exclude certain 

procedures or situations, including 

central line placement, thoracotomy, 

and use of a ventilator, if iatrogenic 

pneumothorax were to be selected as an 

HAC. 

Response: In light of these public 

comments, we are not selecting 

iatrogenic pneumothorax as an HAC in 

this final rule. Although we are not 

selecting iatrogenic pneumothorax as an 

HAC in this final rule, we do recognize 

this as an adverse event that occurs 

frequently. We will continue to review 

the development of evidence-based 

guidelines for the prevention of 

iatrogenic pneumothorax. If evidence 

warrants, we may consider iatrogenic 

pneumothorax as an HAC in the future. 

j. Methicillin-Resistant Staphylococcus 

aureus (MRSA) 

In October 2007, the CDC published 

in the Journal of the American Medical 

Association an article citing high 

mortality rates from MRSA, an 

antibiotic-resistant ‘‘superbug.’’ The 

article estimates 19,000 people died 

from MRSA infections in the United 

States in 2005. The majority of invasive 

MRSA cases are health care-related—

contracted in hospitals or nursing 

homes—though community-acquired 

MRSA also poses a significant public 

health concern. Hospitals have been 

focused for years on controlling MRSA 

through the application of CDC’s 

evidence-based guidelines outlining 

best practices for combating the 

bacterium in that setting. In the 

proposed FY 2009 IPPS rule, we 


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presented the following information for 

consideration: 

Condition Medicare data (FY 2007) CC/MCC (ICD–9–CM code) Selected evidence-based guidelines 

Methicillin-resistant Staphylococcus 

aureus (MRSA) (Code V09.0 includes infections with microorganisms resistant to penicillins).

• 88,374 (V09.0) cases .........

• $32,049/hospital stay. 

No CC/MCC ........................... Available at the Web site: http:// 

www.cdc.gov/ncidod/dhqp/gl_isolation.html. 

During its March 19–20, 2008 

meeting, the ICD–9–CM Coordination 

and Maintenance Committee discussed 

several new codes to more accurately 

capture MRSA. The following new 

codes will be implemented on October 

1, 2008: 

METHICILLIN-RESISTANT STAPHYLOCOCCUS AUREUS

ICD–9–CM codes Code descriptors 

038.12 ............................................. Methicillin-resistant Staphylococcus aureus septicemia. 

041.12 ............................................. Methicillin-resistant Staphylococcus aureus in conditions classified elsewhere and of unspecified site. 

482.42 ............................................. Methicillin-resistant Pneumonia due to Staphylococcus aureus. 

V02.53 ............................................. Carrier or suspected carrier of Methicillin-susceptible Staphylococcal aureus. 

V02.54 ............................................. Carrier or suspected carrier of Methicillin-resistant Staphylococcal aureus. 

V12.04 ............................................. Personal history of Methicillin-resistant Staphylococcal aureus. 

Though we did not propose MRSA as 

a candidate HAC in the FY 2009 IPPS 

proposed rule, MRSA can trigger the 

HAC payment provision. For every 

infectious condition selected as an HAC, 

MRSA could be the etiology of that 

infection. For example, if MRSA were 

the cause of a vascular catheterassociated infection (one of the eight 

conditions selected in the FY 2008 IPPS 

final rule with comment period), the 

HAC payment provision would apply to 

that MRSA infection. As we noted in the 

FY 2008 IPPS final rule with comment 

period (72 FR 47212), colonization by 

MRSA is not a reasonably preventable 

condition according to the current 

evidence-based guidelines. Therefore, 

MRSA does not meet the ‘‘reasonably 

preventable’’ statutory criterion for an 

HAC. 

Comment: The majority of 

commenters strongly supported the 

CMS decision not to propose MRSA as 

an HAC candidate. 

Response: We appreciate the support 

of the commenters and reiterate that 

MRSA is addressed by the HAC 

payment provision in situations where 

it triggers a condition that we have 

identified as an HAC. We also direct 

readers to a detailed discussion 

regarding coding of MRSA in section 

II.F.10.b. of this preamble. As we noted 

in the FY 2009 IPPS proposed rule (73 

FR 23559), we are pursuing 

collaborative efforts with other HHS 

agencies to combat MRSA. The Agency 

for Healthcare Research and Quality 

(AHRQ) has launched a new initiative 

in collaboration with CDC and CMS to 

identify and suppress the spread of 

MRSA and related infections. In support 

of this work, Congress appropriated $5 

million to fund research, 

implementation, management, and 

evaluation practices that mitigate such 

infections. 

CDC has carried out extensive 

research on the epidemiology of MRSA 

and effective techniques that could be 

used to treat the infection and reduce its 

spread. The following Web sites contain 

information that reflect CDC’s 

commitment: (1) http://www.cdc.gov/ 

ncidod/dhqp/ar_mrsa.html (health careassociated MRSA); (2) http:// 

www.cdc.gov/ncidod/dhqp/ 

ar_mrsa_ca_public.html (communityacquired MRSA); (3) http:// 

www.cdc.gov/mmwr/preview/ 

mmwrhtml/mm4908a1.htm; and (4) 

http://www.cdc.gov/handhygiene/. 

AHRQ has made previous 

investments in systems research to help 

monitor MRSA and related infections in 

hospital settings, as reflected in material 

on its Web sites at: http:// 

www.guideline.gov/browse/

guideline_index.aspx and http:// 

www.ahrq.gov/clinic/ptsafety/pdf/ 

ptsafety.pdf. 

8. Present on Admission Indicator 

Reporting (POA) 

Collection of present on admission 

(POA) indicator data is necessary to 

identify which conditions were 

acquired during hospitalization for the 

HAC payment provision and for broader 

public health uses of Medicare data. 

Through Change Request (CR) No. 5679 

(released June 20, 2007), CMS issued 

instructions requiring IPPS hospitals to 

submit POA indicator data for all 

diagnosis codes on Medicare claims. 

CMS also issued CR No. 6086 (released 

June 30, 2008) regarding instructions for 

processing non-IPPS claims. Specific 

instructions on how to select the correct 

POA indicator for each diagnosis code 

are included in the ICD–9–CM Official 

Guidelines for Coding and Reporting, 

available at the CDC Web site: http:// 

www.cdc.gov/nchs/datawh/ftpserv/ 

ftpicd9/icdguide07.pdf (POA reporting 

guidelines begin on page 92). Additional 

information regarding POA indicator 

reporting and application of the POA 

reporting options is available at the 

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

HospitalAcqCond. CMS has historically 

not provided coding advice, rather we 

collaborate with the American Hospital 

Association (AHA) through the Coding 

Clinic for ICD–9–CM. CMS has been 

collaborating with the AHA to promote 

the Coding Clinic for ICD–9–CM as the 

source for coding advice about the POA 

indicator. 

There are five POA indicator 

reporting options, as defined by the 

ICD–9–CM Official Coding Guidelines: 

Indicator Descriptor 

Y ........................................... Indicates that the condition was present on admission. 


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Indicator Descriptor 

W .......................................... Affirms that the provider has determined based on data and clinical judgment that it is not possible to document 

when the onset of the condition occurred. 

N ........................................... Indicates that the condition was not present on admission. 

U ........................................... Indicates that the documentation is insufficient to determine if the condition was present at the time of admission. 

1 ........................................... Signifies exemption from POA reporting. CMS established this code as a workaround to blank reporting on the 

electronic 4010A1. A list of exempt ICD–9–CM diagnosis codes is available in the ICD–9–CM Official Coding 

Guidelines. 

In the FY 2009 IPPS proposed rule for 

the HAC payment provision (73 FR 

23559), we proposed to pay the CC/MCC 

MS–DRGs only for those HACs coded 

with ‘‘Y’’ and ‘‘W’’ indicators. 

Comment: Commenters 

overwhelmingly supported payment for 

both the POA ‘‘Y’’ and ‘‘W’’ options. 

Response: We agree with commenters 

and are finalizing our proposal to pay 

for both the POA ‘‘Y’’ and ‘‘W’’ options. 

We plan to analyze whether both the 

‘‘Y’’ and ‘‘W’’ indicators are being used 

appropriately. Medicare program 

integrity initiatives closely monitor for 

inaccurate coding and coding that is 

inconsistent with medical record 

documentation. 

We proposed to not pay the CC/MCC 

MS–DRGs for HACs coded with the ‘‘N’’

indicator. 

Comment: Commenters were in favor 

of not paying for the POA ‘‘N’’ indicator 

option. 

Response: We agree with the 

commenters and are finalizing our 

proposal to not pay for the POA ‘‘N’’

indicator option. 

Comment: The majority of 

commenters opposed not paying for the 

POA ‘‘U’’ indicator option. Commenters 

expressed that the reporting of the POA 

indicators is still new, and hospitals 

continue to learn how to apply them, as 

well as educate their physicians on the 

required documentation without which 

POA reporting is impossible. 

Response: Although we recognize that 

POA indicator reporting is new for some 

IPPS hospitals, we are finalizing the 

proposed policy of not paying for the 

‘‘U’’ option. We believe that this 

approach will encourage better 

documentation and will result in more 

accurate public health data. 

We plan to analyze whether both the 

‘‘N’’ and ‘‘U’’ POA reporting options are 

being used appropriately. The American 

Health Information Management 

Association (AHIMA) has promulgated 

Standards of Ethical Coding that require 

accurate coding regardless of the 

payment implications of the diagnoses. 

That is, diagnoses and POA indicators 

must be reported accurately on claims 

regardless of the fact that diagnoses 

coded with an ‘‘N’’ or ‘‘U’’ indicator 

may no longer trigger a higher paying 

MS–DRG. Medicare program integrity 

initiatives closely monitor for inaccurate 

coding and coding inconsistent with 

medical record documentation. 

Although we proposed, and are now 

finalizing, the policy of not paying the 

CC/MCC MS–DRGs for HACs coded 

with the ‘‘U’’ indicator, we recognize 

that there may be some exceptional 

circumstances under which payment 

might be made. Death, elopement 

(leaving against medical advice), and 

transfers out of a hospital may preclude 

making an informed determination of 

whether an HAC was present on 

admission. We sought public comments 

on the potential use of patient discharge 

status codes to identify exceptional 

circumstances. 

Comment: The majority of 

commenters did not address the patient 

discharge status codes as an exception 

for payment when the ‘‘U’’ POA 

indicator is used. The commenters who 

did address this issue were in favor of 

using patient discharge status codes as 

an exception for payment. 

Response: We will monitor the extent 

to which and under what circumstances 

the ‘‘U’’ POA indicator code is used. In 

the future, we may consider proposing 

use of the patient discharge status codes 

to recognize exceptions for payment. 

9. Enhancement and Future Issues 

In section II.F.9. of the FY 2009 IPPS 

proposed rule (73 FR 23560), we 

encouraged the public to provide ideas 

and models for combating preventable 

HACs through the application of VBP 

principles. We note that we are not 

proposing Medicare policy in this 

discussion. However, we believe that 

collaborating with stakeholders to 

improve the HAC policy is another step 

toward fulfilling VBP’s potential to 

provide better health care for Medicare 

beneficiaries. 

To stimulate reflection and creativity, 

we presented several enhancement 

options, including: (a) Applying risk 

adjustment to make the HAC payment 

provision more precise; (b) collecting 

HAC rates to obtain a more robust 

longitudinal measure of a hospital’s 

incidence of these conditions; (c) using 

POA information in various ways to 

decrease the incidence of preventable 

HACs; (d) adopting ICD–10 to facilitate 

more precise identification of HACs; (e) 

applying the principle of the IPPS HAC 

payment provision to Medicare 

payments in other care settings; (f) using 

CMS’ authority to address events on the 

NQF’s list of Serious Reportable 

Adverse Events; and (g) additional 

potential candidate HACs, suggested 

through comment, for future 

consideration. 

a. Risk-Adjustment of Payments Related 

to HACs 

In the FY 2009 IPPS proposed rule, 

we suggested that payment adjustments 

made when one of the selected HACs 

occurs could be made more precise by 

reflecting various sources and degrees of 

individual patient or patient population 

risk. For example, a patient’s medical 

history, current health status (including 

comorbidities), and severity of illness 

can affect the expected occurrence of 

conditions selected as HACs. Rather 

than not paying any additional amount 

when a selected HAC occurs during a 

hospitalization, payment reductions 

could be related to the expected 

occurrence of that condition (that is, the 

less likely the complication, the greater 

the payment reduction). 

In general, most commenters 

supported the idea of risk-adjusted 

payments for HACs, noting that 

proportional payments could reduce the 

risk of unintended consequences, as 

compared to the current HAC payment 

policy, through more equitable 

treatment of both hospitals and patients. 

Specifically, a few commenters 

expressed concern that all-or-nothing 

payment for HACs may 

disproportionately impact urban, 

teaching, and academic hospitals that 

treat under-served populations. 

Commenters stated that, because these 

populations may be at greater risk for 

HACs, risk-adjusted payments could 

allow all hospitals to continue treating 

high-risk populations without being 

penalized for treating riskier patients. 

Commenters proposed addressing 

patient risk factors on both the 

individual and population levels. The 

majority of commenters supported 

assessing risk at the individual patient 

level. Although this approach may offer 


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18 In the FY 2009 IPPS proposed rule, there is a 

typographical error such that the rule refers to ICD–

10–PCS (procedure codes) rather than ICD–10 

(diagnosis codes). 

the most precise risk adjustment, 

current technology and resources limit 

the ability to risk adjust at this level, as 

we discussed in the FY 2009 IPPS 

proposed rule. Risk adjustment at the 

subpopulation level, however, could 

capture and correct for high patient risk 

related to specific medical conditions. 

For example, many commenters noted 

that burn patients in particular are at 

high risk for some of the selected HACs, 

including infections. Other high-risk 

patient populations mentioned by 

commenters included trauma, 

immunosuppressed, and palliative care 

patients. 

Other commenters emphasized that 

for certain HACs, risk adjustment 

strategies would not be appropriate. 

Commenters stated that payments for 

‘‘never events,’’ such as retention of a 

foreign object after surgery, air 

embolism, and blood incompatibility, 

should never be adjusted for risk 

because such occurrences can be 

considered absolutely preventable. 

b. Rate-Based Measurement of HACs 

In the FY 2009 IPPS proposed rule, 

we suggested that a hospital’s rates of 

HACs could be included as a 

measurement domain within each 

hospital’s total performance score under 

a pay-for-performance model like the 

Medicare Hospital Value-Based 

Purchasing Plan. (We refer readers to 

section IV.C. of this preamble for a 

discussion of the Plan.) We asserted that 

measurement of rates over time could be 

a more meaningful, actionable, and fair 

way to adjust a hospital’s MS–DRG 

payments for the incidence of HACs. 

The consequence of a higher incidence 

of measured conditions would be a 

lower VBP incentive payment, while 

public reporting of the measured rates of 

HACs would give hospitals an 

additional, nonfinancial incentive to 

prevent occurrence of the conditions. 

The majority of commenters preferred 

a standardized framework for rate-based 

measurement and VBP payment 

implications for HACs, as opposed to 

not being paid the higher MS–DRG 

amount. Many commenters suggested 

determining expected rates of HACs and 

using those expected rates as benchmark 

targets for comparison, rewarding 

providers who stay at or below 

benchmark, while decreasing payment 

for those who exceed the benchmark. 

Though the majority of commenters 

supported rate-based measurement of 

HACs, some commenters raised issues. 

A number of commenters noted that the 

extremely low incidence of ‘‘never 

events’’ could preclude meaningful ratebased measurement of the occurrence of 

those events. Other commenters 

opposed public reporting of the rates as 

a nonfinancial VBP incentive. 

c. Use of POA Information 

In the FY 2009 IPPS proposed rule, 

we asserted that POA data could be 

used to better understand and prevent 

the occurrence of HACs. Medicare data 

could be analyzed separately or in 

combination with private sector or State 

POA data, which are currently available 

in certain States. Health services 

researchers could use these data in a 

variety of ways to assess the incidence 

of HACs and to identify best practices 

for HAC prevention. In addition, 

publicly reported POA data could also 

be used to support better health care 

decision making by Medicare 

beneficiaries, as well as other health 

care consumers, professionals, and 

caregivers. 

Commenters addressed various uses 

of POA data, including informing risk 

adjustment, making benchmark 

comparisons between and within 

hospitals, and public reporting. 

Commenters noted that POA data have 

important applications to risk 

adjustment for quality measurement. In 

the absence of risk adjustment 

mechanisms, one commenter suggested 

that CMS expand POA codes beyond 

those discussed in section II.F.8. of the 

preamble of the proposed rule to 

include a code that would preclude 

reduced payment if the provider attests 

that ‘‘the HAC is believed to be the 

result of a natural disease process/ 

severe patient condition and is not 

believed to be indicative of the level of 

the quality of care provided.’’ Nearly all 

commenters addressing the use of POA 

data urged CMS to provide hospitals 

with timely feedback of POA 

information. Specifically, many 

commenters wanted CMS to provide 

each hospital with its POA rates and 

comparisons to peer hospitals. 

Commenters’ responses to publicly 

reporting POA data were mixed. A large 

number of commenters opposed public 

reporting of POA data, arguing that only 

measures endorsed by the NQF and 

adopted by the HQA should be 

considered for public reporting. A few 

commenters voiced concern that public 

reporting would discourage hospitals 

from accurately reporting POA data. A 

few commenters suggested a phased-in 

public reporting timeline for POA data, 

allowing hospital data to remain 

confidential for a period while hospitals 

adjust to new coding and reporting 

requirements. Nearly all commenters 

stated that, if POA data were to be 

publicly reported, the data should be 

posted on Hospital Compare. 

d. Transition to ICD–10 

In the FY 2009 IPPS proposed rule, 

we suggested that adopting ICD–10 

codes to replace the outdated, vague 

codes of ICD–9–CM would allow CMS 

to capture more accurate and precise 

information about HACs.18 Noting that 

the current ICD–9–CM codes are over 

three decades old, we proposed that 

ICD–10 codes more precisely capture 

information using current medical 

terminology. For example, ICD–9–CM 

codes for pressure ulcers do not provide 

information about the size, depth, or 

exact location of the ulcer, while ICD–

10 has 125 codes to capture this 

information. 

A number of commenters supported 

the adoption of ICD–10. Many of the 

commenters pointed out that the 

adoption of ICD–10 would facilitate 

more precise identification of HACs. 

Several commenters supported the 

adoption of ICD–10 with an appropriate 

2-year transition period. Commenters 

stated that they have known since the 

1990’s that the ICD–9–CM coding 

structure was reaching its limits, and it 

was becoming increasingly difficult to 

identify new technologies that are 

commonly used in today’s medical 

practices. The commenters stated that 

there is a critical need to move in a 

timely manner to CM and ICD–10–PCS 

because hospitals would have the ability 

to capture data more accurately, thus 

providing higher quality and more 

accurate data for reporting. Commenters 

urged the implementation of ICD–10 to 

ensure the availability of appropriate, 

consistent, and accurate clinical 

information reflective of patients’

medical conditions and care provided. 

Commenters asserted that this would 

allow the nation to better measure 

quality, implement value-based 

purchasing, identify hospital-acquired 

conditions, and continue to refine a 

prospective payment system that 

improves recognition of variances in 

severity of illness. 

One commenter expressed concern 

about the benefit of moving to ICD–10 

and believed that its benefit in the 

outpatient setting had not been 

demonstrated. The commenter 

expressed concern about the cost of 

moving to a new coding system with the 

need to update software and redraft 

policies. 


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e. Healthcare-Associated Conditions in 

Other Payment Settings 

In the FY 2009 IPPS proposed rule, 

we suggested that the broad principle of 

Medicare not paying for preventable 

healthcare-associated conditions could 

potentially be applied in Medicare 

payment settings beyond IPPS hospitals, 

including for example, hospital 

outpatient departments, SNFs, and 

physician practices. Although the 

implementation would be different for 

each setting, alignment of incentives 

across settings of care is an important 

goal for all of CMS’ VBP initiatives. To 

stimulate public input, we have 

included a discussion in several 

Medicare payment regulations regarding 

application of the broad principle of 

Medicare not paying for preventable 

healthcare-associated conditions in 

payment settings beyond IPPS. The 

discussion was included in the 

following regulations: FY 2009 IRF 

proposed rule (73 FR 22688), the CY 

2009 OPPS/ASC proposed rule (73 FR 

41547), the FY 2009 SNF proposed rule 

(73 FR 25932), and the FY 2009 LTCH 

final rule (73 FR 26829). 

Commenters’ reaction to the notion of 

applying the IPPS HAC payment 

provision to other settings was mixed. A 

number of commenters recognized that 

this use of payment incentives could 

promote better continuity of care 

(including documentation) and a 

reduction in avoidable readmissions. 

Commenters noted that aligned payment 

incentives would force pre- and postacute care settings to share 

accountability for preventing 

healthcare-associated conditions. One 

commenter who supported expanding 

the policy to nursing homes suggested 

that CMS consider including 

dehydration measures for nonpayment 

in that setting. 

While many commenters recognized 

potential benefits, many other 

commenters raised concerns or opposed 

implementing the IPPS HAC payment 

provision in other settings. Generally, 

commenters who were opposed to 

expanding the policy’s reach believed 

that doing so would be premature until 

CMS assesses the impacts of the policy 

in the IPPS setting. Commenters also 

raised concerns about applying the 

policy in particular settings. For 

example, many commenters stated that 

Medicare payment for the physician 

setting is extremely different from that 

of the IPPS setting and that attribution 

issues in particular would make the 

policy difficult to accurately and fairly 

implement. 

Commenters suggested that, if CMS 

did implement a similar policy in the 

physician setting, the agency should 

ensure that the policy does not create 

disincentives for treating high-risk 

patients. From the long-term care 

perspective, one commenter noted that 

the risk of an adverse event occurring 

increases with the duration of the stay 

and so such a policy would be 

particularly concerning for LTCHs. 

f. Relationship to NQF’s Serious 

Reportable Adverse Events 

In the FY 2009 IPPS proposed rule, 

we discussed how CMS has applied its 

authority to address the events on the 

NQF’s list of Serious Reportable 

Adverse Events (also known as ‘‘never 

events’’). We have adopted a number of 

items from the NQF’s list of events as 

HACs. However, we also discussed that 

the HAC payment provision is not 

ideally suited to address every 

condition on the NQF’s list. 

Commenters unanimously asserted 

that CMS should not pay for never 

events. However, many commenters 

were concerned about the widespread 

misperception that HACs are never 

events, which can be considered 

absolutely preventable. Commenters 

urged CMS to explicitly differentiate its 

‘‘reasonably preventable’’ HACs from 

the ‘‘never events’’ on the NQF’s list of 

Serious Reportable Adverse Events. 

Commenters suggested alternatives to 

Medicare’s existing authority under the 

HAC provision to address never events. 

One commenter suggested that no 

higher CC/MCC MS–DRG payment 

should be made for claims including a 

selected HAC if that HAC overlaps with 

a never event. This would preclude a 

higher MS–DRG payment regardless of 

whether any other CC/MCCs that would 

otherwise trigger a higher MS–DRG 

payment are present on the claim. 

g. Additional Potential Candidate HACs, 

Suggested Through Comment 

We received the following suggestions 

of potential candidates for the HAC 

payment provision: 

• Surgical site infection following 

device procedures 

• Failure to rescue 

• Death or disability associated with 

drugs, devices, or biologics 

• Events on the NQF’s list of Serious 

Reportable Adverse Events, not 

previously addressed by the HAC 

payment provision 

• Dehydration 

• Malnutrition 

• Water-borne pathogens, not 

previously addressed by the HAC 

payment provision. 

We reiterate that we are not making 

policy in this subsection; rather, we are 

providing a summary of the comments. 

We would like to thank commenters for 

the thoughtful comments received, and 

we will take this input into 

consideration as we develop any future 

regulatory and/or legislative proposals 

to refine and enhance the HAC payment 

provision. 

10 HAC Coding 

This HAC coding section addresses 

additional coding issues that were 

raised by commenters regarding the 

selected and candidate HACs. 

a. Foreign Object Retained After Surgery 

Comment: One commenter requested 

that CMS provide technical guidance on 

how to address certain situations related 

to retained foreign objects. According to 

the commenter, in certain 

circumstances, it may be in the best 

interest of the patient not to remove the 

object. For example, the commenter 

stated that leaving a patient under 

anesthesia for a prolonged period of 

time and displacing internal organs in 

search of a surgical object left in the 

body may be more harmful than leaving 

the object inside the patient and 

completing a surgery in an expedited 

fashion. The commenter suggested that 

CMS clearly specify that the policy 

applies to an unintended retention of a 

foreign object, to allow physicians to 

exercise clinical judgment regarding the 

relative risk of leaving an object versus 

removing it. 

Response: We believe that ICD–9–CM 

codes 998.4 and 998.7 clearly describe 

the application of the HAC provision to 

a foreign body ‘‘inadvertently’’ or 

‘‘accidentally’’ left in a patient during a 

procedure. 

b. MRSA 

Comment: Commenters raised issues 

regarding the MRSA coding. One 

commenter stated that the recent 

addition of unique MRSA ICD–9–CM 

codes will allow for improved tracking 

of MRSA infections and will 

complement the surveillance efforts 

underway at the CDC and the AHRQ. 

The commenter stated that the creation 

of new MRSA-specific codes will 

generate better data on which to base 

important MRSA prevention and 

management policy decisions, and will 

allow the health care community to 

more effectively address this growing 

public health problem. The commenter 

stated that CMS could reflect the 

increased utilization of resources 

associated with MRSA diagnoses by 

making CC/MCC classifications for the 

following three MRSA codes: Code 

038.12 (Methicillin-resistant 

Staphylococcus aureus septicemia—

MCC); code 482.42 (Methicillin-resistant 


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pneumonia due to Staphylococcus 

aureus—MCC); and code 041.12 

(Methicillin-resistant Staphylococcus 

aureus in conditions classified 

elsewhere and of unspecified site—CC). 

As justification for this request, the 

commenter pointed out that the 

predecessor codes for 038.12 and 482.42 

are MCCs. The predecessor code for 

038.12 is 038.11 (Staphylococcus aureus 

septicemia), which is an MCC. The 

predecessor code for 482.42 is 482.41 

(Pneumonia due to Staphylococcus 

aureus), which is also an MCC. 

The commenter’s justification for 

making 041.12 a CC is not based on the 

predecessor code’s CC/MCC assignment. 

The commenter acknowledged the 

predecessor code, 041.11 

(Staphylococcus aureus) is a non-CC. 

The commenter reviewed data provided 

in the development of the original CC/ 

MCC classifications for the MS–DRGs 

and acknowledged that the data did not 

clearly support making predecessor 

code 041.11 a CC. The commenter also 

recognized that clinical judgment was 

also used in deciding the non-CC/CC/ 

MCC classification of each diagnosis 

code. Given CMS’ use of both data and 

clinical evaluation, the commenter 

stated that code 041.11 ‘‘captures many 

minor and routine bacterial infections 

that are relatively simple and 

inexpensive to treat—in other words, 

diagnoses that do not lead to 

substantially increased use of hospital 

resources.’’ Therefore, the commenter 

found it understandable that the 

predecessor code, 041.11, was classified 

as a non-CC. 

However, the commenter believed 

that the new MRSA specific code, 

041.12, will allow differentiation 

between MRSA and other infections and 

will likely show that these MRSA 

infections are significantly more 

difficult and expensive to treat. 

Therefore, the commenter requested that 

code 041.12 be classified as a CC. 

Response: The final CC/MCC 

classifications for new ICD–9–CM 

diagnosis codes are shown in Table 6A 

of the Addendum to this final rule. This 

table shows that we have classified 

codes 038.12 (Methicillin-resistant 

Staphylococcus aureus septicemia) and 

482.42 (Methicillin-resistant pneumonia 

due to Staphylococcus aureus) as MCCs. 

We agree that, based on the predecessor 

code and our clinical evaluation, this 

MCC classification is warranted. 

We disagree with classifying code 

041.12 (Methicillin-resistant 

Staphylococcus aureus in conditions 

classified elsewhere and of unspecified 

site) as a CC. As is shown in Table 6A, 

we have classified this code as a nonCC. We agree with the commenter that 

the predecessor code was a non-CC. 

However, we also point out that all 

codes in the 041.00–041.9 category of 

bacterial infection in conditions 

classified elsewhere and of unspecified 

site are non-CCs. All of the codes in this 

category are used as an additional code 

to identify a bacterial agent in diseases 

that are classified by another more 

precise code. For instance, if a patient 

has a MRSA urinary tract infection or 

infected toenail, one would assign a 

code for the specific type and location 

of the infection (for example, urinary 

tract infection or infected toenail bed) 

and an additional code to fully describe 

the bacterial agent, such as MRSA. The 

CC/MCC classification would be 

determined by the more precise 

infection code (for example, urinary 

tract infection or infected toenail bed). 

We do not believe it is appropriate to 

change the CC/MCC classification of one 

of the codes in the category of bacterial 

infection in conditions classified 

elsewhere and of unspecified site to a 

CC while leaving all of the others as 

non-CCs. Further, we believe it is more 

appropriate to assign a CC/MCC 

classification based on the more precise 

description of the patient’s infection 

such as pneumonia, septicemia, or nail 

bed infection. Therefore, we have made 

code 041.12 a non-CC, as shown in 

Table 6A of the Addendum to this final 

rule. 

c. POA 

Comment: Commenters raised issues 

regarding the timing of laboratory 

testing (receiving results in 48–72 

hours) and the effect this may have on 

the POA indicator reported for the HAC 

candidates proposed, such as 

Staphylococcus aureus septicemia and 

CDAD. The commenters expressed 

concern that when a lab test including 

cultures is performed upon admission, 

the results may not be available until 

48–72 hours later. The commenters 

were not clear on how the POA 

indicator would be applied in this 

scenario. 

Response: We acknowledge the 

commenter’s concerns regarding correct 

assignment of the POA indicator when 

lab tests are involved. We refer the 

reader to the ICD–9–CM Official 

Guidelines for Coding and Reporting, 

Appendix I, Present on Admission 

Reporting Guidelines. These guidelines 

have been updated to address the issue 

of timeframe for POA identification and 

documentation. The updated guidelines 

recognize that in some clinical 

situations it may take a period of time 

after admission before a definitive 

diagnosis can be made. Determination of 

whether the condition was present on 

admission will be based on the 

applicable POA guidelines or on the 

physician’s best clinical judgment. The 

guidelines address several scenarios, 

including those with infections and 

organisms, and how to assign the POA 

indicator. We also note that in this final 

rule we decided not to select at this time 

the proposed HAC cited by the 

commenter, Staphylococcus aureus 

septicemia, as an HAC. 

11. HACs Selected for Implementation 

on October 1, 2008 

The following table sets out a 

complete list of the HACs selected for 

implementation on October 1, 2008 in 

this final rule and in the FY 2008 IPPS 

final rule with comment period: 

HAC CC/MCC 

(ICD–9–CM codes) 

Foreign Object Retained After Surgery .................................................... 998.4 (CC) 

998.7 (CC) 

Air Embolism ............................................................................................ 999.1 (MCC) 

Blood Incompatibility ................................................................................. 999.6 (CC) 

Pressure Ulcer Stages III & IV ................................................................. 707.23 (MCC) 

707.24 (MCC) 

Falls and Trauma: .................................................................................... Codes within these ranges on the CC/MCC list: 

—Fracture .......................................................................................... 800–829 

—Dislocation ..................................................................................... 830–839 

—Intracranial Injury ........................................................................... 850–854 

—Crushing Injury ............................................................................... 925–929 

—Burn ............................................................................................... 940–949 


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HAC CC/MCC 

(ICD–9–CM codes) 

—Electric Shock ................................................................................ 991–994 

Catheter-Associated Urinary Tract Infection (UTI) ................................... 996.64 (CC) 

Also excludes the following from acting as a CC/MCC: 

112.2 (CC) 

590.10 (CC) 

590.11 (MCC) 

590.2 (MCC) 

590.3 (CC) 

590.80 (CC) 

590.81 (CC) 

595.0 (CC) 

597.0 (CC) 

599.0 (CC) 

Vascular Catheter-Associated Infection ................................................... 999.31 (CC) 

Manifestations of Poor Glycemic Control ................................................. 250.10–250.13 (MCC) 

250.20–250.23 (MCC) 

251.0 (CC) 

249.10–249.11 (MCC) 

249.20–249.21 (MCC) 

Surgical Site Infection, Mediastinitis, Following Coronary Artery Bypass 

Graft (CABG).

519.2 (MCC) 

And one of the following procedure codes: 36.10–36.19 

Surgical Site Infection Following Certain Orthopedic Procedures ........... 996.67 (CC) 

998.59 (CC) 

And one of the following procedure codes: 81.01–81.08, 81.23–81.24, 

81.31–81.83, 81.83, 81.85 

Surgical Site Infection Following Bariatric Surgery for Obesity ............... Principal Diagnosis—278.01 

998.59 (CC) 

And one of the following procedure codes: 44.38, 44.39, or 44.95 

Deep Vein Thrombosis and Pulmonary Embolism Following Certain Orthopedic Procedures.415.11 (MCC) 

415.19 (MCC) 

453.40–453.42 (MCC) 

And one of the following procedure codes: 00.85–00.87, 81.51–81.52, 

or 81.54 

G. Changes to Specific MS–DRG 

Classifications 

1. Pre-MDCs: Artificial Heart Devices 

Heart failure affects more than 5 

million patients in the United States 

with 550,000 new cases each year, and 

causes more than 55,000 deaths 

annually. It is a progressive disease that 

is medically managed at all stages, but 

over time leads to continued 

deterioration of the heart’s ability to 

pump sufficient amounts of adequately 

oxygenated blood throughout the body. 

When medical management becomes 

inadequate to continue to support the 

patient, the patient’s heart failure would 

be considered to be the end stage of the 

disease. At this point, the only 

remaining treatment options are a heart 

transplant or mechanical circulatory 

support. A device termed an artificial 

heart has been used only for severe 

failure of both the right and left 

ventricles, also known as biventricular 

failure. Relatively small numbers of 

patients suffer from biventricular 

failure, but the exact numbers are 

unknown. There are about 4,000 

patients approved and waiting to 

receive heart transplants in the United 

States at any given time, but only about 

2,000 hearts per year are transplanted 

due to a scarcity of donated organs. 

There are a number of mechanical 

devices that may be used to support the 

ventricles of a failing heart on either a 

temporary or permanent basis. When it 

is apparent that a patient will require 

long-term support, a ventricular support 

device is generally implanted and may 

be considered either as a bridge to 

recovery or a bridge to transplantation. 

Sometimes a patient’s prognosis is 

uncertain, and with device support the 

native heart may recover its function. 

However, when recovery is not likely, 

the patient may qualify as a transplant 

candidate and require mechanical 

circulatory support until a donor heart 

becomes available. This type of support 

is commonly supplied by ventricular 

assist devices (VADs), which are 

surgically attached to the native 

ventricles but do not replace them. 

Devices commonly called artificial 

hearts are biventricular heart 

replacement systems that differ from 

VADs in that a substantial part of the 

native heart, including both ventricles, 

is removed. When the heart remains 

intact, it remains possible for the native 

heart to recover its function after being 

assisted by a VAD. However, because 

the artificial heart device requires the 

resection of the ventricles, the native 

heart is no longer intact and such 

recovery is not possible. The 

designation ‘‘artificial heart’’ is 

somewhat of a misnomer because some 

portion of the native heart remains and 

there is no current mechanical device 

that fully replaces all four chambers of 

the heart. Over time, better descriptive 

language for these devices may be 

adopted. 

In 1986, CMS made a determination 

that the use of artificial hearts was not 

covered under the Medicare program. 

To conform to that decision, we placed 

ICD–9–CM procedure code 37.52 

(Implantation of total replacement heart 

system) on the GROUPER program’s 

MCE in the noncovered procedure list. 

On August 1, 2007, CMS began a 

national coverage determination process 

for artificial hearts. SynCardia Systems, 

Inc. submitted a request for 

reconsideration of the longstanding 

noncoverage policy when its device, the 

CardioWestTM Temporary Total 

Artificial Heart (TAH–t) System, is used 

for ‘‘bridge to transplantation’’ in 

accordance with the FDA-labeled 

indication for the device. ‘‘Bridge to 

transplantation’’ is a phrase meaning 


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that a patient in end-stage heart failure 

may qualify as a heart transplant 

candidate, but will require mechanical 

circulatory support until a donor heart 

becomes available. The CardioWestTM

TAH–t System is indicated for use as a 

bridge to transplantation in cardiac 

transplant-eligible candidates at risk of 

imminent death from biventricular 

failure. The system is intended for use 

inside the hospital as the patient awaits 

a donor heart. The ultimate desired 

outcome for insertion of the TAH–t is a 

successful heart transplant, along with 

the potential that offers for cure from 

heart failure. 

CMS determined that a broader 

analysis of artificial heart coverage was 

deemed appropriate, as another 

manufacturer, Abiomed, Inc., has 

developed an artificial heart device, 

AbioCor Implantable Replacement 

Heart Device, with different indications. 

SynCardia Systems, Inc. has received 

approval of its device from the FDA for 

humanitarian use as destination therapy 

for patients in end-stage biventricular 

failure who cannot qualify as transplant 

candidates. The AbioCor Implantable 

Replacement Heart Device is indicated 

for use in severe biventricular end-stage 

heart disease patients who are not 

cardiac transplant candidates and who 

are less than 75 years old, who require 

multiple inotropic support, who are not 

treatable by VAD destination therapy, 

and who cannot be weaned from 

biventricular support if they are on such 

support. The desired outcome for this 

device is prolongation of life and 

discharge to home. 

On February 1, 2008, CMS published 

a proposed coverage decision 

memorandum for artificial hearts which 

stated, in part, that while the evidence 

is inadequate to conclude that the use 

of an artificial heart is reasonable and 

necessary for Medicare beneficiaries, the 

evidence is promising for the uses of 

artificial heart devices as described 

above. CMS supports additional 

research for these devices, and therefore 

proposed that the artificial heart will be 

covered by Medicare when performed 

under the auspices of a clinical study. 

The study must meet all of the criteria 

listed in the proposed decision 

memorandum. This proposed coverage 

decision memorandum may be found on 

the CMS Web site at: http:// 

www.cms.hhs.gov/mcd/ 

viewdraftdecisionmemo.asp?id=211. 

Following consideration of the public 

comments received, CMS made a final 

decision to cover artificial heart devices 

for Medicare beneficiaries under 

‘‘Coverage with Evidence Development’’

when beneficiaries are enrolled in a 

clinical study that meets all of the 

criteria set forth by CMS. These criteria 

can be found in the final decision 

memorandum on the CMS Web site at: 

http://www.cms.hhs.gov/mcd/ 

viewdecisionmemo.asp?id=211. The 

effective date of this decision was May 

1, 2008. 

The topic of coding of artificial heart 

devices was discussed at the September 

27–28, 2007 ICD–9–CM Coordination 

and Maintenance Committee meeting 

held at CMS in Baltimore, MD. We note 

that this topic was placed on the 

Committee’s agenda because any 

proposed changes to the ICD–9–CM 

coding system must be discussed at a 

Committee meeting, with opportunity 

for comment from the public. At the 

September 2007 Committee meeting, the 

Committee accepted oral comments 

from participants and encouraged 

attendees or anyone with an interest in 

the topic to comment on proposed 

changes to the code, inclusion terms, or 

exclusion terms. We accepted written 

comments until October 12, 2007. As a 

result of discussion and comment from 

the Committee meeting, the Committee 

revised the title of procedure code 37.52 

for artificial hearts to read 

‘‘Implantation of internal biventricular 

heart replacement system’’ with an 

inclusion note specifying that this is the 

code for an artificial heart. This code 

can be found in Table 6F, Revised 

Procedure Code Titles, in the 

Addendum to this final rule. In 

addition, the Committee created new 

code 37.55 (Removal of internal 

biventricular heart replacement system) 

to identify explantation of the artificial 

heart prior to heart transplantation. This 

code can be found in Table 6B, New 

Procedure Codes, in the Addendum to 

this final rule. 

To make conforming changes to the 

IPPS system with regard to the proposed 

revision to the coverage decision for 

artificial hearts, in the FY 2009 IPPS 

proposed rule (73 FR 23563), we 

proposed to remove procedure code 

37.52 from MS–DRG 215 (Other Heart 

Assist System Implant) and assign it to 

MS–DRG 001 (Heart Transplant or 

Implant of Heart Assist System with 

Major Comorbidity or Complication 

(MCC)) and MS–DRG 002 (Heart 

Transplant or Implant of Heart Assist 

System without Major Comorbidity or 

Complication (MCC)). In addition, we 

proposed to remove procedure code 

37.52 from the MCE ‘‘Non-Covered 

Procedure’’ edit and assign it to the 

‘‘Limited Coverage’’ edit. In addition, 

we proposed to include in this edit the 

requirement that ICD–9–CM diagnosis 

code V70.7 (Examination of participant 

in clinical trial) also be present on the 

claim. We proposed that claims 

submitted without both procedure code 

37.52 and diagnosis code V70.7 would 

be denied because they would not be in 

compliance with the proposed coverage 

policy. 

Comment: Commenters supported 

CMS’ proposal to remove procedure 

code 37.52 from MS–DRG 215 and 

reassign it to MS–DRGs 001 and 002. 

We did not receive any public 

comments regarding the corresponding 

change to the MCE. 

Response: We appreciate the 

commenters’ support. 

Comment: One commenter suggested 

that CMS create a new MS–DRG 

combining all implantable heart assist 

devices to ensure that the proposed 

changes to cost centers reflect both 

LVAD device costs and implantable 

artificial hearts. The commenter 

suggested that if CMS were unwilling to 

create an MS–DRG combining all the 

implantable heart assist devices, an 

acceptable alternative would be to 

assign all ventricular assist devices 

identified by ICD–9–CM procedure code 

37.66 (Insertion of implantable heart 

assist system) into MS–DRG 001, 

irrespective of the absence of a 

secondary diagnosis code determined to 

be an MCC. 

Response: We believe that we have 

already appropriately created MS–DRGs 

combining heart transplantation, heart 

assist devices, and other VAD device 

insertion in MS–DRGs 001 and 002. As 

the coverage decision for artificial hearts 

has only become effective May 1, 2008, 

CMS has no data to suggest that the cost 

centers will not adequately reflect the 

cost of all implantable heart devices. We 

also point out that change to the 

structure of the MS–DRGs is most 

appropriately discussed in the proposed 

rule, so that the public has a chance to 

review the proposal and comment on it 

as it affects a facility or medical 

practice. 

With regard to the alternative 

suggestion of assigning all VADs to MS–

DRG 001, irrespective of the presence of 

an MCC, we point out that when the 

MS–DRGs were originally created for 

use beginning FY 2008, the data 

suggested the appropriateness of 

separating the patients based on their 

severity as determined by the presence 

of an MCC or a CC. We do not have 

convincing evidence that hospitals are 

not being adequately reimbursed for the 

VAD procedures. Therefore, we are not 

adopting this suggestion. 

After consideration of the public 

comments received, in this final rule, 

we are assigning code 37.52 (now titled 

‘‘Implantation of total internal 

biventricular heart replacement 

system’’) to MS–DRGs 001 and 002, as 


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proposed. In addition, we are removing 

code 37.52 from the ‘‘Non-Covered 

Procedure’’ edit and assign it to the 

‘‘Limited Coverage’’ edit. This means 

that implantation of an artificial heart in 

a Medicare beneficiary will be covered 

when the implanting facility has met the 

criteria as set forth by CMS. In addition, 

both procedure code 37.52 and 

diagnosis code V07.7 must be present 

on the claim in order for the claim to be 

considered a covered Medicare service. 

To reiterate, during FY 2008, we made 

mid-year changes to portions of the 

GROUPER program not affecting MS–

DRG assignment or ICD–9–CM coding. 

However, as the final coverage decision 

memorandum for artificial hearts was 

published after the CMS contractor’s 

testing and release of the mid-year 

product, changes to the MCE included 

in the proposed rule were not included 

in that revision of the GROUPER 

Version 25.0. GROUPER Version 26.0, 

which will be in use for FY 2009, 

contains the final changes that we are 

adopting in this final rule. The edits in 

the MCE Version 25.0 will be effective 

retroactive to May 1, 2008. (To reduce 

confusion, we note that the version 

number of the MCE is one digit lower 

than the current GROUPER version 

number; that is, Version 26.0 of the 

GROUPER uses Version 25.0 of the 

MCE.) 

2. MDC 1 (Diseases and Disorders of the 

Nervous System) 

a. Transferred Stroke Patients Receiving 

Tissue Plasminogen Activator (tPA) 

In 1996, the FDA approved the use of 

tissue plasminogen activator (tPA), one 

type of thrombolytic agent that dissolves 

blood clots. In 1998, the ICD–9–CM 

Coordination and Maintenance 

Committee created code 99.10 (Injection 

or infusion of thrombolytic agent) in 

order to be able to uniquely identify the 

administration of these agents. Studies 

have shown that tPA can be effective in 

reducing the amount of damage the 

brain sustains during an ischemic 

stroke, which is caused by blood clots 

that block blood flow to the brain. tPA 

is approved for patients who have blood 

clots in the brain, but not for patients 

who have a bleeding or hemorrhagic 

stroke. Thrombolytic therapy has been 

shown to be most effective when used 

within the first 3 hours after the onset 

of an embolic stroke, but it is 

contraindicated in hemorrhagic strokes. 

For FY 2006, we modified the 

structure of CMS DRGs 14 (Intracranial 

Hemorrhage or Cerebral Infarction) and 

15 (Nonspecific CVA and Precerebral 

Occlusion without Infarction) by 

removing the diagnostic ischemic 

(embolic) stroke codes. We created a 

new CMS DRG 559 (Acute Ischemic 

Stroke with Use of Thrombolytic Agent) 

which increased reimbursement for 

patients who sustained an ischemic or 

embolic stroke and who also had 

administration of tPA. The intent of this 

DRG was not to award higher payment 

for a specific drug, but to recognize the 

need for better overall care for this 

group of patients. Even though tPA is 

indicated only for a small proportion of 

stroke patients, that is, those patients 

experiencing ischemic strokes treated 

within 3 hours of the onset of 

symptoms, our data suggested that there 

was a sufficient quantity of patients to 

support the DRG change. While our goal 

is to make payment relate more closely 

to resource use, we also note that use of 

tPA in a carefully selected patient 

population may lead to better outcomes 

and overall care and may lessen the 

need for postacute care. 

For FY 2008, with the adoption of 

MS–DRGs, CMS DRG 559 became MS–

DRGs 061 (Acute Ischemic Stroke with 

Use of Thrombolytic Agent with MCC), 

062 (Acute Ischemic Stroke with Use of 

Thrombolytic Agent with CC), and 063 

(Acute Ischemic Stroke with Use of 

Thrombolytic Agent without CC/MCC). 

Stroke cases in which no thrombolytic 

agent was administered were grouped to 

MS–DRGs 064 (Intracranial Hemorrhage 

or Cerebral Infarction with MCC), 065 

(Intracranial Hemorrhage or Cerebral 

Infarction with CC), or 066 (Intracranial 

Hemorrhage or Cerebral Infarction 

without CC/MCC). The MS–DRGs that 

reflect use of a thrombolytic agent, that 

is, MS–DRGs 061, 062, and 063, have 

higher relative weights than the 

hemorrhagic or cerebral infarction MS–

DRGs 064, 065, and 066. 

The American Society of 

Interventional and Therapeutic 

Neuroradiology (ASITN) (now the 

Society of NeuroInterventional Surgery 

(SNIS)) and the American Academy of 

Neurology Professional Association 

(AANPA) have made us aware of a 

treatment issue that is of concern to the 

stroke provider’s community. In some 

instances, patients suffering an 

embolytic or thrombolytic stroke are 

evaluated and given tPA in a 

community hospital’s emergency 

department, and then are transferred to 

a larger facility’s stroke center that is 

able to provide the level of services 

required by the increased severity of 

these cases. The facility providing the 

administration of tPA in its emergency 

department does not realize increased 

reimbursement, as the patient is often 

transferred as soon a possible to a stroke 

center. The facility to which the patient 

is transferred does not realize increased 

reimbursement, as the tPA was not 

administered there. The ASITN/SNIS 

requested that CMS give permission to 

code the administration of tPA as if it 

had been given in the receiving facility. 

This would result in the receiving 

facility being paid the higher weighted 

MS–DRGs 061, 062, or 063 instead of 

MS–DRGs 064, 065, or 066. The ASITN/ 

SNIS’s rationale was that the patients 

who received tPA in another facility 

(even though administration of tPA may 

have alleviated some of the worst 

consequences of their strokes) are still 

extremely compromised and require 

increased health care services that are 

much more resource consumptive than 

patients with less severe types of stroke. 

We have advised the ASITN/SNIS that 

hospitals may not report services that 

were not performed in their facility. 

We recognize that the ASITN/SNIS’s 

concerns potentially have merit but the 

quantification of the increased resource 

consumption of these patients is not 

currently possible in the existing ICD–

9–CM coding system. Without specific 

length of stay and average charges data, 

we are unable to determine an 

appropriate MS–DRG for these cases. 

Therefore, we advised the ASITN/SNIS 

and AANAP to present a request at the 

diagnostic portion of the ICD–9–CM 

Coordination and Maintenance 

Committee meeting on March 20, 2008, 

for creation of a code that would 

recognize the fact that the patient had 

received a thrombolytic agent for 

treatment of the current stroke. In the 

proposed rule, we indicated that if this 

request was presented at the March 20, 

2008 meeting, it could not be approved 

in time to be published as a new code 

in Table 6A in the proposed rule. 

However, we indicated that if a 

diagnosis code was created by the 

National Centers for Health Statistics as 

a result of that meeting, it would be 

added to the list of codes published in 

the FY 2009 IPPS final rule effective on 

October 1, 2008. With such information 

appearing on subsequent claims, we 

will have a better idea of how to classify 

these cases within the MS–DRGs. 

Therefore, because we did not have data 

to identify these patients at the time we 

issued the FY 2009 IPPS proposed rule, 

we did not propose an MS–DRG 

modification for the stroke patients 

receiving tPA in one facility prior to 

being transferred to another facility. 

The AANPA did make such a request 

at the Coordination and Maintenance 

Committee Meeting on March 20, 2008, 

which resulted in the creation of code 

V45.88 (Status post administration of 

tPA (rtPA) in a different facility within 

the last 24 hours prior to admission to 

current facility). This code can be found 


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on Table 6A in the Addendum to this 

final rule. 

Comment: All of the commenters 

approved the creation of a V-code to 

identify patients who had tPA 

administered at another hospital but 

were then transferred to a tertiary 

facility with the specialized stroke 

center resources to provide optimal 

patient care throughout the patient’s 

entire hospital stay. According to two of 

the commenters, the description of 

patients who receive intravenous tPA 

administration at one facility but are 

then transferred to a tertiary hospital’s 

stroke center are commonly referred to 

in the health care industry as ‘‘drip and 

ship’’. 

The commenters agreed with CMS’

suggestion to recognize these patients by 

specific diagnostic coding, and 

suggested that CMS gather data in order 

to appropriately categorize these 

patients in the MS–DRG system. One 

commenter specifically suggested that 

data be collected via the new diagnostic 

code in FY 2009 with a view toward 

establishing a new MS–DRG or set of 

MS–DRGs in FY 2010. 

Response: We appreciate the support 

from the industry regarding creation of 

a unique code and subsequent data 

gathering. We believe that the 

transferred patients who have received 

tPA are a unique category of patients, 

but without precise and evidentiary 

data, we are not able yet to evaluate 

whether a modification of the structure 

of the MS–DRG system concerning these 

stroke patients is warranted. We will 

continue to examine these cases and the 

broad category of stroke DRGs in our 

upcoming reviews of revisions to the 

MS–DRG classifications that may be 

warranted. 

Comment: One commenter disagreed 

with CMS’ suggestion that a new 

diagnostic code be approved and used 

to identify ‘‘drip and ship’’ cases. The 

commenter believed that CMS may not 

be able to identify this patient 

population based on the restriction of 

the CMS claims processing system. The 

commenter encouraged CMS to update 

the claims processing systems to accept 

the reporting of more than eight 

secondary diagnosis codes per claim. 

Response: We believe that the 

commenter has misunderstood our 

statement in the proposed rule (73 FR 

23563 and 23564). We stated: ‘‘* * * 

the quantification of the increased 

resource consumption of these patients 

is not currently possible in the existing 

ICD–9–CM coding system. Without 

specific length of stay and average 

charge data, we are unable to determine 

an appropriate MS–DRG for these 

cases.’’ This statement was made in the 

context of describing the need for a 

specific code describing patients to 

whom tPA had been administered in 

another setting and who then were 

transferred to a tertiary care hospital. 

We did not intend to open the CMS 

claims processing system for discussion 

of possible changes. 

There are currently six stroke MS–

DRGs as described above, with MS–

DRGs 061, 062, and 063 identifying 

cases of acute ischemic stroke with use 

of thrombolytic agents, by severity, and 

MS–DRGs 064, 065, and 066 identifying 

cases of intracranial hemorrhage or 

cerebral infarction, again divided by 

severity as determined by the presence 

of an MCC, a CC, or neither a CC or an 

MCC. We believe to arbitrarily assign 

the ‘‘drip and ship’’ cases to any one of 

these six DRGs is capricious and lacks 

objectivity. Further, in the interest of 

longitudinal data, we point out that 

epidemiologists will be able to gather 

their statistics more logically if we 

ultimately assign the cases to the most 

appropriate MS–DRG(s) after it has been 

proven that the patients consume a 

certain level of resources during their 

inpatient hospital course of treatment. 

Comment: One commenter 

encouraged CMS to assign all patients 

receiving tPA in a transferring hospital 

to the categorization of those patients in 

MS–DRGs 061, 062, and 063 at the 

receiving hospital as ‘‘the payment rate 

for these transferred patients should be 

the same as for patients treated with tPA 

in the admitting hospital because the 

remainder of the care is the same. The 

commenter believed that establishment 

of a separate code should not be a 

prerequisite to including these cases in 

MS–DRGs 061, 062, and 063 if CMS 

would allow hospitals to code the 

administration of tPA as if it had 

occurred at the receiving hospital until 

such time as a new code is established. 

Response: The new diagnostic code 

V45.88 (Status post administration of 

tPA (rtPA) in a different facility within 

the last 24 hours prior to admission to 

current facility) has been established, 

and will be implemented for FY 2009 

for those patients who are discharged on 

or after October 1, 2008. This will allow 

CMS sufficient time to collect accurate 

data on the most appropriate assignment 

of these patients in the MS–DRG system. 

We point out that other commenters 

have supported this position by urging 

CMS to gather data in order to create a 

new DRG for these patients. As we do 

not yet have comprehensive information 

on this category of patients regarding 

frequency, distribution, length of stay, 

or charge data, we do not believe it is 

appropriate to assign these cases to a 

potentially inappropriate MS–DRG. We 

point out the MS–DRGs system is a 

system of averages. If we assign cases to 

an MS–DRG based on what the industry 

believes to be warranted, but if later 

data for the cases reflect that the cases 

are less costly than assumed, the result 

would be that, in subsequent annual 

recalibrations, the relative weight(s) for 

those MS–DRGs would decrease. This 

would ultimately result in a lower 

payment for precisely those cases that 

should be receiving higher payment due 

to their complexity. 

In addition, we reiterate our position 

regarding the submission of an ICD–9–

CM code for a service that was not 

specifically performed at a facility 

receiving the transferred patient. 

Hospitals are not permitted to report 

services that were not performed in 

their facilities. 

Comment: Two commenters suggested 

that, if a new code describing the 

administration of tPA at another facility 

is created, the new code be assigned to 

the list of major comorbidities and 

complications. The commenter 

suggested that this action would allow 

cases to be assigned to MS–DRG 064 

(Intracranial Hemorrhage or Cerebral 

Infarction with MCC) or MS–DRG 067 

(Nonspecific Cerebrovascular Accident 

and Precerebral Occlusion without 

Infarction with MCC). 

The commenters also suggested that, 

if a new code describing the 

administration of tPA at another facility 

was not created, a proxy code that is 

already in the list of MCCs could be 

assigned to the ‘‘drip and ship’’ cases 

that would then allow hospitals to be 

compensated for this category of more 

severe patients. The commenters 

suggested code 286.5 (Hemorrhagic 

disorder due to intrinsic circulating 

anticoagulants) as a proxy code. 

Response: We believe the types of 

action suggested by the commenters 

would result in a dilution of the 

principles upon which the MS–DRGs 

are structured. When we created the 

MS–DRGs for implementation beginning 

with FY 2008, we did so based on data 

and statistics. As we stated in the FY 

2008 IPPS final rule: ‘‘The purpose of 

the MS–DRGs is to more accurately 

stratify groups of Medicare patients with 

varying levels of severity’’ (72 FR 

47155). Therefore, we would not assign 

the new diagnostic code V45.88 that we 

have created (discussed earlier) to the 

list of MCCs or CCs without 

understanding the ramifications of such 

an action on the rest of the MS–DRGs 

and thus compromise our own need for 

accuracy. We refer the readers to the FY 

2008 IPPS final rule that identifies the 

criteria we used to create the lists of 

MCCs and CCs (72 FR 47153). In the 


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same vein, we would not randomly 

choose a code that is already assigned 

to the list of MCCs and suggest that 

hospitals include this code on their 

claims submission to insure placement 

of the case in a higher-weighted MS–

DRG. We believe that this violate the 

intent of the construction of the CCs and 

MCCs. We also believe that the hospital 

personnel responsible for entering these 

codes on the claim would be reluctant 

to do so, given that the patient may not 

actually have this condition. 

After consideration of the public 

comments received, we are specifying 

that, for FY 2009 and absent any other 

conditions or procedures that would 

result in an alternative MS–DRG 

assignment, stroke cases involving 

patients who receive intravenous tPA 

administration at one facility but are 

then transferred to a tertiary hospital’s 

stroke center will continue to be 

assigned to MS–DRGs 064, 065, and 

066. We will continue to monitor the 

cases of patients suffering an embolytic 

or thrombolytic stroke who are 

evaluated and given tPA in a 

community hospital’s emergency 

department and then are transferred to 

another facility. In the future, we will 

evaluate our data for potential MS–DRG 

reassignment based on the use of the 

new diagnostic code V45.88, and we are 

strongly encouraging receiving hospitals 

to include this code on appropriate 

claims. 

b. Intractable Epilepsy With Video 

Electroencephalogram (EEG) 

As we did for FY 2008, we received 

a request from an individual 

representing the National Association of 

Epilepsy Centers to consider further 

refinements to the MS–DRGs describing 

seizures. Specifically, the representative 

recommended that a new MS–DRG be 

established for patients with intractable 

epilepsy who receive an 

electroencephalogram with video 

monitoring (vEEG) during their hospital 

stay. Similar to the initial 

recommendation, the representative 

stated that patients who suffer from 

uncontrolled seizures or intractable 

epilepsy are admitted to an epilepsy 

center for a comprehensive evaluation 

to identify the epilepsy seizure type, the 

cause of the seizure, and the location of 

the seizure. These patients are admitted 

to the hospital for 4 to 6 days with 24- 

hour monitoring that includes the use of 

EEG video monitoring along with 

cognitive testing and brain imaging 

procedures. 

Effective October 1, 2007, MS–DRG 

100 (Seizures with MCC) and MS–DRG 

101 (Seizures without MCC) were 

implemented as a result of refinements 

to the DRG system to better recognize 

severity of illness and resource 

utilization. Once again, the 

representative applauded CMS for 

making changes in the DRG structure to 

better recognize differences in patient 

severity. However, the representative 

stated that a subset of patients in MS–

DRG 101 who have a primary diagnosis 

of intractable epilepsy and are treated 

with vEEG are substantially more costly 

to treat than other patients in this MS–

DRG and represent the majority of 

patients being evaluated by specialized 

epilepsy centers. Alternatively, the 

representative stated that he was not 

requesting any change in the structure 

of MS–DRG 100. According to the 

representative, the number of cases that 

would fall into this category is not 

significant. The representative further 

noted that this is a change from last 

year’s request. 

Epilepsy is currently identified by 

ICD–9–CM diagnosis codes 345.0x 

through 345.9x. There are two fifth 

digits that may be assigned to a subset 

of the epilepsy codes depending on the 

physician documentation: 

• ‘‘0’’ for without mention of 

intractable epilepsy 

• ‘‘1’’ for with intractable epilepsy 

With the assistance of an outside 

reviewer, the representative analyzed 

cost data for MS–DRGs 100 and 101, 

which focused on three subsets of 

patients identified with a primary 

diagnosis of epilepsy or convulsions 

who also received vEEG (procedure 

code 89.19): 

• Patients with a primary diagnosis of 

epilepsy with intractability specified 

(codes 345.01 through 345.91) 

• Patients with a primary diagnosis of 

epilepsy without intractability specified 

(codes 345.00 through 345.90) 

• Patients with a primary diagnosis of 

convulsions (codes 780.39) 

The representative acknowledged that 

the association did not include any 

secondary diagnoses in its analyses. 

Based on its results, the representative 

recommended that CMS further refine 

MS–DRG 101 by subdividing cases with 

a primary diagnosis of intractable 

epilepsy (codes 345.01 through 345.91) 

when vEEG (code 89.19) is also 

performed into a separate MS–DRG that 

would be defined as ‘‘MS–DRG XXX’’

(Epilepsy Evaluation without MCC). 

According to the representative, these 

cases are substantially more costly than 

the other cases within MS–DRG 101 and 

are consistent with the criteria for 

dividing MS–DRGs on the basis of CCs 

and MCCs. In addition, the 

representative stated that the request 

would have a minimal impact on most 

hospitals but would substantially 

improve the accuracy of payment to 

hospitals specializing in epilepsy care. 

In the FY 2009 IPPS proposed rule, 

we discussed our performance of an 

analysis using FY 2007 MedPAR data. 

As shown in the table below, we found 

a total of 54,060 cases in MS–DRG 101 

with average charges of $14,508 and an 

average length of stay of 3.69 days. 

There were 879 cases with intractable 

epilepsy and vEEG with average charges 

of $19,227 and an average length of stay 

of 5 days. 

MS–DRG Number of 

cases 

Average length 

of stay 

Average 

charges 

MS–DRG 100—All Cases ......................................................................................................... 16,142 6 .34 $27,623 

MS–DRG 100—Cases with Intractable Epilepsy with vEEG (Codes 345.01, 345.11, 345.41, 

345.51, 345.61, 345.71, 345.81, 345.91) .............................................................................. 69 6 .6 26,990 

MS–DRG 100—Cases with Intractable Epilepsy without vEEG ............................................... 328 7 .81 32,539 

MS–DRG 101—All cases .......................................................................................................... 54,060 3 .69 14,508 

MS–DRG 101—Cases with Intractable Epilepsy with vEEG (Codes 345.01, 345.11, 345.41, 

345.51, 345.61, 345.71, 345.81, 345.91) .............................................................................. 879 5 .0 19,227 

MS–DRG 101—Cases with Intractable Epilepsy without vEEG ............................................... 1,351 4 .25 14,913 

In applying the criteria to establish 

subgroups, the data do not support the 

creation of a new subdivision for MS–

DRG 101 for cases with intractable 

epilepsy and vEEG, nor does the data 

support moving the 879 cases from MS–

DRG 101 to MS–DRG 100. Moving the 

879 cases to MS–DRG 100 would mean 

moving cases with average charges of 

approximately $19,000 into an MS–DRG 

with average charges of $28,000. 

Therefore, we did not propose to refine 


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MS–DRG 101 by subdividing cases with 

a primary diagnosis of intractable 

epilepsy (codes 345.01 through 345.91) 

when vEEG (code 89.19) is also 

performed into a separate MS–DRG. 

Comment: One commenter supported 

the National Association of Epilepsy 

Centers in recommending that MS–DRG 

101 be subdivided for a subset of 

patients with a primary diagnosis of 

intractable epilepsy (codes 345.01 

through 345.91) when EEG with video 

monitoring is reported. Similar to the 

Association’s comments, the commenter 

stated that this subgroup of patients is 

most often admitted to hospitals with 

specialized epilepsy centers for a 

comprehensive evaluation to determine 

epilepsy seizure type, cause and 

location for consideration of surgery or 

to alter medications, and that the 

hospitalization is longer than the other 

cases in MS–DRG 101, resulting in 

higher costs (due to continuous 24-hour 

EEG with video monitoring (vEEG) and 

additional expensive diagnostic tests 

such as MRI, ictal SPECT, PET, and 

neuropsychological testing). 

The commenter acknowledged that 

CMS has set specific criteria for the 

establishment of a new MS–DRG. 

According to the commenter, the FY 

2007 data analyzed by the Association 

reported that the intractable epilepsy 

with vEEG cases exceed the average 

charge criteria as well as the minimum 

number of cases needed to establish a 

separate DRG. However, the total 

number of cases in the subgroup 

represents less than 2 percent of the 

cases in MS–DRG 101, while the 

criterion calls for a threshold of 5 

percent. The commenter stated that the 

number of cases is small because most 

patients with intractable epilepsy 

admitted to the hospital for vEEG are 

younger than 65 years of age and are 

eligible for Medicare due to their 

disability. In addition, the commenter 

indicated that the population is 

typically covered by private insurance 

or Medicaid. The commenter asserted 

that the Medicare intractable epilepsy 

with vEEG cases will remain small, but 

asked that CMS establish the separate 

MS–DRG as it has done for pediatric 

and other small subgroups of patients. 

Lastly, like the Association, the 

commenter noted that most of the 

admissions of the epilepsy subgroup 

occur in a relatively small number of 

hospitals with specialized epilepsy 

centers. The commenter believed that 

the establishment of a separate MS–DRG 

for the epilepsy subgroup would have a 

minimal impact on most hospitals, but 

would substantially improve the 

accuracy of payment to hospitals that 

specialize in epilepsy care. 

Response: We appreciate the 

commenter’s comments. As we 

indicated in the proposed rule and in 

this final rule, we performed an analysis 

of the FY 2007 MedPAR data. In 

applying the criteria to establish 

subgroups, the data did not support the 

creation of a new subdivision for MS–

DRG 101 for cases with intractable 

epilepsy and vEEG. 

As mentioned elsewhere in this final 

rule, we received several comments 

acknowledging CMS’ discussion of the 

FY 2008 implementation of MS–DRGs 

and lack of data to support major MS–

DRG changes for FY 2009. The 

commenters accepted CMS’ proposal of 

not making significant revisions to the 

MS–DRGs until claims data under the 

new MS–DRG system are available. 

Therefore, as final policy for FY 2009, 

we are not modifying MS–DRG 101. 

3. MDC 5 (Diseases and Disorders of the 

Circulatory System) 

a. Automatic Implantable CardioverterDefibrillators (AICD) Lead and 

Generator Procedures 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47257), we 

created a separate, stand alone DRG for 

automatic implantable cardioverterdefibrillator (AICD) generator 

replacements and defibrillator lead 

replacements. The new MS–DRG 245 

(AICD lead and generator procedures) 

contains the following codes: 

• 00.52, Implantation or replacement 

of transvenous lead [electrode] into left 

ventricular coronary venous system 

• 00.54, Implantation or replacement 

of cardiac resynchronization 

defibrillator pulse generator device only 

[CRT–D] 

• 37.95, Implantation of automatic 

cardioverter/defibrillator lead(s) only 

• 37.96, Implantation of automatic 

cardioverter/defibrillator pulse 

generator only 

• 37.97, Replacement of automatic 

cardioverter/defibrillator lead(s) only 

• 37.98, Replacement of automatic 

cardioverter/defibrillator pulse 

generator only 

Commenters on the FY 2008 IPPS 

proposed rule supported this MS–DRG, 

which recognizes the distinct 

differences in resource utilization 

between pacemaker and defibrillator 

generators and leads. One commenter 

suggested that CMS consider additional 

refinements for the defibrillator 

generator and leads. In reviewing the 

standardized charges for the AICD leads, 

the commenter believed that the leads 

may be more appropriately assigned to 

another DRG such as MS–DRG 243 

(Permanent Cardiac Pacemaker Implant 

with CC) or MS–DRG 258 (Cardiac 

Pacemaker Device Replacement with 

MCC). The commenter recommended 

that CMS consider moving the 

defibrillator leads back into a pacemaker 

DRG, either MS–DRG 243 or MS–DRG 

258. 

In response to the commenter, we 

indicated that the data supported 

separate MS–DRGs for these very 

different devices (72 FR 47257). We 

indicated that moving the defibrillator 

leads back into a pacemaker MS–DRG 

defeated the purpose of creating 

separate MS–DRGs for defibrillators and 

pacemakers. Therefore, we finalized 

MS–DRG 245 as proposed with the 

leads and generator codes listed above. 

After publication of the FY 2008 IPPS 

final rule with comment period, we 

received a request from a manufacturer 

that recommended a subdivision for 

MS–DRG 245 (AICD Lead and Generator 

Procedures). The requestor suggested 

creating a new MS–DRG to separate the 

implantation or replacement of the 

AICD leads from the implantation or 

replacement of the AICD pulse 

generators to better recognize the 

differences in resource utilization for 

these distinct procedures. 

The requestor applauded CMS’

decision to create separate MS–DRGs for 

the pacemaker device procedures from 

the AICD procedures in the FY 2008 

IPPS final rule (72 FR 47257). The 

requestor further acknowledged its 

support of the clinically distinct MS–

DRGs for pacemaker devices. Currently, 

MS–DRGs 258 and 259 (Cardiac 

Pacemaker Device Replacement with 

MCC and without MCC, respectively) 

describe the implantation or 

replacement of pacemaker generators, 

while MS–DRGs 260, 261, and 262 

(Cardiac Pacemaker Revision Except 

Device Replacement with MCC, with 

CC, without CC/MCC, respectively) 

describe the insertion or replacement of 

pacemaker leads. 

The requestor believed that the IPPS 

‘‘needs to continue to evolve to 

accurately reflect clinical differences 

and costs of services.’’ As such, the 

requestor recommended that CMS 

follow the same structure as it did with 

the pacemaker MS–DRGs for MS–DRG 

245 to separately identify the 

implantation or replacement of the 

defibrillator leads (codes 37.95, 37.97, 

and 00.52) from the implantation or 

replacement of the pulse generators 

(codes 37.96, 37.98 and 00.54). 

In the FY 2009 IPPS proposed rule, 

we discussed our analysis of the FY 

2007 MedPAR data, in which we found 

a total of 5,546 cases in MS–DRG 245 

with average charges of $62,631 and an 

average length of stay of 3.3 days. We 


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found 1,894 cases with implantation or 

replacement of the defibrillator leads 

(codes 37.95, 37.97, and 00.52) with 

average charges of $42,896 and an 

average length of stay of 3.4 days. We 

also found a total of 3,652 cases with 

implantation or replacement of the 

pulse generator (codes 37.96, 37.98, 

00.54) with average charges of $72,866 

and an average length of stay of 3.2 

days. 

We agree with the requestor that the 

IPPS should accurately recognize 

differences in resource utilization for 

clinically distinct procedures. As the 

data demonstrate, average charges for 

the implantation or replacement of the 

AICD pulse generators are significantly 

higher than for the implantation or 

replacement of the AICD leads. 

Therefore, we proposed to create a new 

MS–DRG 265 to separately identify 

these distinct procedures. 

Comment: Several commenters 

expressed their appreciation and 

applauded CMS for acting on the 

proposal to subdivide MS–DRG 245 and 

create a new MS–DRG to recognize the 

differences in resource utilization for 

the implantation or replacement of leads 

from the implantation or replacement of 

pulse generators. The commenters 

supported these refinements to the MS–

DRG classification system and stated 

that this proposed modification would 

‘‘reflect appropriate allocation and use 

of resources.’’

Response: We appreciate the 

commenters’ support. We proposed that 

the title for this new MS–DRG 265 

would be ‘‘AICD Lead Procedures’’ and 

would include procedure codes that 

identify the AICD leads (codes 37.95, 

37.97 and 00.52). We also proposed that 

the title for MS–DRG 245 would be 

revised to ‘‘AICD Generator Procedures’’

and include procedure codes 37.96, 

37.98, and 00.54. We believe these 

changes will better reflect the clinical 

differences and resources utilized for 

these distinct procedures. 

Therefore, in this final rule, we are 

finalizing our proposals to revise the 

title of MS–DRG 245 to read ‘‘AICD 

Generator Procedures’’, which includes 

procedure codes 37.96, 37.98, 00.54 and 

to create a new MS–DRG 265 (AICD 

Lead Procedures) to include procedure 

codes 37.95, 37.97 and 00.52, effective 

October 1, 2009. 

b. Left Atrial Appendage Device 

Atrial fibrillation (AF) is the primary 

cardiac abnormality associated with 

ischemic or embolytic stroke. Most 

ischemic strokes associated with AF are 

possibly due to an embolism or 

thrombus that has formed in the left 

atrial appendage. Evidence from studies 

such as transesophageal 

echocardiography shows left atrial 

thrombi to be more frequent in AF 

patients with ischemic stroke as 

compared to AF patients without stroke. 

While anticoagulation medication can 

be efficient in ischemic stroke 

prevention, there can be problems of 

safety and tolerability in many patients, 

especially those older than 75 years. 

Chronic warfarin therapy has been 

proven to reduce the risk of embolism 

but there can be difficulties concerning 

its administration. Frequent blood tests 

to monitor warfarin INR are required at 

some cost and patient inconvenience. In 

addition, because warfarin INR is 

affected by a large number of drug and 

dietary interactions, it can be 

unpredictable in some patients and 

difficult to manage. The efficacy of 

aspirin for stroke prevention in AF 

patients is less clear and remains 

controversial. With the known disutility 

of warfarin and the questionable 

effectiveness of aspirin, a device-based 

solution may provide added protection 

against thromboembolism in certain 

patients with AF. 

At the April 1, 2004 ICD–9–CM 

Coordination and Maintenance 

Committee meeting, a proposal was 

presented for the creation of a unique 

procedure code describing insertion of 

the left atrial appendage filter system. 

Subsequently, ICD–9–CM code 37.90 

(Insertion of left atrial appendage 

device) was created for use beginning 

October 1, 2004. This code was 

designated as a non-operating room 

(non-O.R.) procedure, and had an effect 

only on cases in MDC 5, CMS DRG 518 

(Percutaneous Cardiovascular Procedure 

without Coronary Artery Stent or Acute 

Myocardial Infarction). With the 

adoption of MS–DRGs in FY 2008, CMS 

DRG 518 was divided into MS–DRGs 

250 (Percutaneous Cardiovascular 

Procedure without Coronary Artery 

Stent or AMI with MCC) and 251 

(Percutaneous Cardiovascular Procedure 

without Coronary Artery Stent or AMI 

without MCC). 

We have reviewed the data 

concerning this procedure code 

annually. Using FY 2005 MedPAR data 

for the FY 2007 IPPS final rule, 24 cases 

were reported, and the average charges 

($27,620) closely mimicked the average 

charges of the other 22,479 cases in 

CMS DRG 518 ($28,444). As the charges 

were comparable, we made no 

recommendations to change the CMS 

DRG assignment for FY 2007. 

Using FY 2006 MedPAR data for the 

FY 2008 IPPS final rule, we divided 

CMS DRG 518 into the cases that would 

be reflected in the MS–DRG 

configuration; that is, we divided the 

cases based on the presence or absence 

of an MCC. There were 35 cases without 

an MCC with average charges of 

$24,436, again mimicking the 38,002 

cases with average charges of $32,546. 

There were 3 cases with an MCC with 

average charges of $62,337, compared to 

the 5,458 cases also with an MCC with 

average charges of $53,864. Again, it 

was deemed that cases with code 37.90 

were comparable to the rest of the cases 

in CMS DRG 518, and the decision was 

made not to make any changes in the 

DRG assignment for this procedure 

code. As noted above, CMS DRG 518 

became MS–DRGs 250 and 251 in FY 

2008. 

We have received a request regarding 

code 37.90 and its placement within the 

MS–DRG system for FY 2009. The 

requestor, a manufacturer’s 

representative, asked for either the 

reassignment of code 37.90 to an MS–

DRG that would adequately cover the 

costs associated with the complete 

procedure or the creation of a new MS–

DRG that would reimburse hospitals 

adequately for the cost of the device. 

The requestor reported that the device’s 

IDE clinical trial is nearing completion, 

with the conclusion of study enrollment 

in May 2008. The requestor will 

continue to enroll patients in a 

Continued Use Registry following 

completion of the trial. The requestor 

reported that it did not charge hospitals 

for the atrial appendage device, 

estimated to cost $6,000, during the trial 

period, but it will begin to charge 

hospitals upon the completion of the 

trial in May. The requestor provided us 

with its data showing what it believed 

to be a differential of $107 more per case 

than the payment average for MS–DRG 

250, and a shortfall of $3,808 per case 

than the payment average for MS–DRG 

251. 

The requestor pointed out that code 

37.90 is assigned to both MS–DRGs 250 

and 251, but stated that the final MS–

DRG assignment would be MS–DRG 251 

when the patient has a principal 

diagnosis of atrial fibrillation (code 

427.31) because AF is not presently 

listed as a CC or an MCC. We note that 

it is the principal diagnosis that is used 

to determine assignment of a case to the 

correct MDC and subsequently the MS–

DRG. Secondary or additional diagnosis 

codes are the only codes that can be 

used to determine the presence of a CC 

or an MCC. 

With regard to the request to create a 

specific MS–DRG for the insertion of 

this device titled ‘‘Percutaneous 

Cardiovascular Procedures with 

Implantation of a Left Atrial Appendage 

Device without CC/MCC’’, we point out 

that the payments under a prospective 


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payment system are predicated on 

averages. The device is already assigned 

to MS–DRGs containing other 

percutaneous cardiovascular devices; to 

create a new MS–DRG specific to this 

device would be to remove all other 

percutaneously inserted devices and 

base the MS–DRG assignment solely on 

the presence of code 37.90. This 

approach negates our longstanding 

method of grouping like procedures, 

and removes the concept of averaging. 

Further, to ignore the structure of the 

MS–DRG system solely for the purpose 

of increasing payment for one device 

would set an unwelcome precedent for 

defining all of the other MS–DRGs in 

the system. We also point out that the 

final rule establishing the MS–DRGs set 

forth five criteria, all five of which are 

required to be met, in order to warrant 

creation of a CC or an MCC subgroup 

within a base MS–DRG. The criteria can 

be found in the FY 2008 IPPS final rule 

with comment period (72 FR 47169). 

One of the criteria specifies that there 

will be at least 500 cases in the CC or 

MCC subgroup. To date, there are not 

enough cases assigned to code 37.90 

that are reported within the MedPAR 

data. 

Using FY 2007 MedPAR data, for the 

FY 2009 IPPS proposed rule, we 

reviewed MS–DRGs 250 and 251 for the 

presence of the left atrial appendage 

device. The following table displays our 

results: 

MS–DRG Number of 

cases 

Average 

length of stay 

Average 

charges 

250—All Cases ............................................................................................................................ 6,424 7.72 $60,597.58 

250—Cases with code 37.90 ...................................................................................................... 4 6.50 65,829.51 

250—Cases without code 37.90 ................................................................................................. 6,420 7.72 60,594.32 

251—All Cases ............................................................................................................................ 39,456 2.84 35,719.81 

251—Cases with code 37.90 ...................................................................................................... 101 1.30 20,846.09 

251—Cases without code 37.90 ................................................................................................. 39,335 2.85 35,757.98 

There were a total of 105 cases 

assigned code 37.90 that were reported 

for Medicare beneficiaries in the 2007 

MedPAR data. There are 4 cases with an 

atrial appendage device in MS–DRG 250 

that have higher average charges than 

the other 6,420 cases in the MS–DRG, 

and that have slightly shorter lengths of 

stay by 1.25 days. However, the more 

telling data are located in MS–DRG 251, 

which shows that the 101 cases in 

which an atrial appendage device was 

implanted have much lower average 

charges ($20,846.09) than the other 

39,355 cases in the MS–DRG with 

average charges of $35,758.98. The 

difference in the average charges is 

approximately $14,912, so even when 

the manufacturer begins charging the 

hospitals the estimated $6,000 for the 

device, there is still a difference of 

approximately $8,912 in average charges 

based on the comparison within the 

total MS–DRG 251. Interestingly, the 

101 cases also have an average length of 

stay of less than half of the average 

length of stay compared to the other 

cases assigned to that MS–DRG. 

Because the data did not support 

either the creation of a unique MS–DRG 

or the assignment of procedure code 

37.90 to another higher-weighted MS–

DRG, we did not propose any change to 

MS–DRGs 250 and 251, or to code 37.90 

for FY 2009. We believe, based on the 

past 3 years’ comparisons, that this code 

is appropriately located within the MS–

DRG structure. 

We did not receive any comments on 

our proposal to make no changes to MS–

DRGs 250 or 251, or on the assignment 

of code 37.90 (Insertion of left atrial 

appendage device) within the MS–DRG 

structure. Therefore, in the absence of 

comment to the contrary, and in the 

presence of what we believe to be 

compelling evidence concerning the 

accuracy of the placement of code 37.90 

in the current MS–DRG structure, we 

are not modifying MS–DRG 250 or 251 

or procedure code 37.90 for FY 2009. 

As an additional note, we point out 

that the titles of MS–DRGs 250 and 251 

have been changed for FY 2009. We 

have removed the reference to AMI, as 

that portion of the title was a holdover 

from the CMS DRGs last used in FY 

2007. The correct titles are: MS–DRG 

250 (Percutaneous Cardiovascular 

Procedure without Coronary Artery 

Stent with MCC) and MS–DRG 251 

(Percutaneous Cardiovascular Procedure 

without Coronary Artery Stent without 

MCC). The entire list of MS–DRGs can 

be found in Table 5 of the Addendum 

to this final rule. 

4. MDC 8 (Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue): Hip and Knee Replacements 

and Revisions 

For FY 2009, we again received a 

request from the American Association 

of Hip and Knee Surgeons (AAHKS), a 

specialty group within the American 

Academy of Orthopedic Surgeons 

(AAOS), concerning modifications of 

the lower joint procedure MS–DRGs. 

The request is similar, in some respects, 

to the AAHKS’ request in FY 2008, 

particularly as it relates to separating 

routine and complex procedures. For 

the benefit of the reader, we are 

republishing a history of the 

development of DRGs for hip and knee 

replacements and a summary of the 

AAHKS FY 2008 request that were 

included in the FY 2008 IPPS final rule 

with comment period (72 FR 47222 

through 47224) before we discuss the 

AAHKA’s more recent request. 

a. Brief History of Development of Hip 

and Knee Replacement Codes 

In the FY 2006 IPPS final rule (70 FR 

47303), we deleted CMS DRG 209 

(Major Joint and Limb Reattachment 

Procedures of Lower Extremity) and 

created two new CMS DRGs: 544 (Major 

Joint Replacement or Reattachment of 

Lower Extremity) and 545 (Revision of 

Hip or Knee Replacement). The two new 

CMS DRGs were created because 

revisions of joint replacement 

procedures are significantly more 

resource intensive than original hip and 

knee replacements procedures. CMS 

DRG 544 included the following 

procedure code assignments: 

• 81.51, Total hip replacement 

• 81.52, Partial hip replacement 

• 81.54, Total knee replacement 

• 81.56, Total ankle replacement 

• 84.26, Foot reattachment 

• 84.27, Lower leg or ankle 

reattachment 

• 84.28, Thigh reattachment 

CMS DRG 545 included the following 

procedure code assignments: 

• 00.70, Revision of hip replacement, 

both acetabular and femoral 

components 

• 00.71, Revision of hip replacement, 

acetabular component 

• 00.72, Revision of hip replacement, 

femoral component 

• 00.73, Revision of hip replacement, 

acetabular liner and/or femoral head 

only 

• 00.80, Revision of knee 

replacement, total (all components) 

• 00.81, Revision of knee 

replacement, tibial component 


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• 00.82, Revision of knee 

replacement, femoral component 

• 00.83, Revision of knee 

replacement, patellar component 

• 00.84, Revision of knee 

replacement, tibial insert (liner) 

• 81.53, Revision of hip replacement, 

not otherwise specified 

• 81.55, Revision of knee 

replacement, not otherwise specified 

Further, we created a number of new 

ICD–9–CM procedure codes effective 

October 1, 2005, that better distinguish 

the many different types of joint 

replacement procedures that are being 

performed. In the FY 2006 IPPS final 

rule (70 FR 47305), we indicated a 

commenter had requested that, once we 

receive claims data using the new 

procedure codes, we closely examine 

data from the use of the codes under the 

two new CMS DRGs to determine if 

future additional DRG modifications are 

needed. 

b. Prior Recommendations of the 

AAHKS 

Prior to this year, the AAHKS had 

recommended that we make further 

refinements to the CMS DRGs for knee 

and hip arthroplasty procedures. The 

AAHKS previously presented data to 

CMS on the important differences in 

clinical characteristics and resource 

utilization between primary and 

revision total joint arthroplasty 

procedures. The AAHKS stated that 

CMS’ decision to create a separate DRG 

for revision of total joint arthroplasty 

(TJA) in October 2005 resulted in more 

equitable reimbursement for hospitals 

that perform a disproportionate share of 

complex revision of TJA procedures, 

recognizing the higher resource 

utilization associated with these cases. 

The AAHKS stated that this important 

payment policy change led to increased 

access to care for patients with failed 

total joint arthroplasties, and ensured 

that high volume TJA centers could 

continue to provide a high standard of 

care for these challenging patients. 

The AAHKS further stated that the 

addition of new, more descriptive ICD–

9–CM diagnosis and procedure codes 

for TJA in October 2005 gave it the 

opportunity to further analyze 

differences in clinical characteristics 

and resource intensity among TJA 

patients and procedures. Inclusive of 

the preparatory work to submit its 

recommendations, the AAHKS 

compiled, analyzed, and reviewed 

detailed clinical and resource utilization 

data from over 6,000 primary and 

revision TJA procedure codes from 4 

high volume joint arthroplasty centers 

located within different geographic 

regions of the United States: University 

of California, San Francisco, CA; Mayo 

Clinic, Rochester, MN; Massachusetts 

General Hospital, Boston, MA; and the 

Hospital for Special Surgery, New York, 

NY. Based on its analysis, the AAHKS 

recommended that CMS examine 

Medicare claims data and consider the 

creation of separate DRGs for total hip 

and total knee arthroplasty procedures. 

The AAHKS stated that based on the 

differences between patient 

characteristics, procedure 

characteristics, resource utilization, and 

procedure code payment rates between 

total hip and total knee replacements, 

separate DRGs were warranted. 

Furthermore, the AAHKS recommended 

that CMS create separate base DRGs for 

routine versus complex joint revision or 

replacement procedures as shown 

below. 

Routine Hip Replacements 

• 00.73, Revision of hip replacement, 

acetabular liner and/or femoral head 

only 

• 00.85, Resurfacing hip, total, 

acetabulum and femoral head 

• 00.86, Resurfacing hip, partial, 

femoral head 

• 00.87, Resurfacing hip, partial, 

acetabulum 

• 81.51, Total hip replacement 

• 81.52, Partial hip replacement 

• 81.53, Revision of hip replacement, 

not otherwise specified 

Complex Hip Replacements 

• 00.70, Revision of hip replacement, 

both acetabular and femoral 

components 

• 00.71, Revision of hip replacement, 

acetabular component 

• 00.72, Revision of hip replacement, 

femoral component 

Routine Knee Replacements and Ankle 

Procedures 

• 00.83, Revision of knee 

replacement, patellar component 

• 00.84, Revision of knee 

replacement, tibial insert (liner) 

• 81.54, Revision of knee 

replacement, not otherwise specified 

• 81.55, Revision of knee 

replacement, not otherwise specified 

• 81.56, Total ankle replacement 

Complex Knee Replacements and Other 

Reattachments 

• 00.80, Revision of knee 

replacement, total (all components) 

• 00.81, Revision of knee 

replacement, tibial component 

• 00.82, Revision of knee 

replacement, femoral component 

• 84.26, Foot reattachment 

• 84.27, Lower leg or ankle 

reattachment 

• 84.28, Thigh reattachment 

The AAHKS also recommended the 

continuation of CMS DRG 471 (Bilateral 

or Multiple Major Joint Procedures of 

Lower Extremity) without 

modifications. CMS DRG 471 included 

any combination of two or more of the 

following procedure codes: 

• 00.70, Revision of hip replacement, 

both acetabular and femoral 

components 

• 00.80, Revision of knee 

replacement, total (all components) 

• 00.85, Resurfacing hip, total, 

acetabulum and femoral head 

• 00.86, Resurfacing hip, partial, 

femoral head 

• 00.87, Resurfacing hip, partial, 

acetabulum 

• 81.51, Total hip replacement 

• 81.52, Partial hip replacement 

• 81.54, Total knee replacement 

• 81.56, Total ankle replacement 

c. Adoption of MS–DRGs for Hip and 

Knee Replacements for FY 2008 and 

AAHKS’ Recommendations 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47222 through 

47226), we adopted MS–DRGs to better 

recognize severity of illness for FY 2008. 

The MS–DRGs include two new severity 

of illness levels under the then current 

base DRG 544. We also added three new 

severity of illness levels to the base DRG 

for Revision of Hip or Knee 

Replacement. The new MS–DRGs are as 

follows: 

• MS–DRG 466 (Revision of Hip or 

Knee Replacement with MCC) 

• MS–DRG 467 (Revision of Hip or 

Knee Replacement with CC) 

• MS–DRG 468 (Revision of Hip or 

Knee Replacement without CC/MCC) 

• MS–DRG 469 (Major Joint 

Replacement or Reattachment of Lower 

Extremity with MCC) 

• MS–DRG 470 (Major Joint 

Replacement or Reattachment of Lower 

Extremity without MCC) 

We found that the MS–DRGs greatly 

improved our ability to identify joint 

procedures with higher resource costs. 

In the final rule, we presented data 

indicating the average charges for each 

new MS–DRG for the joint procedures. 

In the FY 2008 IPPS final rule with 

comment period, we acknowledged the 

valuable assistance the AAHKS had 

provided to CMS in creating the new 

joint replacement procedure codes and 

modifying the joint replacement DRGs 

beginning in FY 2006. These efforts 

greatly improved our ability to 

categorize significantly different groups 

of patients according to severity of 

illness. Commenters on the FY 2008 

proposed rule had encouraged CMS to 

continue working with the orthopedic 


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community, including the AAHKS, to 

monitor the need for additional new 

DRGs. The commenters stated that MS–

DRGs 466 through 470 are a good first 

step. However, they stated that CMS 

should continue to evaluate the data for 

these procedures and consider 

additional refinements to the MS–DRGs, 

including the need for additional 

severity levels. AAHKS stated that its 

data suggest that all three base DRGs 

(primary replacement, revision of major 

joint replacement, and bilateral joint 

replacement) should be separated into 

three severity levels (that is, MCC, CC, 

and non-CC). (We had proposed three 

severity levels for revision of hip and 

knee replacement (MS–DRGs 466, 467, 

and 468), and AAHKS agreed with this 

3-level subdivision.) 

The AAHKS recommended that the 

base DRG for the proposed two severity 

subdivision MS–DRGs for major joint 

replacement or reattachment of lower 

extremity with and without CC/MCC 

(MS–DRGs 483 and 484) be subdivided 

into three severity levels, as was the 

case for the revision of hip and knee 

replacement MS–DRGs. AAHKS also 

recommended that the two severity 

subdivision MS–DRGs for bilateral or 

multiple major joint procedures of lower 

extremity with and without MCC (MS–

DRGs 461 and 462) be subdivided three 

ways for this base DRG. AAHKS 

acknowledged that the three way split 

would not meet all five of the criteria for 

establishing a subgroup, and stated that 

these criteria were too restrictive, lack 

face validity, and create perverse 

admission selection incentives for 

hospitals by significantly overpaying for 

cases without a CC and underpaying for 

cases with a CC. It recommended that 

the existing five criteria be modified for 

low volume subgroups to assure 

materiality. For higher volume MS–DRG 

subgroups, the AAHKS recommended 

that two other criteria be considered, 

particularly for nonemergency, elective 

admissions: 

• Is the per-case underpayment 

amount significant enough to affect 

admission vs. referral decisions on a 

case-by-case basis? 

• Is the total level of underpayments 

sufficient to encourage systematic 

admission vs. referral policies, 

procedures, and marketing strategies? 

The AAHKS also recommended 

refining the five existing criteria for 

MCC/CC/without subgroups as follows: 

• Create subgroups if they meet the 

five existing criteria, with cost 

difference between subgroups ($1,350) 

substituted for charge difference 

between subgroups ($4,000); 

• If a proposed subgroup meets 

criteria number 2 and 3 (at least 5 

percent and at least 500 cases) but fails 

one of the others, then create the 

subgroup if either of the following 

criteria are met: 

• At least $1,000 cost difference per 

case between subgroups; or 

• At least $1 million overall cost 

should be shifted to cases with a CC (or 

MCC) within the base DRG for payment 

weight calculations. 

In response, we indicated that we did 

not believe it was appropriate to modify 

our five criteria for creating severity 

subgroups. Our data did not support 

creating additional subdivisions based 

on the criteria. At that time, we believed 

the criteria we established to create 

subdivisions within a base DRG were 

reasonable and establish the appropriate 

balance between better recognition of 

severity of illness, sufficient differences 

between the groups, and a reasonable 

number of cases in each subgroup. 

However, we indicated that we may 

consider further modifications to the 

criteria at a later date once we have had 

some experience with MS–DRGs created 

using the proposed criteria. 

The AAHKS indicated in its response 

to the FY 2008 proposed rule that it 

continued to support the separation of 

routine and complex joint procedures. It 

believed that certain joint replacement 

procedures have significantly lower 

average charges than do other joint 

replacements. The AAKHS’ data suggest 

that more routine joint replacements are 

associated with substantially less 

resource utilization than other more 

complex revision procedures. The 

AAHKS stated that leaving these 

procedures in the revision MS–DRGs 

results in substantial overpayment for 

these relatively simple, less costly 

revision procedures, which in turn 

results in a relative underpayment for 

the more complex revision procedures. 

In response, we examined data on this 

issue and identified two procedure 

codes for partial knee revisions that had 

significantly lower average charges than 

did other joint revisions. The two codes 

are as follows: 

• 00.83 Revision of knee replacement, 

patellar component 

• 00.84 Revision of total knee 

replacement, tibial insert (liner) 

The data suggest that these less 

complex partial knee revisions are less 

resource intensive than other cases 

assigned to MS–DRGs 466, 467, or 468. 

We examined other orthopedic DRGs to 

which these two codes could be 

assigned. We found that these cases 

have very similar average charges to 

those in MS–DRG 485 (Knee Procedures 

with Principal Diagnosis of Infection 

with MCC), MS–DRG 486 (Knee 

Procedures with Principal Diagnosis of 

Infection with CC), MS–DRG 487 (Knee 

Procedures with Principal Diagnosis of 

Infection without CC), MS–DRG 488 

(Knee Procedures without Principal 

Diagnosis of Infection with CC or MCC), 

and MS–DRG 489 (Knee Procedures 

without Principal Diagnosis of Infection 

without CC). 

Given the very similar resource 

requirements of MS–DRG 485 and the 

fact that these DRGs also contain knee 

procedures, we moved codes 00.83 and 

00.84 out of MS–DRGs 466, 467, and 

468 and into MS–DRGs 485, 486, 487, 

488, and 489. We also indicated that we 

would continue to monitor the revision 

MS–DRGs to determine if additional 

modifications are needed. 

d. AAHKS’ Recommendations for FY 

2009 

The AAHKS’ current request involves 

the following recommendations: 

• That CMS consolidate and reassign 

certain joint procedures that have a 

diagnosis of an infection or malignancy 

into MS–DRGs that are similar in terms 

of clinical characteristics and resource 

utilization. The AAKHS further 

identifies groups called Stage 1 and 2 

procedures that it believes require 

significant differences in resource 

utilization. 

• That CMS reclassify certain specific 

joint procedures, which AAHKS refers 

to as ‘‘routine,’’ out of their current MS–

DRG assignments. The three joint 

procedures that AAHKS classifies as 

‘‘routine’’ are codes 00.73 (Revision of 

hip replacement, acetabular liner and/or 

femoral head only), 00.83 (Revision of 

knee replacement, patellar component), 

and 00.84 (Revision of total knee 

replacement, tibial insert (liner)). The 

AAHKS advocated removing these three 

‘‘routine’’ procedures from the following 

DRGs: MS–DRGs 466, 467, and 468, 

MS–DRGs 485, 486, and 487, and MS–

DRGs 488 and 489. The AAHKS refers 

to MS–DRGs 466, 467, and 468 as 

‘‘complex’’ revision MS–DRGs, and 

recommended that the three ‘‘routine’’

procedures be moved out of MS–DRGs 

466, 467, and 468 and MS–DRGs 485, 

486, and 489 and into MS–DRGs 469 

and 470 (Major Joint Replacement or 

Reattachment of Lower Extremity with 

and without MCC, respectively). The 

AAHKS contended that the three 

‘‘routine’’ procedures have similar 

clinical characteristics and resource 

utilization to those in MS–DRGs 469. 

The recommendations suggested by 

AAHKS are quite complex and involve 

a number of specific code lists and MS–

DRG assignment changes. We discuss 

each of these requests in detail below. 

(1) AAHKS Recommendation 1: 

Consolidate and reassign patients with 


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hip and knee prosthesis related 

infections or malignancies. 

The AAHKS pointed out that deep 

infection is one of the most devastating 

complications associated with hip and 

knee replacements. These infections 

have been reported to occur in 

approximately 0.5 percent to 3 percent 

of primary and 4 percent to 6 percent of 

revision total joint replacement 

procedures. These infections often 

result in the need for multiple 

reoperations, prolonged use of 

intravenous and oral antibiotics, 

extended inpatient and outpatient 

rehabilitation, and frequent followup 

visits. Furthermore, clinical outcomes 

following single- and two-stage revision 

total joint arthroplasty procedures have 

been less favorable than revision for 

other causes of failure not associated 

with infection. 

In addition to the clinical impact, the 

AAHKS stated that infected total joint 

replacement procedures also have 

substantial economic implications for 

patients, payers, hospitals, physicians, 

and society in terms of direct medical 

costs, resource utilization, and the 

indirect costs associated with lost wages 

and productivity. The AAHKS stated 

that the considerable resources required 

to care for these patients have resulted 

in a strong financial disincentive for 

physicians and hospitals to provide care 

for patients with infected total joint 

replacements, an increased economic 

burden on the high volume tertiary care 

referral centers where patients with 

infected hip replacement procedures are 

frequently referred for definitive 

management. The AAHKS further stated 

that, in some cases, there are 

compromised patient outcomes due to 

treatment delays as patients with 

infected joint replacements seek 

providers who are willing to care for 

them. 

Once a deep infection of a total joint 

prosthesis is identified, the first stage of 

treatment involves a hospital admission 

for removal of the infected prosthesis 

and debridement of the involved bone 

and surrounding tissue. During the same 

procedure, an antibiotic-impregnated 

cement spacer is typically inserted to 

maintain alignment of the limb during 

the course of antibiotic therapy. The 

patient is then discharged to a 

rehabilitation facility/nursing home (or 

to home if intravenous therapy can be 

safely arranged for the patient) for a 6- 

week course of IV antibiotic treatment 

until the infection has cleared. 

After the completion of antibiotic 

therapy, the hip or knee may be 

reaspirated to look for evidence of 

persistent infection or eradication of 

infection. A second stage procedure is 

then undertaken, where the patient is 

readmitted, the hip or knee is 

reexplored, and the cement spacer 

removed. If there are no signs of 

persistent infection, a hip or knee 

prosthesis is reimplanted, often using 

bone graft and costly revision implants 

in order to address extensive bone loss 

and distorted anatomy. Thus, the entire 

course of treatment for patients with 

infected joint replacements is 4 to 6 

months, with an additional 6 to 12 

months of rehabilitation. Furthermore, 

clinical outcomes following revision for 

infection are poor relative to outcomes 

following revision for other aseptic 

causes. The AAHKS noted that patients 

with bone malignancy have a similar 

treatment focus—surgery to remove 

diseased tissue, chemotherapy to treat 

the malignancy, and implantation of the 

new prosthesis. They also have similar 

resource use. For simplicity, the 

AAHKS’ discussion focused on infected 

joint prostheses, but it suggested that 

the issues it raises would apply to 

patients with a malignancy as well. 

The AAHKS stated that these patients 

are currently grouped in multiple MS–

DRGs, and the cases are often ‘‘outliers’’

in each one. AAHKS proposed to 

consolidate these patients with similar 

clinical characteristics and treatment 

into MS–DRGs reflective of their 

resource utilization. 

The AAHKS states that these more 

severe patients are currently classified 

into the following MS–DRGs: 

• MS–DRGs 463, 463, and 465 

(Wound Debridement and Skin Graft 

Excluding Hand, for MusculoskeletalConnective Tissue Disease with MCC, 

with CC, without CC/MCC, respectively) 

• MS–DRGs 480, 481, and 482 (Hip 

and Femur Procedures Except Major 

Joint with MCC, with CC, without CC/ 

MCC, respectively) 

• MS–DRGs 485, 486, and 487 (Knee 

Procedures with Principal Diagnosis of 

Infection and with MCC, with CC, and 

without CC/MCC, respectively) 

• MS–DRGs 488 and 489 (Knee 

Procedures without Principal Diagnosis 

of Infection and with CC/MCC and 

without CC/MCC, respectively) 

• MS–DRGs 495, 496, and 497 (Local 

Excision and Removal of Internal 

Fixation Devices Except Hip and Femur 

with MCC, with CC, and without CC/ 

MCC, respectively) 

• Other MS–DRGs (The AAHKS did 

not specify what these other MS–DRGs 

were.) 

The AAHKS indicated that cases with 

the severe diagnoses of infections, 

neoplasms, and structural defects have 

similarities. These similarities are due 

to an overlap of a severe diagnosis 

(including a principal diagnosis of code 

996.66 (Infected joint prosthesis) and 

the resulting need for more extensive 

surgical procedures. The AAHKS stated 

that currently these patients are grouped 

into MS–DRGs by major procedure 

alone. AAHKS recommended that these 

cases be grouped into what it refers to 

as Stages 1 and 2 as follows: 

• Stage 1 would include the removal 

of an infected prosthesis and includes 

cases in MS–DRGs 463, 464, and 465, 

480, 481, and 482, 485 through 489, and 

495, 496, and 497. Stage 1 joint 

procedure codes would include codes 

80.05 (Arthrotomy for removal of 

prosthesis, hip), 80.06 (Arthrotomy for 

removal of prosthesis, knee), 00.73 

(Revision of hip replacement, acetabular 

liner and/or femoral head only), and 

00.84 (Revision of knee replacement, 

tibial insert (liner)). 

• Stage 2 would include the implant 

of a new prosthesis and includes cases 

in MS–DRGs 461 and 462, 463, 464, and 

465, 466, 467, and 468, and 469 and 

470. Stage 2 joint procedure codes 

would include codes 00.70 (Revision of 

hip replacement, both acetabular and 

femoral components), 00.71 (Revision of 

hip replacement, acetabular 

component), 00.72 (Revision of hip 

replacement, femoral component), 00.80 

(Revision of knee replacement, total (all 

components)), 00.81 (Revision of knee 

replacement, tibial component), 00.82 

(Revision of knee replacement, femoral 

component), 00.85 (Resurfacing hip, 

total, acetabulum and femoral head), 

00.86 (Resurfacing hip, partial, femoral 

head), 00.87 (Resurfacing hip, partial, 

acetabulum), 81.51 (Total hip 

replacement), 81.52 (Partial hip 

replacement), 81.53 (Revise hip 

replacement), 81.54 (Total knee 

replacement), 81.55 (Revise knee 

replacement), and 81.56 (Total ankle 

replacement). 

As stated earlier, the AAHKS 

recommended patients with certain 

more severe diagnoses be grouped into 

a higher severity level. While most of 

AAHKS’ comments focused on joint 

replacement patients with infections, 

the AAHKS also believed that patients 

with certain neoplasms require greater 

resources. To this group of infections 

and neoplasms, the AAHKS 

recommended the addition of four codes 

that capture acquired deformities. The 

AAHKS believed that these codes would 

capture admissions for the second stage 

of the treatment for an infected joint. 

The AAHKS stated that the significance 

of these diagnoses when they are 

reported as the principal code position 

was significant in predicting resource 

utilization. However, the impact was 

not as significant when the diagnosis 

was reported as a secondary diagnosis. 


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The AAHKS recommended that patients 

with one of the following infection/ 

neoplasm/defect principal diagnosis 

codes be segregated into a higher 

severity level. 

Stage 1 Infection/Neoplasm/Defect 

Principal Diagnosis Codes 

• 170.7 (Malignant neoplasm of long 

bones of lower limb) 

• 171.3 (Malignant neoplasm of soft 

tissue, lower limb, including hip) 

• 711.05 (Pyogenic arthritis, pelvic 

region and thigh) 

• 711.06 (Pyogenic arthritis, lower 

leg) 

• 730.05 (Acute osteomyelitis, pelvic 

region and thigh) 

• 730.06 (Acute osteomyelitis, lower 

leg) 

• 730.15 (Chronic osteomyelitis, 

pelvic region and thigh) 

• 730.16 (Chronic osteomyelitis, 

lower leg) 

• 730.25 (Unspecified osteomyelitis, 

pelvic region and thigh) 

• 730.26 (Unspecified osteomyelitis, 

lower leg) 

• 996.66 (Infection and inflammatory 

reaction due to internal joint prosthesis) 

• 996.67 (Infection and inflammatory 

reaction due to other internal 

orthopedic device, implant, and graft) 

Stage 2 Infection/Neoplasm/Defect 

Principal Diagnosis Codes (an Asterisk * 

Shows the Diagnoses Included in Stage 

2 That Were Not Listed in Stage 1) 

• 170.7 (Malignant neoplasm of long 

bones of lower limb) 

• 171.3 (Malignant neoplasm of soft 

tissue, lower limb, including hip) 

• 198.5 (Secondary malignant 

neoplasm of bone and bone marrow) * 

• 711.05 (Pyogenic arthritis, pelvic 

region and thigh) 

• 711.06 (Pyogenic arthritis, lower 

leg) 

• 730.05 (Acute osteomyelitis, pelvic 

region and thigh) 

• 730.06 (Acute osteomyelitis, lower 

leg) 

• 730.15 (Chronic osteomyelitis, 

pelvic region and thigh) 

• 730.16 (Chronic osteomyelitis, 

lower leg) 

• 730.25 (Unspecified osteomyelitis, 

pelvic region and thigh) 

• 730.26 (Unspecified osteomyelitis, 

lower leg) 

• 736.30 (Acquired deformities of 

hip, unspecified deformity) 

• 736.39 (Other acquired deformities 

of hip) * 

• 736.6 (Other acquired deformities of 

knee) * 

• 736.89 (Other acquired deformities 

of other parts of limbs) * 

• 996.66 (Infection and inflammatory 

reaction due to internal joint 

prosthesis) * 

• 996.67 (Infection and inflammatory 

reaction due to other internal 

orthopedic device, implant, and graft) * 

For the Stage 2 procedures, AAHKS 

also suggested the use of the following 

secondary diagnosis codes to assign the 

cases to a higher severity level. These 

conditions would not be the reason the 

patient was admitted to the hospital. 

They would instead represent secondary 

conditions that were also present on 

admission or conditions that were 

diagnosed after admission. 

Stage 2 Infection/Neoplasm/Defect 

Secondary Diagnosis Codes 

• 170.7 (Malignant neoplasm of long 

bones of lower limb) 

• 171.3 (Malignant neoplasm of soft 

tissue, lower limb, including hip) 

• 711.05 (Pyogenic arthritis, pelvic 

region and thigh) 

• 711.06 (Pyogenic arthritis, lower 

leg) 

• 730.05 (Acute osteomyelitis, pelvic 

region and thigh) 

• 730.06 (Acute osteomyelitis, lower 

leg) 

• 730.15 (Chronic osteomyelitis, 

pelvic region and thigh) 

• 730.16 (Chronic osteomyelitis, 

lower leg) 

• 730.25 (Unspecified osteomyelitis, 

pelvic region and thigh) 

• 730.26 (Unspecified osteomyelitis, 

lower leg) 

• 996.66 (Infection and inflammatory 

reaction due to internal joint prosthesis) 

• 996.67 (Infection and inflammatory 

reaction due to other internal 

orthopedic device, implant, and graft) 

(2) AAHKS Recommendation 2: 

Reclassify certain specific joint 

procedures. 

The AAHKS suggested that cases with 

the infection/neoplasm/defect diagnoses 

listed above be segregated according to 

the Stage 1 and 2 groups listed above. 

The AAHKS made one final 

recommendation concerning joint 

procedure cases with infections. It 

identified a subset of patients who had 

a principal diagnosis of code 996.66 

(Infection and inflammatory reaction 

due to internal joint prosthesis) and 

who also had a secondary diagnosis of 

sepsis or septicemia. The AAHKS 

believed that these patients are for the 

most part admitted with both the joint 

infection and sepsis/septicemia present 

at the time of admission. The codes for 

sepsis/septicemia are classified as MCCs 

under MS–DRGs. The AAHKS believed 

it is inappropriate to count the 

secondary diagnosis of sepsis/ 

septicemia as an MCC when it is 

reported with code 996.66. The AAHKS 

believed that counting sepsis and 

septicemia as an MCC results in double 

counting the infections. It believed that 

the joint infection and septicemia are 

the same infection. The AAHKS 

recommended that the following sepsis 

and septicemia codes not count as an 

MCC when reported with code 996.66: 

• 038.0 (Streptococcal septicemia) 

• 038.10 (Staphylococcal septicemia, 

unspecified) 

• 038.11 (Staphylococcal aureus 

septicemia) 

• 038.19 (Other staphylococcal 

septicemia) 

• 038.2 (Pneumococcal septicemia 

[streptococcus pneumonia septicemia]) 

• 038.3 (Septicemia due anaerobes) 

• 038.40 (Septicemia due to gramnegative organisms) 

• 038.41 (Hemophilus influenzae [H. 

Influenzae]) 

• 038.42 (Escherichia coli [E. Coli]) 

• 038.43 (Pseudomonas) 

• 038.44 (Serratia) 

• 038.49 (Other septicemia due to 

gram-negative organisms) 

• 038.8 (Other specified septicemias) 

• 038.9 (Unspecified septicemia) 

• 995.91 (Sepsis) 

• 995.92 (Severe sepsis) 

e. CMS’ Response to AAHKS’

Recommendations 

The MS–DRG modifications proposed 

by the AAHKS are quite complex and 

have many separate parts. We made 

changes to the MS–DRGs in FY 2008 as 

a result of a request by the AAHKS as 

discussed above, to recognize two types 

of partial knee replacements as less 

complex procedures. We have no data 

on how effective the new MS–DRGs for 

joint procedures are in differentiating 

patients with varying degrees of 

severity. Therefore, as we indicated in 

the proposed rule, we analyzed data 

reported prior to the adoption of MS–

DRGs to analyze each of the 

recommendations made. We begin our 

analysis by focusing first on the more 

simple aspects of the recommendations 

made by the AAHKS. 

(1) Changing the MS–DRG assignment 

for codes 00.73, 00.83, and 00.84. 

As discussed previously, in FY 2008, 

the AAHKS recommended that CMS 

classify certain joint procedures as 

either routine or complex. We examined 

the data for these cases and found that 

the following two codes had 

significantly lower charges than the 

other joint revisions: 00.83 (Revision of 

knee replacement, patellar component) 

and 00.84 (Revision of knee 

replacement, tibial insert (liner)). 

Therefore, we moved these two codes to 

MS–DRGs 485, 486, and 487, and MS–

DRGs 488 and 489. 

As a result of AAHKS’ most recent 

recommendations, we once again 


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examined claims data for these two knee 

procedures (codes 00.83 and 00.84) as 

well as its request that we move code 

00.73 (Revision of hip replacement, 

acetabular liner and/or femoral head 

only). Code 00.73 is assigned to MS–

DRGs 466, 467, and 468. The following 

tables show our findings. 

MS–DRG Number of 

cases 

Average 

length of stay 

Average 

charges 

485—All Cases ............................................................................................................................ 1,122 12.20 $64,672.47 

485—Cases with Code 00.83 or 00.84 ....................................................................................... 179 11.83 64,446.68 

485—Cases without Code 00.83 or 00.84 .................................................................................. 943 12.27 64,715.33 

486—All Cases ............................................................................................................................ 2,061 8.03 40,758.55 

486—Cases with Code 00.83 or 00.84 ....................................................................................... 464 7.34 39,864.39 

486—Cases without Code 00.83 or 00.84 .................................................................................. 1,597 8.23 41,018.34 

487—All Cases ............................................................................................................................ 1,236 5.67 29,180.88 

487—Cases with Code 00.83 or 00.84 ....................................................................................... 284 5.61 31,231.79 

487—Cases without Code 00.83 or 00.84 .................................................................................. 952 5.68 28,569.06 

488—All Cases ............................................................................................................................ 2,374 5.17 30,180.80 

488—Cases with Code 00.83 or 00.84 ....................................................................................... 754 4.09 28,432.06 

488—Cases without Code 00.83 or 00.84 .................................................................................. 1,620 5.67 30,994.73 

489—All Cases ............................................................................................................................ 5,493 3.04 21,385.67 

489—Cases with Code 00.83 or 00.84 ....................................................................................... 2,154 3.07 23,122.18 

489—Cases without Code 00.83 or 00.84 .................................................................................. 3,339 3.03 20,265.44 

469—All Cases ............................................................................................................................ 29,030 8.17 56,681.64 

470—All Cases ............................................................................................................................ 385,123 3.93 36,126.23 

466—All Cases ............................................................................................................................ 3,888 9.18 76,015.66 

466—Cases with Code 00.73 ...................................................................................................... 273 10.02 71,293.33 

466—Cases without Code 00.73 ................................................................................................. 3,616 9.12 76,372.06 

467—All Cases ............................................................................................................................ 13,551 5.50 53,431.63 

467—Cases with Code 00.73 ...................................................................................................... 1,078 5.94 43,635.63 

467—Cases without Code 00.73 ................................................................................................. 12,484 5.47 54,284.13 

468—All Cases ............................................................................................................................ 19,917 3.94 44,055.62 

468—Cases with Code 00.73 ...................................................................................................... 1,688 3.93 33,449.22 

468—Cases without Code 00.73 ................................................................................................. 18,232 3.94 45,037.09 

469—All Cases ............................................................................................................................ 29,030 8.17 56,681.64 

470—All Cases ............................................................................................................................ 385,123 3.93 36,126.23 

The tables show that codes 00.73, 

00.83, and 00.84 are appropriately 

assigned to their current MS–DRGs. The 

data do not support moving these three 

codes to MS–DRGs 469 and 470. 

Therefore, we did not propose a change 

of MS–DRG assignment for codes 00.73, 

00.83, and 00.84 for FY 2009. 

(2) Excluding sepsis and septicemia 

from being an MCC with code 996.66. 

There are cases where a patient may 

be admitted with an infection of a joint 

prosthesis (code 996.66) and also have 

sepsis. In these cases, it may be possible 

to perform joint procedures as suggested 

by AAHKS. However, in other cases, a 

patient may be admitted with an 

infection of a joint prosthesis and then 

develop sepsis during the stay. Because 

our current data do not indicate whether 

a condition is present on admission, we 

could not determine whether or not the 

sepsis occurred after admission. Our 

data have consistently shown that cases 

of sepsis and septicemia require 

significant resources. Therefore, we 

classified the sepsis and septicemia 

codes as MCCs. Our clinical advisors do 

not believe it is appropriate to exclude 

all cases of sepsis and septicemia that 

are reported as a secondary diagnosis 

with code 996.66 from being classified 

as a MCC. We discuss septicemia as part 

of the HAC provision under section II.F. 

of the preamble of the proposed rule 

and this final rule. For the purposes of 

classifying sepsis and septicemia as 

non-CCs when reported with code 

996.66, we do not support this 

recommendation. Therefore, in the 

proposed rule, we did not propose that 

the sepsis and septicemia codes be 

added to the CC exclusion list for code 

996.66. 

(3) Differences between Stage 1 and 2 

cases with severe diagnoses. 

As indicated in the proposed rule, we 

next examined data on AAHKS’

suggestion that there are significant 

differences in resource utilization for 

cases they refer to as Stage 1 and 2. 

AAHKS stated that this is particularly 

true for those with infections, 

neoplasms, or structural defects. We 

used the list of procedure codes listed 

above that AAHKS describes as Stage 1 

and 2 procedures. We also used 

AAHKS’ designated lists of Stage 1 and 

2 principal diagnosis codes to examine 

this proposal. This proposal entails 

moving cases with a Stage 1 or 2 

principal diagnosis and procedure out 

of their current MS–DRG assignment in 

the following 19 MS–DRGs and into a 

newly consolidated set of MS–DRGs: 

MS–DRGs 463, 464, and 465, 480, 481, 

and 482, 485 through 489, and 495, 496, 

and 497. 

As can be seen from the information 

below, there was not a significant 

difference in average charges between 

these Stage 1 and Stage 2 cases that have 

an MCC. 

Stage 1 Total cases Average 

length of stay 

Average 

charges 

Stage 1 Cases With Infection, Neoplasm, or Structural Defect 

With MCC .................................................................................................................................... 1,306 14.1 $79,232 

Without MCC ............................................................................................................................... 4,115 7.6 $44,716 


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Stage 1 Total cases Average 

length of stay 

Average 

charges 

Stage 2 Cases With Infection, Neoplasm, or Structural Defect 

With MCC .................................................................................................................................... 1,072 10.9 $80,781 

Without MCC ............................................................................................................................... 5,413 6.0 $57,355 

Average charges for Stage 1 cases with 

an MCC was $79,232 compared to 

$80,781 for Stage 2. Stage 1 cases 

without an MCC had average charges of 

$44,716 compared to $57,355. These 

data do not support reconfiguring the 

current MS–DRGs based on this new 

subdivision. 

(4) Moving joint procedure cases to 

new MS–DRGs based on secondary 

diagnoses of infection. 

We examined AAHKS’

recommendation that Stage 2 joint cases 

with specific secondary diagnoses of 

infection or neoplasm be moved out of 

their current MS–DRG assignments and 

into a newly constructed MS–DRG. We 

indicated in the proposed rule that we 

are reluctant to make this type of 

significant DRG change to the joint MS–

DRGs based on the presence of a 

secondary diagnosis. This results in the 

movement of cases out of MS–DRGs 

which were configured based on the 

reason for the admission (for example, 

principal diagnosis) and surgery. The 

cases would instead be assigned based 

on conditions that are reported as 

secondary diagnoses. In some cases, the 

infection may have developed or be 

diagnosed during the admission. This 

would be a significant logic change to 

the MS–DRGs for joint procedures. This 

logic change would involve setting a 

new precedent of reassigning cases to a 

different MS–DRG if an infection is 

reported as a secondary diagnosis. The 

secondary diagnosis of infection could 

be present on admission or develop after 

the admission. Currently, secondary 

diagnoses are evaluated to determine if 

they are an MCC or CC, and then they 

can lead to the case being assigned to a 

higher severity level. The secondary 

diagnoses do not currently lead to the 

removal of the case from the MS–DRG 

and reassignment to a new MS–DRG. 

We have not had an opportunity to 

examine claims data based on hospital 

discharges under the MS–DRGs which 

began October 1, 2008. Our clinical 

advisors believe it would be more 

appropriate to wait for data under the 

new MS–DRG system to determine how 

well the new severity levels are 

addressing accurate payment for these 

cases before considering this approach 

to assigning cases to a MS–DRG. 

(5) Moving cases with infection, 

neoplasms, or structural defects out of 

19 MS–DRGs and into two newly 

developed MS–DRGs. 

The last recommended by AAHKS 

that we considered was moving cases 

with a principal diagnosis of infection, 

neoplasm, or structural defect from their 

list of Stage 1 and 2 diagnoses and 

consolidating them into newly 

constructed and modified MS–DRGs. 

AAHKS could not identify an existing 

set of MS–DRGs with similar resource 

utilizations into which the Stage 1 cases 

could be assigned. Therefore, the 

AAHKS recommended that CMS create 

three new MS–DRGs for Stage 1 cases 

with infections, neoplasms and 

structural defects which would be titled 

‘‘Arthrotomy/Removal/Component 

exchange of Infected Hip or Knee 

Prosthesis with MCC, with CC, and 

without CC/MCC’’, respectively. 

The AAHKS recommended moving 

Stage 2 cases out of MS–DRGs 466, 467, 

and 468, and 469 and 470 and into MS–

DRGs 461 and 462. AAHKS 

recommended that MS–DRGs 461 and 

462 be renamed ‘‘Major Joint Procedures 

of Lower Extremity—Bilateral/Multiple/ 

Infection/Malignancy’’. 

As we indicated in the proposed rule, 

in reviewing these proposed changes, 

we had a number of concerns. The first 

concern was that these proposed 

changes would result in the removal of 

cases with varying average charges from 

19 current MS–DRGs and consolidating 

them into two separate sets of MS–

DRGs. As the data below indicate, the 

average charges vary from as low as 

$29,181 in MS–DRG 487 to $81,089 in 

MS–DRG 463. Furthermore, the average 

charges for these infection/neoplasm/ 

structural defect cases are very similar 

to other cases in their respective MS–

DRG assignments for many of these MS–

DRGs. There are cases where the average 

charges are higher. In MS–DRG 469 and 

470, the infection/neoplasm/structural 

defect cases are significantly higher. 

However, there are only 136 cases in 

MS–DRG 469 out of a total of 29,030 

cases with these diagnoses. There are 

only 673 cases in MS–DRG 470 out of 

a total of 385,123 cases with one of 

these diagnoses. The table below clearly 

demonstrates the wide variety of 

charges for cases with these diagnoses. 

MS–DRGs Number of 

cases 

Average 

length of stay 

Average 

charges 

463—All Cases ............................................................................................................................ 4,747 16.25 $73,405.46 

463—Cases with PDX of Infection/Malignancy/React ................................................................ 1,009 17.79 81,089.07 

464—All Cases ............................................................................................................................ 5,499 10.21 44,387.73 

464—Cases with PDX of Infection/Malignancy/React ................................................................ 1,420 10.59 46,800.60 

465—All Cases ............................................................................................................................ 2,271 5.95 26,631.57 

465—Cases with PDX of Infection/Malignancy/React ................................................................ 557 10.59 29,816.40

466—All Cases ............................................................................................................................ 3,888 9.18 76,015.66 

466—Cases with PDX of Infection/Malignancy/React ................................................................ 890 10.67 79,334.69

467—All Cases ............................................................................................................................ 13,551 5.50 53,431.63 

467—Cases with PDX of Infection/Malignancy/React ................................................................ 2,401 6.71 58,506.86 

468—All Cases ............................................................................................................................ 19,917 3.94 44,055.62 

468—Cases with PDX of Infection/Malignancy/React ................................................................ 1,994 4.76 54,322.03 

469—All Cases ............................................................................................................................ 29,030 8.17 56,681.64 

469—Cases with PDX of Infection/Malignancy/React ................................................................ 136 11.74 85,256.07

470—All Cases ............................................................................................................................ 385,123 3.93 36,126.23 

470—Cases with PDX of Infection/Malignancy/React ................................................................ 673 6.44 59,676.31 

480—All Cases ............................................................................................................................ 25,391 9.32 52,281.65 

480—Cases with PDX of Infection/Malignancy/React ................................................................ 880 14.53 76,355.15

481—All Cases ............................................................................................................................ 68,655 5.94 32,963.64 


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MS–DRGs Number of 

cases 

Average 

length of stay 

Average 

charges 

481—Cases with PDX of Infection/Malignancy/React ................................................................ 878 8.78 48,655.30 

482—All Cases ............................................................................................................................ 45,832 4.86 27,266.20 

482—Cases with PDX of Infection/Malignancy/React ................................................................ 577 6.19 37,572.38 

485—All Cases ............................................................................................................................ 1,122 12.20 64,672.47 

485—Cases with PDX of Infection/Malignancy/React ................................................................ 1,122 12.20 64,672.47 

486—All Cases ............................................................................................................................ 2,061 8.03 40,758.55 

486—Cases with PDX of Infection/Malignancy/React ................................................................ 2,061 8.03 40,758.55 

487—All Cases ............................................................................................................................ 1,236 5.67 29,180.88 

487—Cases with PDX of Infection/Malignancy/React ................................................................ 1,236 5.67 29,180.88 

488—All Cases ............................................................................................................................ 2,374 5.17 30,180.80 

488—Cases with PDX of Infection/Malignancy/React ................................................................ 31 7.13 50,155.42 

489—All Cases ............................................................................................................................ 5,493 3.04 21,385.67 

489—Cases with PDX of Infection/Malignancy/React ................................................................ 36 3.72 35,313.84 

495—All Cases ............................................................................................................................ 1,860 10.94 55,103.91 

495—Cases with PDX of Infection/Malignancy/React ................................................................ 1,025 11.74 59,453.69 

496—All Cases ............................................................................................................................ 5,203 5.95 32,177.29 

496—Cases with PDX of Infection/Malignancy/React ................................................................ 2,759 6.98 36,940.99 

497—All Cases ............................................................................................................................ 6,259 3.01 21,445.60 

497—Cases with PDX of Infection/Malignancy/React ................................................................ 1,500 5.18 29,966.98 

Given the wide variety of charges and 

the small number of cases where there 

are differences in charges, we do not 

believe the data support the AAKHS’

recommendations. The data do not 

support removing these cases from the 

19 MS–DRGs above and consolidating 

them into a new set of MS–DRGs, either 

newly created, or by adding them to 

MS–DRG 461 or 462, which have 

average charges of $80,718 and $57,355, 

respectively. 

A second major concern involves 

redefining MS–DRGs 461 and 462 is that 

these MS–DRGs currently capture 

bilateral and multiple joint procedures. 

These MS–DRGs were specifically 

created to capture a unique set of 

patients who undergo procedures on 

more than one lower joint. Redefining 

these MS–DRGs to include both single 

and multiple joints undermines the 

clinical coherence of this MS–DRG. It 

would create a widely diverse group of 

patients based on either a list of specific 

diagnoses or the fact that the patient had 

multiple lower joint procedures. 

Comment: While we did not receive 

any public comments specifically 

supporting the reassignment of codes 

00.73, 00.83, and 00.84 to MS–DRGs 469 

and 470, several commenters 

acknowledged CMS’ discussion of the 

FY 2008 implementation of MS–DRGs 

and lack of data to support major MS–

DRG changes for FY 2009. The 

commenters accepted CMS’ proposal of 

not making significant revisions to the 

MS–DRGs until claims data under the 

new MS–DRG system are available. 

Several commenters suggested an 

alternative way of capturing the more 

resource intensive joint procedure cases, 

particularly those involving an infected 

joint. The commenters recommended 

moving codes 80.05 (Arthrotomy for 

removal of hip prosthesis) and 80.06 

(Arthrotomy for removal of knee 

prosthesis) into MS–DRGs 463 through 

465 (Wound Debridement and Skin 

Graft Except Hand, for MusculoskeletalConnective Tissue Disease with MCC, 

with CC, and without CC/MCC, 

respectively). (We note that code 80.05 

is currently assigned to MS–DRGs 480 

through 482 (Hip and Femur Procedures 

Except Major Joint with MCC, with CC, 

and without CC/MCC, respectively). 

Code 80.06 is currently assigned to MS–

DRGs 495 through 497 (Local Excision 

and Removal Internal Fixation Devices 

Except Hip and Femur with MCC, with 

CC, and without CC/MCC, 

respectively).) 

The commenters stated that a deep 

infection is one of the most devastating 

complications associated with hip and 

knee joint replacements, and that these 

cases require increased costs and 

resource utilization. The commenters 

believed that there is a strong financial 

disincentive for physicians and 

hospitals to provide care for patients 

with infected joint replacements. They 

indicated that this leads to an increased 

economic burden on tertiary care 

referral centers where patients with 

infected joint replacements are 

frequently referred for definitive 

management. 

The commenters believed that codes 

80.05 and 80.06 were a good proxy for 

cases of infected joints containing a 

previously implanted joint prosthesis. 

The commenters suggested that moving 

these two codes was considerably less 

complex than the previously discussed 

revisions to the joint DRGs. They also 

believed these two codes clearly 

captured cases with infected joint 

prostheses. The commenters believed 

that these codes would only be reported 

in cases of an infected joint where the 

previous infected prosthesis was 

removed and no new prosthesis was 

inserted. The commenters stated that 

when a previously implanted joint 

prosthesis is removed and replaced with 

a new prosthesis, coders assign only the 

code for the insertion of the new 

prosthesis. They added that they do not 

routinely assign an additional code for 

the removal of the joint prosthesis (code 

80.05 or 80.06). The commenters also 

stated that when there is an infected 

joint, the joint prosthesis may be 

removed and extensive debridement 

may be provided involving bone and 

surrounding tissue. The commenters 

further stated that an antibioticimpregnated cement spacer may be 

inserted to maintain alignment of the 

limb during the course of antibiotic 

therapy. According to the commenters, 

the new prosthesis will not be inserted 

until such time as the infection is fully 

resolved. In this case, the commenter 

stated that code 80.05 or 80.06 would be 

reported. 

The commenters believed that when 

codes 80.05 or 80.06 are reported to 

capture the removal of a joint 

prosthesis, one can assume that the 

patient had a joint infection. Therefore, 

the commenters requested that codes 

80.05 and 80.06 be reassigned to MS–

DRGs 463, 464, and 465 because wound 

debridement is a treatment for infected 

joints. 

Response: We agree with the 

commenters that we should not move 

codes 00.73, 00.83, and 00.84 to MS–

DRGs 469 and 470. Our data do not 

support this change. Therefore, in this 

final rule for FY 2009, we are not 

moving codes 00.73, 00.83, and 00.84 to 

MS–DRGs 469 and 470. 


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We evaluated the alternative 

suggestion of moving codes 80.05 and 

80.06 into MS–DRGs 463, 464, and 465. 

We disagree with the suggestion that the 

use of codes 80.05 and 80.06 serves as 

a good proxy for cases of infected joint 

prostheses. These two codes are used to 

capture the fact that a previously 

inserted joint prosthesis is now being 

removed. These prostheses can be 

removed for a variety of reason 

including wearing, breakage, and 

infection. Assuming that these cases are 

infections and then moving the cases to 

the debridement DRGs, MS–DRGs 463, 

464, and 465, is inappropriate. We 

acknowledge that when a patient has an 

infected joint prosthesis, the prosthesis 

may be removed and treatment for the 

infection instituted, such as 

debridement. However, the most 

specific way of identifying these cases 

would be to examine the diagnosis code 

for the presence of an infection and to 

look for a debridement procedure code. 

Furthermore, the current codes for 

removal of joint prostheses do not have 

specific instructions indicating that a 

coder must not report codes 80.05 and 

80.06 when also reporting one of the 

joint revision codes. While the coding 

index implies that one does not need to 

report a code for the removal of the 

prosthesis when it is being replaced, it 

is not precluded under the codes. If a 

code is reported for the removal of the 

previous joint prosthesis along with a 

code for the joint revision, the proposed 

logic change would result in the case 

being assigned to MS–DRGs 463, 464, 

and 465 even though the patient did not 

have an infection or a debridement 

performed. This DRG assignment would 

be a result of the surgical hierarchy 

which places the debridement DRGs 

(MS–DRGs 463, 464, and 465) higher 

than the joint revision DRGs (MS–DRGs 

466, 467, and 468). The proposed MS–

DRG logic change could lead to the 

misclassification of many joint revision 

cases that did not have an infection or 

a debridement into the debridement 

DRGs. 

We plan to discuss the need to 

provide more definitive coding notes 

under codes 80.05 and 80.06 at the 

September 24–25, 2008 ICD–9–CM 

Coordination and Maintenance 

Committee meeting to better clarify that 

one would not assign a code for the 

removal of a joint prosthesis if a new 

prosthesis is inserted. This clarification 

may be useful when considering future 

refinements to the joint procedure 

DRGs. However, at this time, we believe 

that codes 80.05 and 80.06 cannot be 

used as a definitive means of capturing 

cases of an infected joint prosthesis. We 

believe it is more appropriate to utilize 

diagnosis codes to clearly identify joint 

infections and debridement codes to 

indicate debridement. We will continue 

to examine means to better classify joint 

infections under the MS–DRGs. 

However, we are not moving codes 

80.05 and 80.06 into MS–DRGs 463, 

464, and 465 at this time. In addition, 

as stated previously, we also are not 

moving codes 00.73, 00.83, and 00.84 to 

MS–DRGs 469 and 470. We are making 

no changes to the joint procedure MS–

DRGs for FY 2009. 

Comment: One commenter provided 

additional recommendations to those 

discussed in the previous comment. The 

commenter stated that, after submission 

of his first comment, he had discovered 

a technical anomaly in the treatment of 

patients with hip and knee revision who 

also have a debridement that relates to 

the surgical hierarchy in MDC 8. The 

commenter pointed out that the wound 

debridement and skin graft MS–DRGs 

(MS–DRGs 463, 464, and 465) are 

currently sequenced before the revision 

of hip or knee replacement MS–DRGs 

(MS–DRGs 466, 467, and 468). 

Therefore, the commenter added, if 

codes are reported for revision of hip or 

knee replacement as well as for 

debridement of an infection, the case 

will be assigned to MS–DRGs 463, 467, 

or 465. The commenter believed that 

cases with both a debridement and a 

total revision prosthesis are more 

clinically similar to the revision cases 

than the debridement cases. Therefore, 

the commenter requested that the order 

of the wound debridement and skin 

graft MS–DRGs and the revision of the 

hip and knee MS–DRGs be reversed. 

Response: We agree that the current 

logic for wound debridement of 

infections results in cases being 

assigned to MS–DRGs 463, 467, and 

465. We also agree that joint revisions 

without debridements of infections are 

currently assigned to MS–DRGs 466, 

467, and 468. We point out that this 

logic results in patients with infections 

being assigned to the exact MS–DRGs 

requested by the commenters in the 

prior discussion. We believe this current 

logic results in the appropriate 

assignment of joint revisions with and 

without debridements. 

MS–DRGs 466, 467, and 468 contain 

revisions for both total and partial joint 

revisions. For instance, MS–DRGs 466, 

467, and 468 includes revisions of the 

total hip joint as well as a partial hip 

revision of only the femoral component. 

The commenter believed that a subset of 

the revision cases, those with a total 

revision, are more clinically similar to 

the revision cases than to the 

debridement cases. For this reason, the 

commenter recommended that the 

surgical hierarchy be changed so that 

revision of a hip and knee prosthesis in 

MS–DRGs 466, 467, and 468 should be 

placed above the debridement MS–

DRGs (MS–DRGs 463, 464, and 465). We 

point out that the surgical hierarchy is 

based on all cases within each DRG, not 

a subset. Furthermore, we have no MS–

DRG claims data on which to evaluate 

the need to change the surgical 

hierarchy based on this 

recommendation. We note that this 

discussion reinforces the point that the 

current codes for debridement of an 

infection and joint revisions seem to 

correctly assign cases to the most 

appropriate MS–DRG. Therefore, in this 

final rule, we are not making any 

changes to the joint procedure MS–

DRGs for FY 2009. We are deferring the 

examination of infections of joint 

replacements until such time as we have 

MS–DRG claims data. 

Comment: Several commenters 

expressed their concern about the joint 

procedure MS–DRGs. The commenters 

supported CMS’ efforts in the FY 2008 

IPPS final rule to better reflect the 

clinical needs of patients and the 

resources used by hospitals. The 

commenters particularly appreciated 

CMS’ adoption of the FY 2008 refined 

joint replacement MS–DRGs that better 

recognize patient acuity. However, the 

commenters believed that further 

refinements and additional MS–DRGs 

are needed for joint procedures. The 

commenters stated that the joint 

procedure MS–DRGs could be improved 

by making changes in FY 2009 to the 

MCC/CC classifications of specific codes 

that represent conditions impacting 

joint procedure patients. In particular, 

the commenters recommended the 

following changes: 

• Changing the following codes from 

non-CCs to CCs: 731.3 (Major osseous 

defects); 278.0 (Overweight and 

obesity); V85.35 (Body Mass index 35.0–

35.9, adult); V85.36 (Body Mass index 

36.0–36.9, adult); and V85.37 (Body 

Mass index 37.0–37.9, adult). 

• Changing the following codes from 

non-CCs to MCCs: 278.01 (Morbid 

obesity); V85.38 (Body Mass index 38.0–

38.9, adult); and V85.39 (Body Mass 

index 39.0–39.9, adult). 

• Changing code V85.40 (Body Mass 

index 40 and over, adult) from a CC to 

an MCC. 

The commenters also recommended 

that CMS continue to evaluate the MS–

DRG assignments for codes 00.73 

(Revision of hip replacement, acetabular 

liner and/or femoral head only) and 

00.84 (Revision of total knee 

replacement, tibial insert (liner)). The 

commenters stated that once CMS 

receives MS–DRG data, these data may 


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support reassigning these codes to other 

MS–DRGs. 

Response: While we acknowledge that 

the commenters were concerned about 

the effect that the obesity may have on 

joint patients, we point out that specific 

codes are classified as CCs or MCCs 

based on how they affect a wide range 

of patients. In the creation of the MS–

DRGs, clinical evaluation and claims 

data did support the current MCC/CC 

classifications for these codes. However, 

as we gain experience and data under 

the MS–DRG system, we will continue 

to examine ways to improve the joint 

procedure MS–DRGs. We do not have 

MS–DRG data to evaluate these MCC/CC 

reclassifications or the possible 

reassignment of codes 00.73 or 00.84 at 

this time. 

Therefore, in this final rule, we are 

not changing the MCC/CC 

classifications or the MS–DRG 

reassignments for codes 00.73, 00.83, or 

00.84 for FY 2009. We also are not 

making changes to the joint procedure 

MS–DRGs for FY 2009. 

f. Conclusion 

The AAHKS recommended a number 

of complicated, interrelated MS–DRG 

changes to the joint procedure MS–

DRGs. We have not yet had the 

opportunity to review data for these 

cases under the new MS–DRGs. We did 

analyze the impact of these 

recommendations using cases prior to 

the implementation of MS–DRGs. The 

recommendations were difficult to 

analyze because there were so many 

separate logic changes that impacted a 

number of MS–DRGs. We did examine 

each major suggestion separately, and 

found that our data and clinical analysis 

did not support making these changes. 

Therefore, in the FY 2009 IPPS 

proposed rule, we did not propose any 

revisions to the joint procedure MS–

DRGs for FY 2009, nor are we making 

any revisions in this final rule. We look 

forward to examining these issues once 

we receive data under the MS–DRG 

system. As we indicated in the proposed 

rule, we also welcome additional 

recommendations from the AAHKS and 

others on a more incremental approach 

to resolving its concerns about the 

ability of the current MS–DRGs to 

adequately capture differences in 

severity levels for joint procedure 

patients. 

5. MDC 18 (Infections and Parasitic 

Diseases (Systemic or Unspecified 

Sites): Severe Sepsis 

We received a request from a 

manufacturer to modify the titles for 

three MS–DRGs with the most 

significant concentration of severe 

sepsis patients. The manufacturer stated 

that modification of the titles will assist 

in quality improvement efforts and 

provide a better reflection on the types 

of patients included in these MS–DRGs. 

Specifically, the manufacturer urged 

CMS to incorporate the term ‘‘severe 

sepsis’’ into the titles of the following 

MS–DRGs that became effective October 

1, 2007 (FY 2008) 

• MS–DRG 870 (Septicemia with 

Mechanical Ventilation 96+ Hours) 

• MS–DRG 871 (Septicemia without 

Mechanical Ventilation 96+ Hours with 

MCC) 

• MS–DRG 872 (Septicemia without 

Mechanical Ventilation 96+ Hours 

without MCC) 

These MS–DRGs were created to 

better recognize severity of illness 

among patients diagnosed with 

conditions including septicemia, severe 

sepsis, septic shock, and systemic 

inflammatory response syndrome (SIRS) 

who are also treated with mechanical 

ventilation for a specified duration of 

time. 

According to the manufacturer, 

‘‘severe sepsis is a common, deadly and 

costly disease, yet the number of 

patients impacted and the outcomes 

associated with their care remain largely 

hidden within the administrative data 

set.’’ The manufacturer further noted 

that, although improvements have been 

made in the ICD–9–CM coding of severe 

sepsis (diagnosis code 995.92) and 

septic shock (diagnosis code 785.52), 

results of an analysis demonstrated an 

unacceptably high mortality rate for 

patients reported to have those 

conditions. The manufacturer believed 

that revising the titles to incorporate 

‘‘severe sepsis’’ will provide various 

clinicians and researchers the 

opportunity to improve outcomes for 

these patients. Therefore, the 

manufacturer recommended revising the 

current MS–DRG titles as follows: 

• Proposed Revised MS–DRG 870 

(Septicemia or Severe Sepsis with 

Mechanical Ventilation 96+ Hours) 

• Proposed Revised MS–DRG 871 

(Septicemia or Severe Sepsis without 

Mechanical Ventilation 96+ Hours with 

MCC) 

• Proposed Revised MS–DRG 872 

(Septicemia or Severe Sepsis without 

Mechanical Ventilation 96+ Hours 

without MCC) 

Comment: Many commenters 

applauded CMS for helping to promote 

quality improvement efforts for patients 

with severe sepsis. The commenters 

expressed their support for revising the 

titles of MS–DRGs 870, 871, and 872 to 

include the term ‘‘Severe Sepsis’’. The 

commenters agreed that MS–DRGs 870, 

871, and 872 already include a 

significant concentration of patients 

with severe sepsis and the change 

would increase awareness as well as 

facilitate research to improve care and 

patient outcomes. 

Response: As we indicated in the 

proposed rule, we agree that revising the 

current MS–DRG titles to include the 

term ‘‘Severe Sepsis’’ would better assist 

in the recognition and identification of 

this disease, which could lead to better 

clinical outcomes and quality 

improvement efforts. In addition, both 

severe sepsis (diagnosis code 995.92) 

and septic shock (diagnosis code 

785.52) are currently already assigned to 

these three MS–DRGs. Therefore, as we 

proposed, in this final rule we are 

revising the titles of MS–DRGs 870, 871, 

and 872 to reflect severe sepsis in the 

titles for FY 2009, as suggested and 

listed above. 

Comment: One commenter thanked 

CMS for the proposal to modify the 

titles for MS–DRGs 870, 871, and 872 by 

including the term ‘‘severe sepsis’’ and 

suggested that the title for MS–DRG 853 

(Infectious and Parasitic Diseases with 

O.R. Procedure with MCC) be modified 

to include the term ‘‘severe sepsis and 

other’’ as well. The commenter stated 

that, based on an analysis the 

commenter conducted using Medicare 

discharge data, the concentration of 

patients with severe sepsis (code 

995.92) and septic shock (code 785.52) 

in surgical MS–DRG 853 is comparable 

to the concentration of patients in 

medical MS–DRGs 870, 871, and 872. 

According to the commenter’s study, 

43.1 percent of cases in MS–DRG 853 

represent patients with severe sepsis. As 

a result of these findings, the 

commenter stated that revising the title 

for MS–DRG 853 to include the term 

‘‘severe sepsis and other’’ would be 

consistent with the rationale for 

proposing to modify the titles to MS–

DRGs 870, 871, and 872. The 

commenter asserted that this additional 

MS–DRG modification would also better 

assist in the recognition and 

identification of severe sepsis, leading 

to better clinical outcomes and quality 

improvement efforts. 

Response: We appreciate the 

commenter’s support for the proposal to 

modify the titles to MS–DRGs 870, 871, 

and 872 to include the term ‘‘Severe 

Sepsis’’. As stated above, we agree and 

are finalizing the proposed revisions to 

the titles for MS–DRGs 870, 871, and 

872 for FY 2009. 

With regard to modifying the title to 

MS–DRG 853, we point out that the 

MS–DRG titles generally do not reflect 

all of the diagnoses or conditions that 

may have a significant concentration of 

patients within that particular MS–DRG. 


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In other words, the foundation of the 

MS–DRG titles represents ‘‘DiagnosticRelated Groups’’ [emphasis added]. 

We have also received several 

comments acknowledging CMS’

discussion of the FY 2008 

implementation of MS–DRGs and the 

lack of data to support major MS–DRG 

changes at this time. Overall, the 

commenters accepted CMS’ proposal of 

not making significant revisions to the 

MS–DRGs until claims data under this 

new system are available. Therefore, as 

final policy for FY 2009, we are not 

making any change to the title for MS–

DRG 853. 

Comment: One commenter agreed 

with CMS’ proposal to revise the 

descriptions for MS–DRGs 870, 871, and 

872 by including the term ‘‘Severe 

Sepsis’’ in the titles. However, the 

commenter also suggested that CMS 

continue to study technological 

advances that may provide earlier 

identification of sepsis and clinical 

findings that indicate endotoxemia as a 

‘‘driver of morbidity and mortality in 

sepsis.’’

The commenter believed that it would 

be essential to continue making 

modifications to the MS–DRG 

classification system to recognize newer 

technologies and treatments. 

Specifically, this commenter asked that 

CMS consider endotoxemia as an MCC, 

stating this would be consistent with the 

current MS–DRG system’s designation 

of sepsis and septicemia as MCCs. 

Response: We acknowledge the 

commenter’s suggestion and appreciate 

the support for modifying the titles for 

MS–DRGs 870, 871, and 872 to include 

the term ‘‘Severe Sepsis’’. As mentioned 

earlier, we are finalizing the proposed 

revisions to the titles for these MS–

DRGs for FY 2009. 

In response to the commenter’s 

recommendation that the MS–DRG 

classification system continue to be 

modified for purposes of recognizing 

new technologies or treatments, we do 

have a process in place under which we 

annually evaluate data and specific 

issues brought to our attention to 

determine if revisions are warranted. 

We refer the reader to section II.B.2 of 

the preamble in this final rule for a 

discussion on this process, as well as 

section II.J. of the preamble of this final 

rule for a discussion on the new 

technology add-on payment policy. 

The term ‘‘endotoxemia’’ is defined as 

the presence of endotoxins in the blood. 

This condition (or finding) is 

established on the basis of a laboratory 

test. The ICD–9–CM coding system 

currently indexes the term 

‘‘endotoxemia’’ with the instructional 

note to ‘‘code to condition’’. This 

instruction refers the coder to seek the 

underlying, definitive condition that is 

established and documented as a result 

of the laboratory finding of 

endotoxemia. Therefore, an ICD–9–CM 

code for endotoxemia does not exist and 

consideration cannot be given as to a 

severity level assignment such as MCC, 

as the commenter requested. However, 

as the commenter pointed out, the 

diagnoses of sepsis and septicemia are 

currently designated as MCCs and, as 

such; patients with these diagnoses are 

already appropriately identified in the 

classification system, despite the 

presence or absence of endotoxemia. 

6. MDC 21 (Injuries, Poisonings and 

Toxic Effects of Drugs): Traumatic 

Compartment Syndrome 

Traumatic compartment syndrome is 

a condition in which increased pressure 

within a confined anatomical space that 

contains blood vessels, muscles, nerves, 

and bones causes a decrease in blood 

flow and may lead to tissue necrosis. 

There are five ICD–9–CM diagnosis 

codes that were created effective 

October 1, 2006, to identify traumatic 

compartment syndrome of various sites. 

• 958.90 (Compartment syndrome, 

unspecified) 

• 958.91 (Traumatic compartment 

syndrome of upper extremity) 

• 958.92 (Traumatic compartment 

syndrome of lower extremity) 

• 958.93 (Traumatic compartment 

syndrome of abdomen) 

• 958.99 (Traumatic compartment 

syndrome of other sites) 

Cases with one of the diagnosis codes 

listed above reported as the principal 

diagnosis and no operating room 

procedure are assigned to either MS–

DRG 922 (Other Injury, Poisoning and 

Toxic Effect Diagnosis with MCC) or 

MS–DRG 923 (Other Injury, Poisoning 

and Toxic Effect Diagnosis without 

MCC) in MDC 21. 

In the FY 2008 IPPS final rule with 

comment period when we adopted the 

MS–DRGs, we inadvertently omitted the 

addition of these traumatic 

compartment syndrome codes 958.90 

through 958.99 to the multiple trauma 

MS–DRGs 963 (Other Multiple 

Significant Trauma with MCC), MS–

DRG 964 (Other Multiple Significant 

Trauma with CC), and MS–DRG 965 

(Other Multiple Significant Trauma 

without CC/MCC) in MDC 24 (Multiple 

Significant Trauma). Cases are assigned 

to MDC 24 based on the principal 

diagnosis of trauma and at least two 

significant trauma diagnosis codes 

(either as principal or secondary 

diagnoses) from different body site 

categories. There are eight different 

body site categories as follows: 

• Significant head trauma 

• Significant chest trauma 

• Significant abdominal trauma 

• Significant kidney trauma 

• Significant trauma of the urinary 

system 

• Significant trauma of the pelvis or 

spine 

• Significant trauma of the upper 

limb 

• Significant trauma of the lower limb 

Therefore, in the FY 2009 IPPS 

proposed rule, we proposed to add 

traumatic compartment syndrome codes 

958.90 through 958.99 to MS–DRGs 963 

and MS–DRG 965 in MDC 24. Under 

this proposal, codes 958.90 through 

958.99 would be added to the list of 

principal diagnosis of significant 

trauma. In addition, code 958.91 would 

be added to the list of significant trauma 

of upper limb, code 958.92 would be 

added to the list of significant trauma of 

lower limb, and code 958.93 would be 

added to the list of significant 

abdominal trauma. 

We did not address the consolidation 

of heart transplant MS–DRGs or liver 

transplant MS–DRGs in the FY 2009 

IPPS proposed rule. However, we 

received a comment on these issues. 

Comment: One commenter 

representing a national association of 

health information professionals 

expressed appreciation to CMS for 

proposing to add the traumatic 

compartment syndrome codes to the 

multiple trauma MS–DRGs in order to 

correct a previous omission. 

Response: We appreciate the 

commenter’s support. 

In this final rule, we are adopting as 

final our proposal to add traumatic 

compartment syndrome codes 958.90 

through 958.99 to MS–DRGs 963 and 

MS–DRG 965 in MDC 24. Codes 958.90 

through 958.99 are added to the list of 

principal diagnosis of significant 

trauma. In addition, code 958.91 is 

added to the list of significant trauma of 

upper limb, code 958.92 is added to the 

list of significant trauma of lower limb, 

and code 958.93 is added to the list of 

significant abdominal trauma. 

7. Medicare Code Editor (MCE) Changes 

As explained under section II.B.1. of 

the preamble of this final rule, the 

Medicare Code Editor (MCE) is a 

software program that detects and 

reports errors in the coding of Medicare 

claims data. Patient diagnoses, 

procedure(s), and demographic 

information are entered into the 

Medicare claims processing systems and 

are subjected to a series of automated 

screens. The MCE screens are designed 

to identify cases that require further 

review before classification into a DRG. 


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For FY 2009, we proposed to make the 

following changes to the MCE edits: 

a. List of Unacceptable Principal 

Diagnoses in MCE 

Diagnosis code V62.84 (Suicidal 

ideation) was created for use beginning 

October 1, 2005. At the time the 

diagnosis code was created, it was not 

clear that the creation of this code was 

requested in order to describe the 

principal reason for admission to a 

facility or the principal reason for 

treatment. The NCHS Official ICD–9–

CM Coding Guidelines therefore 

categorized the group of codes in V62.X 

for use only as additional or secondary 

diagnoses. It has been brought to the 

government’s attention that the use of 

this code is hampered by its designation 

as an additional-only diagnosis. NCHS 

has therefore modified the Official 

Coding Guidelines for FY 2009 by 

making this code acceptable as a 

principal diagnosis as well as an 

additional diagnosis. In order to 

conform to this change by NCHS, we 

proposed to remove code V62.84 from 

the MCE list of ‘‘Unacceptable Principal 

Diagnoses’’ for FY 2009. 

We did not receive any public 

comments on this proposal. Therefore, 

in this final rule, we are adopting as 

final our proposal to remove code 

V62.84 from the MCE list of 

‘‘Unacceptable Principal Diagnoses’’ for 

FY 2009. 

b. Diagnoses Allowed for Males Only 

Edit 

There are four diagnosis codes that 

were inadvertently left off of the MCE 

edit titled ‘‘Diagnoses Allowed for 

Males Only.’’ These codes are located in 

the chapter of the ICD–9–CM diagnosis 

codes entitled ‘‘Diseases of Male Genital 

Organs.’’ We are proposing to add the 

following four codes to this MCE edit: 

603.0 (Encysted hydrocele), 603.1 

(Infected hydrocele), 603.8 (Other 

specified types of hydrocele), and 603.9 

(Hydrocele, unspecified). We have had 

no reported problems or confusion with 

the omission of these codes from this 

section of the MCE, but in order to have 

an accurate product, we proposed that 

these codes be added for FY 2009. 

We did not receive any public 

comments on these proposed MCE 

revisions. Therefore, for FY 2009, we are 

implementing the proposed changes as 

final by adding codes 603.0, 603.1, 

603.8, and 603.9 to the MCE edit of 

diagnosis allowed for males only. 

c. Limited Coverage Edit 

As explained in section II.G.1. of the 

preamble of the proposed rule, we 

proposed to remove procedure code 

37.52 (Implantation of internal 

biventricular heart replacement system) 

from the MCE ‘‘Non-Covered 

Procedure’’ edit and to assign it to the 

‘‘Limited Coverage’’ edit. We proposed 

to include in this proposed edit the 

requirement that ICD–9–CM diagnosis 

code V70.7 (Examination of participant 

in clinical trial) also be present on the 

claim. We proposed that claims 

submitted without both procedure code 

37.52 and diagnosis code V70.7 would 

be denied because they would not be in 

compliance with the coverage policy 

explained in section II.G.1. of this 

preamble. 

We did not receive any public 

comments on this proposed MCE 

revision. Therefore, for FY 2009, we are 

implementing the proposed changes as 

final by removing code 37.52 from the 

‘‘Non-Covered Procedures’’ edit and 

assigning it to the ‘‘Limited Coverage’’

edit. In addition, included in this edit 

is the requirement that ICD–9–CM 

diagnosis code V70.7 also be present on 

the claim. Claims submitted on behalf of 

Medicare beneficiaries that do not have 

both procedure code 37.52 and 

diagnosis code V70.7 will be denied, 

retroactive to May 1, 2008 (the date of 

the coverage decision memorandum 

described in section II.G.1. of the 

preamble of this final rule). 

8. Surgical Hierarchies 

Some inpatient stays entail multiple 

surgical procedures, each one of which, 

occurring by itself, could result in 

assignment of the case to a different 

MS–DRG within the MDC to which the 

principal diagnosis is assigned. 

Therefore, it is necessary to have a 

decision rule within the GROUPER by 

which these cases are assigned to a 

single MS–DRG. The surgical hierarchy, 

an ordering of surgical classes from 

most resource-intensive to least 

resource-intensive, performs that 

function. Application of this hierarchy 

ensures that cases involving multiple 

surgical procedures are assigned to the 

MS–DRG associated with the most 

resource-intensive surgical class. 

Because the relative resource intensity 

of surgical classes can shift as a function 

of MS–DRG reclassification and 

recalibrations, we reviewed the surgical 

hierarchy of each MDC, as we have for 

previous reclassifications and 

recalibrations, to determine if the 

ordering of classes coincides with the 

intensity of resource utilization. 

A surgical class can be composed of 

one or more MS–DRGs. For example, in 

MDC 11, the surgical class ‘‘kidney 

transplant’’ consists of a single MS–DRG 

(MS–DRG 652) and the class ‘‘kidney, 

ureter and major bladder procedures’’

consists of three MS–DRGs (MS–DRGs 

653, 654, and 655). Consequently, in 

many cases, the surgical hierarchy has 

an impact on more than one MS–DRG. 

The methodology for determining the 

most resource-intensive surgical class 

involves weighting the average 

resources for each MS–DRG by 

frequency to determine the weighted 

average resources for each surgical class. 

For example, assume surgical class A 

includes MS–DRGs 1 and 2 and surgical 

class B includes MS–DRGs 3, 4, and 5. 

Assume also that the average charge of 

MS–DRG 1 is higher than that of MS–

DRG 3, but the average charges of MS–

DRGs 4 and 5 are higher than the 

average charge of MS–DRG 2. To 

determine whether surgical class A 

should be higher or lower than surgical 

class B in the surgical hierarchy, we 

would weight the average charge of each 

MS–DRG in the class by frequency (that 

is, by the number of cases in the MS–

DRG) to determine average resource 

consumption for the surgical class. The 

surgical classes would then be ordered 

from the class with the highest average 

resource utilization to that with the 

lowest, with the exception of ‘‘other 

O.R. procedures’’ as discussed below. 

This methodology may occasionally 

result in assignment of a case involving 

multiple procedures to the lowerweighted MS–DRG (in the highest, most 

resource-intensive surgical class) of the 

available alternatives. However, given 

that the logic underlying the surgical 

hierarchy provides that the GROUPER 

search for the procedure in the most 

resource-intensive surgical class, in 

cases involving multiple procedures, 

this result is sometimes unavoidable. 

We note that, notwithstanding the 

foregoing discussion, there are a few 

instances when a surgical class with a 

lower average charge is ordered above a 

surgical class with a higher average 

charge. For example, the ‘‘other O.R. 

procedures’’ surgical class is uniformly 

ordered last in the surgical hierarchy of 

each MDC in which it occurs, regardless 

of the fact that the average charge for the 

MS–DRG or MS–DRGs in that surgical 

class may be higher than that for other 

surgical classes in the MDC. The ‘‘other 

O.R. procedures’’ class is a group of 

procedures that are only infrequently 

related to the diagnoses in the MDC, but 

are still occasionally performed on 

patients in the MDC with these 

diagnoses. Therefore, assignment to 

these surgical classes should only occur 

if no other surgical class more closely 

related to the diagnoses in the MDC is 

appropriate. 

A second example occurs when the 

difference between the average charges 

for two surgical classes is very small. 


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19See the FY 1989 final rule (53 FR 38485, 

September 30, 1988), for the revision made for the 

discharges occurring in FY 1989; the FY 1990 final 

rule (54 FR 36552, September 1, 1989), for the FY 

1990 revision; the FY 1991 final rule (55 FR 36126, 

September 4, 1990), for the FY 1991 revision; the 

FY 1992 final rule (56 FR 43209, August 30, 1991) 

for the FY 1992 revision; the FY 1993 final rule (57 

FR 39753, September 1, 1992), for the FY 1993 

revision; the FY 1994 final rule (58 FR 46278, 

September 1, 1993), for the FY 1994 revisions; the 

FY 1995 final rule (59 FR 45334, September 1, 

1994), for the FY 1995 revisions; the FY 1996 final 

rule (60 FR 45782, September 1, 1995), for the FY 

1996 revisions; the FY 1997 final rule (61 FR 46171, 

August 30, 1996), for the FY 1997 revisions; the FY 

1998 final rule (62 FR 45966, August 29, 1997) for 

the FY 1998 revisions; the FY 1999 final rule (63 

FR 40954, July 31, 1998), for the FY 1999 revisions; 

the FY 2001 final rule (65 FR 47064, August 1, 

2000), for the FY 2001 revisions; the FY 2002 final 

rule (66 FR 39851, August 1, 2001), for the FY 2002 

revisions; the FY 2003 final rule (67 FR 49998, 

August 1, 2002), for the FY 2003 revisions; the FY 

2004 final rule (68 FR 45364, August 1, 2003), for 

the FY 2004 revisions; the FY 2005 final rule (69 

FR 49848, August 11, 2004), for the FY 2005 

revisions; the FY 2006 final rule (70 FR 47640, 

August 12, 2005), for the FY 2006 revisions; the FY 

2007 final rule (71 FR 47870) for the FY 2007 

revisions; and the FY 2008 final rule (72 FR 47130) 

for the FY 2008 revisions. In the FY 2000 final rule 

(64 FR 41490, July 30, 1999, we did not modify the 

CC Exclusions List because we did not make any 

changes to the ICD–9–CM codes for FY 2000. 

We have found that small differences 

generally do not warrant reordering of 

the hierarchy because, as a result of 

reassigning cases on the basis of the 

hierarchy change, the average charges 

are likely to shift such that the higherordered surgical class has a lower 

average charge than the class ordered 

below it. 

For FY 2009, we proposed to revise 

the surgical hierarchy for MDC 5 

(Diseases and Disorders of the 

Circulatory System) by reordering MS–

DRG 245 (AICD Generator Procedures) 

above new MS–DRG 265 (AICD Lead 

Procedures). 

We did not receive any public 

comments on the proposed change to 

the surgical hierarchy described above. 

Based on the test of the proposed 

revision using the March 2008 update of 

the FY 2007 MedPAR file and the 

revised GROUPER software, we found 

that the revision is still supported by the 

data. Therefore, we are incorporating 

the proposed revision to the surgical 

hierarchy as final for FY 2009. 

9. CC Exclusions List 

a. Background 

As indicated earlier in the preamble 

of this final rule, under the IPPS DRG 

classification system, we have 

developed a standard list of diagnoses 

that are considered CCs. Historically, we 

developed this list using physician 

panels that classified each diagnosis 

code based on whether the diagnosis, 

when present as a secondary condition, 

would be considered a substantial 

complication or comorbidity. A 

substantial complication or comorbidity 

was defined as a condition that, because 

of its presence with a specific principal 

diagnosis, would cause an increase in 

the length of stay by at least 1 day in 

at least 75 percent of the patients. We 

refer readers to section II.D.2. and 3. of 

the preamble of the FY 2008 IPPS final 

rule with comment period for a 

discussion of the refinement of CCs in 

relation to the MS–DRGs we adopted for 

FY 2008 (72 FR 47152 through 47121). 

b. CC Exclusions List for FY 2009 

In the September 1, 1987 final notice 

(52 FR 33143) concerning changes to the 

DRG classification system, we modified 

the GROUPER logic so that certain 

diagnoses included on the standard list 

of CCs would not be considered valid 

CCs in combination with a particular 

principal diagnosis. We created the CC 

Exclusions List for the following 

reasons: (1) To preclude coding of CCs 

for closely related conditions; (2) to 

preclude duplicative or inconsistent 

coding from being treated as CCs; and 

(3) to ensure that cases are appropriately 

classified between the complicated and 

uncomplicated DRGs in a pair. As we 

indicated above, we developed a list of 

diagnoses, using physician panels, to 

include those diagnoses that, when 

present as a secondary condition, would 

be considered a substantial 

complication or comorbidity. In 

previous years, we have made changes 

to the list of CCs, either by adding new 

CCs or deleting CCs already on the list. 

In the May 19, 1987 proposed notice 

(52 FR 18877) and the September 1, 

1987 final notice (52 FR 33154), we 

explained that the excluded secondary 

diagnoses were established using the 

following five principles: 

• Chronic and acute manifestations of 

the same condition should not be 

considered CCs for one another. 

• Specific and nonspecific (that is, 

not otherwise specified (NOS)) 

diagnosis codes for the same condition 

should not be considered CCs for one 

another. 

• Codes for the same condition that 

cannot coexist, such as partial/total, 

unilateral/bilateral, obstructed/ 

unobstructed, and benign/malignant, 

should not be considered CCs for one 

another. 

• Codes for the same condition in 

anatomically proximal sites should not 

be considered CCs for one another. 

• Closely related conditions should 

not be considered CCs for one another. 

The creation of the CC Exclusions List 

was a major project involving hundreds 

of codes. We have continued to review 

the remaining CCs to identify additional 

exclusions and to remove diagnoses 

from the master list that have been 

shown not to meet the definition of a 

CC.19

For FY 2009, as we proposed, in this 

final rule we are making limited 

revisions to the CC Exclusions List to 

take into account the changes that will 

be made in the ICD–9–CM diagnosis 

coding system effective October 1, 2008. 

(See section II.G.11. of the preamble of 

this final rule for a discussion of ICD–

9–CM changes.) We are making these 

changes in accordance with the 

principles established when we created 

the CC Exclusions List in 1987. In 

addition, as discussed in section II.D.3. 

of the preamble of this final rule, we are 

indicating on the CC exclusion list some 

updates to reflect the exclusion of a few 

codes from being an MCC under the 

MS–DRG system that we adopted for FY 

2008. 

Tables 6G and 6H, Additions to and 

Deletions from the CC Exclusion List, 

respectively, which will be effective for 

discharges occurring on or after October 

1, 2008, are not being published in this 

final rule because of the length of the 

two tables. Instead, we are making them 

available through the Internet on the 

CMS Web site at: http:// 

www.cms.hhs.gov/AcuteInpatientPPS. 

Each of these principal diagnoses for 

which there is a CC exclusion is shown 

in Tables 6G and 6H with an asterisk, 

and the conditions that will not count 

as a CC, are provided in an indented 

column immediately following the 

affected principal diagnosis. 

A complete updated MCC, CC, and 

Non-CC Exclusions List is also available 

through the Internet on the CMS Web 

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

AcuteInpatientPPS. Beginning with 

discharges on or after October 1, 2008, 

the indented diagnoses will not be 

recognized by the GROUPER as valid 

CCs for the asterisked principal 

diagnosis. 

To assist readers in the review of 

changes to the MCC and CC lists that 

occurred as a result of updates to the 

ICD–9–CM codes, as described in Tables 

6A, 6C, and 6E, we are providing the 

following summaries of those MCC and 

CC changes. 

In the summary tables, the diagnosis 

codes with an asterisk (*) were 

discussed at the March 19–20, 2008 

ICD–9–CM Coordination and 

Maintenance Committee meeting and 

were not finalized in time to include in 

the proposed rule. Code 998.33 in Table 

6J1, marked with two asterisks (**), had 

a change in code title subsequent to the 


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proposed rule. The new codes will be 

implemented on October 1, 2008. 

SUMMARY OF ADDITIONS TO THE MS–DRG MCC LIST—TABLE 6I.1 

Code Description 

038.12* .............. Methicillin resistant Staphylococcus aureus septicemia. 

249.10 ................ Secondary diabetes mellitus with ketoacidosis, not stated as uncontrolled, or unspecified. 

249.11 ................ Secondary diabetes mellitus with ketoacidosis, uncontrolled. 

249.20 ................ Secondary diabetes mellitus with hyperosmolarity, not stated as uncontrolled, or unspecified. 

249.21 ................ Secondary diabetes mellitus with hyperosmolarity, uncontrolled. 

249.30 ................ Secondary diabetes mellitus with other coma, not stated as uncontrolled, or unspecified. 

249.31 ................ Secondary diabetes mellitus with other coma, uncontrolled. 

482.42* .............. Methicillin resistant pneumonia due to Staphylococcus aureus. 

535.71* .............. Eosinophilic gastritis, with hemorrhage. 

707.23 ................ Pressure ulcer, stage III. 

707.24 ................ Pressure ulcer, stage IV. 

777.50 ................ Necrotizing enterocolitis in newborn, unspecified. 

777.51 ................ Stage I necrotizing enterocolitis in newborn. 

777.52 ................ Stage II necrotizing enterocolitis in newborn. 

777.53 ................ Stage III necrotizing enterocolitis in newborn. 

780.72 ................ Functional quadriplegia. 

SUMMARY OF DELETIONS FROM THE MS–DRG MCC LIST—TABLE 6I.2 

Code Description 

136.2 .................. Specific infections by free-living amebae. 

511.8 .................. Other specified forms of pleural effusion, except tuberculous. 

707.02 ................ Pressure ulcer, upper back. 

707.03 ................ Pressure ulcer, lower back. 

707.04 ................ Pressure ulcer, hip. 

707.05 ................ Pressure ulcer, buttock. 

707.06 ................ Pressure ulcer, ankle. 

707.07 ................ Pressure ulcer, heel. 

777.5 .................. Necrotizing enterocolitis in fetus or newborn. 

SUMMARY OF ADDITIONS TO THE MS–DRG CC LIST—TABLE 6J.1 

Code Description 

046.11 ................ Variant Creutzfeldt-Jakob disease. 

046.19 ................ Other and unspecified Creutzfeldt-Jakob disease. 

046.71 ................ Gerstmann-Stra ̈ussler-Scheinker syndrome. 

046.72 ................ Fatal familial insomnia. 

046.79 ................ Other and unspecified prion disease of central nervous system. 

059.01 ................ Monkeypox. 

059.21 ................ Tanapox. 

136.29 ................ Other specific infections by free-living amebae. 

199.2 .................. Malignant neoplasm associated with transplant organ. 

203.02 ................ Multiple myeloma, in relapse. 

203.12 ................ Plasma cell leukemia, in relapse. 

203.82 ................ Other immunoproliferative neoplasms, in relapse. 

204.02 ................ Acute lymphoid leukemia, in relapse. 

204.12 ................ Chronic lymphoid leukemia, in relapse. 

204.22 ................ Subacute lymphoid leukemia, in relapse. 

204.82 ................ Other lymphoid leukemia, in relapse. 

204.92 ................ Unspecified lymphoid leukemia, in relapse. 

205.02 ................ Acute myeloid leukemia, in relapse. 

205.12 ................ Chronic myeloid leukemia, in relapse. 

205.22 ................ Subacute myeloid leukemia, in relapse. 

205.32 ................ Myeloid sarcoma, in relapse. 

205.82 ................ Other myeloid leukemia, in relapse. 

205.92 ................ Unspecified myeloid leukemia, in relapse. 

206.02 ................ Acute monocytic leukemia, in relapse. 

206.12 ................ Chronic monocytic leukemia, in relapse. 

206.22 ................ Subacute monocytic leukemia, in relapse. 

206.82 ................ Other monocytic leukemia, in relapse. 

206.92 ................ Unspecified monocytic leukemia, in relapse. 

207.02 ................ Acute erythremia and erythroleukemia, in relapse. 

207.12 ................ Chronic erythremia, in relapse. 

207.22 ................ Megakaryocytic leukemia, in relapse. 

207.82 ................ Other specified leukemia, in relapse. 


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SUMMARY OF ADDITIONS TO THE MS–DRG CC LIST—TABLE 6J.1—Continued 

Code Description 

208.02 ................ Acute leukemia of unspecified cell type, in relapse. 

208.12 ................ Chronic leukemia of unspecified cell type, in relapse. 

208.22 ................ Subacute leukemia of unspecified cell type, in relapse. 

208.82 ................ Other leukemia of unspecified cell type, in relapse. 

208.92 ................ Unspecified leukemia, in relapse. 

209.00 ................ Malignant carcinoid tumor of the small intestine, unspecified portion. 

209.01 ................ Malignant carcinoid tumor of the duodenum. 

209.02 ................ Malignant carcinoid tumor of the jejunum. 

209.03 ................ Malignant carcinoid tumor of the ileum. 

209.10 ................ Malignant carcinoid tumor of the large intestine, unspecified portion. 

209.11 ................ Malignant carcinoid tumor of the appendix. 

209.12 ................ Malignant carcinoid tumor of the cecum. 

209.13 ................ Malignant carcinoid tumor of the ascending colon. 

209.14 ................ Malignant carcinoid tumor of the transverse colon. 

209.15 ................ Malignant carcinoid tumor of the descending colon. 

209.16 ................ Malignant carcinoid tumor of the sigmoid colon. 

209.17 ................ Malignant carcinoid tumor of the rectum. 

209.20 ................ Malignant carcinoid tumor of unknown primary site. 

209.21 ................ Malignant carcinoid tumor of the bronchus and lung. 

209.22 ................ Malignant carcinoid tumor of the thymus. 

209.23 ................ Malignant carcinoid tumor of the stomach. 

209.24 ................ Malignant carcinoid tumor of the kidney. 

209.25 ................ Malignant carcinoid tumor of foregut, not otherwise specified. 

209.26 ................ Malignant carcinoid tumor of midgut, not otherwise specified. 

209.27 ................ Malignant carcinoid tumor of hindgut, not otherwise specified. 

209.29 ................ Malignant carcinoid tumor of other sites. 

209.30 ................ Malignant poorly differentiated neuroendocrine carcinoma, any site. 

238.77 ................ Post-transplant lymphoproliferative disorder (PTLD). 

279.50 ................ Graft-versus-host disease, unspecified. 

279.51 ................ Acute graft-versus-host disease. 

279.52 ................ Chronic graft-versus-host disease. 

279.53 ................ Acute on chronic graft-versus-host disease. 

346.60 ................ Persistent migraine aura with cerebral infarction, without mention of intractable migraine without mention of status 

migrainosus. 

346.61 ................ Persistent migraine aura with cerebral infarction, with intractable migraine, so stated, without mention of status migrainosus. 

346.62 ................ Persistent migraine aura with cerebral infarction, without mention of intractable migraine with status migrainosus. 

346.63 ................ Persistent migraine aura with cerebral infarction, with intractable migraine, so stated, with status migrainosus. 

349.31* .............. Accidental puncture or laceration of dura during a procedure. 

349.39* .............. Other dural tear. 

511.81 ................ Malignant pleural effusion. 

511.89 ................ Other specified forms of effusion, except tuberculous. 

649.70 ................ Cervical shortening, unspecified as to episode of care or not applicable. 

649.71 ................ Cervical shortening, delivered, with or without mention of antepartum condition. 

649.73 ................ Cervical shortening, antepartum condition or complication. 

695.12 ................ Erythema multiforme major. 

695.13 ................ Stevens-Johnson syndrome. 

695.14 ................ Stevens-Johnson syndrome-toxic epidermal necrolysis overlap syndrome. 

695.15 ................ Toxic epidermal necrolysis. 

695.53 ................ Exfoliation due to erythematous condition involving 30–39 percent of body surface. 

695.54 ................ Exfoliation due to erythematous condition involving 40–49 percent of body surface. 

695.55 ................ Exfoliation due to erythematous condition involving 50–59 percent of body surface. 

695.56 ................ Exfoliation due to erythematous condition involving 60–69 percent of body surface. 

695.57 ................ Exfoliation due to erythematous condition involving 70–79 percent of body surface. 

695.58 ................ Exfoliation due to erythematous condition involving 80–89 percent of body surface. 

695.59 ................ Exfoliation due to erythematous condition involving 90 percent or more of body surface. 

997.31 ................ Ventilator associated pneumonia. 

997.39 ................ Other respiratory complications. 

998.30 ................ Disruption of wound, unspecified. 

998.33** ............. Disruption of traumatic injury wound repair. 

999.81 ................ Extravasation of vesicant chemotherapy. 

999.82 ................ Extravasation of other vesicant agent 

SUMMARY OF DELETIONS TO THE MS–DRG CC LIST—TABLE 6J.2 

Code Description 

046.1 .................. Jakob-Creutzfeldt disease. 

337.0 .................. Idiopathic peripheral autonomic neuropathy. 

695.1 .................. Erythema multiforme. 

707.00 ................ Pressure ulcer, unspecified site. 

707.01 ................ Pressure ulcer, elbow. 


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20The original list of the ICD–9–CM procedure 

codes for the procedures we consider nonextensive 

procedures, if performed with an unrelated 

principal diagnosis, was published in Table 6C in 

section IV. of the Addendum to the FY 1989 final 

rule (53 FR 38591). As part of the FY 1991 final rule 

(55 FR 36135), the FY 1992 final rule (56 FR 43212), 

the FY 1993 final rule (57 FR 23625), the FY 1994 

final rule (58 FR 46279), the FY 1995 final rule (59 

FR 45336), the FY 1996 final rule (60 FR 45783), 

the FY 1997 final rule (61 FR 46173), and the FY 

1998 final rule (62 FR 45981), we moved several 

other procedures from DRG 468 to DRG 477, and 

some procedures from DRG 477 to DRG 468. No 

procedures were moved in FY 1999, as noted in the 

final rule (63 FR 40962); in FY 2000 (64 FR 41496); 

in FY 2001 (65 FR 47064); or in FY 2002 (66 FR 

39852). In the FY 2003 final rule (67 FR 49999) we 

did not move any procedures from DRG 477. 

However, we did move procedure codes from DRG 

468 and placed them in more clinically coherent 

DRGs. In the FY 2004 final rule (68 FR 45365), we 

moved several procedures from DRG 468 to DRGs 

476 and 477 because the procedures are 

nonextensive. In the FY 2005 final rule (69 FR 

48950), we moved one procedure from DRG 468 to 

477. In addition, we added several existing 

procedures to DRGs 476 and 477. In the FY 2006 

(70 FR 47317), we moved one procedure from DRG 

468 and assigned it to DRG 477. In FY 2007, we 

moved one procedure from DRG 468 and assigned 

it to DRGs 479, 553, and 554. In FY 2008, no 

procedures were moved, as noted in the final rule 

with comment period (72 FR 46241). 

SUMMARY OF DELETIONS TO THE MS–DRG CC LIST—TABLE 6J.2—Continued 

Code Description 

707.09 ................ Pressure ulcer, other site. 

997.3 .................. Respiratory complications. 

999.8 .................. Other transfusion reaction. 

Alternatively, the complete 

documentation of the GROUPER logic, 

including the current CC Exclusions 

List, is available from 3M/Health 

Information Systems (HIS), which, 

under contract with CMS, is responsible 

for updating and maintaining the 

GROUPER program. The current DRG 

Definitions Manual, Version 25.0, is 

available for $225.00, which includes 

$15.00 for shipping and handling. 

Version 26.0 of this manual, which 

includes the final FY 2009 DRG 

changes, is available in hard copy for 

$250.00. Version 26.0 of the manual is 

also available on a CD for $200.00; a 

combination hard copy and CD is 

available for $400.00. These manuals 

may be obtained by writing 3M/HIS at 

the following address: 100 Barnes Road, 

Wallingford, CT 06492; or by calling 

(203) 949–0303. Please specify the 

revision or revisions requested. 

10. Review of Procedure Codes in MS 

DRGs 981, 982, and 983; 984, 985, and 

986; and 987, 988, and 989. 

Each year, we review cases assigned 

to former CMS DRG 468 (Extensive O.R. 

Procedure Unrelated to Principal 

Diagnosis), CMS DRG 476 (Prostatic 

O.R. Procedure Unrelated to Principal 

Diagnosis), and CMS DRG 477 

(Nonextensive O.R. Procedure Unrelated 

to Principal Diagnosis) to determine 

whether it would be appropriate to 

change the procedures assigned among 

these CMS DRGs. Under the MS–DRGs 

that we adopted for FY 2008, CMS DRG 

468 was split three ways and became 

MS–DRGs 981, 982, and 983 (Extensive 

O.R. Procedure Unrelated to Principal 

Diagnosis with MCC, with CC, and 

without CC/MCC). CMS DRG 476 

became MS–DRGs 984, 985, and 986 

(Prostatic O.R. Procedure Unrelated to 

Principal Diagnosis with MCC, with CC, 

and without CC/MCC). CMS DRG 477 

became MS–DRGs 987, 988, and 989 

(Nonextensive O.R. Procedure Unrelated 

to Principal Diagnosis with MCC, with 

CC, and without CC/MCC). 

MS–DRGs 981 through 983, 984 

through 986, and 987 through 989 

(formerly CMS DRGs 468, 476, and 477, 

respectively) are reserved for those cases 

in which none of the O.R. procedures 

performed are related to the principal 

diagnosis. These DRGs are intended to 

capture atypical cases, that is, those 

cases not occurring with sufficient 

frequency to represent a distinct, 

recognizable clinical group. MS–DRGs 

984 through 986 (previously CMS DRG 

476) are assigned to those discharges in 

which one or more of the following 

prostatic procedures are performed and 

are unrelated to the principal diagnosis: 

• 60.0, Incision of prostate 

• 60.12, Open biopsy of prostate 

• 60.15, Biopsy of periprostatic tissue 

• 60.18, Other diagnostic procedures 

on prostate and periprostatic tissue 

• 60.21, Transurethral prostatectomy 

• 60.29, Other transurethral 

prostatectomy 

• 60.61, Local excision of lesion of 

prostate 

• 60.69, Prostatectomy, not elsewhere 

classified 

• 60.81, Incision of periprostatic 

tissue 

• 60.82, Excision of periprostatic 

tissue 

• 60.93, Repair of prostate 

• 60.94, Control of (postoperative) 

hemorrhage of prostate 

• 60.95, Transurethral balloon 

dilation of the prostatic urethra 

• 60.96, Transurethral destruction of 

prostate tissue by microwave 

thermotherapy 

• 60.97, Other transurethral 

destruction of prostate tissue by other 

thermotherapy 

• 60.99, Other operations on prostate 

All remaining O.R. procedures are 

assigned to MS–DRGs 981 through 983 

and 987 through 989, with MS–DRGs 

987 through 989 assigned to those 

discharges in which the only procedures 

performed are nonextensive procedures 

that are unrelated to the principal 

diagnosis.20

For FY 2009, we did not propose to 

change the procedures assigned among 

these DRGs. We did not receive any 

public comments on our proposal and, 

therefore, are adopting it as final for FY 

2009 in this final rule. 

a. Moving Procedure Codes From MS–

DRGs 981 Through 983 or MS–DRGs 

987 Through 989 to MDCs 

We annually conduct a review of 

procedures producing assignment to 

MS–DRGs 981 through 983 (formerly 

CMS DRG 468) or MS–DRGs 987 

through 989 (formerly CMS DRG 477) 

on the basis of volume, by procedure, to 

see if it would be appropriate to move 

procedure codes out of these DRGs into 

one of the surgical DRGs for the MDC 

into which the principal diagnosis falls. 

The data are arrayed in two ways for 

comparison purposes. We look at a 

frequency count of each major operative 

procedure code. We also compare 

procedures across MDCs by volume of 

procedure codes within each MDC. 

We identify those procedures 

occurring in conjunction with certain 

principal diagnoses with sufficient 

frequency to justify adding them to one 

of the surgical DRGs for the MDC in 

which the diagnosis falls. For FY 2009, 

we did not propose to remove any 

procedures from MS–DRGs 981 through 

983 or MS–DRGs 987 through 989. We 

did not receive any public comments on 

our proposal and, therefore, we are 

adopting it as final for FY 2009 in this 

final rule. 

b. Reassignment of Procedures Among 

MS–DRGs 981 Through 983, 984 

Through 986, and 987 Through 989 

We also annually review the list of 

ICD–9–CM procedures that, when in 

combination with their principal 


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diagnosis code, result in assignment to 

MS–DRGs 981 through 983, 984 through 

986, and 987 through 989 (formerly, 

CMS DRGs 468, 476, and 477, 

respectively), to ascertain whether any 

of those procedures should be 

reassigned from one of these three DRGs 

to another of the three DRGs based on 

average charges and the length of stay. 

We look at the data for trends such as 

shifts in treatment practice or reporting 

practice that would make the resulting 

DRG assignment illogical. If we find 

these shifts, we would propose to move 

cases to keep the DRGs clinically similar 

or to provide payment for the cases in 

a similar manner. Generally, we move 

only those procedures for which we 

have an adequate number of discharges 

to analyze the data. 

For FY 2009, we did not propose to 

move any procedure codes among these 

DRGs. We did not receive any public 

comments on our proposal and, 

therefore, we are adopting it as final for 

FY 2009 in this final rule. 

c. Adding Diagnosis or Procedure Codes 

to MDCs 

Based on our review this year, as we 

proposed, we are not adding any 

diagnosis codes to MDCs for FY 2009. 

We did not receive any public 

comments on this subject. 

11. Changes to the ICD–9–CM Coding 

System 

As described in section II.B.1. of the 

preamble of this final rule, the ICD–9–

CM is a coding system used for the 

reporting of diagnoses and procedures 

performed on a patient. In September 

1985, the ICD–9–CM Coordination and 

Maintenance Committee was formed. 

This is a Federal interdepartmental 

committee, co-chaired by the National 

Center for Health Statistics (NCHS), the 

Centers for Disease Control and 

Prevention, and CMS, charged with 

maintaining and updating the ICD–9–

CM system. The Committee is jointly 

responsible for approving coding 

changes, and developing errata, 

addenda, and other modifications to the 

ICD–9–CM to reflect newly developed 

procedures and technologies and newly 

identified diseases. The Committee is 

also responsible for promoting the use 

of Federal and non-Federal educational 

programs and other communication 

techniques with a view toward 

standardizing coding applications and 

upgrading the quality of the 

classification system. 

The Official Version of the ICD–9–CM 

contains the list of valid diagnosis and 

procedure codes. (The Official Version 

of the ICD–9–CM is available from the 

Government Printing Office on CD–

ROM for $27.00 by calling (202) 512–

1800.) Complete information on 

ordering the CD–ROM is also available 

at: http://www.cdc.gov/nchs/products/ 

_prods/subject/icd96ed.htm. The 

Official Version of the ICD–9–CM is no 

longer available in printed manual form 

from the Federal Government; it is only 

available on CD–ROM. Users who need 

a paper version are referred to one of the 

many products available from 

publishing houses. 

The NCHS has lead responsibility for 

the ICD–9–CM diagnosis codes included 

in the Tabular List and Alphabetic 

Index for Diseases, while CMS has lead 

responsibility for the ICD–9–CM 

procedure codes included in the 

Tabular List and Alphabetic Index for 

Procedures. 

The Committee encourages 

participation in the above process by 

health-related organizations. In this 

regard, the Committee holds public 

meetings for discussion of educational 

issues and proposed coding changes. 

These meetings provide an opportunity 

for representatives of recognized 

organizations in the coding field, such 

as the American Health Information 

Management Association (AHIMA), the 

American Hospital Association (AHA), 

and various physician specialty groups, 

as well as individual physicians, health 

information management professionals, 

and other members of the public, to 

contribute ideas on coding matters. 

After considering the opinions 

expressed at the public meetings and in 

writing, the Committee formulates 

recommendations, which then must be 

approved by the agencies. 

The Committee presented proposals 

for coding changes for implementation 

in FY 2009 at a public meeting held on 

September 27–28, 2007 and finalized 

the coding changes after consideration 

of comments received at the meetings 

and in writing by December 3, 2007. 

Those coding changes are announced in 

Tables 6A through 6F in the Addendum 

to this final rule. The Committee held 

its 2008 meeting on March 19–20, 2008. 

New codes for which there was a 

consensus of public support and for 

which complete tabular and indexing 

changes were made by May 2008 will be 

included in the October 1, 2008 update 

to ICD–9–CM. Code revisions that were 

discussed at the March 19–20, 2008 

Committee meeting but that could not 

be finalized in time to include them in 

the Addendum to the proposed rule are 

included in Tables 6A through 6F of 

this final rule and are marked with an 

asterisk (*). 

Copies of the minutes of the 

procedure codes discussions at the 

Committee’s September 27–28, 2007 

meeting and March 19–20, 2008 meeting 

can be obtained from the CMS Web site 

at: http://cms.hhs.gov/ 

ICD9ProviderDiagnosticCodes/ 

03_meetings.asp. The minutes of the 

diagnosis codes discussions at the 

September 27–28, 2007 meeting and 

March 19–20, 2008 meeting are found 

at: http://www.cdc.gov/nchs/icd9.htm. 

Paper copies of these minutes are no 

longer available and the mailing list has 

been discontinued. These Web sites also 

provide detailed information about the 

Committee, including information on 

requesting a new code, attending a 

Committee meeting, and timeline 

requirements and meeting dates. 

We encourage commenters to address 

suggestions on coding issues involving 

diagnosis codes to: Donna Pickett, CoChairperson, ICD–9–CM Coordination 

and Maintenance Committee, NCHS, 

Room 2402, 3311 Toledo Road, 

Hyattsville, MD 20782. Comments may 

be sent by E-mail to: dfp4@cdc.gov. 

Questions and comments concerning 

the procedure codes should be 

addressed to: Patricia E. Brooks, CoChairperson, ICD–9–CM Coordination 

and Maintenance Committee, CMS, 

Center for Medicare Management, 

Hospital and Ambulatory Policy Group, 

Division of Acute Care, C4–08–06, 7500 

Security Boulevard, Baltimore, MD 

21244–1850. Comments may be sent by 

E-mail to: 

patricia.brooks2@cms.hhs.gov. 

The ICD–9–CM code changes that 

have been approved will become 

effective October 1, 2008. The new ICD–

9–CM codes are listed, along with their 

DRG classifications, in Tables 6A and 

6B (New Diagnosis Codes and New 

Procedure Codes, respectively) in the 

Addendum to this final rule. As we 

stated above, the code numbers and 

their titles were presented for public 

comment at the ICD–9–CM 

Coordination and Maintenance 

Committee meetings. Both oral and 

written comments were considered 

before the codes were approved. In the 

FY 2009 IPPS proposed rule, we only 

solicited comments on the proposed 

classification of these new codes. 

For codes that have been replaced by 

new or expanded codes, and the 

corresponding new or expanded 

diagnosis codes are included in Table 

6A. New procedure codes are shown in 

Table 6B. Diagnosis codes that have 

been replaced by expanded codes or 

other codes or have been deleted are in 

Table 6C (Invalid Diagnosis Codes). 

These invalid diagnosis codes will not 

be recognized by the GROUPER 

beginning with discharges occurring on 

or after October 1, 2008. Table 6D 

contains invalid procedure codes. These 


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invalid procedure codes will not be 

recognized by the GROUPER beginning 

with discharges occurring on or after 

October 1, 2008. Revisions to diagnosis 

code titles are in Table 6E (Revised 

Diagnosis Code Titles), which also 

includes the MS–DRG assignments for 

these revised codes. Table 6F includes 

revised procedure code titles for FY 

2009. 

In the September 7, 2001 final rule 

implementing the IPPS new technology 

add-on payments (66 FR 46906), we 

indicated we would attempt to include 

proposals for procedure codes that 

would describe new technology 

discussed and approved at the Spring 

meeting as part of the code revisions 

effective the following October. As 

stated previously, ICD–9–CM codes 

discussed at the March 19–20, 2008 

Committee meeting that received 

consensus and that were finalized by 

May 2008, are included in Tables 6A 

through 6F of the Addendum to this 

final rule. 

Comment: One commenter was 

encouraged that CMS and the CDC have 

acted favorably on the commenter’s 

proposal to create a new ICD–9–CM 

diagnosis code for heparin-induced 

thrombocytopenia (HIT). 

According to the commenter, a 

specific code dedicated to this disease 

will provide more information regarding 

the prevalence of the condition and the 

cost associated with treating the disease. 

The increased focus on this condition 

can in turn promote proper screening to 

avoid its occurrence and improve 

patient safety. Accurate diagnosis and 

coding will also ensure that proper 

protocols are put in place and HIT 

specific treatment is rendered, thereby 

reducing adverse events when HIT does 

arise. 

Response: We appreciate the 

comment. Effective October 1, 2008, an 

ICD–9–CM diagnosis code 289.84 

(Heparin-induced thrombocytopenia 

(HIT)) is created. 

Section 503(a) of Public Law 108–173 

included a requirement for updating 

ICD–9–CM codes twice a year instead of 

a single update on October 1 of each 

year. This requirement was included as 

part of the amendments to the Act 

relating to recognition of new 

technology under the IPPS. Section 

503(a) amended section 1886(d)(5)(K) of 

the Act by adding a clause (vii) which 

states that the ‘‘Secretary shall provide 

for the addition of new diagnosis and 

procedure codes on April 1 of each year, 

but the addition of such codes shall not 

require the Secretary to adjust the 

payment (or diagnosis-related group 

classification) * * * until the fiscal year 

that begins after such date.’’ This 

requirement improves the recognition of 

new technologies under the IPPS system 

by providing information on these new 

technologies at an earlier date. Data will 

be available 6 months earlier than 

would be possible with updates 

occurring only once a year on 

October 1. 

While section 1886(d)(5)(K)(vii) of the 

Act states that the addition of new 

diagnosis and procedure codes on April 

1 of each year shall not require the 

Secretary to adjust the payment, or DRG 

classification, under section 1886(d) of 

the Act until the fiscal year that begins 

after such date, we have to update the 

DRG software and other systems in 

order to recognize and accept the new 

codes. We also publicize the code 

changes and the need for a mid-year 

systems update by providers to identify 

the new codes. Hospitals also have to 

obtain the new code books and encoder 

updates, and make other system changes 

in order to identify and report the new 

codes. 

The ICD–9–CM Coordination and 

Maintenance Committee holds its 

meetings in the spring and fall in order 

to update the codes and the applicable 

payment and reporting systems by 

October 1 of each year. Items are placed 

on the agenda for the ICD–9–CM 

Coordination and Maintenance 

Committee meeting if the request is 

received at least 2 months prior to the 

meeting. This requirement allows time 

for staff to review and research the 

coding issues and prepare material for 

discussion at the meeting. It also allows 

time for the topic to be publicized in 

meeting announcements in the Federal 

Register as well as on the CMS Web site. 

The public decides whether or not to 

attend the meeting based on the topics 

listed on the agenda. Final decisions on 

code title revisions are currently made 

by March 1 so that these titles can be 

included in the IPPS proposed rule. A 

complete addendum describing details 

of all changes to ICD–9–CM, both 

tabular and index, is published on the 

CMS and NCHS Web sites in May of 

each year. Publishers of coding books 

and software use this information to 

modify their products that are used by 

health care providers. This 5-month 

time period has proved to be necessary 

for hospitals and other providers to 

update their systems. 

A discussion of this timeline and the 

need for changes are included in the 

December 4–5, 2005 ICD–9–CM 

Coordination and Maintenance 

Committee minutes. The public agreed 

that there was a need to hold the fall 

meetings earlier, in September or 

October, in order to meet the new 

implementation dates. The public 

provided comment that additional time 

would be needed to update hospital 

systems and obtain new code books and 

coding software. There was considerable 

concern expressed about the impact this 

new April update would have on 

providers. 

In the FY 2005 IPPS final rule, we 

implemented section 1886(d)(5)(K)(vii) 

of the Act, as added by section 503(a) 

of Public Law 108–173, by developing a 

mechanism for approving, in time for 

the April update, diagnosis and 

procedure code revisions needed to 

describe new technologies and medical 

services for purposes of the new 

technology add-on payment process. We 

also established the following process 

for making these determinations. Topics 

considered during the Fall ICD–9–CM 

Coordination and Maintenance 

Committee meeting are considered for 

an April 1 update if a strong and 

convincing case is made by the 

requester at the Committee’s public 

meeting. The request must identify the 

reason why a new code is needed in 

April for purposes of the new 

technology process. The participants at 

the meeting and those reviewing the 

Committee meeting summary report are 

provided the opportunity to comment 

on this expedited request. All other 

topics are considered for the October 1 

update. Participants at the Committee 

meeting are encouraged to comment on 

all such requests. There were no 

requests approved for an expedited 

April l, 2008 implementation of an ICD–

9–CM code at the September 27–28, 

2007 Committee meeting. Therefore, 

there were no new ICD–9–CM codes 

implemented on April 1, 2008. 

We believe that this process captures 

the intent of section 1886(d)(5)(K)(vii) of 

the Act. This requirement was included 

in the provision revising the standards 

and process for recognizing new 

technology under the IPPS. In addition, 

the need for approval of new codes 

outside the existing cycle (October 1) 

arises most frequently and most acutely 

where the new codes will identify new 

technologies that are (or will be) under 

consideration for new technology addon payments. Thus, we believe this 

provision was intended to expedite data 

collection through the assignment of 

new ICD–9–CM codes for new 

technologies seeking higher payments. 

Current addendum and code title 

information is published on the CMS 

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

icd9ProviderDiagnosticCodes/ 

01_overview.asp#TopofPage. 

Information on ICD–9–CM diagnosis 

codes, along with the Official ICD–9–

CM Coding Guidelines, can be found on 

the Web site at: http://www.cdc.gov/ 


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nchs/icd9.htm. Information on new, 

revised, and deleted ICD–9–CM codes is 

also provided to the AHA for 

publication in the Coding Clinic for 

ICD–9–CM. AHA also distributes 

information to publishers and software 

vendors. 

CMS also sends copies of all ICD–9–

CM coding changes to its contractors for 

use in updating their systems and 

providing education to providers. 

These same means of disseminating 

information on new, revised, and 

deleted ICD–9–CM codes will be used to 

notify providers, publishers, software 

vendors, contractors, and others of any 

changes to the ICD–9–CM codes that are 

implemented in April. The code titles 

are adopted as part of the ICD–9–CM 

Coordination and Maintenance 

Committee process. Thus, although we 

publish the code titles in the IPPS 

proposed and final rules, they are not 

subject to comment in the proposed or 

final rules. We will continue to publish 

the October code updates in this manner 

within the IPPS proposed and final 

rules. For codes that are implemented in 

April, we will assign the new procedure 

code to the same DRG in which its 

predecessor code was assigned so there 

will be no DRG impact as far as DRG 

assignment. Any midyear coding 

updates will be available through the 

Web sites indicated above and through 

the Coding Clinic for ICD–9–CM. 

Publishers and software vendors 

currently obtain code changes through 

these sources in order to update their 

code books and software systems. We 

will strive to have the April 1 updates 

available through these Web sites 5 

months prior to implementation (that is, 

early November of the previous year), as 

is the case for the October 1 updates. 

12. Other MS–DRG Issues 

a. Heart Transplants or Implants of 

Heart Assist System and Liver 

Transplants 

Comment: One commenter 

representing transplant surgeons was 

concerned about the proposed 

reductions in the MS–DRG relative 

weights for MS–DRG 002 (Heart 

Transplant or Implant of Heart Assist 

System without MCC) and MS–DRG 006 

(Liver Transplant without MCC). 

According to the commenter, the 

relative weight for MS–DRG 006 would 

decrease by approximately 33 percent 

and the relative weight for MS–DRG 002 

would be reduced by 20 percent. The 

commenter also reported that only 30 

percent of the heart transplant cases 

were assigned to MS–DRG 002 and 26 

percent of the liver transplant cases 

were assigned to MS–DRG 006. The 

commenter questioned the statistical 

reliability of the data and recommended 

that CMS establish a single MS–DRG for 

heart transplants and a single MS–DRG 

for liver transplants. 

The commenter stated that one factor 

that influences hospital costs and 

lengths of stay is the characteristics of 

the donor organ. The commenter stated 

that the donor risk index (DRI) and the 

model for end-stage liver disease 

(MELD) system which prioritizes 

patients waiting for liver transplants by 

severity of illness are two important 

factors for any severity index for 

transplant DRGs. This information is not 

identified in the MedPAR data. The 

commenter acknowledged that it is in 

the process of developing a proposal for 

NCHS to incorporate this information 

into potential ICD–9–CM diagnosis 

codes. The commenter stated that, until 

these factors can be incorporated into 

the data, it is not appropriate to have 

severity-based DRGs for heart and liver 

transplant procedures based on CC or 

MCC that have not been validated as 

predictors in the transplant population. 

The commenter also requested that 

CMS create a new MS–DRG for 

combined liver/kidney transplants. 

These cases are currently assigned to the 

liver transplant DRGs 005–006 (Liver 

Transplant with MCC or Intestinal 

Transplant and Liver Transplant 

without MCC). While the commenter 

acknowledged that most of these cases 

would be assigned to MS–DRG 005, the 

MCC group, the commenter contended 

that a separate DRG is needed to address 

the significantly higher costs and length 

of stay associated with combined liver/ 

kidney transplants. 

Response: As we stated in the FY 

2008 IPPS final rule (72 FR 47251), 

clinical evaluation and claims data 

supported the current MCC split for 

heart and liver transplants. Several 

commenters accepted CMS’s proposal of 

not making significant revisions to the 

MS–DRGs until claims data under the 

new MS–DRG system are available. At 

this time, we do not have MS–DRG data 

to evaluate these significant changes. 

Therefore, we are not implementing any 

changes to the transplant MS–DRGs for 

FY 2009. 

b. New Codes for Pressure Ulcers 

As discussed in the FY 2008 IPPS 

final rule with comment period (72 FR 

47205–47206), we referred the need for 

more detailed ICD–9–CM pressure ulcer 

codes to the CDC. The topic of 

expanding pressure ulcer codes to 

capture the stage of the ulcer was 

addressed at the September 27–28, 

2007, meeting of the ICD–9–CM 

Coordination and Maintenance 

Committee. A summary report of that 

meeting is available on the Web site at: 

http://www.cdc.gov/nchs/about/ 

otheract/icd9/maint/maint.htm. 

At the September 2007 meeting of the 

ICD–9–CM Coordination and 

Maintenance Committee, numerous 

wound care professionals supported 

modifying the pressure ulcer codes to 

capture staging information. The stage 

of the pressure ulcer is a powerful 

predictor of severity and resource 

utilization. At the meeting, the ICD–9–

CM Coordination and Maintenance 

Committee discussed the creation of 

pressure ulcer codes to capture staging 

information. The new codes, along with 

their CC/MCC classifications, are shown 

in Table 6A of the Addendum to the 

proposed rule and this final rule. The 

new codes are as follows: 

• 707.20 (Pressure ulcer, unspecified 

stage) 

• 707.21 (Pressure ulcer stage I) 

• 707.22 (Pressure ulcer stage II) 

• 707.23 (Pressure ulcer stage III) 

• 707.24 (Pressure ulcer stage IV) 

• 707.25 (Pressure ulcer unstageable) 

Comment: Several commenters 

supported the ICD–9–CM diagnosis 

codes for pressure ulcer stages. The 

commenters also supported the revised 

terminology for the existing decubitus 

ulcer codes (707.00 through 707.09), 

stating that changing these code titles 

from decubitus ulcer to pressure ulcer is 

a more accurate and appropriate 

nomenclature. Further, the commenters 

asked for additional pressure ulcer stage 

codes beyond what was created for FY 

2009, as shown in Table 6A of the 

Addendum to this final rule (codes 

707.20 through 707.25). Instead of a 

single code for pressure ulcer, 

unstageable (707.25), the commenters 

requested the following: 

• Recommended new code: 707.25 

(Deep tissue injury) 

• Recommended new code: 707.26 

(Unstageable pressure ulcers) 

The commenters asked that both of 

these proposed new codes be classified 

as MCCs because either condition can 

progress to a stage III or stage IV 

pressure ulcer. In addition, the 

commenters stated that unstageable 

pressure ulcers will be a stage III or 

stage IV if debridement takes place. 

However, the commenters added, 

debridement is not always indicated in 

unstageable pressure ulcers, so the 

wound may remain unstageable 

throughout the entire stay. The 

commenters further stated that deep 

tissue injury can deteriorate rapidly into 

a stage III or stage IV pressure ulcer, 

even with optimal treatment. 

Response: As stated earlier, the 

creation of new codes for pressure 


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ulcers was discussed at the ICD–9–CM 

Coordination and Maintenance 

Committee on September 28, 2007. CDC 

received formal comments on the 

proposed new codes through December 

3, 2007. CDC considered a wide range 

of comments, including those 

mentioned above. CDC finalized the 

pressure ulcer stage codes, which 

included new codes 707.20 through 

707.25. As mentioned above, CDC 

created a new ICD–9–CM code, 707.25 

(Pressure ulcer, unstageable) to include 

pressure ulcers described as unstageable 

as well as pressure ulcers documented 

as deep tissue injury. The ICD–9–CM 

index specifically assigns pressure 

ulcers that are described as deep tissue 

injuries to code 707.25. These new 

codes will go into effect on October 1, 

2008. After experience is gained using 

these new codes, the public can request 

that the ICD–9–CM Coordination and 

Maintenance Committee reconsider the 

issue of pressure ulcer coding. 

We do not support the request to 

make ICD–9–CM code 707.25 (Pressure 

ulcer, unstageable) an MCC. Unstageable 

indicates that the stage of the pressure 

ulcer cannot be determined because it is 

covered by a dressing or because it is 

covered by a black eschar. If the ulcer 

does deteriorate and is determined to be 

a stage III or stage IV pressure ulcer, 

then stage III or IV codes will be 

reported. To classify an unstageable 

pressure ulcer as the same severity as a 

stage III or stage IV because it may 

become a stage III or stage IV is 

inappropriate. Therefore, we are not 

changing the MCC/CC classification of 

code 707.25 (Pressure ulcer, 

unstageable), and it will remain a nonCC. 

The CDC has recently updated the 

ICD–9–CM coding guidance for pressure 

ulcers. Code assignments for pressure 

ulcer stages may be based on medical 

record documentation from clinicians 

who are not the patient’s provider. The 

coding guidelines are available at: 

http://www.cdc.gov/nchs/datawh/ 

ftpserv/ftpICD9/ftpICD9.htm. 

c. Coronary Artery Stents 

This topic was not raised by CMS in 

the proposed rule. However, four 

commenters have taken this opportunity 

to comment on the content of MS–DRG 

246 (Percutaneous Cardiovascular 

Procedure with Drug-Eluting Stent with 

MCC or 4+ Vessels/Stents), and 248 

(Percutaneous Cardiovascular Procedure 

with Non-Drug-Eluting Stent with MCC 

or 4+ Vessels/Stents) in MDC 5 

(Diseases and Disorders of the 

Circulatory System). 

For a comprehensive review of the 

most recent discussion concerning 

coronary stents, both drug-eluting and 

non-drug-eluting, we refer readers to FY 

2006 IPPS final rule (70 FR 47929 

through 47295). In Table 6B of that rule, 

we published the new ICD–9–CM 

procedure codes describing newly 

created adjunct codes 00.40 through 

00.43 (codes describing the number of 

blood vessels upon which a procedure 

had been performed) and 00.45 through 

00.48 (codes describing the number of 

vascular stents which had been 

inserted). These codes were available for 

use beginning October 1, 2006, for FY 

2007. We note that under the former 

CMS DRG structure, the DRGs 

containing either drug-eluting or nondrug-eluting stents were located in CMS 

DRG 556 (Percutaneous Cardiovascular 

Procedure with Non-Drug-Eluting Stent 

without Major Cardiovascular 

Diagnosis), CMS DRG 557 (Percutaneous 

Cardiovascular Procedure with DrugEluting Stent with Major Cardiovascular 

Diagnosis), or CMS DRG 558 

(Percutaneous Cardiovascular Procedure 

with Drug-Eluting Stent without Major 

Cardiovascular Diagnosis). 

In response to a late comment during 

the last update cycle regarding insertion 

of four or more stents, CMS had 

reviewed, but did not publish, FY 2007 

MedPAR data containing some statistics 

included in MS–DRGs 246 and 248. The 

ICD–9–CM procedure codes we 

reviewed were: 

• 00.66 (Percutaneous transluminal 

coronary angioplasty [PTCA] or 

coronary atherectomy) 

• 00.40 (Procedure on single vessel) 

• 00.41 (Procedure on two vessels) 

• 00.42 (Procedure on three vessels) 

• 00.43 (Procedure on four or more 

vessels) 

• 00.44 (Procedure on vessel 

bifurcation) 

• 00.45 (Insertion of one vascular 

stent) 

• 00.46 (Insertion of two vascular 

stents) 

• 00.47 (Insertion of three vascular 

stents) 

• 00.48 (Insertion of four or more 

vascular stents) 

We arrayed the data several ways, 

looking at PTCA cases with 4+ vessels 

without 4+ stents (codes 00.66 with 

00.43), with 4+ stents without 4+ 

vessels (codes 00.66 with 00.48), and 

the balance of the contents of MS–DRGs 

246 and 248 eliminating PTCA plus 4+ 

vessels and 4+ stents (codes 00.66 plus 

00.43) and (codes 00.66 plus 00.48). In 

addition, we reviewed the data on cases 

involving 1–3 vessels with 4+ stents 

(codes 00.40 through 00.42 with 00.48) 

and 1–3 stents with 4+ vessels (codes 

00.45 through 00.47 with 00.43). We 

also reviewed MS–DRGs 246, 247, 248, 

and 249 containing the code for vessel 

bifurcation (code 00.44). The data we 

reviewed are represented in the tables 

below. 

MS–DRGs Number of 

cases 

Average 

length of stay 

Average 

charges 

246—All Cases ............................................................................................................................ 27,591 5.36 $65,423.34 

246—Cases with PTCA with 4+ vessels without 4+ stents (Codes 00.66 with 00.43) .............. 311 2.56 50,986.31 

246—Cases with PTCA with 4+ stents without 4+ vessels (Codes 00.66 with 00.48) .............. 5,697 2.73 66,275.14 

246—Cases without Codes 00.66 with 00.43 or 00.66 with 00.48 ............................................. 21,289 6.13 65,329.96 

247—All Cases ............................................................................................................................ 180,307 2.17 42,084.09 

248—All Cases ............................................................................................................................ 12,979 6.03 59,016.01 

248—Cases with PTCA with 4+ vessels without 4+ stents (Codes 00.66 with 00.48) .............. 59 2.44 44,454.05 

248—Cases with PTCA with 4+ stents withouth 4+ vessels (Codes 00.66 with 00.48) ............ 1,474 3.57 57,210.58 

248—Cases without Codes 00.66 with 00.43 or 00.66 with 00.48 ............................................. 11,396 6.38 59,318.54 

249—All Cases ............................................................................................................................ 65,858 2.50 36,958.18 

246—All Cases ............................................................................................................................ 27,591 5.36 65,423.34 

246—Cases with 1–3 vessels with 4+ stents (Codes 00.40–00.42 with 00.48) ......................... 3,901 2.67 64,363.82 

246—Cases with 1–3 stents with 4+ vessels (Codes 00.45–00.47 with 00.43) ......................... 214 2.45 50,425.73 

246—Cases with procedure on vessel bifurcation (Code 00.44) ............................................... 387 3.56 62,338.01 

247—All Cases ............................................................................................................................ 180,307 2.17 42,084.09 

247—Cases with procedure on vessel bifurcation (Code 00.44) ............................................... 1,742 1.97 42,212.23 

248—All Cases ............................................................................................................................ 12,979 6.03 59,016.01 

248—Cases with 1–3 vessels with 4+ stents (Codes 00.40–00.42 with 00.48) ......................... 961 3.60 55,721.11 

248—Cases with 1–3 stents with 4+ vessels (Codes 00.45–00.47 with 00.43) ......................... 45 2.36 45,491.68 


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MS–DRGs Number of 

cases 

Average 

length of stay 

Average 

charges 

248—Cases with procedure on vessel bifurcation (Code 00.44) ............................................... 92 5.22 65,756.27 

249—All Cases ............................................................................................................................ 65,858 2.50 36,958.18 

249—Cases with procedure on vessels bifurcation (Code 00.44) .............................................. 422 2.31 38,507.05 

The results of our review do not 

suggest to us that there should be any 

proposal for change to MS–DRGs 246 or 

248 for FY 2009 because there was no 

compelling evidence that the cases 

involving either 4+ vessels or 4+ stents 

were inappropriately placed in the MS–

DRGs. 

Comment: Three commenters urged 

CMS to revise the GROUPER logic to 

include ICD–9–CM procedure codes 

00.42 and 00.47 in MS–DRG 246. In 

addition, the commenters suggested the 

CMS revise the GROUPER logic for the 

bare metal stents in MS–DRG 248 by 

assigning codes 00.42 and 00.47 there as 

well. One commenter stated that 

assigning these codes to the ‘‘with 

MCC’’ MS–DRGs increases payment 

accuracy. 

Response: We agree that reassigning 

these codes to MS–DRG 246 and 248 

would increase payment. However, at 

this time we are not convinced that a 

change of this nature would increase 

payment accuracy. As previously stated, 

we reviewed the data for cases involving 

4+ vessels and 4+ stents as shown above 

in the tables, but did not specifically 

review the data for cases involving 3 

vessels and/or 3 stents inserted at one 

operative episode. However, we note 

that while all three commenters 

submitted data based on the MedPAR 

files of FY 2007, their conclusions 

regarding the numbers of cases and the 

charges were not consistent among 

themselves, nor did their data match our 

figures, even to the number of cases 

under review. 

We note that evaluation of CMS’s data 

comparing insertion of 1–3 stents with 

4+ vessels shows an average length of 

stay almost 3 days lower than the 

average length of stay for the entire MS–

DRG 246, as well as average charges 

$15,000 lower than the average for the 

entire DRG. Another evaluation of 

CMS’s data comparing insertion in 1–3 

vessels with 4+ stents shows an average 

length of stay of 2.7 days lower than the 

average length of stay for the entire MS–

DRG 246, as well as average charges 

more than $1,000 lower than the average 

for the entire DRG. We believe that these 

data do not support an MS–DRG change. 

Comment: One commenter, a device 

manufacturer, believed that MS–DRGs 

246 through 251 (percutaneous 

cardiovascular procedures with and 

without drug-eluting and non-drugeluting stents and with and without 

MCCs) contain appropriate procedure 

code assignments. The commenter 

indicated its intent to continue to 

monitoring the data in these MS–DRGs 

in an effort to improve coding accuracy 

and appropriate hospital resource 

allocation, but, at this time, 

recommended no changes to this group 

of MS–DRGs. 

Response: We appreciate the 

commenter’s feedback and look forward 

to working with the industry to assure 

appropriate payment to hospitals under 

all MS–DRGs. 

As stated above, the topic of 

reassigning certain procedure codes for 

numbers of cardiac stents in cardiac 

vessels was not discussed in the FY 

2009 IPPS proposed rule; therefore, no 

proposals had been made by CMS. We 

believe it is inappropriate to make these 

MS–DRG modifications without claims 

data under the MS–DRG system. 

Therefore, we will continue to monitor 

MDC 5 and the stent MS–DRGs. Should 

there be evidence-based justification for 

reassignment of codes within these MS–

DRGs, we will be open to proposing to 

make changes to the structure of the 

MS–DRG in the future. 

d. TherOx (Downstream System) 

This topic was not discussed in the 

FY 2009 IPPS proposed rule. However, 

one commenter addressed this subject. 

TherOx, manufacturer of the 

Downstream System, also known as 

SuperSaturated Oxygen Therapy (SSO2) 

or Aqueous Oxygen (AO) System, is a 

new technology involving the creation 

and delivery of superoxygenated arterial 

blood directly to reperfused areas of 

myocardial tissue. The concept is that 

this will reduce infarct size by 

minimizing microvascular damage in 

heart attack patients following 

percutaneous coronary intervention. 

The Downstream System is the console 

portion of a disposable cartridge-based 

system that withdraws a small amount 

of the patient’s arterial blood, mixes it 

with a small amount of saline, and 

supersaturates it with oxygen to create 

highly oxygen-enriched blood, which is 

delivered directly to the infarct-related 

artery via the TherOx infusion catheter. 

An additional 100 minutes of 

catheterization laboratory time is 

required for this procedure. According 

to the proposed package insert, the 

Downstream System will be used for 

patients undergoing a percutaneous 

cardiovascular procedure in which a 

stent is implanted. According to the 

manufacturer, factoring in the average 

charges for supplies ($2,333), procedure 

time ($8,727) and device cost ($10,560), 

the additional charges unique to the 

Downstream System are estimated to 

be $21,620. 

At the September 27, 2007, a request 

was made before the ICD–9–CM 

Coordination and Maintenance 

Committee to consider establishing a 

new code to describe this intervention. 

A new code, 00.49 (SuperSaturated 

oxygen therapy) was created for use 

beginning October 1, 2008, for FY 2009. 

This code can be found in Table 6B of 

the Addendum to this final rule. 

Comment: One commenter, the 

manufacturer of the Downstream

System, expressed concern about the 

assignment of code 00.49 as a non-O.R. 

procedure in the proposed rule. This is 

indicated by an ‘‘N’’ in the O.R. column 

of Table 6B, and indicates that the 

GROUPER program will not take this 

code into account when reviewing 

Medicare claims data for MS–DRG 

assignment. The manufacturer 

encouraged CMS to assign code 00.49 to 

MS–DRG 246 (Percutaneous 

Cardiovascular Procedures with DrugEluting Stent with MCC or 4+ Vessels/ 

Stents), irrespective of the actual 

presence of a drug-eluting stent or an 

MCC. 

The manufacturer also encouraged 

CMS to help ensure that hospitals adopt 

this unique and beneficial treatment 

option in a timely manner after its FDA 

approval by assigning cases using the 

technology to MS–DRG 246, stating that: 

‘‘This action will provide appropriate 

reimbursement [to hospitals] for its 

use’’. The manufacturer further noted 

that in 2002, CMS established DRG 

assignments for drug-eluting stents, a 

technology that had not yet been 

approved by the FDA. The manufacturer 

requested that CMS take similar action 

[to the precedent set for drug-eluting 

stents] for cases involving patients that 

have had an anterior ST-elevated 

myocardial infarction (STEMI) and have 

received a stent and the Downstream

System. 

The manufacturer further noted that 

assigning all cases using the 

Downstream System to MS–DRG 246 is 


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consistent with CMS’ past MS–DRG 

reclassifications, pointing out that, in 

the FY 2008 final rule, CMS reorganized 

several MS–DRGs to better recognize the 

costs of particular technologies. The 

example was given concerning the 

reassignment of all cases utilizing the 

Gliadel Wafer to MS–DRG 023 after 

CMS found that the average charges for 

Gliadel cases in MS–DRG 024 were 27 

percent greater than the average charges 

for non-Gliadel cases. The 

manufacturer encourages CMS to follow 

this example ‘‘by assigning all cases 

using the Downstream System to MS–

DRG 246 where the average charges of 

these cases will be more closely aligned 

with the overall average of charges in 

the MS–DRG.’’

Response: We note that procedure 

code 00.49 is so new that it has not yet 

had a chance to be reflected in the 

MedPAR database. Therefore, we do not 

have data on the impact of the 

Downstream System procedure, which 

is an adjunct therapy to PTCA. Without 

claims data, we cannot evaluate the 

commenter’s suggestion that the use of 

the Downstream System is equivalent 

to cases in MS–DRG 246 which include 

the insertion of drug-eluting stents with 

MCC or 4+ vessels/stent. We also 

believe that the Downstream System is 

not a stand-alone procedure (that is, it 

is only performed after a PTCA has been 

done, and while the patient is still in 

the catheterization laboratory). 

Therefore, it is most appropriately 

described as non-O.R. in its GROUPER 

designation. This would continue to 

allow the MS–DRG assignment to be 

based on the definitive procedures 

performed such as a PTCA or the 

insertions of stents, and not on 

adjunctive procedures. 

When we created the severity-based 

MS–DRGs for use beginning in FY 2008, 

we thoroughly reviewed over 13,000 

diagnosis codes in order to establish 

realistic severity measures. We had two 

major goals: To create DRGs that would 

more accurately reflect the severity of 

the cases assigned to them; and to create 

groups that would have sufficient 

volume so that meaningful and stable 

payment weights could be developed. 

We developed a set of five criteria to 

determine whether an MS–DRG should 

be subdivided into subgroups based on 

the presence of a CC or an MCC, and 

determined that a subgroup had to meet 

all five criteria in order to be so 

subdivided. These criteria can be 

reviewed in the FY 2008 final rule with 

comment period (72 FR 47169). There 

was no criteria suggesting that devicebased procedures be assigned to the 

MS–DRG with an MCC designation in 

order for additional reimbursement to 

be made available to hospitals. 

The commenter used the example of 

our review of the Gliadel Wafer and 

subsequent MS–DRG reassignment to 

bolster the argument that these 

Downstream System cases should be 

assigned to MS–DRG 246. We point out 

that the commenter himself noted that 

this reassignment took place after CMS 

had reviewed the MedPAR data and was 

able to determine that the average 

charges for Gliadel cases in MS–DRG 

024 were 27 percent greater than the 

average charges for non-Gliadel cases, 

thereby warranting such a change. 

Without evidence-based data, we are 

reluctant to subjectively assign a 

technology to an MS–DRG based on 

assumption. Further, to ignore the 

structure of the MS–DRG system solely 

for the purpose of increasing payment 

for one device would set an unwelcome 

precedent for defining all of the other 

MS–DRGs in the system, as previously 

stated in the FY 2007 IPPS final rule (71 

FR 47943). We believe that the MS–DRG 

structure for the percutaneous 

procedures with stent insertion (MS–

DRGs 246, 247, 248, and 249, with and 

without volume of vessels and/or stents, 

and with or without CC/MCC) are 

appropriate MS–DRG assignments for 

the Downstream System, and the cases 

will be assigned based on the presence 

of either a drug-eluting or a non-drug 

eluting stent, and the presence or 

absence of an MCC. Therefore, for FY 

2009, because there is no data to 

support the assignment of procedure 

code 00.49 to MS–DRG 246, we are not 

making the change requested by the 

commenter. Should there be evidencebased justification for assignment of 

code 00.49 in the future, we will be 

open to making a proposal to change the 

structure of these MS–DRGs. 

e. Spinal Disc Devices 

This topic was not discussed in the 

FY 2009 IPPS proposed rule. However, 

one commenter addressed this subject. 

Comment: One commenter 

representing a manufacturer of artificial 

disc devices recommended that CMS 

create a new MS–DRG for disc device 

procedures in MDC 8 (Diseases and 

Disorders of the Musculoskeletal System 

and Connective Tissue). Specifically, 

the commenter suggested that ICD–9–

CM codes 84.58 (Implantation of 

interspinous process decompression 

device), 84.59 (Insertion of other spinal 

devices), 84.62 (Insertion of total spinal 

disc prosthesis, cervical), and 84.65 

(Insertion of total spinal disc prosthesis, 

lumbosacral) be moved into a separate 

MS–DRG that combines procedures that 

utilize expensive implantable devices. 

According to the commenter, by 

creating this new MS–DRG, CMS would 

avoid classifying these procedures with 

procedures that do not utilize devices. 

Response: We point out that ICD–9–

CM code 84.58 was deleted effective 

October 1, 2007 (FY 2008). The 

procedure previously assigned to that 

code was reassigned to new ICD–9–CM 

code 84.80 (Insertion or replacement of 

interspinous process device(s)). 

With regards to the creation of a new 

MS–DRG for the procedure codes 84.59, 

84.62, and 84.65, we refer the reader to 

the FY 2008 IPPS proposed rule (72 FR 

24733 through 24735) and the FY 2008 

IPPS final rule with comment period (72 

FR 47226 through 47232) for a 

discussion on the comprehensive 

evaluation of all the spinal DRGs in the 

development of the MS–DRG 

classification system. Effective October 

1, 2007, all the aforementioned 

procedures were grouped together in 

MS–DRG 490 (Back and Neck 

Procedures Except Spinal Fusion with 

CC/MCC or Disc Device/ 

Neurostimulator). The modifications 

made to the spinal DRGs for FY 2008 

recognized the similar utilization of 

resources, differences in levels of 

severity and the complexity of the 

services being performed on patients 

undergoing those types of procedures. 

In response to the suggested creation 

of a new, separate MS–DRG to combine 

spinal procedures that utilize expensive 

implantable devices, we note that the 

MS–DRG classification system (and 

more importantly, the IPPS), is not 

based solely on the cost of devices; it is 

not a device classification system. We 

refer the reader to section II.B.2. of the 

preamble to this final rule for a 

summary of the process and criteria 

utilized in determining whether specific 

MS–DRG modifications are warranted in 

a given year. 

We note that several commenters 

acknowledged CMS’ discussion of the 

FY 2008 implementation of the MS–

DRGs and the lack of data to support 

major MS–DRG changes for FY 2009. In 

addition, several commenters accepted 

CMS’ proposal of not making significant 

revisions to the MS–DRGs until claims 

data under the new MS–DRG system are 

available. Therefore, because we do not 

have claims data at this time to evaluate 

the need for revisions to MS–DRGs, we 

are not making any revisions to the MS–

DRGs involving implantable spinal 

devices for FY 2009. 

f. Spinal Fusion 

This topic was not discussed in the 

FY 2009 IPPS proposed rule. However, 

one commenter addressed this subject. 


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Comment: Similar to last year, a 

manufacturer again requested that CMS 

reassign procedure code 84.82 (Insertion 

or replacement of pedicle-based 

dynamic stabilization device(s)), which 

was effective October 1, 2007, from MS–

DRG 490 (Back and Neck Procedures 

Except Spinal Fusion with CC/MCC or 

Disc Device/Neurostimulator) to MS–

DRG 460 (Spinal Fusion Except Cervical 

without MCC). 

As a result of CMS’ final policy for FY 

2008 that assigned procedure code 84.82 

to MS–DRG 490, the commenter 

reported that it conducted a number of 

analyses that included: (1) A clinical 

comparison of the implant procedure of 

dynamic stabilization and instrumented 

spinal fusion; (2) a comparison of 

average charge data in MS–DRGs 460 

and 490 utilizing FY 2007 MedPAR 

data; and (3) a cost comparison of 

claims including the implant of the 

Dynesys system compared to those of 

spinal fusion. 

Due to the fact that claims data on 

procedure code 84.82 was unavailable 

in the MedPAR file, the commenter 

stated it utilized procedure code 84.59 

(Insertion of other spinal devices) and 

conducted the same analysis CMS had 

done for FY 2008. Results of the 

commenter’s analysis showed a large 

increase in the volume of cases with 

procedure code 84.59 assigned, which, 

according to the commenter, provided a 

more reliable number of cases to 

compare average charges. 

Response: We appreciate the 

commenter’s analysis and acknowledge 

the commenter’s request. In response to 

the commenter’s analyses of the charge 

data for procedure code 84.59, the 

Dynesys system is not the only 

technology that was assigned to code 

84.59 in the years that the commenter 

examined. During that time, there were 

a number of other spinal technologies 

that were under development or in 

clinical trials that were also assigned 

procedure code 84.59 because a unique 

code for their specific technology did 

not yet exist. 

As stated in the FY 2008 final rule 

with comment period (72 FR 47228), we 

conducted a comprehensive review of 

the entire group of spine DRGs in the 

development of the MS–DRG system. In 

the analysis that we conducted, the data 

demonstrated that procedures assigned 

to MS–DRG 490 were not the same in 

terms of resource utilization, severity of 

illness, and complexity of care, as those 

assigned to MS–DRG 460 (Spinal Fusion 

Except Cervical without MCC). As we 

stated earlier, we received several 

comments acknowledging CMS’

discussion of the recent implementation 

of MS–DRGs and lack of data to support 

major MS–DRG changes for FY 2009. 

The commenters accepted CMS’

proposal of not making significant 

revisions to the MS–DRGs until claims 

data under the new MS–DRG system are 

available. Therefore, as final policy for 

FY 2009, we are not reassigning 

procedure code 84.82 from MS–DRG 

490 to MS–DRG 460. 

g. Special Treatment for Hospitals With 

High Percentages of ESRD Discharges 

In our existing regulations under 42 

CFR 412.104, we provide that CMS will 

make an additional payment to a 

hospital for inpatient services furnished 

to a beneficiary with end-stage renal 

disease (ESRD) who is discharged and 

who receives a dialysis treatment during 

a hospital stay, if the hospital has 

established that ESRD beneficiary 

discharges constitute 10 percent or more 

of its total Medicare discharges. 

However, as specified in the regulations, 

in determining a hospital’s eligibility for 

this additional payment, we excluded 

from the hospital’s ESRD beneficiary 

discharge count discharges classified 

into the following CMS DRGs: DRG 302 

(Kidney Transplant); DRG 316 (Renal 

Failure); or DRG 317 (Admit for Renal 

Dialysis). As discussed in section II.C. of 

the preamble of this final rule, we 

adopted the MS–DRG classification 

system for FY 2008 to better recognize 

severity of illness. Under the MS–DRG 

system, these three DRGs have been 

changed. Therefore, we are revising 

§ 412.104 to make the three DRG 

numbers and titles consistent with their 

replacement MS–DRGs. DRG 302 

(Kidney Transplant) became MS–DRG 

652; DRG 316 (Renal Failure) became 

MS–DRG 682 (Renal Failure with MCC), 

MS–DRG 683 (Renal Failure with CC), 

and MS–DRG 684 (Renal Failure 

without CC/MCC); and DRG 317 (Admit 

for Renal Dialysis) became MS–DRG 685 

(Admit for Renal Dialysis). 

H. Recalibration of MS–DRG Weights 

In section II.E. of the preamble of this 

final rule, we state that we are fully 

implementing the cost-based DRG 

relative weights for FY 2009, which is 

the third year in the 3-year transition 

period to calculate the relative weights 

at 100 percent based on costs. In the FY 

2008 IPPS final rule with comment 

period (72 FR 47267), as recommended 

by RTI, for FY 2008, we added two new 

CCRs for a total of 15 CCRs: One for 

‘‘Emergency Room’’ and one for ‘‘Blood 

and Blood Products,’’ both of which can 

be derived directly from the Medicare 

cost report. 

As we proposed, in developing the FY 

2009 system of weights, we used two 

data sources: Claims data and cost 

report data. As in previous years, the 

claims data source is the MedPAR file. 

This file is based on fully coded 

diagnostic and procedure data for all 

Medicare inpatient hospital bills. The 

FY 2007 MedPAR data used in this final 

rule include discharges occurring on 

October 1, 2006, through September 30, 

2007, based on bills received by CMS 

through March 2008, from all hospitals 

subject to the IPPS and short-term, acute 

care hospitals in Maryland (which are 

under a waiver from the IPPS under 

section 1814(b)(3) of the Act). The FY 

2007 MedPAR file used in calculating 

the relative weights includes data for 

approximately 11,554,993 Medicare 

discharges from IPPS providers. 

Discharges for Medicare beneficiaries 

enrolled in a Medicare Advantage 

managed care plan are excluded from 

this analysis. The data exclude CAHs, 

including hospitals that subsequently 

became CAHs after the period from 

which the data were taken. The second 

data source used in the cost-based 

relative weighting methodology is the 

FY 2006 Medicare cost report data files 

from HCRIS (that is, cost reports 

beginning on or after October 1, 2005, 

and before October 1, 2006), which 

represents the most recent full set of 

cost report data available. We used the 

March 31, 2008 update of the HCRIS 

cost report files for FY 2006 in setting 

the relative cost-based weights. 

The methodology we used to calculate 

the DRG cost-based relative weights 

from the FY 2007 MedPAR claims data 

and FY 2006 Medicare cost report data 

is as follows: 

• To the extent possible, all the 

claims were regrouped using the FY 

2009 MS–DRG classifications discussed 

in sections II.B. and G. of the preamble 

of this final rule. 

• The transplant cases that were used 

to establish the relative weights for heart 

and heart-lung, liver and/or intestinal, 

and lung transplants (MS–DRGs 001, 

002, 005, 006, and 007, respectively) 

were limited to those Medicareapproved transplant centers that have 

cases in the FY 2007 MedPAR file. 

(Medicare coverage for heart, heart-lung, 

liver and/or intestinal, and lung 

transplants is limited to those facilities 

that have received approval from CMS 

as transplant centers.) 

• Organ acquisition costs for kidney, 

heart, heart-lung, liver, lung, pancreas, 

and intestinal (or multivisceral organs) 

transplants continue to be paid on a 

reasonable cost basis. Because these 

acquisition costs are paid separately 

from the prospective payment rate, it is 

necessary to subtract the acquisition 

charges from the total charges on each 

transplant bill that showed acquisition 


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charges before computing the average 

cost for each DRG and before 

eliminating statistical outliers. 

• Claims with total charges or total 

length of stay less than or equal to zero 

were deleted. Claims that had an 

amount in the total charge field that 

differed by more than $10.00 from the 

sum of the routine day charges, 

intensive care charges, pharmacy 

charges, special equipment charges, 

therapy services charges, operating 

room charges, cardiology charges, 

laboratory charges, radiology charges, 

other service charges, labor and delivery 

charges, inhalation therapy charges, 

emergency room charges, blood charges, 

and anesthesia charges were also 

deleted. 

• At least 95.9 percent of the 

providers in the MedPAR file had 

charges for 10 of the 15 cost centers. 

Claims for providers that did not have 

charges greater than zero for at least 10 

of the 15 cost centers were deleted. 

• Statistical outliers were eliminated 

by removing all cases that were beyond 

3.0 standard deviations from the mean 

of the log distribution of both the total 

charges per case and the total charges 

per day for each DRG. 

Once the MedPAR data were trimmed 

and the statistical outliers were 

removed, the charges for each of the 15 

cost groups for each claim were 

standardized to remove the effects of 

differences in area wage levels, IME and 

DSH payments, and for hospitals in 

Alaska and Hawaii, the applicable costof-living adjustment. Because hospital 

charges include charges for both 

operating and capital costs, we 

standardized total charges to remove the 

effects of differences in geographic 

adjustment factors, cost-of-living 

adjustments, DSH payments, and IME 

adjustments under the capital IPPS as 

well. Charges were then summed by 

DRG for each of the 15 cost groups so 

that each DRG had 15 standardized 

charge totals. These charges were then 

adjusted to cost by applying the national 

average CCRs developed from the FY 

2006 cost report data. 

The 15 cost centers that we used in 

the relative weight calculation are 

shown in the following table. The table 

shows the lines on the cost report and 

the corresponding revenue codes that 

we used to create the 15 national cost 

center CCRs. 


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We developed the national average 

CCRs as follows: 

Taking the FY 2006 cost report data, 

we removed CAHs, Indian Health 

Service hospitals, all-inclusive rate 

hospitals, and cost reports that 

represented time periods of less than 1 

year (365 days). We included hospitals 

located in Maryland as we are including 

their charges in our claims database. We 

then created CCRs for each provider for 

each cost center (see prior table for line 

items used in the calculations) and 

removed any CCRs that were greater 

than 10 or less than 0.01. We 

normalized the departmental CCRs by 

dividing the CCR for each department 

by the total CCR for the hospital for the 

purpose of trimming the data. We then 

took the logs of the normalized cost 

center CCRs and removed any cost 

center CCRs where the log of the cost 

center CCR was greater or less than the 

mean log plus/minus 3 times the 

standard deviation for the log of that 

cost center CCR. Once the cost report 

data were trimmed, we calculated a 

Medicare-specific CCR. The Medicarespecific CCR was determined by taking 

the Medicare charges for each line item 

from Worksheet D–4 and deriving the 

Medicare-specific costs by applying the 

hospital-specific departmental CCRs to 

the Medicare-specific charges for each 

line item from Worksheet D–4. Once 

each hospital’s Medicare-specific costs 

were established, we summed the total 

Medicare-specific costs and divided by 

the sum of the total Medicare-specific 

charges to produce national average, 

charge-weighted CCRs. 

After we multiplied the total charges 

for each DRG in each of the 15 cost 

centers by the corresponding national 

average CCR, we summed the 15 ‘‘costs’’

across each DRG to produce a total 

standardized cost for the DRG. The 

average standardized cost for each DRG 

was then computed as the total 

standardized cost for the DRG divided 

by the transfer-adjusted case count for 

the DRG. The average cost for each DRG 

was then divided by the national 

average standardized cost per case to 

determine the relative weight. 

The new cost-based relative weights 

were then normalized by an adjustment 

factor of 1.50598 so that the average case 

weight after recalibration was equal to 

the average case weight before 

recalibration. The normalization 

adjustment is intended to ensure that 

recalibration by itself neither increases 

nor decreases total payments under the 

IPPS, as required by section 

1886(d)(4)(C)(iii) of the Act. 

The 15 national average CCRs for FY 

2009 are as follows: 

Group CCR 

Routine Days ........................ 0.546 

Intensive Days ...................... 0.486 

Drugs .................................... 0.205 

Supplies & Equipment .......... 0.345 

Therapy Services .................. 0.423 

Laboratory ............................. 0.169 

Operating Room ................... 0.295 

Cardiology ............................. 0.190 

Radiology .............................. 0.171 

Emergency Room ................. 0.292 

Blood and Blood Products .... 0.444 

Other Services ...................... 0.432 

Labor & Delivery ................... 0.476 

Inhalation Therapy ................ 0.199 

Anesthesia ............................ 0.149 

As we explained in section II.E. of the 

preamble of this final rule, we are 

completing our 2-year transition to the 

MS–DRGs. For FY 2008, the first year of 

the transition, 50 percent of the relative 

weight for an MS–DRG was based on the 

two-thirds cost-based weight/one-third 

charge-based weight calculated using 

FY 2006 MedPAR data grouped to the 

Version 24.0 (FY 2007) DRGs. The 

remaining 50 percent of the FY 2008 

relative weight for an MS–DRG was 

based on the two-thirds cost-based 

weight/one-third charge-based weight 

calculated using FY 2006 MedPAR 

grouped to the Version 25.0 (FY 2008) 

MS–DRGs. In FY 2009, the relative 

weights are based on 100 percent cost 


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weights computed using the Version 

26.0 (FY 2009) MS–DRGs. 

When we recalibrated the DRG 

weights for previous years, we set a 

threshold of 10 cases as the minimum 

number of cases required to compute a 

reasonable weight. We are using that 

same case threshold in recalibrating the 

MS–DRG weights for FY 2009. Using the 

FY 2007 MedPAR data set, there are 8 

MS–DRGs that contain fewer than 10 

cases. Under the MS–DRGs, we have 

fewer low-volume DRGs than under the 

CMS DRGs because we no longer have 

separate DRGs for patients age 0 to 17 

years. With the exception of newborns, 

we previously separated some DRGs 

based on whether the patient was age 0 

to 17 years or age 17 years and older. 

Other than the age split, cases grouping 

to these DRGs are identical. The DRGs 

for patients age 0 to 17 years generally 

have very low volumes because children 

are typically ineligible for Medicare. In 

the past, we have found that the low 

volume of cases for the pediatric DRGs 

could lead to significant year-to-year 

instability in their relative weights. 

Although we have always encouraged 

non-Medicare payers to develop weights 

applicable to their own patient 

populations, we have heard frequent 

complaints from providers about the use 

of the Medicare relative weights in the 

pediatric population. We believe that 

eliminating this age split in the MS–

DRGs will provide more stable payment 

for pediatric cases by determining their 

payment using adult cases that are 

much higher in total volume. All of the 

low-volume MS–DRGs listed below are 

for newborns. Newborns are unique and 

require separate DRGs that are not 

mirrored in the adult population. 

Therefore, it remains necessary to retain 

separate DRGs for newborns. In FY 

2009, because we do not have sufficient 

MedPAR data to set accurate and stable 

cost weights for these low-volume MS–

DRGs, we are computing weights for the 

low-volume MS–DRGs by adjusting 

their FY 2008 weights by the percentage 

change in the average weight of the 

cases in other MS–DRGs. The crosswalk 

table is shown below: 

Low-volume MS–DRG MS–DRG title Crosswalk to MS–DRG 

768 .................................................. Vaginal Delivery with O.R. Procedure Except Sterilization and/or D&C.FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

789 .................................................. Neonates, Died or Transferred to Another Acute 

Care Facility.

FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

790 .................................................. Extreme Immaturity or Respiratory Distress Syndrome, Neonate.FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

791 .................................................. Prematurity with Major Problems .............................. FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

792 .................................................. Prematurity without Major Problems ......................... FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

793 .................................................. Full-Term Neonate with Major Problems .................. FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

794 .................................................. Neonate with Other Significant Problems ................. FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

795 .................................................. Normal Newborn ........................................................ FY 2008 FR weight (adjusted by percent change in 

average weight of the cases in other MS–DRGs). 

We did not receive any public 

comments on this section. Therefore, we 

are adopting the national average CCRs 

as proposed, with the MS–DRG weights 

recalibrated based on these CCRs. 

I. Medicare Severity Long-Term Care 

(MS–LTC–DRG) Reclassifications and 

Relative Weights for LTCHs for FY 2009 

1. Background 

Section 123 of the BBRA requires that 

the Secretary implement a PPS for 

LTCHs (that is, a per discharge system 

with a diagnosis-related group (DRG)- 

based patient classification system 

reflecting the differences in patient 

resources and costs). Section 307(b)(1) 

of the BIPA modified the requirements 

of section 123 of the BBRA by requiring 

that the Secretary examine ‘‘the 

feasibility and the impact of basing 

payment under such a system [the longterm care hospital (LTCH) PPS] on the 

use of existing (or refined) hospital 

DRGs that have been modified to 

account for different resource use of 

LTCH patients, as well as the use of the 

most recently available hospital 

discharge data.’’

When the LTCH PPS was 

implemented for cost reporting periods 

beginning on or after October 1, 2002, 

we adopted the same DRG patient 

classification system (that is, the CMS 

DRGs) that was utilized at that time 

under the IPPS. As a component of the 

LTCH PPS, we refer to the patient 

classification system as the ‘‘long-term 

care diagnosis-related groups (LTC–

DRGs).’’ As discussed in greater detail 

below, although the patient 

classification system used under both 

the LTCH PPS and the IPPS are the 

same, the relative weights are different. 

The established relative weight 

methodology and data used under the 

LTCH PPS result in LTC–DRG relative 

weights that reflect ‘‘the differences in 

patient resource use * * *’’ of LTCH 

patients (section 123(a)(1) of the BBRA 

(Pub. L. 106–113). As part of our efforts 

to better recognize severity of illness 

among patients, in the FY 2008 IPPS 

final rule with comment period (72 FR 

47130), the MS–DRGs and the Medicare 

severity long-term care diagnosis-related 

groups (MS–LTC–DRGs) were adopted 

for the IPPS and the LTCH PPS, 

respectively, effective October 1, 2007 

(FY 2008). For a full description of the 

development and implementation of the 

MS–DRGs and MS–LTC–DRGs, we refer 

readers to the FY 2008 IPPS final rule 

with comment period (72 FR 47141 

through 47175 and 47277 through 

47299). (We note that, in that same final 

rule, we revised the regulations at 

§ 412.503 to specify that for LTCH 

discharges occurring on or after October 

1, 2007, when applying the provisions 

of 42 CFR Part 412, Subpart O 

applicable to LTCHs for policy 

descriptions and payment calculations, 

all references to LTC–DRGs would be 

considered a reference to MS–LTC–

DRGs. For the remainder of this section, 

we present the discussion in terms of 

the current MS–LTC–DRG patient 

classification system unless specifically 

referring to the previous LTC–DRG 

patient classification system that was in 

effect before October 1, 2007.) We 

believe the MS–DRGs (and by extension, 

the MS–LTC–DRGs) represent a 

substantial improvement over the 

previous CMS DRGs in their ability to 

differentiate cases based on severity of 

illness and resource consumption. 


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The MS–DRGs represent an increase 

in the number of DRGs by 207 (that is, 

from 538 to 745) (72 FR 47171). In 

addition to improving the DRG system’s 

recognition of severity of illness, we 

believe the MS–DRGs are responsive to 

the public comments that were made on 

the FY 2007 IPPS proposed rule with 

respect to how we should undertake 

further DRG reform. The MS–DRGs use 

the CMS DRGs as the starting point for 

revising the DRG system to better 

recognize resource complexity and 

severity of illness. We have generally 

retained all of the refinements and 

improvements that have been made to 

the base DRGs over the years that 

recognize the significant advancements 

in medical technology and changes to 

medical practice. 

Consistent with section 123 of the 

BBRA, as amended by section 307(b)(1) 

of the BIPA, and § 412.515, we use 

information derived from LTCH PPS 

patient records to classify LTCH 

discharges into distinct MS–LTC–DRGs 

based on clinical characteristics and 

estimated resource needs. We then 

assign an appropriate weight to the MS–

LTC–DRGs to account for the difference 

in resource use by patients exhibiting 

the case complexity and multiple 

medical problems characteristic of 

LTCHs. 

Generally, under the LTCH PPS, a 

Medicare payment is made at a 

predetermined specific rate for each 

discharge; and that payment varies by 

the MS–LTC–DRG to which a 

beneficiary’s stay is assigned. Cases are 

classified into MS–LTC–DRGs for 

payment based on the following six data 

elements: 

• Principal diagnosis. 

• Up to eight additional diagnoses. 

• Up to six procedures performed. 

• Age. 

• Sex. 

• Discharge status of the patient. 

Upon the discharge of the patient 

from a LTCH, the LTCH must assign 

appropriate diagnosis and procedure 

codes from the most current version of 

the International Classification of 

Diseases, Ninth Revision, Clinical 

Modification (ICD–9–CM). HIPAA 

Transactions and Code Sets Standards 

regulations at 45 CFR parts 160 and 162 

require that no later than October 16, 

2003, all covered entities must comply 

with the applicable requirements of 

Subparts A and I through R of Part 162. 

Among other requirements, those 

provisions direct covered entities to use 

the ASC X12N 837 Health Care Claim: 

Institutional, Volumes 1 and 2, Version 

4010, and the applicable standard 

medical data code sets for the 

institutional health care claim or 

equivalent encounter information 

transaction (45 CFR 162.1002 and 45 

CFR 162.1102). For additional 

information on the ICD–9–CM Coding 

System, we refer readers to the FY 2008 

IPPS final rule with comment period (72 

FR 47241 through 47243 and 47277 

through 47281). We also refer readers to 

the detailed discussion on correct 

coding practices in the August 30, 2002 

LTCH PPS final rule (67 FR 55981 

through 55983). Additional coding 

instructions and examples are published 

in the Coding Clinic for ICD–9–CM, a 

product of the American Hospital 

Association. 

Medicare contractors (that is, fiscal 

intermediaries or MACs) enter the 

clinical and demographic information 

into their claims processing systems and 

subject this information to a series of 

automated screening processes called 

the Medicare Code Editor (MCE). These 

screens are designed to identify cases 

that require further review before 

assignment into a MS–LTC–DRG can be 

made. During this process, the following 

types of cases are selected for further 

development: 

• Cases that are improperly coded. 

(For example, diagnoses are shown that 

are inappropriate, given the sex of the 

patient. Code 68.69 (Other and 

unspecified radical abdominal 

hysterectomy) would be an 

inappropriate code for a male.) 

• Cases including surgical procedures 

not covered under Medicare. (For 

example, organ transplant in a 

nonapproved transplant center.) 

• Cases requiring more information. 

(For example, ICD–9–CM codes are 

required to be entered at their highest 

level of specificity. There are valid 3- 

digit, 4-digit, and 5-digit codes. That is, 

code 262 (Other severe protein-calorie 

malnutrition) contains all appropriate 

digits, but if it is reported with either 

fewer or more than 3 digits, the claim 

will be rejected by the MCE as invalid.) 

After screening through the MCE, 

each claim is classified into the 

appropriate MS–LTC–DRG by the 

Medicare LTCH GROUPER software. 

The Medicare GROUPER software, 

which is used under the LTCH PPS, is 

specialized computer software, and is 

the same GROUPER software program 

used under the IPPS. The GROUPER 

software was developed as a means of 

classifying each case into a MS–LTC–

DRG on the basis of diagnosis and 

procedure codes and other demographic 

information (age, sex, and discharge 

status). Following the MS–LTC–DRG 

assignment, the Medicare contractor 

determines the prospective payment 

amount by using the Medicare PRICER 

program, which accounts for hospitalspecific adjustments. Under the LTCH 

PPS, we provide an opportunity for the 

LTCH to review the MS–LTC–DRG 

assignments made by the Medicare 

contractor and to submit additional 

information within a specified 

timeframe as provided in § 412.513(c). 

The GROUPER software is used both 

to classify past cases to measure relative 

hospital resource consumption to 

establish the MS–LTC–DRG weights and 

to classify current cases for purposes of 

determining payment. The records for 

all Medicare hospital inpatient 

discharges are maintained in the 

MedPAR file. The data in this file are 

used to evaluate possible MS–DRG and 

MS–LTC–DRG classification changes 

and to recalibrate the MS–DRG and MS–

LTC–DRG relative weights during our 

annual update under both the IPPS 

(§ 412.60(e)) and the LTCH PPS 

(§ 412.517), respectively. 

In the June 6, 2003 LTCH PPS final 

rule (68 FR 34122), we changed the 

LTCH PPS annual payment rate update 

cycle to be effective July 1 through June 

30 instead of October 1 through 

September 30. In addition, because the 

patient classification system utilized 

under the LTCH PPS uses the same 

DRGs as those used under the IPPS for 

acute care hospitals, in that same final 

rule, we explained that the annual 

update of the LTC–DRG classifications 

and relative weights will continue to 

remain linked to the annual 

reclassification and recalibration of the 

DRGs used under the IPPS. Therefore, 

we specified that we will continue to 

update the LTC–DRG classifications and 

relative weights to be effective for 

discharges occurring on or after October 

1 through September 30 each year. We 

further stated that we will publish the 

annual proposed and final update of the 

LTC–DRGs in the same notice as the 

proposed and final update for the IPPS 

(69 FR 34125). 

In the RY 2009 LTCH PPS final rule 

(73 FR 26798), due to administrative 

considerations as well as in response to 

numerous comments urging CMS to 

establish one rulemaking cycle that 

would encompass the update of the 

LTCH PPS payment rates, which has 

been updated on a rate year basis, 

effective July 1 as well as the 

development of the MS–LTC–DRG 

weights, which are updated on a fiscal 

year basis, effective October 1, we 

amended the regulations at § 412.503 

and § 412.535 in order to consolidate 

the rate year and fiscal year rulemaking 

cycles. Specifically, the annual update 

of the LTCH PPS payment rates (and 

description of the methodology and data 

used to calculate these payment rates) 

and the annual update of the MS–LTC–


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DRG classifications and associated 

weighting factors for LTCHs will be 

effective on October 1 of each Federal 

fiscal year beginning October 1, 2009. In 

order to revise the payment rate update 

from July 1 through June 30 to an 

October 1 through September 30 cycle, 

we extended the 2009 rate period to 

September 30, 2009, so that RY 2009 is 

15 months. This 15-month rate year 

period is July 1, 2008, through 

September 30, 2009. We believe that 

extending RY 2009 by 3 months (to 

include July, August, and September) 

provides for a smooth transition to a 

consolidated annual update for both the 

LTCH PPS payment rates and the LTCH 

PPS MS–LTC–DRG classifications and 

weighting factors. Consequently, under 

the extension of RY 2009 to a 15-month 

rate period, after September 30, 2009, 

when the RY 2009 cycle ends, the LTCH 

PPS payment rates and other policy 

changes will subsequently be updated 

on an October 1 through September 30 

cycle in conjunction with the annual 

update to the MS–LTC–DRG 

classifications and relative weights. 

Accordingly, the next update to the 

LTCH PPS payment rates, after the 15- 

month RY 2009, will begin October 1, 

2009, coinciding with the 2010 Federal 

fiscal year. 

In the past, the annual update to the 

DRGs used under the IPPS has been 

based on the annual revisions to the 

ICD–9–CM codes and was effective each 

October 1. As discussed in the FY 2009 

IPPS proposed rule (73 FR 23591 

through 23592), with the 

implementation of section 503(a) of 

Public Law 108–173, there is the 

possibility that one feature of the 

GROUPER software program may be 

updated twice during a Federal fiscal 

year (October 1 and April 1) as required 

by the statute for the IPPS. Section 

503(a) of Public Law 108–173 amended 

section 1886(d)(5)(K) of the Act by 

adding a new clause (vii) which states 

that ‘‘the Secretary shall provide for the 

addition of new diagnosis and 

procedure codes in [sic] April 1 of each 

year, but the addition of such codes 

shall not require the Secretary to adjust 

the payment (or diagnosis-related group 

classification) * * * until the fiscal year 

that begins after such date.’’ This 

requirement improves the recognition of 

new technologies under the IPPS by 

accounting for those ICD–9–CM codes 

in the MedPAR claims data earlier than 

the agency had accounted for new 

technology in the past. In implementing 

the statutory change, the agency has 

provided that ICD–9–CM diagnosis and 

procedure codes for new medical 

technology may be created and assigned 

to existing DRGs in the middle of the 

Federal fiscal year, on April 1. However, 

this policy change does not impact the 

DRG relative weights in effect for that 

year, which will continue to be updated 

only once a year (October 1). The use of 

the ICD–9–CM code set is also 

compliant with the current 

requirements of the Transactions and 

Code Sets Standards regulations at 45 

CFR parts 160 and 162, promulgated in 

accordance with HIPAA. 

As noted above, the patient 

classification system used under the 

LTCH PPS is the same patient 

classification system that is used under 

the IPPS. Therefore, the ICD–9–CM 

codes currently used under both the 

IPPS and the LTCH PPS have the 

potential of being updated twice a year. 

This requirement is included as part of 

the amendments to the Act relating to 

recognition of new medical technology 

under the IPPS. 

Because we do not publish a midyear 

IPPS rule, any April 1 ICD–9–CM 

coding update will not be published in 

the Federal Register. Rather, we will 

assign any new diagnosis or procedure 

codes to the same DRG in which its 

predecessor code was assigned, so that 

there will be no impact on the DRG 

assignments (as also discussed in 

section II.G.11. of the preamble of this 

final rule). Any coding updates will be 

available through the Web sites 

provided in section II.G.11. of the 

preamble of this final rule and through 

the Coding Clinic for ICD–9–CM. 

Publishers and software vendors 

currently obtain code changes through 

these sources in order to update their 

code books and software system. If new 

codes are implemented on April 1, 

revised code books and software 

systems, including the GROUPER 

software program, will be necessary 

because the most current ICD–9–CM 

codes must be reported. Therefore, for 

purposes of the LTCH PPS, because 

each ICD–9–CM code must be included 

in the GROUPER algorithm to classify 

each case under the correct LTCH PPS, 

the GROUPER software program used 

under the LTCH PPS would need to be 

revised to accommodate any new codes. 

In implementing section 503(a) of 

Public Law 108–173, there will only be 

an April 1 update if new technology 

diagnosis and procedure code revisions 

are requested and approved. We note 

that any new codes created for April 1 

implementation will be limited to those 

primarily needed to describe new 

technologies and medical services. 

However, we reiterate that the process 

of discussing updates to the ICD–9–CM 

is an open process through the ICD–9–

CM Coordination and Maintenance 

Committee. Requestors will be given the 

opportunity to present the merits for a 

new code and to make a clear and 

convincing case for the need to update 

ICD–9–CM codes for purposes of the 

IPPS new technology add-on payment 

process through an April 1 update (as 

also discussed in section II.G.11. of the 

preamble of this final rule). 

At the September 27, 2007 ICD–9–CM 

Coordination and Maintenance 

Committee meeting, there were no 

requests for an April 1, 2008 

implementation of ICD–9–CM codes. 

Therefore, the next update to the ICD–

9–CM coding system will occur on 

October 1, 2008 (FY 2009). Because 

there were no coding changes suggested 

for an April 1, 2008 update, the ICD–9–

CM coding set implemented on October 

1, 2008, will continue through 

September 30, 2009 (FY 2009). The 

update to the ICD–9–CM coding system 

for FY 2009 is discussed in section 

II.G.11. of the preamble of this final 

rule. 

Accordingly, in this final rule, as 

discussed in greater detail below and as 

we proposed, we are modifying and 

revising the MS–LTC–DRG 

classifications and relative weights to be 

effective October 1, 2008 through 

September 30, 2009 (FY 2009). As 

discussed in greater detail below, the 

MS–LTC–DRGs for FY 2009 in this final 

rule are the same as the MS–DRGs for 

the IPPS for FY 2009 (GROUPER 

Version 26.0) discussed in section II.B. 

of the preamble to this final rule. 

2. Changes in the MS–LTC–DRG 

Classifications 

a. Background 

As discussed earlier, section 123 of 

Public Law 106–113 specifically 

requires that the agency implement a 

PPS for LTCHs that is a per discharge 

system with a DRG-based patient 

classification system reflecting the 

differences in patient resources and 

costs in LTCHs. Section 307(b)(1) of 

Public Law 106–554 modified the 

requirements of section 123 of Public 

Law 106–113 by specifically requiring 

that the Secretary examine ‘‘the 

feasibility and the impact of basing 

payment under such a system [the 

LTCH PPS] on the use of existing (or 

refined) hospital diagnosis-related 

groups (DRGs) that have been modified 

to account for different resource use of 

long-term care hospital patients as well 

as the use of the most recently available 

hospital discharge data.’’

Consistent with section 123 of Public 

Law 106–113 as amended by section 

307(b)(1) of Public Law 106–554 and 

§ 412.515 of our existing regulations, the 


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LTCH PPS uses information from LTCH 

patient records to classify patient cases 

into distinct LTC–DRGs based on 

clinical characteristics and expected 

resource needs. As described in section 

II.D. of the preamble of this final rule, 

for FY 2008, we adopted MS–DRGs 

under the IPPS because we believe that 

this system results in a significant 

improvement in the DRG system’s 

recognition of severity of illness and 

resource usage. We stated that we 

believe these improvements in the DRG 

system are equally applicable to the 

LTCH PPS. The changes we are making 

in this FY 2009 IPPS final rule are 

reflected in the FY 2009 GROUPER, 

Version 26.0, that will be effective for 

discharges occurring on or after October 

1, 2008, through September 30, 2009. 

Consistent with our historical practice 

of having LTC–DRGs correspond to the 

DRGs applicable under the IPPS, under 

the broad authority of section 123(a) of 

Public Law 106–113, as modified by 

section 307(b) of Public Law 106–554, 

under the LTCH PPS for FY 2008, we 

adopted the use of MS–LTC–DRGs, 

which correspond to the MS–DRGs we 

adopted under the IPPS. In addition, as 

stated above, we are using the final FY 

2009 GROUPER Version 26.0, 

established in section II.B. of this final 

rule, to classify cases effective for LTCH 

discharges occurring on or after October 

1, 2008, and through September 30, 

2009. The changes to the MS–DRG 

classification system that we are using 

under the IPPS for FY 2009 (GROUPER 

Version 26.0) are discussed in section 

II.B. of the preamble to this final rule. 

Under the LTCH PPS, as described in 

greater detail below, we determine 

relative weights for each of the MS–

LTC–DRGs to account for the difference 

in resource use by patients exhibiting 

the case complexity and multiple 

medical problems characteristic of 

LTCH patients. (Unless otherwise noted 

in this final rule, our MS–LTC–DRG 

analysis is based on LTCH data from the 

March 2008 update of the FY 2007 

MedPAR file, which contains hospital 

bills received through March 31, 2008, 

for discharges occurring in FY 2007.) 

LTCHs do not typically treat the full 

range of diagnoses as do acute care 

hospitals. Therefore, as we discussed in 

the August 30, 2002 LTCH PPS final 

rule (67 FR 55985), which implemented 

the LTCH PPS, and the FY 2008 IPPS 

final rule with comment period (72 FR 

47283), we use low-volume quintiles in 

determining the DRG relative weights 

for DRGs with less than 25 LTCH cases 

(low-volume MS–LTC–DRGs). 

Specifically, we group those lowvolume DRGs into 5 quintiles based on 

average charges per discharge. (A listing 

of the composition of low-volume 

quintiles for the FY 2008 MS–LTC–

DRGs (based on FY 2006 MedPAR data) 

appears in section II.I.3. of the FY 2008 

IPPS final rule with comment period (72 

FR 47281 through 47288).) We also 

adjust for cases in which the stay at the 

LTCH is less than or equal to five-sixths 

of the geometric average length of stay; 

that is, short-stay outlier (SSO) cases, as 

discussed below in section II.I.4. of the 

preamble of this final rule. 

b. Patient Classifications Into MS–LTC–

DRGs 

Generally, under the LTCH PPS, 

Medicare payment is made at a 

predetermined specific rate for each 

discharge; that is, payment varies by the 

DRG to which a beneficiary’s stay is 

assigned. Just as cases have been 

classified into the MS–DRGs for acute 

care hospitals under the IPPS (discussed 

in section II.B. of the preamble of this 

final rule), cases have been classified 

into MS–LTC–DRGs for payment under 

the LTCH PPS based on the principal 

diagnosis, up to eight additional 

diagnoses, and up to six procedures 

performed during the stay, as well as 

demographic information about the 

patient. The diagnosis and procedure 

information is reported by the hospital 

using the ICD–9–CM coding system. 

Under the MS–DRGs for the IPPS and 

the MS–LTC–DRGs for the LTCH PPS, 

these factors will not change. 

Section II.B. of the preamble of this 

final rule discusses the organization of 

the existing MS–DRGs, which we are 

maintaining under the MS–LTC–DRG 

system. As noted above, the patient 

classification system for the LTCH PPS 

is derived from the IPPS DRGs and is 

similarly organized into 25 major 

diagnostic categories (MDCs). Most of 

these MDCs are based on a particular 

organ system of the body and the 

remainder involves multiple organ 

systems (such as MDC 22, Burns). 

Accordingly, the principal diagnosis 

determines MDC assignment. Within 

most MDCs, cases are then divided into 

surgical DRGs and medical DRGs. Under 

the MS–DRGs, some surgical and 

medical DRGs are further defined for 

severity purposes based on the presence 

or absence of MCCs or CCs. The existing 

MS–LTC–DRGs are similarly 

categorized. (We refer readers to section 

II.B. of the preamble of this final rule for 

further discussion of surgical DRGs and 

medical DRGs.) 

Therefore, consistent with the MS–

DRGs, a base MS–LTC–DRG may be 

subdivided according to three 

alternatives. The first alternative 

includes division of the DRG into one, 

two, or three severity levels. The most 

severe level has cases with at least one 

code that is a major CC, referred to as 

‘‘with MCC’’. The next lower severity 

level contains cases with at least one 

CC, referred to as ‘‘with CC’’. Those 

DRGs without an MCC or a CC are 

referred to as ‘‘without CC/MCC’’. When 

data do not support the creation of three 

severity levels, the base DRG is divided 

into either two levels or the base is not 

subdivided. 

The two-level subdivisions consist of 

one of the following subdivisions: ‘‘with 

CC/MCC’’ or ‘‘without CC/MCC.’’ In this 

type of subdivision, cases with at least 

one code that is on the CC or MCC list 

are assigned to the ‘‘with CC/MCC’’

DRG. Cases without a CC or an MCC are 

assigned to the ‘‘without CC/MCC’’

DRG. 

The other type of two-level 

subdivision is as follows: ‘‘with MCC’’

and without MCC.’’ In this type of 

subdivision, cases with at least one code 

that is on the MCC list are assigned to 

the ‘‘with MCC’’ DRG. Cases that do not 

have an MCC are assigned to the 

‘‘without MCC’ DRG. This type of 

subdivision could include cases with a 

CC code, but no MCC. 

3. Development of the FY 2009 MS–

LTC–DRG Relative Weights 

a. General Overview of Development of 

the MS–LTC–DRG Relative Weights 

As we stated in the August 30, 2002 

LTCH PPS final rule (67 FR 55981), one 

of the primary goals for the 

implementation of the LTCH PPS is to 

pay each LTCH an appropriate amount 

for the efficient delivery of medical care 

to Medicare patients. The system must 

be able to account adequately for each 

LTCH’s case-mix in order to ensure both 

fair distribution of Medicare payments 

and access to adequate care for those 

Medicare patients whose care is more 

costly. To accomplish these goals, we 

have annually adjusted the LTCH PPS 

standard Federal prospective payment 

system rate by the applicable relative 

weight in determining payment to 

LTCHs for each case. (As we have noted 

above, we adopted the MS–LTC–DRGs 

for the LTCH PPS beginning in FY 2008. 

However, this change in the patient 

classification system does not affect the 

basic principles of the development of 

relative weights under a DRG–based 

prospective payment system.) 

Although the adoption of the MS–

LTC–DRGs resulted in some 

modifications of existing procedures for 

assigning weights in cases of zero 

volume and/or nonmonotonicity, as 

discussed in the FY 2008 IPPS final rule 

with comment period (72 FR 47289 

through 47295) and the FY 2009 IPPS 


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proposed rule and as detailed in the 

following sections, the basic 

methodology for developing the FY 

2009 MS–LTC–DRG relative weights in 

this final rule continue to be determined 

in accordance with the general 

methodology established in the August 

30, 2002 LTCH PPS final rule (67 FR 

55989 through 55991). Under the LTCH 

PPS, relative weights for each MS–LTC–

DRG are a primary element used to 

account for the variations in cost per 

discharge and resource utilization 

among the payment groups (§ 412.515). 

To ensure that Medicare patients 

classified to each MS–LTC–DRG have 

access to an appropriate level of services 

and to encourage efficiency, we 

calculate a relative weight for each MS–

LTC–DRG that represents the resources 

needed by an average inpatient LTCH 

case in that MS–LTC–DRG. For 

example, cases in an MS–LTC–DRG 

with a relative weight of 2 will, on 

average, cost twice as much to treat as 

cases in an MS–LTC–DRG with a weight 

of 1. 

b. Data 

In the FY 2009 IPPS proposed rule (73 

FR 23593), to calculate the proposed 

MS–LTC–DRG relative weights for FY 

2009, we obtained total Medicare 

allowable charges from FY 2007 

Medicare LTCH bill data from the 

December 2007 update of the MedPAR 

file, which were the best available data 

at that time, and we used the proposed 

Version 26.0 of the CMS GROUPER that 

was also proposed for use under the 

IPPS to classify LTCH cases for FY 2009. 

We also proposed that if more recent 

data became available, we would use 

those data and the finalized Version 

26.0 of the CMS GROUPER in 

establishing the FY 2009 MS–LTC–DRG 

relative weights in the final rule. 

Consistent with that proposal, to 

calculate the MS–LTC–DRG relative 

weights for FY 2009, in this final rule, 

we obtained total Medicare allowable 

charges from FY 2007 Medicare LTCH 

bill data from the March 2008 update of 

the FY 2007 MedPAR file, which are the 

best available data at this time, and we 

used the Version 26.0 of the CMS 

GROUPER that will be used under the 

IPPS (as discussed in section III.B. of the 

preamble of this final rule). 

Consistent with our historical 

methodology, as proposed, we have 

excluded the data from LTCHs that are 

all-inclusive rate providers and LTCHs 

that are reimbursed in accordance with 

demonstration projects authorized 

under section 402(a) of Public Law 90–

248 or section 222(a) of Public Law 92–

603. (We refer readers to the FY 2008 

IPPS final rule with comment period (72 

FR 47282).) Therefore, in the 

development of the FY 2009 MS–LTC–

DRG relative weights in this final rule, 

we have excluded the data of the 17 allinclusive rate providers and the 2 

LTCHs that are paid in accordance with 

demonstration projects that had claims 

in the FY 2007 MedPAR file. 

c. Hospital-Specific Relative Value 

(HSRV) Methodology 

By nature, LTCHs often specialize in 

certain areas, such as ventilatordependent patients and rehabilitation 

and wound care. Some case types 

(DRGs) may be treated, to a large extent, 

in hospitals that have, from a 

perspective of charges, relatively high 

(or low) charges. This nonarbitrary 

distribution of cases with relatively high 

(or low) charges in specific MS–LTC–

DRGs has the potential to 

inappropriately distort the measure of 

average charges. To account for the fact 

that cases may not be randomly 

distributed across LTCHs, as we 

proposed, in this final rule, we used a 

hospital-specific relative value (HSRV) 

methodology to calculate the MS–LTC–

DRG relative weights instead of the 

methodology used to determine the MS–

DRG relative weights under the IPPS 

described in section II.H. of the 

preamble of this final rule. We believe 

this method will remove this hospitalspecific source of bias in measuring 

LTCH average charges. Specifically, we 

are reducing the impact of the variation 

in charges across providers on any 

particular MS–LTC–DRG relative weight 

by converting each LTCH’s charge for a 

case to a relative value based on that 

LTCH’s average charge. 

Under the HSRV methodology, we 

standardize charges for each LTCH by 

converting its charges for each case to 

hospital-specific relative charge values 

and then adjusting those values for the 

LTCH’s case-mix. The adjustment for 

case-mix is needed to rescale the 

hospital-specific relative charge values 

(which, by definition, average 1.0 for 

each LTCH). The average relative weight 

for a LTCH is its case-mix, so it is 

reasonable to scale each LTCH’s average 

relative charge value by its case-mix. In 

this way, each LTCH’s relative charge 

value is adjusted by its case-mix to an 

average that reflects the complexity of 

the cases it treats relative to the 

complexity of the cases treated by all 

other LTCHs (the average case-mix of all 

LTCHs). 

In accordance with the methodology 

established in the August 30, 2002 

LTCH PPS final rule (67 FR 55989 

through 55991), we continue to 

standardize charges for each case by 

first dividing the adjusted charge for the 

case (adjusted for SSOs under § 412.529 

as described in section II.I.4. (step 3) of 

the preamble of this final rule) by the 

average adjusted charge for all cases at 

the LTCH in which the case was treated. 

SSO cases are cases with a length of stay 

that is less than or equal to five-sixths 

the average length of stay of the MS–

LTC–DRG (§ 412.529 and § 412.503). 

The average adjusted charge reflects the 

average intensity of the health care 

services delivered by a particular LTCH 

and the average cost level of that LTCH. 

The resulting ratio is multiplied by that 

LTCH’s case-mix index to determine the 

standardized charge for the case. 

Multiplying by the LTCH’s case-mix 

index accounts for the fact that the same 

relative charges are given greater weight 

at a LTCH with higher average costs 

than they would at a LTCH with low 

average costs, which is needed to adjust 

each LTCH’s relative charge value to 

reflect its case-mix relative to the 

average case-mix for all LTCHs. Because 

we standardize charges in this manner, 

we count charges for a Medicare patient 

at a LTCH with high average charges as 

less resource intensive than they would 

be at a LTCH with low average charges. 

For example, a $10,000 charge for a case 

at a LTCH with an average adjusted 

charge of $17,500 reflects a higher level 

of relative resource use than a $10,000 

charge for a case at a LTCH with the 

same case-mix, but an average adjusted 

charge of $35,000. We believe that the 

adjusted charge of an individual case 

more accurately reflects actual resource 

use for an individual LTCH because the 

variation in charges due to systematic 

differences in the markup of charges 

among LTCHs is taken into account. 

d. Treatment of Severity Levels in 

Developing Relative Weights 

Under the MS–LTC–DRGs, for 

purposes of the setting of the relative 

weights, as we discussed in the FY 2009 

IPPS proposed rule (73 FR 23594), there 

would be three different categories of 

DRGs based on volume of cases within 

specific MS–LTC–DRGs. MS–LTC–

DRGs with at least 25 cases are each 

assigned a unique relative weight; lowvolume MS–LTC–DRGs (that is, MS–

LTC–DRGs that contain between one 

and 24 cases annually) are grouped into 

quintiles (described below) and 

assigned the weight of the quintile. Novolume MS–LTC–DRGs (that is, no 

cases in the database were assigned to 

those MS–LTC–DRGs) are crosswalked 

to other MS–LTC–DRGs based on the 

clinical similarities and assigned the 

relative weight of the crosswalked MS–

LTC–DRG. (We provide in-depth 

discussions of our policy regarding 

weight setting for low-volume MS–LTC–


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DRGs in section II.I.3.e. of the preamble 

of this final rule and for no-volume MS–

LTC–DRGs, under Step 5 in section 

II.I.4. of the preamble of this final rule.) 

As described above, in response to the 

need to account for severity and pay 

appropriately for cases, we developed a 

severity-adjusted patient classification 

system which we adopted for both the 

IPPS and the LTCH PPS in FY 2008. As 

described in greater detail above, the 

MS–LTC–DRG system can accommodate 

three severity levels: ‘‘with MCC’’ (most 

severe); ‘‘with CC,’’ and ‘‘without CC/ 

MCC’’ (the least severe) with each level 

assigned an individual MS–LTC–DRG 

number. In cases with two subdivisions, 

the levels are either ‘‘with CC/MCC’’

and ‘‘without CC/MCC’’ or ‘‘with MCC’’

and ‘‘without MCC’’. For example, 

under the MS–LTC–DRG system, 

multiple sclerosis and cerebellar ataxia 

with MCC is MS–LTC–DRG 58; multiple 

sclerosis and cerebellar ataxia with CC 

is MS–LTC–DRG 59; and multiple 

sclerosis and cerebellar ataxia without 

CC/MCC is MS–LTC–DRG 60. For 

purposes of discussion in this section, 

the term ‘‘base DRG’’ is used to refer to 

the DRG category that encompasses all 

levels of severity for that DRG. For 

example, when referring to the entire 

DRG category for multiple sclerosis and 

cerebellar ataxia, which includes the 

above three severity levels, we would 

use the term ‘‘base-DRG.’’

As noted above, while the LTCH PPS 

and the IPPS use the same patient 

classification system, the methodology 

that is used to set the DRG weights for 

use in each payment system differs 

because the overall volume of cases in 

the LTCH PPS is much less than in the 

IPPS. As a general rule, consistent with 

the methodology we used when we 

adopted the MS–LTC–DRGs in the FY 

2008 IPPS final rule with comment 

period (72 FR 47278 through 47281), as 

we proposed, we determined the FY 

2009 relative weights for the MS–LTC–

DRGs using the following steps: (1) If an 

MS–LTC–DRG has at least 25 cases, it is 

assigned its own relative weight; (2) if 

an MS–LTC–DRG has between 1 and 24 

cases, it is assigned to a quintile for 

which we compute a relative weight for 

all of the MS–LTC–DRGS assigned to 

that quintile; and (3) if an MS–LTC–

DRG has no cases, it is crosswalked to 

another MS–LTC–DRG based upon 

clinical similarities to assign an 

appropriate relative weight (as 

described below in detail in Step 5 of 

the Steps for Determining the FY 2009 

MS–LTC–DRG Relative Weights). 

Furthermore, in determining the FY 

2009 MS–LTC–DRG relative weights, 

when necessary, as we proposed, we are 

making adjustments to account for 

nonmonotonicity, as explained below. 

Theoretically, cases under the MS–

LTC–DRG system that are more severe 

require greater expenditure of medical 

care resources and will result in higher 

average charges. Therefore, in the three 

severity levels, weights should increase 

with severity, from lowest to highest. If 

the weights do not increase (that is, if 

based on the relative weight 

methodology outlined above, the MS–

LTC–DRG with MCC would have a 

lower relative weight than one with CC, 

or the MS–LTC–DRG without CC/MCC 

would have a higher relative weight 

than either of the others), there is a 

problem with monotonicity. Since the 

start of the LTCH PPS for FY 2003 (67 

FR 55990), in determining the LTC–DRG 

relative weights, we have made 

adjustments in order to maintain 

monotonicity by grouping both sets of 

cases together and establishing a new 

relative weight for both LTC–DRGs. We 

continue to believe that utilizing 

nonmonotonic relative weights to adjust 

Medicare payments would result in 

inappropriate payments because, in a 

nonmonotonic system, cases that are 

more severe and require greater 

expenditure of medical care resources 

would be paid based on a lower relative 

weight than cases that are less severe 

and require lower resource use. The 

procedure for dealing with 

nonmonotonicity under the MS–LTC–

DRG classification system is discussed 

in greater detail below in section II.I.4. 

(Step 6) of the preamble of this final 

rule. 

e. Low-Volume MS–LTC–DRGs 

In order to account for MS–LTC–

DRGs with low volume (that is, with 

fewer than 25 LTCH cases), consistent 

with the methodology we established 

when we implemented the LTCH PPS 

(August 30, 2002; 67 FR 55984 through 

55995), we group those ‘‘low-volume 

MS–LTC–DRGs’’ (that is, MS–LTC–

DRGs that contained between 1 and 24 

cases annually) into one of five 

categories (quintiles) based on average 

charges, for the purposes of determining 

relative weights (72 FR 47283 through 

47288). In determining the FY 2009 

MS–LTC–DRG relative weights in this 

final rule, as we proposed, we continue 

to employ this quintile methodology for 

low-volume MS–LTC–DRGs. In 

addition, in cases where the initial 

assignment of a low-volume MS–LTC–

DRG to quintiles results in 

nonmonotonicity within a base-DRG, in 

order to ensure appropriate Medicare 

payments, consistent with our historical 

methodology, we are making 

adjustments to the treatment of lowvolume MS–LTC–DRGs to preserve 

monotonicity, as discussed in detail 

below in section II.I.4 (Step 6 of the 

methodology for determining the FY 

2009 MS–LTC–DRG relative weights). In 

this final rule, using LTCH cases from 

the March 2008 update of the FY 2007 

MedPAR file, we identified 290 MS–

LTC–DRGs that contained between 1 

and 24 cases. This list of MS–LTC–

DRGs was then divided into one of the 

5 low-volume quintiles, each containing 

58 MS–LTC–DRGs (290/5 = 58). As 

proposed, we assigned a low-volume 

MS–LTC–DRG to a specific low-volume 

quintile by sorting the low-volume MS–

LTC–DRGs in ascending order by 

average charge in accordance with our 

established methodology. Specifically, 

for this final rule, the 290 low-volume 

MS–LTC–DRGs were sorted by 

ascending order by average charge and 

assigned to a specific low-volume 

quintile (as described below). After 

sorting the 290 low-volume MS–LTC–

DRGs by average charge in ascending 

order, we grouped the first fifth (1st 

through 58th) of low-volume MS–LTC–

DRGs (with the lowest average charge) 

into Quintile 1. This process was 

repeated through the remaining lowvolume MS–LTC–DRGs so that each of 

the 5 low-volume quintiles contains 58 

MS–LTC–DRGs. The highest average 

charge cases are grouped into Quintile 

5. (We note that, consistent with our 

historical methodology, if the number of 

low-volume MS–LTC–DRGs had not 

been evenly divisible by 5, we would 

have used the average charge of the lowvolume MS–LTC–DRG to determine 

which low-volume quintile would have 

received the additional low-volume 

MS–LTC–DRG.) 

Accordingly, in order to determine 

the relative weights for the MS–LTC–

DRGs with low-volume for FY 2009, as 

proposed, we used the five low-volume 

quintiles described above. The 

composition of each of the five lowvolume quintiles shown in the chart 

below was used in determining the MS–

LTC–DRG relative weights for FY 2009 

(Table 11 of the Addendum to this final 

rule). We determined a relative weight 

and (geometric) average length of stay 

for each of the five low-volume quintiles 

using the methodology that we applied 

to the regular MS–LTC–DRGs (25 or 

more cases), as described in section 

II.I.4. of the preamble of this final rule. 

As we proposed, we assigned the same 

relative weight and average length of 

stay to each of the low-volume MS–

LTC–DRGs that make up an individual 

low-volume quintile. We note that, as 

this system is dynamic, it is possible 

that the number and specific type of 


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MS–LTC–DRGs with a low volume of 

LTCH cases will vary in the future. We 

use the best available claims data in the 

MedPAR file to identify low-volume 

MS–LTC–DRGs and to calculate the 

relative weights based on our 

methodology. 


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We note that we will continue to 

monitor the volume (that is, the number 

of LTCH cases) in the low-volume 

quintiles to ensure that our quintile 

assignments result in appropriate 

payment for such cases and do not 

result in an unintended financial 

incentive for LTCHs to inappropriately 

admit these types of cases. 

4. Steps for Determining the FY 2009 

MS–LTC–DRG Relative Weights 

In general, as we proposed, the FY 

2009 MS–LTC–DRG relative weights in 

this final rule were determined based on 

the methodology established in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 55989 through 55991). In 

summary, for FY 2009, we grouped 

LTCH cases to the appropriate MS–

LTC–DRG, while taking into account the 

low-volume MS–LTC–DRGs (as 

described above), before the FY 2009 

MS–LTC–DRG relative weights were 

determined. After grouping the cases to 

the appropriate MS–LTC–DRG (or lowvolume quintile), we calculated the 

relative weights for FY 2009 by first 

removing statistical outliers and cases 

with a length of stay of 7 days or less 

(as discussed in greater detail below). 

Next, we adjusted the number of cases 

in each MS–LTC–DRG (or low-volume 

quintile) for the effect of SSO cases (as 

also discussed in greater detail below). 

The SSO adjusted discharges and 

corresponding charges were used to 

calculate ‘‘relative adjusted weights’’ in 

each MS–LTC–DRG (or low-volume 

quintile) using the HSRV method 

(described above). In general, to 

determine the FY 2009 MS–LTC–DRG 

relative weights in this final rule, as we 

proposed, we used the same 

methodology we used in determining 

the FY 2008 MS–LTC–DRG relative 

weights in the FY 2008 IPPS final rule 

with comment period (72 FR 47281 

through 47299). However, as we 

proposed, we made a modification to 

our methodology for determining 

relative weights for MS–LTC–DRGs with 

no LTCH cases (as discussed in greater 

detail in Step 5 below). Also, we note 

that, although we are generally using the 

same methodology in this final rule 

(with the exception noted above) as the 


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methodology used in the FY 2008 IPPS 

final rule with comment, the discussion 

presented below of the steps for 

determining the FY 2009 MS–LTC–DRG 

relative weights varies slightly from the 

discussion of the steps for determining 

the FY 2008 MS–LTC–DRG relative 

weights (presented in the FY 2008 IPPS 

final rule with comment) because we 

took this opportunity to refine our 

description to more precisely explain 

our methodology for determining the 

MS–LTC–DRG relative weights. 

As discussed in the FY 2008 IPPS 

final rule with comment when we 

adopted the MS–LTC–DRGs, the 

adoption of the MS–LTC–DRGs with 

either two or three severity levels 

resulted in some slight modifications of 

procedures for assigning relative 

weights in cases of zero volume and/or 

nonmonotonicity (described in detail 

below) from the methodology we 

established when we implemented the 

LTCH PPS in the August 30, 2002 LTCH 

PPS final rule. As also discussed in the 

FY 2008 IPPS final rule with comment 

when we adopted the MS–LTC–DRGs, 

we implemented the MS–LTC–DRGs 

with a 2-year transition beginning in FY 

2008. For FY 2008, the first year of the 

transition, 50 percent of the relative 

weight for a MS–LTC–DRG was based 

on the average LTC–DRG relative weight 

under Version 24.0 of the LTC–DRG 

GROUPER. The remaining 50 percent of 

the relative weight was based on the 

MS–LTC–DRG relative weight under 

Version 25.0 of the MS–LTC–DRG 

GROUPER. In FY 2009, the MS–LTC–

DRG relative weights are based on 100 

percent of the MS–LTC–DRG relative 

weights. Accordingly, in determining 

the FY 2009 MS–LTC–DRG relative 

weights in this final rule, there was no 

longer a need to include a step to 

calculate MS–LTC–DRG transition 

blended relative weights (see Step 7 in 

the FY 2008 IPPS final rule with 

comment period (72 FR 47295). 

Therefore, as we proposed, in this final 

rule, we determined the FY 2009 MS–

LTC–DRG relative weights based solely 

on the MS–LTC–DRG relative weight 

under Version 26.0 of the MS–LTC–DRG 

GROUPER, which is discussed in 

section II.B. of the preamble of this final 

rule. Furthermore, as we proposed, we 

determined the final FY 2009 MS–LTC–

DRG relative weights in this final rule 

based on the final Version 26.0 of the 

MS–LTC–DRG GROUPER that is 

presented in this final rule. 

Below we discuss in detail the steps 

for calculating the FY 2009 MS–LTC–

DRG relative weights. We note that, as 

we stated above in section II.I.3.b. of the 

preamble of this final rule, we have 

excluded the data of all-inclusive rate 

LTCHs and LTCHs that are paid in 

accordance with demonstration projects 

that had claims in the FY 2007 MedPAR 

file. 

Step 1—Remove statistical outliers. 

As we proposed, the first step in the 

calculation of the FY 2009 MS–LTC–

DRG relative weights is to remove 

statistical outlier cases. Consistent with 

our historical relative weight 

methodology, we continue to define 

statistical outliers as cases that are 

outside of 3.0 standard deviations from 

the mean of the log distribution of both 

charges per case and the charges per day 

for each MS–LTC–DRG. These statistical 

outliers are removed prior to calculating 

the relative weights because we believe 

that they may represent aberrations in 

the data that distort the measure of 

average resource use. Including those 

LTCH cases in the calculation of the 

relative weights could result in an 

inaccurate relative weight that does not 

truly reflect relative resource use among 

the MS–LTC–DRGs. 

Step 2—Remove cases with a length 

of stay of 7 days or less. 

The MS–LTC–DRG relative weights 

reflect the average of resources used on 

representative cases of a specific type. 

Generally, cases with a length of stay of 

7 days or less do not belong in a LTCH 

because these stays do not fully receive 

or benefit from treatment that is typical 

in a LTCH stay, and full resources are 

often not used in the earlier stages of 

admission to a LTCH. If we were to 

include stays of 7 days or less in the 

computation of the FY 2009 MS–LTC–

DRG relative weights, the value of many 

relative weights would decrease and, 

therefore, payments would decrease to a 

level that may no longer be appropriate. 

We do not believe that it would be 

appropriate to compromise the integrity 

of the payment determination for those 

LTCH cases that actually benefit from 

and receive a full course of treatment at 

a LTCH, by including data from these 

very short-stays. Therefore, consistent 

with our historical relative weight 

methodology, in determining the FY 

2009 MS–LTC–DRG relative weights, as 

we proposed, we removed LTCH cases 

with a length of stay of 7 days or less. 

Step 3—Adjust charges for the effects 

of SSOs. 

After removing cases with a length of 

stay of 7 days or less, we are left with 

cases that have a length of stay of greater 

than or equal to 8 days. As we proposed, 

as the next step in the calculation of the 

FY 2009 MS–LTC–DRG relative weights, 

consistent with our historical relative 

weight methodology, we adjusted each 

LTCH’s charges per discharge for those 

remaining cases for the effects of SSOs 

(as defined in § 412.529(a) in 

conjunction with § 412.503 for LTCH 

discharges occurring on or after October 

1, 2008). (We note that even if a case 

was removed in Step 2 (that is, cases 

with a length of stay of 7 days or less), 

it was paid as an SSO if its length of stay 

was less than or equal to five-sixths of 

the average length of stay of the MS–

LTC–DRG.) 

We made this adjustment by counting 

an SSO case as a fraction of a discharge 

based on the ratio of the length of stay 

of the case to the average length of stay 

for the MS–LTC–DRG for non-SSO 

cases. This has the effect of 

proportionately reducing the impact of 

the lower charges for the SSO cases in 

calculating the average charge for the 

MS–LTC–DRG. This process produces 

the same result as if the actual charges 

per discharge of an SSO case were 

adjusted to what they would have been 

had the patient’s length of stay been 

equal to the average length of stay of the 

MS–LTC–DRG. 

Counting SSO cases as full discharges 

with no adjustment in determining the 

FY 2009 MS–LTC–DRG relative weights 

would lower the FY 2009 MS–LTC–DRG 

relative weight for affected MS–LTC–

DRGs because the relatively lower 

charges of the SSO cases would bring 

down the average charge for all cases 

within an MS–LTC–DRG. This would 

result in an ‘‘underpayment’’ for nonSSO cases and an ‘‘overpayment’’ for 

SSO cases. Therefore, as we proposed, 

we adjusted for SSO cases under 

§ 412.529 in this manner because it 

results in more appropriate payments 

for all LTCH cases. 

Step 4—Calculate the FY 2009 MS–

LTC–DRG relative weights on an 

iterative basis. 

Consistent with our historical relative 

weight methodology, as we proposed, 

we calculated the MS–LTC–DRG 

relative weights using the HSRV 

methodology, which is an iterative 

process. First, for each LTCH case, we 

calculate a hospital-specific relative 

charge value by dividing the SSO 

adjusted charge per discharge (see step 

3) of the LTCH case (after removing the 

statistical outliers (see step 1)) and 

LTCH cases with a length of stay of 7 

days or less (see step 2) by the average 

charge per discharge for the LTCH in 

which the case occurred. The resulting 

ratio was then multiplied by the LTCH’s 

case-mix index to produce an adjusted 

hospital-specific relative charge value 

for the case. An initial case-mix index 

value of 1.0 is used for each LTCH. 

For each MS–LTC–DRG, the FY 2009 

relative weight was calculated by 

dividing the average of the adjusted 

hospital-specific relative charge values 

(from above) for the MS–LTC–DRG by 


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the overall average hospital-specific 

relative charge value across all cases for 

all LTCHs. Using these recalculated 

MS–LTC–DRG relative weights, each 

LTCH’s average relative weight for all of 

its cases (that is, its case-mix) were 

calculated by dividing the sum of all the 

LTCH’s MS–LTC–DRG relative weights 

by its total number of cases. The LTCHs’

hospital-specific relative charge values 

above were multiplied by these 

hospital-specific case-mix indexes. 

These hospital-specific case-mix 

adjusted relative charge values were 

then used to calculate a new set of MS–

LTC–DRG relative weights across all 

LTCHs. This iterative process was 

continued until there was convergence 

between the weights produced at 

adjacent steps, for example, when the 

maximum difference is less than 0.0001. 

Step 5—Determine an FY 2009 

relative weight for MS–LTC–DRGs with 

no LTCH cases. 

As we stated above, we determined 

the FY 2009 relative weight for each 

MS–LTC–DRG using total Medicare 

allowable charges reported in the best 

available LTCH claims data (that is, the 

March 2008 update of the FY 2007 

MedPAR file for this final rule). Of the 

FY 2009 MS–LTC–DRGs, we identified 

a number of MS–LTC–DRGs for which 

there were no LTCH cases in the 

database. That is, based on data from the 

FY 2007 MedPAR file used for this final 

rule, no patients who would have been 

classified to those MS–LTC–DRGs were 

treated in LTCHs during FY 2007 and, 

therefore, no charge data were available 

for those MS–LTC–DRGs. Thus, in the 

process of determining the MS–LTC–

DRG relative weights, we were unable to 

calculate relative weights for these MS–

LTC–DRGs with no LTCH cases using 

the methodology described in Steps 1 

through 4 above. However, because 

patients with a number of the diagnoses 

under these MS–LTC–DRGs may be 

treated at LTCHs, consistent with our 

historical methodology, as we proposed, 

we assigned relative weights to each of 

the no-volume MS–LTC–DRGs based on 

clinical similarity and relative costliness 

(with the exception of ‘‘transplant’’ MS–

LTC–DRGs and ‘‘error’’ MS–LTC–DRGs 

as discussed below). In general, we 

determined FY 2009 relative weights for 

the MS–LTC–DRGs with no LTCH cases 

in the FY 2007 MedPAR file used in this 

final rule (that is, ‘‘no-volume MS–LTC–

DRGs) by crosswalking each no-volume 

MS–LTC–DRG to another MS–LTC–DRG 

with a calculated relative weight 

(determined in accordance with the 

methodology described above). Then, 

the ‘‘no-volume’’ MS–LTC–DRG was 

assigned the same relative weight of the 

MS–LTC–DRG to which it was 

crosswalked (as described in greater 

detail below). As noted above, as 

proposed, we made a modification to 

our methodology for determining 

relative weights for MS–LTC–DRGs with 

no LTCH cases in this final rule, which 

is discussed in greater detail below. As 

also noted above, even where we are not 

changing our existing methodology, as 

we did in the FY 2009 IPPS proposed 

rule, we took this opportunity to refine 

our description to more precisely 

explain our proposed methodology for 

determining the MS–LTC–DRG relative 

weights in this final rule. 

Specifically, in this final rule, as we 

proposed, we determined the relative 

weight for each MS–LTC–DRG using 

total Medicare allowable charges 

reported in the March 2008 update of 

the FY 2007 MedPAR file. Of the 746 

MS–LTC–DRGs for FY 2009, we 

identified 203 MS–LTC–DRGs for which 

there were no LTCH cases in the 

database (including the 8 ‘‘transplant’’

MS–LTC–DRGs and 2 ‘‘error’’ MS–LTC–

DRGs). For this final rule, as noted 

above and as we proposed, we assigned 

relative weights for each of the 203 novolume MS–LTC–DRGs (with the 

exception of the 8 ‘‘transplant’’ MS–

LTC–DRGs and the 2 ‘‘error’’ MS–LTC–

DRGs, which are discussed below) 

based on clinical similarity and relative 

costliness to one of the remaining 543 

(746¥203= 543) MS–LTC–DRGs for 

which we were able to determine 

relative weights, based on FY 2007 

LTCH claims data. (For the remainder of 

this discussion, we refer to one of the 

543 MS–LTC–DRGs for which we were 

able to determine relative weight as the 

‘‘crosswalked’’ MS–LTC–DRG.) Then, as 

we proposed, we assigned the novolume MS–LTC–DRG the relative 

weight of the crosswalked MS–LTC–

DRG. As discussed in the FY 2009 IPPS 

proposed rule (73 FR 23602), this 

approach differs from the one we used 

to determine the FY 2008 MS–LTC–DRG 

relative weights when there were no 

LTCH cases (72 FR 47290). Specifically, 

in determining the FY 2008 MS–LTC–

DRG relative weights in the FY 2008 

IPPS final rule with comment period, if 

the no volume MS–LTC–DRG was 

crosswalked to a MS–LTC–DRG that had 

25 or more cases and, therefore, was not 

in a low-volume quintile, we assigned 

the relative weight of a quintile to a novolume MS–LTC–DRG (rather than 

assigning the relative weight of the 

crosswalked MS–LTC–DRG). While we 

believe this approach would result in 

appropriate LTCH PPS payments 

(because it is consistent with our 

methodology for determining relative 

weights for MS–LTC–DRGs that have a 

low volume of LTCH cases (which is 

discussed above in section II.I.3.e. of 

this preamble)), upon further review 

during the development of the FY 2009 

MS–LTC–DRG relative weights in this 

final rule, we now believe that assigning 

the relative weight of the crosswalked 

MS–LTC–DRG to the no-volume MS–

LTC–DRG would result in more 

appropriate LTCH PPS payments 

because those cases generally require 

equivalent relative resource (and 

therefore should generally have the 

same LTCH PPS payment). The relative 

weight of each MS–LTC–DRG should 

reflect relative resource of the LTCH 

cases grouped to that MS–LTC–DRG. 

Because the no-volume MS–LTC–DRGs 

are crosswalked to other MS–LTC–DRGs 

based on clinical similarity and relative 

costliness, which usually require 

equivalent relative resource use, we 

believe that assigning the no-volume 

MS–LTC–DRG the relative weight of the 

crosswalked MS–LTC–DRG would 

result in appropriate LTCH PPS 

payments. (As explained below in Step 

6, when necessary, we made 

adjustments to account for 

nonmonotonicity.) 

Comment: Although we did not 

receive any comments on any of the 

specific proposed MS–LTC–DRG novolume crosswalks presented in the 

table in the proposed rule, we received 

one general comment on our description 

of the proposed methodology to 

determine the proposed no-volume MS–

LTC–DRGs crosswalks for FY 2009. 

Specifically, the commenter stated that, 

although it generally supported the 

proposed methodology for determining 

relative weights for the no-volume MS–

LTC–DRGs, it was not clear how CMS 

was able to compare the ‘‘relative 

costliness’’ of the no-volume MS–LTC–

DRGs to other MS–LTC–DRGs because, 

by definition, the no-volume MS–LTC–

DRGs do not have costs associated with 

them (since there are no LTCH cases in 

the data). The commenter questioned 

whether CMS may have evaluated the 

relative costliness of the proposed novolume FY 2009 MS–LTC–DRGs using 

prior years’ LTCH data or if relative 

costliness was assessed based on the 

cost experience of those MS–DRGs 

under the IPPS. The commenter 

requested that, in the final rule, CMS 

provide additional detail on the 

‘‘relative costliness’’ aspect of the 

proposed no-volume crosswalk 

methodology. 

Response: We appreciate the 

commenter’s support of our proposed 

methodology for determining relative 

weight for the no-volume MS–LTC–

DRGs for FY 2009. As requested by the 

commenter, we are taking this 


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opportunity to provide additional 

information on how we evaluated the 

relative costliness in determining the 

applicable MS–LTC–DRG to which a novolume MS–LTC–DRG was crosswalked in order to assign an appropriate 

relative weight for the no-volume MS–

LTC–DRGs in FY 2009. In general, most 

of the no-volume MS–LTC–DRGs 

historically have not had any cases in 

the LTCH data. Therefore, we typically 

are unable to evaluate relative costliness 

based on prior years’ LTCH claims data. 

In evaluating the relative costliness for 

most of the no-volume MS–LTC–DRGs, 

a group of CMS Medical Officers, who 

have extensive knowledge and 

familiarity with both the IPPS and 

LTCH DRG-based payment systems, 

used their DRG experience to evaluate 

the relative costliness of the no-volume 

MS–LTC–DRGs. Specifically, the 

relative costliness of each of the novolume MS–LTC–DRGs was assessed by 

taking into consideration factors such as 

relative resource use, clinical 

cohesiveness, and the comparableness 

of services provided, based on the 

collective IPPS and LTCH PPS 

experience of those Medical Officers. 

We also note, as discussed above, the 

no-volume MS–LTC–DRG crosswalks 

are based on both clinical similarity and 

relative costliness, including such 

factors as care provided during the 

period of time surrounding surgery, 

surgical approach (if applicable), length 

of time of surgical procedure, 

postoperative care, and length of stay. 

We believe in the rare event that there 

would be a few LTCH cases grouped to 

one of the no-volume MS–LTC–DRGs in 

the future, the relative weights assigned 

based on the crosswalked MS–LTC–

DRGs will result in an appropriate 

LTCH PPS payment because the 

crosswalks, which are based on similar 

clinical similarity and relative 

costliness, generally require equivalent 

relative resource use. 

In this final rule, we are adopting the 

methodology we proposed for 

determining the relative weights for the 

no-volume MS–LTC–DRGs. Our 

methodology for determining the 

relative weights for the no-volume MS–

LTC–DRGs is as follows: We crosswalk 

the no-volume MS–LTC–DRG to an MS–

LTC–DRG for which there are LTCH 

cases in the FY 2007 MedPAR file and 

to which it is similar clinically in 

intensity of use of resources and relative 

costliness as determined by criteria such 

as care provided during the period of 

time surrounding surgery, surgical 

approach (if applicable), length of time 

of surgical procedure, postoperative 

care, and length of stay. We then assign 

the relative weight of the crosswalked 

MS–LTC–DRG as the relative weight for 

the no-volume MS–LTC–DRG such that 

both of these MS–LTC–DRGs (that is, 

the no-volume MS–LTC–DRG and the 

crosswalked MS–LTC–DRG) would have 

the same relative weight. We note that 

if the crosswalked MS–LTC–DRG has 25 

cases or more, its relative weight, which 

is calculated using the methodology 

described in steps 1 through 4 above, is 

assigned to the no-volume MS–LTC–

DRG as well. Similarly, if the MS–LTC–

DRG to which the no-volume MS–LTC–

DRG is crosswalked has 24 or less cases, 

and therefore is designated to one of the 

low-volume quintiles for purposes of 

determining the relative weights, we 

assign the relative weight of the 

applicable low-volume quintile to the 

no-volume MS–LTC–DRG such that 

both of these MS–LTC–DRGs (that is, 

the no-volume MS–LTC–DRG and the 

crosswalked MS–LTC–DRG) have the 

same relative weight. (As we noted 

above, in the infrequent case where 

nonmonotonicity involving a no-volume 

MS–LTC–DRG results, additional 

measures as described in Step 6 are 

required in order to maintain 

monotonically increasing relative 

weights.) 

For this final rule, a list of the novolume FY 2009 MS–LTC–DRGs and 

the FY 2009 MS–LTC–DRG to which it 

is crosswalked (that is, the crosswalked 

MS–LTC–DRG) is shown in the chart 

below. 

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BILLING CODE 4120–01–C 

To illustrate this methodology for 

determining the relative weights for the 

MS–LTC–DRGs with no LTCH cases, we 

are providing the following example, 

which refers to the no-volume MS–

LTC–DRGs crosswalk information for 

FY 2009 provided in the chart above. 

Example: There were no cases in the FY 

2007 MedPAR file used for this final rule for 

MS–LTC–DRG 61 (Acute Ischemic Stroke 

with Use of Thrombolytic Agent with MCC). 

We determined that MS–LTC–DRG 70 

(Nonspecific Cerebrovascular Disorders with 

MCC) was similar clinically and based on 

resource use to MS–LTC–DRG 61. Therefore, 

we assigned the same relative weight of MS–

LTC–DRG 70 of 0.8718 for FY 2009 to MS–

LTC–DRG 61 (Table 11 of the Addendum to 

this final rule). 

Furthermore, for FY 2009, consistent 

with our historical relative weight 

methodology, as we proposed, we are 

establishing MS–LTC–DRG relative 

weights of 0.0000 for the following 

transplant MS–LTC–DRGs: Heart 

Transplant or Implant of Heart Assist 

System with MCC (MS–LTC–DRG 1); 

Heart Transplant or Implant of Heart 

Assist System without MCC (MS–LTC–

DRG 2); Liver Transplant with MCC or 

Intestinal Transplant (MS–LTC–DRG 5); 

Liver Transplant without MCC (MS–

LTC–DRG 6); Lung Transplant (MS–

LTC–DRG 7); Simultaneous Pancreas/ 

Kidney Transplant (MS–LTC–DRG 8); 

Pancreas Transplant (MS–LTC–DRG 10); 

and Kidney Transplant (MS–LTC–DRG 

652). This is because Medicare will only 

cover these procedures if they are 

performed at a hospital that has been 

certified for the specific procedures by 

Medicare and presently no LTCH has 

been so certified. Based on our research, 

we found that most LTCHs only perform 

minor surgeries, such as minor small 

and large bowel procedures, to the 

extent any surgeries are performed at 

all. Given the extensive criteria that 

must be met to become certified as a 

transplant center for Medicare, we 

believe it is unlikely that any LTCHs 

will become certified as a transplant 

center. In fact, in the more than 20 years 

since the implementation of the IPPS, 

there has never been a LTCH that even 

expressed an interest in becoming a 

transplant center. 

If in the future a LTCH applies for 

certification as a Medicare-approved 

transplant center, we believe that the 

application and approval procedure 

would allow sufficient time for us to 

determine appropriate weights for the 


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MS–LTC–DRGs affected. At the present 

time, we only include these eight 

transplant MS–LTC–DRGs in the 

GROUPER program for administrative 

purposes only. Because we use the same 

GROUPER program for LTCHs as is used 

under the IPPS, removing these MS–

LTC–DRGs would be administratively 

burdensome. 

Again, we note that, as this system is 

dynamic, it is entirely possible that the 

number of MS–LTC–DRGs with no 

volume of LTCH cases based on the 

system will vary in the future. We used 

the most recent available claims data in 

the MedPAR file to identify no-volume 

MS–LTC–DRGs and to determine the 

relative weights in this final rule. 

Step 6—Adjust the FY 2009 MS–LTC–

DRG relative weights to account for 

nonmonotonically increasing relative 

weights. 

As discussed in section II.B. of the 

preamble of this final rule, the MS–

DRGs (used under the IPPS) on which 

the MS–LTC–DRGs are based provide a 

significant improvement in the DRG 

system’s recognition of severity of 

illness and resource usage. The MS–

DRGs contain base DRGs that have been 

subdivided into one, two, or three 

severity levels. Where there are three 

severity levels, the most severe level has 

at least one code that is referred to as 

an MCC. The next lower severity level 

contains cases with at least one code 

that is a CC. Those cases without an 

MCC or a CC are referred to as without 

CC/MCC. When data did not support the 

creation of three severity levels, the base 

was divided into either two levels or the 

base was not subdivided. The two-level 

subdivisions could consist of the CC/ 

MCC and the without CC/MCC. 

Alternatively, the other type of two level 

subdivision could consist of the MCC 

and without MCC. 

In those base MS–LTC–DRGs that are 

split into either two or three severity 

levels, cases classified into the ‘‘without 

CC/MCC’’ MS–LTC–DRG are expected 

to have a lower resource use (and lower 

costs) than the ‘‘with CC/MCC’’ MS–

LTC–DRG (in the case of a two-level 

split) or the ‘‘with CC’’ and ‘‘with MCC’’

MS–LTC–DRGs (in the case of a threelevel split). That is, theoretically, cases 

that are more severe typically require 

greater expenditure of medical care 

resources and will result in higher 

average charges. Therefore, in the three 

severity levels, relative weights should 

increase by severity, from lowest to 

highest. If the relative weights do not 

increase (that is, if within a base MS–

LTC–DRG, an MS–LTC–DRG with MCC 

has a lower relative weight than one 

with CC, or the MS–LTC–DRG without 

CC/MCC has a higher relative weight 

than either of the others, they are 

nonmonotonic). We continue to believe 

that utilizing nonmonotonic relative 

weights to adjust Medicare payments 

would result in inappropriate payments. 

Consequently, in general, as we 

proposed, we combined MS–LTC–DRG 

severity levels within a base MS–LTC–

DRG for the purpose of computing a 

relative weight when necessary to 

ensure that monotonicity is maintained. 

In determining the FY 2009 MS–LTC–

DRG relative weights in this final rule, 

in general, we are using the same 

methodology to adjust for 

nonmonotonicity that we used to 

determine the FY 2008 MS–LTC–DRG 

relative weights in the FY 2008 IPPS 

final rule with comment (72 FR 47293 

through 47295). However, as noted 

above and as we did in the proposed 

rule, we are taking this opportunity to 

refine our description to more precisely 

explain our methodology for 

determining the MS–LTC–DRG relative 

weights in this final rule. We note that 

we did not receive any comments on 

our refinement to the description of our 

methodology for adjusting for 

nonmonotonicity in determining the 

relative weights for FY 2009 that was 

presented in the FY 2009 IPPS proposed 

rule. In determining the FY 2009 MS–

LTC–DRG relative weights in this final 

rule, under each of the example 

scenarios provided below, we combined 

severity levels within a base MS–LTC–

DRG as follows: 

The first example of 

nonmonotonically increasing relative 

weights for a MS–LTC–DRG pertains to 

a base MS–LTC–DRG with a three-level 

split and each of the three levels has 25 

or more LTCH cases and, therefore, 

none of those MS–LTC–DRGs is 

assigned to one of the five low-volume 

quintiles. In this final rule, if 

nonmonotonicity was detected in the 

relative weights of the MS–LTC–DRGs 

in adjacent severity levels (for example, 

the relative weight of the ‘‘with MCC’’

(the highest severity level) is less than 

the ‘‘with CC’’ (the middle level), or the 

‘‘with CC’’ is less than the ‘‘without CC/ 

MCC’’), we combined the nonmonotonic 

adjacent MS–LTC–DRGs and 

redetermined a relative weight based on 

the case-weighted average of the 

combined LTCH cases of the 

nonmonotonic MS–LTC–DRGs. The 

case-weighted average charge is 

calculated by dividing the total charges 

for all LTCH cases in both severity 

levels by the total number of LTCH 

cases for both MS–LTC–DRGs. The same 

relative weight is assigned to both 

affected levels of the base MS–LTC–

DRG. If nonmonotonicity remains an 

issue because the above process resulted 

in a relative weight that was still 

nonmonotonic to the remaining MS–

LTC–DRG relative weight within the 

base MS–LTC–DRG, we combined all 

three of the severity levels to 

redetermine the relative weights based 

on the case-weighted average charge of 

the combined severity levels. This same 

relative weight was then assigned to 

each of the MS–LTC–DRGs in that base 

MS–LTC–DRG. 

A second example of 

nonmonotonically increasing relative 

weights for a base MS–LTC–DRG 

pertains to the situation where there are 

three severity levels and one or more of 

the severity levels within a base MS–

LTC–DRG has less than 25 LTCH cases 

(that is, low volume). In this final rule, 

if nonmonotonicity occurs in the case 

where either the highest or lowest 

severity level (‘‘with MCC’’ or ‘‘without 

CC/MCC’’) has 25 LTCH cases or more 

and the other two severity levels are low 

volume (and therefore the other two 

severity levels are otherwise assigned 

the relative weight of the applicable 

low-volume quintile(s)), we combined 

the data for the cases in the two adjacent 

low-volume MS–LTC–DRGs for the 

purpose of determining a relative 

weight. If the combination resulted in at 

least 25 cases, we redetermined one 

relative weight based on the caseweighted average charge of the 

combined severity levels and assigned 

this same relative weight to each of the 

severity levels. If the combination 

resulted in less than 25 cases, based on 

the case-weighted average charge of the 

combined low-volume MS–LTC–DRGs, 

both MS–LTC–DRGs were assigned to 

the appropriate low-volume quintile 

(discussed above in section II.I.3.e. of 

this preamble) based on the caseweighted average charge of the 

combined low-volume MS–LTC–DRGs. 

Then the relative weight of the affected 

low-volume quintile was redetermined 

and that relative weight was assigned to 

each of the affected severity levels (and 

all of the MS–LTC–DRGs in the affected 

low-volume quintile). If 

nonmonotonicity persisted, we 

combined all three severity levels and 

redetermined one relative weight based 

on the case-weighted average charge of 

the combined severity levels and this 

same relative weight was assigned to 

each of the three levels. 

Similarly, in nonmonotonic cases 

where the middle level has 25 cases or 

more but either or both of the lowest or 

highest severity level has less than 25 

cases (that is, low volume), we 

combined the nonmonotonic lowvolume MS–LTC–DRG with the middle 

level MS–LTC–DRG of the base MS–


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LTC–DRG. We redetermined one 

relative weight based on the caseweighted average charge of the 

combined severity levels and assigned 

this same relative weight to each of the 

affected MS–LTC–DRGs. If 

nonmonotonicity persisted, we 

combined all three levels for the 

purpose of redetermining a relative 

weight based on the case-weighted 

average charge of the combined severity 

levels, and assigned that relative weight 

to each of the three severity levels. 

In the case where all three severity 

levels in the base MS–LTC–DRGs were 

low-volume MS–LTC–DRGs and two of 

the severity levels were nonmonotonic 

in relation to each other, we combined 

the two adjacent nonmonotonic severity 

levels. If that combination resulted in 

less than 25 cases, both low-volume 

MS–LTC–DRGs were assigned to the 

appropriate low-volume quintile 

(discussed above in section II.I.3.e. of 

this preamble) based on the caseweighted average charge of the 

combined low-volume MS–LTC–DRGs. 

Then the relative weight of the affected 

low-volume quintile was redetermined 

and that relative weight was assigned to 

each of the affected severity levels (and 

all of the MS–LTC–DRGs in the affected 

low-volume quintile). If the 

nonmonotonicity persisted, we 

combined all three levels of that base 

MS–LTC–DRG for the purpose of 

redetermining a relative weight based 

on the case-weighted average charge of 

the combined severity levels, and 

assigned that relative weight to each of 

the three severity levels. If that 

combination of all three severity levels 

resulted in less than 25 cases, we 

assigned that ‘‘combined’’ base MS–

LTC–DRG to the appropriate lowvolume quintile based on the caseweighted average charge of the 

combined low-volume MS–LTC–DRGs. 

Then the relative weight of the affected 

low-volume quintile was redetermined 

and that relative weight was assigned to 

each of the affected severity levels (and 

all of the MS–LTC–DRGs in the affected 

low-volume quintile). 

Another example of nonmonotonicity 

involves a base MS–LTC–DRG with 

three severity levels where at least one 

of the severity levels has no cases. As 

discussed above in greater detail in Step 

5, based on resource use intensity and 

clinical similarity, as we proposed, we 

crosswalked a no-volume MS–LTC–DRG 

to an MS–LTC–DRG that had at least 

one case. Under our methodology for 

the treatment of no-volume MS–LTC–

DRGs, the no-volume MS–LTC–DRG 

was assigned the same relative weight as 

the MS–LTC–DRG to which the novolume MS–LTC–DRG was 

crosswalked. For many no-volume MS–

LTC–DRGs, as shown in the chart above 

in Step 5, the application of our 

methodology resulted in a crosswalked 

MS–LTC–DRG that is the adjacent 

severity level in the same base MS–

LTC–DRG. Consequently, in most 

instances, the no-volume MS–LTC–DRG 

and the adjacent MS–LTC–DRG to 

which it was crosswalked did not result 

in nonmonotonicity because both of 

these severity levels would have the 

same relative weight. (In this final rule, 

under our methodology for the 

treatment of no-volume MS–LTC–DRGs, 

in the case where the no-volume MS–

LTC–DRG was either the highest or 

lowest severity level, the crosswalked 

MS–LTC–DRG would be the middle 

level (‘‘with CC’’) within the same base 

MS–LTC–DRG, and therefore the novolume MS–LTC–DRG (either the ‘‘with 

MCC’’ or the ‘‘without CC/MCC’’) and 

the crosswalked MS–LTC–DRG (the 

‘‘with CC’’) would have the same 

relative weight. Consequently, no 

adjustment for monotonicity was 

necessary.) However, if our 

methodology for determining relative 

weights for no-volume MS–LTC–DRGs 

resulted in nonmonotonicity with the 

third severity level in the base MS–

LTC–DRG, all three severity levels were 

combined for the purpose of 

redetermining one relative weight based 

on the case-weighted average charge of 

the combined severity levels. This same 

relative weight was assigned to each of 

the three severity levels in the base MS–

LTC–DRG. 

Thus far in the discussion, we have 

presented examples of nonmonotonicity 

in a base MS–LTC–DRG that has three 

severity levels. We apply the same 

process where the base MS–LTC–DRG 

contains only two severity levels. For 

example, if nonmonotonicity occurs in 

a base MS–LTC–DRG with two severity 

levels (that is, the relative weight of the 

higher severity level is less than the 

lower severity level), where both of the 

MS–LTC–DRGs have at least 25 cases or 

where one or both of the MS–LTC–DRGs 

is low volume (that is, less than 25 

cases), we combine the two MS–LTC–

DRGs of that base MS–LTC–DRG for the 

purpose of redetermining a relative 

weight based on the combined caseweighted average charge for both 

severity levels. This same relative 

weight is assigned to each of the two 

severity levels in the base MS–LTC–

DRG. Specifically, if the combination of 

the two severity levels results in at least 

25 cases, we redetermine one relative 

weight based on the case-weighted 

average charge and assign that relative 

weight to each of the two MS–LTC–

DRGs. If the combination results in less 

than 25 cases, we assign both MS–LTC–

DRGs to the appropriate low-volume 

quintile (discussed above in section 

II.I.3.e. of this preamble) based on their 

combined case-weighted average charge. 

Then the relative weight of the affected 

low-volume quintile is redetermined 

and that relative weight is assigned to 

each of the affected severity levels. 

Step 7— Calculate the FY 2009 budget 

neutrality factor. 

As we established in the RY 2008 

LTCH PPS final rule (72 FR 26882), 

under the broad authority conferred 

upon the Secretary under section 123 of 

Public Law 106–113 as amended by 

section 307(b) of Public Law 106–554 to 

develop the LTCH PPS, beginning with 

the MS–LTC–DRG update for FY 2008, 

the annual update to the MS–LTC–DRG 

classifications and relative weights is 

done in a budget neutral manner such 

that estimated aggregate LTCH PPS 

payments would be unaffected, that is, 

would be neither greater than nor less 

than the estimated aggregate LTCH PPS 

payments that would have been made 

without the MS–LTC–DRG classification 

and relative weight changes. 

Specifically, in that same final rule, we 

established under § 412.517(b) that the 

annual update to the MS–LTC–DRG 

classifications and relative weights be 

done in a budget neutral manner. For a 

detailed discussion on the 

establishment of the requirement to 

update the MS–LTC–DRG classifications 

and relative weights in a budget neutral 

manner, we refer readers to the RY 2008 

LTCH PPS final rule (72 FR 26880 

through 26884). Updating the MS–LTC–

DRGs in a budget neutral manner results 

in an annual update to the individual 

MS–LTC–DRG classifications and 

relative weights based on the most 

recent available data to reflect changes 

in relative LTCH resource use. To 

accomplish this, for each annual update, 

the MS–LTC–DRG relative weights are 

uniformly adjusted to ensure that 

estimated aggregate payments under the 

LTCH PPS would not be affected (that 

is, decreased or increased). Consistent 

with that provision, as we proposed, we 

updated the MS–LTC–DRG 

classifications and relative weights for 

FY 2009 based on the most recent 

available data and included a budget 

neutrality adjustment that was applied 

in determining the MS–LTC–DRG 

relative weights. 

To ensure budget neutrality in 

updating the MS–LTC–DRG 

classifications and relative weights 

under § 412.517(b), consistent with the 

budget neutrality methodology we 

established in the FY 2008 IPPS final 

rule with comment period (72 FR 47295 


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through 47296), in determining the 

budget neutrality adjustment for FY 

2009 in this final rule, as we proposed, 

we used a method that is similar to the 

methodology used under the IPPS. 

Specifically, for FY 2009, after 

recalibrating the MS–LTC–DRG relative 

weights as we do under the 

methodology as described in detail in 

Steps 1 through 6 above, we calculated 

and applied a normalization factor to 

those relative weights to ensure that 

estimated payments were not influenced 

by changes in the composition of case 

types or the changes to the classification 

system. That is, the normalization 

adjustment is intended to ensure that 

the recalibration of the MS–LTC–DRG 

relative weights (that is, the process 

itself) neither increases nor decreases 

total estimated payments. 

To calculate the normalization factor 

for FY 2009, as we proposed, we used 

the following steps: (1) We use the most 

recent available claims data (FY 2007) 

and the MS–LTC–DRG relative weights 

(determined above in Steps 1 through 6 

above) to calculate the average CMI; (2) 

we group the same claims data (FY 

2007) using the FY 2008 GROUPER 

(Version 25.0) and FY 2008 relative 

weights (established in the FY 2008 

IPPS final rule with comment period (72 

FR 47295 through 47296)) and calculate 

the average CMI: and (3), we compute 

the ratio of these average CMIs by 

dividing the average CMI determined in 

step (2) by the average CMI determined 

in step (1). In determining the MS–LTC–

DRG relative weights for FY 2009, based 

on the latest available LTCH claims 

data, the normalization factor is 

estimated as 1.03887, which is applied 

in determining each MS–LTC–DRG 

relative weight. That is, each MS–LTC–

DRG relative weight is multiplied by 

1.03887 in the first step of the budget 

neutrality process. Accordingly, the 

relative weights in Table 11 in the 

Addendum of this final rule reflect this 

normalization factor. We also ensured 

that estimated aggregate LTCH PPS 

payments (based on the most recent 

available LTCH claims data) after 

reclassification and recalibration (the 

new FY 2009 MS–LTC–DRG 

classifications and relative weights) are 

equal to estimated aggregate LTCH PPS 

payments (for the same most recent 

available LTCH claims data) before 

reclassification and recalibration (the 

existing FY 2008 MS–LTC–DRG 

classifications and relative weights). 

Therefore, we calculated the budget 

neutrality adjustment factor by 

simulating estimated total payments 

under both sets of GROUPERs and 

relative weights using current LTCH 

PPS payment policies (RY 2009) and the 

most recent available LTCH claims data 

(FY 2007). As we discussed in the FY 

2009 IPPS proposed rule (73 FR 23608), 

we have established payments rates and 

policies for RY 2009 prior to the 

development of the FY 2009 IPPS final 

rule (73 FR 26788 through 26874). 

Therefore, for purposes of determining 

the FY 2009 budget neutrality factor in 

this final rule, as we proposed, we 

simulated estimated total payments 

using the most recent LTCH PPS 

payment policies and LTCH claims data 

that are available at this time. As noted 

above, the most recent available LTCH 

claims data are from the March 2008 

update of the FY 2007 MedPAR file. 

Accordingly, we used RY 2009 LTCH 

PPS rates and policies in determining 

the FY 2009 budget neutrality 

adjustment in this final rule, using the 

following steps: (1) We simulated 

estimated total payments using the 

normalized relative weights under 

GROUPER Version 26.0 (as described 

above); (2) we simulated estimated total 

payments using the FY 2008 GROUPER 

(Version 25.0) and FY 2008 MS–LTC–

DRG relative weights (as established in 

the FY 2008 IPPS final rule (72 FR 

47295 through 47296)); and (3) we 

calculated the ratio of these estimated 

total payments by dividing the 

estimated total payments determined in 

step (2) by the estimated total payments 

determined in step (1). Then, each of the 

normalized relative weights was 

multiplied by the budget neutrality 

factor to determine the budget neutral 

relative weight for each MS–LTC–DRG. 

Accordingly, in determining the MS–

LTC–DRG relative weights for FY 2009 

in this final rule, based on the most 

recent available LTCH claims data, we 

are establishing a budget neutrality 

factor of 1.04186, which was applied to 

the normalized relative weights 

(described above). The FY 2009 MS–

LTC–DRG relative weights in Table 11 

in the Addendum of this final rule 

reflect this budget neutrality factor. 

Table 11 in the Addendum to this 

final rule lists the MS–LTC–DRGs and 

their respective budget neutral relative 

weights, geometric mean length of stay, 

and five-sixths of the geometric mean 

length of stay (used in the determination 

of SSO payments under § 412.529) for 

FY 2009. 

5. Other Comments 

Comment: While CMS did not 

propose for FY 2009 an adjustment for 

improved coding practices resulting 

from the transition to the MS–LTC–DRG 

system, one commenter urged CMS to 

wait until sufficient claims data under 

the MS–LTC–DRG system are available 

to provide CMS with a solid benchmark 

on coding behavior for the comparison 

between the previous LTC–DRG and 

current MS–LTC–DRG systems. The 

commenter believed that any evaluation 

of the need for an adjustment for 

improved coding practices should take 

into account all of the previous case-mix 

adjustments to the market basket and 

the self-correcting nature of the current 

policy of the budget neutral reweighting 

of the MS–LTC–DRG relative weights. 

Furthermore, the commenter believed 

that it would not be appropriate to 

apply a coding adjustment to the MS–

LTC–DRGs where coding changes 

would not be expected to change as a 

result of the transitioning from LTC–

DRGs to MS–LTC–DRGs (for example, 

in ventilator DRGs where there have 

been no changes from the LTC–DRG 

system to the MS–LTC–DRG system). 

Response: At this time, we have not 

proposed any adjustment for FY 2009 to 

account for improved coding practices 

resulting from the transition to the MS–

LTC–DRG system. In the FY 2008 IPPS 

final rule with comment period (72 FR 

47297 through 47299), we indicated that 

we believe that the adoption of the MS–

LTC–DRGs would create a risk of 

increased aggregate levels of payment as 

a result of increased documentation and 

coding. However, we acknowledged, at 

the time, that because we had not been 

able to determine an appropriate 

adjustment factor for LTCHs and 

because we have an established 

mechanism to adjust LTCH PPS 

payments to account for the effects of 

changes in documentation and coding 

practices, we believed that it was 

appropriate to continue to use this 

established process. We note that, in the 

FY 2008 IPPS final rule with comment 

period, we responded to comments 

similar to the one summarized above. In 

section II.D.4. of this final rule, we 

discuss the intended future evaluation 

of claims data and resulting case-mix 

growth from the implementation of the 

MS–DRG system. A similar 

retrospective evaluation will be 

conducted for MS–LTC–DRGs. The 

analysis, findings, and any resulting 

proposals to adjust payments to offset 

the estimated amount of increase or 

decrease in aggregate payments that 

occurred in FY 2008 and FY 2009 for 

LTCHs as a result of coding 

improvements, will be discussed in 

future years’ proposed rules, which 

would be open for public comment. 

Comment: One commenter addressed 

our discussion in the RY 2009 LTCH 

final rule on the possible application to 

LTCHs of the broad principle articulated 

in the HACs payment provision that 


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goes into effect for acute care hospitals 

paid under the IPPS for FY 2009. 

Response: We appreciate the 

commenter’s support and remarks 

concerning the possible application of a 

HACs payment provision to LTCHs. 

Although we did not propose a HAC 

provision under the LTCH PPS nor did 

we discuss the possible application of 

one in the FY 2009 IPPS proposed rule, 

we will take into account the 

commenter’s concerns and 

recommendations in our ongoing 

consideration of the applicability of a 

possible HACs policy for LTCHs. 

J. Add-On Payments for New Services 

and Technologies 

1. Background 

Sections 1886(d)(5)(K) and (L) of the 

Act establish a process of identifying 

and ensuring adequate payment for new 

medical services and technologies 

(sometimes collectively referred to in 

this section as ‘‘new technologies’’) 

under the IPPS. Section 

1886(d)(5)(K)(vi) of the Act specifies 

that a medical service or technology will 

be considered new if it meets criteria 

established by the Secretary after notice 

and opportunity for public comment. 

Section 1886(d)(5)(K)(ii)(I) of the Act 

specifies that the process must apply to 

a new medical service or technology if, 

‘‘based on the estimated costs incurred 

with respect to discharges involving 

such service or technology, the DRG 

prospective payment rate otherwise 

applicable to such discharges under this 

subsection is inadequate.’’

The regulations implementing this 

provision establish three criteria for new 

medical services and technologies to 

receive an additional payment. First, 42 

CFR 412.87(b)(2) states that a specific 

medical service or technology will be 

considered new for purposes of new 

medical service or technology add-on 

payments until such time as Medicare 

data are available to fully reflect the cost 

of the technology in the DRG weights 

through recalibration. Typically, there is 

a lag of 2 to 3 years from the point a new 

medical service or technology is first 

introduced on the market (generally on 

the date that the technology receives 

FDA approval/clearance) and when data 

reflecting the use of the medical service 

or technology are used to calculate the 

DRG weights. For example, data from 

discharges occurring during FY 2007 are 

used to calculate the FY 2009 DRG 

weights in this final rule. Section 

412.87(b)(2) of our existing regulations 

provides that ‘‘a medical service or 

technology may be considered new 

within 2 or 3 years after the point at 

which data begin to become available 

reflecting the ICD–9–CM code assigned 

to the new medical service or 

technology (depending on when a new 

code is assigned and data on the new 

medical service or technology become 

available for DRG recalibration). After 

CMS has recalibrated the DRGs based on 

available data to reflect the costs of an 

otherwise new medical service or 

technology, the medical service or 

technology will no longer be considered 

‘new’ under the criterion for this 

section.’’

The 2-year to 3-year period during 

which a medical service or technology 

can be considered new would ordinarily 

begin on the date on which the medical 

service or technology received FDA 

approval or clearance. (We note that, for 

purposes of this section of the final rule, 

we refer to both FDA approval and FDA 

clearance as FDA ‘‘approval.’’) However, 

in some cases, initially there may be no 

Medicare data available for the new 

service or technology following FDA 

approval. For example, the newness 

period could extend beyond the 2-year 

to 3-year period after FDA approval is 

received in cases where the product 

initially was generally unavailable to 

Medicare patients following FDA 

approval, such as in cases of a national 

noncoverage determination or a 

documented delay in bringing the 

product onto the market after that 

approval (for instance, component 

production or drug production has been 

postponed following FDA approval due 

to shelf life concerns or manufacturing 

issues). After the DRGs have been 

recalibrated to reflect the costs of an 

otherwise new medical service or 

technology, the medical service or 

technology is no longer eligible for 

special add-on payment for new 

medical services or technologies 

(§ 412.87(b)(2)). For example, an 

approved new technology that received 

FDA approval in October 2007 and 

entered the market at that time may be 

eligible to receive add-on payments as a 

new technology for discharges occurring 

before October 1, 2010 (the start of FY 

2011). Because the FY 2011 DRG 

weights would be calculated using FY 

2009 MedPAR data, the costs of such a 

new technology would be fully reflected 

in the FY 2011 DRG weights. Therefore, 

the new technology would no longer be 

eligible to receive add-on payments as a 

new technology for discharges occurring 

in FY 2011 and thereafter. 

Section 412.87(b)(3) further provides 

that, to be eligible for the add-on 

payment for new medical services or 

technologies, the DRG prospective 

payment rate otherwise applicable to 

the discharge involving the new medical 

services or technologies must be 

assessed for adequacy. Under the cost 

criterion, to assess the adequacy of 

payment for a new technology paid 

under the applicable DRG-prospective 

payment rate, we evaluate whether the 

charges for cases involving the new 

technology exceed certain threshold 

amounts. In the FY 2004 IPPS final rule 

(68 FR 45385), we established the 

threshold at the geometric mean 

standardized charge for all cases in the 

DRG plus 75 percent of 1 standard 

deviation above the geometric mean 

standardized charge (based on the 

logarithmic values of the charges and 

converted back to charges) for all cases 

in the DRG to which the new medical 

service or technology is assigned (or the 

case-weighted average of all relevant 

DRGs, if the new medical service or 

technology occurs in more than one 

DRG). 

However, section 503(b)(1) of Public 

Law 108–173 amended section 

1886(d)(5)(K)(ii)(I) of the Act to provide 

that, beginning in FY 2005, CMS will 

apply ‘‘a threshold * * * that is the 

lesser of 75 percent of the standardized 

amount (increased to reflect the 

difference between cost and charges) or 

75 percent of one standard deviation for 

the diagnosis-related group involved.’’

(We refer readers to section IV.D. of the 

preamble to the FY 2005 IPPS final rule 

(69 FR 49084) for a discussion of the 

revision of the regulations to 

incorporate the change made by section 

503(b)(1) of Pub. L. 108–173.) Table 10 

in section XIX. of the interim final rule 

with comment period published in the 

Federal Register on November 27, 2007, 

contained the final thresholds that are 

being used to evaluate applications for 

new technology add-on payments for FY 

2009 (72 FR 66888 through 66892). An 

applicant must demonstrate that the 

cost threshold is met using information 

from inpatient hospital claims. 

We note that section 124 of Public 

Law 110–275 extends, through FY 2009, 

wage index reclassifications under 

section 508 of Public Law 108–173 (the 

MMA) and special exceptions contained 

in the final rule promulgated in the 

Federal Register on August 11, 2004 (69 

FR 49105, 49107) and extended under 

section 117 of the MMSEA of 2007 (Pub. 

L. 110–173). The wage data affects the 

standardized amounts (as well as the 

outlier offset and budget neutrality 

factors that are applied to the 

standardized amounts), which we use to 

compute the cost criterion thresholds in 

Table 10 of this final rule. Therefore, the 

thresholds reflected in Table 10 of this 

final rule are tentative. A new Table 10 

with revised thresholds will be 

published when section 124 of Public 

Law 110–275 is implemented and the 


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wage index rates for FY 2009 are 

finalized. Subsequent to the publication 

of this final rule, we will publish a 

Federal Register document listing the 

final version of Table 10 that will be 

used to determine if an applicant for 

new technology add-on payments in FY 

2010 meets the cost threshold for new 

technology add-on payments for FY 

2010. The final thresholds also will be 

published on the CMS Web site. 

In the September 7, 2001 final rule 

that established the new technology 

add-on payment regulations (66 FR 

46917), we discussed the issue of 

whether the HIPAA Privacy Rule at 45 

CFR parts 160 and 164 applies to claims 

information that providers submit with 

applications for new technology add-on 

payments. Specifically, we explained 

that health plans, including Medicare, 

and providers that conduct certain 

transactions electronically, including 

the hospitals that would be receiving 

payment under the FY 2001 IPPS final 

rule, are required to comply with the 

HIPAA Privacy Rule. We further 

explained how such entities could meet 

the applicable HIPAA requirements by 

discussing how the HIPAA Privacy Rule 

permitted providers to share with health 

plans information needed to ensure 

correct payment, if they had obtained 

consent from the patient to use that 

patient’s data for treatment, payment, or 

health care operations. We also 

explained that, because the information 

to be provided within applications for 

new technology add-on payment would 

be needed to ensure correct payment, no 

additional consent would be required. 

The HHS Office of Civil Rights has since 

amended the HIPAA Privacy Rule, but 

the results remain. The HIPAA Privacy 

Rule no longer requires covered entities 

to obtain consent from patients to use or 

disclose protected health information 

for treatment, payment, or health care 

operations, and expressly permits such 

entities to use or to disclose protected 

health information for any of these 

purposes. (We refer readers to 45 CFR 

164.502(a)(1)(ii), and 164.506(c)(1) and 

(c)(3), and the Standards for Privacy of 

Individually Identifiable Health 

Information published in the Federal 

Register on August 14, 2002, for a full 

discussion of changes in consent 

requirements.) 

Section 412.87(b)(1) of our existing 

regulations provides that a new 

technology is an appropriate candidate 

for an additional payment when it 

represents ‘‘an advance that 

substantially improves, relative to 

technologies previously available, the 

diagnosis or treatment of Medicare 

beneficiaries.’’ For example, a new 

technology represents a substantial 

clinical improvement when it reduces 

mortality, decreases the number of 

hospitalizations or physician visits, or 

reduces recovery time compared to the 

technologies previously available. (We 

refer readers to the September 7, 2001 

final rule for a complete discussion of 

this criterion (66 FR 46902).) 

The new medical service or 

technology add-on payment policy 

under the IPPS provides additional 

payments for cases with relatively high 

costs involving eligible new medical 

services or technologies while 

preserving some of the incentives 

inherent under an average-based 

prospective payment system. The 

payment mechanism is based on the 

cost to hospitals for the new medical 

service or technology. Under § 412.88, if 

the costs of the discharge (determined 

by applying CCRs as described in 

§ 412.84(h)) exceed the full DRG 

payment (including payments for IME 

and DSH, but excluding outlier 

payments), Medicare will make an addon payment equal to the lesser of: (1) 50 

percent of the estimated costs of the 

new technology (if the estimated costs 

for the case including the new 

technology exceed Medicare’s payment) 

or (2) 50 percent of the difference 

between the full DRG payment and the 

hospital’s estimated cost for the case. 

Unless the discharge qualifies for an 

outlier payment, Medicare payment is 

limited to the full DRG payment plus 50 

percent of the estimated costs of the 

new technology. 

Section 1886(d)(4)(C)(iii) of the Act 

requires that the adjustments to annual 

DRG classifications and relative weights 

must be made in a manner that ensures 

that aggregate payments to hospitals are 

not affected. Therefore, in the past, we 

accounted for projected payments under 

the new medical service and technology 

provision during the upcoming fiscal 

year, while at the same time estimating 

the payment effect of changes to the 

DRG classifications and recalibration. 

The impact of additional payments 

under this provision was then included 

in the budget neutrality factor, which 

was applied to the standardized 

amounts and the hospital-specific 

amounts. However, section 503(d)(2) of 

Public Law 108–173 provides that there 

shall be no reduction or adjustment in 

aggregate payments under the IPPS due 

to add-on payments for new medical 

services and technologies. Therefore, 

following section 503(d)(2) of Public 

Law 108–173, add-on payments for new 

medical services or technologies for FY 

2005 and later years have not been 

subjected to budget neutrality. 

Applicants for add-on payments for 

new medical services or technologies for 

FY 2010 must submit a formal request, 

including a full description of the 

clinical applications of the medical 

service or technology and the results of 

any clinical evaluations demonstrating 

that the new medical service or 

technology represents a substantial 

clinical improvement, along with a 

significant sample of data to 

demonstrate the medical service or 

technology meets the high-cost 

threshold. Complete application 

information, along with final deadlines 

for submitting a full application, will be 

posted as it becomes available on our 

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

AcuteInpatientPPS/ 

08_newtech.asp#TopOfPage. To allow 

interested parties to identify the new 

medical services or technologies under 

review before the publication of the 

proposed rule for FY 2010, the Web site 

will also list the tracking forms 

completed by each applicant. 

The Council on Technology and 

Innovation (CTI) at CMS oversees the 

agency’s cross-cutting priority on 

coordinating coverage, coding and 

payment processes for Medicare with 

respect to new technologies and 

procedures, including new drug 

therapies, as well as promoting the 

exchange of information on new 

technologies between CMS and other 

entities. The CTI, composed of senior 

CMS staff and clinicians, was 

established under section 942(a) of 

Public Law 108–173. The Council is cochaired by the Director of the Office of 

Clinical Standards and Quality (OCSQ) 

and the Director of the Center for 

Medicare Management (CMM), who is 

also designated as the CTI’s Executive 

Coordinator. 

The specific processes for coverage, 

coding, and payment are implemented 

by CMM, OCSQ, and the local claimspayment contractors (in the case of local 

coverage and payment decisions). The 

CTI supplements rather than replaces 

these processes by working to assure 

that all of these activities reflect the 

agency-wide priority to promote highquality, innovative care, and at the same 

time to streamline, accelerate, and 

improve coordination of these processes 

to ensure that they remain up to date as 

new issues arise. To achieve its goals, 

the CTI works to streamline and create 

a more transparent coding and payment 

process, improve the quality of medical 

decisions, and speed patient access to 

effective new treatments. It is also 

dedicated to supporting better decisions 

by patients and doctors in using 

Medicare-covered services through the 

promotion of better evidence 

development, which is critical for 


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improving the quality of care for 

Medicare beneficiaries. 

CMS plans to continue its Open Door 

forums with stakeholders who are 

interested in CTI’s initiatives. In 

addition, to improve the understanding 

of CMS’ processes for coverage, coding, 

and payment and how to access them, 

the CTI is developing an ‘‘innovator’s 

guide’’ to these processes. This guide 

will, for example, outline regulation 

cycles and application deadlines. The 

intent is to consolidate this information, 

much of which is already available in a 

variety of CMS documents and in 

various places on the CMS Web site, in 

a user-friendly format. 

In the meantime, we invite any 

product developers with specific issues 

involving the agency to contact us early 

in the process of product development 

if they have questions or concerns about 

the evidence that would be needed later 

in the development process for the 

agency’s coverage decisions for 

Medicare. 

The CTI aims to provide useful 

information on its activities and 

initiatives to stakeholders, including 

Medicare beneficiaries, advocates, 

medical product manufacturers, 

providers, and health policy experts. 

Stakeholders with further questions 

about Medicare’s coverage, coding, and 

payment processes, or who want further 

guidance about how they can navigate 

these processes, can contact the CTI at 

CTI@cms.hhs.gov or from the ‘‘Contact 

Us’’ section of the CTI home page 

(http://www.cms.hhs.gov/ 

CouncilonTechInnov/). 

Comment: One commenter supported 

CMS’ emphasis on the role of the CTI. 

The commenter also urged CMS to 

remain vigilant in ensuring that CTI’s 

activities do not inadvertently layer new 

processes and requirements onto those 

already applicable to innovative 

medical technology. 

Response: We appreciate the support 

from the commenter. As discussed in 

the proposed rule, we intend to 

continue to use the CTI to promote high 

quality, innovative care while working 

to streamline, accelerate and improve 

coordination of the coverage, coding, 

and payment processes. 

2. Public Input Before Publication of a 

Notice of Proposed Rulemaking on AddOn Payments 

Section 1886(d)(5)(K)(viii) of the Act, 

as amended by section 503(b)(2) of 

Public Law 108–173, provides for a 

mechanism for public input before 

publication of a notice of proposed 

rulemaking regarding whether a medical 

service or technology represents a 

substantial clinical improvement or 

advancement. The process for 

evaluating new medical service and 

technology applications requires the 

Secretary to—

• Provide, before publication of a 

proposed rule, for public input 

regarding whether a new service or 

technology represents an advance in 

medical technology that substantially 

improves the diagnosis or treatment of 

Medicare beneficiaries; 

• Make public and periodically 

update a list of the services and 

technologies for which applications for 

add-on payments are pending; 

• Accept comments, 

recommendations, and data from the 

public regarding whether a service or 

technology represents a substantial 

clinical improvement; and 

• Provide, before publication of a 

proposed rule, for a meeting at which 

organizations representing hospitals, 

physicians, manufacturers, and any 

other interested party may present 

comments, recommendations, and data 

regarding whether a new medical 

service or technology represents a 

substantial clinical improvement to the 

clinical staff of CMS. 

In order to provide an opportunity for 

public input regarding add-on payments 

for new medical services and 

technologies for FY 2009 prior to 

publication of the FY 2009 IPPS 

proposed rule, we published a notice in 

the Federal Register on December 28, 

2007 (72 FR 73845 through 73847), and 

held a town hall meeting at the CMS 

Headquarters Office in Baltimore, MD, 

on February 21, 2008. In the 

announcement notice for the meeting, 

we stated that the opinions and 

alternatives provided during the 

meeting would assist us in our 

evaluations of applications by allowing 

public discussion of the substantial 

clinical improvement criterion for each 

of the FY 2009 new medical service and 

technology add-on payment 

applications before the publication of 

the FY 2009 IPPS proposed rule. 

Approximately 70 individuals 

attended the town hall meeting in 

person, while approximately 20 

additional participants listened over an 

open telephone line. Each of the four FY 

2009 applicants presented information 

on its technology, including a focused 

discussion of data reflecting the 

substantial clinical improvement aspect 

of the technology. We considered each 

applicant’s presentation made at the 

town hall meeting, as well as written 

comments submitted on each 

applicant’s application, in our 

evaluation of the new technology addon applications for FY 2009 in the FY 

2009 proposed rule and in this final 

rule. We received two comments during 

the town hall meeting. In the proposed 

rule, we summarized the comments we 

received at the town hall meeting or, if 

applicable, indicated at the end of the 

discussion of each application that no 

comments were received on that new 

technology. We refer readers to the FY 

2009 IPPS proposed rule at 73 FR 23611 

for those comments and responses. 

In addition to the comment 

summaries and our responses presented 

in the proposed rule, we received 

additional comments as summarized 

below. 

Comment: A number of commenters 

addressed topics relating to the marginal 

cost factor for the new technology addon payment, the potential 

implementation of ICD–10–CM, the use 

of external data in determining the cost 

threshold, and the use of the date that 

a ICD–9–CM code is assigned to a 

technology or the FDA approval date 

(whichever is later) as the start of the 

newness period. 

Response: We did not request public 

comments nor propose to make any 

changes to any of the issues addressed 

above. Because these comments are out 

of the scope of the provisions in the 

proposed rule, we are not providing a 

complete summary of the comments or 

responding to them in this final rule. 

3. FY 2009 Status of Technologies 

Approved for FY 2008 Add-On 

Payments 

We did not approve any applications 

for new technology add-on payments for 

FY 2008. For additional information, we 

refer readers to the FY 2008 IPPS final 

rule with comment period (72 FR 47305 

through 47307). 

4. FY 2009 Applications for New 

Technology Add-On Payments 

We received four applications to be 

considered for new technology add-on 

payment for FY 2009. A discussion of 

each of these applications is presented 

below. We note that, in the past, we 

have considered applications during the 

rulemaking process that had not yet 

received FDA approval, but were 

anticipating FDA approval prior to 

publication of the IPPS final rule. In 

such cases, we generally provide a more 

limited discussion of those technologies 

in the proposed rule because it is not 

known if these technologies will meet 

the newness criterion in time for us to 

conduct a complete analysis in the final 

rule. This year, three out of four 

applicants had not yet received FDA 

approval of their technologies 

(Emphasys Medical Zephyr

Endobronchial Valve, Oxiplex, and the 

TherOx Downstream System) prior to 


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issuance of the proposed rule. 

Consequently, we presented a limited 

analysis of them in the proposed rule. 

At the time of the development of this 

final rule, FDA approval was still 

pending for all three of the applicants. 

Therefore, those three applications are 

not eligible for consideration for FY 

2009 new technology add-on payments 

because they do not meet the newness 

criterion (because, by definition, a 

technology that has not received FDA 

approval cannot be considered ‘‘new’’

for purposes of new technology add-on 

payments). Because those applications 

do not meet the newness criterion, the 

cost threshold criterion and the 

substantial clinical improvement 

criterion applicable to those 

applications are not discussed in this 

final rule. If FDA approval is received 

in time for consideration for the FY 

2010 new technology add-on payment 

application process, we encourage those 

applicants to submit new technology 

add-on payments applications for 

consideration during the FY 2010 IPPS 

rulemaking process. 

a. CardioWestTM Temporary Total 

Artificial Heart System (CardioWestTM

TAH-t) 

SynCardia Systems, Inc. submitted an 

application for approval of the 

CardioWestTM temporary Total Artificial 

Heart system (TAH–t) for new 

technology add-on payments for FY 

2009. The TAH–t is a technology that is 

used as a bridge to heart transplant 

device for heart transplant-eligible 

patients with end-stage biventricular 

failure. The TAH–t pumps up to 9.5 

liters of blood per minute. This high 

level of perfusion helps improve 

hemodynamic function in patients, thus 

making them better heart transplant 

candidates. 

The TAH–t was approved by the FDA 

on October 15, 2004, for use as a bridge 

to transplant device in cardiac 

transplant-eligible candidates at risk of 

imminent death from biventricular 

failure. The TAH–t is intended to be 

used in hospital inpatients. One of the 

FDA’s post-approval requirements is 

that the manufacturer agrees to provide 

a post-approval study demonstrating 

success of the device at one center can 

be reproduced at other centers. The 

study was to include at least 50 patients 

who would be followed up to 1 year, 

including (but not limited to) the 

following endpoints; survival to 

transplant, adverse events, and device 

malfunction. 

In the past, Medicare did not cover 

artificial heart devices, including the 

TAH–t. However, on February 1, 2008, 

CMS proposed to reverse a national 

noncoverage determination that would 

extend coverage to this technology 

within the confines of an approved 

clinical study. (To view the proposed 

national coverage determination (NCD), 

we refer readers to the CMS Web site at 

http://www.cms.hhs.gov/mcd/ 

viewdraftdecisionmemo.asp?

from2=viewdraftdecisionmemo.asp&

id=211&). On May 1, 2008, CMS issued 

a final NCD expanding Medicare 

coverage of artificial hearts when they 

are implanted as part of a study that is 

approved by the FDA and is determined 

by CMS to meet CMS’ Coverage with 

Evidence Development (CED) clinical 

research criteria. (The final NCD is 

available on the CMS Web site at: http:// 

www.cms.hhs.gov/mcd/ 

viewdecisionmemo.asp?id=211.) 

Because Medicare’s previous coverage 

policy with respect to this device has 

precluded payment from Medicare, we 

do not expect the costs associated with 

this technology to be currently reflected 

in the data used to determine MS–DRGs 

relative weights. As we have indicated 

in the past, and as we discussed in the 

proposed rule, although we generally 

believe that the newness period would 

begin on the date that FDA approval 

was granted, in cases where the 

applicant can demonstrate a 

documented delay in market availability 

subsequent to FDA approval, we would 

consider delaying the start of the 

newness period. This technology’s 

situation represents such a case. We also 

note that section 1886(d)(5)(K)(ii)(II) of 

the Act requires that we provide for the 

collection of cost data for a new medical 

service or technology for a period of at 

least 2 years and no more than 3 years 

‘‘beginning on the date on which an 

inpatient hospital code is issued with 

respect to the service or technology.’’

Furthermore, the statute specifies that 

the term ‘‘inpatient hospital code’’

means any code that is used with 

respect to inpatient hospital services for 

which payment may be made under the 

IPPS and includes ICD–9–CM codes and 

any subsequent revisions. Although the 

TAH–t has been described by the 

ICD–9–CM code(s) (described below in 

the cost threshold discussion) since the 

time of its FDA approval, because the 

TAH–t has not been covered under the 

Medicare program (and, therefore, no 

Medicare payment has been made for 

this technology), this code is not ‘‘used 

with respect to inpatient hospital 

services for which payment’’ is made 

under the IPPS, and thus we assume 

that none of the costs associated with 

this technology would be reflected in 

the Medicare claims data used to 

recalibrate the MS–DRG weights for FY 

2009. For this reason, as discussed in 

the proposed rule, despite its FDA 

approval date, it appeared that this 

technology would still be eligible to be 

considered ‘‘new’’ for purposes of the 

new technology add-on payment if and 

when the proposal to reverse the 

national noncoverage determination 

concerning this technology was 

finalized. Therefore, based on this 

information, we stated that we believed 

that the TAH–t would meet the newness 

criterion on the date that Medicare 

coverage began, consistent with 

issuance of the final NCD. Because the 

final NCD was issued and became 

effective on May 1, 2008, we believe 

that the TAH–t meets the newness 

criterion as of May 1, 2008. 

Comment: One commenter, the 

manufacturer, agreed with CMS’

statement in the proposed rule that the 

TAH–t appeared to meet the newness 

criterion even though it received FDA 

approval more than 3 years ago. The 

commenter stated that because the 

TAH–t had not been covered by 

Medicare in any setting until the 

coverage decision issued on May 1, 

2008, the costs associated with the 

TAH–t are not yet reflected in the 

Medicare claims data used to recalibrate 

the FY 2009 MS–DRG relative weights. 

Response: We agree with the 

commenter and, as we discussed in the 

proposed rule, we continue to believe 

that the TAH–t meets the newness 

criterion despite having received FDA 

approval more than 3 years ago because 

it was not covered by Medicare until 

May 1, 2008. Therefore, as stated above, 

we believe that the TAH–t meets the 

newness criterion as of May 1, 2008. 

In an effort to demonstrate that 

TAH–t would meet the cost criterion, as 

presented in the proposed rule, the 

applicant submitted data based on 28 

actual cases of the TAH–t. The data 

included 6 cases (or 21.4 percent of 

cases) from 2005, 13 cases (or 46.5 

percent of cases) from 2006, 7 cases (or 

25 percent of cases) from 2007, and 2 

cases (or 7.1 percent of cases) from 

2008. Currently, cases involving the 

TAH–t are assigned to MS–DRG 215 

(Other Heart Assist System Implant). As 

discussed below in this section, we are 

proposing to remove the TAH–t from 

MS–DRG 215 and reassign the TAH–t to 

MS–DRGs 001 (Heart Transplant or 

Implant of Heart Assist System with 

MCC) and 002 (Heart Transplant or 

Implant of Heart Assist System without 

MCC). Therefore, to determine if the 

technology meets the cost criterion, it is 

appropriate to compare the average 

standardized charge per case to the 

thresholds for MS–DRGs 001, 002, and 

215 included in Table 10 of the 


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November 27, 2007 interim final rule 

(72 FR 66888 through 66889). The 

thresholds for MS–DRGs 001, 002, and 

215 included in Table 10 are $345,031, 

$178,142, and $151,824, respectively. 

Based on the 28 cases the applicant 

submitted, the average standardized 

charge per case was $731,632. Because 

the average standardized charge per case 

is much greater than the thresholds 

cited above for MS–DRG 215 (and MS–

DRGs 001 and 002, should the proposal 

to reassign the TAH–t be finalized), the 

applicant asserted that the TAH–t meets 

the cost criterion whether or not the 

costs were analyzed by using either a 

case-weighted threshold or caseweighted standardized charge per case. 

In addition to analyzing the costs of 

actual cases involving the TAH–t, the 

applicant searched the FY 2006 

MedPAR file to identify cases involving 

patients who would have potentially 

been eligible to receive the TAH–t. The 

applicant submitted three different 

MedPAR analyses. The first MedPAR 

analysis involved a search for cases 

using ICD–9–CM diagnosis code 428.0 

(Congestive heart failure) in 

combination with ICD–9–CM procedure 

code 37.66 (Insertion of implantable 

heart assist system), and an inpatient 

hospital length of stay greater than or 

equal to 60 days. The applicant found 

two cases that met this criterion, which 

had an average standardized charge per 

case of $821,522. The second MedPAR 

analysis searched for cases with ICD–9–

CM diagnosis code 428.0 (Congestive 

heart failure) and one or more of the 

following ICD–9–CM procedure codes: 

37.51 (Heart transplant), 37.52 

(Implantation of total heart replacement 

system), 37.64 (Removal of heart assist 

system), 37.66 (Insertion of implantable 

heart assist system), or 37.68 (Insertion 

of percutaneous external heart assist 

device), and a length of stay greater than 

or equal to 60 days. The applicant found 

144 cases that met this criterion, which 

had an average standardized charge per 

case of $841,827. The final MedPAR 

analysis searched for cases with ICD–9–

CM procedure code 37.51 (Heart 

transplant) in combination with one of 

the following ICD–9–CM procedure 

codes: 37.52 (Implantation of total heart 

replacement system), 37.65 

(Implantation of external heart system), 

or 37.66 (Insertion of implantable heart 

assist system). The applicant found 37 

cases that met this criterion, which had 

an average standardized charge per case 

of $896,601. Because only two cases met 

the criterion for the first analysis, 

consistent with historical practice, we 

would not consider it to be of statistical 

significance and, therefore, would not 

rely upon it to demonstrate whether the 

TAH–t would meet the cost threshold. 

However, both of the additional 

analyses seem to provide an adequate 

number of cases to demonstrate whether 

the TAH–t would meet the cost 

threshold. We assume that none of the 

costs associated with this technology 

would be reflected in the MedPAR 

analyses that the applicant used to 

demonstrate that the technology would 

meet the cost criterion. We note that, 

under all three of the analyses the 

applicant performed, it identified cases 

that would have been eligible for the 

TAH–t, but did not remove charges that 

were unrelated to the TAH–t, nor did 

the applicant insert a proxy of charges 

related to the TAH–t. However, as stated 

above, the average standardized charge 

per case is much greater than any of the 

thresholds for MS–DRGs 001, 002, and 

215. Therefore, even if the applicant 

were to approximate what the costs of 

cases eligible to receive the TAH–t 

would have been by removing nonTAH–t associated charges and inserting 

charges related to the TAH–t, it appears 

that the average standardized charges 

per case for cases eligible for the TAH–

t would exceed the relevant thresholds 

included in Table 10 (as discussed 

above) and would therefore appear to 

meet the cost criterion. In the FY 2009 

IPPS proposed rule, we invited public 

comment on whether TAH–t met the 

cost criterion. 

Comment: One commenter, the 

manufacturer, asserted that it believed 

that the TAH–t satisfied the cost 

criterion by exceeding the cost 

threshold and agreed with CMS’

discussion in the proposed rule that the 

TAH–t appeared to meet the cost 

threshold. 

Response: Based on data submitted by 

the applicant and discussed in the 

proposed rule, we noted that the TAH–

t appeared to meet the cost threshold 

criterion. Using the March update of the 

FY 2007 MedPAR file, we searched for 

cases that matched the manufacturer’s 

second and third MedPAR analyses 

described above. (As previously noted, 

because the first analysis only returned 

two cases, we did not simulate it for the 

final rule.) When we simulated the 

second and third analyses, we found a 

total of 75 cases and 79 cases, 

respectively (that mapped to CMS DRG 

103 (Heart Transplant or Implant of 

Heart Assist System) which crosswalks 

to MS–DRGs 001 and 002), with an 

average standardized charge per case of 

$883,301 and $830,200, respectively. 

Therefore, because the average 

standardized charge exceeds the 

thresholds of MS–DRGs 001 and 002 

($345,031 and $178,142, respectively) 

based on data submitted by the 

applicant and on our analyses of 

MedPAR data, we believe that the TAH–

t meets the cost threshold criterion. 

As noted in section II.G.1. of the 

preamble to the FY 2009 IPPS proposed 

rule, we proposed to remove the TAH–

t from MS–DRG 215 and reassign the 

TAH–t to MS–DRGs 001 and 002. As 

stated earlier, on May 1, 2008, CMS 

issued an NCD that extends coverage to 

artificial heart devices within the 

confines of an FDA-approved clinical 

study. Therefore, as of May 1, 2008, the 

MCE will require both procedure code 

37.52 (Implantation of total replacement 

heart system) and diagnosis code 

reflecting clinical trial—V70.7 

(Examination of participant in clinical 

trial). As we stated in the proposed rule, 

the TAH–t appeared to meet the cost 

thresholds for MS–DRGs 001, 002, and 

215. Therefore, we noted, its proposed 

reassignment from MS–DRG 215 to MS–

DRGs 001 and 002 would not appear to 

have a material effect on meeting the 

cost thresholds in MS–DRGs 001 and 

002 should the reassignment proposal 

be finalized. In section II.G.1. of the 

preamble of this final rule, we finalized 

the proposal to reassign cases involving 

the TAH–t from MS–DRG 215 to MS–

DRGs 001 and 002. We refer readers to 

that section for additional information. 

The manufacturer stated that the 

TAH–t is the only mechanical 

circulatory support device intended as a 

bridge-to-transplant for patients with 

irreversible biventricular failure. It also 

asserted that the TAH–t improves 

clinical outcomes because it has been 

shown to reduce mortality in patients 

who are otherwise in end-stage heart 

failure. In addition, the manufacturer 

claimed that the TAH–t provides greater 

hemodynamic stability and end-organ 

perfusion, thus making patients who 

receive it better candidates for eventual 

heart transplant. 

We did not receive any written 

comments or public comments at the 

town hall meeting regarding whether 

this technology represents a substantial 

clinical improvement in the treatment of 

inpatients with end-stage biventricular 

heart failure relative to previous 

technology available to the Medicare 

population. However, in the FY 2009 

IPPS proposed rule, we welcomed 

comments from the public regarding 

whether the TAH–t represents a 

substantial clinical improvement. 

Comment: One commenter, the 

manufacturer, stated that, with regard to 

whether the TAH–t meet the substantial 

clinical improvement criterion, the 

TAH–t ‘‘fulfills a role that no other 

mechanical circulatory support device 

can for patients in irreversible 


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biventricular failure * * *’’ With 

respect to the coverage decision that 

was issued on May 1, 2008, the 

commenter stated that ‘‘the agency’s 

reversal of such a longstanding 

noncoverage policy alone demonstrates 

that the TAH–t is a substantial clinical 

improvement.’’

Response: We disagree with the 

commenter’s assertion that CMS’ recent 

change to the coverage decision alone 

demonstrates that the TAH–t is a 

substantial clinical improvement. 

Rather the coverage decision signifies 

that the TAH–t device is ‘‘reasonable 

and necessary’’ within the parameters of 

approved clinical trial studies. In our 

view, demonstration of substantial 

clinical improvement requires that a 

higher threshold be met. That is, not 

only is the device safe and effective (as 

indicated by FDA approval) and 

reasonable and necessary (as indicated 

by CMS coverage), but the device offers 

such clinical improvement over 

previously available technologies to the 

Medicare population that Medicare will 

lessen barriers inhibiting physicians and 

hospitals from utilizing the costly new 

technology so as not to hinder Medicare 

beneficiaries’ access to the technology 

before its costs are adequately reflected 

in the MS–DRG payment system. 

However, we agree with the 

commenter’s assertion that the TAH–t 

‘‘fulfills a role that no other mechanical 

circulatory support device can for 

patients in irreversible biventricular 

failure.’’ We note that the TAH–t is the 

only available FDA-approved temporary 

total artificial heart device. Clinical 

evidence submitted by the applicant 

supports the manufacturer’s assertion 

that the TAH–t provides a treatment 

option for patients suffering from 

biventricular failure who may be 

unresponsive to, or ineligible for, 

currently available treatments 

(including other mechanical circulatory 

devices). Specifically, the applicant 

referred to the FDA approved 

multicenter IDE clinical trial in which 

81 patients at risk of imminent death 

from biventricular heart failure received 

the device. At 30 days, 69.1 percent of 

those patients met the treatment success 

criteria for the study, which included: 

Having an improvement in heart failure 

from New York Heart Association Class 

IV to Class I or II, not being bedridden, 

not being ventilator dependent and not 

being on dialysis. Therefore, the TAH–

t appears to provide a viable treatment 

option to patients who might otherwise 

be at risk for imminent death, and who, 

by virtue of successful bridge to 

transplant, may ultimately benefit from 

the extended survival that is possible 

with heart transplant. We acknowledge 

that there were some patients who did 

not survive despite receiving the TAH–

t, but we believe at this time that the 

benefit provided by the device to 

patients who might otherwise be at risk 

for imminent death outweighs the risks 

associated with the device. Therefore, 

we believe that this device has 

demonstrated that it is a substantial 

clinical improvement over existing 

technology for those patients who meet 

the specific criteria for inclusion in an 

approved clinical trial for purposes of 

FY 2009 new technology add-on 

payments. 

After evaluation of the three new 

technology add-on criteria (newness, 

costs, and substantial clinical 

improvement) and consideration of the 

public comments received, we are 

approving the TAH–t for FY 2009 new 

technology add-on payment. As 

discussed above, we believe that the 

TAH–t offers a new treatment option 

that previously did not exist for patients 

with end-stage biventricular failure. 

However, we recognize that the TAH–t’s 

Medicare coverage is limited to 

approved clinical trial settings. The new 

technology add-on payment status does 

not negate the restrictions under the 

NCD nor does it obviate the need for 

continued monitoring of clinical 

evidence for the TAH–t, and we remain 

interested in seeing whether the clinical 

evidence from the CED parameters 

demonstrates that the TAH–t continues 

to be effective. If evidence is found that 

the TAH–t may no longer offer a 

substantial clinical improvement, we 

reserve the right to discontinue new 

technology add-on payments, even 

within the 2 to 3 year period that the 

device may still be considered to be 

new. The new technology add-on 

payment for FY 2009 will be triggered 

by the presence of ICD–9–CM procedure 

code 37.52 (Implantation of total heart 

replacement system), condition code 30, 

and diagnosis code reflecting clinical 

trial—V70.7 (Examination of participant 

in clinical trial). As noted in the 

proposed rule, the manufacturer 

submitted data to support its estimated 

operating cost per case involving the 

TAH–t procedure of $106,000. 

Accordingly, we are finalizing a 

maximum add-on payment of $53,000 

(that is, 50 percent of the estimated 

operating costs of the device) for cases 

that involve this technology. 

b. Emphasys Medical Zephyr

Endobronchial Valve (Zephyr EBV) 

Emphasys Medical submitted an 

application for new technology add-on 

payments for FY 2009 for the Emphasys 

Medical Zephyr Endobronchial Valve 

(Zephyr EBV). The Zephyr EBV is 

intended to treat patients with 

emphysema by reducing volume in the 

diseased, hyperinflated portion of the 

emphysematous lung with fewer risks 

and complications than with more 

invasive surgical alternatives. Zephyr

EBV therapy involves placing small, 

one-way valves in the patients’ airways 

to allow air to flow out of, but not into, 

the diseased portions of the lung thus 

reducing the hyperinflation. A typical 

procedure involves placing three to four 

valves in the target lobe using a 

bronchoscope, and the procedure takes 

approximately 20 to 40 minutes to 

complete. The Zephyr EBVs are 

designed to be relatively easy to place, 

and are intended to be removable so 

that, unlike more risky surgical 

alternatives such as Lung Volume 

Reduction Surgery (LVRS) or Lung 

Transplant, the procedure has the 

potential to be fully reversible. 

In the proposed rule, we noted that 

the Zephyr EBV had yet to receive 

approval from the FDA, but the 

manufacturer indicated to CMS that it 

expected to receive its FDA approval in 

the second or third quarter of 2008. 

Because the technology had not yet been 

approved by the FDA, we limited our 

discussion of this technology in the 

proposed rule to data that the applicant 

submitted, rather than make specific 

proposals with respect to whether the 

device would meet the new technology 

add-on criteria. 

In an effort to demonstrate that the 

Zephyr EBV would meet the cost 

criterion, as discussed in the proposed 

rule, the applicant searched the FY 2006 

MedPAR file for cases with one of the 

following ICD–9–CM diagnosis codes: 

492.0 (Emphysematous bleb), 492.8 

(Other emphysema, NEC), or 496 

(Chronic airway obstruction, NEC). 

Based on the diagnosis codes searched 

by the applicant, cases of the Zephyr

EBV would be most prevalent in MS–

DRGs 190 (Chronic Obstructive 

Pulmonary Disease with MCC), 191 

(Chronic Obstructive Pulmonary Disease 

with CC), and 192 (Chronic Obstructive 

Pulmonary Disease without CC/MCC). 

The applicant found 1,869 cases (or 12.8 

percent of cases) in MS–DRG 190, 5,789 

cases (or 39.5 percent of cases) in MS–

DRG 191, and 6,995 cases (or 47.7 

percent of cases) in MS–DRG 192 

(which equals a total of 14,653 cases). 

The average standardized charge per 

case was $21,567 for MS–DRG 190, 

$15,494 for MS–DRG 191, and $11,826 

for MS–DRG 192. The average 

standardized charge per case does not 

include charges related to the Zephyr

EBV; therefore, it is necessary to add the 

charges related to the device to the 

average standardized charge per case in 


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48558 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

21Strange, Charlie., et al., Design of the 

Endobronchial Valve for Emphysema Palliation trial 

(VENT): A Nonsurgical Method of Lung Volume 

Reduction, BMC Pulmonary Medicine. 2007; 7:10. 

evaluating the cost threshold criteria. 

Although the applicant submitted data 

related to the estimated cost of the 

Zephyr EBV per case, the applicant 

noted that the cost of the device was 

proprietary information because the 

device is not yet available on the open 

market. The applicant estimated 

$23,920 in charges related to the 

Zephyr EBV (based on a 100 percent 

charge markup of the cost of the device). 

In addition to case-weighting the data 

based on the amount of cases that the 

applicant found in the FY 2006 

MedPAR file, the applicant caseweighted the data based on its own 

projections of how many Medicare cases 

it would expect to map to MS–DRGs 

190, 191, and 192 in FY 2009. The 

applicant projected that, 5 percent of the 

cases would map to MS–DRG 190, 15 

percent of the cases would map to MS–

DRG 191, and 80 percent of the cases 

would map to MS–DRG 192. Adding the 

charges related to the device to the 

average standardized charge per case 

(based on the applicant’s projected case 

distribution) resulted in a case-weighted 

average standardized charge per case of 

$36,782 ($12,862 plus $23,920). Using 

the thresholds published in Table 10 (72 

FR 66889), the case-weighted threshold 

for MS–DRGs 190, 191, and 192 was 

$18,394. Because the case-weighted 

average standardized charge per case for 

the applicable MS–DRGs exceed the 

case-weighted threshold amount, the 

applicant maintained that the Zephyr

EBV would meet the cost criterion. As 

noted above, the applicant also 

performed a case-weighted analysis of 

the data based on the 14,653 cases the 

applicant found in the FY 2006 

MedPAR file. Based on this analysis, the 

applicant found that the case-weighted 

average standardized charge per case 

($38,441 based on the 14,653 cases) 

exceeded the case-weighted threshold 

($20,606 based on the 14,653 cases). 

Based on both analyses described above, 

we stated in the proposed rule that it 

appeared that the applicant would meet 

the cost criterion. 

In the FY 2009 IPPS proposed rule, 

we invited public comment on whether 

Zephyr EBV met the cost criterion. 

Comment: One commenter, the 

manufacturer, addressed issues 

regarding whether the Zephyr EBV met 

the cost criterion. 

Response: Because the Zephyr EBV 

has not yet received FDA approval, and 

therefore, does not meet the newness 

criterion, as discussed above, it is not 

eligible for the IPPS new technology 

add-on payments for FY 2009. 

Therefore, we are not summarizing the 

details of this comment nor responding 

to them in this final rule. 

As discussed in the proposed rule, the 

applicant also asserted that the Zephyr

EBV is a substantial clinical 

improvement because it provides a new 

therapy along the continuum of care for 

patients with emphysema that offers 

improvement in lung function over 

standard medical therapy while 

incurring significantly less risk than 

more invasive treatments such as LVRS 

and lung transplant. Specifically, the 

applicant submitted data from the 

ongoing pivotal Endobronchial Valve for 

Emphysema Palliation (VENT) trial,21

which compared 220 patients who 

received EBV treatment to 101 patients 

who received standard medical therapy, 

including bronchodilators, steroids, 

mucolytics, and supplemental oxygen. 

At 6 months, patients who received the 

Zephyr EBV had an average of 7.2 

percent and 5.8 percent improvement 

(compared to standard medical therapy) 

in the primary effectiveness endpoints 

of the Forced Expiratory Volume in 1 

second test (FEV1), and the 6 Minute 

Walk Test (6MWT), respectively. Both 

results were determined by the 

applicant to be statistically significant. 

The FEV1 results were determined 

using the t-test parametric confidence 

intervals (the p value determined using 

the one-side t-test adjusted for unequal 

variance) and the 6MWT results were 

determined using the Mann-Whitney 

nonparametric confidence intervals (the 

p value was calculated using the onesided Wilcoxon rank sum test). 

However, the data also showed that 

patients who received the Zephyr EBV 

experienced a number of adverse events, 

including hemoptyis, pneumonia, 

respiratory failure, pneumothorax, and 

COPD exacerbations, as well as valve 

migrations and expectorations that, in 

some cases, required repeat 

bronchoscopy. The manufacturer also 

submitted the VENT pivotal trial 1-year 

followup data, but requested that the 

data not be disclosed in the proposed 

rule because it had not yet been 

presented publicly nor published in a 

peer-reviewed journal. 

While CMS recognizes that the 

Zephyr EBV therapy is significantly 

less risky than LVRS and lung 

transplant, we are concerned that the 

benefits as shown in the VENT pivotal 

trial may not outweigh the risks when 

compared with medical therapy alone. 

Further, we note that, according to the 

applicant, the Zephyr EBV is intended 

for use in many patients who are 

ineligible for LVRS and/or lung 

transplant (including those too sick to 

undergo more invasive surgery and 

those with lower lobe predominant 

disease distribution), but that certain 

patients (that is, those with upper lobe 

predominant disease distribution) could 

be eligible for either surgery or the 

Zephyr EBV. 

In the FY 2009 IPPS proposed rule, 

we welcomed comments from the 

public on both the patient population 

who would be eligible for the 

technology, and whether the Zephyr

EBV represented a substantial clinical 

improvement in the treatment of 

patients with emphysema. 

Comment: Commenters representing 

the manufacturer and physicians, 

outlined various reasons why they 

believed that the Zephyr EBV 

represented a substantial clinical 

improvement over technologies 

currently available to Medicare 

beneficiaries. 

Response: Because the Zephyr EBV 

has not yet received FDA approval, and 

therefore does not meet the newness 

criterion, as discussed above, it is not 

eligible for the IPPS new technology 

add-on payments for FY 2009. 

Therefore, we are not summarizing the 

details of these comments received nor 

responding to them in this final rule. 

As noted in the proposed rule, we 

also received written comments from 

the manufacturer and its presenters at 

the town hall meeting clarifying some 

questions that were raised at the town 

hall meeting. Specifically, these 

commenters explained that, in general, 

the target population for the Zephyr

EBV device was the same population 

that could benefit from LVRS, and also 

includes some patients who were too 

sick to undergo surgery. The 

commenters also explained that patients 

with emphysema with more 

heterogeneous lung damage were more 

likely to benefit from the device. 

In the FY 2009 IPPS proposed rule, 

we welcomed public comments 

regarding where exactly this technology 

falls in the continuum of care of patients 

with emphysema, and for whom the 

risk/benefit ratio is most favorable. 

Comment: Commenters representing 

the manufacturer and individual 

physicians addressed issues regarding 

where the Zephyr EBV fell in the 

continuum of care of patients with 

emphysema and for whom the risk/ 

benefit ratio was most favorable. 

Response: Because the Zephyr EBV 

has not yet received FDA approval, and 

therefore does not meet the newness 

criterion, it is not eligible for the IPPS 

new technology add-on payments for FY 

2009. Therefore, we are not 

summarizing the details of these public 


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comments nor responding to them in 

this final rule. 

As we previously stated, because the 

Zephyr EBV has not yet received FDA 

approval, it does not meet the newness 

criterion. Therefore, it cannot be 

approved for FY 2009 IPPS new 

technology add-on payments. 

c. Oxiplex

FzioMed, Inc. submitted an 

application for new technology add-on 

payments for FY 2009 for Oxiplex. 

Oxiplex is an absorbable, viscoelastic 

gel made of carboxymethylcellulose 

(CMC) and polyethylene oxide (PEO) 

that is intended to be surgically 

implanted during a posterior 

discectomy, laminotomy, or 

laminectomy. The manufacturer 

asserted that the gel reduces the 

potential for inflammatory mediators 

that injure, tether, or antagonize the 

nerve root in the epidural space by 

creating an acquiescent, semi-permeable 

environment to protect against localized 

debris. These proinflammatory 

mediators (phospholipase A and nitric 

oxide), induced or extruded by 

intervertebral discs, may be responsible 

for increased pain during these 

procedures. The manufacturer also 

asserted that Oxiplex is a unique 

material in that it coats tissue, such as 

the nerve root in the epidural space, to 

protect the nerve root from the effects of 

inflammatory mediators originating 

from either the nucleus pulposus, from 

blood derived inflammatory cells, or 

cytokines during the healing process. 

Oxiplex indicated to CMS that it was 

expecting to receive premarket approval 

from the FDA by June 2008. As 

discussed earlier in this section, 

Oxiplex had not received FDA 

approval prior to the development of 

this final rule. Because the technology 

had not yet received FDA approval at 

the time the proposed rule was 

developed, we indicated in the 

proposed rule that we were limiting our 

discussion of this technology to data 

that the applicant submitted, rather than 

make specific proposals with respect to 

whether the device would meet the new 

technology add-on payment criteria. 

In the proposed rule, we noted that 

we were concerned that Oxiplex may 

be substantially similar to adhesion 

barriers that have been on the market for 

several years. We also noted that 

Oxiplex has been marketed as an 

adhesion barrier in other countries 

outside of the United States. The 

manufacturer maintained that Oxiplex

is different from adhesion barriers in 

several ways, including chemical 

composition, method of action, surgical 

application (that is, it is applied 

liberally to the nerve root and 

surrounding neural tissues as opposed 

to minimally only to nerve elements), 

and tissue response (noninflammatory 

as opposed to inflammatory). 

In the FY 2009 IPPS proposed rule, 

we welcomed comments from the 

public on this issue. 

Comment: One commenter, the 

manufacturer, addressed the issue of 

whether Oxiplex met the newness 

criterion. The commenter explained that 

there are no products approved for this 

indication in the spine in the United 

States. The commenter further 

explained that the indication for use for 

Oxiplex outside the United States 

includes the descriptor ‘‘for the 

reduction of pain, radiculopathy, lower 

extreme weakness’’ and the United State 

IDE study was designed to show that 

Oxiplex reduces back and leg pain and 

associated neurological symptoms 

following discectomy or laminectomy, 

in a controlled, randomized study. The 

commenter asserted that this is a new 

and different indication for use in the 

United States, designated by the FDA as 

a product that fulfills an ‘‘Unmet 

Medical Need.’’ The commenter 

submitted clinical studies to 

demonstrate that Oxiplex is 

substantially different than other 

adhesion barriers in the mode of action, 

dural healing, wound healing, and local 

tissue response. 

Response: We thank the commenter 

for its comments on the newness 

criteria. However, because Oxiplex has 

not yet received FDA approval, and 

therefore does not meet the newness 

criterion, it is not eligible for the IPPS 

new technology add-on payments for FY 

2009. Therefore, we are responding to 

these comments in this final rule. 

In an effort to demonstrate that the 

technology meets the cost criterion, as 

discussed in the proposed rule, the 

applicant searched the FY 2006 

MedPAR file for cases with ICD–9–CM 

procedure codes 03.09 (Other 

exploration and decompression of 

spinal canal) or 80.51 (Excision of 

interveterbral disc) that mapped to CMS 

DRGs 499 and 500 (CMS DRGs 499 and 

500 are crosswalked to MS–DRGs 490 

and 491 (Back and Neck Procedures 

except Spinal Fusion with or without 

CC)). Because these cases do not include 

charges associated with the technology, 

the applicant determined it was 

necessary to add an additional $7,143 in 

charges to the average standardized 

charge per case of cases that map to 

MS–DRGs 490 and 491. (To do this, the 

applicant used a methodology of 

inflating the costs of the technology by 

the average CCR computed by using the 

average costs and charges for supplies 

for cases with ICD–9–CM procedure 

codes 03.09 and 80.51 that map to MS–

DRGs 490 and 491). Of the 221,505 

cases the applicant found, 95,340 cases 

(or 43 percent of cases) would map to 

MS–DRG 490, which has an average 

standardized charge of $60,301, and 

126,165 cases (or 57 percent of cases) 

would map to MS–DRG 491, which has 

an average standardized charge per case 

of $43,888. This resulted in a caseweighted average standardized charge 

per case of $50,952. The case-weighted 

threshold for MS–DRGs 490 and 491 

was $27,481. Because the case-weighted 

average standardized charge per case 

exceeds the case-weighted threshold in 

MS–DRGs 490 and 491, the applicant 

maintained that Oxiplex would meet 

the cost criterion. 

In the FY 2009 IPPS proposed rule, 

we invited public comment on whether 

Oxiplex met the cost criterion. 

Comment: One commenter, the 

manufacturer, addressed the issue of 

whether Oxiplex met the cost criterion. 

Response: Because Oxiplex has not 

yet received FDA approval, and 

therefore does not meet the newness 

criterion, we are not summarizing this 

public comment nor responding to it in 

this final rule. 

As discussed in the proposed rule, the 

manufacturer maintained that Oxiplex

is a substantial clinical improvement 

because it ‘‘creates a protective 

environment around the neural tissue 

that limits nerve root exposure to postsurgical irritants and damage and thus 

reduces adverse outcomes associated 

with Failed Back Surgery Syndrome 

(FBSS) following surgery.’’ The 

manufacturer also claimed that the 

Oxiplex gel reduces leg and back pain 

after discetomy, laminectomy, and 

laminotomy. The manufacturer also 

asserted that the use of Oxiplex is 

consistent with fewer revision surgeries. 

(During the FDA Investigational Device 

Exemption (IDE) trial, one Oxiplex

patient required revision surgery 

compared to six control patients.) 

However, as we noted in the proposed 

rule, we had concerns that Oxiplex

may be substantially similar to adhesion 

barriers that have been on the market for 

several years. We also stated that we 

were concerned that even if we were to 

determine that Oxiplex is not 

substantially similar to existing 

adhesion barriers, there may still be 

insufficient evidence to support the 

manufacturer’s claims that Oxiplex

reduces pain associated with spinal 

surgery. In addition, as discussed in the 

proposed rule, we have found no 

evidence to support the manufacturer’s 

claims regarding mode of action, degree 

of dural healing, degree of wound 


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healing, and local tissue response such 

as might be shown in animal studies. 

We did not receive any written 

comments or public comments at the 

town hall meeting regarding the 

substantial clinical improvement 

aspects of this technology. However, in 

the FY 2009 IPPS proposed rule, we 

welcomed comments from the public 

regarding whether Oxiplex represented 

a substantial clinical improvement. 

Comment: One commenter, the 

manufacturer, claimed that Oxiplex

represents a substantial clinical 

improvement over technology currently 

available to Medicare beneficiaries. 

Other commenters representing trade 

associations and physicians, stated that 

there was not enough evidence to 

determine whether Oxiplex

represented a substantial clinical 

improvement because it had not yet 

received FDA approval and there was 

insufficient peer-reviewed published 

literature to make such a determination. 

Response: Because Oxiplex has not 

yet received FDA approval, and 

therefore does not meet the newness 

criterion, we are not summarizing these 

public comments nor responding to 

them in this final rule. 

As we previously stated, Oxiplex

does not meet the newness criterion 

and, therefore, cannot be approved for 

FY 2009 IPPS new technology add-on 

payments. 

d. TherOx Downstream System 

TherOx, Inc. submitted an application 

for new technology add-on payments for 

FY 2009 for the TherOx Downstream

System (Downstream System). The 

TherOx Downstream System uses 

SuperSaturatedOxygen Therapy (SSO2) 

that is designed to limit myocardial 

necrosis by minimizing microvascular 

damage in acute myocardial infarction 

(AMI) patients following intervention 

with Percutaneous Transluminal 

Coronary Angioplasty (PTCA), and 

coronary stent placement by perfusing 

the affected myocardium with blood 

that has been supersaturated with 

oxygen. SSO2 therapy refers to the 

delivery of superoxygenated arterial 

blood directly to areas of myocardial 

tissue that have been reperfused using 

PTCA and stent placement, but which 

may still be at risk. The desired effect 

of SSO2 therapy is to reduce infarct size 

and thus preserve heart muscle and 

function. The TherOx DownStream

System is the console portion of a 

disposable cartridge-based system that 

withdraws a small amount of the 

patient’s arterial blood, mixes it with a 

small amount of saline, and 

supersaturates it with oxygen to create 

highly oxygen-enriched blood. The 

superoxygenated blood is delivered 

directly to the infarct-related artery via 

the TherOx infusion catheter. SSO2 

therapy is a catheter laboratory-based 

procedure. Additional time in the 

catheter lab area is an average of 100 

minutes. The manufacturer claimed that 

the SSO2 therapy duration lasts 90 

minutes and requires an additional 10 

minutes post-procedure preparation for 

transfer time. The TherOx Downstream

System was not FDA approved at the 

time that the proposed rule was 

published; however, the manufacturer 

indicated to CMS that it expected to 

receive FDA approval in the second 

quarter of 2008. Because the technology 

was not approved by the FDA during 

the development of the proposed rule, 

we limited our discussion of this 

technology to data that the applicant 

submitted, rather than make specific 

proposals with respect to whether the 

device would meet the new technology 

add-on criteria in the proposed rule. At 

the time of the development of this final 

rule, the TherOx Downstream System 

had not yet received FDA approval. 

In an effort to demonstrate that it 

would meet the cost criterion as we 

discussed in the proposed rule, the 

applicant submitted two analyses. The 

applicant stated that it believed that 

cases that would be eligible for the 

Downstream System would most 

frequently group to MS–DRGs 246 

(Percutaneous Cardiovascular Procedure 

with Drug-Eluting Stent with MCC or 4+ 

Vessels/Stents), 247 (Percutaneous 

Cardiovascular Procedure with DrugEluting Stent without MCC), 248 

(Percutaneous Cardiovascular Procedure 

with Non-Drug-Eluting Stent with MCC 

or 4+ Vessels/Stents), and 249 

(Percutaneous Cardiovascular Procedure 

with Non-Drug-Eluting Stent without 

MCC). The first analysis used data based 

on 83 clinical trial patients from 10 

clinical sites. Of the 83 cases, 78 were 

assigned to MS–DRGs 246, 247, 248, or 

249. The data showed that 32 of these 

patients were 65 years old or older. 

There were 12 cases (or 15.4 percent of 

cases) in MS–DRG 246, 56 cases (or 71.8 

percent cases) in MS–DRG 247, 2 cases 

(or 2.6 percent of cases) in MS–DRG 

248, and 8 cases (or 10.3 percent of 

cases) in MS–DRG 249. (The remaining 

five cases grouped to MS–DRGs that the 

technology would not frequently group 

to and therefore are not included in this 

analysis.) The average standardized 

charge per case for MS–DRGs 246, 247, 

248, and 249 was $66,730, $53,963, 

$54,977, and $41,594, respectively. The 

case-weighted average standardized 

charge per case for the four MS–DRGs 

listed above is $54,665. Based on the 

threshold from Table 10 (72 FR 66890), 

the case-weighted threshold for the four 

MS–DRGs listed above was $49,303. 

The applicant also searched the FY 2006 

MedPAR file to identify cases that 

would be eligible for the Downstream

System. The applicant specifically 

searched for cases with primary ICD–9–

CM diagnosis code 410.00 (Acute 

myocardial infarction of anterolateral 

wall with episode of care unspecified), 

410.01 (Acute myocardial infarction of 

anterolateral wall with initial episode of 

care), 410.10 (Acute myocardial 

infarction of other anterior wall with 

episode of care unspecified), or 410.11 

(Acute myocardial infarction of other 

anterior wall with initial episode of 

care) in combination with ICD–9–CM 

procedure code of 36.06 (Insertion of 

non-drug-eluting coronary artery 

stent(s)) or 36.07 (Insertion of drugeluting coronary artery stent(s)). The 

applicant’s search found 13,527 cases 

within MS–DRGs 246, 247, 248, and 249 

distributed as follows: 2,287 cases (or 

16.9 percent of cases) in MS–DRG 246; 

9,691 cases (or 71.6 percent of cases) in 

MS–DRG 247; 402 cases (or 3 percent of 

cases) in MS–DRG 248; and 1,147 cases 

(or 8.5 percent of cases) in MS–DRG 

249. Not including the charges 

associated with the technology, the 

geometric mean standardized charge per 

case for MS–DRGs 246, 247, 248, and 

249 was $59,631, $42,357, $49,718 and 

$37,446, respectively. Therefore, based 

on this analysis, the total case-weighted 

geometric mean standardized charge per 

case across these MS–DRGs was 

$45,080. The applicant estimated that it 

was necessary to add an additional 

$21,620 in charges to the total caseweighted geometric mean standardized 

charge per case. In the additional charge 

amount, the applicant included charges 

for supplies and tests related to the 

technology, charges for 100 minutes of 

additional procedure time in the 

catheter laboratory and charges for the 

technology itself. The inclusion of these 

charges would result in a total caseweighted geometric mean standardized 

charge per case of $66,700. The caseweighted threshold for MS–DRGs 246, 

247, 248, and 249 (from Table 10 (72 FR 

66889)) was $49,714. Because the total 

case-weighted average standardized 

charge per case from the first analysis 

and the case-weighted geometric mean 

standardized charge per case from the 

second analysis exceeds the applicable 

case-weighted threshold, the applicant 

maintained the Downstream System 

would meet the cost criterion. 

In the FY 2009 IPPS proposed rule, 

we invited public comment on whether 


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22Oneill, W.W., et al.: Acute Myocardial 

Infarction with Hyperoxemic Therapy (AMIHOT): A 

Prospective Randomized Trial of Intracoronary 

Hyperoxemic Reperfusion after Percutaneous 

Coronary Intervention. Journal of the American 

College of Cardiology, Vol. 50, No. 5, 2007, pp. 397–

405. 

Downstream System met the cost 

criterion. 

Comment: One commenter, the 

manufacturer, addressed the issue of 

whether the TherOx Downstream

System met the cost criterion. Another 

comment addressed the 100 minutes of 

additional catheter lab time that is 

required for the therapy and the 

preparation for transfer time. 

Response: Because the TherOx 

Downstream System has not yet 

received FDA approval, and therefore 

does not meet the newness criterion, it 

is not eligible for the IPPS new 

technology add-on payments for FY 

2009. Therefore, we are not 

summarizing the details of these 

comments nor responding to them in 

this final rule. 

As discussed in the proposed rule, the 

applicant asserted that the 

Downstream System is a substantial 

clinical improvement because it reduces 

infarct size in acute AMI where PTCA 

and stent placement have also been 

performed. Data was submitted from the 

Acute Myocardial Infarction Hyperbaric 

Oxygen Treatment (AMIHOT) II trial 

which was presented at the October 

2007 Transcatheter Cardiovascular 

Therapeutics conference, but has not 

been published in peer reviewed 

literature, that showed an average of 6.5 

percent reduction in infarct size as 

measured with Tc-99m Sestamibi 

imaging in patients who received 

supersaturated oxygen therapy. We note 

that those patients also showed a 

significantly higher incidence of 

bleeding complications. While we 

recognize that a reduction of infarct size 

may correlate with improved clinical 

outcomes, we question whether the 

degree of infarct size reduction found in 

the trial represents a substantial clinical 

improvement, particularly in light of the 

apparent increase in bleeding 

complications. 

As noted in the proposed rule, we 

received one written comment from the 

manufacturer clarifying questions that 

were raised at the town hall meeting. 

Specifically, the commenter explained 

the methodology of Tc-99m sestamibi 

scanning and interpretation in the 

AMIHOT II trial. In addition, the 

commenter explained that the 

AMIHOT22 and AMIHOT II trials did 

not attempt to measure differences in 

heart failure outcomes nor mortality 

outcomes. 

In the FY 2009 IPPS proposed rule, 

we welcomed comments from the 

public on this matter. 

Comment: Commenters representing 

the manufacturer and physicians 

addressed the issue of whether the 

TherOx Downstream System meets the 

substantial clinical improvement 

criterion. 

Response: Because the TherOx 

Downstream System has not yet 

received FDA approval, and therefore 

does not meet the newness criterion, it 

is not eligible for the IPPS new 

technology add-on payments for FY 

2009. Therefore, we are not 

summarizing the details of this 

comment nor responding to it in this 

final rule. 

As we previously stated, because the 

Downstream System does not meet the 

newness criterion, it cannot be 

approved for FY 2009 IPPS new 

technology add-on payments. 

5. Regulatory Changes 

Section 1886(d)(5)(K)(i) of the Act 

directs us to establish a mechanism to 

recognize the cost of new medical 

services and technologies under the 

IPPS, with such mechanism established 

after notice and opportunity for public 

comment. In accordance with this 

authority, we established at § 412.87(b) 

of our regulations criteria that a medical 

service or technology must meet in 

order to qualify for the additional 

payment for new medical services and 

technologies. Specifically, we evaluate 

applications for new medical service or 

technology add-on payment by 

determining whether they meet the 

criteria of newness, adequacy of 

payment, and substantial clinical 

improvement. 

As stated in section III.J.1. of the 

preamble of this final rule, 

§ 412.87(b)(2) of our existing regulations 

provides that a specific medical service 

or technology will be considered new 

for purposes of new medical service or 

technology add-on payments after the 

point at which data begin to become 

available reflecting the ICD–9–CM code 

assigned to the new service or 

technology. The point at which these 

data become available typically begins 

when the new medical service or 

technology is first introduced on the 

market, generally on the date that the 

medical service or technology receives 

FDA approval. Accordingly, for 

purposes of the new medical service or 

technology add-on payment, a medical 

service or technology cannot be 

considered new prior to the date on 

which FDA approval is granted. 

In addition, as stated in section III.J.1. 

of the preamble of this final rule, 

§ 412.87(b)(3) of our existing regulations 

provides that, to be eligible for the addon payment for new medical services or 

technologies, the DRG prospective 

payment rate otherwise applicable to 

the discharge involving the new medical 

service or technology must be assessed 

for adequacy. Under the cost criterion, 

to assess the adequacy of payment for a 

new medical service or technology paid 

under the applicable DRG prospective 

payment rate, we evaluate whether the 

charges for cases involving the new 

medical service or technology exceed 

certain threshold amounts. 

Section 412.87(b)(1) of our existing 

regulations provides that, to be eligible 

for the add-on payment for new medical 

services or technologies, the new 

medical service or technology must 

represent an advance that substantially 

improves, relative to technologies 

previously available, the diagnosis or 

treatment of Medicare beneficiaries. In 

addition, § 412.87(b)(1) states that CMS 

will announce its determination as to 

whether a new medical service or 

technology meets the substantial 

clinical improvement criteria in the 

Federal Register as part of the annual 

updates and changes to the IPPS. 

Since the implementation of the 

policy on add-on payments for new 

medical services and technologies, we 

accept applications for add-on payments 

for new medical services and 

technologies on an annual basis by a 

specified deadline. For example, 

applications for FY 2009 were 

submitted in November 2007. After 

accepting applications, CMS then 

evaluates them in the annual IPPS 

proposed and final rules to determine 

whether the medical service or 

technology is eligible for the new 

medical service or technology add-on 

payment. If an application meets each of 

the eligibility criteria, the medical 

service or technology is eligible for new 

medical service or technology add-on 

payments beginning on the first day of 

the new fiscal year (that is, October 1). 

We have advised prior and potential 

applicants that we evaluate whether a 

medical service or technology is eligible 

for the new medical service or 

technology add-on payments prior to 

publication of the final rule setting forth 

the annual updates and changes to the 

IPPS, with the results of our 

determination announced in the final 

rule. We announce our results in the 

final rule for each fiscal year because we 

believe predictability is an important 

aspect of the IPPS and that it is 

important to apply a consistent payment 

methodology for new medical services 


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or technologies throughout the entire 

fiscal year. For example, hospitals must 

train their billing and other staff after 

publication of the final rule to properly 

implement the coding and payment 

changes for the upcoming fiscal year set 

forth in the final rule. In addition, 

hospitals’ budgetary process and 

clinical decisions regarding whether to 

utilize new technologies are based in 

part on the applicable payment rates 

under the IPPS for the upcoming fiscal 

year, including whether the new 

medical services or technologies qualify 

for the new medical service or 

technology add-on payment. If CMS 

were to make multiple payment changes 

under the IPPS during a fiscal year, 

these changes could adversely affect the 

decisions hospitals implement at the 

beginning of the fiscal year. As we 

stated in the proposed rule, for these 

reasons, we believe applications for new 

medical service or technology add-on 

payments should be evaluated prior to 

publication of the final IPPS rule for 

each fiscal year. Therefore, if an 

application does not meet the new 

medical service or technology add-on 

payment criteria prior to publication of 

the final rule, it will not be eligible for 

the new medical service or technology 

add-on payments for the fiscal year for 

which it applied for the add-on 

payments. 

Because we make our determination 

regarding whether a medical service or 

technology meets the eligibility criteria 

for the new medical service or 

technology add-on payments prior to 

publication of the final rule, we have 

advised both past and potential 

applicants that their medical service or 

technology must receive FDA approval 

early enough in the IPPS rulemaking 

cycle to allow CMS enough time to fully 

evaluate the application prior to the 

publication of the IPPS final rule. 

Moreover, because new medical services 

or technologies that have not received 

FDA approval do not meet the newness 

criterion, it would not be necessary or 

prudent for us to make a final 

determination regarding whether a new 

medical service or technology meets the 

cost threshold and substantial clinical 

improvement criteria prior to the 

medical service or technology receiving 

FDA approval. In addition, we do not 

believe it is appropriate for CMS to 

determine whether a medical service or 

technology represents a substantial 

clinical improvement over existing 

technologies before the FDA makes a 

determination as to whether the medical 

service or technology is safe and 

effective. For these reasons, we first 

determine whether a medical service or 

technology meets the newness criteria, 

and only if so, do we then make a 

determination as to whether the 

technology meets the cost threshold and 

represents a substantial clinical 

improvement over existing medical 

services or technologies. For example, 

even if an application has FDA 

approval, if the medical service or 

technology is beyond the timeline of 2–

3 years to be considered new, in the past 

we have not made a determination on 

the cost threshold and substantial 

clinical improvement. Further, as we 

have discussed in prior final rules (69 

FR 49018–49019 and 70 FR 47344), it is 

our past and present practice to analyze 

the new medical service or technology 

add-on payment criteria in the following 

sequence: Newness, cost threshold, and 

finally substantial clinical 

improvement. 

In the FY 2009 IPPS proposed rule (73 

FR 23616) we proposed to continue this 

practice of analyzing the eligibility 

criteria in this sequence and announce 

in the annual Federal Register as part of 

the annual updates and changes to the 

IPPS our determination on whether a 

medical service or technology meets the 

eligibility criteria in § 412.87(b). 

However, in the interest of more clearly 

defining the parameters under which 

CMS can fully and completely evaluate 

new medical service or technology addon payment applications, we proposed 

to amend the regulations at § 412.87 by 

adding a new paragraph (c) to codify our 

current policy and specify that CMS 

will consider whether a new medical 

service or technology meets the 

eligibility criteria in § 412.87(b) and 

announce the results in the Federal 

Register as part of the annual updates 

and changes to the IPPS. As a result, we 

proposed to remove the duplicative text 

in § 412.87(b)(1) that specifies that CMS 

will determine whether a new medical 

service or technology meets the 

substantial clinical improvement 

criteria and announce the results of its 

determination in the Federal Register as 

part of the annual updates and changes 

to the IPPS. We noted that this proposal 

was not a change to our current policy, 

as we have always given consideration 

to whether an application meets the 

new medical service or technology 

eligibility criteria in the annual IPPS 

proposed and final rules. Rather, the 

proposal was to simply codify our 

current practice of fully evaluating new 

medical service or technology add-on 

payment applications prior to 

publication of the final rule in order to 

maintain predictability within the IPPS 

for the upcoming fiscal year. 

We did not receive any public 

comments on this proposal. Therefore, 

in this final rule, we are adopting as 

final our proposal to § 412.87(b)(1) to 

remove the duplicative text. 

We also proposed in new paragraph 

(c) of § 412.87 to set July 1 of each year 

as the deadline by which IPPS new 

medical service or technology add-on 

payment applications must receive FDA 

approval. This deadline would provide 

us with enough time to fully consider 

all of the new medical service or 

technology add-on payment criteria for 

each application and maintain 

predictability in the IPPS for the coming 

fiscal year. 

Finally, under our proposal, 

applications that have not received FDA 

approval by July 1 would not be 

considered in the final rule, even if they 

were summarized in the corresponding 

IPPS proposed rule. However, 

applications that receive FDA approval 

of the medical service or technology 

after July 1 would be able to reapply for 

the new medical service or technology 

add-on payment the following year (at 

which time they would be given full 

consideration in both the IPPS proposed 

and final rules). 

Comment: A few commenters 

opposed the proposed policy. 

Specifically, the commenters expressed 

concern that the imposition of such a 

deadline would decrease flexibility in 

the new technology add-on payment 

approval process because applicants 

who received FDA approval shortly 

after the deadline would not be able to 

be considered for new technology addon payments for the corresponding 

fiscal year and would instead have to 

wait until a subsequent year to apply. 

One commenter suggested that CMS use 

July 1 as a general guideline for when 

FDA approval would have to be 

received, but that technologies that 

received FDA approval a day or two 

after the deadline should also be 

considered. One commenter suggested 

that the deadline be announced at the 

annual new technology town hall 

meeting instead of through regulation. 

Response: While we acknowledge that 

the deadline may decrease flexibility in 

the new technology add-on payment 

approval process by a very marginal 

degree, we remind the commenters that 

we have been committed to working 

with applicants very closely throughout 

the new technology application review 

process and that we have afforded 

applicants an opportunity to 

supplement their original applications 

with information that we believed might 

better support their ability to 

demonstrate that they meet the 

eligibility criteria for the new 

technology add-on payments. 

Furthermore, we have provided 


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flexibility in the new technology add-on 

application process by accepting 

applications for technologies prior to 

their approval by the FDA, despite the 

fact that we are unable to approve a 

technology that has not been proven to 

be ‘‘safe and effective’’ for marketing in 

the United States as FDA approval 

signifies. We note that it is difficult to 

determine whether a technology is a 

substantial clinical improvement over 

existing (FDA-approved) technologies 

because there is usually only limited 

clinical data available and because it 

requires subjective judgment, but we 

have made efforts to analyze data 

available to us even prior to FDA 

approval. While we prefer that 

technologies have FDA approval at the 

time that an application for new 

technology add-on payment is 

submitted, we acknowledge that it is not 

always feasible for a new technology to 

receive FDA approval prior to the 

submission deadline for new technology 

add-on payment applications. We 

believe that July 1 of each year provides 

an appropriate balance between the 

necessity for adequate time to fully 

evaluate the applications, the 

requirement to publish the IPPS final 

rule by August 1 of each year, and the 

commenters’ concerns that potential 

new technology applicants have some 

flexibility with respect to when their 

technology receives FDA approval. 

Finally, we believe that announcing the 

deadline at the annual new technology 

town hall meeting does not provide a 

standard as predictable as a regulatory 

standard. In addition, not all interested 

parties are able to attend the town hall 

meeting and, therefore, may not be 

aware of a deadline that is announced 

at that meeting. 

Comment: Two commenters 

supported the proposal. The 

commenters stated that setting a 

deadline would increase transparency 

and predictability in the IPPS new 

technology add-on application process. 

One of the commenters noted that 

setting such a deadline would save 

manufacturers the cost and effort of 

submitting an application for 

technologies that were not likely to 

make the deadline and that the deadline 

would also save CMS time from 

reviewing these applications. The 

commenter also stated that the deadline 

would bring clarity to the new 

technology application process by 

helping applicants coordinate the 

timing of their applications with FDA 

approval. 

Response: We appreciate the 

commenters’ support and agree that 

both transparency and predictability in 

the new technology add-on payment 

application process will be improved as 

a result of this regulatory change. We 

also continue to believe that this policy 

will provide us with enough time to 

fully consider all of the new medical 

service or technology add-on payment 

criteria for each application without 

imposing additional burden on future 

applicants that are unable to meet this 

deadline. 

After consideration of the public 

comments received, we are adopting as 

final our proposal to revise § 412.87 to 

remove the second sentence of (b)(1), 

thereby codifying our current practice of 

how CMS evaluates new medical 

service or technology add-on payment 

applications. We are also finalizing our 

proposal in paragraph (c) of § 412.87 

which establishes a date of July 1 of 

each year as the deadline by which IPPS 

new medical service or technology addon payment applications must receive 

FDA approval in order to be fully 

evaluated in the applicable IPPS final 

rule each year. 

III. Changes to the Hospital Wage Index 

A. Background 

Section 1886(d)(3)(E) of the Act 

requires that, as part of the methodology 

for determining prospective payments to 

hospitals, the Secretary must adjust the 

standardized amounts ‘‘for area 

differences in hospital wage levels by a 

factor (established by the Secretary) 

reflecting the relative hospital wage 

level in the geographic area of the 

hospital compared to the national 

average hospital wage level.’’ In 

accordance with the broad discretion 

conferred under the Act, we currently 

define hospital labor market areas based 

on the definitions of statistical areas 

established by the Office of Management 

and Budget (OMB). A discussion of the 

FY 2009 hospital wage index based on 

the statistical areas, including OMB’s 

revised definitions of Metropolitan 

Areas, appears under section III.C. of 

this preamble. 

Beginning October 1, 1993, section 

1886(d)(3)(E) of the Act requires that we 

update the wage index annually. 

Furthermore, this section provides that 

the Secretary base the update on a 

survey of wages and wage-related costs 

of short-term, acute care hospitals. The 

survey must exclude the wages and 

wage-related costs incurred in 

furnishing skilled nursing services. This 

provision also requires us to make any 

updates or adjustments to the wage 

index in a manner that ensures that 

aggregate payments to hospitals are not 

affected by the change in the wage 

index. The adjustment for FY 2009 is 

discussed in section II.B. of the 

Addendum to this final rule. 

As discussed below in section III.I. of 

this preamble, we also take into account 

the geographic reclassification of 

hospitals in accordance with sections 

1886(d)(8)(B) and 1886(d)(10) of the Act 

when calculating IPPS payment 

amounts. Under section 1886(d)(8)(D) of 

the Act, the Secretary is required to 

adjust the standardized amounts so as to 

ensure that aggregate payments under 

the IPPS after implementation of the 

provisions of sections 1886(d)(8)(B) and 

(C) and 1886(d)(10) of the Act are equal 

to the aggregate prospective payments 

that would have been made absent these 

provisions. The budget neutrality 

adjustment for FY 2009 is discussed in 

section II.A.4.b. of the Addendum to 

this final rule. 

Section 1886(d)(3)(E) of the Act also 

provides for the collection of data every 

3 years on the occupational mix of 

employees for short-term, acute care 

hospitals participating in the Medicare 

program, in order to construct an 

occupational mix adjustment to the 

wage index. A discussion of the 

occupational mix adjustment that we 

are applying beginning October 1, 2008 

(the FY 2009 wage index) appears under 

section III.D. of this preamble. 

After the issuance of the FY 2009 

IPPS proposed rule, a new law, the 

Medicare Improvements for Patients and 

Providers Act of 2008 (Pub. L. 110–275) 

was enacted on July 15, 2008. Section 

124 of Public Law 110–275 extended 

certain hospital wage index 

reclassifications originally provided for 

under section 508 of Public Law 108–

173, as well as certain special 

exceptions, through September 30, 2009 

(FY 2009). A discussion of the 

provisions of section 124 and its 

implementation in a separate Federal 

Register notice to be published 

subsequent to this final rule are 

discussed in section III.I.7. of this 

preamble. 

B. Requirements of Section 106 of the 

MIEA–TRHCA 

1. Wage Index Study Required Under 

the MIEA–TRHCA 

a. Legislative Requirement 

Section 106(b)(1) of the MIEA–

TRHCA (Pub. L. 109–432) required 

MedPAC to submit to Congress, not later 

than June 30, 2007, a report on the 

Medicare wage index classification 

system applied under the Medicare 

IPPS. Section 106(b) of MIEA–TRHCA 

required the report to include any 

alternatives that MedPAC recommends 

to the method to compute the wage 


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index under section 1886(d)(3)(E) of the 

Act. 

In addition, section 106(b)(2) of the 

MIEA–TRHCA instructed the Secretary 

of Health and Human Services, taking 

into account MedPAC’s 

recommendations on the Medicare wage 

index classification system, to include 

in the FY 2009 IPPS proposed rule one 

or more proposals to revise the wage 

index adjustment applied under section 

1886(d)(3)(E) of the Act for purposes of 

the IPPS. The Secretary was also to 

consider each of the following: 

• Problems associated with the 

definition of labor markets for the wage 

index adjustment. 

• The modification or elimination of 

geographic reclassifications and other 

adjustments. 

• The use of Bureau of Labor of 

Statistics (BLS) data or other data or 

methodologies to calculate relative 

wages for each geographic area. 

• Minimizing variations in wage 

index adjustments between and within 

MSAs and statewide rural areas. 

• The feasibility of applying all 

components of CMS’ proposal to other 

settings. 

• Methods to minimize the volatility 

of wage index adjustments while 

maintaining the principle of budget 

neutrality. 

• The effect that the implementation 

of the proposal would have on health 

care providers on each region of the 

country. 

• Methods for implementing the 

proposal(s), including methods to phase 

in such implementations. 

• Issues relating to occupational mix 

such as staffing practices and any 

evidence on quality of care and patient 

safety including any recommendation 

for alternative calculations to the 

occupational mix. 

b. MedPAC’s Recommendations 

In its June 2007 Report to Congress, 

‘‘Report to the Congress: Promoting 

Greater Efficiency in Medicare’’

(Chapter 6 with Appendix), MedPAC 

made three broad recommendations 

regarding the wage index: 

(1) Congress should repeal the 

existing hospital wage index statute, 

including reclassifications and 

exceptions, and give the Secretary 

authority to establish a new wage index 

system; 

(2) The Secretary should establish a 

hospital compensation index that—

• Uses wage data from all employers 

and industry-specific occupational 

weights; 

• Is adjusted for geographic 

differences in the ratio of benefits to 

wages; 

• Is adjusted at the county level and 

smoothes large differences between 

counties; and 

• Is implemented so that large 

changes in wage index values are 

phased in over a transition period; and 

(3) The Secretary should use the 

hospital compensation index for the 

home health and skilled nursing facility 

prospective payment systems and 

evaluate its use in the other Medicare 

fee-for-service prospective payment 

systems. 

The full June 2007 Report to Congress 

is available at the Web site: http:// 

www.medpac.gov/documents/ 

Jun07_EntireReport.pdf). 

In the presentation and analysis of its 

alternative wage index system, MedPAC 

addressed almost all of the nine points 

for consideration under section 

106(b)(2) of Public Law 109–432. 

Following are the highlights of the 

alternative wage index system 

recommended by MedPAC: 

• Although the MedPAC 

recommended wage index generally 

retains the current labor market 

definitions, it supplements the 

metropolitan areas with county-level 

adjustments and eliminates single wage 

index values for rural areas. 

• In the MedPAC recommended wage 

index, the county-level adjustments, 

together with a smoothing process that 

constrains the magnitude of differences 

between and within contiguous wage 

areas, serve as a replacement for 

geographical reclassifications. 

• The MedPAC recommended wage 

index uses BLS data instead of the CMS 

hospital wage data collected on the 

Medicare cost report. MedPAC adjusts 

the BLS data for geographic differences 

in the ratio of benefits to wages using 

Medicare cost report data. 

• The BLS data are collected from a 

sample of all types of employers, not 

just hospitals. The MedPAC 

recommended wage index could be 

adapted to other providers such as 

HHAs and SNFs by replacing hospital 

occupational weights with occupational 

weights appropriate for other types of 

providers. 

• In the MedPAC recommended wage 

index, volatility over time is addressed 

by the use of BLS data, which is based 

on a 3-year rolling sample design. 

• MedPAC recommended a phased 

implementation for its recommended 

wage index in order to cushion the 

effect of large wage index changes on 

individual hospitals. 

• MedPAC suggested that using BLS 

data automatically addresses 

occupational mix differences, because 

the BLS data are specific to health care 

occupations, and national industry-wide 

occupational weights are applied to all 

geographic areas. 

• The MedPAC report does not 

provide any evidence of the impact of 

its wage index on staffing practices or 

the quality of care and patient safety. 

c. CMS Contract for Impact Analysis 

and Study of Wage Index Reform 

To assist CMS in meeting the 

requirements of section 106(b)(2) of 

Public Law 109–432, in February 2008, 

CMS awarded a Task Order to Acumen, 

LLC. The two general responsibilities of 

the Task Order are to (1) conduct a 

detailed impact analysis that compares 

the effects of MedPAC’s recommended 

wage and hospital compensation indices 

with the CMS wage index and (2) 

provide analysis and research that assist 

CMS in developing a proposal (or 

proposals) that addresses the nine 

points for consideration under section 

106(b)(2) of Public Law 109–432. 

Specifically, the tasks under the Task 

Order include, but are not limited to, an 

evaluation of whether differences 

between the two types of wage data (that 

is, CMS cost report and occupational 

mix data and BLS data) produce 

significant differences in wage index 

values among labor market areas, a 

consideration of alternative methods of 

incorporating benefit costs into the 

construction of the wage index, a review 

of past and current research on 

alternative labor market area definitions, 

and a consideration of how aspects of 

the MedPAC recommended wage index 

can be applied to the CMS wage data in 

constructing a new methodology for the 

wage index. Acumen has completed the 

first phase of its study (that is, a 

comparative and impact analysis of the 

CMS wage index and the MedPAC 

recommended wage indices). A 

summary of Acumen’s findings is 

included in section III.B.1.e. of the 

preamble to this final rule. Acumen will 

post on its Web site, subsequent to the 

publication of this final rule, an interim 

report that includes the full set of 

findings from this analysis. Acumen’s 

Web site is: http://www.acumenllc.com/ 

reports/cms. 

d. Public Comments Received on the 

MedPAC Recommendations and the 

CMS/Acumen Wage Index Study and 

Analysis 

We received many public comments 

regarding the MedPAC’s 

recommendations for reforming the 

wage index, as well as on CMS’ and 

Acumen’s study and analysis. The 

public comments vary greatly, and at 

this time, we are not proposing or 

finalizing the specific recommendations 

made by MedPAC discussed above. For 


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this reason, we are briefly highlighting 

the public comments according to the 

issues they address. A complete set of 

the public comments on the FY 2009 

IPPS proposed rule (CMS–1390–P) is 

available on the Internet at: 

www.regulations.gov. In developing 

proposals for additional wage index 

reform (anticipated to be included in the 

FY 2010 IPPS proposed rule), we plan 

to consider all of the public comments 

on the MedPAC recommendations that 

we received in this rulemaking cycle, 

along with the interim and final reports 

to be submitted to us by Acumen. 

MedPAC Recommendation: Congress 

should repeal the existing hospital wage 

index statute, including reclassifications 

and exceptions. 

Public Comment Summaries: 

• Wage index reclassifications and 

exceptions process should not be 

eliminated. Exceptions are necessary for 

hospitals with labor costs that are 

atypical for their local area but 

comparable to other areas. 

• Reclassifications and other wage 

index exceptions should be modified or 

eliminated. As the MedPAC noted, 40 

percent of hospitals receive a wage 

index exception, thereby indicating that 

the current system is broken. 

MedPAC Recommendation: Use BLS 

data instead of the CMS hospital wage 

data collected on the Medicare cost 

report to calculate the wage index. 

Public Comment Summaries: 

• CMS should adopt the MedPAC’s 

recommendations to use BLS data. A 

wage index based on a 3-year average, 

instead of a single year of 4-year-old 

data, would better reflect hospitals’

average hourly wages. 

• BLS data may be inappropriate to 

use for the hospital wage index because 

it includes data from all employers, not 

just short term acute hospitals. 

• Wages for contract or temporary 

employees are included in BLS data, but 

they reflect the lower salary paid by the 

agency to the employee and not the 

higher salary of what the hospital paid 

the agency. 

• Unlike CMS’s public process for 

reviewing and correcting wage index 

data at the hospital level, BLS has a 

strict confidentiality policy. Hospitals 

would be unable to verify any 

inaccuracies in the BLS data. Complete 

transparency is needed for the entire 

wage index process. 

• Every 6 months, BLS surveys 

200,000 establishments and builds the 

database to include 1.2 million unique 

establishments over a 3-year period. The 

data are then inflated to a certain month 

and year using a ‘‘single national 

estimate’’ of wage growth for broad 

occupational divisions. This approach 

fails to account for any differences in 

wage growth between markets over the 

3-year period. 

• To determine average hourly wages, 

CMS collects data over a 12-month 

period, while the BLS collects data from 

2 payroll periods, with each period 

capturing data from one-sixth of the 

total number of sampled establishments. 

Integrity in the wage index may be 

compromised using data from only two 

payroll periods rather than from 12 

months of data. 

• BLS data exclude overtime pay, jury 

duty pay, and shift differentials. 

Excluding these costs, which are often 

associated with tight labor market areas, 

could understate areas that have higher 

utilization of these items. 

• BLS data do not include employee 

fringe benefits costs. The MedPAC 

relied on benefit data from the CMS 

hospital, home health agency, and SNF 

cost reports, which negates the potential 

benefit of eliminating the collection of 

hospital-specific wage data. There are 

also concerns about mixing data from 

two sources. 

• Full-time and part-time employees 

are equally weighted in the BLS data. 

• Estimates from using a sampling 

methodology like the BLS uses are 

subject to sampling errors and will be 

less reliable than CMS’ current 

methodology of using data from all PPS 

hospitals. 

• CMS data are mandatory while BLS 

data are voluntary. Data that are 

voluntarily submitted may have less 

integrity than mandatory data. 

• BLS imputes data for nonresponsive 

employers. The use of imputed data is 

inappropriate. 

• BLS data do not reflect premiums 

that hospitals must pay for certain 

workers; for example, premiums for 

registered nurses with additional 

training and certification in specialties 

such as critical care. Payment premiums 

for these workers would not be 

adequately reflected in the BLS data 

because the BLS survey does not 

capture information on nurse specialty 

areas. 

• On the BLS survey, hospitals 

simply report data for occupational 

categories by average hourly wage 

ranges. Hospitals do not report actual 

hours worked. BLS’ method for 

weighting the data in computing hourly 

rates is confusing because it does not 

have hours as a basis for the weighting. 

MedPAC Recommendation: Use 

county-level adjustments, together with 

a smoothing process, to constrain the 

magnitude of differences between and 

within contiguous wage areas. 

Public Comment Summaries: 

• The MedPAC used 2000 census 

data to establish the relationship 

between counties within a MSA. Using 

old data may create differences in wage 

indices that are inconsistent with actual 

geographic differences in wages. 

• Using counties as the units of 

analysis may not be optimal. Some 

counties tend to be quite large and 

topographically diverse, while other 

counties are small and relatively 

homogeneous. 

• CMS’ current methodology, with 

the exception of commuting pattern 

adjustments, assumes there is no 

interrelationship between areas. More 

refined areas, such as resulting from the 

MedPAC’s smoothing methodology, 

may be more realistic and less arbitrary. 

• Smoothing may mask actual 

variation between labor market areas. 

• The 10-percent cliffs used in the 

MedPAC’s smoothing process are set 

subjectively and, as the MedPAC noted, 

a percentage of 8 or 12 percent could 

alternatively be used. Depending on the 

area, changing the percentage could 

cause swings of millions of dollars. 

MedPAC Recommendation: Adopt 

methods (such as a 3-year rolling 

average) to minimize the volatility of 

wage index adjustments while 

maintaining the principle of budget 

neutrality. 

Public Comment Summaries: 

• Volatility in hospital wage indices 

from one year to the next makes it 

difficult for hospitals to estimate 

Medicare payments for budgeting 

purposes. While the 3-year rolling 

average used by BLS may reduce 

volatility, alternative approaches should 

be examined, including those that do 

not rely on BLS data. 

• While a rolling average may make 

the wage data look better from a 

statistical point, it may not result in a 

fair wage distribution tool. As hospitals 

make adjustments for current market 

conditions, an average will mask the 

change. 

CMS/Acumen Study and Analysis 

Plan: As stated earlier, CMS contracted 

with Acumen to conduct an impact 

analysis and compare the effects of 

MedPAC’s recommended wage and 

hospital compensation indexes with the 

CMS wage index and to provide 

analysis that assists CMS in developing 

a proposal(s) that address the nine 

points under section 106(b)(2) of the 

MIEA–TRHCA. 

Public Comment Summaries: 

• Comments were favorable and 

supportive of CMS’ contract with 

Acumen. One commenter found 

Acumen’s analysis plan ‘‘very 

thorough’’ and was pleased with the 

‘‘wide variety of options and issues 


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relating to the wage index’’ that were 

included in the analysis plan. (Acumen 

discussed the plan at CMS’ May 20, 

2008 special open door forum on wage 

index reform. The full transcript of the 

forum discussions is available at the 

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

OpendoorForums/ 

05_ODF_SpecialODF.asp. Acumen’s 

analysis plan will be posted on 

Acumen’s Web site subsequent to the 

publication of this final rule at: http:// 

www.acumenllc.com/reports/cms.) 

Another commenter expressed 

appreciation for the breadth and 

complexity of fulfilling CMS’ statutory 

obligation under MIEA–TRHCA as well 

as the ‘‘political challenges of this task,’’

and commended CMS’ engagement of 

an outside, independent contractor to 

assist CMS in this endeavor. 

• The majority of commenters 

suggested that comprehensive wage 

index reform was necessary as opposed 

to incremental, interim changes. To that 

end, the commenters strongly urged that 

CMS make no changes to the wage 

index system until the Acumen study 

has been completed. The commenters 

also stated that the process to consider 

changes to the existing wage index 

should be very thorough and include a 

wide range of options beyond 

MedPAC’s recommendations. In 

addition, the commenters recommended 

that CMS’ review include the reasons 

that CMS replaced the BLS data with 

cost report data in the 1980s. 

• Commenters commended CMS for 

the open door forum on the wage index 

held in May 2008 and believed that, 

given the importance the wage index 

has on hospital payment and the need 

for reform, the industry and interested 

stakeholders be given every opportunity 

for input through such open door 

forums. The commenters recommended 

transparency in the process and that 

CMS provide ample time for public 

review and comment on the study and 

any proposals stemming from CMS’ and 

Acumen’s study results. 

• Several commenters suggested 

alternatives to the MedPAC 

recommendations and CMS proposals. 

For example, some commenters 

recommended that CMS implement a 

stop-loss to reduce wage index 

decreases from one year to the next. The 

commenters explained that a stop-loss 

would reduce volatility and increase 

predictability within the hospital wage 

index. In addition, many commenters 

expressed the need for a transition 

period for any changes to the wage 

index to ensure less volatility in the 

wage index and prevent significant 

reallocation of Medicare funds. 

Response: We appreciate the many 

comments we received regarding 

MedPAC’s recommendations and the 

CMS/Acumen study and analysis of 

reforming the wage index. At this time, 

because Acumen has not yet completed 

all of its research and analysis and 

because we have not fully analyzed the 

MedPAC recommendations, we are 

neither proposing nor finalizing any 

changes in response to the specific 

MedPAC recommendations. As stated 

above, as we study wage index reform 

in further depth, we plan to consider all 

of the public comments on the 

recommendations received during the 

rulemaking cycle. We plan to include 

our assessment of the MedPAC 

recommendations, along with any 

additional recommendations for further 

reforming the wage index, in the FY 

2010 IPPS proposed rule. 

e. Impact Analysis of Using MedPAC’s 

Recommended Wage Index 

Acumen conducted an analysis 

comparing use of the MedPAC 

recommended wage indices to the 

current CMS wage index. In the 

following discussion, we use a variety of 

terminology to refer to the wage indices 

recommended by MedPAC, as well as 

the wage indices currently used by 

CMS. 

• When we refer to MedPAC’s 

‘‘hospital compensation index’’ or 

‘‘compensation index’’, we are 

discussing the wage index that MedPAC 

developed that includes an adjustment 

to account for differences in the ratio of 

benefits to wages in different labor 

market areas. MedPAC developed this 

ratio of benefits using Medicare cost 

report data. 

• When we refer to MedPAC’s 

recommended ‘‘wage index’’, we are 

discussing the MedPAC-developed 

index without any adjustment for 

nonwage benefits. This wage index was 

developed using BLS data. 

• When we refer to CMS’ ‘‘prereclassification wage index’’ or ‘‘prereclassification, pre-floor wage index’’, 

we are discussing the wage index 

developed by CMS but without any 

adjustments for geographic 

reclassifications or the rural floor. This 

wage index also does not include any 

adjustments for outmigration, section 

508 reclassifications, Lugar 

redesignations, section 401 urban-torural reclassifications, or for any special 

exceptions. 

• When we refer to CMS’ ‘‘final wage 

index’’, we are discussing the wage 

index developed by CMS that is the 

final wage index received by or to be 

received by a hospital. Thus, this wage 

index does account for all geographic 

reclassifications as well as the rural 

floor. This final wage index also 

includes any adjustments as a result of 

outmigration, section 508 

reclassifications, Lugar redesignations, 

section 401 urban-to-rural 

reclassifications, or any other special 

exceptions. 

Acumen analyzed and compared all 

four of the wage indices discussed 

above. In other words, Acumen 

compared (A) CMS’ pre-reclassification, 

pre-floor wage index for FY 2008 (which 

was provided by CMS and is based on 

hospital cost reports from FY 2004) and 

CMS’ final wage index for FY 2008 with 

(B) both the MedPAC recommended 

hospital compensation index and wage 

index for FY 2007. Acumen’s 

comparisons of the CMS wage index to 

the MedPAC recommended indices 

indicate the effects of various 

components of the alternative wage 

indices. All of the comparisons reflect 

differences between the CMS and BLS 

wage data. The comparison of the CMS 

pre-reclassification index to the 

MedPAC compensation index reflects 

the additional impact of MedPAC’s 

method of using county level adjustors 

to smooth differences in index values 

among the CMS wage areas. The 

comparison of the CMS prereclassification index to the MedPAC 

recommended wage index includes the 

effect of county-level smoothing and 

indicates the incremental effect of 

removing the MedPAC adjustment for 

benefits. The comparison of the CMS 

final wage index to the MedPAC 

recommended wage index adds the 

incremental effect of geographic 

reclassifications and other wage index 

exceptions (for example, the rural and 

imputed floors) to the preceding 

comparison. Finally, the comparison of 

the CMS final wage index to the 

MedPAC recommended compensation 

index yields the combined effects of all 

the differences between the two indices. 

First, Acumen analyzed the overall 

impacts of the MedPAC recommended 

indices. Acumen conducted the analysis 

at two levels: the hospital level and the 

county level. At the hospital level, 

Acumen analyzed all four comparisons 

described above. However, at the county 

level, Acumen did not include 

comparisons using the CMS final wage 

index because it includes 

reclassifications and other changes 

which are granted to hospitals, not 

counties. As a result, hospitals in the 

same county or wage area can have 

different final index values. Acumen’s 

analysis was based on 3,426 hospitals, 

for which all four wage index values 

were available (the CMS prereclassification wage index, the CMS 


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final wage index, the MedPAC 

recommended hospital wage index, and 

the MedPAC recommended hospital 

compensation index), and on the 1,595 

counties in which these hospitals are 

located. 

Second, Acumen estimated the 

impact for several subgroups of 

hospitals and counties. At the hospital 

level, Acumen assessed the impact by 

geographic area (for example, urban 

hospitals and rural hospitals), hospital 

size (number of beds), geographic 

region, teaching status, DSH status, SCH 

status, RRC status, MDH status, type of 

ownership (government, proprietary, 

voluntary), and reclassification status. 

At the county level, Acumen presented 

results for metropolitan area counties 

and rural counties. 

Third, Acumen calculated the change 

in the wage index that each hospital (or 

county) could expect to experience from 

adopting the MedPAC recommendations 

and reported statistics on these expected 

differences (mean, median, standard 

deviation, minimum and maximum). 

Acumen did not model changes in 

Medicare payments that would result 

from using different wage indices. 

Instead, Acumen normalized all four 

wage indices by setting their discharge 

weighted means equal to 1.00. 

Normalization puts all four wage 

indices on the same scale so that 

differences in wage index values 

between one index and another index 

are directly comparable. As a result, the 

wage index differences reported by 

Acumen imply payment differences, but 

do not precisely measure the magnitude 

of those payment differences. 

The main findings of Acumen’s 

impact analysis are summarized as 

follows: 

• Adopting the MedPAC 

recommendations would reduce the 

differentials between wage index values 

across geographic areas. Both the 

MedPAC wage and compensation 

indices are less dispersed than either 

the CMS pre-reclassification wage index 

or the final wage index. 

• Under either of the MedPAC 

recommended indices, differences 

between the highest and lowest wage 

index hospitals would be reduced. For 

example, the range or difference that 

exists from the highest wage index 

hospital to the lowest wage index 

hospital (the ‘‘high-low range’’) under 

the MedPAC compensation index (0.752 

versus 1.499, or a difference of 0.747) is 

roughly 11 percent smaller than the 

high-low range in the CMS final wage 

index (0.732 versus 1.569, or a 

difference of 0.837). Using the CMS prereclassification wage index as a 

comparison (with a high-low range of 

0.716 versus 1.600), the MedPAC 

recommended compensation index is 

roughly 16 percent smaller. The 

minimum value of the MedPAC 

recommended compensation index 

(0.752) is roughly 5 percent larger than 

the minimum value of the CMS prereclassification wage index (0.716), and 

the maximum value of the MedPAC 

recommended compensation index 

(1.499) is roughly 6 percent less than the 

maximum value of the CMS prereclassification index (1.600). 

• Adopting the MedPAC 

recommendations would also lower the 

wage dispersion among both rural and 

urban hospitals (whether classified by 

geography or payment), among hospitals 

of all sizes, and among all hospitals 

categorized by teaching status, DSH 

status, ownership status, and Medicare 

utilization status. These findings are 

generally consistent, regardless of 

whether the MedPAC recommended 

compensation index is compared to the 

CMS final wage index or to the CMS 

pre-reclassification wage index. 

• Adopting the MedPAC 

recommendations would have a 

differential impact on urban hospitals 

across geographic regions of the 

country. In moving from the CMS final 

wage index to the MedPAC 

compensation index, the largest 

reduction in standard deviations would 

occur for urban hospitals in the New 

England region (¥19.0 percent), the 

Middle Atlantic region (¥27.8 percent), 

and the Pacific region (¥19.0 percent). 

However, for urban hospitals in the 

West North Central region, the standard 

deviation of wage index values would 

increase by 11.7 percent. 

• Adopting the MedPAC 

recommendations would decrease the 

standard deviation among hospitals 

with most types of reclassifications. For 

example, compared to the CMS final 

wage index, the MedPAC compensation 

index would reduce the standard 

deviation by 11.6 percent. 

• The adoption of the MedPAC 

recommended indices would lead a 

substantial number of hospitals to 

experience a large change in their index 

values in the transition. If the MedPAC 

compensation index is compared to the 

CMS final wage index, 37 percent of all 

hospitals would see either increases or 

decreases of more than 5 percent. For 

approximately 34 percent of the 

reclassified hospitals (or 278 hospitals), 

wage index values would decrease by 

more than 5 percent. Reclassified 

hospitals comprise more than one-half 

of all hospitals that would likely 

experience wage index decreases greater 

than 5 percent in moving from the CMS 

final wage index to the MedPAC 

compensation index. 

• Under a move from the CMS prereclassification wage index to the 

MedPAC recommended compensation 

index, counties in rural areas would 

experience fewer decreases and more 

increases in their wage index compared 

to counties in urban areas. (As noted 

above, county level comparisons were 

not performed using the CMS final wage 

index.) 

The above findings are discussed in 

more detail in Acumen’s interim report, 

which will be available after the 

publication of this final rule, at the Web 

site: http://www.acumenllc.com/ 

reports/cms. 

2. CMS Proposals and Final Policy 

Changes in Response to Requirements 

Under Section 106(b) of the MIEA–

TRHCA 

As discussed in section III.A. of this 

preamble, the purpose of the hospital 

wage index is to adjust the IPPS 

standardized payment to reflect labor 

market area differences in wage levels. 

The geographic reclassification system 

exists in order to assist ‘‘hospitals which 

are disadvantaged by their current 

geographic classification because they 

compete with hospitals that are located 

in the geographic area to which they 

seek to be reclassified’’ (56 FR 25469). 

Geographic reclassification is 

established under section 1886(d)(10) of 

the Act and is implemented through 42 

CFR part 412, subpart L. (We refer 

readers to section III.I. of this preamble 

for a detailed discussion of the 

geographic reclassification system and 

other area wage index exceptions.) 

In its June 2007 Report to Congress, 

MedPAC discussed its findings that 

geographic reclassification, and 

numerous other area wage index 

exceptions added to the system over the 

years, have created major complexities 

and ‘‘troubling anomalies’’ in the 

hospital wage index. A review of the 

IPPS final rules reveals a long history of 

legislative changes that have permitted 

certain hospitals, that otherwise would 

not be able to reclassify under section 

1886(d)(10) of the Act, to receive a 

higher wage index than calculated for 

their geographic area. MedPAC reports 

that more than one-third of hospitals 

now receive a higher wage index due to 

geographic reclassification or other 

wage index exceptions. We are 

concerned about the integrity of the 

current system, and agree with MedPAC 

that the process has become 

burdensome. 

As noted above, MedPAC 

recommended the elimination of 

geographic reclassification and other 


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wage index exceptions. In addition, the 

President’s FY 2009 Budget included a 

proposal to apply the geographic 

reclassification budget neutrality 

requirement at the State level rather 

than by adjusting the standardized rate 

for hospitals nationwide. Given the 

language in section 1886(d)(10) of the 

Act establishing the MGCRB, we believe 

a statutory change would be required to 

make these changes. However, we do 

have the authority to make some 

regulatory changes to the 

reclassification system. These regulatory 

changes are discussed below. We note 

that these changes do not preclude 

future consideration of the MedPAC 

recommendations discussed in section 

III.B.1. of this preamble, when the 

recommendations could be 

implemented administratively. 

a. Proposed and Final Revision of the 

Reclassification Average Hourly Wage 

Comparison Criteria 

Regulations at 42 CFR 413.230(d)(1) 

set forth the average hourly wage 

comparison criteria that an individual 

hospital must meet in order for the 

MGCRB to approve a geographic 

reclassification application. Our current 

criteria (requiring an urban hospital to 

demonstrate that its average hourly 

wage is at least 108 percent of the 

average hourly wage of hospitals in the 

area in which the hospital is located and 

at least 84 percent of the average hourly 

wage of hospitals in the area to which 

it seeks redesignation) were adopted in 

the FY 1993 IPPS final rule (57 FR 

39825). In that final rule, we explained 

that the 108 percent threshold ‘‘is based 

on the national average hospital wage as 

a percentage of its area wage (96 

percent) plus one standard deviation (12 

percent).’’ We also explained that we 

would use the 84-percent threshold to 

reflect the average hospital wage of the 

hospital as a percentage of its area wage 

less one standard deviation. We stated 

that ‘‘to qualify for a wage index 

reclassification, a hospital must have an 

average hourly wage that is more than 

one national standard deviation above 

its original labor market area and not 

less than one national standard 

deviation below its new labor market 

area’’ (57 FR 39770). In response to 

numerous public comments we 

received, we expressed our policy and 

legal justifications for adopting the 

specific thresholds. Among other things, 

we stated that geographic 

reclassifications must be viewed not just 

in terms of those hospitals that are 

reclassifying, but also in terms of the 

nonreclassifying hospitals that, through 

a budget neutrality adjustment, are 

required to bear a financial burden 

associated with the higher wage indices 

received by those hospitals that 

reclassify. We also indicated that the 

Secretary has ample legal authority 

under section 1886(d)(10) of the Act to 

set the wage comparison thresholds and 

to revise such thresholds upon further 

review. We refer readers to that final 

rule for a full discussion of our 

justifications for the standards. 

In the FY 2000 IPPS final rule (65 FR 

47089 through 47090), the wage 

comparison criteria for rural hospitals 

seeking individual hospital 

reclassifications were reduced to 82 

percent and 106 percent to compensate 

for the historic economic 

underperformance of rural hospitals. 

The 2-percent drop in both thresholds 

was determined to allow a significant 

benefit to some hospitals that were close 

to meeting the existing criteria but 

would not make the reclassification 

standards overly liberal for rural 

hospitals. 

CMS had not evaluated or recalibrated 

the average hourly wage criteria for 

geographic reclassification since they 

were established in FY 1993. In 

consideration of the MIEA–TRHCA 

requirements and MedPAC’s finding 

that over one-third of hospitals are 

receiving a reclassified wage index or 

other wage index adjustment, we 

decided to reevaluate the average hourly 

wage criteria for geographic 

reclassification. We ran simulations 

with more recent wage data to 

determine what would be the 

appropriate average hourly wage 

criteria. We found that the average 

hospital average hourly wage as a 

percentage of its area’s wage has 

increased from approximately 96 

percent in FY 1993 to closer to 98 

percent over FYs 2006, 2007, and 2008 

(97.8, 98.1, and 98.1 percent, 

respectively). We also determined that 

the standard deviation has been reduced 

from approximately 12 percent in FY 

1993 to closer to 10 percent over the 

same 3-year period (10.7, 10.3, and 10.1 

percent, respectively); that is, assuming 

normal distributions, approximately 68 

percent of all hospitals would have an 

average hourly wage that deviates less 

than 10 percentage points above or 

below the mean. This assessment 

indicates that the new baseline criteria 

for reclassification should be set to 88/ 

108 percent. While the 108 criterion 

does not require adjustment, the current 

84 percent standard is too low a 

threshold to serve the purpose of 

establishing wage comparability with a 

proximate labor market area. 

To assess the impact that these 

changes would have had on hospitals 

that reclassified in FY 2008, we ran 

models that set urban individual 

reclassification standards to 88/108 

percent and the county group 

reclassification standard to 88 percent. 

We retained the 2-percent benefit for 

rural hospitals by setting an 86/106 

percent standard. We used 3-year 

average hourly wage figures from the 

2005, 2006, and 2007 wage surveys and 

compared them to 3-year average hourly 

wage figures for CBSAs over the same 3- 

year period. 

Of the 295 hospitals that applied for 

and received individual reclassifications 

in FY 2008, 45 of them (15.3 percent) 

would not meet the proposed 88/86 

percent threshold. Of the 66 hospitals 

that applied for and received county 

group reclassification in FY 2008, 6 

hospitals (9.1 percent) in 3 groups 

would not have qualified with the new 

standards. We also ran comparisons for 

hospitals that reclassified in FY 2006 

and FY 2007 to determine if they would 

have been able to reclassify in FY 2008, 

using 3-year averages available in FY 

2008. We found that, of all hospitals 

that were reclassified in FY 2008 (that 

is, applications approved for FYs 2006 

through 2008), 14.7 percent of 

individual reclassifications and 8.5 

percent of county group reclassification 

would not have qualified to reclassify in 

FY 2008. 

Section 106 of MIEA–TRHCA requires 

us to propose revisions to the hospital 

wage index system after considering the 

recommendations of MedPAC. To 

address this requirement, in the FY 

2009 IPPS proposed rule (73 FR 23620), 

we proposed that the 84/108 criteria for 

urban hospital reclassifications and the 

82/106 criteria for rural hospital 

reclassifications be recalibrated using 

the methodology published in the FY 

1993 final rule and more recent wage 

data (that is, data used in computing the 

FYs 2006, 2007, 2008 wage indices). As 

we stated in the proposed rule, we 

believe that hospitals that are seeking to 

reclassify to another area should be 

required to demonstrate more similarity 

to the area than the current criteria 

permit, and our recent analysis 

demonstrates that those criteria are no 

longer appropriate. Therefore, we 

proposed to change the criterion for the 

comparison of a hospital’s average 

hourly wage to that of the area to which 

the hospital seeks reclassification to 88 

percent for urban hospitals and 86 

percent for rural hospitals for new 

reclassifications beginning with the FY 

2010 wage index and, accordingly, 

revise our regulations at 42 CFR 412.230 

to reflect these changes. The criterion 

for the comparison of a hospital’s 

average hourly wage to that of its 

geographic area would be unchanged 


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(108 percent for urban hospitals and 106 

percent for rural hospitals). We also 

proposed that, when there are 

significant changes in labor market area 

definitions, such as CMS’ adoption of 

new OMB CBSA definitions based upon 

the decennial census (69 FR 49027), we 

would again reevaluate and, if 

warranted, recalibrate these criteria. 

This would allow CMS to consider the 

effects of periodic changes in labor 

market boundaries and provide a regular 

timeline for updating and validating the 

reclassification criteria. Finally, we 

proposed to adjust the 85 percent 

criterion for both urban and rural 

county group reclassifications to be 

equal to the proposed 88 percent 

standard for urban reclassifications, and 

to revise the regulations at 42 CFR 

412.232 and 412.234 to reflect the 

change. The urban and rural county 

group average hourly wage standard has 

always been equivalent for both urban 

and rural county groups and has always 

been 1 percent higher than the 84 

percent urban area individual 

reclassification standard. We proposed 

to continue the policy of having an 

equivalent wage comparison criterion 

for both urban and rural county groups, 

as these groups have always used the 

same wage comparison criteria. We also 

proposed to use the individual urban 

hospital reclassification standard of 88 

percent because this threshold would 

ensure that the hospitals in the county 

group are at least as comparable to the 

proximate area as are individual 

hospitals within their own areas. In 

addition, we indicated that we do not 

believe it would be appropriate to have 

a group reclassification standard lower 

than the individual reclassification 

standards, thus potentially creating a 

situation where all of the hospitals in a 

county could reclassify, even though no 

single hospital within such county 

would be able to meet any average 

hourly wage-related comparisons for an 

individual reclassification. 

We considered raising the group 

reclassification criterion to 89 percent in 

order to preserve the historical policy of 

the standard being set at 1 percent 

higher than the individual 

reclassification standard. However, we 

determined that making the group 

standard equal to the individual 

standard would adequately address our 

stated concerns. 

The proposed changes in the 

reclassification criteria would apply 

only to new reclassifications beginning 

with the FY 2010 wage index. Any 

hospital or county group that is in the 

midst of a 3-year reclassification in FY 

2010 would not be affected by the 

proposed criteria change until they 

reapply for a geographic reclassification. 

Therefore, we proposed that the 

effective date for these changes would 

be September 1, 2008, the deadline for 

hospitals to submit applications for 

reclassification for the FY 2010 wage 

index. 

Comment: The majority of 

commenters did not support CMS’

proposal to revise the average hourly 

wage criteria because of concern that the 

policy would make achieving 

geographic reclassification more 

difficult for some providers. Most 

commenters stated that such proposals 

should be delayed and incorporated into 

a more comprehensive reform 

framework. The commenters also 

expressed concerns that such a proposal 

would further destabilize an already 

highly variable wage index system, and 

would make provider operations and 

planning more onerous and result in 

detrimental impacts on quality of care. 

Although some commenters supported 

CMS using more recent data to analyze 

the reclassification criteria, they 

questioned whether CMS performed 

appropriate statistical analysis. The 

commenters requested additional study 

and impact analyses to assure that 

provider-to-CBSA average hourly wage 

ratios (the basis for the reclassification 

average hourly wage criteria) were 

indeed normally distributed, as was 

assumed by the original methodology. 

Response: We do not believe that our 

commitment to examine further broadbased reform requires us to postpone 

specific reclassification criteria changes 

that would enhance labor market 

integrity under the current system. It is 

not our intention to destabilize the wage 

index system, but to instead implement 

consistent and meaningful criteria to 

standardize a reclassification process 

that analysis proves no longer 

accomplishes its stated purpose. The 

MedPAC report on the Medicare 

hospital wage index reform specifically 

cited the fact that a large percentage of 

the wage index variation between its 

proposed methodologies and the current 

system occurred relative to 

reclassifications and other wage index 

exceptions. This suggests that the 

current reclassification system has a 

strong causal connection to the large 

variations and inconsistencies that are 

often observed in the Medicare hospital 

wage index system. Although some 

hospitals will likely no longer be able to 

reclassify with the new standards, 

revising the reclassification average 

hourly wage comparison criteria is not 

only well within the authority of CMS 

under section 1886(d)(10)(D) of the Act, 

but it also reflects what we believe to be 

a more reasonable reclassification 

threshold based on the most recent data. 

In response to concerns expressed 

about the assumptions and validity of 

our methodology, we refer to the chart 

at the end of this response. We agree 

that, in using standard deviations from 

the mean to establish threshold criteria, 

it is important for the data to be 

normally distributed (for example, a 

bell-shaped curve). While some 

commenters stated that a mean of 98 

percent (versus a mean of 100 percent 

or 1.00) shows that the distribution was 

necessarily skewed, using FY 2008 data, 

we found that the analyzed ratios 

formed a consistent bell-curve and 

demonstrated only a minor negative 

skew which tested well within the 

bounds of statistical significance of a 

normal distribution. Rural hospitals 

show a greater variability and less 

central tendency than urban providers. 

However, even if the original 

methodology was applied to urban and 

rural providers separately, the mean and 

standard deviation would support a 

comparison criterion still more 

restrictive than the proposed 86-percent 

standard for rural providers. 

Furthermore, additional statistical 

analysis would suggest that the 106- 

percent standard is not restrictive 

enough for rural providers. Certain 

outliers are removed from the chart at 

the end of this response to provide a 

clearer visual representation. Inclusion 

or exclusion of these outliers did not 

greatly affect the statistical significance 

of the analysis. With the nearly perfectly 

distributed nature of the comparison 

data, and the additional 2 percent 

benefit that rural providers receive, we 

are not convinced that an alternative 

methodology would yield a truer 

representation of typical variations in 

any given labor market area. 


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Comment: Some commenters 

requested CMS to specifically address 

the impact on rural providers and RRCs. 

Response: Rural providers would be 

more likely to fail to meet 

reclassification standards. More than 

half of the hospitals currently receiving 

geographic reclassification are located 

in rural areas, while less than one-third 

of all IPPS hospitals are located in rural 

CBSAs. Therefore, it is to be expected 

that the proposed criteria change would 

affect a higher proportion of rural 

providers. However, we cannot fully 

analyze such a specific impact on rural 

providers because the 35-mile 

reclassification proximity requirement 

makes it quite possible that many rural 

providers would have additional 

reclassification opportunities, perhaps 

to more wage appropriate CBSAs. We 

also note that our proposal did not affect 

benefits currently afforded to RRCs, 

such as waiver of the 106/108 percent 

standards and limited waiver of normal 

proximity requirements. 

Comment: Other comments cited 

specific circumstances where providers 

would encounter significant negative 

impacts not considered by CMS when 

the average hourly wage criteria 

proposal is implemented in conjunction 

with other wage index proposals. One 

commenter requested that any criteria 

changes be phased in over the course of 

multiple fiscal years. 

Response: We believe that the overall 

benefits of maintaining appropriate 

reclassification standards will improve 

the overall wage index payment system. 

If some hospitals have been benefiting 

from reclassifying to labor market areas 

which are not statistically appropriate 

on the basis of their average hourly 

wage data, such reclassifications have 

been at the expense of all other 

providers because of the geographic 

reclassification budget neutrality 

adjustment. 

After consideration of the public 

comments we received, we are adopting 

in this final rule the policy to adjust the 

reclassification average hourly wage 

standard, comparing a reclassifying 

hospital’s (or county hospital group’s) 

average hourly wage relative to the 

average hourly wage of the area to 

which it seeks reclassification. 

However, we will be phasing in the 

adjustment over two years. For the first 

transitional year, FY 2010, the average 

hourly wage standards will be changed 

to 86 percent for urban and group 

reclassifications and to 84 percent for 

rural hospitals. In the second year, FY 

2011, the average hourly wage standards 

will be changed to 88 percent for urban 

and group reclassifications and to 86 

percent for rural hospitals (revised 

§§ 412.230, 412.232, and 412.234). The 

purpose of the wage index is to provide, 

as accurate as possible, a measure of 

geographic labor cost variations. The 

reclassification process was intended to 

provide hospitals that, due to 

imperfections in the labor market 

boundaries and/or definitions, compete 

with hospitals in higher waged labor 

market areas. It is a fundamental flaw in 

the reclassification system if payments 

are inappropriately redistributed 

because hospitals without statistically 

comparable labor costs are reclassified 

to areas with higher wage index values. 

Therefore, for reclassifications 

beginning in FY 2010 (for which the 

application deadline is September 2, 

2008), the transitional average hourly 

wage comparison criteria will be in 

effect. For reclassifications beginning in 

FY 2011, the new average hourly wage 

comparison criteria will be fully in 

effect. 

b. Within-State Budget Neutrality 

Adjustment for the Rural and Imputed 

Floors 

Section 4410 of the Balanced Budget 

Act of 1997 (BBA) established the rural 

floor by requiring that the wage index 

for a hospital in an urban area of a State 

cannot be less than the area wage index 

received by rural hospitals in that State. 

Section 4410(b) of the BBA imposed the 

budget neutrality requirement and 

stated that the Secretary shall ‘‘adjust 

the area wage index referred to in 

subsection (a) for hospitals not 

described in such subsection.’’

Therefore, in order to compensate for 

the increased wage indices of urban 

hospitals receiving the rural floor, a 

nationwide budget neutrality 

adjustment is applied to the wage index 

to account for the additional payment to 

these hospitals. As a result, urban 

hospitals that qualify for their State’s 

rural floor wage index receive enhanced 

payments at the expense of all rural 

hospitals nationwide and all other 

urban hospitals that do not receive their 

State’s rural floor. Tentatively, for the 

final wage index, we find that 277 

hospitals in 28 States would receive the 

rural floor. (Due to the intervening 

requirements of section 124 of Pub. L. 

110–275, these numbers could change 

in the final FY 2009 wage index to be 

published in a separate Federal Register 

notice subsequent to this final rule.) The 

first chart below lists the percentage of 

total payments each State could either 


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receive or contribute to fund the current 

rural floor and imputed floor provisions 

with national budget neutrality 

adjustments (as indicated in the 

discussion of the imputed floor below in 

this section III.B.2.b.). The second chart 

below provides a graphical depiction of 

the tentative FY 2009 impacts. 

FY 2009 IPPS ESTIMATED PAYMENTS WITH TRANSITION TO WITHIN-STATE RURAL FLOOR AND IMPUTED FLOOR BUDGET

NEUTRALITY

State 

Former policy 

application of 

national rural floor 

and imputed floor 

budget neutrality 

New policy 

application of rural 

floor and imputed 

rural floor with 

blend of 80% national and 20% 

state-specific 

budget neutrality 

compared to no 

rural or imputed 

rural floor 

Net effect of the 

change in policy 

for FY 2009 

Alabama ..................................................................................................................... ¥0.2 ¥0.2 0 

Alaska ........................................................................................................................ 0 0 0 

Arizona ....................................................................................................................... ¥0.2 ¥0.2 0 

Arkansas .................................................................................................................... ¥0.2 ¥0.2 0 

California .................................................................................................................... 0.8 0.7 ¥0.2 

Colorado .................................................................................................................... 0 0 0 

Connecticut ................................................................................................................ 2.1 1.7 ¥0.4 

Delaware .................................................................................................................... ¥0.2 ¥0.2 0 

Washington, DC ......................................................................................................... ¥0.2 ¥0.2 0 

Florida ........................................................................................................................ ¥0.1 ¥0.1 0 

Georgia ...................................................................................................................... ¥0.2 ¥0.2 0 

Hawaii ........................................................................................................................ ¥0.2 ¥0.1 0 

Idaho .......................................................................................................................... ¥0.2 ¥0.1 0 

Illinois ......................................................................................................................... ¥0.2 ¥0.2 0 

Indiana ....................................................................................................................... ¥0.2 ¥0.1 0 

Iowa ........................................................................................................................... 0 0 0 

Kansas ....................................................................................................................... ¥0.2 ¥0.1 0 

Kentucky .................................................................................................................... ¥0.2 ¥0.1 0 

Louisiana .................................................................................................................... ¥0.2 ¥0.1 0 

Maine ......................................................................................................................... ¥0.2 ¥0.1 0 

Massachusetts ........................................................................................................... ¥0.2 ¥0.2 0 

Michigan ..................................................................................................................... ¥0.2 ¥0.2 0 

Minnesota .................................................................................................................. ¥0.2 ¥0.2 0 

Mississippi .................................................................................................................. ¥0.2 ¥0.2 0 

Missouri ...................................................................................................................... ¥0.2 ¥0.1 0 

Montana ..................................................................................................................... ¥0.1 ¥0.1 0 

Nebraska .................................................................................................................... ¥0.2 ¥0.1 0 

Nevada ....................................................................................................................... ¥0.2 ¥0.2 0 

New Hampshire ......................................................................................................... 0.8 0.7 ¥0.2 

New Jersey ................................................................................................................ 0.7 0.5 ¥0.2 

New Mexico ............................................................................................................... ¥0.1 ¥0.1 0 

New York ................................................................................................................... ¥0.2 ¥0.2 0 

North Carolina ............................................................................................................ ¥0.2 ¥0.2 0 

North Dakota .............................................................................................................. 0.1 0.1 0 

Ohio ........................................................................................................................... ¥0.2 ¥0.1 0 

Oklahoma ................................................................................................................... ¥0.2 ¥0.1 0 

Oregon ....................................................................................................................... ¥0.2 ¥0.2 0 

Pennsylvania .............................................................................................................. ¥0.2 ¥0.1 0 

Puerto Rico ................................................................................................................ ¥0.1 ¥0.1 0 

Rhode Island .............................................................................................................. ¥0.2 ¥0.2 0 

South Carolina ........................................................................................................... ¥0.1 ¥0.1 0 

South Dakota ............................................................................................................. ¥0.2 ¥0.1 0 

Tennessee ................................................................................................................. ¥0.1 0 0 

Texas ......................................................................................................................... ¥0.2 ¥0.1 0 

Utah ........................................................................................................................... ¥0.2 ¥0.2 0 

Vermont ..................................................................................................................... 3.4 2.7 ¥0.7 

Virginia ....................................................................................................................... ¥0.2 ¥0.2 0 

Washington ................................................................................................................ ¥0.1 ¥0.1 0 

West Virginia .............................................................................................................. ¥0.1 ¥0.1 0 

Wisconsin ................................................................................................................... ¥0.1 ¥0.1 0 

Wyoming .................................................................................................................... 0 0 0 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

The above charts demonstrate how, at 

a State-by-State level, the rural floor is 

creating a benefit for a minority of States 

that is then funded by a majority of 

States, including States that are 

overwhelmingly rural in character. The 

rural floor was established to address 

anomalous occurrences where certain 

urban areas in a State have unusually 

depressed wages when compared to the 

State’s rural areas. However, as we 

indicated in the proposed rule, because 

these comparisons occur at the State 

level, we believe it also would be sound 

policy to make the budget neutrality 

adjustment specific to the State, 

redistributing payments among 

hospitals within the State, rather than 

adjusting payments to hospitals in other 

States. 

In addition, we stated in the proposed 

rule that we believed a statewide budget 

neutrality adjustment would address the 

situation we discussed in the FY 2008 

IPPS final rule with comment period (72 

FR 47324) in which rural CAHs were 

converting to IPPS status, apparently to 

raise the State’s rural wage index to a 

level whereby all urban hospitals in the 

State would receive the rural floor. 

Medicare payments to CAHs are based 


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on 101 percent of reasonable costs, 

while the IPPS pays hospitals a fixed 

rate per discharge. In addition, as a 

CAH, a hospital is guaranteed to recover 

its costs, while an IPPS hospital is 

provided with incentives to increase 

efficiency to cover its costs. Thus, we 

stated that the identified CAHs were 

converting back to IPPS, even though 

the conversion would not directly 

benefit them. Because these hospitals’

wage levels are higher than most, if not 

all, of the urban hospitals in the State, 

the wage indices for most, if not all, of 

the State’s urban hospitals would 

increase as a result of the rural floor 

provision if the CAHs convert to IPPS 

status. In simulating the effect of the 

hospitals setting the State’s rural floor, 

we estimated that payment to hospitals 

in the State would increase in excess of 

$220 million in a single year. The 

MedPAC, in its June 2007 Report to the 

Congress stated, ‘‘The fact that the 

movement of one or two CAHs in or out 

of the [I]PPS system can increase (or 

decrease) Medicare payments by $220 

million suggests there is a flaw in the 

design of the wage index system.’’ (We 

refer readers to page 131 of the report.) 

For the above reasons, in the FY 2009 

IPPS proposed rule (73 FR 23622), we 

proposed to apply a State level rural 

floor budget neutrality adjustment to the 

wage index beginning in FY 2009. We 

proposed that States that have no 

hospitals receiving a rural floor wage 

index would no longer have a negative 

budget neutrality adjustment applied to 

their wage indices. Conversely, 

hospitals in States with hospitals 

receiving a rural floor would have their 

wage indices downwardly adjusted to 

achieve budget neutrality within the 

State. We proposed that all hospitals 

within each State would, in effect, be 

responsible for funding the rural floor 

adjustment applicable within that 

specific State. 

In the FY 2005 IPPS final rule and the 

FY 2008 IPPS final rule with comment 

period (69 FR 49109 and 72 FR 47321, 

respectively), we temporarily adopted 

an ‘‘imputed’’ floor measure to address 

a concern by some individuals that 

hospitals in all-urban States were 

disadvantaged by the absence of rural 

hospitals. Because no rural wage index 

could be calculated, no rural floor could 

be applied within such States. We 

originally limited application of the 

policy to FYs 2005 through 2007 and 

then extended it one additional year, 

through FY 2008. In the FY 2009 IPPS 

proposed rule (73 FR 23623), we 

proposed to extend the imputed floor 

for 3 additional years, through FY 2011, 

and to revise the introductory text of 

§ 412.64(h)(4) of our regulations to 

reflect this extension. For FY 2009, 26 

hospitals in New Jersey (33.8 percent) 

would receive the imputed floor. Rhode 

Island, the only other all-urban State, 

has no hospitals that would receive the 

imputed floor. In past years, we applied 

a national budget neutrality adjustment 

to the standardized amount to ensure 

that payments remained constant to 

payments that would have occurred in 

the absence of the imputed floor policy. 

As a result, payments to all other 

hospitals in the Nation were adjusted 

downward to subsidize the higher 

payments to New Jersey hospitals 

receiving the imputed floor. As the 

intent of the imputed floor is to create 

a protection to all-urban States similar 

to the protection offered to urban-rural 

mixed States by the rural floor, and the 

effect of the measure is also Statespecific like the rural floor, we 

indicated that we believe that the 

budget neutrality adjustments for the 

imputed floor and the rural floor should 

be applied in the same manner. 

Therefore, beginning with FY 2009, we 

also proposed to apply the imputed 

floor budget neutrality adjustment to the 

wage index and at the State level. 

In the proposed rule, we specifically 

requested public comments from 

national and State hospital associations 

regarding the proposals, particularly the 

national associations, as they represent 

member hospitals that are both 

positively and negatively affected by the 

proposed policies, and were, therefore, 

in the best position to comment on the 

policy merits of the proposals. We 

indicated that we would view the 

absence of any comments from the 

national hospital associations as a sign 

that they do not object to our proposed 

policies. 

Comment: Some commenters 

supported the proposal to apply the 

rural floor and imputed floor budget 

neutrality adjustment on a State basis, 

as opposed to making a national 

adjustment. A few commenters stated 

that it was not appropriate and 

competitively unfair for a provider 

receiving a wage index lower than the 

lowest urban providers in another State 

to have its wage index reduced by CMS 

to increase payments to the other higher 

paid providers. Other commenters 

supported CMS’s efforts to protect 

hospitals from unwarranted reductions 

in their wage index values due to the 

current rural floor policy. MedPAC 

expressed its support for CMS’s 

proposed statewide budget neutrality 

adjustments for the rural and imputed 

floors as an interim step in reforming 

the wage index. MedPAC noted that the 

rural floor policy itself is troubling 

because it is ‘‘built on a false 

assumption that hospital wage rates in 

all urban labor markets in a (S)tate are 

always higher than the average hospital 

wage rate in rural areas of the (S)tate.’’

MedPAC agreed with CMS that the 

proposed State level budget neutrality 

adjustment ‘‘would improve fairness 

and reduce opportunities to game the 

wage index system.’’

However, the majority of commenters, 

including most national and State 

hospital associations, did not support 

the proposal to apply a State level 

budget neutrality adjustment for the 

rural and imputed floors. Many 

commenters stated that a major policy 

initiative should be postponed and 

included in discussions and planning 

for more broad-based wage index 

reform. They suggested that such a 

policy decision by CMS only makes the 

Medicare wage index system more 

variable and unstable, creating onerous 

difficulties for hospital administrators to 

plan operations and potentially harming 

the quality of care provided. Many of 

the commenters, particularly in States 

that benefit most from the current 

national budget neutrality adjustment 

for the rural and imputed floors, cited 

the financial losses that would result 

from our proposal. 

Some commenters stated that it is 

inconsistent with prior CMS policy to 

apply any wage index adjustment on a 

State-by-State basis. They suggested 

that, because the intent of Congress for 

the rural floor was to address 

‘‘anomalous’’ situations where urban 

areas may have lower wages than nearby 

rural areas, the adjustment should be 

shared by all hospitals to maximize the 

benefit of the floor, while minimizing 

the individual costs to fund it. 

Similarly, the commenters contended 

that, ‘‘budget neutrality must remain a 

national policy in accordance with 

current practice in order to retain 

balance and symmetry within a complex 

wage index environment.’’

Response: We continue to believe 

that, while the majority of wage index 

budget neutrality adjustments have been 

applied on a nationwide basis, the 

particular nature of the rural and 

imputed floors, for which applicability 

is determined on a State level basis, is 

better addressed by a within-State 

adjustment. The current system requires 

hospitals nationwide to fund an 

adjustment to the Medicare payment 

system to address unrelated situations 

in a minority of States. The variances 

between urban and rural wage indices 

within a State have no relevant causal 

connection to the wage indices of 

another State, and it does not follow 

that such variances should be adjusted 


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through a national budget neutrality 

adjustment. 

Therefore, we have decided to adopt 

our proposal for State level budget 

neutrality for the rural and imputed 

floors as final in this final rule, to be 

effective beginning with the FY 2009 

wage index. However, in response to the 

public’s concerns and taking into 

account the potentially drastic payment 

cuts that may occur to hospitals in some 

States, we have decided to phase in, 

over a 3-year period, the transition from 

the national budget neutrality 

adjustment to the State level budget 

neutrality adjustment. In FY 2009, 

hospitals will receive a blended wage 

index that is 20 percent of a wage index 

with the State level rural and imputed 

floor budget neutrality adjustment and 

80 percent of a wage index with the 

national budget neutrality adjustment. 

In FY 2010, the blended wage index will 

reflect 50 percent of the State level 

adjustment and 50 percent of the 

national adjustment. In FY 2011, the 

adjustment will be completely 

transitioned to the State level 

methodology. 

We are incorporating this final policy 

in our regulation text at new 

§ 412.64(e)(4). Specifically, we are 

providing that CMS makes an 

adjustment to the wage index to ensure 

that aggregate payments after 

implementation of the rural floor under 

section 4410 of the Balanced Budget Act 

of 1997 (Pub. L. 105–33) and the 

imputed rural floor under § 412.64(h)(4) 

are made in a manner that ensures that 

aggregate payments to hospitals are not 

affected. Beginning October 1, 2008, 

such adjustments will transition from a 

nationwide to a statewide adjustment, 

with a statewide adjustment fully in 

place by October 1, 2011. 

Comment: While some commenters 

supported CMS’s efforts to address the 

issue of potential gaming of the rural 

floor, many commenters indicated that 

it should not be the sole impetus for 

within-State rural floor budget 

neutrality because it would unfairly 

penalize nongaming providers. 

Response: As discussed above, as well 

as in the FY 2008 final and FY 2009 

proposed rules (72 FR 47321 and 73 FR 

23620, respectively), while the gaming 

issue was an important concern that we 

sought to address, it was neither the 

only nor the primary justification for 

proposing the within-State budget 

neutrality adjustment. We believe that, 

for all providers, the within-State 

budget neutrality policy is more 

equitable than the national adjustment 

because it concentrates the budget 

neutrality at the State level for a 

statutory provision that applies benefits 

at the State level. We note that the 

statute requires that total payments with 

a rural floor do not exceed payments 

that would have been made in the 

absence of a floor, but does not mandate 

a national adjustment. 

Comment: One commenter stated that 

adoption of a within-State application of 

budget neutrality will further 

complicate the methodology for 

calculating the wage index, particularly 

for hospitals in CBSAs that cross State 

lines, or that reclassify to a CBSA in 

another State. The commenter expressed 

concern that the proposal will lead to 

less transparency in the wage index 

calculation and make it more difficult 

for hospitals to evaluate their most 

beneficial options in regard to 

reclassification and other wage index 

exceptions. 

Response: Application of the rural 

floor already requires that, for CBSAs 

that cross State lines, two or more wage 

indices may need to be calculated in 

order to reflect the reality of a rural floor 

applying in one or more of the States. 

(We refer readers to Table 4A, to be 

published in a separate Federal Register 

notice subsequent this final rule, to see 

how State location may affect the wage 

index within a single CBSA.) A State’s 

rural or imputed floor budget neutrality 

adjustment applies to any hospital that 

is geographically located in the State, 

even when a hospital is reclassified or 

redesignated to a CBSA in another State. 

We explain in section II.A. of the 

Addendum to this final rule how 

within-State budget neutrality 

adjustments for the rural and imputed 

floors are calculated and how the 

transitional blended adjustment will be 

implemented. 

Comment: Some commenters 

disagreed with CMS’ decision to further 

extend the imputed floor policy through 

FY 2011. The commenters contended 

that the imputed floor is unnecessary 

and should never have been 

implemented without Congressional 

mandate. Other commenters supported 

CMS’ proposal to extend the imputed 

floor policy, but some supported the 

extension only on the condition that 

CMS applies the imputed floor budget 

neutrality adjustment in the same 

manner that it applies the rural floor 

adjustment. 

Response: As proposed, we are 

extending the imputed floor for 3 

additional years, through FY 2011. 

Beginning with the FY 2009 wage index 

in this final rule, we are also applying 

budget neutrality for the imputed floor 

in the same manner that we apply 

budget neutrality for the rural floor. (We 

refer readers to the discussion in section 

III.B.2.b. of this preamble.) 

In the proposed rule, we indicated 

that based on our impact analysis of 

these proposals for FY 2009, of the 49 

States (Maryland is excluded because it 

is under a State waiver), the District of 

Columbia, and Puerto Rico, 39 would 

see either no change or an increase in 

total Medicare payments as a result of 

applying a budget neutrality adjustment 

to the wage index for the rural and 

imputed floors at the State level rather 

than the national level. The total 

payments of the remaining 12 States 

would decrease 0.1 percent to 3.4 

percent compared to continuing our 

prior national adjustment policy. For 

this final rule, the full impact analysis 

of the final policy is reflected in the two 

charts presented in section III.B.2.b. of 

the preamble of this final rule. Table 

4D–1, which will be included in a 

separate Federal Register notice 

subsequent to this final rule reflects the 

final FY 2009 State level budget 

neutrality adjustments for the rural and 

imputed floors for the first year of the 

3-year transition of the budget neutrality 

adjustments for these floors from the 

national level to the State level, as 

discussed above. 

c. Within-State Budget Neutrality 

Adjustment for Geographic 

Reclassification 

As discussed in the FY 2009 IPPS 

proposed rule (73 FR 23623), the FY 

2009 President’s Budget includes a 

legislative proposal to apply geographic 

reclassification budget neutrality at the 

State level (available at the Web site: 

http://www.hhs.gov/budget/09budget/ 

2009BudgetInBrief.pdf under FY 2009 

Medicare Proposals, page 54). 

Comment: A number of commenters 

objected to the legislative proposal we 

discussed in the proposed rule that 

would apply budget neutrality for 

geographic reclassification at the State 

level. 

Response: Our discussion of withinState budget neutrality for geographic 

reclassifications related to a legislative 

proposal included in the FY 2009 

President’s Budget, and not a new 

proposed administrative policy. If such 

a measure were enacted by the 

Congress, CMS would comply with the 

law. 

C. Core-Based Statistical Areas for the 

Hospital Wage Index 

The wage index is calculated and 

assigned to hospitals on the basis of the 

labor market area in which the hospital 

is located. In accordance with the broad 

discretion under section 1886(d)(3)(E) of 

the Act, beginning with FY 2005, we 

define hospital labor market areas based 

on the Core-Based Statistical Areas 


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(CBSAs) established by OMB and 

announced in December 2003 (69 FR 

49027). For a discussion of OMB’s 

revised definitions of CBSAs and our 

implementation of the CBSA 

definitions, we refer readers to the 

preamble of the FY 2005 IPPS final rule 

(69 FR 49026 through 49032). 

As with the FY 2008 final rule, in the 

FY 2009 IPPS proposed rule (73 FR 

23623), we proposed to provide that 

hospitals receive 100 percent of their 

wage index based upon the CBSA 

configurations. Specifically, for each 

hospital, we proposed to determine a 

wage index for FY 2009 employing wage 

index data from hospital cost reports for 

cost reporting periods beginning during 

FY 2005 and using the CBSA labor 

market definitions. We consider CBSAs 

that are MSAs to be urban, and CBSAs 

that are Micropolitan Statistical Areas as 

well as areas outside of CBSAs to be 

rural. In addition, it has been our 

longstanding policy that where an MSA 

has been divided into Metropolitan 

Divisions, we consider the Metropolitan 

Division to comprise the labor market 

areas for purposes of calculating the 

wage index (69 FR 49029). We proposed 

to codify this longstanding policy into 

our regulations at § 412.64(b)(1)(ii)(A). 

Comment: One commenter supported 

the CMS proposal to codify its 

longstanding policy that a Metropolitan 

Division of an MSA is treated as a labor 

market area for purposes of calculating 

the wage index. 

Response: We appreciate the 

commenter’s support of our proposal to 

codify this policy in our regulations. In 

this final rule, we are adopting the 

proposed change under 

§ 412.64(b)(1)(ii)(A) as final. 

On November 20, 2007, OMB 

announced the revision of titles for eight 

urban areas (OMB Bulletin No. 08–01). 

The revised titles are as follows: 

• Hammonton, New Jersey qualifies 

as a new principal city of the Atlantic 

City, New Jersey CBSA. The new title is 

Atlantic City-Hammonton, New Jersey 

CBSA; 

• New Brunswick, New Jersey, 

located in the Edison, New Jersey 

Metropolitan Division, qualifies as a 

new principal city of the New YorkNorthern New Jersey-Long Island, New 

York, New Jersey, Pennsylvania CBSA. 

The new title for the Metropolitan 

Division is Edison-New Brunswick, 

New Jersey CBSA; 

• Summerville, South Carolina 

qualifies as a new principal city of the 

Charleston-North Charleston, South 

Carolina CBSA. The new title is 

Charleston-North CharlestonSummerville, South Carolina; 

• Winter Haven, Florida qualifies as a 

new principal city of the Lakeland, 

Florida CBSA. The new title is 

Lakeland-Winter Haven, Florida; 

• Bradenton, Florida replaces 

Sarasota, Florida as the most populous 

principal city of the Sarasota-BradentonVenice, Florida CBSA. The new title is 

Bradenton-Sarasota-Venice, Florida. The 

new CBSA code is 14600; 

• Frederick, Maryland replaces 

Gaithersburg, Maryland as the second 

most populous principal city in the 

Bethesda-Gaithersburg-Frederick, 

Maryland CBSA. The new title is 

Bethesda-Frederick-Gaithersburg, 

Maryland; 

• North Myrtle Beach, South Carolina 

replaces Conway, South Carolina as the 

second most populous principal city of 

the Myrtle Beach-Conway-North Myrtle 

Beach, South Carolina CBSA. The new 

title is Myrtle Beach-North Myrtle 

Beach-Conway, South Carolina; 

• Pasco, Washington replaces 

Richland, Washington as the second 

most populous principal city of the 

Kennewick-Richland-Pasco, Washington 

CBSA. The new title is KennewickPasco-Richland, Washington. 

The OMB bulletin is available on the 

OMB Web site at https:// 

www.whitehouse.gov/OMB—go to 

‘‘Bulletins’’ or ‘‘Statistical Programs and 

Standards.’’ CMS will apply these 

changes to the IPPS beginning October 

1, 2008. 

D. Occupational Mix Adjustment to the 

FY 2009 Wage Index 

As stated earlier, section 1886(d)(3)(E) 

of the Act provides for the collection of 

data every 3 years on the occupational 

mix of employees for each short-term, 

acute care hospital participating in the 

Medicare program, in order to construct 

an occupational mix adjustment to the 

wage index, for application beginning 

October 1, 2004 (the FY 2005 wage 

index). The purpose of the occupational 

mix adjustment is to control for the 

effect of hospitals’ employment choices 

on the wage index. For example, 

hospitals may choose to employ 

different combinations of registered 

nurses, licensed practical nurses, 

nursing aides, and medical assistants for 

the purpose of providing nursing care to 

their patients. The varying labor costs 

associated with these choices reflect 

hospital management decisions rather 

than geographic differences in the costs 

of labor. 

1. Development of Data for the FY 2009 

Occupational Mix Adjustment 

On October 14, 2005, we published a 

notice in the Federal Register (70 FR 

60092) proposing to use a new survey, 

the 2006 Medicare Wage Index 

Occupational Mix Survey (the 2006 

survey) to apply an occupational mix 

adjustment to the FY 2008 wage index. 

In the proposed 2006 survey, we 

included several modifications based on 

the comments and recommendations we 

received on the 2003 survey, including 

(1) allowing hospitals to report their 

own average hourly wage rather than 

using BLS data; (2) extending the 

prospective survey period; and (3) 

reducing the number of occupational 

categories but refining the subcategories 

for registered nurses. 

We made the changes to the 

occupational categories in response to 

MedPAC comments to the FY 2005 IPPS 

final rule (69 FR 49036). Specifically, 

MedPAC recommended that CMS assess 

whether including subcategories of 

registered nurses would result in a more 

accurate occupational mix adjustment. 

MedPAC believed that including all 

registered nurses in a single category 

may obscure significant wage 

differences among the subcategories of 

registered nurses, for example, the 

wages of surgical registered nurses and 

floor registered nurses may differ. Also, 

to offset additional reporting burden for 

hospitals, MedPAC recommended that 

CMS should combine the general 

service categories that account for only 

a small percentage of a hospital’s total 

hours with the ‘‘all other occupations’’

category because most of the 

occupational mix adjustment is 

correlated with the nursing general 

service category. 

In addition, in response to the public 

comments on the October 14, 2005 

notice, we modified the 2006 survey. On 

February 10, 2006, we published a 

Federal Register notice (71 FR 7047) 

that solicited comments and announced 

our intent to seek OMB approval on the 

revised occupational mix survey (Form 

CMS–10079 (2006)). OMB approved the 

survey on April 25, 2006. 

The 2006 survey provided for the 

collection of hospital-specific wages and 

hours data, a 6-month prospective 

reporting period (that is, January 1, 

2006, through June 30, 2006), the 

transfer of each general service category 

that comprised less than 4 percent of 

total hospital employees in the 2003 

survey to the ‘‘all other occupations’’

category (the revised survey focused 

only on the mix of nursing occupations), 

additional clarification of the 

definitions for the occupational 

categories, an expansion of the 

registered nurse category to include 

functional subcategories, and the 

exclusion of average hourly rate data 

associated with advance practice nurses. 


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The 2006 survey included only two 

general occupational categories: nursing 

and ‘‘all other occupations.’’ The 

nursing category has four subcategories: 

Registered nurses, licensed practical 

nurses, aides, orderlies, attendants, and 

medical assistants. The registered nurse 

subcategory includes two functional 

subcategories: Management personnel 

and staff nurses or clinicians. As 

indicated above, the 2006 survey 

provided for a 6-month data collection 

period, from January 1, 2006 through 

June 30, 2006. However, we allowed 

flexibility for the reporting period 

beginning and ending dates to 

accommodate some hospitals’ biweekly 

payroll and reporting systems. That is, 

the 6-month reporting period had to 

begin on or after December 25, 2005, 

and end before July 9, 2006. 

As we proposed in the FY 2009 IPPS 

proposed rule (73 FR 23624), we are 

using the entire 6-month 2006 survey 

data to calculate the occupational mix 

adjustment for the FY 2009 wage index. 

The original timelines for the collection, 

review, and correction of the 2006 

occupational mix data were discussed 

in detail in the FY 2007 IPPS final rule 

(71 FR 48008). The revision and 

correction process for all of the data, 

including the 2006 occupational mix 

survey data to be used for computing 

the FY 2009 wage index, is discussed in 

detail in section III.K. of the preamble 

of this final rule. 

2. Calculation of the Occupational Mix 

Adjustment for FY 2009 

For FY 2009 (as we did for FY 2008), 

we are calculating the occupational mix 

adjustment factor using the following 

steps: 

Step 1—For each hospital, determine 

the percentage of the total nursing 

category attributable to a nursing 

subcategory by dividing the nursing 

subcategory hours by the total nursing 

category’s hours (registered nurse 

management personnel and registered 

nurse staff nurses or clinicians are 

treated as separate nursing 

subcategories). Repeat this computation 

for each of the five nursing 

subcategories: registered nurse 

management personnel; registered nurse 

staff nurses or clinicians; licensed 

practical nurses; nursing aides, 

orderlies, and attendants; and medical 

assistants. 

Step 2—Determine a national average 

hourly rate for each nursing subcategory 

by dividing a subcategory’s total salaries 

for all hospitals in the occupational mix 

survey database by the subcategory’s 

total hours for all hospitals in the 

occupational mix survey database. 

Step 3—For each hospital, determine 

an adjusted average hourly rate for each 

nursing subcategory by multiplying the 

percentage of the total nursing category 

(from Step 1) by the national average 

hourly rate for that nursing subcategory 

(from Step 2). Repeat this calculation for 

each of the five nursing subcategories. 

Step 4—For each hospital, determine 

the adjusted average hourly rate for the 

total nursing category by summing the 

adjusted average hourly rate (from Step 

3) for each of the nursing subcategories. 

Step 5—Determine the national 

average hourly rate for the total nursing 

category by dividing total nursing 

category salaries for all hospitals in the 

occupational mix survey database by 

total nursing category hours for all 

hospitals in the occupational mix 

survey database. 

Step 6—For each hospital, compute 

the occupational mix adjustment factor 

for the total nursing category by 

dividing the national average hourly 

rate for the total nursing category (from 

Step 5) by the hospital’s adjusted 

average hourly rate for the total nursing 

category (from Step 4). 

If the hospital’s adjusted average 

hourly rate is less than the national 

average hourly rate (indicating the 

hospital employs a less costly mix of 

nursing employees), the occupational 

mix adjustment factor is greater than 

1.0000. If the hospital’s adjusted average 

hourly rate is greater than the national 

average hourly rate, the occupational 

mix adjustment factor is less than 

1.0000. 

Step 7—For each hospital, calculate 

the occupational mix adjusted salaries 

and wage-related costs for the total 

nursing category by multiplying the 

hospital’s total salaries and wage-related 

costs (from Step 5 of the unadjusted 

wage index calculation in section III.G. 

of this preamble) by the percentage of 

the hospital’s total workers attributable 

to the total nursing category (using the 

occupational mix survey data, this 

percentage is determined by dividing 

the hospital’s total nursing category 

salaries by the hospital’s total salaries 

for ‘‘nursing and all other’’) and by the 

total nursing category’s occupational 

mix adjustment factor (from Step 6 

above). 

The remaining portion of the 

hospital’s total salaries and wage-related 

costs that is attributable to all other 

employees of the hospital is not 

adjusted by the occupational mix. A 

hospital’s all other portion is 

determined by subtracting the hospital’s 

nursing category percentage from 100 

percent. 

Step 8—For each hospital, calculate 

the total occupational mix adjusted 

salaries and wage-related costs for a 

hospital by summing the occupational 

mix adjusted salaries and wage-related 

costs for the total nursing category (from 

Step 7) and the portion of the hospital’s 

salaries and wage-related costs for all 

other employees (from Step 7). 

To compute a hospital’s occupational 

mix adjusted average hourly wage, 

divide the hospital’s total occupational 

mix adjusted salaries and wage-related 

costs by the hospital’s total hours (from 

Step 4 of the unadjusted wage index 

calculation in section III.G. of this 

preamble). 

Step 9—To compute the occupational 

mix adjusted average hourly wage for an 

urban or rural area, sum the total 

occupational mix adjusted salaries and 

wage-related costs for all hospitals in 

the area, then sum the total hours for all 

hospitals in the area. Next, divide the 

area’s occupational mix adjusted 

salaries and wage-related costs by the 

area’s hours. 

Step 10—To compute the national 

occupational mix adjusted average 

hourly wage, sum the total occupational 

mix adjusted salaries and wage-related 

costs for all hospitals in the Nation, then 

sum the total hours for all hospitals in 

the Nation. Next, divide the national 

occupational mix adjusted salaries and 

wage-related costs by the national 

hours. The FY 2009 occupational mix 

adjusted national average hourly wage is 

$32.2449. 

Step 11—To compute the 

occupational mix adjusted wage index, 

divide each area’s occupational mix 

adjusted average hourly wage (Step 9) 

by the national occupational mix 

adjusted average hourly wage (Step 10). 

Step 12—To compute the Puerto Rico 

specific occupational mix adjusted wage 

index, follow Steps 1 through 11 above. 

The FY 2009 occupational mix adjusted 

Puerto Rico specific average hourly 

wage is $13.7851. 

The table below is an illustrative 

example of the occupational mix 

adjustment. 

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Because the occupational mix 

adjustment is required by statute, all 

hospitals that are subject to payments 

under the IPPS, or any hospital that 

would be subject to the IPPS if not 

granted a waiver, must complete the 

occupational mix survey, unless the 

hospital has no associated cost report 

wage data that are included in the FY 

2009 wage index. 

For the FY 2008 wage index, if a 

hospital did not respond to the 

occupational mix survey, or if we 

determined that a hospital’s submitted 

data were too erroneous to include in 

the wage index, we assigned the 

hospital the average occupational mix 

adjustment for the labor market area (72 

FR 47314). We believed this method had 

the least impact on the wage index for 

other hospitals in the area. For areas 

where no hospital submitted data for 

purposes of calculating the occupational 

mix adjustment, we applied the national 

occupational mix factor of 1.0000 in 

calculating the area’s FY 2008 

occupational mix adjusted wage index. 

We indicated in the FY 2008 IPPS final 

rule that we reserve the right to apply 

a different approach in future years, 

including potentially penalizing 

nonresponsive hospitals (72 FR 47314). 

For the FY 2009 wage index, as we 

proposed, we are handling the data for 

hospitals that did not respond to the 

occupational mix survey (neither the 1st 

quarter nor 2nd quarter data) in the 

same manner as discussed above for the 

FY 2008 wage index. In addition, if a 

hospital submitted survey data for either 

the 1st quarter or 2nd quarter, but not 

for both quarters, we are using the data 

the hospital submitted for one quarter to 

calculate the hospital’s FY 2009 

occupational mix adjustment factor. 

Lastly, if a hospital submitted a 

survey(s), but that survey data can not 

be used because we determine it to be 

aberrant, we also assigned the hospital 

the average occupational mix 

adjustment for its labor market area. For 

example, if a hospital’s individual nurse 

category average hourly wages were out 

of range (that is, unusually high or low), 

and the hospital did not provide 

sufficient documentation to explain the 

aberrancy, or the hospital did not 

submit any registered nurse staff salaries 

or hours data, we assigned the hospital 

the average occupational mix 

adjustment for the labor market area in 

which it is located. 

In calculating the average 

occupational mix adjustment factor for 

a labor market area, we replicated Steps 

1 through 6 of the calculation for the 

occupational mix adjustment. However, 

instead of performing these steps at the 

hospital level, we aggregated the data at 

the labor market area level. In following 

these steps, for example, for CBSAs that 

contain providers that did not submit 

occupational mix survey data, the 

occupational mix adjustment factor 

ranged from a low of 0.9060 (CBSA 

12020, Athens-Clarke County, GA), to a 

high of 1.0805 (CBSA 22500, Florence, 

SC). Also, in computing a hospital’s 

occupational mix adjusted salaries and 

wage-related costs for nursing 

employees (Step 7 of the calculation), in 

the absence of occupational mix survey 

data, we multiplied the hospital’s total 

salaries and wage-related costs by the 

percentage of the area’s total workers 

attributable to the area’s total nursing 

category. For FY 2009, there are no 

CBSAs for which we did not have 

occupational mix data for any of its 

providers. 

In the FY 2007 IPPS final rule, we 

also indicated that we would give 

serious consideration to applying a 

hospital-specific penalty if a hospital 

does not comply with regulations 

requiring submission of occupational 

mix survey data in future years. We 

stated that we believe that section 

1886(d)(5)(I)(i) of the Act provides us 

with the authority to penalize hospitals 

that do not submit occupational mix 

survey data. That section authorizes us 

to provide for exceptions and 

adjustments to the payment amounts 

under IPPS as the Secretary deems 

appropriate. We also indicated that we 

would address this issue in the FY 2008 

IPPS proposed rule. 

In the FY 2008 IPPS proposed rule, 

we solicited comments and suggestions 

for a hospital-specific penalty for 

hospitals that do not submit 

occupational mix survey data. In 

response to the FY 2008 IPPS proposed 

rule, some commenters suggested a 1- 

percent to 2-percent reduction in the 

hospital’s wage index value or a set 

percentage of the standardized amount. 

We noted that any penalty that we 

would determine for nonresponsive 

hospitals would apply to a future wage 

index, not the FY 2008 wage index. 

In the FY 2008 final rule with 

comment period, we assigned 

nonresponsive hospitals the average 

occupational mix adjustment for the 

labor market area. For areas where no 

hospital submitted survey data, we 

applied the national occupational mix 

adjustment factor of 1.0000 in 

calculating the area’s FY 2008 

occupational mix adjusted wage index. 

We appreciate the suggestions we 

received regarding future penalties for 

hospitals that do not submit 

occupational mix survey data. We stated 

in the FY 2008 final rule with comment 

period that we may consider proposing 

a policy to penalize hospitals that do 

not submit occupational mix survey 

data for FY 2010, the first year of the 

application of the new 2007–2008 

occupational mix survey, and that we 

expected that any such penalty would 

be proposed in the FY 2009 IPPS 

proposed rule so hospitals would be 

aware of the policy before the deadline 

for submitting the data to the fiscal 

intermediaries/MAC. However, in the 

FY 2009 IPPS proposed rule, we did not 

propose a penalty for FY 2010. Rather, 

we reserved the right to propose a 

penalty in the FY 2010 IPPS proposed 

rule, once we collect and analyze the FY 

2007–2008 occupational mix survey 

data. Hospitals are still on notice that 

any failure to submit occupational mix 

data for the FY 2007–2008 survey year 

may result in a penalty in FY 2010, thus 

achieving our policy goal of ensuring 

that hospitals are aware of the 

consequences of failure to submit data 

in response to the most recent survey. 

Comment: Several commenters 

reiterated the comment they had 

submitted previously with respect to the 

FY 2008 wage index (72 FR 47314) that 

full participation in the occupational 

mix survey is critical, and urged CMS to 

develop a methodology that encourages 

hospitals to report occupational mix 

survey data but does not unfairly 

penalize neighboring hospitals. The 

commenters also suggested that, if CMS 

decides to adopt a penalty for 

nonresponsive hospitals, CMS should 

establish an appeal process for hospitals 

with extenuating circumstances. 

Response: We appreciate the 

commenters’ continuous support for a 

policy to penalize hospitals that do not 

submit occupational mix survey data. 

As discussed above, we will consider 

proposing a penalty for the FY 2010 

wage index after we analyze the results 

of the new 2007–2008 occupational mix 

survey, for which the data are due to 

CMS in the fall of 2008. (We refer 

readers to section III.D.3. of this 

preamble for a discussion of the 2007–

2008 survey). 

Comment: One commenter suggested 

that CMS’ methodology for computing 

the occupational mix adjustment skews 

the results. The commenter stated that 

if CMS had selected a different use of 

the same data, a different and perhaps 

better adjustment could have resulted. 

However, the commenter offered no 

alternative methodology for computing 

the adjustment. 

Response: We welcome the 

commenter to submit to us its 

recommendations for computing the 

occupational mix adjustment, or to 

identify specific components of our 


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methodology that it believes are 

problematic. 

3. 2007–2008 Occupational Mix Survey 

for the FY 2010 Wage Index 

As stated earlier, section 304(c) of 

Public Law 106–554 amended section 

1886(d)(3)(E) of the Act to require CMS 

to collect data every 3 years on the 

occupational mix of employees for each 

short-term, acute care hospital 

participating in the Medicare program. 

We used occupational mix data 

collected on the 2006 survey to compute 

the occupational mix adjustment for FY 

2009. In the FY 2008 IPPS final rule 

with comment period (72 FR 47315), we 

discussed how we modified the 

occupational mix survey. The revised 

2007–2008 occupational mix survey 

provides for the collection of hospitalspecific wages and hours data for the 1- 

year period of July 1, 2007, through June 

30, 2008, additional clarifications to the 

survey instructions, the elimination of 

the registered nurse subcategories, some 

refinements to the definitions of the 

occupational categories, and the 

inclusion of additional cost centers that 

typically provide nursing services. The 

revised 2007–2008 occupational mix 

survey will be applied beginning with 

the FY 2010 wage index. 

On February 2, 2007, we published in 

the Federal Register a notice soliciting 

comments on the proposed revisions to 

the occupational mix survey (72 FR 

5055). The comment period for the 

notice ended on April 3, 2007. After 

considering the comments we received, 

we made a few minor editorial changes 

and published the final 2007–2008 

occupational mix survey on September 

14, 2007 (72 FR 52568). OMB approved 

the survey without change on February 

1, 2008 (OMB Control Number 0938–

0907). The 2007–2008 Medicare 

occupational mix survey (Form CMS–

10079 (2008)) is available on the CMS 

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

AcuteInpatientPPS/WIFN/ 

list.asp#TopOfPage, and through the 

fiscal intermediaries/MAC. Hospitals 

must submit their completed surveys to 

their fiscal intermediaries/MAC by 

September 2, 2008. The preliminary, 

unaudited 2007–2008 occupational mix 

survey data will be released in early 

October 2008, along with the FY 2006 

Worksheet S–3 wage data, for the FY 

2010 wage index review and correction 

process. 

E. Worksheet S–3 Wage Data for the FY 

2009 Wage Index 

The FY 2009 wage index values 

(effective for hospital discharges 

occurring on or after October 1, 2008, 

and before October 1, 2009, and to be 

published in a separate Federal Register 

notice subsequent to this final rule) will 

be based on the data collected from the 

Medicare cost reports submitted by 

hospitals for cost reporting periods 

beginning in FY 2005 (the FY 2008 wage 

index was based on FY 2004 wage data). 

1. Included Categories of Costs 

The FY 2009 wage index includes the 

following categories of data associated 

with costs paid under the IPPS (as well 

as outpatient costs): 

• Salaries and hours from short-term, 

acute care hospitals (including paid 

lunch hours and hours associated with 

military leave and jury duty) 

• Home office costs and hours 

• Certain contract labor costs and 

hours (which includes direct patient 

care, certain top management, 

pharmacy, laboratory, and nonteaching 

physician Part A services, and certain 

contract indirect patient care services 

(as discussed in the FY 2008 final rule 

with comment period (72 FR 47315)) 

• Wage-related costs, including 

pensions and other deferred 

compensation costs. We note that, on 

March 28, 2008, CMS published a 

technical clarification to the cost 

reporting instructions for pension and 

deferred compensation costs (sections 

2140 through 2142.7 of the Provider 

Reimbursement Manual, Part I). These 

instructions are used for developing 

pension and deferred compensation 

costs for purposes of the wage index, as 

discussed in the instructions for 

Worksheet S–3, Part II, Lines 13 through 

20 and in the FY 2006 final rule (70 FR 

47369). 

2. Excluded Categories of Costs 

Consistent with the wage index 

methodology for FY 2008, the wage 

index for FY 2009 also excludes the 

direct and overhead salaries and hours 

for services not subject to IPPS payment, 

such as SNF services, home health 

services, costs related to GME (teaching 

physicians and residents) and certified 

registered nurse anesthetists (CRNAs), 

and other subprovider components that 

are not paid under the IPPS. The FY 

2009 wage index also excludes the 

salaries, hours, and wage-related costs 

of hospital-based rural health clinics 

(RHCs), and Federally qualified health 

centers (FQHCs) because Medicare pays 

for these costs outside of the IPPS (68 

FR 45395). In addition, salaries, hours, 

and wage-related costs of CAHs are 

excluded from the wage index, for the 

reasons explained in the FY 2004 IPPS 

final rule (68 FR 45397). 

3. Use of Wage Index Data by Providers 

Other Than Acute Care Hospitals under 

the IPPS 

Data collected for the IPPS wage 

index are also currently used to 

calculate wage indices applicable to 

other providers, such as SNFs, home 

health agencies, and hospices. In 

addition, they are used for prospective 

payments to IRFs, IPFs, and LTCHs, and 

for hospital outpatient services. We note 

that, in the IPPS rules, we do not 

address comments pertaining to the 

wage indices for non-IPPS providers. 

Such comments should be made in 

response to separate proposed rules for 

those providers. 

F. Verification of Worksheet S–3 Wage 

Data 

The wage data for the FY 2009 wage 

index were obtained from Worksheet S–

3, Parts II and III of the FY 2005 

Medicare cost reports. Instructions for 

completing Worksheet S–3, Parts II and 

III are in the Provider Reimbursement 

Manual (PRM), Part II, sections 3605.2 

and 3605.3. The data file used to 

construct the wage index includes FY 

2005 data submitted to us as of February 

29, 2008. As in past years, we performed 

an intensive review of the wage data, 

mostly through the use of edits designed 

to identify aberrant data. 

We asked our fiscal intermediaries/ 

MAC to revise or verify data elements 

that resulted in specific edit failures. 

For the proposed FY 2009 wage index, 

we identified and excluded 37 providers 

with data that was too aberrant to 

include in the proposed wage index, 

although we stated that if data elements 

for some of these providers were 

corrected, we intended to include some 

of these providers in the FY 2009 final 

wage index. However, because some 

unresolved data elements were included 

in the proposed FY 2009 wage index, 

we instructed fiscal intermediaries/ 

MACs to complete their data 

verification of questionable data 

elements and to transmit any changes to 

the wage data no later than April 14, 

2008. While the data for four hospitals 

were resolved, the data for two other 

hospitals were identified as too aberrant 

to include in the final wage index. 

Therefore, we determined that the data 

for 35 hospitals should not be included 

in the FY 2009 final wage index. 

In constructing the FY 2009 wage 

index, we included the wage data for 

facilities that were IPPS hospitals in FY 

2005; inclusive of those facilities that 

have since terminated their 

participation in the program as 

hospitals, as long as those data did not 

fail any of our edits for reasonableness. 


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We believe that including the wage data 

for these hospitals is, in general, 

appropriate to reflect the economic 

conditions in the various labor market 

areas during the relevant past period 

and to ensure that the current wage 

index represents the labor market area’s 

current wages as compared to the 

national average of wages. However, we 

excluded the wage data for CAHs as 

discussed in the FY 2004 IPPS final rule 

(68 FR 45397). For this final rule, we 

removed 22 hospitals that converted to 

CAH status between February 16, 2007, 

the cut-off date for CAH exclusion from 

the FY 2008 wage index, and February 

18, 2008, the cut-off date for CAH 

exclusion from the FY 2009 wage index. 

After removing hospitals with aberrant 

data and hospitals that converted to 

CAH status, the FY 2009 wage index is 

calculated based on 3,534 hospitals. 

1. Wage Data for Multicampus Hospitals 

In the FY 2008 final rule with 

comment period (72 FR 47317), we 

discussed our policy for allocating a 

multicampus hospital’s wages and 

hours data, by full-time equivalent 

(FTE) staff, among the different labor 

market areas where its campuses are 

located. During the FY 2009 wage index 

desk review process, we requested fiscal 

intermediaries/MACs to contact 

multicampus hospitals that had 

campuses in different labor market areas 

to collect the data for the allocation. The 

FY 2009 wage index in this final rule 

includes separate wage data for 

campuses of three multicampus 

hospitals. 

For FY 2009, we are again allowing 

hospitals to use FTE or discharge data 

for the allocation of a multicampus 

hospital’s wage data among the different 

labor market areas where its campuses 

are located. The Medicare cost report 

was updated in May 2008 to provide for 

the reporting of FTE data by campus for 

multicampus hospitals. Because the 

data from cost reporting periods that 

begin in FY 2008 will not be used in 

calculating the wage index until FY 

2012, a multicampus hospital will still 

have the option, through the FY 2011 

wage index, to use either FTE or 

discharge data for allocating wage data 

among its campuses by providing the 

information from the applicable cost 

reporting period to CMS through its 

fiscal intermediary/MAC. Two of the 

three multicampus hospitals chose to 

have their wage data allocated by their 

Medicare discharge data for the FY 2009 

wage index. One of the hospitals 

provided FTE staff data for the 

allocation. The average hourly wage 

associated with each geographical 

location of a multicampus hospital is 

reflected in Table 2 of the Addendum to 

this final rule. 

2. New Orleans’ Post-Katrina Wage 

Index 

Since 2005 when Hurricane Katrina 

devastated the Gulf States, we have 

received numerous comments 

suggesting that current Medicare 

payments to hospitals in New Orleans, 

Louisiana are inadequate, and the wage 

index does not accurately reflect the 

increase in labor costs experienced by 

the city after the storm. The post-Katrina 

effects on the New Orleans wage index 

will not be realized in the wage index 

until FY 2010, when the wage index 

will be based on cost reporting periods 

beginning during FY 2006 (that is, 

beginning on or after October 1, 2005 

and before October 1, 2006). 

In responding to the health-related 

needs of people affected by the 

hurricane, the Federal Government, 

through the Deficit Reduction Act of 

2005 (DRA), appropriated $2 billion in 

FY 2006. These funds allowed the 

Secretary to make available $160 

million in February 2007 to Louisiana, 

Mississippi, and Alabama for payments 

to hospitals and skilled nursing 

facilities facing financial stress because 

of changing wage rates not yet reflected 

in Medicare payment methodologies. In 

March and May 2007, the Department 

provided two additional DRA grants of 

$15 million and $35 million, 

respectively, to Louisiana for 

professional health care workforce 

recruitment and sustainability in the 

greater New Orleans area, namely the 

Orleans, Jefferson, St. Bernard, and 

Plaquemines Parishes. In addition, the 

Department issued a supplemental 

award of $60 million in provider 

stabilization grant funding to Louisiana, 

Mississippi, and Alabama to continue to 

help health care providers meet 

changing wage rates not yet reflected by 

Medicare’s payment policies. On July 

23, 2007, HHS awarded to Louisiana a 

new $100 million Primary Care Grant to 

help increase access to primary care in 

the Greater New Orleans area. The 

resulting stabilization and expansion of 

the community based primary care 

infrastructure, post Katrina, helps 

provide a viable alternative to local 

hospital emergency rooms for all 

citizens of New Orleans, especially 

those who are poor and uninsured. In 

other Department efforts, the OIG has 

performed an in-depth review of the 

post-Katrina infrastructure of five New 

Orleans hospitals, including the 

hospitals’ staffing levels and wage costs. 

The OIG’s final reports and 

recommendations, which were 

published in the Spring of 2008, are 

available on the following Web site: 

http://oig.hhs.gov/oas/cms.html. 

G. Method for Computing the FY 2009 

Unadjusted Wage Index 

The method used to compute the FY 

2009 wage index without an 

occupational mix adjustment follows: 

Step 1—As noted above, we are 

basing the FY 2009 wage index on wage 

data reported on the FY 2005 Medicare 

cost reports. We gathered data from each 

of the non-Federal, short-term, acute 

care hospitals for which data were 

reported on the Worksheet S–3, Parts II 

and III of the Medicare cost report for 

the hospital’s cost reporting period 

beginning on or after October 1, 2004, 

and before October 1, 2005. In addition, 

we included data from some hospitals 

that had cost reporting periods 

beginning before October 2004 and 

reported a cost reporting period 

covering all of FY 2004. These data are 

included because no other data from 

these hospitals would be available for 

the cost reporting period described 

above, and because particular labor 

market areas might be affected due to 

the omission of these hospitals. 

However, we generally describe these 

wage data as FY 2005 data. We note 

that, if a hospital had more than one 

cost reporting period beginning during 

FY 2005 (for example, a hospital had 

two short cost reporting periods 

beginning on or after October 1, 2004, 

and before October 1, 2005), we 

included wage data from only one of the 

cost reporting periods, the longer, in the 

wage index calculation. If there was 

more than one cost reporting period and 

the periods were equal in length, we 

included the wage data from the later 

period in the wage index calculation. 

Step 2—Salaries—The method used to 

compute a hospital’s average hourly 

wage excludes certain costs that are not 

paid under the IPPS. (We note that, 

beginning with FY 2008 (72 FR 47315), 

we include lines 22.01, 26.01, and 27.01 

of Worksheet S–3, Part II for overhead 

services in the wage index. However, we 

note that the wages and hours on these 

lines are not incorporated into line 101, 

column 1 of Worksheet A, which, 

through the electronic cost reporting 

software, flows directly to line 1 of 

Worksheet S–3, Part II. Therefore, the 

first step in the wage index calculation 

for FY 2009 is to compute a ‘‘revised’’

Line 1, by adding to the Line 1 on 

Worksheet S–3, Part II (for wages and 

hours respectively) the amounts on 

Lines 22.01, 26.01, and 27.01.) In 

calculating a hospital’s average salaries 

plus wage-related costs, we subtract 

from Line 1 (total salaries) the GME and 

CRNA costs reported on Lines 2, 4.01, 


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6, and 6.01, the Part B salaries reported 

on Lines 3, 5 and 5.01, home office 

salaries reported on Line 7, and exclude 

salaries reported on Lines 8 and 8.01 

(that is, direct salaries attributable to 

SNF services, home health services, and 

other subprovider components not 

subject to the IPPS). We also subtract 

from Line 1 the salaries for which no 

hours were reported. To determine total 

salaries plus wage-related costs, we add 

to the net hospital salaries the costs of 

contract labor for direct patient care, 

certain top management, pharmacy, 

laboratory, and nonteaching physician 

Part A services (Lines 9 and 10), home 

office salaries and wage-related costs 

reported by the hospital on Lines 11 and 

12, and nonexcluded area wage-related 

costs (Lines 13, 14, and 18). 

We note that contract labor and home 

office salaries for which no 

corresponding hours are reported are 

not included. In addition, wage-related 

costs for nonteaching physician Part A 

employees (Line 18) are excluded if no 

corresponding salaries are reported for 

those employees on Line 4. 

Step 3—Hours—With the exception of 

wage-related costs, for which there are 

no associated hours, we compute total 

hours using the same methods as 

described for salaries in Step 2. 

Step 4—For each hospital reporting 

both total overhead salaries and total 

overhead hours greater than zero, we 

then allocate overhead costs to areas of 

the hospital excluded from the wage 

index calculation. First, we determine 

the ratio of excluded area hours (sum of 

Lines 8 and 8.01 of Worksheet S–3, Part 

II) to revised total hours (Line 1 minus 

the sum of Part II, Lines 2, 3, 4.01, 5, 

5.01, 6, 6.01, 7, and Part III, Line 13 of 

Worksheet S–3). We then compute the 

amounts of overhead salaries and hours 

to be allocated to excluded areas by 

multiplying the above ratio by the total 

overhead salaries and hours reported on 

Line 13 of Worksheet S–3, Part III. Next, 

we compute the amounts of overhead 

wage-related costs to be allocated to 

excluded areas using three steps: (1) We 

determine the ratio of overhead hours 

(Part III, Line 13 minus the sum of lines 

22.01, 26.01, and 27.01) to revised hours 

excluding the sum of lines 22.01, 26.01, 

and 27.01 (Line 1 minus the sum of 

Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 

8.01, 22.01, 26.01, and 27.01). (We note 

that for the FY 2008 and subsequent 

wage index calculations, we are 

excluding the sum of lines 22.01, 26.01, 

and 27.01 from the determination of the 

ratio of overhead hours to revised hours 

because hospitals typically do not 

provide fringe benefits (wage-related 

costs) to contract personnel. Therefore, 

it is not necessary for the wage index 

calculation to exclude overhead wagerelated costs for contract personnel. 

Further, if a hospital does contribute to 

wage-related costs for contracted 

personnel, the instructions for lines 

22.01, 26.01, and 27.01 require that 

associated wage-related costs be 

combined with wages on the respective 

contract labor lines.); (2) we compute 

overhead wage-related costs by 

multiplying the overhead hours ratio by 

wage-related costs reported on Part II, 

Lines 13, 14, and 18; and (3) we 

multiply the computed overhead wagerelated costs by the above excluded area 

hours ratio. Finally, we subtract the 

computed overhead salaries, wagerelated costs, and hours associated with 

excluded areas from the total salaries 

(plus wage-related costs) and hours 

derived in Steps 2 and 3. 

Step 5—For each hospital, we adjust 

the total salaries plus wage-related costs 

to a common period to determine total 

adjusted salaries plus wage-related 

costs. To make the wage adjustment, we 

estimate the percentage change in the 

employment cost index (ECI) for 

compensation for each 30-day 

increment from October 14, 2003, 

through April 15, 2005, for private 

industry hospital workers from the BLS’

Compensation and Working Conditions. 

We use the ECI because it reflects the 

price increase associated with total 

compensation (salaries plus fringes) 

rather than just the increase in salaries. 

In addition, the ECI includes managers 

as well as other hospital workers. This 

methodology to compute the monthly 

update factors uses actual quarterly ECI 

data and assures that the update factors 

match the actual quarterly and annual 

percent changes. We also note that, 

since April 2006 with the publication of 

March 2006 data, the BLS’ ECI uses a 

different classification system, the North 

American Industrial Classification 

System (NAICS), instead of the Standard 

Industrial Codes (SICs), which no longer 

exist. We have consistently used the ECI 

as the data source for our wages and 

salaries and other price proxies in the 

IPPS market basket and did not propos 

to make any changes to the usage for FY 

2009. The factors used to adjust the 

hospital’s data were based on the 

midpoint of the cost reporting period, as 

indicated below. 

MIDPOINT OF COST REPORTING

PERIOD

After Before Adjustment 

factor 

10/14/2004 ........ 11/15/2004 1.05390 

11/14/2004 ........ 12/15/2004 1.05035 

12/14/2004 ........ 01/15/2005 1.04690 

MIDPOINT OF COST REPORTING

PERIOD—Continued 

After Before Adjustment 

factor 

01/14/2005 ........ 02/15/2005 1.04342 

02/14/2005 ........ 03/15/2005 1.03992 

03/14/2005 ........ 04/15/2005 1.03641 

04/14/2005 ........ 05/15/2005 1.03291 

05/14/2005 ........ 06/15/2005 1.02940 

06/14/2005 ........ 07/15/2005 1.02596 

07/14/2005 ........ 08/15/2005 1.02264 

08/14/2005 ........ 09/15/2005 1.01943 

09/14/2005 ........ 10/15/2005 1.01627 

10/14/2005 ........ 11/15/2005 1.01308 

11/14/2005 ........ 12/15/2005 1.00987 

12/14/2005 ........ 01/15/2006 1.00661 

01/14/2006 ........ 02/15/2006 1.00333 

02/14/2006 ........ 03/15/2006 1.00000 

03/14/2006 ........ 04/15/2006 0.99670 

For example, the midpoint of a cost 

reporting period beginning January 1, 

2005, and ending December 31, 2005, is 

June 30, 2005. An adjustment factor of 

1.02596 would be applied to the wages 

of a hospital with such a cost reporting 

period. In addition, for the data for any 

cost reporting period that began in FY 

2005 and covered a period of less than 

360 days or more than 370 days, we 

annualize the data to reflect a 1-year 

cost report. Dividing the data by the 

number of days in the cost report and 

then multiplying the results by 365 

accomplishes annualization. 

Step 6—Each hospital is assigned to 

its appropriate urban or rural labor 

market area before any reclassifications 

under section 1886(d)(8)(B), section 

1886(d)(8)(E), or section 1886(d)(10) of 

the Act. Within each urban or rural 

labor market area, we add the total 

adjusted salaries plus wage-related costs 

obtained in Step 5 for all hospitals in 

that area to determine the total adjusted 

salaries plus wage-related costs for the 

labor market area. 

Step 7—We divide the total adjusted 

salaries plus wage-related costs obtained 

under both methods in Step 6 by the 

sum of the corresponding total hours 

(from Step 4) for all hospitals in each 

labor market area to determine an 

average hourly wage for the area. 

Step 8—We add the total adjusted 

salaries plus wage-related costs obtained 

in Step 5 for all hospitals in the Nation 

and then divide the sum by the national 

sum of total hours from Step 4 to arrive 

at a national average hourly wage. Using 

the data as described above, the national 

average hourly wage (unadjusted for 

occupational mix) is $32.2696. 

Step 9—For each urban or rural labor 

market area, we calculate the hospital 

wage index value, unadjusted for 

occupational mix, by dividing the area 

average hourly wage obtained in Step 7 


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by the national average hourly wage 

computed in Step 8. 

Step 10—Following the process set 

forth above, we develop a separate 

Puerto Rico-specific wage index for 

purposes of adjusting the Puerto Rico 

standardized amounts. (The national 

Puerto Rico standardized amount is 

adjusted by a wage index calculated for 

all Puerto Rico labor market areas based 

on the national average hourly wage as 

described above.) We add the total 

adjusted salaries plus wage-related costs 

(as calculated in Step 5) for all hospitals 

in Puerto Rico and divide the sum by 

the total hours for Puerto Rico (as 

calculated in Step 4) to arrive at an 

overall average hourly wage (unadjusted 

for occupational mix) of $13.7956 for 

Puerto Rico. For each labor market area 

in Puerto Rico, we calculate the Puerto 

Rico-specific wage index value by 

dividing the area average hourly wage 

(as calculated in Step 7) by the overall 

Puerto Rico average hourly wage. 

Step 11—Section 4410 of Public Law 

105–33 provides that, for discharges on 

or after October 1, 1997, the area wage 

index applicable to any hospital that is 

located in an urban area of a State may 

not be less than the area wage index 

applicable to hospitals located in rural 

areas in that State. The areas affected by 

this provision will be identified in Table 

4D–2 that is to be published in a 

separate Federal Register subsequent to 

this final rule. 

In the FY 2005 IPPS final rule (69 FR 

49109), we adopted the ‘‘imputed’’ floor 

as a temporary 3-year measure to 

address a concern by some individuals 

that hospitals in all-urban States were 

disadvantaged by the absence of rural 

hospitals to set a wage index floor in 

those States. The imputed floor was 

originally set to expire in FY 2007, but 

we are extending it an additional year 

in the FY 2008 IPPS final rule with 

comment period (72 FR 47321). As 

explained in section III.B.2.b. of the 

preamble of this final rule, we are 

extending the imputed floor for an 

additional 3 years, through FY 2011. 

H. Analysis and Implementation of the 

Occupational Mix Adjustment and the 

FY 2009 Occupational Mix Adjusted 

Wage Index 

As discussed in section III.D. of this 

preamble, for FY 2009, we apply the 

occupational mix adjustment to 100 

percent of the FY 2009 wage index. We 

calculated the occupational mix 

adjustment using data from the 2006 

occupational mix survey data, using the 

methodology described in section 

III.D.3. of this preamble. 

Using the first and second quarter 

occupational mix survey data and 

applying the occupational mix 

adjustment to 100 percent of the FY 

2009 wage index results in a national 

average hourly wage of $32.2449 and a 

Puerto-Rico specific average hourly 

wage of $13.7851. After excluding data 

of hospitals that either submitted 

aberrant data that failed critical edits, or 

that do not have FY 2005 Worksheet S–

3 cost report data for use in calculating 

the FY 2009 wage index, we calculated 

the FY 2009 wage index using the 

occupational mix survey data from 

3,365 hospitals. Using the Worksheet S–

3 cost report data of 3,534 hospitals and 

occupational mix first and/or second 

quarter survey data from 3,365 hospitals 

represents a 95.2 percent survey 

response rate. The FY 2009 national 

average hourly wages for each 

occupational mix nursing subcategory 

as calculated in Step 2 of the 

occupational mix calculation are as 

follows: 

Occupational mix nursing 

subcategory 

Average 

hourly wage 

National RN Management .... $38.6364 

National RN Staff .................. 33.4698 

National LPN ........................ 19.2364 

National Nurse Aides, Orderlies, and Attendants .......... 13.6892 

National Medical Assistants 15.7714 

National Nurse Category ...... 28.7265 

The national average hourly wage for 

the entire nurse category as computed in 

Step 5 of the occupational mix 

calculation is $28.7265. Hospitals with 

a nurse category average hourly wage (as 

calculated in Step 4) of greater than the 

national nurse category average hourly 

wage receive an occupational mix 

adjustment factor (as calculated in Step 

6) of less than 1.0. Hospitals with a 

nurse category average hourly wage (as 

calculated in Step 4) of less than the 

national nurse category average hourly 

wage receive an occupational mix 

adjustment factor (as calculated in Step 

6) of greater than 1.0. 

Based on the January through June 

2006 occupational mix survey data, we 

determined (in Step 7 of the 

occupational mix calculation) that the 

national percentage of hospital 

employees in the Nurse category is 

42.97 percent, and the national 

percentage of hospital employees in the 

All Other Occupations category is 57.03 

percent. At the CBSA level, the 

percentage of hospital employees in the 

Nurse category ranged from a low of 

27.26 percent in one CBSA, to a high of 

85.30 percent in another CBSA. 

The final wage index values for FY 

2009 (except those for hospitals 

receiving wage index adjustments under 

section 1886(d)(13) of the Act) will be 

shown in Tables 4A, 4B, 4C, and 4F that 

are to be published in a separate Federal 

Register notice subsequent to this final 

rule. 

Tables 3A and 3B in the Addendum 

to this final rule list the 3-year average 

hourly wage for each labor market area 

before the redesignation of hospitals 

based on FYs 2007, 2008, and 2009 cost 

reporting periods. Table 3A lists these 

data for urban areas and Table 3B lists 

these data for rural areas. In addition, 

Table 2 in the Addendum to this final 

rule includes the adjusted average 

hourly wage for each hospital from the 

FY 2003 and FY 2004 cost reporting 

periods, as well as the FY 2005 period 

used to calculate the FY 2009 wage 

index. The 3-year averages are 

calculated by dividing the sum of the 

dollars (adjusted to a common reporting 

period using the method described 

previously) across all 3 years, by the 

sum of the hours. If a hospital is missing 

data for any of the previous years, its 

average hourly wage for the 3-year 

period is calculated based on the data 

available during that period. 

The wage index values in Tables 4A, 

4B, 4C, and 4F (to be published in a 

subsequent Federal Register notice) will 

include the occupational mix 

adjustment. The average hourly wages 

in Tables 2, 3A, and 3B in the 

Addendum to this final rule include the 

occupational mix adjustment. The wage 

index values in Tables 4A, 4B, and 4C 

in the separate issuance also will 

include the State-specific rural floor and 

imputed floor budget neutrality 

adjustments that are discussed in 

section III.B.2. of this preamble. The 

State budget neutrality adjustments for 

the rural and imputed floors will be 

included in Table 4D–1 in a separate 

Federal Register notice to be published 

subsequent to this final rule. 

I. Revisions to the Wage Index Based on 

Hospital Redesignations 

1. General 

Under section 1886(d)(10) of the Act, 

the MGCRB considers applications by 

hospitals for geographic reclassification 

for purposes of payment under the IPPS. 

Hospitals must apply to the MGCRB to 

reclassify 13 months prior to the start of 

the fiscal year for which reclassification 

is sought (generally by September 1). 

Generally, hospitals must be proximate 

to the labor market area to which they 

are seeking reclassification and must 

demonstrate characteristics similar to 

hospitals located in that area. The 

MGCRB issues its decisions by the end 

of February for reclassifications that 

become effective for the following fiscal 

year (beginning October 1). The 


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regulations applicable to 

reclassifications by the MGCRB are 

located in 42 CFR 412.230 through 

412.280. 

Section 1886(d)(10)(D)(v) of the Act 

provides that, beginning with FY 2001, 

a MGCRB decision on a hospital 

reclassification for purposes of the wage 

index is effective for 3 fiscal years, 

unless the hospital elects to terminate 

the reclassification. Section 

1886(d)(10)(D)(vi) of the Act provides 

that the MGCRB must use average 

hourly wage data from the 3 most 

recently published hospital wage 

surveys in evaluating a hospital’s 

reclassification application for FY 2003 

and any succeeding fiscal year. 

Section 304(b) of Public Law 106–554 

provides that the Secretary must 

establish a mechanism under which a 

statewide entity may apply to have all 

of the geographic areas in the State 

treated as a single geographic area for 

purposes of computing and applying a 

single wage index, for reclassifications 

beginning in FY 2003. The 

implementing regulations for this 

provision are located at 42 CFR 412.235. 

Section 1886(d)(8)(B) of the Act 

requires the Secretary to treat a hospital 

located in a rural county adjacent to one 

or more urban areas as being located in 

the MSA to which the greatest number 

of workers in the county commute, if 

the rural county would otherwise be 

considered part of an urban area under 

the standards for designating MSAs and 

if the commuting rates used in 

determining outlying counties were 

determined on the basis of the aggregate 

number of resident workers who 

commute to (and, if applicable under 

the standards, from) the central county 

or counties of all contiguous MSAs. In 

light of the CBSA definitions and the 

Census 2000 data that we implemented 

for FY 2005 (69 FR 49027), we 

undertook to identify those counties 

meeting these criteria. Eligible counties 

are discussed and identified under 

section III.I.5. of this preamble. 

2. Effects of Reclassification/ 

Redesignation 

Section 1886(d)(8)(C) of the Act 

provides that the application of the 

wage index to redesignated hospitals is 

dependent on the hypothetical impact 

that the wage data from these hospitals 

would have on the wage index value for 

the area to which they have been 

redesignated. These requirements for 

determining the wage index values for 

redesignated hospitals are applicable 

both to the hospitals deemed urban 

under section 1886(d)(8)(B) of the Act 

and hospitals that were reclassified as a 

result of the MGCRB decisions under 

section 1886(d)(10) of the Act. 

Therefore, as provided in section 

1886(d)(8)(C) of the Act, the wage index 

values were determined by considering 

the following: 

• If including the wage data for the 

redesignated hospitals would reduce the 

wage index value for the area to which 

the hospitals are redesignated by 1 

percentage point or less, the area wage 

index value determined exclusive of the 

wage data for the redesignated hospitals 

applies to the redesignated hospitals. 

• If including the wage data for the 

redesignated hospitals reduces the wage 

index value for the area to which the 

hospitals are redesignated by more than 

1 percentage point, the area wage index 

determined inclusive of the wage data 

for the redesignated hospitals (the 

combined wage index value) applies to 

the redesignated hospitals. 

• If including the wage data for the 

redesignated hospitals increases the 

wage index value for the urban area to 

which the hospitals are redesignated, 

both the area and the redesignated 

hospitals receive the combined wage 

index value. Otherwise, the hospitals 

located in the urban area receive a wage 

index excluding the wage data of 

hospitals redesignated into the area. 

Rural areas whose wage index values 

would be reduced by excluding the 

wage data for hospitals that have been 

redesignated to another area continue to 

have their wage index values calculated 

as if no redesignation had occurred 

(otherwise, redesignated rural hospitals 

are excluded from the calculation of the 

rural wage index). The wage index value 

for a redesignated rural hospital cannot 

be reduced below the wage index value 

for the rural areas of the State in which 

the hospital is located. 

CMS has also adopted the following 

policies: 

• The wage data for a reclassified 

urban hospital is included in both the 

wage index calculation of the area to 

which the hospital is reclassified 

(subject to the rules described above) 

and the wage index calculation of the 

urban area where the hospital is 

physically located. 

• In cases where urban hospitals have 

reclassified to rural areas under 42 CFR 

412.103, the urban hospital wage data 

are: (a) Included in the rural wage index 

calculation, unless doing so would 

reduce the rural wage index; and (b) 

included in the urban area where the 

hospital is physically located. 

3. FY 2009 MGCRB Reclassifications 

Under section 1886(d)(10) of the Act, 

the MGCRB considers applications by 

hospitals for geographic reclassification 

for purposes of payment under the IPPS. 

The specific procedures and rules that 

apply to the geographic reclassification 

process are outlined in 42 CFR 412.230 

through 412.280. 

At the time this final rule was 

constructed, the MGCRB had completed 

its review of FY 2009 reclassification 

requests. Based on such reviews, there 

were 314 hospitals approved for wage 

index reclassifications by the MGCRB 

for FY 2009. Because MGCRB wage 

index reclassifications are effective for 3 

years, for FY 2009, hospitals reclassified 

during FY 2007 or FY 2008 are eligible 

to continue to be reclassified to a 

particular labor market area based on 

such prior reclassifications. There were 

175 hospitals approved for wage index 

reclassifications in FY 2007 and 324 

hospitals approved for wage index 

reclassifications in FY 2008. Of all of 

the hospitals approved for 

reclassification for FY 2007, FY 2008, 

and FY 2009, based upon the review at 

the time of the final rule, 813 hospitals 

are in a reclassification status for FY 

2009. 

Under 42 CFR 412.273, hospitals that 

have been reclassified by the MGCRB 

were permitted to withdraw their 

applications within 45 days of the 

publication of the proposed rule. 

Generally stated, the request for 

withdrawal of an application for 

reclassification or termination of an 

existing 3-year reclassification that 

would be effective in FY 2009 had to be 

received by the MGCRB within 45 days 

of the publication of the proposed rule. 

(We note that special rules for areas 

affected by section 124 of Pub. L. 110–

275 are discussed in section III.I.7. of 

this preamble.) Hospitals may also 

cancel prior reclassification 

withdrawals or terminations in certain 

circumstances. For further information 

about withdrawing, terminating, or 

canceling a previous withdrawal or 

termination of a 3-year reclassification 

for wage index purposes, we refer the 

reader to 42 CFR 412.273, as well as the 

August 1, 2002, IPPS final rule (67 FR 

50065), and the August 1, 2001, IPPS 

final rule (66 FR 39887). 

Changes to the wage index that result 

from withdrawals of requests for 

reclassification, wage index corrections, 

appeals, and the Administrator’s review 

process will be incorporated into the 

wage index values published in a 

separate Federal Register notice, in 

response to section 124 of Public Law 

110–275 (see section III.I.7. of this 

preamble). These changes affect not 

only the wage index value for specific 

geographic areas, but also the wage 

index value redesignated hospitals 

receive; that is, whether they receive the 

wage index that includes the data for 


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both the hospitals already in the area 

and the redesignated hospitals. Further, 

the wage index value for the area from 

which the hospitals are redesignated 

may have been affected. 

Applications for FY 2010 

reclassifications are due to the MGCRB 

by September 2, 2008 (the first working 

day of September 2008). We note that 

this is also the deadline for canceling a 

previous wage index reclassification 

withdrawal or termination under 42 

CFR 412.273(d). Applications and other 

information about MGCRB 

reclassifications may be obtained, 

beginning in mid-July 2008, via the 

CMS Internet Web site at: http:// 

cms.hhs.gov/providers/prrb/ 

mgcinfo.asp, or by calling the MGCRB at 

(410) 786–1174. The mailing address of 

the MGCRB is: 2520 Lord Baltimore 

Drive, Suite L, Baltimore, MD 21244–

2670. 

4. FY 2008 Policy Clarifications and 

Revisions 

We note below several policies related 

to geographic reclassification that were 

clarified or revised in the FY 2008 IPPS 

final rule with comment period (72 FR 

47333): 

• Reinstating Reclassifications—As 

provided for in 42 CFR 412.273(b)(2), 

once a hospital (or hospital group) 

accepts a newly approved 

reclassification, any previous 

reclassification is permanently 

terminated. 

• Geographic Reclassification for 

Multicampus Hospitals—Because 

campuses of a multicampus hospital can 

now have their wages and hours data 

allocated by FTEs or discharge data, a 

hospital campus located in a geographic 

area distinct from the geographic area 

associated with the provider number of 

the multicampus hospital will have 

official wage data to supplement an 

individual or group reclassification 

application (§ 412.230(d)(2)(v)). 

• New England Deemed Counties—

Hospitals in New England deemed 

counties are treated the same as Lugar 

hospitals in calculating the wage index. 

That is, the area is considered rural, but 

the hospitals within the area are deemed 

to be urban (§ 412.64(b)(3)(ii)). 

• ‘‘Fallback’’ Reclassifications—A 

hospital will automatically be given its 

most recently approved reclassification 

(thereby permanently terminating any 

previously approved reclassifications) 

unless it provides written notice to the 

MGCRB within 45 days of publication of 

the notice of proposed rulemaking that 

it wishes to withdraw its most recently 

approved reclassification and ‘‘fall 

back’’ to either its prior reclassification 

or its home area wage index for the 

following fiscal year. 

5. Redesignations of Hospitals Under 

Section 1886(d)(8)(B) of the Act 

Section 1886(d)(8)(B) of the Act 

requires us to treat a hospital located in 

a rural county adjacent to one or more 

urban areas as being located in the MSA 

if certain criteria are met. Effective 

beginning FY 2005, we use OMB’s 2000 

CBSA standards and the Census 2000 

data to identify counties in which 

hospitals qualify under section 

1886(d)(8)(B) of the Act to receive the 

wage index of the urban area. Hospitals 

located in these counties have been 

known as ‘‘Lugar’’ hospitals and the 

counties themselves are often referred to 

as ‘‘Lugar’’ counties. We provide the FY 

2009 chart below with the listing of the 

rural counties containing the hospitals 

designated as urban under section 

1886(d)(8)(B) of the Act. For discharges 

occurring on or after October 1, 2008, 

hospitals located in the rural county in 

the first column of this chart will be 

redesignated for purposes of using the 

wage index of the urban area listed in 

the second column. 

RURAL COUNTIES CONTAINING HOSPITALS REDESIGNATED AS URBAN UNDER SECTION 1886(D)(8)(B) OF THE ACT

[Based on CBSAs and census 2000 data] 

Rural county CBSA 

Cherokee, AL ........................................................................... Rome, GA. 

Macon, AL ................................................................................ Auburn-Opelika, AL. 

Talladega, AL ........................................................................... Anniston-Oxford, AL. 

Hot Springs, AR ....................................................................... Hot Springs, AR. 

Windham, CT ........................................................................... Hartford-West Hartford-East Hartford, CT.

Bradford, FL ............................................................................. Gainesville, FL. 

Hendry, FL ................................................................................ West Palm Beach-Boca Raton-Boynton, FL. 

Levy, FL .................................................................................... Gainesville, FL. 

Walton, FL ................................................................................ Fort Walton Beach-Crestview-Destin, FL. 

Banks, GA ................................................................................ Gainesville, GA. 

Chattooga, GA .......................................................................... Chattanooga, TN-GA. 

Jackson, GA ............................................................................. Atlanta-Sandy Springs-Marietta, GA. 

Lumpkin, GA ............................................................................. Atlanta-Sandy Springs-Marietta, GA. 

Morgan, GA .............................................................................. Atlanta-Sandy Springs-Marietta, GA. 

Peach, GA ................................................................................ Macon, GA. 

Polk, GA ................................................................................... Atlanta-Sandy Springs-Marietta, GA. 

Talbot, GA ................................................................................ Columbus, GA-AL. 

Bingham, ID .............................................................................. Idaho Falls, ID. 

Christian, IL .............................................................................. Springfield, IL. 

DeWitt, IL .................................................................................. Bloomington-Normal, IL. 

Iroquois, IL ................................................................................ Kankakee-Bradley, IL. 

Logan, IL .................................................................................. Springfield, IL. 

Mason, IL .................................................................................. Peoria, IL. 

Ogle, IL ..................................................................................... Rockford, IL. 

Clinton, IN ................................................................................. Lafayette, IN. 

Henry, IN .................................................................................. Indianapolis-Carmel, IN. 

Spencer, IN .............................................................................. Evansville, IN-KY. 

Starke, IN ................................................................................. Gary, IN. 

Warren, IN ................................................................................ Lafayette, IN. 

Boone, IA .................................................................................. Ames, IA. 

Buchanan, IA ............................................................................ Waterloo-Cedar Falls, IA. 

Cedar, IA .................................................................................. Iowa City, IA. 

Allen, KY ................................................................................... Bowling Green, KY. 


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RURAL COUNTIES CONTAINING HOSPITALS REDESIGNATED AS URBAN UNDER SECTION 1886(D)(8)(B) OF THE ACT—

Continued 

[Based on CBSAs and census 2000 data] 

Rural county CBSA 

Assumption Parish, LA ............................................................. Baton Rouge, LA. 

St. James Parish, LA ............................................................... Baton Rouge, LA. 

Allegan, MI ............................................................................... Holland-Grand Haven, MI. 

Montcalm, MI ............................................................................ Grand Rapids-Wyoming, MI. 

Oceana, MI ............................................................................... Muskegon-Norton Shores, MI. 

Shiawassee, MI ........................................................................ Lansing-East Lansing, MI. 

Tuscola, MI ............................................................................... Saginaw-Saginaw Township North, MI. 

Fillmore, MN ............................................................................. Rochester, MN. 

Dade, MO ................................................................................. Springfield, MO. 

Pearl River, MS ........................................................................ Gulfport-Biloxi, MS. 

Caswell, NC .............................................................................. Burlington, NC. 

Davidson, NC ........................................................................... Greensboro-High Point, NC. 

Granville, NC ............................................................................ Durham, NC. 

Harnett, NC .............................................................................. Raleigh-Cary, NC. 

Lincoln, NC ............................................................................... Charlotte-Gastonia-Concord, NC-SC. 

Polk, NC ................................................................................... Spartanburg, SC. 

Los Alamos, NM ....................................................................... Santa Fe, NM. 

Lyon, NV ................................................................................... Carson City, NV. 

Cayuga, NY .............................................................................. Syracuse, NY. 

Columbia, NY ........................................................................... Albany-Schenectady-Troy, NY. 

Genesee, NY ............................................................................ Rochester, NY. 

Greene, NY .............................................................................. Albany-Schenectady-Troy, NY. 

Schuyler, NY ............................................................................ Ithaca, NY. 

Sullivan, NY .............................................................................. Poughkeepsie-Newburgh-Middletown, NY.

Wyoming, NY ........................................................................... Buffalo-Niagara Falls, NY. 

Ashtabula, OH .......................................................................... Cleveland-Elyria-Mentor, OH. 

Champaign, OH ........................................................................ Springfield, OH. 

Columbiana, OH ....................................................................... Youngstown-Warren-Boardman, OH-PA. 

Cotton, OK ................................................................................ Lawton, OK. 

Linn, OR ................................................................................... Corvallis, OR. 

Adams, PA ............................................................................... York-Hanover, PA. 

Clinton, PA ............................................................................... Williamsport, PA. 

Greene, PA ............................................................................... Pittsburgh, PA. 

Monroe, PA .............................................................................. Allentown-Bethlehem-Easton, PA-NJ. 

Schuylkill, PA ............................................................................ Reading, PA. 

Susquehanna, PA .................................................................... Binghamton, NY. 

Clarendon, SC .......................................................................... Sumter, SC. 

Lee, SC .................................................................................... Sumter, SC. 

Oconee, SC .............................................................................. Greenville, SC. 

Union, SC ................................................................................. Spartanburg, SC. 

Meigs, TN ................................................................................. Cleveland, TN. 

Bosque, TX ............................................................................... Waco, TX. 

Falls, TX ................................................................................... Waco, TX. 

Fannin, TX ................................................................................ Dallas-Plano-Irving, TX. 

Grimes, TX ............................................................................... College Station-Bryan, TX. 

Harrison, TX ............................................................................. Longview, TX. 

Henderson, TX ......................................................................... Dallas-Plano-Irving, TX. 

Milam, TX ................................................................................. Austin-Round Rock, TX. 

Van Zandt, TX .......................................................................... Dallas-Plano-Irving, TX. 

Willacy, TX ............................................................................... Brownsville-Harlingen, TX. 

Buckingham, VA ....................................................................... Charlottesville, VA. 

Floyd, VA .................................................................................. Blacksburg-Christiansburg-Radford, VA. 

Middlesex, VA .......................................................................... Virginia Beach-Norfolk-Newport News, VA.

Page, VA .................................................................................. Harrisonburg, VA. 

Shenandoah, VA ...................................................................... Winchester, VA-WV. 

Island, WA ................................................................................ Seattle-Bellevue-Everett, WA. 

Mason, WA ............................................................................... Olympia, WA. 

Wahkiakum, WA ....................................................................... Longview, WA. 

Jackson, WV ............................................................................ Charleston, WV. 

Roane, WV ............................................................................... Charleston, WV. 

Green, WI ................................................................................. Madison, WI. 

Green Lake, WI ........................................................................ Fond du Lac, WI. 

Jefferson, WI ............................................................................ Milwaukee-Waukesha-West Allis, WI. 

Walworth, WI ............................................................................ Milwaukee-Waukesha-West Allis, WI. 

As in the past, hospitals redesignated 

under section 1886(d)(8)(B) of the Act 

are also eligible to be reclassified to a 

different area by the MGCRB. Affected 

hospitals are permitted to compare the 

reclassified wage index for the labor 


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market area in Table 4C in the 

Addendum to the proposed rule into 

which they have been reclassified by the 

MGCRB to the wage index for the area 

to which they are redesignated under 

section 1886(d)(8)(B) of the Act. 

Hospitals could have withdrawn from 

an MCGRB reclassification within 45 

days of the publication of the proposed 

rule. (We refer readers also to section 

III.I.7. of the preamble of this final rule 

for special withdrawal and termination 

rules that apply to areas affected by 

section 124 of Pub. L. 110–275.) 

6. Reclassifications Under Section 

1886(d)(8)(B) of the Act 

As discussed in last year’s FY 2008 

IPPS final rule with comment period (72 

FR 47336–47337), Lugar hospitals are 

treated like reclassified hospitals for 

purposes of determining their 

applicable wage index and receive the 

reclassified wage index (Table 4C in a 

separate notice to be published in the 

Federal Register subsequent to this final 

rule) for the urban area to which they 

have been redesignated. Because Lugar 

hospitals are treated like reclassified 

hospitals, when they are seeking 

reclassification by the MCGRB, they are 

subject to the rural reclassification rules 

set forth at 42 CFR 412.230. The 

procedural rules set forth at § 412.230 

list the criteria that a hospital must meet 

in order to reclassify as a rural hospital. 

Lugar hospitals are subject to the 

proximity criteria and payment 

thresholds that apply to rural hospitals. 

Specifically, the hospital must be no 

more than 35 miles from the area to 

which it seeks reclassification 

(§ 412.230(b)(1)); and the hospital must 

show that its average hourly wage is at 

least 106 percent of the average hourly 

wage of all other hospitals in the area in 

which the hospital is located 

(§ 412.230(d)(1)(iii)(C)). As discussed in 

section III.B.2.a. of the preamble of this 

final rule, beginning with the FY 2010 

wage index we will be phasing in 

regulatory changes, so that the hospital 

must also demonstrate that its average 

hourly wage is equal to at least 84 

percent (in FY 2010) and 86 percent 

(beginning in FY 2011) of the average 

hourly wage of hospitals in the area to 

which it seeks redesignation 

(§ 412.230(d)(1)(iv)(C)). 

Hospitals not located in a Lugar 

county seeking reclassification to the 

urban area where the Lugar hospitals 

have been redesignated are not 

permitted to measure to the Lugar 

county to demonstrate proximity (no 

more than 15 miles for an urban 

hospital, and no more than 35 miles for 

a rural hospital or the closest urban or 

rural area for RRCs or SCHs) in order to 

be reclassified to such urban area. These 

hospitals must measure to the urban 

area exclusive of the Lugar County to 

meet the proximity or nearest urban or 

rural area requirement. As discussed in 

the FY 2008 final rule with comment 

period, we treat New England deemed 

counties in a manner consistent with 

how we treat Lugar counties. (We refer 

readers to 72 FR 47337 for a discussion 

of this policy.) 

7. Reclassifications Under Section 508 

of Public Law 108–173 

On July 15, 2008, the Medicare 

Improvements for Patients and 

Providers Act of 2008, Public Law 110–

275 was enacted. Section 124 of Public 

Law 110–275 extends through FY 2009 

wage index reclassifications under 

section 508 of Public Law 108–173 and 

certain special exceptions (for example, 

those special exceptions contained in 

the final rule promulgated in the 

Federal Register on August 11, 2004 (69 

FR 49105, 49107)) and extended under 

section 117 of the MMSEA of 2007 (Pub. 

L. 110–173). 

Under section 508 of Public Law 108–

173, a qualifying hospital could appeal 

the wage index classification otherwise 

applicable to the hospital and apply for 

reclassification to another area of the 

State in which the hospital is located 

(or, at the discretion of the Secretary), to 

an area within a contiguous State. We 

implemented this process through 

notices published in the Federal 

Register on January 6, 2004 (69 FR 661), 

and February 13, 2004 (69 FR 7340). 

Such reclassifications were applicable 

to discharges occurring during the 3- 

year period beginning April 1, 2004, and 

ending March 31, 2007. Section 106(a) 

of the MIEA–TRHCA extended any 

geographic reclassifications of hospitals 

that were made under section 508 and 

that would expire on March 31, 2007. 

On March 23, 2007, we published a 

notice in the Federal Register (72 FR 

13799) that indicated how we were 

implementing section 106(a) of the 

MIEA–TRHCA through September 30, 

2007. Section 117 of the MMSEA further 

extended section 508 reclassifications 

and special exceptions through 

September 30, 2008. On February 22, 

2008, we published a notice in the 

Federal Register (73 FR 9807) regarding 

our implementation of section 117 of 

the MMSEA. 

Section 124 of Public Law 110–275 

has now extended the hospital 

reclassifications provisions of section 

508 and certain special exceptions 

through September 30, 2009 (FY 2009). 

Because of the timing of enactment of 

Public Law 110–275, we are not able to 

recompute the FY 2009 wage index 

values for any hospital that would be 

reclassified under the section 508 and 

special exceptions provisions in time for 

inclusion in this final rule. Instead, we 

will issue the final FY 2009 wage index 

values and other related tables, as 

specified in the Addendum to this final 

rule, in a separate Federal Register 

notice implementing this extension that 

will be published subsequent to this 

final rule. We will analyze the data of 

hospitals in labor market areas affected 

by this extension, including hospitals 

with Lugar redesignations, and make 

our best efforts to give those hospitals a 

wage index value that we believe results 

in the highest FY 2009 wage index for 

which they are eligible. The intervening 

legislation potentially affects only those 

areas that include the hospitals whose 

reclassifications or special exceptions 

were extended, as well as areas to which 

such hospitals were reclassified for FY 

2009. Therefore, we want to make clear 

that we will not be choosing wage index 

values for hospitals that are reclassified 

to or located in areas containing no 

hospitals whose reclassifications or 

exceptions were extended by section 

124 of Public Law 110–275. 

Hospitals will have 15 days from the 

date of publication of the separate 

notice to notify us if they wish to revise 

the decision that CMS makes on their 

behalf. Members of a group 

reclassification must ensure that all 

members of the group (except hospitals 

whose reclassifications were extended 

by section 124 of Pub. L. 110–275) have 

signed the revision request. Written 

requests to revise CMS’ wage index 

decision must be received at the 

following address by no later than 5 

p.m. EST 15 days from the date of 

publication of the separate notice in the 

Federal Register: Division of Acute 

Care, Center for Medicare Management, 

C4–08–06, 7500 Security Boulevard, 

Baltimore, MD 21244, Attn: Brian Slater. 

If we do not receive notice from the 

hospital within this 15-day timeframe, 

the determination made by CMS on 

behalf of the hospital in the separate 

notice will be deemed final for FY 2009. 

We will not further recalculate the wage 

indices or standardized amounts based 

on hospitals’ decisions that further 

revise decisions made by CMS on the 

hospitals’ behalf. If CMS makes a 

decision on a hospital’s behalf to 

terminate or withdraw a reclassification 

so that a hospital will receive a higher 

qualifying wage index for FY 2009, and 

the hospital does not reverse or modify 

CMS’ decision within the 15-day 

timeframe, we will deem the hospital’s 

reclassification is withdrawn or 

terminated for FY 2009 only, as section 

508 reclassifications and special 


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exceptions are only extended through 

FY 2009. Such hospitals, if there is at 

least one remaining year in their 3-year 

reclassification, will automatically have 

their MGCRB reclassification reinstated 

for FY 2010. Thus, for example, if we 

assign a hospital a section 508 

reclassification wage index for FY 2009 

and the hospital had been previously 

granted a reclassification by the MGCRB 

for FY 2008 through 2010, the hospital’s 

previous reclassification would be 

automatically reinstated for the 

remaining year, FY 2010. By the same 

token, if the omission of a section 508 

or special exception hospital from the 

calculation of the reclassification wage 

index in Table 4C of the separate 

issuance results in the reclassification 

wage index decreasing to the point that 

a hospital should have terminated its 

MGCRB reclassification for FYs 2008 

through 2010 and accepted its home 

wage index, we will withdraw or 

terminate the reclassification on the 

hospital’s behalf. However, such 

reclassification will then be 

automatically reinstated for FY 2010. In 

the case that a hospital had a choice for 

FY 2009 of two overlapping possible 

MGCRB 3-year reclassifications, and one 

such MGCRB reclassification is assigned 

to the hospital via the process discussed 

above, then the reclassification not 

accepted would be permanently 

terminated. Likewise, if the hospital 

with the choice of two overlapping 

MGCRB reclassifications is a section 508 

or special exception hospital that 

receives the section 508 or special 

exception wage index for FY 2009, then 

only the reclassification that the 

hospital had originally chosen for FY 

2009 will be reinstated, and the other 

reclassification will be permanently 

terminated. In other words, in 

accordance with our current rules with 

regard to overlapping MGCRB 

reclassifications, a hospital will not be 

permitted to hold in reserve two 

possible MGCRB reclassifications 

through these procedures. In addition, if 

CMS believes that waiving a hospital’s 

Lugar redesignation in order for the 

hospital to receive its home area wage 

index plus its out-migration adjustment 

results in the highest possible wage 

index for the hospital, and the hospital 

does not notify CMS within the 15-day 

timeframe to revise CMS’ decision, such 

waiver will only apply to the FY 2009 

wage index. 

Our special procedural rules for FY 

2009 are authorized under section 

1886(d)(10)(D)(v) of the Act, which 

requires the Secretary to ‘‘establish 

procedures under which a subsection 

(d) hospital may elect to terminate’’ a 

reclassification. While the section 

authorizes the Secretary to establish 

procedures, it does not dictate the 

specifics of such procedures. Given the 

intervening legislation for FY 2009, and 

the need to expeditiously engage in a 

series of recalculations for FY 2009, we 

believe the most reasonable course at 

this point is for us to make our best 

efforts to give affected hospitals their 

highest wage index values, and then 

allow hospitals to opt out of such 

selections. 

The special procedural rules will be 

effective upon publication and 

supersede conflicting procedures 

included in 42 CFR 412.273. Because 

these rules are effective only for FY 

2009, we are not revising the general 

rules included in the regulation at 

§ 412.273. 

J. FY 2009 Wage Index Adjustment 

Based on Commuting Patterns of 

Hospital Employees 

In accordance with the broad 

discretion under section 1886(d)(13) of 

the Act, as added by section 505 of 

Public Law 108–173, beginning with FY 

2005, we established a process to make 

adjustments to the hospital wage index 

based on commuting patterns of 

hospital employees (the ‘‘out-migration’’

adjustment). The process, outlined in 

the FY 2005 IPPS final rule (69 FR 

49061), provides for an increase in the 

wage index for hospitals located in 

certain counties that have a relatively 

high percentage of hospital employees 

who reside in the county but work in a 

different county (or counties) with a 

higher wage index. Such adjustments to 

the wage index are effective for 3 years, 

unless a hospital requests to waive the 

application of the adjustment. A county 

will not lose its status as a qualifying 

county due to wage index changes 

during the 3-year period, and counties 

will receive the same wage index 

increase for those 3 years. However, a 

county that qualifies in any given year 

may no longer qualify after the 3-year 

period, or it may qualify but receive a 

different adjustment to the wage index 

level. Hospitals that receive this 

adjustment to their wage index are not 

eligible for reclassification under 

section 1886(d)(8) or section 1886(d)(10) 

of the Act. Adjustments under this 

provision are not subject to the budget 

neutrality requirements under section 

1886(d)(3)(E) of the Act. 

Hospitals located in counties that 

qualify for the wage index adjustment 

are to receive an increase in the wage 

index that is equal to the average of the 

differences between the wage indices of 

the labor market area(s) with higher 

wage indices and the wage index of the 

resident county, weighted by the overall 

percentage of hospital workers residing 

in the qualifying county who are 

employed in any labor market area with 

a higher wage index. Beginning with the 

FY 2008 wage index, we use postreclassified wage indices when 

determining the out-migration 

adjustment (72 FR 47339). 

For the FY 2009 wage index, we will 

calculate the out-migration adjustment 

using the same formula described in the 

FY 2005 IPPS final rule (69 FR 49064), 

with the addition of using the postreclassified wage indices, to calculate 

the out-migration adjustment. This 

adjustment is calculated as follows: 

Step 1. Subtract the wage index for 

the qualifying county from the wage 

index of each of the higher wage area(s) 

to which hospital workers commute. 

Step 2. Divide the number of hospital 

employees residing in the qualifying 

county who are employed in such 

higher wage index area by the total 

number of hospital employees residing 

in the qualifying county who are 

employed in any higher wage index 

area. For each of the higher wage index 

areas, multiply this result by the result 

obtained in Step 1. 

Step 3. Sum the products resulting 

from Step 2 (if the qualifying county has 

workers commuting to more than one 

higher wage index area). 

Step 4. Multiply the result from Step 

3 by the percentage of hospital 

employees who are residing in the 

qualifying county and who are 

employed in any higher wage index 

area. 

These adjustments will be effective 

for each county for a period of 3 fiscal 

years. For example, hospitals that 

received the adjustment for the first 

time in FY 2008 will be eligible to retain 

the adjustment for FY 2009. For 

hospitals in newly qualified counties, 

adjustments to the wage index are 

effective for 3 years, beginning with 

discharges occurring on or after October 

1, 2008. 

Hospitals receiving the wage index 

adjustment under section 1886(d)(13)(F) 

of the Act are not eligible for 

reclassification under sections 

1886(d)(8) or (d)(10) of the Act unless 

they waive the out-migration 

adjustment. Consistent with our FY 

2005, 2006, 2007, and 2008 IPPS final 

rules, we are specifying that hospitals 

redesignated under section 1886(d)(8) of 

the Act or reclassified under section 

1886(d)(10) of the Act will be deemed 

to have chosen to retain their 

redesignation or reclassification. Section 

1886(d)(10) hospitals that wish to 

receive the out-migration adjustment, 

rather than their reclassification, had to 


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follow the termination/withdrawal 

procedures specified in 42 CFR 412.273 

and section III.I.3. of the preamble of the 

proposed rule. Otherwise, they were 

deemed to have waived the outmigration adjustment. Hospitals 

redesignated under section 1886(d)(8) of 

the Act were deemed to have waived the 

out-migration adjustment, unless they 

explicitly notified CMS within 45 days 

from the publication of the proposed 

rule that they elected to receive the outmigration adjustment instead. 

(However, we refer readers to section 

III.I.7. of the preamble of this final rule 

for special rules for hospitals in areas 

affected by section 124 of Pub. L. 110–

275.) 

Table 4J in the Addendum to this 

final rule lists the out-migration wage 

index adjustments for FY 2009. A 

revised table 4J will be published in a 

separate Federal Register notice, as 

explained in section III.I.7. of this 

preamble. Hospitals that are not 

otherwise reclassified or redesignated 

under section 1886(d)(8) or section 

1886(d)(10) of the Act (or who receive 

certain special reclassifications or 

exceptions under section 124 of Pub. L. 

110–275) will automatically receive the 

listed adjustment. In accordance with 

the procedures discussed above, except 

as discussed in section III.I.7. of the 

preamble of this final rule, 

redesignated/reclassified hospitals are 

deemed to have waived the outmigration adjustment unless CMS was 

otherwise notified within the necessary 

timeframe. In addition, hospitals 

eligible to receive the out-migration 

wage index adjustment and that 

withdrew their application for 

reclassification should receive the wage 

index adjustment listed in the final 

Table 4J (a tentative Table 4J is included 

in the Addendum to this final rule but 

will be updated in the separate Federal 

Register notice discussed in section 

III.I.7. of this preamble). 

K. Process for Requests for Wage Index 

Data Corrections 

The preliminary, unaudited 

Worksheet S–3 wage data and 

occupational mix survey data files for 

the FY 2009 wage index were made 

available on October 5, 2007, through 

the Internet on the CMS Web site at: 

http://www.cms.hhs.gov/ 

AcuteInpatientPPS/WIFN/ 

list.asp#TopOfPage. 

In the interest of meeting the data 

needs of the public, beginning with the 

proposed FY 2009 wage index, we 

posted an additional public use file on 

our Web site that reflects the actual data 

that are used in computing the proposed 

wage index. The release of this new file 

did not alter the current wage index 

process or schedule. We notified the 

hospital community of the availability 

of these data as we do with the current 

public use wage data files through our 

Hospital Open Door forum. We 

encouraged hospitals to sign up for 

automatic notifications of information 

about hospital issues and the scheduling 

of the Hospital Open Door forums at: 

http://www.cms.hhs.gov/ 

OpenDoorForums/. 

In a memorandum dated October 5, 

2007, we instructed all fiscal 

intermediaries/MACs to inform the IPPS 

hospitals they service of the availability 

of the wage index data files and the 

process and timeframe for requesting 

revisions (including the specific 

deadlines listed below). We also 

instructed the fiscal intermediaries/ 

MACs to advise hospitals that these data 

were also made available directly 

through their representative hospital 

organizations. 

If a hospital wished to request a 

change to its data as shown in the 

October 5, 2007 wage and occupational 

mix data files, the hospital was to 

submit corrections along with complete, 

detailed supporting documentation to 

its fiscal intermediary/MAC by 

December 7, 2007. Hospitals were 

notified of this deadline and of all other 

possible deadlines and requirements, 

including the requirement to review and 

verify their data as posted on the 

preliminary wage index data files on the 

Internet, through the October 5, 2007 

memorandum referenced above. 

In the October 5, 2007 memorandum, 

we also specified that a hospital 

requesting revisions to its first and/or 

second quarter occupational mix survey 

data was to copy its record(s) from the 

CY 2006 occupational mix preliminary 

files posted to our Web site in October, 

highlight the revised cells on its 

spreadsheet, and submit its 

spreadsheet(s) and complete 

documentation to its fiscal 

intermediary/MAC no later than 

December 7, 2007. 

The fiscal intermediaries (or, if 

applicable, the MACs) notified the 

hospitals by mid-February 2008 of any 

changes to the wage index data as a 

result of the desk reviews and the 

resolution of the hospitals’ earlyDecember revision requests. The fiscal 

intermediaries/MACs also submitted the 

revised data to CMS by mid-February 

2008. CMS published the proposed 

wage index public use files that 

included hospitals’ revised wage index 

data on February 25, 2008. In a 

memorandum also dated February 25, 

2008, we instructed fiscal 

intermediaries/MACs to notify all 

hospitals regarding the availability of 

the proposed wage index public use 

files and the criteria and process for 

requesting corrections and revisions to 

the wage index data. Hospitals had until 

March 11, 2008, to submit requests to 

the fiscal intermediaries/MACs for 

reconsideration of adjustments made by 

the fiscal intermediaries/MACs as a 

result of the desk review, and to correct 

errors due to CMS’s or the fiscal 

intermediary’s (or, if applicable, the 

MAC’s) mishandling of the wage index 

data. Hospitals were also required to 

submit sufficient documentation to 

support their requests. 

After reviewing requested changes 

submitted by hospitals, fiscal 

intermediaries/MACs were required to 

transmit any additional revisions 

resulting from the hospitals’

reconsideration requests by April 14, 

2008. The deadline for a hospital to 

request CMS intervention in cases 

where the hospital disagreed with the 

fiscal intermediary’s (or, if applicable, 

the MAC’s) policy interpretations was 

April 21, 2008. 

Hospitals were given the opportunity 

to examine Table 2 in the Addendum to 

the proposed rule. Table 2 in the 

Addendum to the proposed rule 

contained each hospital’s adjusted 

average hourly wage used to construct 

the wage index values for the past 3 

years, including the FY 2005 data used 

to construct the proposed FY 2009 wage 

index. We noted that the hospital 

average hourly wages shown in Table 2 

only reflected changes made to a 

hospital’s data and transmitted to CMS 

by February 29, 2008. 

We released the final wage index data 

public use files in early May 2008 on 

the Internet at http://www.cms.hhs.gov/ 

AcuteInpatientPPS/WIFN/ 

list.asp#TopOfPage. The May 2008 

public use files were made available 

solely for the limited purpose of 

identifying any potential errors made by 

CMS or the fiscal intermediary/MAC in 

the entry of the final wage index data 

that resulted from the correction process 

described above (revisions submitted to 

CMS by the fiscal intermediaries/MACs 

by April 14, 2008). If, after reviewing 

the May 2008 final files, a hospital 

believed that its wage or occupational 

mix data were incorrect due to a fiscal 

intermediary/MAC or CMS error in the 

entry or tabulation of the final data, the 

hospital had to send a letter to both its 

fiscal intermediary/MAC and CMS that 

outlined why the hospital believed an 

error existed and to provide all 

supporting information, including 

relevant dates (for example, when it first 

became aware of the error). CMS and the 

fiscal intermediaries (or, if applicable, 


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the MACs) had to receive these requests 

no later than June 9, 2008. 

Each request also had to be sent to the 

fiscal intermediary/MAC. The fiscal 

intermediary/MAC reviewed requests 

upon receipt and contacted CMS 

immediately to discuss any findings. 

At this point in the process, that is, 

after the release of the May 2008 wage 

index data files, changes to the wage 

and occupational mix data were only 

made only in those very limited 

situations involving an error by the 

fiscal intermediary/MAC or CMS that 

the hospital could not have known 

about before its review of the final wage 

index data files. Specifically, neither the 

fiscal intermediary/MAC nor CMS 

approved the following types of 

requests: 

• Requests for wage index data 

corrections that were submitted too late 

to be included in the data transmitted to 

CMS by fiscal intermediaries or the 

MACs on or before April 21, 2008. 

• Requests for correction of errors 

that were not, but could have been, 

identified during the hospital’s review 

of the February 25, 2008 wage index 

public use files. 

• Requests to revisit factual 

determinations or policy interpretations 

made by the fiscal intermediary or the 

MAC or CMS during the wage index 

data correction process. 

Verified corrections to the wage index 

data received timely by CMS and the 

fiscal intermediaries or the MACs (that 

is, by June 9, 2008) were incorporated 

into the final wage index in this FY 

2009 IPPS final rule, which will be 

effective October 1, 2008. 

We created the processes described 

above to resolve all substantive wage 

index data correction disputes before we 

finalize the wage and occupational mix 

data for the FY 2009 payment rates. 

Accordingly, hospitals that did not meet 

the procedural deadlines set forth above 

will not be afforded a later opportunity 

to submit wage index data corrections or 

to dispute the fiscal intermediary’s (or, 

if applicable the MAC’s) decision with 

respect to requested changes. 

Specifically, our policy is that hospitals 

that do not meet the procedural 

deadlines set forth above will not be 

permitted to challenge later, before the 

Provider Reimbursement Review Board, 

the failure of CMS to make a requested 

data revision. (See W. A. Foote 

Memorial Hospital v. Shalala, No. 99–

CV–75202–DT (E.D. Mich. 2001) and 

Palisades General Hospital v. 

Thompson, No. 99–1230 (D.D.C. 2003).) 

We refer readers also to the FY 2000 

final rule (64 FR 41513) for a discussion 

of the parameters for appealing to the 

PRRB for wage index data corrections. 

Again, we believe the wage index data 

correction process described above 

provides hospitals with sufficient 

opportunity to bring errors in their wage 

and occupational mix data to the fiscal 

intermediary’s (or, if applicable, the 

MAC’s) attention. Moreover, because 

hospitals had access to the final wage 

index data by early May 2008, they had 

the opportunity to detect any data entry 

or tabulation errors made by the fiscal 

intermediary or the MAC or CMS before 

the development and publication of the 

final FY 2009 wage index by August 1, 

2008, and the implementation of the FY 

2009 wage index on October 1, 2008. If 

hospitals availed themselves of the 

opportunities afforded to provide and 

make corrections to the wage and 

occupational mix data, the wage index 

implemented on October 1 should be 

accurate. Nevertheless, in the event that 

errors are identified by hospitals and 

brought to our attention after June 9, 

2008, we retain the right to make 

midyear changes to the wage index 

under very limited circumstances. 

Specifically, in accordance with 42 

CFR 412.64(k)(1) of our existing 

regulations, we make midyear 

corrections to the wage index for an area 

only if a hospital can show that: (1) The 

fiscal intermediary or the MAC or CMS 

made an error in tabulating its data; and 

(2) the requesting hospital could not 

have known about the error or did not 

have an opportunity to correct the error, 

before the beginning of the fiscal year. 

For purposes of this provision, ‘‘before 

the beginning of the fiscal year’’ means 

by the June 9th deadline for making 

corrections to the wage data for the 

following fiscal year’s wage index. This 

provision is not available to a hospital 

seeking to revise another hospital’s data 

that may be affecting the requesting 

hospital’s wage index for the labor 

market area. As indicated earlier, 

because CMS makes the wage index 

data available to hospitals on the CMS 

Web site prior to publishing both the 

proposed and final IPPS rules, and the 

fiscal intermediaries or the MAC notify 

hospitals directly of any wage index 

data changes after completing their desk 

reviews, we do not expect that midyear 

corrections will be necessary. However, 

under our current policy, if the 

correction of a data error changes the 

wage index value for an area, the 

revised wage index value will be 

effective prospectively from the date the 

correction is made. 

In the FY 2006 IPPS final rule (70 FR 

47385), we revised 42 CFR 412.64(k)(2) 

to specify that, effective on October 1, 

2005, that is beginning with the FY 2006 

wage index, a change to the wage index 

can be made retroactive to the beginning 

of the Federal fiscal year only when: (1) 

The fiscal intermediary (or, if 

applicable, the MAC) or CMS made an 

error in tabulating data used for the 

wage index calculation; (2) the hospital 

knew about the error and requested that 

the fiscal intermediary (or if applicable 

the MAC) and CMS correct the error 

using the established process and 

within the established schedule for 

requesting corrections to the wage index 

data, before the beginning of the fiscal 

year for the applicable IPPS update (that 

is, by the June 9, 2008 deadline for the 

FY 2009 wage index); and (3) CMS 

agreed that the fiscal intermediary (or if 

applicable, the MAC) or CMS made an 

error in tabulating the hospital’s wage 

index data and the wage index should 

be corrected. 

In those circumstances where a 

hospital requested a correction to its 

wage index data before CMS calculates 

the final wage index (that is, by the June 

9th deadline), and CMS acknowledges 

that the error in the hospital’s wage 

index data was caused by CMS’ or the 

fiscal intermediary’s (or, if applicable, 

the MAC’s) mishandling of the data, we 

believe that the hospital should not be 

penalized by our delay in publishing or 

implementing the correction. As with 

our current policy, we indicated that the 

provision is not available to a hospital 

seeking to revise another hospital’s data. 

In addition, the provision cannot be 

used to correct prior years’ wage index 

data; and it can only be used for the 

current Federal fiscal year. In other 

situations where our policies would 

allow midyear corrections, we continue 

to believe that it is appropriate to make 

prospective-only corrections to the wage 

index. 

We note that, as with prospective 

changes to the wage index, the final 

retroactive correction will be made 

irrespective of whether the change 

increases or decreases a hospital’s 

payment rate. In addition, we note that 

the policy of retroactive adjustment will 

still apply in those instances where a 

judicial decision reverses a CMS denial 

of a hospital’s wage index data revision 

request. 

L. Labor-Related Share for the Wage 

Index for FY 2009 

Section 1886(d)(3)(E) of the Act 

directs the Secretary to adjust the 

proportion of the national prospective 

payment system base payment rates that 

are attributable to wages and wagerelated costs by a factor that reflects the 

relative differences in labor costs among 

geographic areas. It also directs the 

Secretary to estimate from time to time 

the proportion of hospital costs that are 

labor-related: ‘‘The Secretary shall 


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adjust the proportion (as estimated by 

the Secretary from time to time) of 

hospitals’ costs which are attributable to 

wages and wage-related costs of the 

DRG prospective payment rates * * *’’. 

We refer to the portion of hospital costs 

attributable to wages and wage-related 

costs as the labor-related share. The 

labor-related share of the prospective 

payment rate is adjusted by an index of 

relative labor costs, which is referred to 

as the wage index. 

Section 403 of Public Law 108–173 

amended section 1886(d)(3)(E) of the 

Act to provide that the Secretary must 

employ 62 percent as the labor-related 

share unless this ‘‘would result in lower 

payments to a hospital than would 

otherwise be made.’’ However, this 

provision of Public Law 108–173 did 

not change the legal requirement that 

the Secretary estimate ‘‘from time to 

time’’ the proportion of hospitals’ costs 

that are ‘‘attributable to wages and 

wage-related costs.’’ We interpret this to 

mean that hospitals receive payment 

based on either a 62-percent laborrelated share, or the labor-related share 

estimated from time to time by the 

Secretary, depending on which laborrelated share resulted in a higher 

payment. 

We have continued our research into 

the assumptions employed in 

calculating the labor-related share. Our 

research involves analyzing the 

compensation share separately for urban 

and rural hospitals, using regression 

analysis to determine the proportion of 

costs influenced by the area wage index, 

and exploring alternative methodologies 

to determine whether all or only a 

portion of professional fees and 

nonlabor intensive services should be 

considered labor-related. 

In the FY 2006 IPPS final rule (70 FR 

47392), we presented our analysis and 

conclusions regarding the methodology 

for updating the labor-related share for 

FY 2006. We also recalculated a laborrelated share of 69.731 percent, using 

the FY 2002-based PPS market basket 

for discharges occurring on or after 

October 1, 2005. In addition, we 

implemented this revised and rebased 

labor-related share in a budget neutral 

manner, but consistent with section 

1886(d)(3)(E) of the Act, we did not take 

into account the additional payments 

that would be made as a result of 

hospitals with a wage index less than or 

equal to 1.0 being paid using a laborrelated share lower than the laborrelated share of hospitals with a wage 

index greater than 1.0. 

The labor-related share is used to 

determine the proportion of the national 

PPS base payment rate to which the area 

wage index is applied. In this final rule, 

as we proposed, we are not making any 

changes to the national average 

proportion of operating costs that are 

attributable to wages and salaries, fringe 

benefits, professional fees, contract 

labor, and labor intensive services. 

Therefore, we are continuing to use a 

labor-related share of 69.731 percent for 

discharges occurring on or after October 

1, 2008. Tables 1A and 1B in the 

Addendum to this final rule reflect this 

labor-related share. However, as noted 

in the Addendum, these figures are 

tentative only and will be revised as a 

result of section 124 of Public Law 110–

275 in a separate Federal Register 

notice to be published subsequent to 

this final rule. We note that section 403 

of Public Law 108–173 amended 

sections 1886(d)(3)(E) and 

1886(d)(9)(C)(iv) of the Act to provide 

that the Secretary must employ 62 

percent as the labor-related share unless 

this employment ‘‘would result in lower 

payments to a hospital than would 

otherwise be made.’’

As we proposed, we also are 

continuing to use a labor-related share 

for the Puerto Rico-specific 

standardized amounts of 58.7 percent 

for discharges occurring on or after 

October 1, 2008. Consistent with our 

methodology for determining the 

national labor-related share, we added 

the Puerto Rico-specific relative weights 

for wages and salaries, fringe benefits, 

contract labor, nonmedical professional 

fees, and other labor-intensive services 

to determine the labor-related share. 

Puerto Rico hospitals are paid based on 

75 percent of the national standardized 

amounts and 25 percent of the Puerto 

Rico-specific standardized amounts. For 

Puerto Rico hospitals, the national 

labor-related share will always be 62 

percent because the wage index for all 

Puerto Rico hospitals is less than 1.0. A 

Puerto Rico-specific wage index is 

applied to the Puerto Rico-specific 

portion of payments to the hospitals. 

The labor-related share of a hospital’s 

Puerto Rico-specific rate will be either 

62 percent or the Puerto Rico-specific 

labor-related share depending on which 

results in higher payments to the 

hospital. If the hospital has a Puerto 

Rico-specific wage index of greater than 

1.0, we will set the hospital’s rates using 

a labor-related share of 62 percent for 

the 25 percent portion of the hospital’s 

payment determined by the Puerto Rico 

standardized amounts because this 

amount will result in higher payments. 

Conversely, a hospital with a Puerto 

Rico-specific wage index of less than 1.0 

will be paid using the Puerto Ricospecific labor-related share of 58.7 

percent of the Puerto Rico-specific rates 

because the lower labor-related share 

will result in higher payments. The 

Puerto Rico labor-related share of 58.7 

percent for FY 2008 is reflected in the 

tentative Table 1C of the Addendum to 

this final rule. (As explained in this 

preamble and the Addendum to this 

final rule, section 124 of Pub. L. 119–

275 will require us to recalculate the 

final rates and publish such rates in a 

separate Federal Register notice.) 

IV. Other Decisions and Changes to the 

IPPS for Operating Costs and GME 

Costs 

A. Changes to the Postacute Care 

Transfer Policy (§ 412.4) 

1. Background 

Existing regulations at § 412.4(a) 

define discharges under the IPPS as 

situations in which a patient is formally 

released from an acute care hospital or 

dies in the hospital. Section 412.4(b) 

defines transfers from one acute care 

hospital to another. Section 412.4(c) 

establishes the conditions under which 

we consider a discharge to be a transfer 

for purposes of our postacute care 

transfer policy. In accordance with 

§ 412.4(f), in transfer situations, the 

transferring hospital is paid based on a 

per diem rate for each day of the stay, 

not to exceed the full MS–DRG payment 

that would have been made if the 

patient had been discharged without 

being transferred. 

The per diem rate paid to a 

transferring hospital is calculated by 

dividing the full MS–DRG payment by 

the geometric mean length of stay for 

the MS–DRG. Based on an analysis that 

showed that the first day of 

hospitalization is the most expensive 

(60 FR 5804), our policy generally 

provides for payment that is double the 

per diem amount for the first day, with 

each subsequent day paid at the per 

diem amount up to the full DRG 

payment (§ 412.4(f)(1)). Transfer cases 

are also eligible for outlier payments. 

The outlier threshold for transfer cases 

is equal to the fixed-loss outlier 

threshold for nontransfer cases (adjusted 

for geographic variations in costs), 

divided by the geometric mean length of 

stay for the MS–DRG, multiplied by the 

length of stay for the case plus one day. 

The purpose of the IPPS postacute care 

transfer payment policy is to avoid 

providing an incentive for a hospital to 

transfer patients to another hospital, a 

SNF, or home under a written plan of 

care for home health services early in 

the patients’ stay in order to minimize 

costs while still receiving the full MS–

DRG payment. The transfer policy 

adjusts the payments to approximate the 

reduced costs of transfer cases. 


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Beginning with the FY 2006 IPPS, the 

regulations at § 412.4 specified that, 

effective October 1, 2005, a DRG would 

be subject to the postacute care transfer 

policy if, based on Version 23.0 of the 

DRG Definitions Manual (FY 2006), 

using data from the March 2005 update 

of FY 2004 MedPAR file, the DRG meets 

the following criteria: 

• The DRG had a geometric mean 

length of stay of at least 3 days; 

• The DRG had at least 2,050 

postacute care transfer cases; and 

• At least 5.5 percent of the cases in 

the DRG were discharged to postacute 

care prior to the geometric mean length 

of stay for the DRG. 

In addition, if the DRG was one of a 

paired set of DRGs based on the 

presence or absence of a CC or major 

cardiovascular condition (MCV), both 

paired DRGs would be included if either 

one met the three criteria above. 

If a DRG met the above criteria based 

on the Version 23.0 DRG Definitions 

Manual and FY 2004 MedPAR data, we 

made the DRG subject to the postacute 

care transfer policy. We noted in the FY 

2006 final rule that we would not revise 

the list of DRGs subject to the postacute 

care transfer policy annually unless we 

made a change to a specific CMS DRG. 

We established this policy to promote 

certainty and stability in the postacute 

care transfer payment policy. Annual 

reviews of the list of CMS DRGs subject 

to the policy would likely lead to great 

volatility in the payment methodology 

with certain DRGs qualifying for the 

policy in one year, deleted the next 

year, only to be reinstated the following 

year. However, we noted that, over time, 

as treatment practices change, it was 

possible that some CMS DRGs that 

qualified for the policy will no longer be 

discharged with great frequency to 

postacute care. Similarly, we explained 

that there may be other CMS DRGs that 

at that time had a low rate of discharges 

to postacute care, but which might have 

very high rates in the future. 

The regulations at § 412.4 further 

specify that if a DRG did not exist in 

Version 23.0 of the DRG Definitions 

Manual or a DRG included in Version 

23.0 of the DRG Definitions Manual is 

revised, the DRG will be a qualifying 

DRG if it meets the following criteria 

based on the version of the DRG 

Definitions Manual in use when the 

new or revised DRG first became 

effective, using the most recent 

complete year of MedPAR data: 

• The total number of discharges to 

postacute care in the DRG must equal or 

exceed the 55th percentile for all DRGs; 

and 

• The proportion of short-stay 

discharges to postacute care to total 

discharges in the DRG exceeds the 55th 

percentile for all DRGs. A short-stay 

discharge is a discharge before the 

geometric mean length of stay for the 

DRG. 

A DRG also is a qualifying DRG if it 

is paired with another DRG based on the 

presence or absence of a CC or MCV that 

meets either of the above two criteria. 

The MS–DRGs that we adopted for FY 

2008 were a significant revision to the 

CMS DRG system (72 FR 47141). 

Because the MS–DRGs were not 

reflected in Version 23.0 of the DRG 

Definitions Manual, consistent with 

§ 412.4, we established policy to 

recalculate the 55th percentile 

thresholds in order to determine which 

MS–DRGs would be subject to the 

postacute care transfer policy (72 FR 

47186 through 47188). Further, under 

the MS–DRGs, the subdivisions within 

the base DRGs are different than those 

under the previous CMS DRGs. Unlike 

the CMS DRGs, the MS–DRGs are not 

divided based on the presence or 

absence of a CC or MCV. Rather, the 

MS–DRGs have up to three subdivisions 

based on: (1) The presence of an MCC; 

(2) the presence of a CC; or (3) the 

absence of either an MCC or a CC. 

Consistent with our previous policy 

under which both CMS DRGs in a CC/ 

non-CC pair were qualifying DRGs if 

one of the pair qualified, we established 

that each MS–DRG that shared a base 

MS–DRG will be a qualifying DRG if one 

of the MS–DRGs that shared the base 

DRG qualifies. We revised 

§ 412.4(d)(3)(ii) to codify this policy. 

Similarly, the adoption of the MS–

DRGs also necessitated a revision to one 

of the criteria used in § 412.4(f)(5) of the 

regulations to determine whether a DRG 

meets the criteria for payment under the 

‘‘special payment methodology.’’ Under 

the special payment methodology, a 

case subject to the special payment 

methodology that is transferred early to 

a postacute care setting will be paid 50 

percent of the total IPPS payment 

(excluding any outlier payments and 

add-on payments for new technology) 

plus the average per diem for the first 

day of the stay. In addition, the hospital 

will receive 50 percent of the per diem 

amount for each subsequent day of the 

stay, up to the full MS–DRG payment 

amount. A CMS DRG was subject to the 

special payment methodology if it met 

the criteria in the regulations under 

§ 412.4(f)(5). Section 412.4(f)(5)(iv) 

specifies that, for discharges occurring 

on or after October 1, 2005, and prior to 

October 1, 2007, if a DRG meets the 

criteria specified under § 412.4(f)(5)(i) 

through (f)(5)(iii), any DRG that is 

paired with it based on the presence or 

absence of a CC or MCV is also subject 

to the special payment methodology. 

Given that this criterion was no longer 

applicable under the MS–DRG system, 

in the FY 2008 IPPS final rule with 

comment period, we added a new 

§ 412.4(f)(6) (42 FR 47188 and 47410). 

Section 412.4(f)(6) provides that, for 

discharges on or after October 1, 2007, 

if an MS–DRG meets the criteria 

specified under §§ 412.4(f)(6)(i) through 

(f)(6)(iii), any other MS–DRG that is part 

of the same MS–DRG group is also 

subject to the special payment 

methodology. We updated this criterion 

so that it conformed to the changes 

associated with adopting MS–DRGs for 

FY 2008. The revision makes an MS–

DRG subject to the special payment 

methodology if it shares a base MS–DRG 

with an MS–DRG that meets the criteria 

for receiving the special payment 

methodology. 

Section 1886(d)(5)(J) of the Act 

provides that, effective for discharges on 

or after October 1, 1998, a ‘‘qualified 

discharge’’ from one of DRGs selected 

by the Secretary to a postacute care 

provider would be treated as a transfer 

case. This section required the Secretary 

to define and pay as transfers all cases 

assigned to one of the DRGs selected by 

the Secretary, if the individuals are 

discharged to one of the following 

postacute care settings: 

• A hospital or hospital unit that is 

not a subsection 1886(d) hospital. 

(Section 1886(d)(1)(B) of the Act 

identifies the hospitals and hospital 

units that are excluded from the term 

‘‘subsection (d) hospital’’ as psychiatric 

hospitals and units, rehabilitation 

hospitals and units, children’s hospitals, 

long-term care hospitals, and cancer 

hospitals.) 

• A skilled nursing facility (as 

defined at section1819(a) of the Act). 

• Home health services provided by a 

home health agency, if the services 

relate to the condition or diagnosis for 

which the individual received inpatient 

hospital services, and if the home health 

services are provided within an 

appropriate period (as determined by 

the Secretary). In the FY 1999 IPPS final 

rule (63 FR 40975 through 40976 and 

40979 through 40981), we specified that 

a patient discharged to home would be 

considered transferred to postacute care 

if the patient received home health 

services within 3 days after the date of 

discharge. In addition, in the FY 1999 

IPPS final rule, we did not include 

patients transferred to a swing-bed for 

skilled nursing care in the definition of 

postacute care transfer cases (63 FR 

40977). 


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2. Policy Change Relating to Transfers to 

Home with a Written Plan for the 

Provision of Home Health Services 

As noted above, in the FY 1999 IPPS 

final rule (63 FR 40975 through 40976 

and 40979 through 40981), we 

determined that 3 days is an appropriate 

period within which home health 

services should begin following a 

beneficiary’s discharge to the home in 

order for the discharge to be considered 

a ‘‘qualified discharge’’ subject to the 

payment adjustment for postacute care 

transfer cases. In that same final rule, 

we noted that we would monitor 

whether 3 days would remain an 

appropriate timeframe. 

Section 1886(d)(5)(J)(ii)(III) of the Act 

provides that the discharge of an 

individual who receives home health 

services upon discharge will be treated 

as a transfer if ‘‘such services are 

provided within an appropriate period 

(as determined by the Secretary. * * *’’. 

The statute thus confers upon the 

Secretary the authority to determine an 

appropriate timeframe for the 

application of the postacute care 

transfer policy in cases where home 

health services commence subsequent to 

discharge from an acute care hospital. In 

the FY 1999 final IPPS rule, we 

established the policy that the postacute 

care transfer policy would apply to 

cases in which the home health care 

begins within 3 days after the date of 

discharge from an acute care hospital. 

We noted in that rule that we did not 

believe that it was appropriate to limit 

the transfer definition to cases in which 

home health care begins on the same 

day as the patient is discharged from the 

hospital. We observed that data 

indicated that less than 8 percent of 

discharged patients who receive home 

health care begin receiving those 

services on the date of discharge. We 

stated that we did not believe that it was 

reasonable to expect that patients who 

are discharged later in the day would 

receive a home health visit that same 

day. Furthermore, we believed that the 

financial incentive to delay needed 

home health care for only a matter of 

hours would be overwhelming if we 

limited the timeframe to one day. At the 

time of that final rule, we explained that 

we believed that 3 days would be a 

more appropriate timeframe because it 

would mitigate the incentive to delay 

home health services to avoid the 

application of the postacute care 

transfer policy, and because a 3-day 

timeframe was consistent with existing 

patterns of care. 

In that final rule, we also noted that 

a number of commenters had raised 

issues and questions concerning the 

proposal to adopt 3 days as the 

appropriate timeframe for the 

application of the postacute care 

transfer policy in these cases. While 

most of the commenters advocated 

shorter timeframes, on the grounds that 

postacute care beginning 3 days after a 

discharge should not be considered a 

substitute for inpatient hospital care, 

others suggested that a 3-day window 

might still allow for needlessly 

prolonged hospital care or delayed 

home health in order to avoid the 

application of the postacute care 

transfer policy. Although MedPAC 

agreed with the commenters who 

asserted that home health care services 

furnished after a delay of more than one 

day may not necessarily be regarded as 

substituting for inpatient acute care, 

they also noted that a 3-day window 

allows for the fact that most home 

health patients do not receive care every 

day, as well as for those occasions in 

which there may be a delay in arranging 

for the provision of planned care (for 

example, an intervening weekend). 

MedPAC also stated that a shorter 

period may create a stronger incentive 

to delay the provision of necessary care 

beyond the window so that the hospital 

will receive the full DRG payment. In 

the light of these comments and, in 

particular, of the concern that a 3-day 

timeframe still allowed for some 

incentive to delay necessary home 

health services in order to avoid the 

application of the postacute care 

transfer policy, we indicated that we 

would continue to monitor this policy 

in order to track any changes in 

practices that may indicate the need for 

revising the window. 

Since the adoption of this policy in 

FY 1999, we have continued to receive 

reports that some providers discharge 

patients prior to the geometric mean 

length of stay but intentionally delay 

home health services beyond 3 days 

after the acute hospital discharge in 

order to avoid the postacute care 

transfer payment adjustment policy. 

These reports, and the concerns 

expressed by some commenters in FY 

1999 about the adequacy of a 3-day 

window to reduce such incentives, have 

prompted us to examine the available 

data concerning the initiation and 

program payments for home health care 

subsequent to discharge from postacute 

care. 

We merged the FY 2004 MedPAR file 

with postacute care bill files matching 

beneficiary identification numbers and 

discharge and admission dates and 

looked at the 10 DRGs that were subject 

to the postacute care transfer policy 

from FYs 1999 through 2003 (DRG 14 

(Intracranial Hemorrhage and Stroke 

with Infarction (formerly ‘‘Specific 

Cerebrovascular Disorders Except 

Transient Ischemic Attack’’)); DRG 113 

(Amputation for Circulatory System 

Disorders Except Upper Limb and Toe); 

DRG 209 (Major Joint Limb 

Reattachment Procedures of Lower 

Extremity); DRG 210 (Hip and Femur 

Procedures Except Major Joint 

Procedures Age ≤17 with CC); DRG 211 

(Hip and Femur Procedures Except 

Major Joint Procedures Age ≤17 without 

CC); DRG 236 (Fractures of Hip and 

Pelvis); DRG 263 (Skin Graft and/or 

Debridement for Skin Ulcer or Cellulitis 

with CC); DRG 264 (Skin Graft and/or 

Debridement for Skin Ulcer or Cellulitis 

without CC); DRG 429 (Organic 

Disturbances and Mental Retardation); 

and DRG 483 (Tracheostomy with 

Mechanical Ventilation 96+ Hours or 

Principal Diagnosis Except Face, Mouth, 

and Neck Diagnoses (formerly 

‘‘Tracheostomy Except for Face, Mouth, 

and Neck Diagnoses’’)). We selected the 

original 10 ‘‘qualified DRGs’’ because 

they were the DRGs to which the 

postacute care transfer policy applied 

for FYs 1999 through 2003 and because 

we expect that trends that we found in 

the data with those DRGs would be 

likely to accurately reflect provider 

practices after the inception of the 

postacute care transfer policy. We 

expect that provider practices for the 

original 10 DRGs would be consistent 

even with the expansion of the DRGs 

that are subject to the postacute care 

transfer policy. We note that providers 

may have even a greater incentive to 

delay the initiation of home health care 

in an effort to avoid the postacute care 

transfer policy now that there are more 

DRGs to which the policy applies. We 

compared data on home health services 

provided to patients who were 

discharged prior to the geometric mean 

length of stay to patients who were 

discharged at or beyond the geometric 

mean length of stay. For purposes of this 

analysis, we assumed that home health 

was the first discharge designation from 

the acute care hospital setting. 

The data showed that, on average, the 

Medicare payment per home health visit 

was higher for patients who were 

discharged prior to the geometric mean 

length of stay (as compared to patients 

who were discharged at or beyond the 

geometric mean length of stay). 

Specifically, we found that average 

Medicare payments per home health 

care visit were consistently higher for 

patients discharged prior to the 

geometric mean length of stay than for 

patients discharged at or after the 

geometric mean length of stay. The 

average home health care per visit 


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payments for patients treated for the 

relevant DRGs and discharged before the 

geometric mean length of stay are $204 

when the initiation of home health care 

began on the second day after discharge, 

$199 on the third day, and $182 on the 

sixth day, compared to $177, $163, and 

$171, respectively for patients 

discharged on or after the geometric 

mean length of stay. Furthermore, the 

ratio of the payments for these two 

groups increased from 1.16 on the third 

day after discharge to 1.22 on the fourth 

day, before falling again to 1.04, 1.07, 

and 1.08 on the fifth, sixth, and seventh 

days. This suggested to us the 

possibility that home health care for 

some relatively sicker patients is being 

delayed until just beyond the 3-day 

window during which the postacute 

care transfer policy applies. 

In the light of these data, we indicated 

in the FY 2009 IPPS proposed rule (73 

FR 23641) that we believed it was 

appropriate to propose extending the 

applicable timeframe in order to reduce 

the incentive for providers to delay 

home health care when discharging 

patients from the acute care setting. 

Further examination of the data 

indicated that the average per day 

Medicare payments for home health 

care for those patients, in the DRGs to 

which the postacute care transfer policy 

applies, who are discharged from the 

hospital prior to the geometric mean 

length of stay, stabilizes at a somewhat 

lower amount when the initiation of 

home health visits begins on the seventh 

and subsequent days after discharge. 

Specifically, average payments per visit 

for this group fall from $182 when home 

health services began on the sixth day 

after the acute care hospital discharge to 

$174 on the seventh day, and then 

remain relatively steady at $171, $177, 

and $172 on the eighth, ninth, and tenth 

days. This suggested to us that a 7-day 

period might be an appropriate point at 

which to establish a new timeframe. 

As a consequence of this analysis, in 

the proposed rule, we proposed to 

revise the regulations at § 412.4(c)(3) to 

extend the timeframe to within 7 days 

after the date of discharge to home 

under a written plan for the provision 

of home health services, effective 

October 1, 2008. We stated that we 

believed extending the applicable 

timeframe would lessen the incentive 

for providers to delay the start of home 

health care after discharging patients 

from the acute care hospital setting. We 

also indicated that during the comment 

period on the proposed rule, we 

planned to continue to search our data 

on postacute care discharges to home 

health services. We welcomed 

comments and suggestions on other data 

analyses that could be performed to 

determine an appropriate timeframe for 

which the postacute care transfer policy 

would apply. 

In addition to the reasons noted 

above, we stated that we believed that 

7 days is currently an appropriate 

timeframe because we believe that it 

accommodates current practices and it 

is sufficiently long enough to lessen the 

likelihood that providers would delay 

the initiation of necessary home health 

services. At the same time, we stated 

that we believed that 7 days is narrow 

enough that we would still expect the 

majority of the home health services to 

be related to the condition to which the 

acute inpatient hospital stay was 

necessary. Further, we noted that there 

may be some cases for which it is not 

clinically appropriate to begin home 

health services immediately following 

an acute care discharge, and that even 

when home health services are 

clinically appropriate sooner than 

within 7 days of acute care discharge, 

home health services may not be 

immediately available. 

We note that, as we stated in the FY 

2000 IPPS final rule (65 FR 47081), if 

the hospital’s continuing care plan for 

the patient is not related to the purpose 

of the inpatient hospital admission, a 

condition code 42 must be entered on 

the claim. In addition, if the proposed 

policy were to be adopted and the 

continuing care plan is related to the 

purpose of the inpatient hospital 

admission but begins after 7 days after 

discharge, a condition code 43 would 

have to be entered on the claim. Under 

the present policy, condition code 43 

applies when the home health services 

begin within 3 days after the date of 

discharge from the acute care hospital. 

The presence of either of these 

condition codes in conjunction with 

patient status discharge code 06 

(Discharged/Transferred to Home under 

Care of Organized Home Health Service 

Organization in Anticipation of Covered 

Skilled Care) will result in full payment 

rather than the transfer payment 

amount. 

We received many comments on this 

proposal. The commenters included 

hospitals, hospital industry 

associations, HHAs, representatives of 

the home health care industry, and 

MedPAC. The comments were almost 

uniformly opposed to the proposal. As 

we discuss in more detail below, we are 

not proceeding with finalizing this 

proposal. 

Comment: Some commenters 

expressed opposition to the proposal on 

the grounds that the postacute care 

transfer policy in itself is inconsistent 

with the principles of a PPS. The 

commenters emphasized the nature of a 

PPS as a system of averages, designed to 

reward hospitals for the efficient 

provision of services. Under a PPS, they 

asserted, cases with longer-than-average 

lengths of stay tend to be paid less than 

costs, while cases with shorter-thanaverage stays tend to be paid more than 

costs. These commenters argued that, in 

general, the postacute care transfer 

policy penalizes hospitals for the 

efficient treatment of patients. 

Expansion of the postacute care transfer 

policy, they opined, would thus further 

undercut the basic principles and 

objectives of a PPS and only penalize 

hospitals further. 

Response: We disagree that the 

proposed postacute care transfer policy 

violates the principles of a PPS. The 

postacute care transfer provision is 

mandated by statute, and in previous 

rules we have thoroughly discussed the 

sound policy reasons for including such 

a provision within the IPPS. (We refer 

readers to previous IPPS final rules, 

including the rules at 63 FR 40975 

through 40976 and 63 FR 40979 through 

40981, for more details.) Therefore, we 

do not believe that objections to the 

postacute care transfer policy in general 

provide any rationale for refraining from 

expansions and revisions to the policy, 

provided those changes are in and of 

themselves warranted by sound policy 

considerations. 

Comment: Many commenters opposed 

the proposal for reasons related to the 

merits of the proposal itself. These 

commenters presented a number of 

arguments against the proposal. Some 

commenters asserted that the data CMS 

used to support the proposal were 

outdated and incomplete. Other 

commenters argued that home health 

care that begins 4 or more days after the 

date of discharge is unlikely to be a 

continuation of acute-level care. Some 

commenters asserted that it is 

physicians, not hospitals, who typically 

order home health services for patients. 

Therefore, they contended, hospitals 

should not be financially penalized for 

decisions made outside of their control. 

Other commenters suggested that 

physicians be held responsible for those 

decisions through the physician fee 

schedule instead. 

Response: In response to the comment 

that we used outdated and incomplete 

data in developing our proposal, we 

note that, for the years for which the 

analysis was conducted (the data were 

based on claims from FYs 1999 through 

2003), there were only 10 DRGs subject 

to the postacute care transfer policy. We 

continue to believe, as we stated in the 

proposed rule, that the trends we found 

when there were only 10 DRGs subject 


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to the policy would be consistent with 

the trends that will be found in more 

recent data. Furthermore, we believe 

that these trends may be even more 

pronounced in light of the fact that there 

are now many more MS–DRGs (273) 

subject to the postacute care transfer 

policy. 

We also do not find persuasive the 

comments arguing that because 

physicians typically order home health 

care rather than hospitals, decisions 

regarding the commencement of the 

provision of home health care are made 

outside of the hospital’s control. We 

note that, even under the current 3-day 

policy, physicians, not hospitals, 

typically discharge patients from the 

acute care hospital setting and that the 

postacute care transfer policy applies 

when a ‘‘qualified’’ discharge occurs 

prior to the geometric mean length of 

stay and the hospital receives a reduced 

payment even under the current policy. 

Furthermore, because the physician 

who orders both the early discharge and 

the initiation of home health care for the 

patient is typically employed, 

contracted, or at least, has privileges at 

the affected hospital, we believe that the 

hospital has a relationship with the 

physician and should have knowledge 

of the physician’s practices. Therefore, 

we disagree with the contention that the 

hospital is being inappropriately 

penalized for actions outside its control. 

Similarly, in response to the comment 

related to reducing physician payments, 

we note that section 1886(d)(5)(J)(ii)(III) 

of the Act requires that the postacute 

care transfer policy apply to acute care 

hospital payments under the IPPS, and 

not to physicians under the Medicare 

PFS. Therefore, we disagree with the 

contention that physician payments 

under the Medicare PFS should be 

affected by this provision. We also note 

that it is the hospital, not the physician, 

that stands to gain financially from the 

early discharge of a patient. 

We also note that the commenters 

who expressed the concern that home 

health care initiated more than 4 days 

after the discharge would be unrelated 

to the acute care stay failed to mention 

an important feature of the postacute 

care transfer policy. Specifically, it is 

important to recognize that CMS allows 

hospitals, through use of a condition 

code on the claim, to bypass the 

reduced transfer payment for home 

health care that is unrelated to the acute 

care stay. Therefore, we disagree that 

acute hospitals are financially penalized 

for appropriate transfers to home health 

that are unrelated to the acute care stay. 

Comment: Some commenters claimed 

that it is administratively burdensome 

for hospitals to track whether patients 

received home health care services up to 

7 days after they have been discharged 

from the hospital, particularly for 

hospitals that submit their claims 

within 7 days of discharge. In addition, 

these and other commenters argued that 

CMS should not implement a change to 

the postacute care transfer policy in 

light of recent changes made to the 

home health PPS in CY 2008, and in the 

light of our proposal to implement the 

CARE tool demonstration that will 

examine differences in costs and 

outcomes across postacute care settings 

(discussed in section IV.B. of this 

preamble). 

Response: We have stated in prior 

Federal Register notices and in provider 

education articles that, in most 

instances, we would expect the provider 

to be aware of the postacute care that its 

patient would receive. We also note that 

providers are allowed to adjust claims 

after they have been submitted, 

including making adjustments for the 

purpose of reflecting any home health 

services that are provided subsequent to 

the acute care hospital discharge. 

Providers made similar arguments 

when we adopted the 3-day window in 

FY 1999, which we responded to at that 

time. We refer readers to the FY 1999 

IPPS final rule (63 FR 40979 through 

40980) for a complete discussion. We 

have not become aware of any 

widespread pattern of providers being 

unaware of the postacute care received 

by recently discharged patients, 

although, as we mentioned in the FY 

1999 IPPS final rule (63 FR 40980), 

there may be occasional instances in 

which the hospital is unaware that a 

physician has ordered home health 

services for a recently discharged 

patient. Therefore, we are not persuaded 

by these comments. 

In response to the comment related to 

recent changes in the home health PPS, 

we again note that the postacute care 

transfer policy applies to acute IPPS 

hospital payments, not to home health 

PPS payments. Based on information 

provided by the commenter (which did 

not point out any specific changes in the 

home health PPS that could potentially 

have an effect on the postacute care 

transfer policy), it is unclear exactly 

how changes to home health payments 

might have an effect on payments made 

under the postacute care transfer policy 

provision. Additionally, the commenter 

did not provide specific information on 

how the CARE Tool demonstration is 

related to postacute care transfer 

payments to acute care hospitals, and 

we see no evidence that one should 

effect the other. 

Comment: One commenter 

acknowledged that it had received 

anecdotal reports that some hospitals 

instructed physicians to delay the 

initiation of home health services until 

after 3 days. However, the commenter 

argued that expansion of the existing 

policy would not alter this behavior. 

Other commenters argued that there are 

legitimate reasons that the start of home 

health care services may be delayed, 

including: Patient/family preferences, 

availability of home health care 

providers, and insurance coverage. 

Specifically, commenters stated that 

patients may request that their primary 

care physician (someone other than the 

physician taking care of them while 

they were in the hospital) arrange for 

home health services. In addition, it is 

not uncommon for a patient to be 

discharged home from the hospital, then 

to visit their physician a day or two 

later, only to have the physician order 

home health services that take another 

day or two to begin—again pushing the 

start of home health services beyond the 

3-day window. These commenters 

contended that hospitals should not be 

‘‘penalized’’ because of these legitimate 

delays. 

Response: We agree that there may be 

legitimate delays in the initiation of 

home health care services subsequent to 

an acute care hospital discharge. 

However, the fact that the delays are 

legitimate does not establish that it is 

inappropriate to adjust payments to 

account for the discharge into postacute 

care. There may be legitimate delays in 

the initiation of home health care 

services even under the 3-day window, 

but the postacute transfer policy still 

applies in that situation. This is because 

one of the primary objectives of the 

postacute care transfer policy is to pay 

providers appropriately for services 

rendered. When the care of a patient is 

shared between an acute care hospital 

provider and home health care services 

within 3 days of the acute care 

discharge, we believe that it is 

appropriate to pay the acute care 

hospital a reduced payment because it 

only provided services for a shorter than 

average amount of time. Therefore, we 

believe that these comments lend 

support to the continued need to 

monitor the current policy to see if there 

are trends of delays in the initiation of 

home health services, whether such 

delays are ‘‘legitimate’’ or not. As we 

discuss below, we are not proceeding 

with finalizing this proposal. We will 

continue to consider whether the 3-day 

window is appropriate in light of all the 

relevant data. 

Comment: MedPAC commented that 

it does not believe that the data 

presented in the proposed rule support 

an expansion of the policy from 3 days 


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to 7 days. MedPAC conducted its own 

analysis of 2005 and 2006 data and 

commented that its data do not support 

an expansion. In particular, MedPAC 

pointed out that its data provide no 

evidence of a spike in home health use 

4 days after discharge, which it would 

have expected to see if there was 

significant gaming under our current 3- 

day window policy. In addition, 

MedPAC found that the distribution of 

claims by the number of days between 

hospital discharge and the beginning of 

home heath care is similar between 

DRGs subject to the postacute care 

transfer policy and those that are not 

subject to the postacute care transfer 

policy, suggesting that there has not 

been significant gaming of the system 

under the current 3-day window. 

MedPAC, therefore, concluded that 

CMS should provide stronger support 

for why the change is needed. Other 

commenters also suggested that CMS 

analyze the data more thoroughly and 

make a proposal based on that analysis 

in FY 2010. 

Response: We have not yet received 

MedPAC’s data analysis in support of its 

conclusion that there is no evidence of 

a spike in home health care services that 

begin after 4 days of discharge from the 

acute care hospital setting. Similarly, we 

have not seen the specific data 

indicating that there is no significant 

difference between the number of days 

between hospital discharge and 

postacute care between those DRGs 

subject to the postacute care transfer 

policy. Therefore, we are unable to 

compare their data with our own data, 

which have shown some evidence of a 

spike in home heath care services 4 days 

after discharge. However, we agree with 

MedPAC that it would be preferable to 

defer proceeding with this or a similar 

proposal until stronger evidence (that is, 

data) is available in support of the 

change. We also agree with the other 

commenters who suggested that it is 

more prudent at this time to continue 

studying this issue than to proceed with 

finalizing our proposal to extend the 

current 3-day window to 7 days. 

However, we remain concerned that a 

relatively brief window, such as 3 days, 

may create a strong incentive to delay 

the provision of necessary care beyond 

the window so that the hospital will 

receive the full MS–DRG payment. 

Therefore, we will continue to monitor 

this policy in order to track any changes 

in practices that may indicate the need 

for revising the window. We may 

proceed with this proposal or another 

proposal to address the issue in a 

subsequent rulemaking cycle. 

After consideration of the public 

comments received, we are not adopting 

as final our proposed change to the 

regulations at § 412.4(c)(3) relating to 

the proposed 7-day window for 

postacute care transfers to home health 

care services. As we indicated above, we 

will continue to monitor the existing 

policy and may address the issue in a 

subsequent rulemaking. 

3. Evaluation of MS–DRGs Under 

Postacute Care Transfer Policy for FY 

2009 

For FY 2009, we did not propose to 

make any changes to the criteria by 

which an MS–DRG would qualify for 

inclusion in the postacute care transfer 

policy. However, because we proposed 

to revise some existing MS–DRGs and to 

add one new MS–DRG (discussed under 

section II.G. of this preamble), we 

proposed to evaluate those MS–DRGs 

under our existing postacute care 

transfer criteria in order to determine 

whether any of the revised or new MS–

DRGs will meet the postacute care 

transfer criteria for FY 2009. Therefore, 

we indicated that, for 2009, we were 

evaluating MS–DRGs 001, 002, 215, 245, 

901 through 909, 913 through 923, 955 

through 959, and 963 through 965. We 

noted that any revisions made would 

not constitute a change to the 

application of the postacute care 

transfer policy. We included a list 

indicating which MS–DRGs would be 

subject to the postacute care transfer 

policy for FY 2009 in Table 5 in the 

Addendum to the proposed rule. 

We did not receive any public 

comments on this issue. We completed 

our evaluation of the MS–DRGs listed 

above against the criteria for postacture 

care transfer payments. Table 5 of this 

final rule contains a complete list of 

MS–DRGs that are subject to the 

postacute care transfer policy for FY 

2009. 

B. Reporting of Hospital Quality Data 

for Annual Hospital Payment Update 

1. Background 

a. Overview 

CMS is transforming the Medicare 

program from a passive payer to an 

active purchaser of higher quality, more 

efficient health care. Such changes will 

contribute to the sustainability of the 

Medicare program, encourage the 

delivery of high quality care while 

avoiding unnecessary costs, and help 

ensure high value for beneficiaries. To 

support this transformation, CMS has 

worked with stakeholders to develop 

and implement quality measures, make 

provider and plan performance public, 

link payment incentives to reporting on 

measures, and ultimately is working to 

link payment to actual performance on 

these measures. Commonly referred to 

as value-based purchasing, this policy 

aligns payment incentives with the 

quality of care as well as the resources 

used to deliver care to encourage the 

delivery of high-value health care. 

The success of this transformation is 

supported by and dependent upon an 

increasing number of widely-agreed 

upon quality measures. The Medicare 

program has defined measures of quality 

in almost every setting and measures 

some aspect of care for almost all 

Medicare beneficiaries. These measures 

include clinical processes, patient 

perception of their care experience, and, 

increasingly, outcomes. 

The Medicare program has 

established mechanisms for collecting 

information on these measures, such as 

QualityNet, an Internet-based process 

that hospitals use to report all-payer 

information. Initial voluntary efforts 

were supplemented beginning in FY 

2005 by a provision in the Medicare 

Prescription Drug Improvement and 

Modernization Act (MMA), which 

provided the full annual payment 

update only to ‘‘subsection (d) 

hospitals’’ (that is, hospitals paid under 

the IPPS) that successfully reported on 

a set of widely-agreed upon quality 

measures. Since FY 2007, as required by 

subsequent legislation (the Deficit 

Reduction Act (DRA)) the number of 

quality measures and the amount of the 

financial incentive have increased. 

As a result, the great majority of 

hospitals now report on quality 

measures for heart failure, acute 

myocardial infarction, pneumonia, and 

surgical care improvement and received 

the full annual update for FY 2008. The 

number of measures has continued to 

grow and the types of measures have 

grown as well, with the addition of 

outcomes measures, such as heart attack 

and heart failure mortality measures, 

and the HCAHPS measures of patient 

satisfaction. In section IV.B.2. of the 

preamble to the FY 2009 IPPS proposed 

rule, we sought public comments on 

proposed additional quality measures 

(73 FR 23646). Reporting on these 

measures provides hospitals a greater 

awareness of the quality of care they 

provide and provides actionable 

information for consumers to make 

more informed decisions about their 

health care providers and treatments. 

Moving beyond pay for reporting to 

paying for performance, CMS has 

designed a Hospital Value-Based 

Purchasing (VBP) Plan that would link 

hospital payments to their actual 

performance on quality measures. In 

accordance with the DRA, the Plan was 

submitted to Congress in November 


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2007. We discuss the Plan more fully in 

section IV.C. of this preamble. 

The ongoing CMS Premier Hospital 

Quality Incentive Demonstration project 

is another effort linking payments to 

quality performance. Launched in 2003, 

the Premier Hospital Quality Incentive 

Demonstration project promotes 

measurable improvements in the quality 

of care, examining whether economic 

incentives to hospitals are effective at 

improving the quality of care. Early 

evidence from the project indicates that 

linking payments to quality 

performance is effective. This 

demonstration project is ongoing with a 

scheduled end date of September 2009. 

As required by section 5001(c) the 

DRA, CMS also has implemented a 

program intended to encourage the 

prevention of certain avoidable or 

preventable hospital-acquired 

conditions (HACs), including infections 

that may occur during a hospital stay. 

Beginning October 1, 2007, CMS 

required hospitals to begin reporting 

information on Medicare claims 

specifying whether certain diagnoses 

were present on admission (POA). 

Beginning October 1, 2008, CMS will no 

longer pay hospitals for a DRG using the 

higher-paying CC or MCC associated 

with one or more of these conditions (if 

no other condition meeting the higher 

paying CC or MCC criteria is present) 

unless the condition was POA (that is, 

not acquired during the hospital stay). 

Linking a payment incentive to 

hospitals’ prevention of avoidable or 

preventable HACs will encourage high 

quality care and the prevention of these 

HACs. Combating these HACs can 

reduce morbidity and mortality as well 

as reduce unnecessary costs. In the FY 

2008 IPPS final rule with comment 

period (72 FR 47217), CMS identified 

eight HACs. In section II.F. of the 

preamble to the FY 2009 IPPS proposed 

rule, CMS sought comment on 

additional proposed conditions (73 FR 

23547). 

CMS is committed to enhancing these 

value-based purchasing programs, in 

close collaboration with stakeholders, 

through the development and use of 

new measures for quality reporting, 

expanded public reporting, greater and 

more widespread incentives in the 

payment system for reporting on quality 

measures, and ultimately performance 

on those measures. These initiatives 

hold the potential to transform the 

delivery of health care by rewarding 

quality of care and delivering higher 

value to Medicare beneficiaries. 

A critical element of value-based 

purchasing is well-accepted measures. 

Hospitals can then measure their 

performance relative to other hospitals. 

Further, this information can be posted 

on the Internet for consumers to use to 

make more informed choices about their 

care. In this section IV.B. of this 

preamble, we describe past and current 

efforts to make this information 

available and proposals to expand these 

efforts and make even more useful 

hospital quality information available to 

the public. 

b. Voluntary Hospital Quality Data 

Reporting 

In December 2002, the Secretary 

announced a partnership with several 

collaborators intended to promote 

hospital quality improvement and 

public reporting of hospital quality 

information. These collaborators 

included the American Hospital 

Association (AHA), the Federation of 

American Hospitals (FAH), the 

Association of American Medical 

Colleges (AAMC), the Joint Commission 

on Accreditation of Healthcare 

Organizations (now called The Joint 

Commission), the National Quality 

Forum (NQF), the American Medical 

Association (AMA), the ConsumerPurchaser Disclosure Project, the 

American Association of Retired 

Persons (AARP), the American 

Federation of Labor-Congress of 

Industrial Organizations (AFL–CIO), the 

Agency for Healthcare Research and 

Quality (AHRQ), as well as CMS and 

others. In July 2003, CMS began the 

National Voluntary Hospital Reporting 

Initiative. This initiative is now known 

as the Hospital Quality Alliance: 

Improving Care through Information 

(HQA). 

We established the following ‘‘starter 

set’’ of 10 quality measures for 

voluntary reporting as of November 1, 

2003: 

Heart Attack (Acute Myocardial 

Infarction or AMI) 

• Was aspirin given to the patient 

upon arrival to the hospital? 

• Was aspirin prescribed when the 

patient was discharged? 

• Was a beta blocker given to the 

patient upon arrival to the hospital? 

• Was a beta blocker prescribed when 

the patient was discharged? 

• Was an Angiotensin Converting 

Enzyme (ACE) Inhibitor given for the 

patient with heart failure? 

Heart Failure (HF) 

• Did the patient get an assessment of 

his or her heart function? 

• Was an ACE Inhibitor given to the 

patient? 

Pneumonia (PN) 

• Was an antibiotic given to the 

patient in a timely way? 

• Had the patient received a 

pneumococcal vaccination? 

• Was the patient’s oxygen level 

assessed? 

This starter set of 10 quality measures 

was endorsed by the NQF. The NQF is 

a voluntary consensus standard-setting 

organization established to standardize 

health care quality measurement and 

reporting through its consensus 

development process. In addition, this 

starter set is a subset of measures 

currently collected for The Joint 

Commission as part of its hospital 

inpatient certification program. 

We chose these 10 quality measures 

in order to collect data that would: (1) 

Provide useful and valid information 

about hospital quality to the public; (2) 

provide hospitals with a sense of 

predictability about public reporting 

expectations; (3) begin to standardize 

data and data collection mechanisms; 

and (4) foster hospital quality 

improvement. 

Hospitals submit quality data through 

the secure portion of the QualityNet 

Web site (formerly known as QualityNet 

Exchange) (http://www.QualityNet.org). 

This Web site meets or exceeds all 

current Health Insurance Portability and 

Accountability Act requirements for 

security of personal health information. 

Data from this initiative are used to 

populate the Hospital Compare Web 

site, http:// 

www.hospitalcompare.hhs.gov. This 

Web site assists beneficiaries and the 

general public by providing information 

on hospital quality of care for 

consumers who need to select a 

hospital. It further serves to encourage 

consumers to work with their doctors 

and hospitals to discuss the quality of 

care hospitals provide to patients, 

thereby providing an additional 

incentive to improve the quality of care 

that they furnish. 

c. Hospital Quality Data Reporting 

Under Section 501(b) of Public Law 

108–173 

Section 1886(b)(3)(B)(vii) of the Act, 

as added by section 501(b) of Public 

Law 108–173, revised the mechanism 

used to update the standardized amount 

of payment for inpatient hospital 

operating costs. Specifically, the statute 

provided for a reduction of 0.4 

percentage points to the update 

percentage increase (also known as the 

market basket update) for each of FYs 

2005 through 2007 for any subsection 

(d) hospital that does not submit data on 

a set of 10 quality indicators established 


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23 Institute of Medicine, ‘‘Performance 

Measurement: Accelerating Improvement,’’

December 1, 2005, available at: http:// 

www.iom.edu/CMS/3809/19805/31310.aspx. 

by the Secretary as of November 1, 2003. 

The statute also provided that any 

reduction would apply only to the fiscal 

year involved, and would not be taken 

into account in computing the 

applicable percentage increase for a 

subsequent fiscal year. This measure 

established an incentive for IPPS 

hospitals to submit data on the quality 

measures established by the Secretary. 

We initially implemented section 

1886(b)(3)(B)(vii) of the Act in the FY 

2005 IPPS final rule (69 FR 49078). In 

addition, we established the RHQDAPU 

program and added 42 CFR 412.64(d)(2) 

to our regulations. We adopted 

additional requirements under the 

RHQDAPU program in the FY 2006 

IPPS final rule (70 FR 47420). 

d. Hospital Quality Data Reporting 

Under Section 5001(a) of Public Law 

109–171 

Section 5001(a) of the Deficit 

Reduction Act of 2005, Public Law 109–

171 (DRA), further amended section 

1886(b)(3)(B) of the Act to revise the 

mechanism used to update the 

standardized amount for payment for 

hospital inpatient operating costs. 

Specifically, sections 

1886(b)(3)(B)(viii)(I) and (II) of the Act 

provide that the payment update for FY 

2007 and each subsequent fiscal year be 

reduced by 2.0 percentage points for any 

subsection (d) hospital that does not 

submit certain quality data in a form 

and manner, and at a time, specified by 

the Secretary. Section 

1886(b)(3)(B)(viii)(III) of the Act requires 

that the Secretary expand the ‘‘starter 

set’’ of 10 quality measures that were 

established by the Secretary as of 

November 1, 2003, as the Secretary 

determines to be appropriate for the 

measurement of the quality of care 

furnished by a hospital in inpatient 

settings. In expanding this set of 

measures, section 1886(b)(3)(B)(viii)(IV) 

of the Act requires that, effective for 

payments beginning with FY 2007, the 

Secretary begin to adopt the baseline set 

of performance measures as set forth in 

a December 2005 report issued by the 

Institute of Medicine (IOM) of the 

National Academy of Sciences under 

section 238(b) of the MMA.23

The IOM measures include: 21 HQA 

quality measures (including the ‘‘starter 

set’’ of 10 quality measures); the 

HCAHPS patient experience of care 

survey; and 3 structural measures. The 

structural measures are: (1) 

Implementation of computerized 

provider order entry for prescriptions; 

(2) staffing of intensive care units with 

intensivists; and (3) evidence-based 

hospital referrals. These structural 

measures constitute the Leapfrog 

Group’s original ‘‘three leaps,’’ and are 

part of the NQF’s 30 Safe Practices for 

Better Healthcare. 

Sections 1886(b)(3)(B)(viii)(V) and 

(VI) of the Act require that, effective for 

payments beginning with FY 2008, the 

Secretary add other quality measures 

that reflect consensus among affected 

parties, and to the extent feasible and 

practicable, have been set forth by one 

or more national consensus building 

entities, and provide the Secretary with 

the discretion to replace any quality 

measures or indicators in appropriate 

cases, such as where all hospitals are 

effectively in compliance with a 

measure, or the measures or indicators 

have been subsequently shown to not 

represent the best clinical practice. 

Thus, the Secretary is granted broad 

discretion to replace measures that are 

no longer appropriate for the RHQDAPU 

program. 

Section 1886(b)(3)(B)(viii)(VII) of the 

Act requires that the Secretary establish 

procedures for making quality data 

available to the public after ensuring 

that a hospital would have the 

opportunity to review its data before 

these data are made public. In addition, 

this section requires that the Secretary 

report quality measures of process, 

structure, outcome, patients’ perspective 

of care, efficiency, and costs of care that 

relate to services furnished in inpatient 

settings on the CMS Web site. 

Section 1886(b)(3)(B)(viii)(I) of the 

Act also provides that any reduction in 

a hospital’s payment update will apply 

only with respect to the fiscal year 

involved, and will not be taken into 

account for computing the applicable 

percentage increase for a subsequent 

fiscal year. 

In the FY 2007 IPPS final rule (71 FR 

48045), we amended our regulations at 

42 CFR 412.64(d)(2) to reflect the 2.0 

percentage point reduction in the 

payment update for FY 2007 and 

subsequent fiscal years for subsection 

(d) hospitals that do not comply with 

requirements for reporting quality data, 

as provided for under section 

1886(b)(3)(B)(viii) of the Act. In the FY 

2007 IPPS final rule, we also added 11 

additional quality measures to the 10- 

measure starter set to establish an 

expanded set of 21 quality measures (71 

FR 48033 through 48037). 

Commenters on the FY 2007 IPPS 

proposed rule requested that we notify 

the public as far in advance as possible 

of any proposed expansions of the 

measure set and program procedures in 

order to encourage broad collaboration 

and to give hospitals time to prepare for 

any anticipated change. Taking these 

concerns into account, in the CY 2007 

OPPS/ASC final rule (71 FR 68201), we 

adopted six additional quality measures 

for the FY 2008 IPPS update, for a total 

of 27 measures. The measure set that we 

adopted for the FY 2008 payment 

determination was as follows: 

Topic Quality measure 

Heart Attack (Acute Myocardial Infarction) .............................................. • Aspirin at arrival.* 

• Aspirin prescribed at discharge.* 

• Angiotensin Converting Enzyme Inhibitor (ACE–I) or Angiotensin II 

Receptor Blocker (ARB) for left ventricular systolic dysfunction.* 

• Beta blocker at arrival.* 

• Beta blocker prescribed at discharge.* 

• Fibrinolytic (thrombolytic) agent received within 30 minutes of hospital arrival.** 

• Percutaneous Coronary Intervention (PCI) received within 120 minutes of hospital arrival.** 

• Adult smoking cessation advice/counseling.** 

Heart Failure (HF) .................................................................................... • Left ventricular function assessment.* 

• Angiotensin Converting Enzyme Inhibitor (ACE–I) or Angiotensin II 

Receptor Blocker (ARB) for left ventricular systolic dysfunction. 

• Discharge instructions.** 

• Adult smoking cessation advice/counseling.** 

Pneumonia (PN) ....................................................................................... • Initial antibiotic received within 4 hours of hospital arrival.* 


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Topic Quality measure 

• Oxygenation assessment.* 

• Pneumococcal vaccination status.* 

• Blood culture performed before first antibiotic received in hospital.** 

• Adult smoking cessation advice/counseling.** 

• Appropriate initial antibiotic selection.** 

• Influenza vaccination status.** 

Surgical Care Improvement Project (SCIP)—named SIP for discharges 

prior to July 2006 (3Q06).

• Prophylactic antibiotic received within 1 hour prior to surgical incision.** 

• Prophylactic antibiotics discontinued within 24 hours after surgery 

end time.** 

• SCIP–VTE–1: Venous thromboembolism (VTE) prophylaxis ordered 

for surgery patients.*** 

• SCIP–VTE–2: VTE prophylaxis within 24 hours pre/post surgery.*** 

• SCIP Infection 2: Prophylactic antibiotic selection for surgical patients.*** 

Mortality Measures (Medicare patients) ................................................... • Acute Myocardial Infarction 30-day mortality Medicare patients.*** 

• Heart Failure 30-day mortality Medicare patients.*** 

Patients’ Experience of Care .................................................................... • HCAHPS patient survey.*** 

* Measure included in 10 measure starter set. 

** Measure included in 21 measure expanded set. 

*** Measure added in CY 2007 OPPS/ASC final rule with comment period (data submission required as of January 2007 for three additional 

SCIP measures). 

For FY 2008, hospitals were required 

to submit data on 25 of the 27 measures. 

No data submission was required for the 

two mortality outcome measures (30- 

Day Risk Standardized Mortality Rates 

for Heart Failure and AMI), because 

they were calculated using existing 

administrative Medicare claims data. 

The measures used for the payment 

determination included, for the first 

time, the HCAHPS patient experience of 

care survey as well as two outcome 

measures. These measures expanded the 

types of measures available for public 

reporting as required under section 

1886(b)(3)(B)(viii)(VII) of the Act. In 

addition, the outcome measures, which 

are claims-based measures, did not 

increase the data submission 

requirements for hospitals, thereby 

reducing the burden associated with 

collection of data for quality reporting. 

In the FY 2008 IPPS proposed rule (72 

FR 24805), we proposed to add 1 

outcome measure and 4 process 

measures to the existing 27-measure set 

to establish a new set of 32 quality 

measures to be used under the 

RHQDAPU program for the FY 2009 

IPPS annual payment determination. 

We proposed to add the following five 

measures for the FY 2009 IPPS annual 

payment determination: 

• PN 30-day mortality measure 

(Medicare patients) 

• SCIP Infection 4: Cardiac Surgery 

Patients with Controlled 6AM 

Postoperative Serum Glucose 

• SCIP Infection 6: Surgery Patients 

with Appropriate Hair Removal 

• SCIP Infection 7: Colorectal Patients 

with Immediate Postoperative 

Normothermia 

• SCIP Cardiovascular 2: Surgery 

Patients on a Beta Blocker Prior to 

Arrival Who Received a Beta Blocker 

During the Perioperative Period 

We stated that we planned to formally 

adopt these measures a year in advance 

in order to provide time for hospitals to 

prepare for changes related to the 

RHQDAPU program. We also stated that 

we anticipated that the proposed 

measures would be endorsed by the 

NQF. Finally, we stated that any 

proposed measure that was not 

endorsed by the NQF by the time that 

we published the FY 2008 IPPS final 

rule with comment period would not be 

finalized in that final rule. 

At the time we published the FY 2008 

IPPS final rule with comment period, 

only the PN 30-day mortality measure 

had been endorsed by the NQF. 

Therefore, we finalized only that 

measure as part of the FY 2009 IPPS 

measure set and stated that we would 

further address adding additional 

measures in the CY 2008 OPPS/ASC 

final rule and, if necessary, in the FY 

2009 IPPS proposed and final rules. We 

also responded to comments we had 

received on the five proposed measures 

(72 FR 47348 through 47351). 

In the CY 2008 OPPS/ASC final rule 

with comment period (72 FR 66875), we 

noted that the NQF had endorsed the 

following additional process measures 

that we had proposed to include in the 

FY 2009 RHQDAPU program measure 

set: 

• SCIP Infection 4: Cardiac Surgery 

Patients with Controlled 6AM 

Postoperative Serum Glucose 

• SCIP Infection 6: Surgery Patients 

with Appropriate Hair Removal 

As we stated in the FY 2008 IPPS 

proposed rule (72 FR 24805), these 

measures reflect our continuing 

commitment to quality improvement in 

both clinical care and quality. These 

quality measures reflect consensus 

among affected parties as demonstrated 

by endorsement by a national consensus 

building entity. The addition of these 

two measures for the FY 2009 measure 

set bring the total number of measures 

in that measure set to 30 (72 FR 66876). 

The measure set to be used for FY 

2009 annual payment determination is 

as follows: 

Topic Quality measure 

Heart Attack (Acute Myocardial Infarction) .............................................. • Aspirin at arrival.* 

• Aspirin prescribed at discharge.* 

• Angiotensin Converting Enzyme Inhibitor (ACE–I) or Angiotensin II 

Receptor Blocker (ARB) for left ventricular systolic dysfunction.* 

• Beta blocker at arrival.* 

• Beta blocker prescribed at discharge.* 

• Fibrinolytic (thrombolytic) agent received within 30 minutes of hospital arrival.** 


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Topic Quality measure 

• Primary Percutaneous Coronary Intervention (PCI) received within 

120 minutes of hospital arrival.** 

• Adult smoking cessation advice/counseling.** 

Heart Failure (HF) .................................................................................... • Left ventricular function assessment.* 

• Angiotensin Converting Enzyme Inhibitor (ACE–I) or Angiotensin II 

Receptor Blocker (ARB) for left ventricular systolic dysfunction.* 

• Discharge instructions.** 

• Adult smoking cessation advice/counseling.** 

Pneumonia (PN) ....................................................................................... • Initial antibiotic received within 4 hours of hospital arrival.* 

• Oxygenation assessment.* 

• Pneumococcal vaccination status.* 

• Blood culture performed before first antibiotic received in hospital.** 

• Adult smoking cessation advice/counseling.** 

• Appropriate initial antibiotic selection.** 

• Influenza vaccination status.** 

Surgical Care Improvement Project (SCIP)—named SIP for discharges 

prior to July 2006 (3Q06).

• Prophylactic antibiotic received within 1 hour prior to surgical incision.** 

• Prophylactic antibiotics discontinued within 24 hours after surgery 

end time.** 

• SCIP–VTE–1: Venous thromboembolism (VTE) prophylaxis ordered 

for surgery patients.*** 

• SCIP–VTE–2: VTE prophylaxis within 24 hours pre/post surgery.*** 

• SCIP Infection 2: Prophylactic antibiotic selection for surgical patients.*** 

• SCIP–Infection 4: Cardiac Surgery Patients with Controlled 6AM 

Postoperative Serum Glucose.***** 

• SCIP Infection 6: Surgery Patients with Appropriate Hair Removal.***** 

Mortality Measures (Medicare patients) ................................................... • Acute Myocardial Infarction 30-day mortality Medicare patients.*** 

• Heart Failure 30-day mortality Medicare patients.*** 

• Pneumonia 30-day mortality Medicare patients.  

Patients’ Experience of Care .................................................................... • HCAHPS patient survey.** * 

* Measure included in 10 measure starter set. 

** Measure included in 21 measure expanded set. 

*** Measure added in CY 2007 OPPS/ASC final rule with comment period. 

  Measure added in FY 2008 IPPS final rule with comment period. 

** *** Measure added in CY 2008 OPPS/ASC final rule with comment period (data submission required effective with discharges starting January 1, 2008). 

We also stated in the FY 2008 IPPS 

final rule with comment period and the 

CY 2008 OPPS/ASC final rule with 

comment period that the RHQDAPU 

program participation requirements for 

the FY 2009 program would apply to 

additional measures we adopt for the FY 

2009 program (72 FR 47361; 72 FR 

66877). 

Therefore, hospitals are required to 

start submitting data for SCIP Infection 

4 and SCIP Infection 6 starting with first 

quarter calendar year 2008 discharges 

and subsequent quarters until further 

notice. Hospitals must submit their 

aggregate population and sample size 

counts for Medicare and non-Medicare 

patients. These requirements are 

consistent with the requirements for the 

other AMI, HF, PN, and SCIP process 

measures included in the FY 2009 

measure set. The complete list of 

procedures for participating in the 

RHQDAPU program for FY 2009 are 

provided in the FY 2008 IPPS final rule 

with comment period (72 FR 47359 

through 47361). 

Because SCIP Cardiovascular 2 and 

SCIP Infection 7 had not been endorsed 

by a national consensus building entity 

by the publishing deadline for the CY 

2008 OPPS/ASC final rule with 

comment period, we did not adopt these 

measures as part of the FY 2009 IPPS 

measure set. 

In the FY 2008 IPPS proposed rule, 

we also solicited public comments on 

18 measures included within 8 

categories of measure sets that could be 

selected for future inclusion in the 

RHQDAPU program (72 FR 24805). 

These measures and measure sets 

highlight our interest in improving 

patient safety and outcomes of care, 

with a particular focus on the quality of 

surgical care and patient outcomes. In 

order to engender a broad review of 

potential performance measures, the list 

included measures that have not yet 

received endorsement by a national 

consensus review process for public 

reporting. The list also included 

measures developed by organizations 

other than CMS as well as measures that 

can be calculated using administrative 

data (such as claims). 

We solicited public comment not only 

on the measures and measure sets that 

were listed, but also on whether there 

were any critical gaps or ‘‘missing’’

measures or measure sets. We 

specifically requested input concerning 

the following issues: 

• Which of the measures or measure 

sets should be included in the FY 2009 

RHQDAPU program or in subsequent 

years? 

• What challenges for data collection 

and reporting are posed by the 

identified measures and measure sets? 

• What improvements could be made 

to data collection or reporting that might 

offset or otherwise address those 

challenges? 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47351), after 

consideration of the public comments 

received, we decided not to adopt any 

of these measures or measure sets for FY 

2009. We indicated that we will 

continue to consider some of these 

measures and measure sets for 

subsequent years. 


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2. Quality Measures for the FY 2010 

Payment Determination and Subsequent 

Years 

a. Quality Measures for the FY 2010 

Payment Determination 

In the FY 2009 IPPS proposed rule, 

for the FY 2010 payment determination, 

we proposed to require continued 

hospital submission of data on 26 of the 

30 existing AMI, Heart Failure, 

Pneumonia, HCAHPS, and SCIP 

measures adopted for FY 2009, and to 

remove the chart-abstracted Pneumonia 

Oxygenation Assessment measure from 

the FY 2010 measure set (73 FR 23646). 

As noted above, the three outcome 

measures do not require hospitals to 

submit data. 

Under section 1886(b)(3)(B)(viii)(III) 

of the Act, the Secretary shall expand 

the RHQDAPU program measures 

beyond the measures specified as of 

November 1, 2003. Under section 

1886(b)(3)(B)(viii)(V) of the Act, these 

measures, to the extent feasible and 

practicable, shall include measures set 

forth by one or more national consensus 

building entities. 

In the FY 2009 IPPS proposed rule (73 

FR 23647), we proposed to adopt the 

following 72 measures for the FY 2010 

payment determination: 

Topic Quality Measure 

Heart Attack (Acute Myocardial Infarction) .............................................. • AMI–1 Aspirin at arrival.* 

• AMI–2 Aspirin prescribed at discharge.* 

• AMI–3 Angiotensin Converting Enzyme Inhibitor (ACE–I) or 

Angiotensin II Receptor Blocker (ARB) for left ventricular systolic 

dysfunction.* 

• AMI 6 Beta blocker at arrival.* 

• AMI–5 Beta blocker prescribed at discharge.* 

• AMI–7a Fibrinolytic (thrombolytic) agent received within 30 minutes 

of hospital arrival.** 

• AMI–4 Adult smoking cessation advice/counseling.** 

• AMI–8a Timing of Receipt of Primary Percutaneous Coronary Intervention (PCI). 

Heart Failure (HF) .................................................................................... • HF–2 Left ventricular function assessment.* 

• HF–3 Angiotensin Converting Enzyme Inhibitor (ACE–I) or 

Angiotensin II Receptor Blocker (ARB) for left ventricular systolic 

dysfunction.* 

• HF–1 Discharge instructions.** 

• HF–4 Adult smoking cessation advice/counseling.** 

Pneumonia (PN) ....................................................................................... • PN–2 Pneumococcal vaccination status.* 

• PN–3b Blood culture performed before first antibiotic received in hospital.** 

• PN–4 Adult smoking cessation advice/counseling.** 

• PN–6 Appropriate initial antibiotic selection.** 

• PN–7 Influenza vaccination status.** 

• PN–5c Timing of Receipt of Initial Antibiotic following hospital arrival.****** 

Surgical Care Improvement Project (SCIP)—named SIP for discharges 

prior to July 2006 (3Q06).

• SCIP–1 Prophylactic antibiotic received within 1 hour prior to surgical 

incision.** 

• SCIP–3 Prophylactic antibiotics discontinued within 24 hours after 

surgery end time.** 

• SCIP–VTE–1: Venous thromboembolism (VTE) prophylaxis ordered 

for surgery patients.*** 

• SCIP–VTE–2: VTE prophylaxis—within 24 hours pre/post surgery.*** 

• SCIP Infection 2: Prophylactic antibiotic selection for surgical patients.*** 

• SCIP–Infection 4: Cardiac Surgery Patients with Controlled 6AM 

Postoperative Serum Glucose.***** 

• SCIP Infection 6: Surgery Patients with Appropriate Hair Removal.***** 

• SCIP Cardiovascular 2: Surgery Patients on a Beta Blocker Prior to 

Arrival Who Received a Beta Blocker During the Perioperative Period.****** 

Mortality Measures (Medicare patients) ................................................... • MORT–30–AMI Acute Myocardial Infarction 30-day mortality Medicare patients.*** 

• MORT–30–HF Heart Failure 30-day mortality Medicare patients.*** 

• MORT–30–PN Pneumonia 30-day mortality Medicare patients.  

Patients’ Experience of Care .................................................................... • HCAHPS patient survey.** * 

Readmission Measures (Medicare patients) ............................................ • Heart Attack (AMI) 30-Day Risk Standardized Readmission Measure 

(Medicare patients).****** 

• Heart Failure (HF) 30-Day Risk Standardized Readmission Measure 

(Medicare patients).****** 

• Pneumonia (PN) 30-Day Risk Standardized Readmission Measure 

(Medicare patients).****** 

Inpatient Stroke Care ............................................................................... • STK–1 DVT Prophylaxis.****** 

• STK–2 Discharged on Antithrombotic Therapy.****** 

• STK–3 Patients with Atrial Fibrillation Receiving Anticoagulation 

Therapy.****** 

• STK–5 Antithrombotic Medication By End of Hospital Day Two.****** 

• STK–7 Dysphasia Screening.****** 

Venous Thromboembolic Care ................................................................. • VTE–1: VTE Prophylaxis.****** 

• VTE–2: VTE Prophylaxis in the ICU.****** 


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Topic Quality Measure 

• VTE–4: Patients with overlap in anticoagulation therapy.****** 

• VTE–5/6: (as combined measure) patients with UFH dosages who 

have platelet count monitoring and adjustment of medication per protocol or nomagram.****** 

• VTE–7: Discharge instructions to address: follow-up monitoring, compliance, dietary restrictions, and adverse drug reactions/interactions.****** 

• VTE–8: Incidence of preventable VTE.****** 

AHRQ Patient Safety Indicators ............................................................... • Death among surgical patients with treatable serious complications.****** 

• Iatrogenic pneumothorax, adult.****** 

• Postoperative wound dehiscence.****** 

• Accidental puncture or laceration.****** 

AHRQ Inpatient Quality Indicators (IQI) ................................................... • Abdominal aortic aneurysm (AAA) mortality rate (with or without volume).****** 

• Hip fracture mortality rate.****** 

AHRQ IQI Composite Measures .............................................................. • Mortality for selected surgical procedures (composite).****** 

• Complication/patient safety for selected indicators (composite).****** 

• Mortality for selected medical conditions (composite).****** 

Nursing Sensitive Measures ..................................................................... • Failure to Rescue.****** 

• Pressure Ulcer Prevalence and Incidence by Severity.****** 

• Patient Falls Prevalence.****** 

• Patient Falls with Injury.****** 

Cardiac Surgery Measures ....................................................................... • Participation in a Systematic Database for Cardiac Surgery.****** 

• Pre-operative Beta Blockade.****** 

• Prolonged Intubation.****** 

• Deep Sternal Wound Infection Rate.****** 

• Stroke/CVA.****** 

• Post-operative Renal Insufficiency.****** 

• Surgical Reexploration.****** 

• Anti-platelet Medication at Discharge.****** 

• Beta Blockade Therapy at Discharge.****** 

• Anti-lipid Treatment at Discharge.****** 

• Risk-Adjusted Operative Mortality for CABG.****** 

• Risk-Adjusted Operative Mortality for Aortic Valve Replacement.****** 

• Risk-Adjusted Operative Mortality for Mitral Valve Replacement/Repair.****** 

• Risk-Adjusted Mortality for Mitral Valve Replacement and CABG Surgery.****** 

• Risk-Adjusted Mortality for Aortic Valve Replacement and CABG 

Surgery.****** 

* Measure included in 10 measure starter set. 

** Measure included in 21 measure expanded set. 

*** Measure added in CY 2007 OPPS/ASC final rule with comment period. 

  Measure added in FY 2008 IPPS final rule with comment period. 

** *** Measure added in CY 2008 OPPS/ASC final rule with comment period. 

****** Measure proposed in FY 2009 IPPS proposed rule. 

(1) Pneumonia Oxygenation Assessment 

Measure Removal and Measure 

Retirement Generally 

CMS proposed to remove the 

Pneumonia Oxygenation Assessment 

measure from the RHQDAPU program 

measure set. We proposed to 

discontinue requiring hospitals to 

submit data on the Pneumonia 

Oxygenation Assessment measure, 

effective with discharges beginning 

January 1, 2009. Section 

1886(b)(3)(B)(viii)(VI) of the Act 

provides the Secretary with the 

discretion to replace any quality 

measures or indicators in appropriate 

cases, such as where all hospitals are 

effectively in compliance with a 

measure. We interpret this to authorize 

the Secretary to remove or retire 

measures from the RHQDAPU program. 

In the case of the Pneumonia 

Oxygenation Assessment measure, the 

vast majority of hospitals are performing 

near 100 percent. In addition, 

oxygenation assessment is routinely 

performed by hospitals for admitted 

patients without regard to the specific 

diagnosis. Thus, the measure is topped 

out so completely across virtually all 

hospitals as to provide no significant 

opportunity for improvement. We 

believe that the burden to hospitals to 

abstract and report these data outweighs 

the benefit in publicly reporting 

hospital level data with very little 

variation among hospitals. We do not 

expect that the retirement of the 

Pneumonia Oxygenation Assessment 

measure will result in the deterioration 

of care. However, if we determine 

otherwise, we may seek to reintroduce 

the measure. 

The proposed removal of the 

Pneumonia Oxygenation Assessment 

measure represents the first instance of 

retiring a measure. We intend to review 

other existing chart-abstracted measures 

recognizing the significant burden to 

hospitals that chart abstraction requires. 

In this way, we seek to maximize the 

value of the RHQDAPU program to 

promote quality improvement by 

hospitals and to report information that 

the public will find beneficial in 

choosing inpatient hospital services. In 

the FY 2009 IPPS proposed rule, we 

invited comment on the retirement of 

the Pneumonia Oxygenation 

Assessment measure (73 FR 23647). In 

addition, we invited comment on other 

measures that may be suitable for 

retirement from the RHQDAPU program 

measure set. Finally, we invited 

comment on the following general 


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considerations relevant to retiring 

measures: 

• Should CMS retire a RHQDAPU 

program measure when hospital 

performance on the measure has 

reached a high threshold (that is, 

performance on the measure has topped 

out) even if the measure still reflects 

best practice? 

• Are there reasons to consider 

retiring a measure other than high 

overall performance? 

• When a measure is retired on the 

basis of substantially complete 

compliance by hospitals, should data 

collection on the measure again be 

required after 1 or 2 years to assure that 

high compliance level remains, or 

should some other way of monitoring 

continued hospital compliance be used? 

Comment: A number of commenters 

supported CMS’ proposal to retire the 

Pneumonia Oxygenation Assessment 

measure because the commenters 

believed that the measure did not 

appear to present a significant 

opportunity for improvement. In 

addition, some commenters suggested 

the retirement of AMI–1 and AMI–2 as 

the commenters believed that these 

measures are topped out as well. 

Response: We appreciate the 

comments received on the topic of 

retirement. At this time, we are 

finalizing the retirement of the 

Pneumonia Oxygenation Assessment 

measure and hospitals will no longer 

have to report on this measure effective 

with January 1, 2009 discharges. We did 

not propose to retire any other measures 

but we will consider the retirement of 

other topped off measures (those with 

very high performance levels) such as 

AMI–1 and AMI–2. 

Comment: Many commenters 

suggested that hospitals continue to 

submit data regarding the Pneumonia 

Oxygenation Assessment measure for 

several years. In addition, several other 

commenters indicated that CMS should 

remove topped off measures from the 

Hospital Compare Web site, but 

continue to conduct monitoring 

activities to ensure that ‘‘backsliding’’

does not take place. 

Response: We interpret backsliding to 

mean a reduction in performance if a 

measure is no longer reported by 

hospitals. We agree that continued 

collection even for topped off measures 

may be warranted if backsliding is 

expected. However, we do not believe 

that this would occur for the Pneumonia 

Oxygenation Assessment measure, 

which has become a routine assessment 

for essentially all admitted hospitalized 

patients without regard to diagnosis. 

After consideration of the comments 

received, CMS will retire the 

Pneumonia Oxygenation measure. 

Hospitals will no longer be required to 

submit data on this measure beginning 

with January 1, 2009 discharges. 

(2) Updating Measures 

The specifications for two of the 

existing measures have been updated by 

the NQF, effective May 2007, with 

respect to the applicable timing interval. 

For the measures previously identified 

as: 

• AMI—Primary Percutaneous 

Coronary Intervention (PCI) received 

within 120 minutes of hospital arrival, 

the NQF has revised its endorsement of 

the specifications to reflect that the 

timing interval has been changed to PCI 

within 90 minutes of arrival. 

• Pneumonia—Initial antibiotic 

received within 4 hours of hospital 

arrival, the NQF has revised its 

endorsement of the specifications to 

reflect that the initial antibiotic must be 

received within 6 hours of arrival. 

In the FY 2009 IPPS proposed rule, 

because the NQF is now endorsing 

different timing intervals with respect to 

these measures, we proposed to also 

update these measures for the purposes 

of the FY 2010 RHQDAPU program (73 

FR 23647). The updated measures are as 

follows: 

• AMI—Timing of Receipt of Primary 

Percutaneous Coronary Intervention 

(PCI); and 

• Pneumonia—Timing of receipt of 

initial antibiotic following hospital 

arrival. 

We note that the technical 

specifications for these measures will 

not change, and hospitals will continue 

to submit the same data that they 

currently submit. However, beginning 

with discharges on or after January 1, 

2009, CMS will calculate the measures 

using the updated timing intervals. 

The NQF updated these two measures 

to reflect the most current consensus 

standards effective May 2007. Because 

this was after we issued the FY 2008 

IPPS proposed rule, we could not adopt 

the updated measures in the FY 2008 

IPPS final rule with comment period or 

CY 2008 OPPS/ASC final rule with 

comment period. Instead, we allowed 

hospitals to suppress the public 

reporting of the quality data for the two 

measures for hospital discharges starting 

with April 1, 2007 discharges. This was 

the case so that hospitals would not be 

held to out-of-date consensus standards 

for public reporting pending the next 

regulatory cycle. 

We proposed using a subregulatory 

process to act upon updates made to 

existing RHQDAPU program measures 

by a consensus building entity such as 

the NQF. We stated that we believe this 

is necessary to be able to utilize the 

most up-to-date consensus standards in 

the RHQDAPU program, and to 

recognize that neither scientific 

advances nor consensus building entity 

standard updates are linked to the 

timing of regulatory actions. We 

proposed to implement updates to 

existing RHQDAPU program measures 

and provide notification through the 

QualityNet Web site, and additionally in 

the Specifications Manual where data 

collection and measure specifications 

changes are necessary (73 FR 23647). 

We invited comment on this proposal. 

Comment: Numerous commenters 

indicated that they would prefer that 

any changes to existing measures be 

made through the regulatory process, 

which allows for public comment, and 

that no changes should be made to 

existing measures through a 

subregulatory process, as proposed in 

the FY 2009 IPPS proposed rule. 

Response: After consideration of 

comments received, we have decided 

not to adopt a separate subregulatory 

process to implement measure updates 

made to existing measures by consensus 

building entities. Instead, as we 

currently do, we will continue to update 

technical specifications for each of the 

measures in the Specifications Manual. 

Substantive changes to existing 

measures will be made through the 

rulemaking process. 

Comment: Several commenters 

recommended that CMS not revise the 

pneumococcal and influenza 

vaccination measures without 

consulting the HQA or seeking public 

input. In certain instances where a 

change in science or an implementation 

issue has occurred, such as with past 

influenza vaccine shortages, the 

commenters noted that it may be 

necessary to temporarily suspend 

measure reporting. However, 

commenters urged that all permanent 

changes to existing measures be made 

through the regulatory process to allow 

for public input. 

Response: As discussed previously, 

we will not finalize our proposal to 

implement a subregulatory process to 

update existing RHQDAPU program 

measures that have been updated by a 

consensus building entity. We also 

recognize that the temporary 

suppression of public reporting on 

measures might be necessary under 

certain circumstances, such as when 

clinical practices change or 

implementation issues occur, until we 

can formally update those measures 

through the rulemaking process. 

Comment: Some commenters 

expressed concerns that some of the 

proposed measures were not actionable 


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for quality improvement, and were 

heavily reliant upon provider 

documentation. In addition, some 

commenters stated that the adoption of 

measures such as failure to rescue, 

patient falls with injury, and pressure 

ulcer prevalence and incidence by 

severity will create higher legal risks for 

providers. 

Response: We disagree with the 

comment that the measures we 

proposed are not actionable for quality 

improvement. All finalized measures 

have gone through an extensive 

development process and have achieved 

NQF endorsement for accountability 

and public reporting. NQF endorsement 

occurs after thorough review of the 

measures, public comment, and 

consensus agreement as to their 

importance, scientific acceptability, 

feasibility and usability. As part of its 

review for scientific acceptability, the 

NQF considers the validity of the 

measure as a measure of quality. 

Evaluation of the usability of a measure 

considers the use of the measure for 

continued quality improvement. We are 

uncertain what legal risk that the 

commenters contemplate, but we 

believe that outcomes such as failure to 

rescue, falls with injury and pressure 

ulcers are important measures of 

outcome. 

In the FY 2009 IPPS proposed rule we 

noted that, for the purposes of 

proposing the FY 2010 RHQDAPU 

program measure set, we believe that 

NQF endorsement of a measure 

represents a standard for consensus 

among affected parties as specified in 

section 1886(b)(3)(B)(viii)(V) of the Act 

(73 FR 23647–48). The NQF is an 

independent health care quality 

endorsement organization with a 

diverse representation of consumer, 

purchaser, provider, academic, clinical, 

and other health care stakeholder 

organizations. 

Comment: Numerous commenters 

encouraged CMS to work through the 

HQA to identify measures for public 

reporting. Because CMS chose to 

propose some measures that represented 

a ‘‘consensus among affected 

stakeholders’’ but that were not 

endorsed by the NQF and adopted by 

the HQA, many commenters believed 

that the FY 2009 IPPS proposed rule did 

not follow the DRA requirement. 

Specifically, the commenters noted that 

only 10 of the proposed measures have 

been adopted by the HQA, including 3 

of the 9 proposed AHRQ indicators, the 

surgical care measure, and the 6 venous 

thromboembolism measures. The 

commenters also noted that the 

proposed stroke measures and the AMI/ 

Pneumonia readmission measures have 

not been endorsed by the NQF nor 

adopted by the HQA, and that the heart 

failure readmission measure has not 

been adopted by the HQA, and thus 

should not be included in the FY 2010 

payment determination. Some of the 

commenters concluded that any 

measures added to the RHQDAPU 

program should first go through the 

rigorous, consensus-based assessment 

processes of both the NQF and HQA. 

Response: Section 

1886(b)(3)(B)(viii)(V) of the Act, as 

added by section 5001(a) of the DRA, 

provides that measures must reflect 

consensus among affected parties and, 

to the extent feasible and practicable, 

must include measures set forth by one 

or more national consensus building 

entities. Thus, the Secretary is not 

required to limit measures to those 

endorsed or adopted by any particular 

consensus organization or quality 

alliance, as long as the statutory 

standard has been met. The NQF is a 

voluntary consensus standards 

organization that meets the 

requirements of the National 

Technology Transfer and Advancement 

Act (NTTAA); and we believe that 

measures that are NQF endorsed meet 

the statutory requirement. Indeed, all of 

the measures that we finalize for the FY 

2010 IPPS payment determination will 

be NQF endorsed. 

Comment: A number of commenters 

indicated that CMS should adopt certain 

measures that were not proposed, but 

which have been adopted by HQA, 

including surgical site infection, central 

line catheter-associated blood stream 

infection, and measures on the care 

provided in pediatric intensive care 

units as well as the care provided to 

maternity patients. 

Response: We did not propose for FY 

2010 payment determination to adopt 

the suggested infection rate measures, 

pediatric intensive care measures, or 

maternity care measures mentioned by 

the commenters. We are unable to 

finalize measures that were not 

proposed for which the public at large 

did not have the opportunity to provide 

comments. We also note that the 

suggested infection measures were 

developed by the CDC for public health 

surveillance purposes only, rather than 

for hospital quality assessment. 

Therefore, we do not believe, as 

currently specified, these infection rate 

measures are appropriate for use in the 

RHQDAPU program. Further, CDC is 

currently working with the NQF 

Hospital Acquired Infection committee 

to better define the measures. Although 

these two infection measures are not 

ready for our use in the RHQDAPU 

program, infection measures are a high 

priority for CMS. We may consider 

adding these measures in the future 

when specifications are further 

developed and the NQF has further 

considered them. 

(3) SCIP Cardiovascular 2 Measure for 

the FY 2010 Payment Determination 

In November 2007, the NQF endorsed 

SCIP Cardiovascular 2. CMS believes 

that this measure targets an important 

process of care, beta blocker 

administration for noncardiac surgery 

patients. Therefore, in the FY 2009 IPPS 

proposed rule, we proposed to add SCIP 

Cardiovascular 2 to the RHQDAPU 

program measures for the FY 2010 

payment determination (73 FR 23648). 

The specifications and data collection 

tools are currently available through the 

QualityNet Web site and in the 

Specifications Manual for hospitals to 

utilize and submit data for this measure. 

In this final rule, we are adopting this 

proposal. Hospitals will be required to 

submit data on the SCIP Cardiovascular 

2 measure for discharges occurring on or 

after January 1, 2009. The initial data 

submission deadline for this measure 

will be August 15, 2009. 

We received no comments specific to 

this measure. We did receive general 

comments on the burden associated 

with chart-abstracted measures and the 

burden associated with adopting large 

numbers of measures at once. Those 

comments are discussed below. 

(4) Nursing Sensitive Measures for the 

FY 2010 Payment Determination 

In the FY 2009 IPPS proposed rule, 

we proposed to add four nursing 

sensitive measures to the RHQDAPU 

program measure set for the FY 2010 

payment determination (73 FR 23648). 

The four proposed measures were: 

• Failure to Rescue 

• Pressure Ulcer Prevalence and 

Incidence by Severity (Joint 

Commission developed measure; all 

patient data from chart abstraction) 

• Patient Falls Prevalence 

• Patient Falls with Injury 

We stated that these measures 

broaden the ability of the RHQDAPU 

program measure set to assess care 

generally associated with nursing staff. 

In addition, we stated that these 

measures are directed toward outcomes 

that are underrepresented among the 

RHQDAPU program measures. These 

measures apply to the vast majority of 

inpatient stays and provide a great deal 

of critical information about hospital 

quality to consumers and stakeholders. 

We stated that the specifications and 

data collection tools are scheduled to be 

available in the specifications manual 


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by December 2008 for hospitals to 

utilize and submit data for these 

measures. We also proposed that 

hospitals be required to submit data on 

these four measures effective with 

discharges beginning April 1, 2009. We 

noted that these measures have been 

endorsed by the NQF; however, The 

Joint Commission has initiated rigorous 

field testing of the measures, which will 

not be completed until late 2008. 

Therefore, it was possible that the 

endorsement status of these measures 

might change in the next several 

months. We stated that if this rigorous 

field testing resulted in uncertainty as to 

the NQF endorsement status at the time 

we issue the FY 2009 IPPS final rule, we 

would defer our final decision on 

whether to require these measures for 

the RHQDAPU program for FY 2010 

until we published the CY 2009 OPPS/ 

ASC final rule with comment period. 

Comment: Many commenters 

indicated that it is inappropriate to 

include the nursing sensitive measures 

if they are still undergoing field testing, 

and there is no mechanism specified to 

collect data on the nursing sensitive 

measures. The commenters also noted 

that while many of the measures are 

used by the National Database of 

Nursing Quality Indicators (NDNQI), not 

all organizations participate in this 

database and there may be discrepancies 

in data definitions if different 

information systems are used. 

Response: We appreciate these 

comments and are aware of the ongoing 

testing of the nursing sensitive 

measures. This testing involves the 

feasibility of calculating these measures 

based on patient-level data, and we 

recognize that this testing should be 

completed prior to adopting any of these 

measures, insofar as there is no 

alternative but to calculate them based 

on hospital submitted patient-level data. 

However, claims based measures can be 

implemented without requiring 

additional data submission by hospitals 

beyond existing claims data. Therefore, 

in this final rule we are adopting only 

one Nursing Sensitive measure: Failure 

to Rescue for the FY 2010 payment 

determination. We believe there is no 

uncertainty regarding the NQF 

endorsement status of this measure 

because it can be calculated using 

Medicare claims data only, as opposed 

to using patient-level data submitted by 

hospitals. We intend to propose the 

remaining NQF nursing sensitive 

measures during the FY 2010 IPPS 

rulemaking cycle as requirements for 

the FY 2011 payment determination. 

Comment: Many commenters 

indicated that the addition of a number 

of chart-abstracted measures would be 

overly burdensome to implement in FY 

2009 for use in the FY 2010 payment 

determination. 

Response: We recognize the 

additional burden that would result if 

many chart-abstracted measures were 

required on such an aggressive 

timeframe. Therefore, we are finalizing 

only the failure to rescue measure at this 

time, in part, because it can be 

calculated using Medicare claims data 

instead of using data culled from patient 

charts. This alternative means of 

measure calculation cannot be used for 

the three other proposed nursing 

sensitive measures, and for this reason 

and the other reason stated above, we 

are not finalizing those measures at this 

time. We believe that this decision will 

help to lessen the overall burden on 

hospitals by reducing their obligation to 

submit patient-level data on too large a 

number of new chart-abstracted 

measures at the same time. We plan to 

use the same claims data for the failure 

to rescue measure that we use for other 

RHQDAPU program measures that are 

based solely on Medicare claims. The 

claims data that will be used to 

calculate this measure, as well as all the 

Medicare claims based measures for the 

FY 2010 payment determination, will be 

from July 1, 2007 through June 30, 2008 

(3rd quarter 2007 discharges through 

2nd quarter 2008 discharges). We 

discuss these dates more fully below. 

(5) Readmission Measures for the FY 

2010 Payment Determination 

In the FY 2009 IPPS proposed rule, 

we proposed to adopt three readmission 

measures for the FY 2010 payment 

determination that will be calculated 

using Medicare claims data (73 FR 

23648). The proposed measures were: 

• Pneumonia (PN) 30-Day Risk 

Standardized Readmission Measure 

(Medicare patients) 

• Heart Attack (AMI) 30-Day Risk 

Standardized Readmission Measure 

(Medicare patients) 

• Heart Failure (HF) 30-Day Risk 

Standardized Readmission Measure 

(Medicare patients) 

These readmission measures assess 

both quality of care and efficiency of 

care. They also promote coordination of 

care among hospitals and other 

providers. They compliment the 

existing 30-Day Risk Standardized 

Mortality Measures for Pneumonia, 

Heart Attack, and Heart Failure. These 

measures require no additional data 

collection from hospitals. The measures 

are risk adjusted to account for 

differences between hospitals in the 

characteristics of their patient 

populations. 

Since the time we issued the 

proposed rule, the HF readmission 

measure has received NQF 

endorsement. Therefore, we are 

adopting the HF readmission measure as 

a RHQDAPU program requirement for 

the FY 2010 payment determination in 

this final rule. The AMI and PN 

readmission measures are still pending 

endorsement by the NQF. We intend to 

finalize the AMI and PN readmission 

measures for the FY 2010 payment 

determination in the CY 2009 OPPS/ 

ASC final rule with comment period, 

contingent upon endorsement from a 

national consensus-based entity such as 

the NQF. As we stated in the FY 2009 

IPPS proposed rule, this is consistent 

with our measure expansion during the 

past 2 years, when we finalized some 

RHQDAPU program measures in the 

annual OPPS/ASC final rule with 

comment periods. CMS will calculate 

the rates of the HF readmission measure 

using Medicare claims only. The claims 

data will be for dates July 1, 2007 

through June 30, 2008 (3rd quarter 2007 

through 2nd quarter 2008 discharges). 

This is the same time frame as for the 

other Medicare claims data based 

measures. 

Comment: Commenters noted that the 

AMI and Pneumonia readmissions 

measures are not endorsed by the NQF. 

Response: We recognize that the AMI 

and Pneumonia readmissions measures 

are not yet endorsed by the NQF, and 

we are only finalizing the Heart Failure 

readmission measure in this final rule. 

We intend to adopt the AMI and PN 

readmission measures for the FY 2010 

payment determination in the CY 2009 

OPPS/ASC final rule with comment 

period, contingent upon endorsement 

from a national consensus-based entity 

such as the NQF. 

Comment: Several commenters 

disagreed with having staggered start 

dates and submission time frames for 

the RHQDAPU required measures and 

stated that this would add unnecessary 

confusion and additional complexity. 

Commenters urged CMS to adopt one 

consistent submission time frame. 

Response: We acknowledge that we 

sometimes implement different time 

frames to commence chart abstraction 

data submission. However, in the 

context of chart-abstracted measures we 

believe that this is necessary and 

desirable given the burden of chart 

abstraction and the ongoing phase-in of 

infrastructure capabilities. Furthermore, 

the chart-abstracted measures are 

recalculated quarterly on a rolling basis 

and data that is publicly reported is 

refreshed quarterly. On the other hand, 

for our claims based measures, our 

calculations are done annually. We 


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believe that consistency of time frame 

for the annual calculation of Medicare 

claims based measures is important for 

comparison purposes because we can 

then rely on a single year-long or 

multiple year data set. We will use the 

same annual data time frame for the 

payment determination for FY 2010 

(July 2007 through June 2008 

discharges) for all Medicare claims 

based measures that we used for the FY 

2009 program. This will apply to the 

AHRQ measures, the Nursing Sensitive 

Failure to Rescue measure, the 30 day 

mortality measures for Heart Failure, 

Pneumonia, and AMI, and the 30 day 

readmission measure for Heart Failure. 

(6) Venous Thromboembolism (VTE) 

Measures for the FY 2010 Payment 

Determination 

In the FY 2009 IPPS proposed rule, 

we also proposed to add six Venous 

Thromboembolism (VTE) measures for 

the FY 2010 payment determination (73 

FR 23648). These measures 

comprehensively address a major cause 

of morbidity and mortality among 

hospitalized patients. 

• VTE–1: VTE Prophylaxis 

• VTE–2: VTE Prophylaxis in the ICU 

• VTE–4: Patients with overlap in 

anticoagulation therapy 

• VTE–5/6: (as combined measure) 

Patients with UFH dosages who have 

platelet count monitoring and 

adjustment of medication per protocol 

or nomogram 

• VTE–7: Discharge instructions to 

address: follow-up monitoring, 

compliance, dietary restrictions and 

adverse drug reactions/interactions 

• VTE–8: Incidence of preventable VTE 

Since the time we issued the 

proposed rule, these VTE measures have 

received NQF endorsement. However, 

these measures would require 

submission of chart-abstracted data for 

which current submission mechanisms 

will not be available for use for the FY 

2010 payment determination. Therefore, 

we are not adopting these proposed 

measures for the FY 2010 payment 

determination. We intend to propose 

these measures during the FY 2010 IPPS 

rulemaking cycle for the FY 2011 

payment determination. In addition, we 

intend to explore whether data needed 

to calculate these measures could be 

submitted using electronic health 

records (EHRs). 

Comment: Commenters were 

generally supportive of the VTE 

measures proposed by CMS. 

Response: The VTE measures 

comprehensively address a major cause 

of morbidity and mortality among 

hospitalized patients, and we believe 

that their inclusion in the RHQDAPU 

program will promote quality in these 

areas. However, we are not finalizing 

the VTE measures at this time for two 

reasons: (1) We are sensitive to the 

concerns of commenters that we 

proposed to add a large number of chartabstracted measures all at once and 

wish to decrease the immediate burden 

on hospitals to implement such a large 

number of these measures; and (2) the 

additional infrastructure needed to 

collect this data is not yet available for 

our use. We intend to propose these 

measures in future rulemaking. 

Comment: Some commenters 

suggested that CMS implement 

additional surgical care measures 

(continuity of beta blocker therapy, 

post-op wound dehiscence) and VTE 

measures (prevention, appropriate 

treatments, readmissions, discharge 

instructions). 

Response: We appreciate the 

suggestions that we implement 

additional surgical care and VTE 

measures. We will consider these types 

of measures for future implementation. 

(7) Stroke Measures for the FY 2010 

Payment Determination 

In the FY 2009 IPPS proposed rule, 

we also proposed to add five stroke 

measures which will apply only to 

certain identified groups under specific 

ICD–9–CM codes as specified in the 

Specifications Manual (73 FR 23648). 

These measures comprehensively 

address an important condition not 

currently covered by the RHQDAPU 

program that is associated with 

significant morbidity and mortality. 

• STK–1 DVT Prophylaxis 

• STK–2 Discharged on Antithrombotic 

Therapy 

• STK–3 Patients with Atrial 

Fibrillation Receiving Anticoagulation 

Therapy 

• STK–5 Antithrombotic Medication By 

End of Hospital Day Two 

• STK–7 Dysphasia Screening 

These stroke measures are pending 

NQF endorsement. Due to the lack of 

endorsement from a national consensus 

building entity, we have decided not to 

adopt these measures for the FY 2010 

payment determination. CMS intends to 

propose these measures during the FY 

2010 IPPS rulemaking cycle for the FY 

2011 payment determination. 

Comment: One commenter 

commended CMS on its proposal to 

include stroke quality data among the 

quality measures adopted in the FY 

2009 IPPS rulemaking. However, the 

commenter believed that an important 

quality measurement was missing from 

the list; the administration of 

thrombolytic therapy. 

Response: We appreciate this 

comment. While the stroke measures 

would add a topic area that is important 

to Medicare beneficiaries, we will not be 

implementing stroke measures for the 

FY 2010 payment determination 

because they have not yet received 

endorsement from a consensus building 

entity such as the NQF. We intend to 

propose the stroke measure set during 

the FY 2010 IPPS rulemaking process 

for inclusion in the FY 2011 RHQDAPU 

program measure set and we will 

consider whether to include the 

administration of thrombolytic therapy 

as part of that proposal. 

Comment: Commenters indicated that 

new chart-abstracted measures such as 

the stroke measures proposed by CMS 

would be overly burdensome to 

implement in FY 2009 for use in the FY 

2010 payment determination. 

Response: As previously stated, we 

recognize the additional burden that 

would result if many chart-abstracted 

measures were required on such an 

aggressive timeframe. We are not 

finalizing the stroke measures, which 

would require additional chart 

abstraction burden, at this time. We 

intend to propose these measures in 

future rulemaking. 

(8) AHRQ Measures for the FY 2010 

Payment Determination 

In the FY 2009 IPPS proposed rule (73 

FR 23649), we proposed to add the 

following nine AHRQ Patient Safety 

Indicators (PSIs) and Inpatient Quality 

Indicators (IQIs) that have been 

endorsed by the NQF: 

• Patient Safety Indicator (PSI) 4—

Death among surgical patients with 

treatable serious complications 

• PSI 6—Iatrogenic pneumothorax, 

adult 

• PSI 14—Postoperative wound 

dehiscence 

• PSI 15—Accidental puncture or 

laceration 

• Inpatient Quality Indicator (IQI) 4 and 

11—Abdominal aortic aneurysm 

(AAA) mortality rate (with or without 

volume) 

• IQI 19—Hip fracture mortality rate 

• IQI Mortality for selected medical 

conditions (composite) 

• IQI Mortality for selected surgical 

procedures (composite) 

• IQI Complication/patient safety for 

selected indicators (composite) 

These are claims-based outcome 

measures. They are important additional 

measures that can be calculated for 

hospital inpatients without the burden 

of additional chart abstraction. 

Hospitals currently collect and submit 

these data to CMS and other insurers for 


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reimbursement. These measures will be 

calculated using all-payer claims data 

those hospitals currently collect with 

respect to each patient discharge. We 

proposed to require hospitals to submit 

to CMS the all-payer claims data that we 

specify in the technical Specifications 

Manual as necessary to calculate the 

AHRQ PSI/IQI measures. We proposed 

that hospitals begin submitting data on 

a quarterly basis on these measures to 

CMS by April 1, 2010 beginning with 

October 1, 2009 discharges. However, 

we are aware that a large number of 

hospitals already submit these data on 

a voluntary basis to third party data 

aggregators such as State health agencies 

or State hospital associations. We 

solicited comments on whether a 

hospital that already submits the data 

necessary to calculate these measures to 

such entities should be permitted to 

authorize such an entity to transmit 

these data to CMS, in accordance with 

applicable confidentiality laws, on their 

behalf. This would relieve the hospital 

of the burden of having to submit the 

same data directly to CMS via the QIO 

Clinical Warehouse. As an alternative to 

requiring that hospitals submit all-payer 

claims data for purposes of calculating 

the AHRQ PSI/IQI measures, CMS 

considered whether it should initially 

calculate the AHRQ PSI/IQI measures 

using Medicare claims data only, and at 

a subsequent date require submission of 

all-payer claims data. We also sought 

comment on this alternative. 

As explained below, in this final rule 

we are adopting these measures, and 

will calculate these measures using 

Medicare claims only for the FY 2010 

payment determination. 

Comment: We received many 

comments supporting the use of the 

AHRQ measures. For reporting the nine 

AHRQ IQIs and PSIs, several 

commenters recommended using 

existing State or other third party 

collection entities to acquire ‘‘all payer’’

data, rather than requiring hospitals to 

duplicate the same information for 

CMS. Other commenters recommended 

identifying the key data elements 

needed for the specific measures and 

requesting those States and other third 

party entities to only submit those 

specific data elements, rather than 

entire datasets, and that compensation 

for recoding should also be considered. 

Several commenters noted the burden of 

submitting additional data. Some 

commenters indicated that they did not 

favor using only Medicare claims for 

calculation of the AHRQ indicators 

because artificial skewing of the data 

may occur. Many of the commenters 

recommended inclusion of PSI–9 

(Postoperative Bleeding/Hemorrhage), 

as recent evidence indicates that PCI 

patients with bleeding are more likely to 

die within one year than patients 

without bleeding. Some commenters 

further recommended that CMS 

extensively test whether the AHRQ PSIs 

and IQIs should be considered ready for 

implementation in the RHQDAPU 

program because the commenters 

believed that these measures lack the 

sensitivity required for use as publicly 

reported measures. 

Response: After considering the 

comments, and more general comments 

regarding the burden of additional chart 

abstraction and the large number of 

proposed measures, we will adopt the 9 

AHRQ measures but initially calculate 

them based on existing Medicare claims 

data. We will use the same Medicare 

claims data set that we will use to 

calculate the 30-day HF readmission 

measure, as well as the three mortality 

measures. Consistent with the practice 

that we adopted for the FY 2009 

payment determination for other 

measures calculated using existing 

Medicare claims data only, we will use 

existing claims data for index 

hospitalizations from July 1, 2007 

through June 30, 2008 (3rd quarter 2007 

through 2nd quarter 2008 discharges) 

for purposes of calculating the measures 

for the FY 2010 payment determination. 

While the distribution of the rates 

may be different when calculated using 

Medicare claims only, we believe that 

these calculations will be sufficient to 

account for performance in our 

population of interest because Medicare 

claims make up a substantial portion of 

the overall inpatient claims to which 

these measures apply. However, we 

remain interested in collecting all-payer 

claims and may propose to collect such 

data in the future. 

Because PSI–9 has not yet been 

endorsed by a consensus building entity 

such as the NQF, we did not propose to 

adopt it for the RHQDAPU program. 

Comment: Many commenters 

recommended that CMS adopt the 

AHRQ IQI AAA mortality measure and 

AHRQ’s stroke mortality measure. 

Response: We agree with the 

suggestion to adopt the AAA mortality 

measure. In this final rule, we are 

adopting this measure and will consider 

the other measure for implementation in 

a future rulemaking. 

(9) Cardiac Surgery Measures for the FY 

2010 Payment Determination 

In the FY 2009 IPPS proposed rule, 

we proposed to add 15 cardiac surgery 

measures for the FY 2010 payment 

determination (73 FR 23649). Cardiac 

surgical procedures carry a significant 

risk of morbidity and mortality. We 

believe that the nationwide public 

reporting of these cardiac surgery 

measures would provide highly 

meaningful information for the public. 

Currently, over 85 percent of hospitals 

with a cardiac surgery program submit 

data on the proposed cardiac surgery 

measures listed below to the Society of 

Thoracic Surgeons (STS) Cardiac 

Surgery Clinical Data Registry. We 

proposed to accept these data from the 

STS registry beginning on July 1, 2009, 

on a quarterly basis for discharges on or 

after January 1, 2009. Hospitals that 

participate in the RHQDAPU program, 

but do not submit data on the proposed 

cardiac surgery measures to the STS 

registry for discharges on or after 

January 1, 2009, would need to submit 

such data to CMS. Although we would 

accept cardiac surgery data from other 

clinical data registries, we are unaware 

of any other registries that collect all of 

the data necessary to support 

calculation of the cardiac surgery 

measures. Hospitals and CMS would 

need to establish appropriate legal 

arrangements, to the extent such 

arrangements are necessary, to ensure 

that the transfer of these data from the 

STS registry to CMS complies with all 

applicable laws. By accepting these 

registry-based data, only hospitals with 

cardiac surgery programs that do not 

already collect such data to submit to 

the STS registry will have additional 

data submission burden. All of the 

proposed measures are currently NQFendorsed. We proposed that hospitals 

begin submitting data by July 1, 2009, 

on a quarterly basis on the following 15 

cardiac surgery measures to the STS 

data registry or CMS for 1st quarter 

calendar year 2009 discharges: 

• Participation in a Systematic Database 

for Cardiac Surgery 

• Pre-Operative Beta Blockade 

• Prolonged Intubation 

• Deep Sternal Wound Infection Rate 

• Stroke/CVA 

• Post-Operative Renal Insufficiency 

• Surgical Reexploration 

• Anti-Platelet Medication at Discharge 

• Beta Blockade Therapy at Discharge 

• Anti-Lipid Treatment at Discharge 

• Risk-Adjusted Operative Mortality for 

CABG 

• Risk-Adjusted Operative Mortality for 

Aortic Valve Replacement 

• Risk-Adjusted Operative Mortality for 

Mitral Valve Replacement/Repair 

• Risk-Adjusted Mortality for Mitral 

Valve Replacement and CABG 

Surgery 

• Risk-Adjusted Mortality for Aortic 

Valve Replacement and CABG 

Surgery 

As discussed below, for the FY 2010 

payment determination, we are adopting 


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only one of these proposed measures: 

Participation in a Systematic Database 

for Cardiac Surgery. This is an NQFendorsed measure. The data submission 

window for this measure will be from 

July 1, 2009 to August 15, 2009. 

Specifications for the measure will be 

posted on QualityNet and hospitals will 

submit data for this measure using 

QualityNet. This measure does not 

require the hospital to participate in a 

registry, rather, it only measures 

whether the hospital participates in a 

cardiac surgery registry. CMS intends to 

propose the other 14 cardiac surgery 

measures during the FY 2010 IPPS 

rulemaking cycle for the FY 2011 

payment determination. 

Comment: A few commenters 

suggested that CMS add the NQFendorsed measure ‘‘Anti-Platelet 

medications at discharge for Cardiac 

Surgery’’ to the hospital data reporting 

requirements for FY 2009, noting that 

this measure corresponds to a PQRI 

measure. 

Response: We appreciate this 

comment, and will review the measure 

in question for possible inclusion in the 

RHQDAPU program in future years. 

Comment: Many commenters 

provided a number of reasons why the 

cardiac surgery measures should not be 

included in the RHQDAPU program; the 

measures have not yet been adopted by 

the HQA, the third-party collecting data 

on these measures does not require any 

type of validation for data submitted to 

them, and the methodology of risk 

adjustment used by the third party is 

not transparent. 

A few commenters believed it was 

inappropriate for CMS to institute a data 

reporting requirement under the 

RHQDAPU program that would require 

hospitals to pay money to participate in 

a specific registry (the Society of 

Thoracic Surgeons (STS) Cardiac 

Surgery Clinical Data Registry). Other 

commenters were concerned that 

‘‘participation in a systematic database 

for cardiac surgery’’ could be viewed as 

serving the financial interests of a thirdparty organization. 

Some commenters stated that while 

they were not opposed to using the STS 

registry to submit the proposed cardiac 

surgery measures, hospitals currently 

not submitting data to this registry may 

have trouble meeting the upcoming 

submission deadline, and suggested that 

CMS postpone the date of discharge for 

reporting data on the 15 cardiac surgery 

measures from January 1, 2009, to July 

1, 2009. 

Response: While HQA provides 

informative input regarding measure 

selection the ultimate responsibility of 

the measures’ selection for the 

RHQDAPU program is at the discretion 

of the Secretary. We believe that cardiac 

surgery measures should be part of the 

RHQDAPU program because cardiac 

procedures are commonly performed on 

Medicare patients and that the public 

reporting of those processes of care will 

benefit Medicare beneficiaries. 

However, based on our consideration of 

the comments received, in this final rule 

we are only adopting one of the cardiac 

surgery measures. We will collect data 

regarding whether hospitals are 

participating in a registry for cardiac 

surgery. The window for submission of 

these data (which requires little more 

than a hospital saying ‘‘yes’’ or ‘‘no’’ as 

to whether it participates in a cardiac 

surgery registry) for FY 2010 will be 

between July 1, 2009 (when the ability 

to receive the data submission by CMS 

will be available) and August 15, 2009. 

This is a structural measure which 

requires reporting whether the hospital 

participates in a registry for cardiac 

surgery but does not require that 

hospitals actually participate in a 

registry. Therefore, hospitals that do not 

currently report to a registry will not be 

required to do so, and will not be 

penalized for not participating in a 

registry. Currently, we believe that over 

85 percent of cardiac surgery programs 

already report data to the STS. 

Reporting of the structural measure will 

provide further information regarding 

the extent of participation. In addition, 

it will provide valuable information for 

the Medicare beneficiary. We believe 

that participation in a cardiac surgery 

registry provides participants valuable 

ongoing quality improvement 

information and demonstrates a 

commitment to improvement. 

We are collecting this information 

directly from hospitals rather than STS 

because hospitals may be participating 

in registries other than STS. We are not 

finalizing the other 14 process and 

outcome measures that we proposed to 

collect from STS due to hospitals’

concern about the perceived 

requirement to participate specifically 

in the STS registry, and because we 

have not yet established the 

infrastructure to collect these measures 

directly from hospitals. We will 

consider the best alternative for data 

collection for the other STS measures 

and whether the data should be received 

from the STS registry as proposed in the 

proposed rule or submitted directly to 

CMS. We intend to propose the other 14 

cardiac surgery measures during the FY 

2010 IPPS rulemaking cycle for the FY 

2011 payment determination. 

(10) Summary of Measures for the FY 

2010 Payment Determination Adopted 

in This Final Rule 

In this final rule, one of the 30 current 

measures is being retired and 13 new 

measures are being added into the 

RHQDAPU program for the FY 2010 

payment determination. The 13 new 

measures are being added into the 

RHQDAPU program in this final rule 

are: 

• Surgical Care Improvement Project 

(SCIP) 

• SCIP Cardiovascular 2 Surgery 

Patients on a Beta-Blocker prior to 

arrival who received beta blocker 

during the perioperative period 

• Nursing Sensitive Measures 

• Failure to Rescue 

• Readmission measures 

• Heart Failure readmission 

(Medicare only) 

• AHRQ Quality Indicators: Inpatient 

Quality Indicators and Patient 

Safety Indicators 

• Death among surgical patients with 

treatable serious complications 

• Iatrogenic pneumothorax, adult 

• Postoperative wound dehiscence 

• Accidental puncture or laceration 

• Abdominal aortic aneurysm (AAA) 

mortality rate (with or without 

volume) 

• Hip fracture mortality rate 

• Mortality for selected medical 

conditions (composite) 

• Mortality for selected surgical 

procedures (composite) 

• Complication/patient safety for 

selected indicators (composite) 

• Cardiac Surgery Measures 

• Participation in a systematic 

database for cardiac surgery 

The following table lists the 42 

RHQDAPU program quality measures 

that will be used for the FY 2010 

payment determination 

Topic Quality measures for the FY 2010 payment determination 

Acute Myocardial Infarction (AMI) ............................................................ • AMI–1 Aspirin at arrival.* 

• AMI–2 Aspirin prescribed at discharge.* 


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Topic Quality measures for the FY 2010 payment determination 

• AMI–3 Angiotensin Converting Enzyme Inhibitor (ACE–I) or 

Angiotensin II Receptor Blocker (ARB) for left ventricular systolic 

dysfunction.* 

• AMI–6 Beta blocker at arrival.* 

• AMI–5 Beta blocker prescribed at discharge.* 

• AMI–7a Fibrinolytic (thrombolytic) agent received within 30 minutes 

of hospital arrival.** 

• AMI–4 Adult smoking cessation advice/counseling.** 

• AMI–8a Timing of Receipt of Primary Percutaneous Coronary Intervention (PCI).******* 

Heart Failure (HF) .................................................................................... • HF–2 Left ventricular function assessment.* 

• HF–3 Angiotensin Converting Enzyme Inhibitor (ACE–I) or 

Angiotensin II Receptor Blocker (ARB) for left ventricular systolic 

dysfunction.* 

• HF–1 Discharge instructions.** 

• HF–4 Adult smoking cessation advice/counseling.** 

Pneumonia (PN) ....................................................................................... • PN–2 Pneumococcal vaccination status.* 

• PN–3b Blood culture performed before first antibiotic received in hospital.** 

• PN–4 Adult smoking cessation advice/counseling.** 

• PN–6 Appropriate initial antibiotic selection.** 

• PN–7 Influenza vaccination status.** 

• PN–5c Timing of receipt of initial antibiotic following hospital arrival.******* 

Surgical Care Improvement Project (SCIP)—named SIP for discharges 

prior to July 2006 (3Q06).

• SCIP–1 Prophylactic antibiotic received within 1 hour prior to surgical 

incision.** 

• SCIP–3 Prophylactic antibiotics discontinued within 24 hours after 

surgery end time.** 

• SCIP–VTE–1: Venous thromboembolism (VTE) prophylaxis ordered 

for surgery patients.*** 

• SCIP–VTE–2: VTE prophylaxis within 24 hours pre/post surgery.*** 

• SCIP Infection 2: Prophylactic antibiotic selection for surgical patients.*** 

• SCIP Infection 4: Cardiac Surgery Patients with Controlled 6AM 

Postoperative Serum Glucose.***** 

• SCIP Infection 6: Surgery Patients with Appropriate Hair Removal.***** 

• SCIP Cardiovascular 2: Surgery Patients on a Beta Blocker Prior to 

Arrival Who Received a Beta Blocker During the Perioperative Period.****** 

Mortality Measures (Medicare Patients) ................................................... • MORT–30–AMI Acute Myocardial Infarction 30-day mortality—Medicare patients.*** 

• MORT–30–HF Heart Failure 30-day mortality Medicare patients.*** 

• MORT–30–PN Pneumonia 30-day mortality-Medicare patients.  

Patients’ Experience of Care .................................................................... • HCAHPS patient survey.** * 

Readmission Measure (Medicare Patients) ............................................. • Heart Failure (HF) 30-Day Risk Standardized Readmission Measure 

(Medicare patients).****** 

AHRQ Patient Safety Indicators (PSI), Inpatient Quality Indicators (IQI0 

and Composite Measures.

• Death among surgical patients with treatable serious complications.****** 

• Iatrogenic pneumothorax, adult.****** 

• Postoperative wound dehiscence.****** 

• Accidental puncture or laceration.****** 

• Abdominal aortic aneurysm (AAA) mortality rate (with or without volume).****** 

• Hip fracture mortality rate.****** 

• Mortality for selected surgical procedures (composite).****** 

• Complication/patient safety for selected indicators (composite).****** 

• Mortality for selected medical conditions (composite).****** 

Nursing Sensitive ...................................................................................... • Failure to Rescue (Medicare claims only).***** 

Cardiac Surgery ........................................................................................ • Participation in a Systematic Database for Cardiac Surgery.****** 

* Measure included in 10 measure starter set. 

** Measure included in 21 measure expanded set. 

*** Measure added in CY 2007 OPPS/ASC final rule with comment period. 

  Measure added in FY 2008 IPPS final rule with comment period. 

** *** Measure title proposed to be replaced for FY 2009 with the Timing of receipt of Primary Percutaneous Coronary Intervention (PCI). 

****** Measure title proposed to be replaced for FY 2009 with Timing of initial antibiotic following hospital arrival. 

******* Measure updated in FY 2009 IPPS final rule. 

In this final rule, we are increasing 

the RHQDAPU program measures from 

30 measures for FY 2009 to a total of 42 

measures for the FY 2010 payment 

determination. The following table lists 

the increase in the RHQDAPU program 

measure set since the program’s 

inception: 


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IPPS payment year 

Number of 

RHQDAPU 

program quality 

measures 

Topics covered 

2005–2006 ............................................... 10 AMI, HF, PN. 

2007 ......................................................... 21 AMI, HF, PN, SCIP. 

2008 ......................................................... 27 AMI, HF, PN, SCIP, Mortality, HCAHPS. 

2009 ......................................................... 30 AMI, HF, PN, SCIP, Mortality, HCAHPS. 

2010 ......................................................... 42 AMI, HF, PN, SCIP, Mortality, HCAHPS, Nursing Sensitive, Readmission, AHRQ 

IQI/PSI measures and composites, Cardiac Surgery. 

The above measures reflect our 

continuing commitment to quality 

improvement in both clinical care and 

patient safety. These additional 

measures also demonstrate our 

commitment to include in the 

RHQDAPU program only those quality 

measures that reflect consensus among 

the affected parties and that have been 

reviewed by a consensus building 

process. 

(11) Additional Measures for the FY 

2010 Payment Determination That May 

Be Finalized in the CY 2009 OPPS/ASC 

Final Rule With Comment Period 

In the FY 2009 IPPS proposed rule we 

noted that, to the extent that the 

proposed measures had not already 

been endorsed by a consensus building 

entity such as the NQF, we anticipated 

that they would be endorsed prior to the 

time that we issued this final rule (73 

FR 23651). We stated that we intended 

to finalize the FY 2010 RHQDAPU 

program measure set for the FY 2010 

payment determination in this final 

rule, contingent upon the endorsement 

status of the proposed measures. 

However, we stated that, if a measure 

had not received NQF endorsement by 

the time we issued this final rule, we 

intended to adopt that measure for the 

RHQDAPU program measure set in the 

CY 2009 OPPS/ASC final rule with 

comment period if the measure received 

endorsement prior to the time we issued 

the CY 2009 OPPS/ASC final rule with 

comment period. We requested public 

comment on these measures. Set out 

below are the measures which have not 

yet received NQF endorsement, and that 

we intend to adopt for the FY 2010 

RHQDAPU program measure set in the 

CY 2009 OPPS/ASC final rule with 

comment period if the measures receive 

endorsement from a national consensusbased entity such as NQF: 

Topic Proposed quality measure to be finalized in the CY 2009 OPPS/ASC 

final rule contingent on national consensus-based endorsement 

Readmission Measures (Medicare Patients) ........................................... • AMI 30-Day Risk Standardized Readmission Measure (Medicare patients). 

• Pneumonia (PN) 30-Day Risk Standardized Readmission Measure 

(Medicare patients). 

b. Possible New Quality Measures, 

Measure Sets, and Program 

Requirements for the FY 2011 Payment 

Determination and Subsequent Years 

In the FY 2009 IPPS proposed rule, 

we included the following table which 

describes possible quality measures and 

measure sets from which additional 

quality measures could be selected for 

inclusion in the RHQDAPU program for 

the FY 2011 payment determination and 

subsequent years (73 FR 23651). The 

table includes measures and measure 

sets that highlight CMS’ interest in 

improving patient safety and outcomes 

of care, with a particular focus on the 

quality of surgical care and patient 

outcomes. In order to engender a broad 

review of potential performance 

measures, the list includes measures 

that have not yet been considered for 

approval by the HQA or endorsed by a 

consensus review process such as the 

NQF. The table also includes measures 

developed by organizations other than 

CMS as well as measures that are to be 

derived from administrative data (such 

as claims) that may need to be modified 

for specific use by the Medicare 

program if implemented under the 

RHQDAPU program. 

We solicited public comment on the 

following measure sets for consideration 

in the FY 2011 payment determination 

and subsequent years: 

POSSIBLE MEASURES AND MEASURE SETS FOR THE RHQDAPU PROGRAM FOR FY 2011 AND SUBSEQUENT YEARS

Topic Quality measure 

Chronic Pulmonary Obstructive Disease Measures.

Complications of Vascular Surgery .......................................................... • AAA stratified by open and endovascular methods. 

• Carotid Endarterectomy. 

• Lower extremity bypass. 

Inpatient Diabetes Care Measures.

Healthcare Associated Infection ............................................................... • Central Line-Associated Blood Stream Infections. 

• Surgical Site Infections. 

Timeliness of Emergency Care Measures, including Timeliness ............ • Median Time from ED Arrival to ED Departure for Admitted ED Patients. 

• Median Time from ED Arrival to ED Departure for Discharged ED 

Patients. 


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POSSIBLE MEASURES AND MEASURE SETS FOR THE RHQDAPU PROGRAM FOR FY 2011 AND SUBSEQUENT YEARS—

Continued 

Topic Quality measure 

• Admit Decision Time to ED Departure Time for Admitted Patients. 

Surgical Care Improvement Project (SCIP)—named SIP for discharges 

prior to July 2006 (3Q06).

• SCIP Infection 8—Short Half-life Prophylactic Administered Preoperatively Redosed Within 4 Hours After Preoperative Dose. 

• SCIP Cardiovascular 3—Surgery Patients on a Beta Blocker Prior to 

Arrival Receiving a Beta Blocker on Postoperative Days 1 and 2. 

Complication Measures (Medicare patients).

Healthcare Acquired Conditions ............................................................... • Serious reportable events in health care (never events). 

• Pressure ulcer prevalence and incidence by severity. 

• Catheter-associated UTI. 

Hospital Inpatient Cancer Care Measures ............................................... • Patients with early stage breast cancer who have evaluation of the 

axilla. 

• College of American Pathologists breast cancer protocol. 

• Surgical resection includes at least 12 nodes. 

• College of American Pathologists colon and rectum protocol. 

• Completeness of pathologic reporting. 

Serious Reportable Events in Healthcare (‘‘Never Events’’) ................... • Surgery performed on the wrong body part. 

• Surgery performed on the wrong patient. 

• Wrong surgical procedure on a patient. 

• Retention of a foreign object in a patient after surgery or other procedure. 

• Intraoperative or immediately post-operative death in a normal health 

patient (defined as a Class 1 patient for purposes of the American 

Society of Anesthesiologists patient safety initiative). 

• Patient death or serious disability associated with the use of contaminated drugs, devices, or biologics provided by the health care facility. 

• Patient death or serious disability associated with the use or function 

of a device in patient care in which the device is used or functions 

other than as intended. 

• Patient death or serious disability associated with intravascular air 

embolism that occurs while being cared for in a health care facility. 

• Patient death or serious disability associated with patient elopement 

(disappearance) for more than four hours. 

• Patient suicide, or attempted suicide resulting in serious disability, 

while being cared for in a health care facility. 

• Patient death or serious disability associated with a medication error 

(e.g., error involving the wrong drug, wrong dose, wrong patient, 

wrong time, wrong rate, wrong preparation, or wrong route of administration). 

• Patient death or serious disability associated with a hemolytic reaction due to the administration of ABO-incompatible blood or blood 

products. 

• Patient death or serious disability associated with hypoglycemia, the 

onset of which occurs while the patient is being cared for in a health 

care facility. 

• Stage 3 or 4 pressure ulcers acquired after admission to a health 

care facility. 

• Patient death or serious disability due to spinal manipulative therapy. 

• Patient death or serious disability associated with an electric shock 

while being cared for in a health care facility. 

• Any incident in which a line designated for oxygen or other gas to be 

delivered to a patient contains the wrong gas or is contaminated by 

toxic substances. 

• Patient death or serious disability associated with a burn incurred 

from any source while being cared for in a health care facility. 

• Patient death associated with a fall while being cared for in a health 

care facility. 

• Patient death or serious disability associated with the use of restraints or bedrails while being cared for in a health care facility. 

• Any instance of care ordered by or provided by someone impersonating a physician, nurse, pharmacist, or other licensed health 

care provider. 

• Abduction of a patient of any age. 

• Sexual assault on a patient within or on the grounds of a health care 

facility. 

• Death or significant injury of a patient or staff member resulting from 

a physical assault (i.e., battery) that occurs within or on the grounds 

of a health care facility. 

Average Length of Stay Coupled with Global Readmission Measure.

Preventable Hospital-Acquired Conditions (HACs) .................................. • Catheter-Associated Urinary Tract Infection (UTI). 

• Vascular Catheter-Associated Infection. 


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POSSIBLE MEASURES AND MEASURE SETS FOR THE RHQDAPU PROGRAM FOR FY 2011 AND SUBSEQUENT YEARS—

Continued 

Topic Quality measure 

• Surgical Site Infections—Mediastinitis after Coronary Artery Bypass 

Graft (CABG). 

• Surgical Site Infections following Elective Procedures—Total Knee 

Replacement, Laparoscopic Gastric Bypass, Ligation and Stripping 

of Varicose Veins. 

• Legionnaires’ Disease. 

• Glycemic Control—Diabetic Ketoacidosis, Nonketotic Hypersmolar 

Coma, Hypoglycemic Coma. 

• Iatrogenic pneumothorax. 

• Delirium. 

• Ventilator-Associated Pneumonia (VAP). 

• Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE). 

• Staphylococcus aureus Septicemia. 

• Clostridium-Difficile Associated Disease (CDAD). 

• Methicillin-Resistant Staphylococcus aureus (MRSA). 

Comment: Because only 37 percent of 

colon cancer patients receive adequate 

lymph node evaluation of at least 12 

nodes, many commenters recommended 

that CMS adopt the Hospital Inpatient 

Cancer Care measure—Surgical 

resection includes at least 12 nodes. 

Response: We appreciate the 

commenters’ recommendation. We are 

developing cancer care measures for 

future implementation. Cancer is a 

prevalent diagnosis among Medicare 

beneficiaries, and warrants further 

measurement. 

Comment: Many commenters 

supported the development and 

implementation of care coordination 

measures, and additional glycemic 

control measures. 

Response: In the future, we will 

consider adopting additional glycemic 

control measures endorsed by a 

consensus building entity such as the 

NQF based on our assessment of 

whether they are appropriate for 

inclusion in the RHQDAPU program. 

We will also consider these comments 

as we continue to develop care 

coordination measures. 

Comment: Some commenters 

suggested that CMS review existing 

measures related to AMI in order to 

ensure that they represent the most 

current information that exists, and 

consider deeming participation in a 

heart registry a sufficient criterion to 

meet AMI data reporting requirements. 

Another commenter requested that CMS 

display the reporting methodology for 

AMI measures and exclude those cases 

with the non-diagnostic presentations. 

Response: We agree that it is 

imperative for us to ensure that the 

RHQDAPU program measures reflect the 

most current information. Therefore, it 

is our practice to utilize the most 

current science and the guidance of 

technical experts in the respective fields 

when selecting measures for inclusion 

in the program. As set out in the 

Specification Manual, the AMI 

measures rely upon principal diagnosis 

codes, and not on presentation to 

determine inclusion and exclusion. We 

view participation in a registry as a 

structural measure of quality. However, 

it is not a substitute for reporting data 

on clinical processes and outcomes of 

care. 

c. Considerations in Expanding and 

Updating Quality Measures Under the 

RHQDAPU Program 

The RHQDAPU program has 

significantly expanded from an initial 

set of 10 measures to 30 measures for 

the FY 2009 payment determination. 

Initially, the conditions covered by the 

RHQDAPU program measures were 

limited to Acute Myocardial Infarction, 

Heart Failure, and Pneumonia, three 

high-cost and high-volume conditions. 

In expanding the process measures, 

Surgical Infection Prevention was the 

first additional focus, now 

supplemented by the two SCIP Venous 

Thromboembolism measures, SCIP 

VTE–1, and SCIP VTE–2, for surgical 

patients. Of the 30 current measures, 27 

require data collection from chart 

abstraction and surveying patients as 

well as submission of detailed data 

elements. 

In looking forward to further 

expansion of the RHQDAPU program, 

we believe it is important to take several 

goals into consideration. These include: 

(a) Expanding the types of measures 

beyond process of care measures to 

include an increased number of 

outcome measures, efficiency measures, 

and experience-of-care measures; (b) 

expanding the scope of hospital services 

to which the measures apply; (c) 

considering the burden on hospitals in 

collecting chart-abstracted data; (d) 

harmonizing the measures used in the 

RHQDAPU program with other CMS 

quality programs to align incentives and 

promote coordinated efforts to improve 

quality; (e) seeking to use measures 

based on alternative sources of data that 

do not require chart abstraction or that 

utilize data already being broadly 

reported by hospitals, such as clinical 

data registries or all-payer claims data 

bases; and (f) weighing the 

meaningfulness and utility of the 

measures compared to the burden on 

hospitals in submitting data under the 

RHQDAPU program. 

In the FY 2009 IPPS proposed rule, 

we requested comments on how to 

reduce the burden on the hospitals 

participating in the RHQDAPU program 

(73 FR 23653). We also requested 

comment about which measures would 

be most useful while minimizing 

burden. We realize that our decisions in 

this final rule to expand the RHQDAPU 

program measure set from submission of 

30 measures in FY 2009 to 42 measures 

for the FY 2010 payment determination 

is potentially burdensome. However, to 

minimize the hospitals’ burden, 11 of 

the 13 additional measures adopted in 

this final rule, as well as the 2 

additional measures we intend to adopt 

in the CY 2009 OPPS/ASC final rule 

with comment period (if these measures 

receive NQF endorsement) for the FY 

2010 payment determination use 

Medicare claims data. We also note that 

we are retiring a measure (Pneumonia 

Oxygenation Assessment) that requires 

chart abstraction. 

Comment: Several commenters 

supported including composite 

measures such as mortality for selected 

medical conditions, mortality for 

selected surgical procedures, and 

complication/patient safety as part of 

the RHQDAPU program measure set. 


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Response: We appreciate the 

commenters’ support for the proposal to 

include the inclusion of composite 

measures such as mortality for selected 

medical conditions, mortality for 

selected surgical procedures, and 

complication/patient safety in the 

RHQDAPU program measure set. We are 

implementing some of these composite 

measures in this final rule. Specifically, 

we are adopting the 3 AHRQ composite 

measures for mortality for selected 

surgical procedures, complication/ 

patient safety for selected indicators, 

and mortality for selected medical 

conditions. 

Comment: Many commenters asked 

that CMS make its risk adjustment 

model public so that others may assess 

its validity. In addition, several 

commenters expressed concerns that the 

rates must be acuity adjusted and must 

allow for random variation around the 

mean for the AMI, Heart Failure, and 

Pneumonia readmission measures. 

Response: In an effort to provide the 

public access to the reports on our risk 

adjustment models, we have made 

reports from the measures developers 

available on the QualityNet Web site 

(http://www.QualityNet.org) since June 

2006. These reports, which contain risk 

adjustment methodologies for claims 

based measures that require risk 

adjustment, will continue to be made 

available on QualityNet. The HF 

readmission measure that we are 

finalizing in this final rule will be risk 

adjusted by taking into account the 

patient comorbidities reflected from the 

patient claims across all care settings 

one year prior to the index 

hospitalization. The claims-based risk 

adjustment model does not include 

patient vital signs as predictors, but this 

model is validated against a chart-based 

model that includes patient vital signs 

and lab test results. We use hierarchical 

modeling to calculate the hospital Risk 

Standardized Readmission Rate (RSRR) 

and the interval estimate (like 

confidence interval) around the RSRR. 

Hospitals will be presented with the 

RSRR together with their respective 

interval estimate to show the random 

variation. This risk adjustment model 

will be used for the Heart Failure, AMI, 

and Pneumonia readmission measures. 

Comment: Several commenters 

expressed concerns that increasing the 

amount of information publicly reported 

on Hospital Compare by the number of 

measures proposed only make it more of 

a challenge for the public to understand, 

make the Web site cumbersome to 

navigate, and discourage public interest 

in the site. Many commenters supported 

the development and use of composite 

measures for evaluating hospitals on 

Hospital Compare, as they provide 

useful indices to consumers and others 

when comparing hospital performance. 

The commenters also suggested that 

CMS pursue alternative strategies and 

methods for reporting differences among 

hospitals, including ranking of hospitals 

in an area, providing information to 

consumers on low performers rather 

than on just the high performers, and 

beginning to include cost and resource 

use measures in public reporting 

initiatives. One commenter questioned 

whether or not an on-going process or 

plan was in place to survey the 

Medicare beneficiaries after 

implementation of additional measures 

to evaluate whether publicly reporting 

the measures meets the intended goals 

and has perceived value to beneficiaries. 

Response: Regarding the Hospital 

Compare Web site, we agree that it is 

important that information be displayed 

in a way that is most useful, beneficial, 

and understandable to the consumer. 

We appreciate the comments on ways to 

enhance the Hospital Compare Web site 

and recognize the valuable feedback that 

a survey would provide. CMS uses focus 

groups to test all of the RHQDAPU 

program measures on Hospital Compare 

and will continue to do so when 

revising the Hospital Compare Web site. 

We are finalizing three composite 

measures in this rule and are working 

toward including more composite 

measures on Hospital Compare. 

(1) Expanding the Types of Measures 

Section 1886(b)(3)(B)(viii)(III) of the 

Act requires the Secretary to add other 

quality measures that the Secretary 

determines to be appropriate for the 

measurement of the quality of care 

furnished by hospitals in inpatient 

settings. We intend to expand outcome 

measures such as mortality measures 

and measures of complications. For the 

FY 2010 RHQDAPU program, the 

proposed measure set includes: 

• Patient Experience of Care. 

HCAHPS collects data regarding a 

patient’s experience of care in the 

hospital and provides a very meaningful 

perspective from the patient standpoint. 

• Efficiency. Efficiency is a Quality 

Domain, as defined by the IOM that 

relates Quality and Cost. The three 

proposed readmission measures address 

hospital efficiency. 

(As discussed above, we are adopting 

one of these readmission measures in 

this final rule and intend to adopt the 

other two in the OPPS/ASC final rule 

with comment period if they receive 

NQF endorsement by the time that final 

rule is issued.) These are considered 

efficiency measures because higher 

hospital readmission rates are linked to 

higher costs and also to lower quality of 

care received during hospitalization and 

after the initial hospital stay. We are 

also seeking additional ways in which 

to address efficiency. 

• Outcomes. The three 30-day 

mortality measures, the cardiac surgery 

measure, the AHRQ PSI/IQI measures, 

and the outcome-related nursing 

sensitive measure represent significant 

expansion of the RHQDAPU program 

outcome measures because these 

measures allow us to report more 

comprehensive information on 

outcomes and the results of treatment to 

consumers. Additional outcome 

measures are provided in the list under 

consideration for inclusion in the 

RHQDAPU program for FY 2011 and 

beyond. 

(2) Expanding the Scope of Hospital 

Services To Which Measures Apply 

Many of the most common and highcost Medicare DRGs were posted on the 

Hospital Compare Web site in March 

2008 as part of the President’s 

transparency initiative. We have 

assessed these DRGs and have found 

that the FY 2009 RHQDAPU program 

measure set does not capture data 

regarding care in important areas such 

as Inpatient Diabetes Care, Chronic 

Obstructive Pulmonary Disease (COPD), 

and Chest Pain. These are areas for 

which we currently do not have quality 

measures but which constitute a 

significant portion of the top paying 

DRGs for Medicare beneficiaries. We 

intend to develop measures in these 

areas in order to provide additional 

quality information on the most 

common and high-cost conditions that 

affect Medicare beneficiaries. 

(3) Considering the Burden on Hospitals 

in Collecting Chart-Abstracted Data for 

Measures 

In the FY 2009 IPPS proposed rule, 

we proposed to add 15 additional chartabstracted measures. In this final rule, 

we have retired one measure 

(Pneumonia Oxygenation Assessment) 

that required chart abstraction and 

added only 1 additional chart-abstracted 

measure (SCIP Cardiovascular 2) for the 

FY 2010 payment determination. While 

the cardiac surgery registry participation 

indicator requires submission of 

information by hospitals, it does not 

require chart abstraction, and does not 

significantly increase the burden on 

hospitals to submit data. We also intend 

to work to simplify the data abstraction 

specifications that add to the burden of 

data collection and to explore 

mechanisms for data submission using 

electronic health records. 


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(4) Harmonizing With Other CMS 

Programs 

We intend to harmonize measures 

across settings and other CMS programs 

as evidenced by the implementation of 

the readmission measures, not only for 

the RHQDAPU program, but also for the 

Quality Improvement Organizations’

(QIOs’) 9th Scope of Work (SOW) 

Patient Pathways/Care Transitions 

Theme, which also uses the 30-Day 

Readmission Measures and will provide 

assistance to engage hospitals in 

improving care. The 9th SOW also 

focuses on disparities in health care, 

which is another important area of 

interest for CMS. We plan to analyze 

current RHQDAPU program measures to 

identify particular measures needed to 

evaluate the existence of health care 

disparities, to require data elements that 

would support better identification of 

health care disparities, and to find more 

efficient ways to ascertain this 

information from claims data. In 

addition, some of the CY 2008 Physician 

Quality Reporting Initiative (PQRI) 

measures align with the current 

RHQDAPU program, for example, AMI 

and SCIP measures reported data 

starting with the FY 2007 RHQDAPU 

program measure set. In other words, 

there are financial incentives that cover 

the same clinical processes of care 

across different providers and settings. 

Other examples are the RHQDAPU 

program measure Aspirin for Heart 

Attack which corresponds to PQRI 

measure number 28, and the RHQDAPU 

program measure Surgical Infection 

Antibiotic Timing which corresponds to 

PQRI measure number 20. Outpatient 

quality measures under the Hospital 

Outpatient Data Quality Data Reporting 

Program (HOP QDRP) are also aligned 

with the RHQDAPU program measures. 

For example, the HOP QDRP addresses 

Acute Myocardial Infarction treatment 

for transferred patients and surgical 

infection prevention for outpatient 

surgery. 

(5) Use of Data Collected by State Data 

Organizations, State Hospital 

Associations, Federal Entities, and/or 

Other Data Warehouses 

We are actively pursuing alternative 

data sources, including data sources that 

are electronically maintained. 

Alternative data submission 

methodologies that we proposed in the 

FY 2009 IPPS proposed rule include: 

• Use of registry-collected clinical 

data for which there is broad existing 

hospital participation as previously 

described with the STS registry. 

• Use of data collected by State data 

organizations, State hospital 

associations, Federal entities such as 

AHRQ, and/or other data warehouses. 

In addition, we are considering 

adopting the following methods of data 

collection in the future and requested 

comments on these methods: 

• Use of the CMS Continuity 

Assessment Record & Evaluation 

(CARE) tool, a standardized data 

collection instrument, which would 

allow data to be transmitted in ‘‘real 

time.’’ This recently developed, 

Internet-based, quality data collection 

tool was developed as a part of the Post 

Acute Care Reform Demonstration 

Program mandated by section 5008 of 

the DRA. The CARE tool consists of a 

core set of assessment items, common to 

all patients and all care settings 

(meeting criteria of being predictive of 

cost, utilization, outcomes, among 

others), organized under five major 

domains: Medical, Functional, Social, 

Environmental, and Cognitive—

Continuity of Care. The Internet-based 

CARE tool will communicate critical 

information across settings accurately, 

quickly, and efficiently with reduced 

time burden to providers and is 

intended to enhance beneficiaries’ safe 

transitions between settings to prevent 

avoidable, costly events such as 

unnecessary rehospitalizations or 

medication errors. We believe that the 

CARE tool may provide a vehicle for 

collection of data elements to be used 

for calculating RHQDAPU program 

quality measures. CMS is considering 

utilizing the CARE tool in this manner. 

The Care tool is available at: http:// 

www.cms.hhs.gov/ 

PaperworkReductionActof1995/PRAL/ 

list.asp#TopOfPage. (Viewers should 

select ‘‘Show only items with the word 

10243,’’ click on show items, select 

CMS–10243, click on downloads, and 

open Appendices A & B, pdf files.) 

In the FY 2009 IPPS proposed rule, 

we indicated that we were particularly 

interested in receiving public comment 

on this tool (73 FR 23654). Our goal is 

to have a standardized, efficient, 

effective, interoperable, common 

assessment tool to capture key patient 

characteristics that will help CMS 

capture information related to resource 

utilization; expected costs as well as 

clinical outcomes; and post-discharge 

disposition. The CARE tool will also be 

useful for guiding payment and quality 

policies. Specifically, we indicated that 

we were interested in receiving public 

comments on how CARE might advance 

the use of health information technology 

in automating the process for collecting 

and submitting quality data. 

• Submission of data derived from 

electronic versions of laboratory test 

reports that are issued by the laboratory 

in accordance with CLIA to the ordering 

provider and maintained by the hospital 

as part of the patient’s medical record 

during and after the patient’s course of 

treatment at the hospital. We are 

considering using these data to support 

risk adjustment for claims-based 

outcome measures (for example, 

mortality measures) and to develop 

other outcomes measures. This would 

support use of electronically maintained 

data and our goal of reducing manual 

data collection burden on hospitals. 

• Submission of data currently being 

collected by clinical data registries in 

addition to the STS registry. This would 

support and leverage existing clinical 

data registries and existing voluntary 

clinical data collection efforts, such as: 

• American College of Cardiology (ACC) 

data registry for Cardiac Measures 

• ACC data registry for ICD 

• ACC data registry for Carotid Stents 

• Vascular Surgery Registry for Vascular 

Surgical Procedures 

• ACC-sponsored ‘‘Get with the 

Guidelines’’ registry for Stroke Care 

Comment: Several commenters 

expressed concern about using the 

CARE tool. The commenters perceived 

the tool as time consuming (taking up to 

20 minutes per patient) and increased 

facility burden. These commenters 

stated that the tool should not be used 

until it has been fully tested, and can be 

made interoperable with provider 

systems. 

Response: We did not propose to 

implement the CARE tool in the FY 

2009 IPPS proposed rule. Before we can 

consider implementation of the CARE 

tool, we agree that the CARE tool must 

be fully tested and that data collection 

issues must be addressed. We will 

continue development of the CARE tool 

so that it can be used to efficiently 

capture valuable information regarding 

care coordination for Medicare 

beneficiaries. 

Comment: Some commenters 

recommended that CMS work with 

other agencies to foster better alignment 

of quality improvement and health 

information technology (Health IT) 

initiatives. The commenters encouraged 

more intense collaboration with 

standard-setting and certification bodies 

to provide an interoperable environment 

for hospitals to automate data 

submission in a reliable and costeffective way, and encouraged CMS to 

support payment policies to facilitate 

and encourage adoption of Health IT. 

Response: We agree with these 

comments and support the adoption of 

Health IT to facilitate the effective and 

efficient administration of quality 

patient care, monitoring, care 


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coordination, data reporting and 

performance improvement. We intend 

to pursue electronic data submission 

based on Health IT standards as an 

alternative to manual chart abstraction. 

(6) Weighing the Meaningfulness and 

Utility of the Measures Compared to the 

Burden on Hospitals in Submitting Data 

Under the RHQDAPU Program 

In the FY 2009 IPPS proposed rule, 

we proposed to retire one measure from 

the RHQDAPU program for the FY 2010 

payment determination because we 

have determined that the burden on 

hospitals in abstracting the data 

outweighs the meaningful benefit that 

we can ascertain from the measure (73 

FR 23655). In this final rule, we are 

adopting the proposal to retire one 

measure. As we explained in the FY 

2009 IPPS proposed rule, we sought 

comments on the applicability to the 

RHQDAPU program of criteria currently 

described in the Hospital VBP Issues 

Paper for inclusion and retirement of 

measures. The Hospital VBP Issues 

Paper is located on the CMS Web site at 

the following location: http:// 

www.cms.hhs.gov/AcuteInpatientPPS/ 

downloads/ 

hospital_VBP_plan_issues_paper.pdf. 

3. Form and Manner and Timing of 

Quality Data Submission 

In the FY 2007 IPPS final rule (71 FR 

48031 through 48045), we set out 

RHQDAPU program procedures for data 

submission, program withdrawal, data 

validation, attestation, public display of 

hospitals’ quality data, and 

reconsiderations. Section 

1886(b)(3)(B)(viii)(I) of the Act requires 

that subsection (d) hospitals submit data 

on measures selected under that clause 

with respect to the applicable fiscal 

year. In addition, section 

1886(b)(3)(B)(viii)(II) of the Act requires 

that each subsection (d) hospital submit 

data on measures selected under that 

clause to the Secretary in a form and 

manner, and at a time, specified by the 

Secretary. The technical specifications 

for each RHQDAPU program measure 

are listed in the Specifications Manual. 

We update this Manual semiannually, 

or more frequently in unusual cases, 

and include detailed instructions and 

calculation algorithms for hospitals to 

collect and submit the data for the 

required measures. 

The maintenance of the specifications 

for the measures selected by the 

Secretary occurs through publication of 

the Specifications Manual. Thus, 

measure selection by the Secretary 

occurs through the rulemaking process; 

whereas the maintenance of the 

technical specifications for the selected 

measures occurs through a 

subregulatory process so as to best 

maintain the specifications consistent 

with current science and consensus. 

The data submission, Specifications 

Manual, and submission deadlines are 

posted on the QualityNet Web site at 

http://www.QualityNet.org. CMS 

requires that hospitals submit data in 

accordance with the specifications for 

the appropriate discharge periods. 

When measure the specifications were 

updated, we proposed in the FY 2009 

IPPS proposed rule to require that 

hospitals submit all of the data required 

to calculate the required measures as 

currently outlined in the Specifications 

Manual as of the patient discharge date 

(73 FR 23655). 

4. RHQDAPU Program Procedures for 

FY 2009 and FY 2010 

a. RHQDAPU Program Procedures for 

FY 2009 

In the FY 2008 IPPS final rule with 

comment period, we stated that the 

requirements for FY 2008 would 

continue to apply for FY 2009 (72 FR 

47361). The ‘‘Reporting Hospital Quality 

Data for Annual Payment Update 

Reference Checklist’’ section of the 

QualityNet Web site contains all of the 

forms to be completed by hospitals 

participating in the RHQDAPU program. 

Under these requirements hospitals 

must—

• Register with QualityNet, before 

participating hospitals initially begin 

reporting data, regardless of the method 

used for submitting data. 

—Identify a QualityNet Administrator 

who follows the registration process 

located on the QualityNet Web site 

(http://www.QualityNet.org). 

—Complete the revised RHQDAPU 

program Notice of Participation form 

(only for hospitals that did not submit 

a form prior to August 15, 2007). For 

hospitals that share the same CMS 

Certification Number (CCN) (formerly 

Medicare Provider Number), report 

the name and address of each hospital 

campus on this form. 

—Collect and report data for each of the 

required measures except the 

Medicare mortality measures (AMI, 

HF, and PN 30-day Mortality for 

Medicare Patients). Hospitals must 

continuously report these data. 

Hospitals must submit the data to the 

QIO Clinical Warehouse using the 

CMS Abstraction & Reporting Tool 

(CART), The Joint Commission 

ORYX Core Measures Performance 

Measurement System, or another 

third-party vendor tool that has met 

the measurement specification 

requirements for data transmission to 

QualityNet. All submissions will be 

executed through QualityNet. Because 

the information in the QIO Clinical 

Warehouse is considered QIO 

information, it is subject to the 

stringent QIO confidentiality 

regulations in 42 CFR Part 480. The 

QIO Clinical Warehouse will submit 

the data to CMS on behalf of the 

hospitals. 

• Submit complete data regarding the 

quality measures in accordance with the 

joint CMS/Joint Commission sampling 

requirements located on the QualityNet 

Web site for each quality measure that 

requires hospitals to collect and report 

data. These requirements specify that 

hospitals must submit a random sample 

or complete population of cases for each 

of the topics covered by the quality 

measures. Hospitals must meet the 

sampling requirements for these quality 

measures for discharges in each quarter. 

• Submit to CMS on a quarterly basis 

aggregate population and sample size 

counts for Medicare and non-Medicare 

discharges for the four topic areas (AMI, 

HF, PN, and SCIP). 

• Continuously collect and submit 

HCAHPS data in accordance with the 

HCAHPS Quality Assurance Guidelines, 

V3.0, located at the Web site http:// 

www.hcahpsonline.org. The QIO 

Clinical Warehouse has been modified 

to accept zero HCAHPS-eligible 

discharges. We remind the public to 

refer to the QualityNet Web site for any 

questions about how to submit ‘‘zero 

cases’’ information. 

For the AMI 30-day, HF 30-day, and 

PN 30-day mortality measures, CMS 

uses Part A and Part B claims for 

Medicare fee-for-service patients to 

calculate the mortality measures. For FY 

2009, hospital inpatient claims (Part A) 

from July 1, 2006 to June 30, 2007, will 

be used to identify the relevant patients 

and the index hospitalizations. Inpatient 

claims for the index hospitalizations 

and Part A and Part B claims for all 

inpatient, outpatient, and physician 

services received one year prior to the 

index hospitalizations are used to 

determine patient comorbidity, which is 

used in the risk adjustment calculation. 

(For more information, we refer readers 

to the Web site: http://www.QualityNet.

org/dcs/ContentServer?cid=

1163010398556&pagename=

QnetPublic%2FPage%2FQnetTier2&c=

Page.) No other hospital data 

submission is required to calculate the 

mortality rates. 

b. RHQDAPU Program Procedures for 

FY 2010 

In the FY 2009 IPPS proposed rule (73 

FR 23656), we proposed to continue 


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requiring the FY 2009 RHQDAPU 

program procedures for FY 2010 for 

hospitals participating in the RHQDAPU 

program, with the following 

modifications: 

• Notice of Participation. New 

subsection (d) hospitals and existing 

hospitals that wish to participate in the 

RHQDAPU program for the first time 

must complete a revised ‘‘Reporting 

Hospital Quality Data for Annual 

Payment Update Notice of 

Participation’’ that includes the name 

and address of each hospital campus 

that shares the same CCN. 

• Data Submission. In order to reduce 

the burden on hospitals that treat a low 

number of patients who are covered by 

the submission requirements, we 

proposed the following: 

—AMI. In the FY 2009 IPPS proposed 

rule, we proposed that a hospital that 

has five or fewer AMI discharges 

(both Medicare and non-Medicare 

combined) in a quarter will not be 

required to submit AMI patient level 

data for that quarter (73 FR 23656). 

We proposed to begin implementing 

this requirement with discharges on 

or after January 1, 2009. However, the 

hospital must still submit its aggregate 

AMI population and sample size 

counts to CMS for that quarter as part 

of its quarterly RHQDAPU program 

data submission. 

—HCAHPS. In the FY 2009 IPPS 

proposed rule, we proposed that a 

hospital that has five or fewer 

HCAHPS-eligible discharges in any 

month will not be required to submit 

HCAHPS surveys for that month (73 

FR 23656). However, the hospital 

must still submit its total number of 

HCAHPS-eligible cases for that month 

as part of its quarterly HCAHPS data 

submission. We proposed to begin 

implementing this requirement with 

discharges on or after January 1, 2009. 

—HF. In the FY 2009 IPPS proposed 

rule, we proposed that a hospital that 

has five or fewer HF discharges (both 

Medicare and non-Medicare 

combined) in a quarter will not be 

required to submit HF patient level 

data for that quarter (73 FR 23656). 

However, the hospital must still 

submit its aggregate HF population 

and sample size counts to CMS for 

that quarter as part of its quarterly 

RHQDAPU program data submission. 

We proposed to begin implementing 

this requirement with discharges on 

or after January 1, 2009. 

—PN. In the FY 2009 IPPS proposed 

rule, we proposed that a hospital that 

has five or fewer PN discharges (both 

Medicare and non-Medicare 

combined) in a quarter will not be 

required to submit PN patient level 

data for that quarter (73 FR 23656). 

However, the hospital must still 

submit its aggregate PN population 

and sample size counts to CMS for 

that quarter as part of its quarterly 

RHQDAPU program data submission. 

We proposed to begin implementing 

this requirement with discharges on 

or after January 1, 2009. 

—SCIP. In the FY 2009 IPPS proposed 

rule, we proposed that a hospital that 

has five or fewer SCIP discharges 

(both Medicare and non-Medicare 

combined) in a quarter will not be 

required to submit SCIP patient level 

data for that quarter (73 FR 23656). 

However, the hospital must still 

submit its aggregate SCIP population 

and sample size counts to CMS for 

that quarter as part of its quarterly 

RHQDAPU program data submission. 

We proposed to begin implementing 

this requirement with discharges on 

or after January 1, 2009. 

Comment: Several commenters 

supported CMS’ proposal to allow 

hospitals that have five or fewer 

HCAHPS-eligible patients in a month, or 

five or fewer heart attack, heart failure, 

pneumonia or surgical care patients in 

a calendar quarter to not submit 

HCAHPS survey or quality measure data 

for those patients beginning in FY 2010. 

The commenters supported this 

approach because it is a sensible way to 

reduce the reporting burden on 

hospitals with a very small number of 

cases; however, the commenters 

believed that hospitals should always be 

able to voluntarily report on quality 

measures if they want to do so. 

Response: We appreciate the 

commenters’ support. This proposal 

strives to minimize the reporting burden 

for hospitals with small patient 

caseloads. We welcome hospitals with 

smaller than the required minimum 

number of cases to submit data 

voluntarily. 

Comment: One commenter asked 

CMS to provide the statistical rationale 

for its proposal to allow hospitals that 

have five or fewer heart attack, heart 

failure, pneumonia or surgical care 

patients in a calendar quarter to not 

submit quality measures data for those 

patients beginning in FY 2010. 

Response: We selected more than five 

cases per quarter as the minimum 

threshold to ensure that the vast 

majority of hospitals with sufficient 

caseload would be required to submit 

data, while easing the burden on 

hospitals whose patient counts were too 

small to reliably predict hospital 

performance. We believe that hospital 

level performance can be reliably 

estimated with 20 to 30 cases reported 

annually, consistent with commonly 

used statistical sampling practice. We 

also chose the more than five cases 

minimum quarterly threshold as a fair, 

consistent, and easily understandable 

requirement that would not reduce the 

amount of reliable publicly reported 

data posted on the Hospital Compare 

Web site. It is likely that the vast 

majority of hospitals affected by this 

requirement would not have sufficient 

annual caseload for CMS to publicly 

report reliable hospital level estimates 

for RHQDAPU program measures. We 

believe that the relative burden on 

hospitals treating these small patient 

caseloads outweighs the improved 

reliability from increased measure 

denominators of a few cases. We believe 

that this proposal does not adversely 

impact quality data for smaller and 

specialty hospitals treating five or fewer 

heart attack, heart failure, pneumonia or 

surgical care patients in a calendar 

quarter. 

In the FY 2009 IPPS proposed rule, 

we proposed the following quarterly 

deadlines for hospitals to submit the FY 

2010 AMI, HF, SCIP, PN, Stroke, VTE, 

and nursing sensitive measure data: 

• The data submission deadline for 

hospitals to submit the patient level 

measure data for 1st calendar quarter of 

2009 discharges would be August 15, 

2009. Data must be submitted for each 

of these measures 4.5 months after the 

end of the preceding quarter. The 

specific deadlines will be listed on the 

QualityNet Web site. 

• Even though data on applicable 

measures will not be due until 4.5 

months after the end of the preceding 

quarter, hospitals must submit their 

aggregate population and sample size 

counts no later than 4 months after the 

end of the preceding quarter (the exact 

dates will be posted on the QualityNet 

Web site). This deadline falls 

approximately 15 days before the data 

submission deadline for the clinical 

process measures, and we proposed it so 

that we can inform hospitals about their 

data submission status for the quarter 

before the 4.5 month clinical process 

measure deadline. We have found from 

past experience that hospitals need 

sufficient time to submit additional data 

when their counts differ from Medicare 

claims counts generated by CMS. We 

will provide hospitals with these 

Medicare claims counts and submitted 

patient level data counts on the 

QualityNet Web site approximately 2 

weeks before the quarterly submission 

deadline. We plan to use the aggregate 

population and sample size data to 

assess submission completeness and 


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adherence to sampling requirements for 

Medicare and non-Medicare patients. 

As discussed above in our responses 

to previous commenters, we decided not 

to adopt all of our proposed measures. 

Therefore, these requirements will only 

apply with respect to the SCIP, HF, 

AMI, and PN chart-abstracted measures 

that we are adopting in this final rule. 

Comment: Several commenters 

addressed the CMS data resubmission 

policy which allows resubmission of 

data up to, but not after, the quarterly 

deadline. The commenters noted that 

the FY 2009 IPPS proposed rule did not 

address the issue of data resubmission 

when a hospital or its vendor becomes 

aware of an error in the data that was 

sent for posting on Hospital Compare, 

and that the proposed rule also did not 

address the issue of appealing to 

resubmit data after the submission 

deadline. These commenters urged CMS 

to immediately adopt an effective 

mechanism for allowing hospitals and 

their vendors to resubmit quality 

measure data if they discover errors. 

Response: We believe that the current 

data submission deadlines for the chartabstracted measures are sufficient to 

allow hospitals time to submit accurate 

and complete data before the 

submission deadline. Our past 

experience has indicated that the vast 

majority of hospitals submit accurate 

data in a timely manner before the 

quarterly submission deadline. We 

encourage hospitals to submit their data 

as early as possible to correct data 

through resubmissions before the 

submission deadline. We believe that 

data submission after the quarterly 

deadline would result in delays in the 

quarterly CDAC validation processing, 

and would adversely impact our ability 

to deliver timely validation results to 

hospitals. 

We will consider allowing future 

resubmissions of data after the 

submission deadline has elapsed for 

public reporting purposes only. This 

resubmission would not adversely 

impact our CDAC validation processing, 

but would allow hospitals to correct 

errors that would impact their publicly 

reported RHQDAPU program measures. 

Comment: One commenter requested 

that CMS provide 30 days between the 

final count of Medicare claims currently 

provided by CMS to the hospitals and 

the submission deadline. This extension 

of time would provide hospitals and 

vendors with the necessary time to 

reabstract and submit the necessary 

cases to comply with the submission 

requirement. 

Response: We provide the final claims 

counts to hospitals approximately 15 

days before the quarterly submission 

deadline of 4.5 months following the 

last quarterly discharge date. We believe 

that providing additional time to 

provide a final claims count would 

result in an incomplete count of 

Medicare claims for hospitals lagging in 

their claims submissions to Medicare. In 

the future, our goal is to utilize the 

hospital submitted aggregate population 

and sample counts to replace these 

Medicare claims counts. We believe that 

hospital submitted aggregated 

population and sample counts will 

provide a complete and accurate 

assessment of the entire list of patients 

treated by hospitals. These counts 

include both Medicare and nonMedicare patients, including Medicare 

fee-for-service and Medicare Advantage 

patients. The current claims counts we 

provide include only Medicare fee-forservice patients, so they are limited in 

assisting hospitals to assessment 

submission completeness. 

Comment: Some commenters objected 

to the proposed requirement for 

hospitals to submit aggregate patient 

population counts for Medicare and 

non-Medicare patients. The commenters 

stated that the requirement was 

burdensome and duplicative of 

Medicare claims counts provided by 

CMS to hospitals. 

Response: We do not currently 

possess any patient population counts 

for non-Medicare patients. Since we do 

not possess patient population counts 

for non-Medicare patients, this 

information is necessary for us to better 

assess the completeness of hospital 

submitted RHQDAPU program data for 

all treated patients, Medicare and nonMedicare. The RHQDAPU program 

measures are intended to provide the 

public with information on all patients 

treated by hospitals, including Medicare 

and non-Medicare patients. We require 

hospitals to comply with the CMS/Joint 

Commission sampling requirements for 

submitting data. These requirements 

require hospitals to submit a random 

sample or a population of their 

caseloads for RHQDAPU program 

measures for both Medicare and nonMedicare patients. We are actively 

educating hospitals and data vendors to 

utilize billing and other information to 

compile a list of patients. We encourage 

hospitals and data vendors to 

collaborate on minimizing the burden 

and ensuring that the data reported on 

Hospital Compare are representative of 

their entire list of patients. 

Comment: One commenter 

commented on potential problems that 

may occur when CMS uses unvalidated 

aggregate population count numbers 

submitted by hospitals to assess 

submission completeness. 

Response: We believe that we can 

adequately validate the aggregate 

population count numbers submitted by 

hospitals, but are looking at the issue 

raised by the commenter. We also plan 

to assess the accuracy of non-Medicare 

aggregate population counts using 

existing all-payer data sources, 

including State lists of patients. Based 

on this assessment, we will consider 

approaches in future years designed to 

ensure that hospitals are reporting 

accurate population counts for all 

Medicare and non-Medicare patients. 

These approaches should also factor in 

the burden on the hospitals. 

Comment: Some commenters wrote 

that the CMS Abstraction & Reporting 

Tool (CART) used by hospitals to 

abstract quality data should be modified 

to include all required RHQDAPU 

program measures. 

Response: The CMS CART includes 

all the RHQDAPU program required 

chart-abstracted measures that we are 

adopting for the FY 2010 payment 

determination. It is not necessary to 

include the claims-based measures, 

since hospitals are not required to 

submit any additional data to us for 

these measures. 

After careful consideration of the 

public comments received, we are 

adopting as final the aggregate 

population and sample size submission 

requirements we proposed. We are 

establishing submission deadlines as set 

out below. We believe that these 

requirements greatly improve our ability 

to ensure the accuracy and 

completeness of hospital reported 

quality data for the RHQDAPU program. 

• Data must be submitted for these 

measures on the QualityNet Web site. 

• The window for submission for the 

participation in a cardiac surgery 

registry measure will be between July 1, 

2009 (when the ability to receive the 

data submission by CMS will be 

available) and August 15, 2009. Data 

must be submitted for this measure on 

the QualityNet Web site. 

• The data submission deadline for 

hospitals to submit patient level data for 

the 26 SCIP, AMI, HF, PN measures for 

1st calendar quarter of 2009 discharges 

will be August 15, 2009. 

• The data submission deadline for 

hospitals to submit aggregate population 

and sample size count data for SCIP, 

AMI, HF, PN for 1st calendar quarter of 

2009 discharges will be August 1, 2009. 

The following RHQDAPU program 

measures will be calculated using 

Medicare claims with no additional data 

submitted by hospitals: 


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Topic Quality measure 

Mortality Measures (Medicare Patients) ................................................... • MORT–30–AMI Acute Myocardial Infarction 30-day mortality Medicare patients. 

• MORT–30–HF Heart Failure 30-day mortality Medicare patients. 

• MORT–30–PN Pneumonia 30-day mortality Medicare patients. 

Readmission Measure (Medicare Patients) ............................................. • Heart Failure (HF) 30-Day Risk Standardized Readmission Measure 

(Medicare patients). 

AHRQ Patient Safety Indicators (PSI), Inpatient Quality Indicators (IQI) 

and Composite Measures.

• Death among surgical patients with treatable serious complications. 

• Iatrogenic pneumothorax, adult. 

• Postoperative wound dehiscence. 

• Accidental puncture or laceration. 

• Abdominal aortic aneurysm (AAA) mortality rate (with or without volume). 

• Hip fracture mortality rate. 

• Mortality for selected surgical procedures (composite). 

• Complication/patient safety for selected indicators (composite). 

• Mortality for selected medical conditions (composite). 

Nursing Sensitive ...................................................................................... • Failure to Rescue (Medicare claims only). 

Consistent with the practice that we 

adopted for the FY 2009 payment 

determination for measures calculated 

using existing Medicare claims data 

only, we will calculate these measures 

for FY 2010 by using existing claims 

data for hospitalizations from July 1, 

2007, through June 30, 2008 (3rd quarter 

2007 through 2nd quarter 2008 

discharges). 

5. HCAHPS Requirements for FY 2009 

and FY 2010 

a. FY 2009 HCAHPS Requirements 

For FY 2009, hospitals must 

continuously collect and submit 

HCAHPS data to the QIO Clinical 

Warehouse by the data submission 

deadlines posted on the Web site at: 

http://www.hcahpsonline.org. The data 

submission deadline for first quarter CY 

2008 (January through March) 

discharges is July 16, 2008. To collect 

HCAHPS data, a hospital can either 

contract with an approved HCAHPS 

survey vendor that will conduct the 

survey and submit data on the hospital’s 

behalf to the QIO Clinical Warehouse, or 

a hospital can self-administer the survey 

without using a survey vendor, 

provided that the hospital meets 

Minimum Survey Requirements as 

specified on the Web site at: http:// 

www.hcahpsonline.org. A current list of 

approved HCAHPS survey vendors can 

be found on the Web site at: http:// 

www.hcahpsonline.org. 

Every hospital choosing to contract 

with a survey vendor should provide 

the sample frame of hospital-eligible 

discharges to its survey vendor with 

sufficient time to allow the survey 

vendor to begin contacting each 

sampled patient within 6 weeks of 

discharge from the hospital (we refer 

readers to the Quality Assurance 

Guidelines for details about HCAHPS 

eligibility and sample frame creation) 

and must authorize the survey vendor to 

submit data via QualityNet on the 

hospital’s behalf. CMS strongly 

recommends that the hospitals 

employing a survey vendor promptly 

review the two HCAHPS Feedback 

Reports (the Provider Survey Status 

Summary Report and the Data 

Submission Detail Report) that are 

available after the survey vendor 

submits the data to the QIO Clinical 

Warehouse. These reports enable a 

hospital to ensure that its survey vendor 

has submitted the data on time and it 

has been accepted into the Warehouse. 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47362), we 

stated that hospitals and survey vendors 

must participate in a quality oversight 

process conducted by the HCAHPS 

project team. Starting in July 2007, we 

began asking hospitals/survey vendors 

to correct any problems that were found 

and provide follow-up documentation 

of corrections for review within a 

defined time period. If the HCAHPS 

project team finds that the hospital has 

not made these corrections, CMS may 

determine that the hospital is not 

submitting HCAHPS data that meet the 

requirements for the RHQDAPU 

program. As part of these activities, 

HCAHPS project staff reviews and 

discusses with survey vendors and 

hospitals self-administering the survey 

their specific Quality Assurance Plans, 

survey management procedures, 

sampling and data collection protocols, 

and data preparation and submission 

procedures. 

b. FY 2010 HCAHPS Requirements 

In the FY 2009 IPPS proposed rule, 

for FY 2010, we proposed continuous 

collection of HCAHPS in accordance 

with the Quality Assurance Guidelines 

located at the Web site: http:// 

www.hcahpsonline.org, by the quarterly 

data submission deadlines posted on the 

Web site: http://www.hcahpsonline.org 

(73 FR 23657). As stated above, starting 

with January 1, 2009, discharges, we 

proposed that hospitals that have five or 

fewer HCAHPS-eligible discharges in a 

month would not be required to submit 

HCAHPS patient-level data for that 

month as part of the quarterly data 

submission that includes that month, 

but they would still be required to 

submit the number of HCAHPS-eligible 

cases for that month as part of their 

HCAHPS quarterly data submission. 

With respect to HCAHPS oversight, 

we proposed that the HCAHPS Project 

Team would continue to conduct site 

visits and/or conference calls with 

hospitals/survey vendors to ensure the 

hospitals’ compliance with the HCAHPS 

requirements. During the onsite visit or 

conference call, the HCAHPS Project 

Team will review the hospital’s/survey 

vendor’s survey systems and will assess 

protocols based upon the most recent 

Quality Assurance Guidelines. All 

materials relevant to survey 

administration will be subject to review. 

The systems and program review 

includes, but it is not necessarily 

limited to: (a) Survey management and 

data systems; (b) printing and mailing 

materials and facilities; (c) telephone/ 

IVR materials and facilities; (d) data 

receipt, entry and storage facilities; and 

(e) written documentation of survey 

processes. Organizations will be given a 

defined time period in which to correct 

any problems and provide follow-up 

documentation of corrections for 

review. Hospitals/survey vendors will 

be subject to follow-up site visits and/ 

or conference calls, as needed. If CMS 

determines that a hospital is 

noncompliant with HCAHPS program 

requirements, CMS may determine that 

the hospital is not submitting HCAHPS 

data that meet the requirements of the 

RHQDAPU program. 


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Comment: One commenter expressed 

concern about hospitals having 

sufficient warning if they or their 

vendors were not complying with the 

HCAHPS protocols as determined 

through a site visit review as part of the 

oversight process. 

Response: We strongly encourage 

hospitals that choose to use a survey 

vendor to be fully appraised of the 

methods and actions of their survey 

vendors—especially the survey vendors’

full compliance with HCAHPS Quality 

Assurance Guidelines—and to carefully 

inspect all data warehouse reports in a 

timely manner. If a hospital is using a 

survey vendor and we find a problem at 

the survey vendor in its survey 

operations, a request to fix the issue(s) 

will be initially directed to the survey 

vendor. If the problem is one that could 

potentially impact whether the hospital 

client(s) meet the RHQDAPU program 

requirements, we would, within seven 

calendar days of determining that the 

problem could impact whether the 

hospital meets the RHQDAPU 

requirements, notify the affected 

hospital(s). The client hospital(s) would 

also be notified, within seven calendar 

days of determining that the problem 

could impact whether the hospital(s) 

meets the RHQDAPU program 

requirements, should their survey 

vendor fail to fix any issue(s) identified 

through the oversight process. Examples 

of problems or practices that could 

jeopardize a hospital’s meeting the 

HCAHPS requirement for the 

RHQDAPU program include but are not 

limited to the following: Administering 

the HCAHPS survey at patient discharge 

rather than two days to six weeks 

following discharge; using a mode of 

survey administration other than the 

four approved survey modes; creating 

and using a translation of the HCAHPS 

survey other than the approved survey 

translations; consistently surveying 

patients after the six week time limit; or 

consistently failing to include in the 

sampling frame the entire population of 

HCAHPS-eligible discharges. Detailed 

information on HCAHPS survey 

administration protocols can be found 

in the HCAHPS Quality Assurance 

Guidelines. 

If reasonable attempts (which 

normally include a review of survey 

vendor’s Quality Assurance Plan, an onsite visit, correspondence and 

conference calls, and review of the 

vendor’s plan to correct any issues 

identified) to bring the survey vendor 

into compliance are not successful, then 

we will within seven calendar days of 

determining that the problem could 

impact whether the hospital meets the 

RHQDAPU requirements, notify all 

affected client hospitals so that they can 

engage an alternative survey vendor if 

they so choose. 

If we determine that a hospital’s noncompliance with HCAHPS requirements 

is the fault of the hospital rather than its 

survey vendor, we will notify the 

hospital within seven calendar days and 

consult with it on how to achieve and 

maintain compliance. If the hospital 

fails to achieve compliance, it may be at 

risk of not meeting RHQDAPU program 

requirements. 

Comment: One commenter expressed 

concern regarding penalizing hospitals 

that use telephone mode. 

Response: We do not ‘‘penalize’’

hospitals based on the mode in which 

they choose to administer the HCAHPS 

survey. We have developed and 

consistently apply survey mode and 

patient-mix adjustments to HCAHPS 

results in order to allow fair 

comparisons to be made across hospitals 

for public reporting, irrespective of the 

mix of patients they serve or the survey 

mode they employ. Because research 

has found that patient responses differ 

systematically by mode of survey 

administration, we believe it is 

necessary to adjust for survey mode. 

When reporting the data, the mode 

adjustment approach assures no net 

advantage on average for any choice of 

survey mode. The adjustments 

counteract advantages or disadvantages 

that would otherwise accrue on the 

basis of survey mode. 

We conducted a large-scale, 

randomized Mode Experiment in order 

to develop adjustments for the effects of 

survey mode on responses to HCAHPS. 

The HCAHPS Mode Experiment was 

based on a nationwide random sample 

of short-term acute care hospitals. 

Hospitals from each of our ten 

geographic regions participated in the 

Mode Experiment. A hospital’s 

probability of being selected for the 

sample was proportional to its volume 

of discharges, which guaranteed that 

each patient would have an equal 

probability of being sampled for the 

experiment. The participating hospitals 

contributed patient discharges from a 

four-month period: February, March, 

April, and May 2006. Within each 

hospital, an equal number of patients 

were randomly assigned to each of the 

four modes of survey administration. A 

randomized mode experiment of 27,229 

discharges from 45 hospitals was used 

to develop adjustments for the effects of 

survey mode (Mail Only, Telephone 

Only, Mixed mode, or Active Interactive 

Voice Response) on responses to the 

HCAHPS survey. 

In general, patients randomized to the 

Telephone Only and Active Interactive 

Voice Response modes provided more 

positive evaluations than patients 

randomized to Mail Only and Mixed 

(Mail with Telephone follow-up) modes. 

Established research on surveys 

demonstrates that patients responding 

to a survey conducted over the 

telephone, as opposed to a mail survey, 

tend to provide more favorable 

responses. This is commonly known as 

‘‘social desirability bias.’’ If the modes 

in which the HCAHPS survey was 

conducted (there are four available 

options) were not taken into account 

through the mode adjustment, then 

hospitals choosing to use the telephone 

methodology would receive artificially 

high HCAHPS results, which would 

undermine the comparability of 

HCAHPS results across hospitals. The 

mode and patient-mix adjustments are 

applied to ensure that fair comparisons 

of HCAHPS results can be made across 

hospitals, irrespective of the survey 

methodology that hospitals employ or 

the mix of patients that hospitals serve. 

Detailed information on mode and 

patient-mix adjustments may be found 

in ‘‘Mode and Patient-mix Adjustment 

of the CAHPS Hospital Survey 

(HCAHPS),’’ located at http:// 

www.hcahpsonline.org/ 

modeadjustment.aspx. 

Comment: Another commenter noted 

that it was a challenge for small 

hospitals that do not have HCAHPSeligible discharges every day to conduct 

daily follow-up with discharges. 

Response: The commenter 

erroneously believes that patients must 

be sampled every day for the HCAHPS 

survey. We are aware that not all 

hospitals participating in the HCAHPS 

survey will have HCAHPS-eligible 

discharges every day. HCAHPS requires 

survey vendors or hospitals to take a 

random sample of eligible discharges 

over a month. Daily follow-up with 

discharges is not required. Hospitals, or 

their survey vendor if they use one, may 

either sample their HCAHPS-eligible 

discharges at one time at the end of each 

month, or sample continuously 

throughout each month. If a hospital is 

using a survey vendor, the hospital must 

assure that its sample frame or the 

sample itself is delivered to the survey 

vendor in sufficient time to allow the 

survey vendor to contact patients within 

the timeframe established in the 

HCAHPS protocols. See Quality 

Assurance Guidelines, V3.0, pp. 33–46 

for details regarding sampling protocols. 

Comment: One commenter believed 

that underlying patient demographics 

such as socioeconomic status (SES) and 

psychiatric comorbidities affect scores 

and that additional analysis should be 

conducted. 


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Response: Certain patient 

characteristics that are beyond the 

control of hospitals have been found to 

influence how patients respond to the 

HCAHPS survey. One such 

characteristic is the patient’s level of 

education, which can be seen as a proxy 

for SES. 

Because different hospitals serve 

different mixes of patients, we adjust for 

the influence of these patient-level 

characteristics on HCAHPS results. 

Doing so allows fair comparisons of 

HCAHPS results to be made across 

hospitals. The particular characteristics 

included in patient-mix adjustment 

were identified by AHRQ in previous 

Consumer Assessment of Healthcare 

Providers and Systems (CAHPS) 

surveys, then tested in the HCAHPS 

Three-State Pilot Study, and reexamined in the HCAHPS Mode 

Experiment, described above. One 

characteristic included in the patientmix adjustment is patient’s level of 

education. This is considered to be the 

best and most stable single indicator of 

SES for adults of all ages. More details 

of this and other patient-mix 

adjustments may be found in ‘‘Mode 

and Patient-mix Adjustment of the 

CAHPS Hospital Survey (HCAHPS),’’

located at http://www.hcahpsonline.org/ 

modeadjustment.aspx. 

With respect to the effect of 

psychiatric comorbidities on HCAHPS 

scores, the patient-level data record of 

the administrative section of the 

HCAHPS survey requires that the 

hospital report only the principal 

service line (medical, surgical or 

maternity care) in which the patient was 

admitted. Requiring hospitals to collect 

information on co-morbidities would 

constitute an additional burden on 

them. In addition, because the HCAHPS 

survey is not deemed suitable for 

patients admitted primarily for 

psychiatric care, such patients are 

ineligible for the survey; psychiatric 

hospitals are excluded as well. More 

details about patient eligibility for 

HCAHPS may be found in Quality 

Assurance Guidelines, V3.0, pp. 33–36. 

If, in the future, we reassess the 

content of the HCAHPS survey, notice 

will be taken of requests to add or alter 

survey items. A self-rated mental health 

status item, perhaps something similar 

to the current self-rated health status 

item, might be considered at that time. 

However, we do not plan to alter the 

HCAHPS survey for several years in 

order to allow hospitals and survey 

vendors to become accustomed to its 

content and methodology. 

After careful consideration of the 

public comments received, we are 

finalizing the proposed HCAHPS 

measure requirements in their entirety. 

6. Chart Validation Requirements for FY 

2009 and FY 2010 

a. Chart Validation Requirements for FY 

2009 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47361), we 

stated that, until further notice, we 

would continue to require that hospitals 

meet the chart validation requirements 

that we implemented in the FY 2006 

IPPS final rule (70 FR 47421 and 47422). 

These requirements, as well as 

additional information on validation 

requirements, continue and are being 

placed on the QualityNet Web site. 

We also stated in the FY 2008 IPPS 

final rule with comment period that, 

until further notice, hospitals must pass 

our validation requirement that requires 

a minimum of 80-percent reliability, 

based upon our chart-audit validation 

process (72 FR 47361). 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47362), we 

indicated that, for the FY 2009 update, 

all FY 2008 validation requirements 

would apply, except for the following 

modifications. We would modify the 

validation requirement to pool the 

quarterly validation estimates for 4th 

quarter CY 2006 through 3rd quarter 

2007 discharges. We would also expand 

the list of validated measures in the FY 

2009 update to add SCIP Infection-2, 

SCIP VTE–1, and SCIP VTE–2 (starting 

with 4th quarter CY 2006 discharges). 

We would also drop the current twostep process to determine if the hospital 

is submitting validated data. For the FY 

2009 update, we stated that we will pool 

validation estimates covering the four 

quarters (4th quarter CY 2006 discharges 

through 3rd quarter 2007 discharges) in 

a similar manner to the current 3rd 

quarter pooled confidence interval. 

In summary, the following chart 

validation requirements apply for the 

FY 2009 RHQDAPU program: 

• The 21-measure expanded set will 

be validated using 4th quarter CY 2006 

(4Q06) through 3rd quarter CY 2007 

(3Q07) discharges. 

• SCIP VTE–1, VTE–2, and SCIP 

Infection 2 will be validated using 2nd 

quarter CY 2007 and 3rd quarter CY 

2007 discharges. 

• SCIP Infection 4 and SCIP Infection 

6 must be submitted starting with 1st 

quarter CY 2008 discharges but will not 

be validated. 

• HCAHPS data must continuously be 

submitted and will be reviewed as 

discussed above. 

• AMI, HF, and PN 30-day mortality 

measures will be calculated as 

discussed below. 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47364), we 

stated that, for the FY 2008 update and 

in subsequent years, we would revise 

and post up-to-date confidence interval 

information on the QualityNet Web site 

explaining the application of the 

confidence interval to the overall 

validation results. The data are being 

validated at several levels. There are 

consistency and internal edit checks to 

ensure the integrity of the submitted 

data; there are external edit checks to 

verify expectations about the volume of 

the data received. 

b. Chart Validation Requirements for FY 

2010 

In the FY 2009 IPPS proposed rule (73 

FR 23658), for FY 2010, we proposed 

the following chart validation 

requirements: 

• The following 21 measures from the 

FY 2009 RHQDAPU program measure 

set would be validated using data from 

4th quarter 2007 through 3rd quarter 

2008 discharges. 

Topic Quality measure validated from 4th quarter 2007 through 3rd quarter 

2008 discharges 

Heart Attack (Acute Myocardial Infarction or AMI) .................................. • Aspirin at arrival. 

• Aspirin prescribed at discharge. 

• Angiotensin Converting Enzyme Inhibitor (ACE–I) or Angiotensin II 

Receptor Blocker (ARB) for left ventricular systolic dysfunction. 

• Beta blocker at arrival. 

• Beta blocker prescribed at discharge. 

• Fibrinolytic (thrombolytic) agent received within 30 minutes of hospital arrival. 

• Adult smoking cessation advice/counseling. 

Heart Failure (HF) .................................................................................... • Left ventricular function assessment. 


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Topic Quality measure validated from 4th quarter 2007 through 3rd quarter 

2008 discharges 

• Angiotensin Converting Enzyme Inhibitor (ACE–I) or Angiotensin II 

Receptor Blocker (ARB) for left ventricular systolic dysfunction. 

• Discharge instructions. 

• Adult smoking cessation advice/counseling. 

Pneumonia (PN) ....................................................................................... • Pneumococcal vaccination status. 

• Blood culture performed before first antibiotic received in hospital. 

• Adult smoking cessation advice/counseling. 

• Appropriate initial antibiotic selection. 

• Influenza vaccination status. 

Surgical Care Improvement Project (SCIP)—named SIP for discharges 

prior to July 2006 (3Q06).

• Prophylactic antibiotic received within 1 hour prior to surgical incision. 

• SCIP–VTE–1: Venous thromboembolism (VTE) prophylaxis ordered 

for surgery patients.*** 

• SCIP–VTE–2: VTE prophylaxis within 24 hours pre/post surgery.*** 

• SCIP Infection 2: Prophylactic antibiotic selection for surgical patients.*** 

• SCIP-Infection 3: Prophylactic antibiotics discontinued within 24 

hours after surgery end time. 

• SCIP Infection 4 and Infection 6 

would be validated using data from 2nd 

and 3rd quarter CY 2008 discharges. 

In addition, we proposed to include 

the following three measures in the FY 

2010 RHQDAPU program validation 

process that are included the FY 2009 

RHQDAPU program measure set but 

have been updated or deleted for the FY 

2010 measure set: 

• Pneumonia antibiotic prophylaxis 

timing within 4 hours would be 

validated using data from 4th quarter 

2007 through 3rd quarter 2008 

discharges. 

• Percutaneous Coronary Intervention 

(PCI) Timing within 120 minutes would 

be validated using data from 4th quarter 

2007 through 3rd quarter 2008 

discharges. 

• Pneumonia Oxygenation 

Assessment would be validated using 

data from 4th quarter through 3rd 

quarter 2008 discharges. 

These measures would be submitted 

by hospitals during 2008 and early 

2009, and are available to be validated 

by CMS in time for the FY 2010 

RHQDAPU program payment eligibility 

determination. 

As explained above, we will also 

revise and post up-to-date confidence 

interval information on the QualityNet 

Web site explaining the application of 

the confidence interval to the overall 

validation results. 

Comment: One commenter proposed 

not validating SCIP Infection 4 and 6 for 

2nd and 3rd quarter 2008 discharges, 

because hospitals would not possess 

sufficient time to educate themselves 

about the abstraction instructions. 

Response: We believe that adding 

these measures to the validation 

requirement is a reasonable approach to 

ensure accurately submitted data. We 

initially published abstraction 

instructions for these measures in the 

Specifications Manual located on the 

QualityNet Web site in 2006, and 

voluntary data submission for these 

measures began with July 2006 

discharges. We believe that this time 

frame has been sufficient for hospitals to 

educate themselves regarding the 

abstraction instructions for these 

measures. In addition, to the extent we 

need to update the technical 

specifications for these measures, we do 

so on a semiannual basis at least six 

months in advance of the initial 

discharge date to which the updates 

apply. 

After careful consideration of the 

public comments received, we are 

adopting as final the FY 2010 

RHQDAPU program chart validation 

requirements we proposed. 

c. Chart Validation Methods and 

Requirements Under Consideration for 

FY 2011 and Subsequent Years 

Under the current and proposed 

RHQDAPU program chart validation 

process, we validate measures by 

reabstracting on a quarterly basis a 

random sample of five patient records 

for each hospital. This quarterly sample 

results in an annual combined sample of 

20 patient records across 4 calendar 

quarters, but because the samples are 

random, they do not necessarily include 

patient records covering each of the 

clinical topics. 

We anticipate that the proposed 

expansion of the RHQDAPU program 

measure set to include additional 

clinical topics will decrease the 

percentage of RHQDAPU program 

clinical topics, as well as the total 

number of measures, covered in many 

hospitals’ annual chart validation. 

However, in the FY 2009 IPPS 

proposed rule, we noted that we are 

considering whether registries and other 

external parties that may be collecting 

data on proposed RHQDAPU program 

measures could validate the accuracy of 

those measures beginning in FY 2011 

(73 FR 23658). In addition, we noted 

that the proposed readmission measures 

are calculated using Medicare claims 

information and do not require chart 

validation. 

In the FY 2009 IPPS proposed rule, 

we stated that we were interested in 

receiving public comments from a broad 

set of stakeholders on the impact of 

adding measures to the validation 

process, as well as modifications to the 

current validation process that could 

improve the reliability and validity of 

the methodology (73 FR 23658). We 

specifically requested input concerning 

the following: 

• Which of the measures or measure 

sets should be included in the FY 2010 

RHQDAPU program chart validation 

process or in the chart validation 

process for subsequent years? 

• What validation challenges are 

posed by the RHQDAPU program 

measures and measure sets? What 

improvements could be made to 

validation or reporting that might offset 

or otherwise address those challenges? 

• Should CMS switch from its current 

quarterly validation sample of five 

charts per hospital to randomly 

selecting a sample of hospitals, and 

selecting more charts on an annual basis 

to improve reliability of hospital level 

validation estimates? 

• Should CMS select the validation 

sample by clinical topic to ensure that 

all publicly reported measures are 

covered by the validation sample? 

Comment: Many commenters 

requested that improvements be made to 

the current validation process. The 

commenters noted that many hospitals 


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have been notified that there have been 

problems validating the data they 

submitted and argued that in several 

instances, these validation problems 

have been due to inconsistencies in the 

definitions of variables used by the 

contractors that are reabstracting 

patient-level data and comparing it to 

the data submitted by the hospitals. The 

commenters stated that, in other 

instances, discrepancies between single 

data elements unrelated to the quality of 

care provided by a hospital, such as the 

patient’s birth date, have caused 

hospitals to fail validation. The 

commenters believed that reabstraction 

of five charts per quarter for each 

hospital is insufficient to ensure the 

reliability of the data and that a more 

resilient and less resource-intensive 

method of validation is needed. The 

commenters believed that the ideas for 

reforming the data validation process 

that were put forward by CMS in its 

VBP Report to Congress hold promise as 

an improved approach toward data 

validation. The commenters were 

disappointed that CMS did not propose 

similar changes for the RHQDAPU 

program in the FY 2009 IPPS proposed 

rule and urged CMS to propose an 

alternative data validation process for 

the RHQDAPU program as soon as 

possible. 

Response: We appreciate these 

comments. We have used a single CDAC 

contractor to abstract the validation data 

since the inception of the RHQDAPU 

program, and are currently using a 

single CDAC contractor for validation 

abstraction. The current validation 

approach was originally designed 

several years ago to provide a reliable 

estimate of data element accuracy, and 

to provide feedback to all hospitals 

about their abstraction accuracy. We 

wanted all participating hospitals with 

sufficient patient size to receive 

quarterly feedback about data accuracy 

during the initial years of the 

RHQDAPU program. We believe that the 

current approach is adequate to assess 

overall accuracy for submitted data. Our 

experience in validating RHQDAPU 

program data has demonstrated that the 

vast majority of hospitals have 

submitted accurate data. Indeed, 99.5 

percent of hospitals met the FY 2008 

RHQDAPU program validation 

requirements. The majority of the 0.5 

percent of hospitals that did not pass 

the FY 2008 RHQDAPU program 

validation requirements failed to return 

at least one entire quarterly sample of 

five medical records to the CDAC 

contractor in a timely manner. 

For the future, we are considering 

alternative validation approaches that 

minimize the burden on hospitals while 

ensuring that accurate data continue to 

be submitted. 

Comment: One commenter opposed 

selecting more charts from a random 

sample of hospitals, because it increases 

the burden that hospitals already must 

incur to track down, copy, and return 

requested validation charts. The 

commenter believed that hospitals 

would be more likely to not return 

charts, and consequently fail validation. 

Response: We will consider this issue 

of burden as we continue to assess 

future validation approaches. However, 

we remind hospitals that under the 

current validation methodology, this 

burden is necessary in order for us to 

adequately assess whether the hospital 

has submitted accurate data for the year 

in question. 

Comment: One commenter was 

concerned that CMS is validating data 

elements that have no bearing on the 

actual RHQDAPU quality measures, 

including antibiotic timing. Some 

elements, such as antibiotic route, are 

not required for calculating all 

RHQDAPU program quality measures 

related to antibiotic administration. 

Response: We validate only data 

elements that are used to calculate at 

least one RHQDAPU measure. For 

example, documentation of antibiotic 

route is required to calculate all of the 

SCIP and PN antibiotic timing and 

administration measures. We utilize a 

single antibiotic administration route 

data element to provide consistent 

instructions that are applicable to all of 

the SCIP and PN antibiotics measures. 

Comment: Many commenters 

supported keeping the current 

validation process, which involves five 

charts per quarter, and argued that in 

light of the proposed increases in 

measure data elements to be collected, 

changing the validation process this 

year would only add more chaos to the 

system. The commenters argued that 

randomly selecting a sample of 

hospitals for validation does not appear 

to work with a required threshold for 

payment. The commenters suggested 

that in the absence of documented 

evidence that the current validation 

process is unworkable, a thorough 

review with all stakeholders should be 

done to determine the best sampling 

methodology. One commenter 

recommended that CMS keep the 

number of requested validation charts to 

be reviewed small in order to minimize 

the burden on hospitals to print paper 

documentation from electronic medical 

records. 

Response: We appreciate the concern 

that changing the current system would 

require sufficient time to educate 

hospitals about the new process. Any 

changes to the current validation 

process in future years would be 

proposed through the rulemaking 

process, so hospitals and other 

stakeholders would be able to review 

and comment on the best sampling 

methodology and other proposed 

validation requirements. 

However, we believe that the current 

approach is adequate to assess overall 

accuracy for submitted data because our 

experience in validating RHQDAPU 

program data has demonstrated that the 

vast majority of hospitals have 

submitted accurate data. 

Comment: One commenter supported 

CMS validating RHQDAPU program 

data, as opposed to registry or other 

external party validation. 

Response: While ensuring the 

accuracy of the data, we are considering 

utilizing third party sources to validate 

RHQDAPU program data to minimize 

burden. We believe the STS and other 

organizations are validating by utilizing 

third party vendors to validate measures 

currently under consideration in the 

RHQDAPU program. We will consider 

this comment when proposing the 

validation approaches for future years. 

Comment: One commenter supported 

stratified validation samples and 

targeting additional samples when the 

hospital scores less than 80 percent as 

an annual validation score. 

Response: We appreciate the 

comment and will consider approaches 

such as selected separate stratified 

validation samples by clinical topic area 

(for example, AMI, Heart Failure, 

Pneumonia, and SCIP), increasing the 

validation sample size for randomly 

selected hospitals, and criteria for 

targeted validation in the future. These 

suggested approaches are potentially 

useful to ensure that all measure sets are 

validated, and that a sufficient sample is 

selected that represents the entire 

RHQDAPU program measure set. 

Comment: A commenter agreed with 

the methodology of selecting an annual 

random sample of hospitals for 

validation each year, but raised the 

issue of whether this approach would 

increase the possibility that hospitals 

that are not selected for validation in a 

given year would not submit accurate 

data. Hospitals not selected for the 

annual random sample would know 

early in the submission year that they 

were not selected in the random sample 

of hospitals. 

Response: We strive to ensure that 

accurate data is submitted by all 

hospitals each year. One possible 

approach in future years to ensure 

accuracy is to use submitted data as 

targeting criteria for validating a 

hospital’s data. For example, hospitals 


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submitting a very high percentage of 

cases excluded from RHQDAPU 

program measures might be targeted for 

validation of their data to ensure that 

they are not improperly excluding cases 

in order to minimize their abstraction 

burden or limit the amount of their data 

that will be publicly reported. This 

approach might be used in conjunction 

with selecting an annual random sample 

of hospitals for validation to ensure 

accurate data submission. 

Comment: Some commenters 

supported random sampling as a way to 

minimize the validation burden on 

hospitals. The commenters stated that 

sample selection by clinical topic is 

preferable, as long as a maximum 

quarterly limit per topic is set. 

Response: We agree that random 

sampling of hospitals would eliminate 

annual recordkeeping and copying 

burden for the majority of hospitals. 

Sample selection by topic can be 

beneficial to ensure that all RHQDAPU 

measures are validated, but requires 

sufficient sample size per hospital to 

ensure that all topics are reliably 

sampled. We must consider the need to 

ensure accurate data, while minimizing 

burden when considering approaches in 

future years. 

Comment: Several commenters 

recommended decreasing validation 

reviews for specific measures in which 

individual hospitals continually 

demonstrate consistent patterns and 

high validation rates. 

Response: We appreciate this 

thoughtful recommendation for 

targeting the validation process and will 

consider it for future improvements to 

our process. 

Comment: A commenter noted that as 

long as hospital medical records 

continue to reside in a paper-based 

format or non-electronic formats and do 

not allow for the necessary data capture 

and architecture to permit uniform 

automated reporting, the validation 

process will remain labor intensive. 

During this interim period before a 

substantial number of hospitals have 

implemented electronic health records 

(EHRs), the commenter recommended 

that CMS consider a process for 

accepting electronic copies of medical 

records from early EHR adopter 

hospitals. 

Response: We will consider this 

recommendation in our plans to 

improve our validation process. We 

must design a process that will be 

consistent with the information 

practices of these leading-edge 

hospitals, while ensuring that hospitals 

still utilizing paper documentation are 

not adversely impacted by our process. 

Comment: One commenter suggested 

that CMS propose to implement a 

validation process for all of the 

proposed measures and that it would be 

prudent for CMS to entertain a formal 

relationship with The Joint Commission 

to utilize the Joint Commission’s 

existing auditing and validation process, 

and increase the power to validate 

RHQDAPU measures. 

Response: We believe that the current 

approach is adequate to assess overall 

accuracy for submitted data. Our 

experience in validating RHQDAPU 

program data has demonstrated that the 

vast majority of hospitals have 

submitted accurate data. Indeed, 99.5 

percent of hospitals met the FY 2008 

RHQDAPU program validation 

requirements. We will consider this idea 

in our future plans for validating 

RHQDAPU program data as our 

RHQDAPU program measure set 

evolves. 

Comment: One commenter strongly 

encouraged CMS to modify its CDAC 

review process to follow CMS 

specifications and incorporate skip 

logic. The commenter believed that this 

would reduce the abstraction burden on 

hospitals and prevent hospitals from 

being unfairly penalized when a parent 

question is incorrect. 

Response: We interpret the 

commenter’s term ‘‘parent question’’ to 

mean data elements occurring earlier in 

the RHQDAPU program measure’s flow. 

If a parent question is answered ‘‘no’’ by 

the hospital, then no additional data 

elements occurring later in the 

measure’s flow are used to calculate the 

measure for that patient stay. The CDAC 

follows the Specifications Manual’s 

instructions when it abstracts validation 

data elements. The primary purpose of 

the current RHQDAPU program chart 

validation process is to assess the 

accuracy of hospitals’ submitted data 

elements, compared to an independent 

abstraction using the hospitals’

submitted paper medical record 

documentation. The CDAC abstracts 

each data element that is part of the 

measure being validated and compares 

that data element to the hospital’s 

electronically submitted data element 

for the same patient case. If the data 

elements in a hospital’s submitted 

RHQDAPU program measure do not 

match the CDAC’s abstracted data 

elements, then the data elements are 

classified as mismatches counting 

against the hospital’s validation score. 

We do not count any element not 

abstracted by the CDAC in the hospital’s 

validation score. 

The use of skip logic by hospitals is 

optional and not required under the 

RHQDAPU program. Hospitals should 

be aware the potential impact of skip 

logic on data quality, abstraction 

burden, and CMS chart audit validation 

scores. Hospitals utilizing skip logic 

should closely monitor the accuracy rate 

of abstracted data elements, particularly 

data elements placed higher in the 

algorithm flow. 

We will consider the issues raised by 

these commenters if we decide to make 

changes to the RHQDAPU program chart 

validation methodology for future years. 

Any changes we make to this process 

will be through rulemaking. 

7. Data Attestation Requirements for FY 

2009 and FY 2010 

a. Data Attestation Requirements for FY 

2009 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47364), we 

stated that we would require for FY 

2008 and subsequent years that 

hospitals attest each quarter to the 

completeness and accuracy of their data, 

including the volume of data, submitted 

to the QIO Clinical Warehouse in order 

to improve aspects of the validation 

checks. We stated that we would 

provide additional information to 

explain this attestation requirement, as 

well as provide the relevant form to be 

completed on the QualityNet Web site, 

at the same time as the publication of 

the FY 2008 IPPS final rule with 

comment period. 

In the FY 2009 IPPS proposed rule, 

we proposed to defer the requirement in 

FY 2009 for hospitals to separately attest 

to the accuracy and completeness of 

their submitted data due to the burden 

placed on hospitals to report paper 

attestation forms on a quarterly basis (73 

FR 23659). We continue to expect that 

hospitals will submit quality data that 

are accurate to the best of their 

knowledge and ability. We received 

many comments in support of the 

proposed deferral of this requirement 

for FY 2009. 

Comment: Many commenters 

supported the proposed plan for 

hospitals to defer attestation for FY 2009 

and to electronically attest to 

completeness and accuracy of their 

submitted data when all hospitals 

possess electronic medical records. One 

commenter opposed the quarterly 

attestation requirement, and stated that 

the requirement is unnecessary and 

added no value. 

Response: We agree with the 

commenters that quarterly attestation is 

more burdensome than annual 

attestation, and will consider this 

approach in future years. We must 

consider the relative burden on the 

hospitals to attest, relative to the need 


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to ensure accurate and complete data. 

The hospital is ultimately responsible 

for ensuring the accuracy and 

completeness of its RHQDAPU program 

data. 

After careful consideration of the 

public comments received, we are 

deferring the attestation requirement for 

FY 2009, and will consider this 

information as we consider proposed 

attestation requirements for future years. 

b. Data Attestation Requirements for FY 

2010 

In the FY 2009 IPPS proposed rule, 

for FY 2010 and subsequent years, we 

solicited public comment on the 

electronic implementation of the 

attestation requirement at the point of 

data submission to the QIO Clinical 

Warehouse (73 FR 23659). Hospitals 

would electronically pledge to CMS that 

their submitted data are accurate and 

complete to the best of their knowledge. 

Hospitals would be required to 

designate an authorized contact to CMS 

for attestation in their patient-level data 

submission. 

Resubmissions would continue to be 

allowed before the quarterly submission 

deadline, and hospitals would be 

required to electronically update their 

pledges about data accuracy at the time 

of resubmission. We welcomed 

comments on this approach. 

Comment: One commenter requested 

that CMS change the frequency of 

attestation to an annual requirement for 

FY 2010 and future years, or once on the 

initial participation form and argued 

that the burden of quarterly attestation 

is too high for hospitals. The commenter 

also supported electronic attestation. 

Response: We appreciate this 

comment, and must weigh the options 

of reducing burden through annual 

submission of attestation or an initial 

attestation on the Notice of Participation 

form against the need to ensure data 

quality by requiring attestation during 

every quarterly data submission. We 

agree that annual or one-time initial 

attestation would minimize burden to 

hospitals. 

We will also consider the option to 

allow hospitals to electronically submit 

their attestation to CMS at the point of 

submission. We believe that requiring 

hospitals to electronically attest when 

submitting data accomplishes the 

intended program goal, to ensure 

accurate and complete data while 

minimizing hospital burden. 

8. Public Display Requirements 

Section 1886(b)(3)(B)(viii)(VII) of the 

Act provides that the Secretary shall 

establish procedures for making data 

submitted under the RHQDAPU 

program available to the public. The 

RHQDAPU program quality measures 

are posted on the Hospital Compare 

Web site (http:// 

www.hospitalcompare.hhs.gov). CMS 

requires that hospitals sign a ‘‘Reporting 

Hospital Quality Data for Annual 

Payment Update Notice of 

Participation’’ form when they first 

register to participate in the RHQDAPU 

program. Once a hospital has submitted 

a form, the hospital is considered to be 

an active RHQDAPU program 

participant until such time as the 

hospital submits a withdrawal form to 

CMS (72 FR 47360). Hospitals signing 

this form agree that they will allow CMS 

to publicly report the quality measures 

as required in the applicable year’s 

RHQDAPU program requirements. 

In the FY 2009 IPPS proposed rule, 

we proposed to continue to display 

quality information for public viewing 

as required by section 

1886(b)(3)(B)(viii)(VII) of the Act (73 FR 

23659). Before we display this 

information, hospitals will be permitted 

to review their information as recorded 

in the QIO Clinical Warehouse. 

Currently, hospital campuses that 

share the same CCN must combine data 

collection and submission across their 

multiple campuses (for both clinical 

measures and for HCAHPS). These 

measures are then publicly reported as 

if they apply to a single hospital. We 

estimate that approximately 5 to 10 

percent of the hospitals reported on the 

Hospital Compare Web site share CCNs. 

Beginning with the FY 2008 RHQDAPU 

program, hospitals must report the name 

and address of each hospital campus 

that shares the same CCN. This 

information will be gathered through 

the RHQDAPU program Notice of 

Participation form for new hospitals 

participating in the RHQDAPU program. 

To increase transparency in public 

reporting and improve the usefulness of 

the Hospital Compare Web site, we will 

note on the Web site where publicly 

reported measures combine results from 

two or more hospital campuses. 

Comment: Several commenters stated 

that they wanted data displayed on 

Hospital Compare at the campus level 

rather than by CCN. 

Response: We appreciate these 

comments and are exploring this issue. 

Currently, we are still gathering data 

from individual hospitals as to whether 

they share a CCN across campuses. The 

first step will be to note this on Hospital 

Compare. The next step will be to 

determine the feasibility of collecting 

data at the campus level. 

Comment: One commenter urged 

CMS to ensure that the Hospital 

Compare Web site is user-friendly, 

especially with the addition of multiple 

measures. 

Response: As explained earlier in this 

section, we use focus groups to test all 

measures before we publicly post them 

on Hospital Compare. We also test the 

usability of computer screens and 

language Hospital Compare Web site 

with consumers to make enhancements 

to ensure that the site is easy to use and 

is understandable. Through this testing, 

draft language and draft Web site 

displays are revised based on feedback. 

9. Reconsideration and Appeal 

Procedures 

In the FY 2009 IPPS proposed rule, 

for FY 2009, we proposed to continue 

the current RHQDAPU program 

reconsideration and appeal procedures 

finalized in the FY 2008 IPPS final rule 

with comment period (73 FR 23659). 

The deadline for submitting a request 

for reconsideration in connection with 

the FY 2009 payment determination is 

November 1, 2008. We also proposed to 

use the same procedural rules finalized 

in the FY 2008 IPPS final rule with 

comment period (72 FR 47365). We 

posted these rules on the QualityNet 

Web site for the FY 2008 RHQDAPU 

program reconsideration process. 

Under the procedural rules, in order 

to receive reconsideration for FY 2009, 

the hospital must—

• Submit to CMS, via QualityNet, a 

Reconsideration Request form (available 

on the QualityNet Web site) containing 

the following information: 

Hospital Medicare ID number 

—Hospital Name 

—CMS-identified reason for failure (as 

provided in the CMS notification of 

failure letter to the hospital) 

—Hospital basis for requesting 

reconsideration. (This must identify 

the hospital’s specific reason(s) for 

believing it met the RHQDAPU 

program requirements and should 

receive the full FY 2009 IPPS annual 

payment update.) 

—CEO contact information, including 

name, e-mail address, telephone 

number, and mailing address (must 

include physical address, not just the 

post office box) 

—QualityNet System Administrator 

contact information, including name, 

e-mail address, telephone number, 

and mailing address (must include 

physical address, not just the post 

office box) 

• The request must be signed by the 

hospital’s CEO. 

Following receipt of a request for 

reconsideration, CMS will—

• Provide an e-mail 

acknowledgement, using the contact 


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information provided in the 

reconsideration request, to the CEO and 

the QualityNet Administrator that the 

letter has been received. 

• Provide a formal response to the 

hospital CEO, using the contact 

information provided in the 

reconsideration request, notifying the 

facility of the outcome of the 

reconsideration process. CMS expects 

the process to take 60 to 90 days from 

the due date of November 1, 2008. 

If a hospital is dissatisfied with the 

result of a RHQDAPU program 

reconsideration decision, the hospital 

may file a claim under 42 CFR Part 405, 

Subpart R (a Provider Reimbursement 

Review Board (PRRB) appeal). 

Comment: Several commenters stated 

that hospitals should have clear 

guidance on how to submit their 

appeals, and CMS should provide 

timely appeals decisions. In the FY 2009 

IPPS proposed rule, CMS stated that it 

would provide hospitals with a decision 

within 60 to 90 days of their appeals. 

The commenters believed that this time 

period is burdensome to hospitals and 

unnecessary. In addition, because CMS 

decreases a hospital’s payments during 

the appeals process, the commenters 

believed that it may cause unnecessary 

cash flow problems for hospitals whose 

validation results are later overturned 

and that this could be particularly 

harmful for hospitals serving large 

numbers of uninsured patients. The 

commenters noted that in FY 2008, CMS 

processed all appeals within 60 days 

and argued that there is no reason why 

this timeline should be expanded to 90 

days for FY 2009. The commenters 

noted that in the Department’s VBP 

Report to Congress, the Department 

outlines an appeals process through 

which hospitals that initially fail 

validation will not receive lower 

payment while their appeals are 

ongoing; instead, only after a final 

decision is reached would any payment 

adjustments be made. The commenters 

believed that this logical process should 

be established now in the RHQDAPU 

program. One commenter suggested that 

CMS implement an approach for 

withholding the 2.0 percentage points 

from the annual payment update similar 

to Medicare’s process for recouping 

overpayments. The commenter stated 

that the recoupment process prohibits 

Medicare contractors from recouping 

funds during the first two levels of an 

appeal. 

Response: We believe that the 

commenters are referring to the 

proposed 60 to 90 day timeframe for the 

RHQDAPU program reconsideration 

process. We agree that hospitals need to 

know the results of this process as 

quickly as possible. The commenter is 

confused about the nature of 

recoupment and has raised an issue that 

does not apply here. Recoupment is a 

defined term in CMS regulations (42 

CFR 405.370) and refers to the recovery 

of outstanding Medicare debt by 

reducing present or future Medicare 

payments and applying the amount 

withheld to the indebtedness. This is 

not the same as a downward adjustment 

of a hospital’s payment update and does 

not concern any ‘‘debt’’ owed to 

Medicare. The ‘‘limitation on 

recoupment’’ policy the commenter 

discusses would not apply to CMS’

decision to adjust downward a 

hospital’s annual payment update by 2.0 

percentage points based on the hospital 

failing to meet RHQDAPU program 

requirements. 

After careful consideration of the 

public comments received, we are 

adopting as final the RHQDAPU 

program reconsideration and appeals 

requirements we proposed. We believe 

that the FY 2009 RHQDAPU program 

reconsideration review will require 60 

to 90 days for completion, based on last 

year’s workload. This time frame is 

necessary to ensure thorough and 

complete review of all hospitals’

submitted reconsideration requests. We 

will communicate all determinations 

within 60 to 90 days following the 

deadline for requesting reconsideration. 

We will strive to provide hospitals with 

a clear and prompt process for 

reconsideration. 

10. RHQDAPU Program Withdrawal 

Deadlines for FY 2009 and FY 2010 

In the FY 2009 IPPS proposed rule, 

we proposed to accept RHQDAPU 

program withdrawal forms for FY 2009 

from hospitals through August 15, 2008 

(73 FR 23660). We proposed this 

deadline to provide CMS with sufficient 

time to update the FY 2009 payment to 

hospitals starting on October 1, 2008. If 

a hospital withdraws from the program 

for FY 2009, it will receive a 2.0 

percentage point reduction in its FY 

2009 annual payment update. 

We also proposed to accept 

RHQDAPU program withdrawal forms 

for FY 2010 from hospitals through 

August 15, 2009. If a hospital withdraws 

from the program for FY 2010, it will 

receive a 2.0 percentage point reduction 

in its FY 2010 annual payment update. 

We received no comments on this 

proposed requirement, and we are 

adopting as final the RHQDAPU 

program withdrawal deadlines we 

proposed for FY 2009 and FY 2010. 

11. Requirements for New Hospitals 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47366), we 

stated that a new hospital that receives 

a CCN (formerly called Medicare 

provider number) on or after October 1 

of each year (beginning with October 1, 

2007) will be required to report 

RHQDAPU program data beginning with 

the first day of the quarter following the 

date the hospital registers to participate 

in the RHQDAPU program. For 

example, a hospital that receives its 

CCN on October 2, 2008, and signs up 

to participate in the RHQDAPU program 

on November 1, 2008, will be expected 

to meet all of the data submission 

requirements for discharges on or after 

January 1, 2009. 

In addition, we strongly 

recommended that each new hospital 

participate in an HCAHPS dry run, if 

feasible, prior to beginning to collect 

HCAHPS data on an ongoing basis to 

meet RHQDAPU program requirements. 

We refer readers to the Web site at 

http://www.hcahpsonline.org for a 

schedule of upcoming dry runs. The dry 

run will give newly participating 

hospitals the opportunity to gain firsthand experience collecting and 

transmitting HCAHPS data without the 

public reporting of results. Using the 

official survey instrument and the 

approved modes of administration and 

data collection protocols, hospitals/ 

survey vendors will collect HCAHPS 

data and submit the data to QualityNet. 

12. Electronic Health Records 

In the FY 2006 IPPS final rule, we 

encouraged hospitals to take steps 

toward the adoption of electronic health 

records (EHRs) (also referred to in this 

preamble and in previous rulemaking 

documents as electronic medical 

records) that will allow for reporting of 

clinical quality data from the EHRs 

directly to a CMS data repository (70 FR 

47420). We intend to begin working 

toward creating measures’

specifications, and a system or 

mechanism, or both, that will accept the 

data directly without requiring the 

transfer of the raw data into an XML file 

as is currently done. The Department 

continues to work cooperatively with 

other Federal agencies through our 

participation in the Healthcare 

Information Technology Standards 

Panel (HITSP)—a public/private 

partnership—to advance the 

harmonization of interoperability 

standards for electronic health 

information exchange. We encouraged 

hospitals that are developing systems to 

conform them to industry standards, 

and in particular to Secretary 


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recognized interoperability standards, 

where applicable, taking measures to 

ensure that the data necessary for 

quality measures are captured. Ideally, 

such systems will also provide point-ofcare decision support that enables 

detection of high levels of performance 

on the measures. Hospitals using EHRs 

to produce data on quality measures 

will be held to the same performance 

expectations as hospitals not using 

EHRs. 

Due to the low volume of comments 

we received on this issue in response to 

the FY 2006 proposed IPPS rule, in the 

FY 2007 IPPS proposed (71 FR 24095), 

we again invited public comment on 

these requirements and related options. 

In the FY 2007 IPPS final rule (71 FR 

48045), we summarized and addressed 

the additional comments we received. 

In the FY 2008 IPPS proposed rule (72 

FR 24809), we noted that we would 

welcome additional comments on this 

issue. 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47366), we 

responded to the additional comments 

we received and noted that CMS plans 

to continue participating in the 

American Health Information 

Community (AHIC) workgroups and 

other entities to explore processes 

through which an EHR could speed the 

collection and minimize the resources 

necessary for quality reporting. (The 

AHIC is a Federal advisory body, 

chartered in 2005 to make 

recommendations to the Secretary on 

how to accelerate the development and 

adoption of health information 

technology.) In addition, we noted that 

we will continue to participate in 

appropriate HHS studies and 

workgroups, as mentioned by a GAO 

report (GAO–07–320) about hospital 

quality data and the use of information 

technology. As appropriate, CMS will 

inform interested parties regarding 

progress in the implementation of HIT 

for the collection and submission of 

hospital quality data as specific steps, 

including timeframes and milestones, 

are identified. Current mechanisms 

include publication in the Federal 

Register as well as ongoing 

collaboration with external stakeholders 

such as the HQA, the AHA, the FAH, 

the AAMC and The Joint Commission. 

We further anticipate that as HIT is 

implemented, a formal plan, including 

training, will be developed to assist 

providers in understanding and 

utilizing HIT in reporting quality data. 

In addition, we will assess the 

effectiveness of our communications 

with providers and stakeholders as it 

relates to all information dissemination 

pertinent to collecting hospital quality 

data as part of an independent and 

comprehensive external evaluation of 

the RHQDAPU program. 

In the FY 2009 IPPS proposed rule, 

we again solicited comments on the 

issues and challenges associated with 

EHRs (73 FR 23660). Specifically, we 

invited comment on our proposed 

changes to our data submission 

requirements to be more aligned with 

currently implemented HIT systems, 

including data collection from registries 

and laboratory data. 

We recognize the potential burden on 

hospitals of increased data reporting 

requirements for process measures that 

require chart abstraction. In FY 2007 

IPPS rulemaking, we listed a variety of 

additional possible measures for future 

years. The measures included and 

emphasized additional outcomes 

measures. Additional measures were 

included for which the data sources are 

claims. For these, no additional data 

abstraction or submission would be 

required for reporting hospitals beyond 

the claims data. In proposing measures 

for FY 2010, we sought to emphasize 

outcome measures and to minimize any 

additional data collection burden. In 

addition, as provided in section 

1886(b)(3)(B)(viii)(VI) and discussed in 

section IV.B.2.a. of the FY 2009 IPPS 

proposed rule, we proposed to retire one 

measure where there is no meaningful 

difference among hospitals as a means 

of reducing data collection burden. 

Comment: Several commenters stated 

that the current Specifications Manual 

is very complex, burdensome, and 

difficult for hospitals to understand. 

Response: We appreciate the 

comments and understand that 

abstracting information from medical 

record documentation is burdensome 

and complex. We strive to improve the 

quality and clarity of the abstraction 

instructions by regularly updating them 

on a semiannual basis. We currently 

provide hospitals with updated 

instructions six months prior to the first 

effective discharge date to which the 

updated instructions apply, and actively 

educate hospitals on the specifications 

through our QIOs. These updates strive 

to improve the clarity and conciseness 

of the specifications, while attempting 

to minimize unnecessary updates. 

We will actively work to further 

simplify our specifications in the future, 

and develop new measures that are less 

burdensome and more easily utilize 

electronic medical records. 

Comment: One commenter expressed 

concern about priority source document 

guidelines in RHQDAPU program 

measure specification abstraction 

instructions. The commenter stated that 

these guidelines do not necessarily align 

with the practices and documentation of 

hospitals using electronic medical 

records. 

Response: We believe that the priority 

source document guidelines in 

RHQDAPU program measure 

specification abstraction instructions 

currently align with the practices and 

documentation of the vast majority of 

hospitals. We strive to align our 

measures specifications with current 

recordkeeping practices of hospitals. We 

constantly review feedback from 

hospitals to improve our current 

specifications through our semiannual 

updates to the Specifications Manual. 

Comment: One commenter stated that 

measures developed outside the sphere 

of joint development by CMS and The 

Joint Commission must be identified as 

such and published and maintained 

outside of the Specifications Manual. 

Response: We understand that many 

of the 43 additional RHQDAPU program 

measures we proposed for the FY 2010 

payment determination were not 

developed by CMS or The Joint 

Commission. These measures are 

currently posted on many different Web 

sites, including the AHRQ Web site for 

AHRQ PSI and IQI measures. In the near 

future, we plan to display RHQDAPU 

program measures developed outside 

the sphere of joint development by CMS 

and The Joint Commission on the 

QualityNet Web site. 

Comment: Two commenters 

encouraged CMS to implement payment 

policies, like incentives, add-ons, or 

bonuses to current payments, to 

facilitate and encourage the effective use 

of information technology that includes 

electronic health records. The 

commenters believed that smaller and 

rural hospitals would particularly 

benefit from this recommendation. 

Response: We appreciate the 

comments. Generally, the Federal 

government supports the adoption of 

health information technology as the 

normal cost of doing business. However, 

we believe that add-ons and bonuses of 

this nature would require legislative 

mandate to modify the payment system. 

Comment: One commenter urged 

CMS to support interoperable standards 

for collecting, transmitting, and 

reporting information and urged CMS to 

work with the private sector to begin 

embedding requirements for 

performance measurement into the 

design of medical and healthcare record 

systems. 

Response: We will consider these 

suggestions in our plans for measure 

development for the RHQDAPU 

program in future years. We will also 

strive to update current measures to 

more closely align with current 


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electronic medical records in use such 

as utilizing data element instructions 

that are utilized by current electronic 

medical records. 

Comment: One commenter stated that 

uniform data content standards are 

crucial to the effort to reduce the burden 

on hospitals and recommended that 

CMS promote the development and 

adoption of data content and 

information technology standards that 

will support automated data collection 

and reporting of clinical data from EHR 

systems. 

Response: We appreciate this 

comment and will consider whether it 

is appropriate to develop and adopt the 

standards suggested by the commenter. 

We will also consider this suggestion in 

our plans for measure development in 

future years. As we explained more 

fully above, we will also strive to update 

current measures to more closely align 

with current electronic medical records 

in use. 

13. RHQDAPU Program Data 

Infrastructure 

In addition to the specific comments 

on data submission requirements 

discussed in section IV.B.4.b. of this 

preamble, we received many general 

comments about the RHQDAPU 

program data infrastructure related to 

current submissions and its capability to 

handle the proposed expanded measure 

set. 

Comment: Some commenters 

identified what they believed to be 

infrastructure problems at the QIO 

Clinical Warehouse that receives 

hospital submitted RHQDAPU program 

quality data. Other commenters 

conveyed the difficulty associated with 

using QualityNet Web site applications, 

including QNet Quest and My 

QualityNet. The commenters urged CMS 

to devote more resources to the data 

infrastructure and to seek comment 

through the regulatory process for what 

changes should be made most urgently. 

Response: We have made recent 

improvements to the infrastructure to 

process the increased data volume 

submitted by hospitals for the 

RHQDAPU program, such as procuring 

additional bandwidth to accommodate 

the increased data flow into the QIO 

Clinical Warehouse. We also are 

working to improve the QNet Quest 

question and answer application for 

hospitals to submit technical and 

measures questions. This application is 

located on the QualityNet Web site. We 

also are working to improve other 

applications used by hospitals in 

support of the RHQDAPU program. We 

will consider these comments when 

planning further infrastructure 

improvements to keep pace with the 

evolution of the RHQDAPU program 

measure set. 

Comment: Some commenters 

supported the use of a single data 

repository for all hospital quality data. 

Response: We must consider many 

factors about this approach, and its 

impact on CMS programmatic needs, 

hospital burden, and other issues. We 

must consider our programmatic needs 

to own the RHQDAPU program data and 

infrastructure in order to ensure 

accurate publicly reported data and to 

support the Medicare IPPS in 

determining annual payment update 

eligibility. We understand that a single 

Federal/non-Federal quality data 

repository would reduce burden and 

provide more research capabilities to 

non-Federal researchers. However, we 

must also abide by Federal statutes and 

rules for sharing the RHQDAPU 

program patient-level data with nonQIO users. 

C. Medicare Hospital Value-Based 

Purchasing (VBP) Plan 

1. Medicare Hospital VBP Plan Report to 

Congress 

Through section 5001(b) of the Deficit 

Reduction Act of 2005 (DRA), Congress 

required the development of a plan to 

implement value-based purchasing 

(VBP) for IPPS hospital services 

beginning FY 2009. By statute, the plan 

must address: (a) The ongoing 

development, selection, and 

modification process for measures of 

quality and efficiency in hospital 

inpatient settings; (b) reporting, 

collection, and validation of quality 

data; (c) the structure, size, and source 

of value-based payment adjustments; 

and (d) public disclosure of hospital 

performance data. The Report was 

submitted to Congress on November 21, 

2007. 

The Medicare Hospital VBP Plan 

builds on the foundation of Medicare’s 

current RHQDAPU program (discussed 

in section IV.B. of the preamble of this 

final rule), which, since FY 2005, has 

provided differential payments to 

hospitals that report their performance 

on a defined set of inpatient measures 

for public posting on the Hospital 

Compare Web site. If authorized by 

Congress, the VBP Plan would include 

both public reporting and new financial 

incentives to drive improvements in 

clinical quality, patient-centeredness, 

and efficiency. 

The proposed Plan contains the 

following key components: (a) A 

performance assessment model that 

incorporates measures from different 

quality domains (that is, clinical process 

of care, patient experience of care, and 

others, when developed) to calculate a 

hospital’s total performance score; (b) 

options for translating this score into an 

incentive payment that would make a 

portion of the hospital’s base DRG 

payment contingent on its total 

performance score; (c) criteria for 

selecting performance measures for the 

financial incentive and candidate 

measures for FY 2009 and beyond; (d) 

a phased approach for transitioning 

from the RHQDAPU program to the VBP 

Plan; (e) proposed enhancements to the 

current data transmission and validation 

infrastructure to support VBP program 

requirements; (f) refinements to the 

Hospital Compare Web site to support 

expanded public reporting; and (g) an 

approach to monitoring VBP impacts. 

The Medicare Hospital VBP Plan 

Report to Congress is available on the 

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

gov/AcuteInpatientPPS/downloads/

HospitalVBPPlan

RTCFINALSUBMITTED2007.pdf. 

2. Testing and Further Development of 

the Medicare Hospital VBP Plan 

A Hospital VBP Workgroup has 

undertaken testing of the VBP Plan. This 

‘‘dry run’’ or ‘‘simulation’’ of the Plan is 

using the most recent clinical processof-care and HCAHPS measurement data 

available from the RHQDAPU program. 

New information generated by the VBP 

Plan testing will include: (a) 

Performance scores by domain; (b) total 

performance scores; and (c) financial 

impacts. Following a process similar to 

that used in developing the Plan, CMS 

will analyze this information by each 

individual IPPS hospital, by segment of 

the hospital industry (that is, geographic 

location, size, teaching status, among 

others), and in aggregate for all IPPS 

hospitals. 

The results of VBP Plan testing will be 

used to further develop the Plan. 

Priorities for Plan completion include 

addressing the small numbers issue 

(described on pages 74 and 75 of the 

Hospital VBP Plan Report to Congress) 

and developing a scoring methodology 

for the outcomes domain (pages 57–58 

of the Hospital VBP Plan Report to 

Congress), which will become an 

additional aspect of the performance 

model. After completion, the Plan will 

be retested. 

In the FY 2009 IPPS proposed rule (73 

FR 23661), we sought public comments 

on how to take full advantage of the new 

information generated through this 

testing and further Plan development. 

For example: Should the testing and 

retesting results be publicly posted? If 

the testing results were to be posted, 

would the best location be the Hospital 


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Compare Web site or the CMS Web site 

at: http://www.cms.hhs.gov? In what 

format would public posting be most 

useful to potential audiences? At what 

level would the data be posted—

individual hospital or some higher 

level? Which data elements from the 

testing results would be most useful to 

share? 

We received 65 public comments 

regarding this section of the proposed 

rule. These public comments are 

summarized below. 

Comment: Overall, the commenters 

agreed that testing will provide valuable 

information for understanding the range 

of performance results under the 

Hospital VBP Plan and could provide a 

useful planning tool for individual 

hospitals. The comments are categorized 

here into eight themes, the first three of 

which are directly responsive to 

questions posed in the proposed rule. 

• What Testing Results Should Be 

Posted 

Commenters were generally opposed 

to publicly posting performance 

information at the individual hospital 

level. The commenters noted that the 

VBP Plan has not yet been authorized by 

Congress, that the methodology might 

be changed during authorization, and 

that the impacts of the current 

methodology on different types of 

hospitals are still being evaluated. The 

commenters were particularly 

concerned that Medicare beneficiaries 

and others might use premature testing 

results to inform healthcare decisions. 

Several commenters emphasized that, if 

results are to be posted at the individual 

hospital level, each hospital should be 

given access to its preliminary results 

prior to publication, be given sufficient 

time to evaluate the results, and have 

the option to appeal to CMS for 

modifications. 

• Where Testing Results Should Be 

Posted 

Most commenters recommended not 

posting testing results on Hospital 

Compare because of concerns that 

posting on Hospital Compare would be 

confusing for beneficiaries who use the 

Web site to make comparisons of 

hospital quality. Alternatively, several 

commenters suggested posting testing 

results on the CMS Web site at: http:// 

www.cms.hhs.gov. Irrespective of which 

Web site, the commenters urged CMS to 

state clearly in any posting that VBP has 

not yet been authorized by Congress, 

that the results are from Plan testing, 

and that the testing results should not 

be used to compare hospital quality. 

The commenters suggested that CMS 

instead note that the results have been 

posted as part of testing the proposed 

VBP Plan methodology and are intended 

to promote feedback for refining the 

methodology. 

• At What Level Testing Results Should 

Be Posted 

Many commenters supported publicly 

posting aggregate-level performance 

results without individual hospital 

identification, such as at the National 

and State levels and by different 

hospital characteristics such as urban 

vs. rural, teaching status, bed size, and 

geographic location. The commenters 

indicated that this information could 

help various stakeholder groups 

understand how the VBP Plan would 

work and its potential impacts on 

improving quality of care for Medicare 

beneficiaries. 

• Sharing Results With Individual 

Hospitals 

Although most commenters opposed 

posting individual hospital data, nearly 

all of the commenters favored sharing 

testing results with each individual 

hospital. In addition, the commenters 

requested that CMS create opportunities 

for hospital leaders to ask questions and 

provide feedback regarding their 

hospitals’ results. One commenter 

suggested that CMS use MyQualityNet 

(formerly QualityNet Exchange) to share 

testing results confidentially, enabling 

hospitals to verify the scores and also to 

see the financial implications of the 

VBP methodology. 

• Application of Incentives 

Many commenters, particularly 

hospitals, expressed concern about how 

incentives would be distributed under 

the VBP Plan. Several commenters 

stressed that the VBP financial incentive 

should not be used to generate Medicare 

program savings, urging instead that any 

at-risk funds should be returned to 

hospitals as incentives. Several 

commenters expressed concern that 

some hospitals, especially safety net and 

under-performing hospitals, could be 

disadvantaged if top-performing 

hospitals were to earn a majority of the 

incentives. One commenter suggested 

that CMS withhold a portion of the 

incentive pool to create a funding 

source for quality improvement grants 

to under-performing hospitals. 

• Sensitivity to Hospital Burden 

A majority of commenters urged CMS 

to be sensitive to the limited resources 

of hospitals, especially safety net 

hospitals, and expressed concern that 

the VBP Plan could significantly 

increase the reporting burden for 

hospitals. Some commenters suggested 

that if VBP were to incorporate too 

many different quality domains, 

hospitals’ attention could be diffused 

and patient care resources further 

stretched. 

• Convening a Technical Advisory 

Panel 

Following the lead of a national 

hospital association, approximately half 

of the commenters on this section in the 

proposed rule requested that CMS bring 

together a technical advisory panel to 

review the VBP Plan testing results. The 

commenters indicated that this advisory 

panel could help CMS assess the impact 

of VBP Plan design choices and could 

suggest refinements to the Plan. Other 

commenters suggested using focus 

groups to vet the results from testing the 

VBP incentive methodology to assess 

the usefulness and clarity of this 

information. 

• Nursing-Specific Issues 

Several commenters proposed 

including nursing-based performance 

measures in VBP. 

Response: We appreciate the 

thoughtful public comments that were 

submitted on this topic and will 

consider the commenters’ input as we 

undertake further testing and refinement 

of the Hospital VBP Plan. 

D. Sole Community Hospitals (SCHs) 

and Medicare-Dependent, Small Rural 

Hospitals (MDHs) (§§ 412.78, 412.92, 

412.108, and 412.109) 

1. Background 

Under the IPPS, special payment 

protections are provided to a sole 

community hospital (SCH). Section 

1886(d)(5)(D)(iii) of the Act defines an 

SCH as a hospital that, by reason of 

factors such as isolated location, 

weather conditions, travel conditions, or 

absence of other like hospitals (as 

determined by the Secretary) is the sole 

source of inpatient hospital services 

reasonably available to Medicare 

beneficiaries. The regulations that set 

forth the criteria that a hospital must 

meet to be classified as an SCH are 

located in 42 CFR 412.92 of the 

regulations. Our regulations at § 412.109 

also provide that certain essential access 

community hospitals (EACHs) will be 

treated as an SCH for payment purposes. 

Under the IPPS, separate special 

payment protections also are provided 

to a Medicare-dependent, small rural 

hospital (MDH). Section 

1886(d)(5)(G)(iv) of the Act defines an 

MDH as a hospital that is located in a 

rural area, has not more than 100 beds, 

is not an SCH, and has a high 

percentage of Medicare discharges (not 


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less than 60 percent of its inpatient days 

or discharges in its 1987 cost reporting 

year or in two of its most recent three 

settled Medicare cost reporting years). 

The regulations that set forth the criteria 

that a hospital must meet to be 

classified as an MDH are located in 42 

CFR 412.108. 

Although SCHs and MDHs are paid 

under special payment methodologies, 

they are hospitals that are paid under 

section 1886(d) of the Act. Like all IPPS 

hospitals paid under section 1886(d) of 

the Act, SCHs and MDHs are paid for 

their discharges based on the DRG 

weights calculated under section 

1886(d)(4) of the Act. 

For SCHs, effective with hospital cost 

reporting periods beginning on or after 

October 1, 2000, and before January 1, 

2009, section 1886(d)(5)(D)(i) of the Act 

(as amended by section 6003(e) of 

Pub. L. 101–239) and section 

1886(b)(3)(I) of the Act (as added by 

section 405 of Pub. L. 106–113 and 

further amended by section 213 of Pub. 

L. 106–554) provide that SCHs are paid 

based on whichever of the following 

rates yields the greatest aggregate 

payment to the hospital for the cost 

reporting period: 

• The Federal rate applicable to the 

hospital; 

• The updated hospital-specific rate 

based on FY 1982 costs per discharge; 

• The updated hospital-specific rate 

based on FY 1987 costs per discharge; 

or 

• The updated hospital-specific rate 

based on FY 1996 costs per discharge. 

For purposes of payment to SCHs for 

which the FY 1996 hospital-specific rate 

yields the greatest aggregate payment, 

payments for discharges during FYs 

2001, 2002, and 2003 were based on a 

blend of the FY 1996 hospital-specific 

rate and the greater of the Federal rate 

or the updated FY 1982 or FY 1987 

hospital-specific rate. For discharges 

during FY 2004 and subsequent fiscal 

years, payments based on the FY 1996 

hospital-specific rate are based on 100 

percent of the updated FY 1996 

hospital-specific rate. 

As discussed in detail in section 

IV.D.2. of this preamble, the recently 

enacted Medicare Improvements for 

Patients and Providers Act of 2008 

(Pub. L. 110–275), contains a provision 

under section 122 that changes the 

provisions for rebasing the payments for 

SCHs, effective for cost reporting 

periods beginning on or after January 1, 

2009. 

Through and including FY 2006, 

under section 1886(d)(5)(G) of the Act, 

MDHs are paid based on the Federal rate 

or, if higher, the Federal rate plus 50 

percent of the difference between the 

Federal rate and the updated hospitalspecific rate based on FY 1982 or FY 

1987 costs per discharge, whichever is 

higher. However, section 5003 of Public 

Law 109–171 (DRA) modified these 

rules for discharges occurring on or after 

October 1, 2006. Section 5003(c) 

changed the 50 percent adjustment to 75 

percent. Section 5003(b) also requires 

using the FY 2002 costs per discharge 

(that is, the FY 2002 updated hospitalspecific rate) if that results in a higher 

payment. MDHs do not have the option 

to use their FY 1996 hospital-specific 

rate. 

For each cost reporting period, the 

fiscal intermediary/MAC determines 

which of the payment options will yield 

the highest aggregate payment. Interim 

payments are automatically made at the 

highest rate using the best data available 

at the time the fiscal intermediary/MAC 

makes the determination. However, it 

may not be possible for the fiscal 

intermediary/MAC to determine in 

advance precisely which of the rates 

will yield the highest aggregate payment 

by year’s end. In many instances, it is 

not possible to forecast the outlier 

payments, or the amount of the DSH 

adjustment or the IME adjustment, all of 

which are applicable only to payments 

based on the Federal rate and not to 

payments based on the hospital-specific 

rate. The fiscal intermediary/MAC 

makes a final adjustment at the close of 

the cost reporting period after it 

determines precisely which of the 

payment rates would yield the highest 

aggregate payment to the hospital. 

If a hospital disagrees with the fiscal 

intermediary’s or MAC’s determination 

regarding the final amount of program 

payment to which it is entitled, it has 

the right to appeal the fiscal 

intermediary’s or MAC’s decision in 

accordance with the procedures set 

forth in 42 CFR Part 405, Subpart R, 

which concern provider payment 

determinations and appeals. 

2. Rebasing of Payments to SCHs 

Since the issuance of the FY 2009 

IPPS proposed rule, a new law has been 

enacted that changed the rebasing 

provisions for payments to SCHs, 

effective with cost reporting periods 

beginning on or after January 1, 2009. 

Section 122 of the Medicare 

Improvements for Patients and 

Providers Act of 2008 (Pub. L. 110–275) 

provides that, for cost reporting periods 

beginning on or after January 1, 2009, 

SCHs will be paid based on a FY 2006 

hospital-specific rate (that is, based on 

their updated costs per discharge from 

their 12-month cost reporting period 

beginning during Federal fiscal year 

2006), if this results in the greatest 

payment to the SCH. Therefore, effective 

with cost reporting periods beginning 

on or after January 1, 2009, SCHs will 

be paid based on the rate that results in 

the greatest aggregate payment using 

either the Federal rate or their hospitalspecific rate based on their 1982, 1987, 

1996, or 2006 costs per discharge. 

Because this statutory provision is 

self-implementing, in this final rule, we 

are incorporating the provision in our 

regulations. Specifically, we are adding 

a new § 412.77A to include the 

provisions of the law and revising 

§ 412.92 to make a conforming technical 

change. 

3. Volume Decrease Adjustment for 

SCHs and MDHs: Data Sources for 

Determining Core Staff Values 

Section 1886(d)(5)(D)(ii) of the Act 

requires that the Secretary make a 

payment adjustment to an SCH that 

experiences a decrease of more than 5 

percent in its total number of inpatient 

discharges from one cost reporting 

period to the next, if the circumstances 

leading to the decline in discharges 

were beyond the SCH’s control. Section 

1886(d)(5)(G)(iii) of the Act requires that 

the Secretary also make a payment 

adjustment to an MDH that experiences 

a decrease of more than 5 percent in its 

total number of inpatient discharges 

from one cost reporting period to the 

next, if the circumstances leading to the 

decline in discharges were beyond the 

MDH’s control. These adjustments were 

designed to compensate an SCH or MDH 

for the fixed costs it incurs in the year 

in which the reduction in discharges 

occurred, which it may be unable to 

reduce. Such costs include the 

maintenance of necessary core staff and 

services. Our records indicate that less 

than 10 SCHs/MDHs request and receive 

this payment adjustment each year. 

We believe that not all staff costs can 

be considered fixed costs. Using a 

specified standardized formula, the SCH 

or MDH must demonstrate that it 

appropriately adjusted the number of 

staff in inpatient areas of the hospital 

based on the decrease in the number of 

inpatient days. This formula examines 

nursing staff in particular. If an SCH or 

MDH has an excess number of nursing 

staff, the cost of maintaining those staff 

members is deducted from the total 

adjustment. One exception to this policy 

is that no SCH or MDH may reduce its 

number of staff to a level below what is 

required by State or local law. In other 

words, an SCH or MDH will not be 

penalized for maintaining a level of staff 

that is consistent with State or local 

requirements. 

The process for determining the 

amount of the volume decrease 


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adjustment can be found in Section 

2810.1 of the Provider Reimbursement 

Manual, Part 1 (PRM–1). Fiscal 

intermediaries/MACs are responsible for 

establishing whether an SCH or MDH is 

eligible for a volume decrease 

adjustment and, if so, the amount of the 

adjustment. To qualify for this 

adjustment, the SCH or MDH must 

demonstrate that: (a) A decrease of more 

than 5 percent in the total number of 

inpatient discharges as compared to the 

prior cost reporting period has occurred; 

and (b) the circumstances that caused 

the decrease in discharges were beyond 

the control of the hospital. Once the 

fiscal intermediary/MAC has 

established that the SCH or MDH 

satisfies these two requirements, it will 

calculate the adjustment. The 

adjustment amount is determined by 

subtracting the second year’s MS–DRG 

payment from the lesser of: (a) The 

second year’s costs minus any 

adjustment for excess staff; or (b) the 

previous year’s costs multiplied by the 

appropriate IPPS update factor minus 

any adjustment for excess staff. The 

SCH or MDH receives the difference in 

a lump-sum payment. 

In order to determine whether or not 

the hospital’s nurse staffing level is 

appropriate, the fiscal intermediary/ 

MAC compares the hospital’s actual 

number of nursing staff in each area 

with the staffing of like-size hospitals in 

the same census region. If a hospital 

employs more than the reported average 

number of nurses for hospitals of its size 

and census region, the fiscal 

intermediary/MAC reduces the amount 

of the adjustment by the cost of 

maintaining the additional staff. The 

amount of the reduction is calculated by 

multiplying the actual number of 

nursing staff above the reported average 

by the average nurse salary for that 

hospital as reported on the hospital’s 

Medicare cost report. The complete 

process for determining the amount of 

the adjustment can be found at Section 

2810.1 of the PRM–1. 

Prior to FY 2007, our policy was for 

fiscal intermediaries/MACs to obtain 

average nurse staffing data from the 

AHA HAS/Monitrend Data Book. 

However, in light of concerns that the 

Data Book had been published in 1989 

and is no longer updated, in the FY 

2007 IPPS rules, we proposed and 

finalized our policy to update the data 

sources and methodology used to 

determine the core staffing factors (that 

is, the average nursing staff for similar 

bed size and census region) for purposes 

of calculating the volume decrease 

adjustment (71 FR 48056 through 

48060). We specified that for adjustment 

requests for decreases in discharges 

beginning with FY 2007 (that is, a 

decrease in discharges in FY 2007 as 

compared to FY 2006), an SCH or MDH 

could opt to use one of two data 

sources: the AHA Annual Survey or the 

Occupational Mix Survey, but could not 

use the HAS/Monitrend Data Book. (For 

any open adjustment requests prior to 

FY 2007, we allowed SCHs and MDHs 

the option of using the results of any of 

three sources: (1) The 2006 

Occupational Mix Survey for cost 

reporting periods beginning in FY 2006; 

(2) the AHA Annual Survey (where 

available); or (3) the AHA HAS/ 

Monitrend Data Book.) We also 

specified a methodology for calculating 

those core staffing factors. For purposes 

of explaining the methodology, we 

applied it to the 2003 Occupational Mix 

Survey data. In our explanation, we 

recognized that some of the 2003 data 

seemed anomalous, and we solicited 

comments on a possible alternative 

methodology. However, there were no 

suggested alternative methodologies 

from the commenters. We also 

explained that, while we used the 2003 

Occupational Mix Survey data ‘‘for 

purposes of describing how we would 

implement this methodology,’’ the final 

policy was to use FY 2006 Occupational 

Mix Survey data going forward. At the 

time we published the proposed and 

final rules, however, we had not yet 

processed the FY 2006 data, and could 

not present the core staffing figures that 

resulted from such data. In the FY 2007 

IPPS final rule (71 FY 48057), we stated 

that because the occupational mix 

survey is conducted once every 3 years, 

we would update the data set every 3 

years. 

We have now processed the 2006 

Occupational Mix Survey data using the 

methodology specified in the FY 2007 

IPPS final rule and continue to see some 

results that cause us to believe that the 

methodology for calculating the core 

staffing factors should be slightly 

revised from the methodology discussed 

in the FY 2007 IPPS final rule (71 FR 

48056 through 48060). The new 

methodology uses a revised formula to 

remove statistical outliers from the core 

staffing values. 

a. Occupational Mix Survey 

In the FY 2007 IPPS final rule (71 FR 

48055), we explained the methodology 

we would use for calculating core 

staffing values from the Occupational 

Mix Survey. We stated that we would 

calculate the nursing hours per patient 

day for each SCH or MDH by dividing 

the number of paid nursing hours (for 

registered nurses, licensed practical 

nurses and nursing aides) reported on 

the Occupational Mix Survey by the 

number of patients days reported on the 

Medicare cost report. The results would 

be grouped in the same bed-size groups 

and census regions as were used in the 

HAS/Monitrend Data Book. 

We indicated that we would publish 

the mean number of nursing hours per 

patient day for each census region and 

bed-size group in the Federal Register 

and on the CMS Web site. For purposes 

of the volume decrease adjustment, the 

published data would be utilized in the 

same way as the HAS/Monitrend data: 

The fiscal intermediary/MAC would 

multiply the SCH’s and MDH’s number 

of patient days by the applicable 

published hours per patient day. This 

figure would be divided by the average 

number of worked hours per year per 

nurse (for example, 2,080 for a standard 

40-hour week). The result would be the 

target number of core nursing staff for 

the particular SCH or MDH. If 

necessary, the cost of any excess staff 

(number of FTEs that exceed the 

published number) would be removed 

from the second year’s costs or, if 

applicable, the previous year’s costs 

multiplied by the IPPS update factor 

when determining the volume decrease 

adjustment. 

In the FY 2007 IPPS final rule, to 

illustrate how we would calculate the 

average number of nursing hours per 

patient day by bed size and region, we 

first merged the FY 2003 Occupational 

Mix Survey data with the FY 2003 

Medicare cost report file. We eliminated 

all observations for non-IPPS providers, 

providers who failed to complete the 

occupational mix survey, and the 

providers for which provider numbers, 

bed counts, and/or days counts were 

missing. 

For each provider in the pool, we 

calculated the number of nursing hours 

by adding the number of registered 

nurses, licensed practical nurses, and 

nursing aide hours reported on the 

Occupational Mix Survey. We divided 

the result of this calculation by the total 

number of inpatient days reported on 

the cost report to determine the number 

of nursing hours per patient day. For 

purposes of calculating the census 

regional averages for the various bedsize groups, we finalized our rule to 

only include observations that fell 

within 3 standard deviations of the 

mean of all observations, thus removing 

potential outliers in the data. 

When the FY 2006 Occupational Mix 

Survey data became available, our 

analysis of the results indicated that the 

methodology for computing core staffing 

factors should be further revised in 

order to further eliminate outlier data. 

After consulting with the Office of the 

Actuary on appropriate statistical 


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methods to remove outlier data, in the 

FY 2009 IPPS proposed rule (73 FR 

23663), we proposed to modify our 

methodology for calculating the average 

nursing hours per patient day using the 

FY 2006 Occupational Mix Survey data 

and FY 2006 Medicare cost report data. 

Similar to what was finalized in the FY 

2007 IPPS final rule, we proposed to 

merge the FY 2006 Occupational Mix 

Survey data with the FY 2006 Medicare 

cost report file. We proposed to then 

eliminate all observations for non-IPPS 

providers, providers with hospital-based 

SNFs, providers who failed to complete 

the occupational mix survey, and the 

providers for which provider numbers, 

bed counts and/or days counts were 

missing. We proposed to annualize the 

results so that the nursing hours from 

the Occupational Mix Survey and the 

patient days reported on the Medicare 

cost report are representative of one 

year. 

For each provider in the pool, we 

proposed to calculate the number of 

nursing hours by adding the number of 

registered nurses, licensed practical 

nurses, and nursing aide hours reported 

on the Occupational Mix Survey. We 

proposed to divide the result of this 

calculation by the total number of 

patient days reported on line 12 on 

Worksheet S–3, Part I, Column 6 of the 

Medicare cost report. This includes 

patient days in the general acute care 

area and the intensive care unit area. 

The result is the number of nursing 

hours per patient day. 

For purposes of calculating the census 

regional averages for the various bedsize groups, we proposed a different 

method to remove outliers in the data. 

First, we proposed to calculate the 

difference between the observations in 

the 75th percentile and the 25th 

percentile, which is the inter-quartile 

range. We would then remove 

observations that are greater than the 

75th percentile plus 1.5 times the interquartile range and less than the 25th 

percentile minus 1.5 times the interquartile range. This methodology, 

proposed by Tukey in the mid-1970’s, 

also has been used by the Office of the 

Actuary to trim data outliers. Under the 

standard deviation method described in 

the FY 2007 IPPS final rule, the mean 

and standard deviation can be 

influenced by extreme values (because 

the standard deviation is increased by 

the very observations that would 

otherwise be discarded from the 

analysis). Our proposed methodology is 

a more robust technique because it uses 

the quartile values instead of variance to 

describe the spread of the data, and 

quartiles are less influenced by extreme 

outlier values that may be present in the 

data. 

Comment: One commenter requested 

that CMS indicate what data it used in 

the Occupational Mix Survey to 

calculate the average nursing staff 

levels. In particular, the commenter 

wanted to know what type of staff was 

used to determine average nursing hours 

per inpatient day. 

Response: As discussed in the FY 

2007 IPPS final rule (71 FR 48057) and 

reiterated in this final rule, the 2006 

Occupational Mix Survey includes 

nursing hours for the following 

categories: (1) Registered nurses; (2) 

licensed practical nurses; and (3) 

nursing aides, orderlies, and attendants. 

(We note that we are not including the 

hours associated with medical 

assistants—a fourth category of hours 

collected by the Occupational Mix 

Survey.) The registered nurse category is 

divided into two subcategories: 

management personnel; and staff nurses 

or clinicians. We are finalizing our 

proposed methodology so that the 

average nursing hours per inpatient day 

includes the hours of registered nurses, 

licensed practical nurses, and nursing 

aides (which includes the nursing aides, 

orderlies and attendants) as reported on 

the FY 2006 Occupational Mix Survey 

(we are not including hours for medical 

assistants). The FY 2006 Occupational 

Mix Survey data are available on the 

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

AcuteInpatientPPS/WIFN/ 

list.asp#TopOfPage). 

Comment: One commenter stated that 

there was an inconsistency in the 

Medicare Cost Report data that CMS 

was using to determine patient days 

because CMS used line 12 of Worksheet 

S–3, Part I, Column 6 that includes 

nursery days. The commenter did not 

believe nursery days should be included 

in the adjustment because it is 

inconsistent with the PRM that states 

that ‘‘Core nursing staff is determined 

by comparing full-time equivalent (FTE) 

staffing in the Adults and Pediatrics and 

Intensive Care Unit cost centers to FTE 

staffing in the prior year and FTE 

staffing in peer hospitals.’’

Response: The guidance in the PRM 

on how the core nursing staff is 

determined is based on the use of the 

HAS/Monitrend data, which provide 

average staffing levels by census region 

and bed size for the ICU and Adult and 

Pediatric areas. However, with our 

updated data sources, we cannot isolate 

nursing hour per patient day to only the 

ICU and Routine Care areas. As we 

stated in the FY 2007 IPPS final rule (71 

FR 48059), the Occupational Mix 

Survey data collects data on both the 

inpatient and outpatient areas of the 

hospital, including the nursery area. In 

addition, it is our understanding that 

nursing staff may, and often do, rotate 

between the inpatient and outpatient 

areas of the hospital as necessary. 

Further, inpatients often utilize services 

in the outpatient (or ancillary) areas of 

the hospital. As a result, we believe that 

the total nursing hours derived from the 

Occupational Mix Survey should be 

divided by total inpatient days, or line 

12 of Worksheet S–3, Part I, Column 6. 

We plan to update the guidance in the 

PRM to reflect the use of our updated 

data sources to determine the core 

nursing staff levels. 

As we stated in the FY 2009 IPPS 

proposed rule, we believe the revised 

method would prevent the mean from 

being influenced by extreme 

observations and assumes that the 

middle 50 percent of the data has no 

outlier observations. Therefore, we are 

finalizing our methodology, and the 

results of the average nursing hours per 

patient day by bed size and region using 

the FY 2006 Occupational Mix Survey 

Data and the March 2008 update to the 

FY 2006 hospital cost report data are 

shown in the table below. The 

application of this methodology results 

in a pool of approximately 2,969 

providers. Each census region and bed 

group category required at least three 

providers in order for their average to be 

published. As stated in the FY 2007 

IPPS final rule (71 FR 48059), the results 

of the FY 2006 Occupational Mix 

Survey may be used for the volume 

decrease adjustment calculations for 

decreases in discharges occurring in 

cost reporting periods beginning in FYs 

2006, 2007, and 2008. 

Comment: Another commenter asked 

if fiscal intermediaries/MAC must 

recalculate completed volume 

adjustment calculations for this period 

(FYs 2006, 2007 and 2008) to apply the 

FY 2006 Occupational Mix Survey data 

in cases where the volume adjustment 

has already been determined using the 

HAS Monitrend data. 

Response: As stated in the FY 2007 

IPPS final rule (71 FR 48059) and in the 

FY 2009 IPPS proposed rule (73 FR 

23664), the results of the FY 2006 

Occupational Mix Survey may be used 

for the volume decrease adjustment 

calculations for decreases in discharges 

occurring in cost reporting periods 

beginning in FYs 2006, 2007, and 2008. 

If the provider believes it would benefit 

from a recalculation of its volume 

decrease adjustment using the 2006 

Occupational Mix Survey data rather 

than the HAS Monitrend data, it may 

submit a request for such a recalculation 

including the prior determination by the 

fiscal intermediary/MAC and the 


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documentation required to make a 

determination based on the 

Occupational Mix data, including 

staffing levels reported consistent with 

the Occupational Mix Survey 

instructions. 

PAID NURSING HOURS PER PATIENT DAY

Number of beds 

Census region 

New 

England 

Middle 

Atlantic 

South 

Atlantic 

East 

North 

Central 

East 

South 

Central 

West 

North 

Central 

West 

South 

Central 

Mountain Pacific 

(1) (2) (3) (4) (5) (6) (7) (8) (9) 

0–49 ............................................. 25.47 20.60 20.61 24.42 20.30 25.96 22.22 24.01 20.99 

50–99 ........................................... 21.17 18.60 20.61 23.16 18.58 22.40 20.58 21.89 19.14 

100–199 ....................................... 18.28 16.25 17.24 19.04 17.08 19.77 16.90 18.22 16.50 

200–399 ....................................... 16.91 13.87 16.02 17.89 15.55 18.94 14.88 17.06 16.57 

400+ ............................................. 17.52 14.51 16.70 18.31 14.84 16.67 16.05 15.50 18.09 

After consideration of the public 

comments received, we are finalizing 

our proposal to calculate the staff 

adjustment for the SCH and MDH low 

volume adjustment using the 2006 

Occupational Mix Survey data based on 

the methodology described above. 

b. AHA Annual Survey 

In the FY 2007 IPPS final rule (71 FR 

48058), we also allowed SCHs or MDHs 

that experienced a greater than 5 

percent reduction in the number of 

discharges during a cost reporting 

period the option of using the AHA 

Annual Survey results, where available, 

to compare the number of hospital’s 

core staff with other like-sized hospitals 

in its geographic area. Our methodology 

for calculating the nursing hours per 

patient day using the AHA Annual 

Survey data and the Medicare hospital 

cost report data was similar to the 

methodology using the Occupational 

Mix Survey data (eliminating outliers 

outside of three standard deviations 

from the mean). For this reason, as with 

the occupational mix data, both 

standard deviations and the mean could 

be influenced by extreme values. 

Therefore, in the FY 2009 IPPS 

proposed rule (73 FR 23664), we 

proposed to refine our methodology to 

calculate the core staffing factors using 

the AHA Annual Survey data as well. 

The AHA Annual Survey contains FTE 

counts for registered nurses, practical 

and vocational nurses, nursing assistive 

personnel, and other personnel in both 

inpatient and outpatient areas of the 

hospital. This is consistent with the 

Occupational Mix Survey data which 

includes data on both the inpatient and 

outpatient areas of the hospital. 

In the FY 2007 IPPS final rule, we 

stated that we would calculate the 

nursing hours per patient day using the 

AHA Annual Survey data in a similar 

method to the Occupational Mix 

Survey. Consistent with the HAS/ 

Monitrend Data book, we proposed to 

calculate the average number of nursing 

staff for a bed-size/census group if there 

are data available for three or more 

hospitals. First, we proposed to merge 

the AHA Annual Survey Data with the 

corresponding Medicare cost report 

data. We would then eliminate all 

observations for non-IPPS providers, 

providers with hospital-based SNFs, 

and the providers for which provider 

numbers, bed counts, and/or days 

counts were missing. We proposed to 

multiply the sum of nurse, licensed 

practical nurse, and nursing aide FTEs 

reported on the AHA Annual Survey by 

2,080 hours to derive the number of 

nursing hours per year (based on a 40- 

hour work week). We would then divide 

this number by the total number of 

patient days reported on line 12 on 

Worksheet S–3, Part I, Column 6 of the 

Medicare cost report. In the FY 2007 

IPPS final rule (71 FR 48060), we had 

stated that we would eliminate all 

providers with results beyond three 

standard deviations from the mean. 

However, to be consistent with our 

methodology with the Occupational Mix 

Survey data, in the FY 2009 IPPS 

proposed rule, we proposed to remove 

outliers from the AHA Annual Survey 

data by calculating the difference 

between the observations in the 75th 

percentile and the 25th percentile, 

which is the inter-quartile range. We 

then proposed to remove observations 

that are greater than the 75th percentile 

plus 1.5 times the inter-quartile range 

and less than the 25th percentile minus 

1.5 times the inter-quartile range. After 

removing the outliers, we proposed to 

group the hospitals by bed size and 

census area to calculate the average 

number of nursing hours per patient day 

for each category. In this final rule, we 

also have updated our results of the 

nursing hours per patient day using the 

2006 AHA Annual Survey data and the 

March 2008 Medicare cost report data, 

which is shown below. Using the 2006 

AHA Annual Survey data, this would 

result in a pool of approximately 1,423 

providers. We proposed to use the 2006 

Survey for the volume decrease 

adjustment calculations for decreases in 

discharges occurring during cost 

reporting periods beginning in FY 2006. 

As we stated in the FY 2007 IPPS final 

rule, for other years, the corresponding 

AHA Annual Survey would be used for 

the year in which the decrease occurred. 

PAID NURSING HOURS PER PATIENT DAY

Number of beds 

Census region 

New 

England 

Middle 

Atlantic 

South 

Atlantic 

East 

North 

Central 

East 

South 

Central 

West 

North 

Central 

West 

South 

Central 

Mountain Pacific 

(1) (2) (3) (4) (5) (6) (7) (8) (9) 

0–49 ............................................. 26.59 24.17 22.32 28.08 19.29 29.29 25.24 27.10 25.52 

50–99 ........................................... 22.13 20.35 22.31 24.40 22.68 24.00 21.17 19.37 20.36 

100–199 ....................................... 19.30 17.09 18.34 19.77 19.05 20.32 19.55 18.99 18.71 


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PAID NURSING HOURS PER PATIENT DAY—Continued 

Number of beds 

Census region 

New 

England 

Middle 

Atlantic 

South 

Atlantic 

East 

North 

Central 

East 

South 

Central 

West 

North 

Central 

West 

South 

Central 

Mountain Pacific 

(1) (2) (3) (4) (5) (6) (7) (8) (9) 

200–399 ....................................... 18.84 15.04 15.67 17.10 15.62 20.35 16.17 18.96 18.43 

400+ ............................................. 18.98 16.58 17.65 21.46 16.73 18.23 16.06 17.76 21.82 

Comment: One commenter asked for 

clarification on which peer group of 

data a provider experiencing a volume 

decrease should use to determine 

whether it meets the allowable staffing 

requirement. 

Response: Providers have been using 

HAS/Monitrend data to determine the 

staffing adjustment. The HAS/ 

Monitrend data may be used as a source 

only for open adjustment requests. 

Beginning in FY 2007, only the AHA 

Annual Survey data and the 

Occupational Mix Survey data can be 

used to determine the amount of the 

volume decrease adjustment. Therefore, 

an SCH or MDH that has experienced a 

decrease in discharges in 2007 as 

compared to 2006 will no longer be 

permitted to use the HAS/Monitrend 

databook results to calculate the amount 

of the volume decrease adjustment. The 

staffing levels based on both data 

sources will be available on the CMS 

Web site. 

The HAS/Monitrend data had 

separated staffing levels by intensive 

care unit and routine care. However, the 

data based on both the AHA Annual 

Survey and the Occupational Mix 

Survey provide only one number 

representing the average nursing hours 

per patient day aggregating the intensive 

care area and the routine care area. For 

an SCH or MDH seeking a volume 

decrease adjustment, the fiscal 

intermediary/MAC will determine the 

SCH or MDH’s total hospital nursing 

staff per inpatient day for the year of the 

volume decrease and compare that 

figure to the number published for the 

hospital’s census area and bed-size 

division in either the Occupational Mix 

Survey or AHA Annual Survey. 

Comment: Several commenters 

encouraged CMS to clarify which data 

should be used for which fiscal year. In 

addition, the commenters requested that 

CMS explain what data source should 

be used for MDHs and SCHs seeking a 

volume decrease adjustment for years 

prior to FY 2006. Some commenters 

wanted to be able to use 2006 

Occupational Mix Survey data or AHA 

Annual Survey data for open volume 

adjustment requests prior to FY 2006. 

Response: In the FY 2007 IPPS final 

rule, we stated that open adjustment 

requests prior to FY 2007 would allow 

SCHs and MDHs the option of using the 

results of any of three sources: (1) The 

2006 Occupational Mix Survey for cost 

reporting period beginning during FY 

2006 through 2008; (2) the AHA Annual 

Survey (where available); or (3) the 

HAS/Monitrend Databook. The FY 2006 

Occupational Mix Survey data and the 

2006 AHA Annual Survey data cannot 

be used for open volume adjustment 

requests prior to FY 2006. 

The Occupational Mix Survey data is 

updated every 3 years. The results of the 

FY 2006 Occupational Mix Survey can 

be used for volume decrease adjustment 

calculations for decreases in discharges 

occurring during the FY 2006, FY 2007, 

and FY 2008 cost reporting periods. The 

results of the FY 2009 Occupational Mix 

Survey will be used to update the data 

for volume decrease adjustment 

calculations for decreases in discharges 

occurring during the FY 2009, FY 2010, 

and FY 2011 cost reporting periods. 

MDHs and SCHs will also have the 

option to use the AHA Annual Survey 

data. The AHA Annual Survey data is 

updated annually. The core staffing 

levels based on the FY 2006 AHA 

Annual Survey data are published in 

this final rule and will also be available 

on the CMS Web site. The fiscal 

intermediary/MAC will use the survey 

results from the year in which the 

decrease occurred. For example, if a 

hospital experiences a decrease between 

its 2006 and 2007 cost reporting 

periods, the fiscal intermediary/MAC 

will compare the hospital’s 2007 staffing 

with the results of the FY 2007 AHA 

Annual Survey. 

Comment: Commenters urged CMS to 

release the FY 2006 core staff data based 

on the Occupational Mix Survey and the 

AHA Annual Survey as soon as 

possible. The commenters asked if CMS 

does not publish the finalized core staff 

data with the final rule, that CMS allow 

interim volume adjustment payments to 

be made based on the data published in 

the FY 2009 IPPS proposed rule. 

Response: This FY 2009 IPPS final 

rule includes two charts of core staffing 

levels by bed-size and census region for 

FY 2006 based on the Occupational Mix 

Survey and the AHA Annual Survey. 

These data will also be posted on the 

CMS Web site. The data can be used to 

determine if a volume decrease 

adjustment is necessary. The FY 2006 

AHA Annual Survey data can be used 

for FY 2006 adjustments, and the FY 

2006 Occupational Mix Survey data can 

be used for adjustments for FY 2006, FY 

2007, and FY 2008. Currently, the AHA 

Annual Survey data for 2007 is not 

available. Core staff levels for FY 2007 

will be available later this year on the 

CMS Web site. 

Comment: A few commenters 

believed that a hospital’s capital costs 

should be included in the determination 

of a qualifying hospital’s additional 

payment. 

Response: Sections 1886(d)(5)(D)(ii) 

and 1886(d)(5)(G)(iii) of the Act provide 

that ‘‘the Secretary shall provide for 

such an adjustment to the payment 

amounts under this subsection [* * *]’’

(emphasis added). Section 1886(d) of 

the Act governs the amount of payment 

for the operating costs of inpatient 

hospital services under the Medicare 

program, that is, payments under the 

operating IPPS. The authority for the 

development and implementation of a 

PPS for the capital-related costs of 

inpatient acute hospital services under 

the Medicare program (that is, the 

capital IPPS) is provided for in section 

1886(g) of the Act. Because the 

respective statutory authority for the 

additional payment to SCHs and MDHs 

that experience a significant volume 

decrease specify that an adjustment will 

be made under section 1886(d) of the 

Act, which governs payments for 

operating costs, we believe it would be 

inconsistent with the statute to include 

a hospital’s capital costs in the 

determination of a qualifying SCH’s or 

MDH’s additional payment under 

1886(d)(5)(D)(ii) and 1886(d)(5)(G)(iii) of 

the Act. Therefore, we are not adopting 

the commenters’ suggestions. 


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Comment: One commenter stated that 

updated data from the Occupational 

Mix Survey and the AHA Annual 

Survey are acceptable starting points, 

but that two additional factors are 

required to make the updated staffing 

factors meaningful. The two factors 

named were a case-mix measurement 

factor to recognize the differences in 

case-mix between the volume 

adjustment applicant versus the average 

case-mix score of the peer group 

hospitals, and a factor to recognize the 

variance in inpatient versus outpatient 

mix between the volume adjustment 

applicant and the peer group average. 

Response: The current volume 

decrease adjustment calculation, using 

the HAS Monitrend data, does not 

include a factor to account for 

differences in the case-mix of the 

applicant provider and its peer group. 

We did not propose any changes to the 

methodology for the adjustment 

calculation. The only issue addressed in 

our proposal was the database to be 

used to determine staffing levels, given 

the fact that the HAS/Monitrend data 

are no longer a viable source. We 

believe that the staffing factors based on 

the more current Occupational Mix 

Survey and AHA Annual Survey data 

are a useful update. Regarding an 

adjustment for a case-mix index factor 

or for variance in inpatient and 

outpatient mix, we did not propose any 

changes to the methodology and we 

believe that additional adjustments 

would add complexity without 

necessarily providing a benefit. 

However, we may consider these 

recommendations in future 

rulemakings. 

Comment: Several commenters 

supported the proposed changes. Other 

commenters who supported the 

proposed changes noted that, compared 

to the previously used Monitrend data, 

both the Occupational Mix Survey and 

the AHA Survey include information on 

nurses in other areas of the hospital 

besides the inpatient nursing units and 

requested that CMS clarify that the use 

of these data for future payment 

adjustment requests will require 

hospitals to analyze their nurse-staffing 

levels in the current and previous year 

using the same instructions used to 

complete the Occupational Mix Survey 

or the AHA Survey, or both. 

The commenters also noted that the 

AHA Survey changed in 2006, and the 

same nursing data are not necessarily 

available from AHA for years prior to 

2006. Likewise, the Occupational Mix 

Survey data are based on 2006 data. The 

commenters requested that CMS 

authorize the use of the 2006 

Occupational Mix Survey data and AHA 

Survey data for payment adjustments for 

volume decreases in years prior to 2006, 

at the hospital’s option. They also 

requested clarification as to when the 

2007 and 2008 AHA survey data would 

be made available. 

Response: We understand the 2007 

AHA Annual Survey data will be made 

available to CMS sometime between 

September and November 2008. We 

expect to have the staffing factors based 

on the 2007 survey calculated and 

posted on the CMS Web site during the 

first quarter of FY 2009. We expect the 

2008 AHA Annual Survey data to 

become available a year later, in autumn 

2009, and to be posted on the CMS Web 

site the first quarter of FY 2010. 

Regarding the application of the 

staffing factors based on the 2006 AHA 

Annual Survey data, those staffing 

factors should only be applied to 

hospital cost reporting periods 

beginning in FY 2006. It is not 

appropriate to use that data for periods 

prior to 2006. For example, if a hospital 

believes it experienced, in its cost 

reporting period beginning in FY 2008, 

a decrease of more than 5 percent in its 

number of inpatient discharges, 

compared to its immediately preceding 

cost reporting period (its cost reporting 

period beginning in FY 2007), the 

hospital would request a volume 

decrease adjustment for its FY 2008 cost 

reporting period, and include its FY 

2007 and FY 2008 cost report 

information. 

The 2007 AHA Annual Survey data 

will be available to CMS by the first 

quarter of FY 2009 and the staffing 

factors based on that data will also be 

posted on the CMS Web site in the first 

quarter of FY 2009. If the hospital opts 

to use the staffing factors based on the 

Occupational Mix Survey for its volume 

decrease adjustment, it would apply the 

staffing factors based on the 2006 

Occupational Mix Survey to its FY 2007 

cost report data. 

After consideration of the public 

comments received, we are finalizing 

our methodology to calculate the 

average nursing hours per patient day 

using AHA Annual Survey data and the 

Medicare Cost Report as described 

above. 

E. Rural Referral Centers (RRCs) 

(§ 412.96) 

Under the authority of section 

1886(d)(5)(C)(i) of the Act, the 

regulations at § 412.96 set forth the 

criteria that a hospital must meet in 

order to qualify under the IPPS as an 

RRC. For discharges occurring before 

October 1, 1994, RRCs received the 

benefit of payment based on the other 

urban standardized amount rather than 

the rural standardized amount. 

Although the other urban and rural 

standardized amounts are the same for 

discharges occurring on or after October 

1, 1994, RRCs continue to receive 

special treatment under both the DSH 

payment adjustment and the criteria for 

geographic reclassification. 

Section 402 of Public Law 108–173 

raised the DSH adjustment for other 

rural hospitals with less than 500 beds 

and RRCs. Other rural hospitals with 

less than 500 beds are subject to a 12- 

percent cap on DSH payments. RRCs are 

not subject to the 12-percent cap on 

DSH payments that is applicable to 

other rural hospitals (with the exception 

of rural hospitals with 500 or more 

beds). RRCs are not subject to the 

proximity criteria when applying for 

geographic reclassification, and they do 

not have to meet the requirement that a 

hospital’s average hourly wage must 

exceed the average hourly wage of the 

labor market area where the hospital is 

located by a certain percentage (106/108 

percent in FY 2008). 

Section 4202(b) of Public Law 105–33 

states, in part, ‘‘[a]ny hospital classified 

as an RRC by the Secretary * * * for 

fiscal year 1991 shall be classified as 

such an RRC for fiscal year 1998 and 

each subsequent year.’’ In the August 

29, 1997 final rule with comment period 

(62 FR 45999), we reinstated RRC status 

for all hospitals that lost the status due 

to triennial review or MGCRB 

reclassification, but did not reinstate the 

status of hospitals that lost RRC status 

because they were now urban for all 

purposes because of the OMB 

designation of their geographic area as 

urban. However, subsequently, in the 

August 1, 2000 final rule (65 FR 47089), 

we indicated that we were revisiting 

that decision. Specifically, we stated 

that we would permit hospitals that 

previously qualified as an RRC and lost 

their status due to OMB redesignation of 

the county in which they are located 

from rural to urban to be reinstated as 

an RRC. Otherwise, a hospital seeking 

RRC status must satisfy the applicable 

criteria. We used the definitions of 

‘‘urban’’ and ‘‘rural’’ specified in 

Subpart D of 42 CFR Part 412. 

One of the criteria under which a 

hospital may qualify as a RRC is to have 

275 or more beds available for use 

(§ 412.96(b)(1)(ii)). A rural hospital that 

does not meet the bed size requirement 

can qualify as an RRC if the hospital 

meets two mandatory prerequisites (a 

minimum CMI and a minimum number 

of discharges), and at least one of three 

optional criteria (relating to specialty 

composition of medical staff, source of 

inpatients, or referral volume) 

(§ 412.96(c)(1) through (c)(5) and the 


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48636 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

September 30, 1988 Federal Register (53 

FR 38513)). With respect to the two 

mandatory prerequisites, a hospital may 

be classified as an RRC if—

• The hospital’s CMI is at least equal 

to the lower of the median CMI for 

urban hospitals in its census region, 

excluding hospitals with approved 

teaching programs, or the median CMI 

for all urban hospitals nationally; and 

• The hospital’s number of discharges 

is at least 5,000 per year, or, if fewer, the 

median number of discharges for urban 

hospitals in the census region in which 

the hospital is located. (The number of 

discharges criterion for an osteopathic 

hospital is at least 3,000 discharges per 

year, as specified in section 

1886(d)(5)(C)(i) of the Act.) 

1. Case-Mix Index 

Section 412.96(c)(1) provides that 

CMS establish updated national and 

regional CMI values in each year’s 

annual notice of prospective payment 

rates for purposes of determining RRC 

status. The methodology we used to 

determine the national and regional CMI 

values is set forth in the regulations at 

§ 412.96(c)(1)(ii). The national median 

CMI value for FY 2009 includes all 

urban hospitals nationwide, and the 

regional values for FY 2009 are the 

median CMI values of urban hospitals 

within each census region, excluding 

those hospitals with approved teaching 

programs (that is, those hospitals that 

train residents in an approved GME 

program as provided in § 413.75). These 

values are based on discharges 

occurring during FY 2007 (October 1, 

2006 through September 30, 2007), and 

include bills posted to CMS’ records 

through March 2008. 

In the FY 2009 IPPS proposed rule (73 

FR 23665), we proposed that, in 

addition to meeting other criteria, if 

rural hospitals with fewer than 275 beds 

are to qualify for initial RRC status for 

cost reporting periods beginning on or 

after October 1, 2008, they must have a 

CMI value for FY 2007 that is at least—

• 1.4285; or 

• The median CMI value (not 

transfer-adjusted) for urban hospitals 

(excluding hospitals with approved 

teaching programs as identified in 

§ 413.75) calculated by CMS for the 

census region in which the hospital is 

located. 

Based on the latest available data (FY 

2007 bills received through March 

2008), in addition to meeting other 

criteria, if rural hospitals with fewer 

than 275 beds are to qualify for initial 

RRC status for cost reporting periods 

beginning on or after October 1, 2008, 

they must have a CMI value for FY 2007 

that is at least—

• 1.4270; or 

• The median CMI value (not 

transfer-adjusted) for urban hospitals 

(excluding hospitals with approved 

teaching programs as identified in 

§ 413.75) calculated by CMS for the 

census region in which the hospital is 

located. 

The final median CMI values by 

region are set forth in the following 

table: 

Region Case-mix 

index value 

1. New England (CT, ME, 

MA, NH, RI, VT) ................ 1.2532 

2. Middle Atlantic (PA, NJ, 

NY) .................................... 1.2661 

3. South Atlantic (DE, DC, 

FL, GA, MD, NC, SC, VA, 

WV) ................................... 1.3588 

4. East North Central (IL, IN, 

MI, OH, WI) ....................... 1.3579 

5. East South Central (AL, 

KY, MS, TN) ...................... 1.3051 

6. West North Central (IA, 

KS, MN, MO, NE, ND, SD) 1.3571 

7. West South Central (AR, 

LA, OK, TX) ...................... 1.4208 

8. Mountain (AZ, CO, ID, 

MT, NV, NM, UT, WY) ...... 1.4669 

9. Pacific (AK, CA, HI, OR, 

WA) ................................... 1.3945 

Hospitals seeking to qualify as RRCs 

or those wishing to know how their CMI 

value compares to the criteria should 

obtain hospital-specific CMI values (not 

transfer-adjusted) from their fiscal 

intermediaries/MACs. Data are available 

on the Provider Statistical and 

Reimbursement (PS&R) System. In 

keeping with our policy on discharges, 

these CMI values are computed based 

on all Medicare patient discharges 

subject to the IPPS DRG-based payment. 

2. Discharges 

Section 412.96(c)(2)(i) provides that 

CMS set forth the national and regional 

numbers of discharges in each year’s 

annual notice of prospective payment 

rates for purposes of determining RRC 

status. As specified in section 

1886(d)(5)(C)(ii) of the Act, the national 

standard is set at 5,000 discharges. In 

the FY 2009 IPPS proposed rule (73 FR 

23666), we proposed to update the 

regional standards based on discharges 

for urban hospitals’ cost reporting 

periods that began during FY 2006 (that 

is, October 1, 2005 through September 

30, 2006), which was the latest cost 

report data available at that time. 

Therefore, in the FY 2009 IPPS 

proposed rule (73 FR 23666), we 

proposed that, in addition to meeting 

other criteria, a hospital, if it is to 

qualify for initial RRC status for cost 

reporting periods beginning on or after 

October 1, 2008, must have as the 

number of discharges for its cost 

reporting period that began during FY 

2006 a figure that is at least—

• 5,000 (3,000 for an osteopathic 

hospital); or 

• The median number of discharges 

for urban hospitals in the census region 

in which the hospital is located. (We 

refer readers to the table set forth in the 

FY 2009 IPPS proposed rule at 73 FR 

23666.) 

Based on the latest discharge data 

available at this time, that is, for cost 

reporting periods that began during FY 

2006, the final median number of 

discharges for urban hospitals by census 

region are set forth in the following 

table. 

Region Number of 

discharges 

1. New England (CT, ME, 

MA, NH, RI, VT) ................ 8,158 

2. Middle Atlantic (PA, NJ, 

NY) .................................... 10,659 

3. South Atlantic (DE, DC, 

FL, GA, MD, NC, SC, VA, 

WV) ................................... 10,982 

4. East North Central (IL, IN, 

MI, OH, WI) ....................... 9,290 

5. East South Central (AL, 

KY, MS, TN) ...................... 7,927 

6. West North Central (IA, 

KS, MN, MO, NE, ND, SD) 8,206 

7. West South Central (AR, 

LA, OK, TX) ...................... 6,589 

8. Mountain (AZ, CO, ID, 

MT, NV, NM, UT, WY) ...... 9,738 

9. Pacific (AK, CA, HI, OR, 

WA) ................................... 8,620 

We note that the median number of 

discharges for hospitals in each census 

region is greater than the national 

standard of 5,000 discharges. Therefore, 

5,000 discharges is the minimum 

criterion for all hospitals. 

We reiterate that, if an osteopathic 

hospital is to qualify for RRC status for 

cost reporting periods beginning on or 

after October 1, 2008, the hospital 

would be required to have at least 3,000 

discharges for its cost reporting period 

that began during FY 2006. 

F. Indirect Medical Education (IME) 

Adjustment (§ 412.105) 

1. Background 

Section 1886(d)(5)(B) of the Act 

provides for an additional payment 

amount under the IPPS for hospitals 

that have residents in an approved 

graduate medical education (GME) 

program in order to reflect the higher 

indirect patient care costs of teaching 

hospitals relative to nonteaching 

hospitals. The regulations regarding the 

calculation of this additional payment, 

known as the indirect medical 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48637 

education (IME) adjustment, are located 

at § 412.105. 

The Balanced Budget Act of 1997 

(Pub. L. 105–33) established a limit on 

the number of allopathic and 

osteopathic residents that a hospital 

may include in its full-time equivalent 

(FTE) resident count for direct GME and 

IME payment purposes. Under section 

1886(h)(4)(F) of the Act, for cost 

reporting periods beginning on or after 

October 1, 1997, a hospital’s 

unweighted FTE count of residents for 

purposes of direct GME may not exceed 

the hospital’s unweighted FTE count for 

its most recent cost reporting period 

ending on or before December 31, 1996. 

Under section 1886(d)(5)(B)(v) of the 

Act, a similar limit on the FTE resident 

count for IME purposes is effective for 

discharges occurring on or after October 

1, 1997. 

2. IME Adjustment Factor for FY 2009 

The IME adjustment to the MS–DRG 

payment is based in part on the 

applicable IME adjustment factor. The 

IME adjustment factor is calculated by 

using a hospital’s ratio of residents to 

beds, which is represented as r, and a 

formula multiplier, which is 

represented as c, in the following 

equation: c × [{1 + r} .405 ¥ 1]. The 

formula is traditionally described in 

terms of a certain percentage increase in 

payment for every 10-percent increase 

in the resident-to-bed ratio. 

Section 502(a) of Public Law 108–173 

modified the formula multiplier (c) to be 

used in the calculation of the IME 

adjustment. Prior to the enactment of 

Public Law 108–173, the formula 

multiplier was fixed at 1.35 for 

discharges occurring during FY 2003 

and thereafter. In the FY 2005 IPPS final 

rule, we announced the schedule of 

formula multipliers to be used in the 

calculation of the IME adjustment and 

incorporated the schedule in our 

regulations at § 412.105(d)(3)(viii) 

through (d)(3)(xii). Section 502(a) 

modifies the formula multiplier 

beginning midway through FY 2004 and 

provides for a new schedule of formula 

multipliers for FYs 2005 and thereafter 

as follows: 

• For discharges occurring on or after 

April 1, 2004, and before October 1, 

2004, the formula multiplier is 1.47. 

• For discharges occurring during FY 

2005, the formula multiplier is 1.42. 

• For discharges occurring during FY 

2006, the formula multiplier is 1.37. 

• For discharges occurring during FY 

2007, the formula multiplier is 1.32. 

• For discharges occurring during FY 

2008 and fiscal years thereafter, the 

formula multiplier is 1.35. 

Accordingly, for discharges occurring 

during FY 2009, the formula multiplier 

is 1.35. We estimate that application of 

this formula multiplier for FY 2009 IME 

adjustment will result in an increase in 

IME payment of 5.5 percent for every 

approximately 10-percent increase in 

the hospital’s resident-to-bed ratio. 

G. Payments for Direct Graduate 

Medical Education (GME) (§§ 413.75 

and 413.79) 

1. Background 

Section 1886(h) of the Act, as 

implemented in regulations at § 413.75 

through § 413.83, establishes a 

methodology for determining payments 

to hospitals for the direct costs of 

approved graduate medical education 

(GME) programs. Section 1886(h)(2) of 

the Act sets forth a methodology for the 

determination of a hospital-specific, 

base-period per resident amount (PRA) 

that is calculated by dividing a 

hospital’s allowable direct costs of GME 

for a base period by its number of 

residents in the base period. The base 

period is, for most hospitals, the 

hospital’s cost reporting period 

beginning in FY 1984 (that is, the period 

between October 1, 1983, through 

September 30, 1984). Medicare direct 

GME payments are calculated by 

multiplying the PRA times the weighted 

number of full-time equivalent (FTE) 

residents working in all areas of the 

hospital complex (and nonhospital sites, 

when applicable), and the hospital’s 

Medicare share of total inpatient days. 

The base year PRA is updated annually 

for inflation. 

Section 1886(h)(4)(F) of the Act 

established caps on the number of 

allopathic and osteopathic residents that 

hospitals may count for purposes of 

calculating direct GME payments. For 

most hospitals, the caps were the 

number of allopathic and osteopathic 

FTE residents training in the hospital’s 

most recent cost reporting period ending 

on or before December 31, 1996. Section 

422 of Public Law 108–173 added 

section 1886(h)(7) of the Act, which 

provided for a reduction to the resident 

caps of teaching hospitals that were 

training a number of FTE residents 

below their cap in a reference period, 

and authorized a ‘‘redistribution’’ of 

those FTE resident slots to hospitals that 

could demonstrate a likelihood of using 

the additional resident slots within the 

first three cost reporting periods 

beginning on or after July 1, 2005. 

2. Medicare GME Affiliation Provisions 

for Teaching Hospitals in Certain 

Emergency Situations 

a. Legislative Authority 

The stated purposes of section 1135 of 

the Act are (1) ‘‘to enable the Secretary 

to ensure to the maximum extent 

feasible, in any emergency area and 

during an emergency period, * * * that 

sufficient health care items and services 

are available to meet the needs of 

individuals enrolled in the programs 

under titles XVIII, XIX, and XXI [that is, 

Medicare, Medicaid, and the State 

Children’s Health Insurance Program 

(SCHIP)]; and (2) that health care 

providers * * * that furnish such items 

and services in good faith, but that are 

unable to comply with one or more 

requirements * * * may be reimbursed 

for such items and services and 

exempted from sanctions for such 

noncompliance, absent any 

determination of fraud or abuse.’’

Specifically, section 1135 of the Act 

authorizes the Secretary, to the extent 

necessary to accomplish the statutory 

purpose, to temporarily waive or modify 

the application of certain types of 

statutory and regulatory provisions 

(such as conditions of participation or 

other certification requirements, 

program participation or similar 

requirements, or preapproval 

requirements) with respect to health 

care items and services furnished by 

health care provider(s) in an emergency 

area during an emergency period. 

The Secretary’s authority under 

section 1135 of the Act arises in the 

event there is an ‘‘emergency area’’ and 

continues during an ‘‘emergency 

period’’ as those terms are defined in 

the statute. Under section 1135(g) of the 

Act, an emergency area is a geographic 

area in which there exists an emergency 

or disaster that is declared by the 

President according to the National 

Emergencies Act or the Robert T. 

Stafford Disaster Relief and Emergency 

Assistance Act, and a public health 

emergency declared by the Secretary 

according to section 319 of the Public 

Health Service Act. (Section 319 of the 

Public Health Service Act authorizes the 

Secretary to declare a public health 

emergency and take the appropriate 

action to respond to the emergency, 

consistent with existing authorities.) 

Throughout the remainder of this 

discussion, we will refer to such 

emergency areas and emergency periods 

as ‘‘section 1135’’ emergency areas and 

emergency periods. 

Furthermore, under section 1135 of 

the Act, ‘‘a waiver or modification of 

requirements pursuant to this section 

may, at the Secretary’s discretion, be 


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made retroactive to the beginning of the 

emergency period or any subsequent 

date in such period specified by the 

Secretary.’’ Section 1135 of the Act 

further states that ‘‘a waiver or 

modification of requirements pursuant 

to this section terminates upon—(A) the 

termination of the applicable 

declaration of emergency or disaster 

* * *; (B) the termination of the 

applicable declaration of public health 

emergency * * *; or (C) * * * the 

termination of a period of 60 days from 

the date the waiver or modification is 

first published (or, if applicable, the 

date of extension of the waiver or 

modification. * * *)’’

As noted previously, sections 

1886(h)(4)(F) and 1886(d)(5)(B)(v) of the 

Act establish limits on the number of 

allopathic and osteopathic residents that 

hospitals may count for purposes of 

calculating direct GME payments and 

the IME adjustment, respectively, 

establishing hospital-specific direct 

GME and IME FTE resident caps. Under 

the authority of section 1886(h)(4)(H)(ii) 

of the Act, the Secretary issued rules to 

allow institutions that are members of 

the same affiliated group to apply their 

direct GME and IME FTE resident caps 

on an aggregate basis through a 

Medicare GME affiliation agreement. 

The Medicare regulations at §§ 413.75 

and 413.79 permit hospitals, through a 

Medicare GME affiliation agreement, to 

adjust IME and direct GME FTE resident 

caps to reflect the rotation of residents 

among affiliated hospitals. 

Section 1886(d)(5)(B)(vi) of the Act 

specifies the application of an intern 

and resident-to-bed (IRB) ratio cap, 

stating that the IRB ratio ‘‘may not 

exceed the ratio of the number of interns 

and residents, subject to the limit under 

clause (v), with respect to the hospital 

for its most recent cost reporting period 

to the hospital’s available beds * * * 

during that cost reporting period.’’ As 

specified under the regulations at 

§ 412.105(a)(1)(i), an IRB ratio is 

calculated for a hospital based generally 

on the ratio of FTE residents (as limited 

by the regulation at § 412.105(f)) in the 

numerator to the number of available 

beds (which is described at 

§ 412.105(1)(b)) in the denominator. 

Furthermore, section 1886(d)(5)(B)(viii) 

of the Act specifies that rules similar to 

the rules under section 1886(h)(4)(H) of 

the Act (special rules for new teaching 

programs and affiliations) shall apply 

for purposes of the IME FTE cap and the 

IRB ratio. 

b. Regulatory Changes Issued in 2006 To 

Address Certain Emergency Situations 

As explained above, the Secretary’s 

authority under section 1135 of the Act 

is prompted by the occurrence of an 

emergency or disaster that leads to 

designation of a section 1135 emergency 

area, and continues throughout a section 

1135 emergency period. For example, 

when Hurricane Katrina occurred on 

August 29, 2005, disrupting health care 

operations and medical residency 

training programs at teaching hospitals 

in New Orleans and the surrounding 

area, the conditions were met for the 

Secretary to establish an emergency area 

and emergency period under section 

1135(g) of the Act, which he did for the 

Gulf Coast region on August 31, 2005. 

Shortly after Hurricane Katrina 

occurred, CMS was informed by 

hospitals in New Orleans that the 

training programs at many teaching 

hospitals in the city were closed as a 

result of the disaster and that the 

displaced residents were being 

transferred to training programs at 

hospitals in other parts of the country. 

At the time, the existing regulations did 

not adequately address the Medicare 

GME payment issues faced by hospitals 

located in a section 1135 emergency 

area that were affected by the disaster, 

and by hospitals that trained displaced 

residents from a section 1135 emergency 

area. 

Specifically, the medical residency 

training programs at many teaching 

hospitals in New Orleans and 

surrounding areas were temporarily 

closed (either partially or completely) in 

the aftermath of Hurricane Katrina. 

Hurricane Rita, which followed Katrina 

by less than a month, further 

exacerbated the disaster conditions 

along the Gulf Coast. As a result, the 

displaced residents from the section 

1135 emergency area were transferred to 

other hospitals (which included 

hospitals located in States outside of the 

emergency area) to continue their 

medical residency training. Hospitals in 

the section 1135 emergency area also 

informed CMS that, while many 

residents would be able to return to 

their original programs to complete 

residency training as these hospitals 

gradually rebuild their programs after 

the hurricanes, some residents may 

need to remain at other hospitals for an 

extended period of time. 

In developing a policy to provide 

hospitals flexibility in responding to a 

disaster, we have stated that we must 

balance two priorities. First, we believe 

that in disaster situations, to the extent 

permitted under the statute, the policy 

should facilitate the continuity of GME, 

minimizing the disruption of residency 

training. Second, the policy should take 

into account that the training programs 

at certain hospitals located in a section 

1135 emergency area may have been 

severely disrupted by a disaster and that 

these hospitals will usually want to 

rebuild their GME programs as soon as 

possible. Accordingly, we amended the 

Medicare regulations on April 12, 2006, 

in an interim final rule with comment 

period published in the Federal 

Register (71 FR 18654). Specifically, we 

revised § 413.75(b) to include 

definitions of home hospital, host 

hospital, section 1135 emergency area, 

section 1135 emergency period, and 

emergency Medicare GME affiliated 

group. We also revised § 413.79(f) to set 

forth the requirements of an emergency 

Medicare GME affiliation agreement. 

The existing regulation at § 413.75(b) 

specifies that hospitals may only form a 

Medicare GME affiliated group (that is, 

a regular, not an emergency, Medicare 

GME affiliated group) with other 

hospitals if they are in the same or 

contiguous urban or rural areas, if they 

are under common ownership, or if they 

are jointly listed as program sponsors or 

major participating institutions in the 

same program. The provisions for a 

regular Medicare GME affiliation at 

§ 413.79(f) permit participating teaching 

hospitals to aggregate and ‘‘share’’ FTE 

caps during a specified academic year. 

The Medicare GME affiliation 

regulations allow hospitals that need to 

either decrease or increase their FTE 

resident counts to reflect the normal 

movement of residents among affiliated 

hospitals to do so for the agreed-upon 

training years. Hospitals that affiliate 

must submit a Medicare GME affiliation 

agreement, as specified at § 413.75(b), to 

their CMS fiscal intermediary or MAC 

and to CMS no later than July 1 of the 

relevant academic year. Each hospital in 

the Medicare GME affiliated group must 

have a shared rotational arrangement 

with at least one other hospital within 

the Medicare GME affiliated group, and 

all of the hospitals within the Medicare 

GME affiliated group must be connected 

by a series of shared rotational 

arrangements. The net effect of the 

adjustments to hospitals’ FTE resident 

caps, whether positive or negative on a 

hospital-specific basis, in the aggregate 

must not exceed zero. While additional 

hospitals may not be added to the 

Medicare GME affiliated group after July 

1 of a year, amendments to the 

affiliation agreement to adjust the 

distribution of the number of FTE 

residents in the original Medicare GME 

affiliation among the hospitals that are 

part of the Medicare GME affiliated 

group can be made through June 30 of 

the academic year for which they are 

effective. 

The April 12, 2006 interim final rule 

with comment period (70 FR 18654 


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through 18667) modified the regulations 

at § 413.75(b) and § 413.79(f) and 

provided the flexibility for hospitals 

whose medical residency programs have 

been disrupted in a section 1135 

emergency area to enter into emergency 

Medicare GME affiliation agreements 

with other hospitals where the hospitals 

may not meet the regulatory 

requirements for regular Medicare GME 

affiliations. Under an emergency 

affiliation, hospitals training displaced 

residents from a section 1135 emergency 

area can specify temporary adjustments 

to their FTE resident caps to permit 

them to receive Medicare direct and 

indirect GME payments relating to the 

displaced residents, even as the 

hospitals affected by the emergency 

event are rebuilding their training 

programs. The April 12, 2006 interim 

final rule with comment period (70 FR 

18654 through 18667) defined the 

hospitals that would be permitted to 

enter into emergency Medicare GME 

affiliation agreements. First, we defined 

a home hospital as a hospital that meets 

all of the following: (1) Is located in a 

section 1135 emergency area; (2) had its 

inpatient bed occupancy decreased by 

20 percent or more as the result of a 

section 1135 emergency period so that 

it is unable to train the number of 

residents it originally intended to train 

in that academic year; and (3) needs to 

send the displaced residents to train at 

a host hospital. Second, we defined a 

host hospital as a hospital training 

residents displaced from a home 

hospital. 

In the April 12, 2006 interim final 

rule with comment period (70 FR 18654 

through 18667), we specified that the 

emergency Medicare GME affiliation 

agreement must be written, signed, and 

dated by responsible representatives of 

each participating hospital and must: (1) 

List each participating hospital and its 

provider number, and specify whether 

the hospital is a home or host hospital; 

(2) specify the effective period of the 

emergency Medicare GME affiliation 

agreement (which must, in any event, 

terminate no later than at the conclusion 

of 2 academic years following the 

academic year in which the section 

1135 emergency period began); (3) list 

each participating hospital’s IME and 

direct GME FTE caps in effect for the 

current academic year before the 

emergency Medicare GME affiliation 

(that is, if the hospital was already a 

member of a regular Medicare GME 

affiliated group before entering into the 

emergency Medicare GME affiliation, 

the emergency Medicare GME affiliation 

must be premised on the FTE caps of 

the hospital as adjusted per the regular 

Medicare GME affiliation agreement, 

and not include any slots gained under 

section 422 of the MMA); and (4) 

specify the total adjustment to each 

hospital’s FTE caps in each year that the 

emergency Medicare GME affiliation 

agreement is in effect, for both direct 

GME and IME, that reflects a positive 

adjustment to the host hospital’s (or 

hospitals’) direct and/or indirect FTE 

caps that is offset by a negative 

adjustment to the home hospital’s (or 

hospitals’) direct and/or indirect FTE 

caps of at least the same amount. The 

sum total of participating hospitals’ FTE 

caps under the emergency Medicare 

GME affiliation agreement may not 

exceed the aggregate adjusted caps of 

the hospitals participating in the 

emergency Medicare GME affiliated 

group before entering into an emergency 

affiliation. A home hospital’s IME and 

direct GME FTE cap reduction under an 

emergency Medicare GME affiliation 

agreement is limited to the home 

hospital’s IME and direct GME FTE 

resident caps in effect for the academic 

year, in accordance with regulations at 

§ 413.79(c) or § 413.79(f)(1) through 

(f)(5), that is, the hospital’s base year 

FTE resident caps as adjusted by any 

and all existing regular Medicare GME 

affiliation agreements. Finally, as we 

stated in the April 12, 2006 interim final 

rule with comment period, amendments 

to the emergency Medicare GME 

affiliation agreement to adjust the 

distribution of the number of FTE 

residents in the original emergency 

Medicare GME affiliation among the 

hospitals that are part of the emergency 

Medicare GME affiliated group can be 

made through June 30 of the academic 

year for which it is effective (71 FR 

18662). 

In summary, the April 12, 2006 

interim final rule with comment period 

made changes as follows: 

• To allow host hospitals to count 

displaced residents for IME and direct 

GME payment purposes, host hospitals 

and home hospitals were permitted to 

enter into emergency Medicare GME 

affiliation agreements effective 

retroactive to the date of the first day of 

the section 1135 emergency period. 

• Through emergency Medicare GME 

affiliation agreements, home hospitals 

were permitted to affiliate with host 

hospitals anywhere in the country. That 

is, a host hospital may be located in any 

State and may receive a temporary 

adjustment to its FTE caps to reflect 

displaced residents (subject to the 

aggregate home and host hospitals’ FTE 

resident caps). 

• Emergency Medicare GME 

affiliation agreements were required to 

be submitted to CMS with a copy to the 

CMS fiscal intermediary or MAC by the 

later of 180 days after the section 1135 

emergency period begins or by July 1 of 

the academic year in which the 

emergency Medicare GME affiliation 

agreement is effective. However, for 

hospitals affected by Hurricanes Katrina 

and Rita, the deadline was subsequently 

extended to October 9, 2006. (We refer 

readers to the final rule published in the 

Federal Register on July 6, 2006, for a 

detailed discussion (71 FR 38264 

through 38266)). 

• The effective period of the 

emergency Medicare GME affiliation 

agreement was permitted to begin on or 

after the first day of a section 1135 

emergency period, and must terminate 

no later than at the conclusion of 2 

academic years following the academic 

year during which the section 1135 

emergency period began. (We note that 

in a subsequent interim final rule with 

comment period, published in the 

Federal Register on November 27, 2007, 

the effective period was subsequently 

extended by 2 additional years (72 FR 

66893 through 66898).) We summarize 

the changes addressed in the November 

27, 2007 interim final rule with 

comment period in the section that 

follows. 

• During the effective period of the 

emergency Medicare GME affiliation 

agreement, hospitals in the emergency 

Medicare GME affiliated group were not 

required to participate in a shared 

rotational arrangement (as they would 

be under a regular Medicare GME 

affiliation agreement). 

• Host hospitals were allowed an 

exception from the otherwise applicable 

rolling average resident count for FTE 

residents added as a result of an 

emergency Medicare GME affiliation 

agreement, but only during the period 

from August 29, 2005 to June 30, 2006. 

• Due to the infrastructure damage 

and continued disruption of operations 

experienced by medical facilities, and 

the consequent disruption in residency 

training caused by Hurricanes Katrina 

and Rita in 2005, there was an urgent 

need for emergency Medicare GME 

affiliation agreements to be effective 

retroactive to the date of the hurricanes. 

Section 1871(e)(1)(A) of the Act, as 

amended by section 903(a)(1) of the 

MMA, generally prohibits the Secretary 

from making retroactive substantive 

changes in policy unless retroactive 

application of the change is necessary to 

comply with statutory requirements, or 

failure to apply the change retroactively 

would be contrary to the public interest. 

Because existing regulations did not 

adequately address the issues faced by 

hospitals that are located in the section 

1135 emergency area, or hospitals that 


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assisted by training displaced residents 

from the section 1135 emergency area, 

and because we believed hospitals 

affected by Hurricanes Katrina and Rita 

would otherwise have faced dramatic 

financial hardship and the recovery of 

graduate medical education programs in 

the emergency area would have been 

impeded, we found that failure to apply 

retroactively the regulatory changes 

contained in the April 12, 2006 interim 

final rule with comment period would 

be contrary to the public interest. Thus, 

the provisions of the April 12, 2006 

interim final rule with comment period 

were made effective retroactively as of 

August 29, 2005. 

For a detailed discussion on each of 

the above emergency Medicare GME 

affiliation provisions, we refer readers to 

the April 12, 2006 interim final rule 

with comment period (71 FR 18654 

through 18667). 

c. Additional Regulatory Changes Issued 

in 2007 To Address GME Issues in 

Emergency Situations 

After the establishment of the 

emergency Medicare GME affiliation 

provisions in the April 12, 2006 interim 

final rule with comment period, we 

monitored the application of the 

emergency Medicare GME affiliation 

agreement rules in order to assess 

whether those regulatory changes 

appropriately addressed the needs of 

hospitals located in the section 1135 

emergency area in the aftermath of 

Hurricanes Katrina and Rita. We 

understand that GME programs in the 

affected area were finding it necessary 

to continue to adjust the location of 

resident training, both within the 

emergency area and in other States, as 

hospitals located within the section 

1135 emergency area continued to 

reopen beds at different rates, and as 

feedback from accreditation surveys 

warranted educational adjustments. 

Furthermore, stakeholders in Louisiana 

informed CMS that they believed 

fluidity in GME programs would 

continue for several more years, and the 

training of residents in the area is not 

likely to reach stability until permanent 

replacement facilities are established 

and functioning in the emergency area. 

As a result, we believed the provisions 

first established in the April 12, 2006 

interim final rule with comment period 

needed to be further modified to meet 

the two priorities stated earlier. That is, 

we believed that the policy should 

facilitate the continuity of GME by 

minimizing the disruption of residency 

training and also enable home hospitals 

to rebuild their GME programs as soon 

as possible. 

Therefore, we issued a second interim 

final rule with comment period in the 

Federal Register on November 27, 2007 

(72 FR 66893). In that second interim 

final rule with comment period, we 

modified the regulations for emergency 

Medicare GME affiliated groups at 

§ 413.79(f)(6) to extend relief to home 

and host hospitals affected by 

disruptions in residency programs in 

the section 1135 emergency area 

declared after Hurricanes Katrina and 

Rita, as well as to provide relief for 

similar challenges in any future 

emergency situation. We noted that we 

had received a number of comments on 

the interim final rule with comment 

period issued on April 12, 2006. 

However, we believed it was beneficial 

to provide the public with the 

opportunity to submit formal comments 

on these latest changes in the context of 

the current training situation in the area 

affected by Hurricanes Katrina and Rita, 

and to respond to all comments in a 

subsequent final rule. 

In summary, the November 27, 2007 

interim final rule with comment period 

made changes as follows: 

(1) Extension of the Effective Period of 

Emergency Medicare GME Affiliation 

Agreements 

In the November 27, 2007 interim 

final rule with comment period (72 FR 

66893 through 66898), we further 

modified the regulations at § 413.75(b) 

and § 413.79(f) to allow hospitals to 

enter into emergency Medicare GME 

affiliation agreements with increased 

flexibility. First, for emergency 

Medicare GME affiliation agreements 

involving a host hospital located in a 

different State from the home hospital 

(hereinafter, an ‘‘out-of-State host 

hospital’’), the permissible effective 

period for such agreements was 

extended from up to 3 years (that is, the 

year in which the section 1135 

emergency period began plus 2 

subsequent academic years) to up to 5 

years (that is, the year in which the 

section 1135 emergency period began 

plus 4 subsequent academic years). 

However, emergency Medicare GME 

affiliation agreements involving out-ofState host hospitals during these two 

additional periods may only apply with 

respect to the actual residents that were 

displaced from training in a hospital 

located in the section 1135 emergency 

area. By ‘‘actual residents that were 

displaced from training in a hospital 

located in the section 1135 emergency 

area,’’ we indicated that we meant 

residents in an approved medical 

residency training program at a home 

hospital at the time of the disaster that 

were either actually training at the home 

hospital or were scheduled to rotate to 

the home hospital during the training 

program. For emergency Medicare GME 

affiliation agreements involving a host 

hospital located in the same State as the 

home hospital (hereinafter, an ‘‘in-State 

host hospital’’), the permissible effective 

period for such agreements was 

extended from up to 3 years to up to 5 

years for any resident (even those not 

displaced from training in a hospital 

located in the 1135 emergency area). We 

provided that emergency Medicare GME 

affiliation agreements involving in-State 

host hospitals during these additional 2 

academic years need not be limited to 

only the actual residents that were 

displaced immediately following the 

disaster. In other words, such 

agreements may apply with respect to 

residents that were actually displaced as 

a result of the disaster, as well as to new 

residents that were not training in the 

program at the time the disaster 

occurred. With the 2-year extension 

described above, the effective period of 

an emergency Medicare GME affiliation 

agreement may begin with the first day 

of a section 1135 emergency period, and 

must terminate no later than at the end 

of the fourth academic year following 

the academic year during which the 

section 1135 emergency period began 

(for Hurricanes Katrina and Rita, this 

would be June 30, 2010). As home 

hospitals recover the ability to train 

residents after a disaster, the effective 

period for emergency Medicare GME 

affiliation agreements is intended to 

allow home hospitals to balance their 

desire to return residents to their 

original training sites, with their need to 

be given the opportunity to rebuild their 

programs incrementally. We believed 

extending the applicability of 

emergency affiliations for out-of-State 

host hospitals for 2 years (for a total of 

up to 5 years) only for the actual 

residents displaced from home hospitals 

allows such displaced residents to 

complete their training outside the 

affected area while providing an 

incentive for home hospitals to begin 

training new incoming residents locally 

(or closer to the home hospital), 

increasing the likelihood for the 

residents to stay and practice in the area 

after their training is completed. 

Affected hospitals in the New Orleans 

area have informed CMS that the 

majority of residents will tend to remain 

in the same State to practice where they 

had trained. We believe this makes 

intuitive sense and the policy 

established in the November 27, 2007 

interim final rule with comment period 

provides additional impetus for 

residents to return to the State where 


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their ‘‘home hospital’’ is located, 

increasing the likelihood that the 

physicians will stay and practice there, 

and encouraging rebuilding of the 

health care infrastructure affected by the 

section 1135 emergency. In the interim 

final rule with comment period, we 

noted that this is consistent with needs 

expressed by affected hospitals in the 

New Orleans area for more physicians to 

replace the large numbers that left 

immediately after the hurricanes. 

Furthermore, after the expiration of the 

initial 3 years of the emergency 

Medicare GME affiliation agreement 

effective period, we believe it would be 

appropriate to begin bringing emergency 

Medicare GME affiliation rules into 

accord with regular Medicare GME 

affiliation rules which specify 

geographical limits. That is, regular 

Medicare GME affiliation rules limit 

hospitals geographically to affiliations 

with other hospitals that are located in 

the same urban or rural area (as those 

terms are defined under § 412.62(f)) or 

in a contiguous area. 

(2) Provisions To Allow Hospitals To 

Count Displaced Residents Training in 

Nonhospital Sites 

In the November 27, 2007 interim 

final rule with comment period, we 

noted that it had come to our attention 

that in the wake of Hurricanes Katrina 

and Rita, host hospitals, many of which 

received large numbers of displaced 

residents, were hard pressed to find 

training sites for these unanticipated 

residents (72 FR 66893 through 66898). 

Many host hospitals called upon 

community physician practices, clinics, 

and other nonhospital settings to 

supplement existing training locations 

and accommodate the displaced 

residents. Some of the host hospitals 

that took in displaced residents had 

never before had any residency training 

programs, and therefore were new to 

Medicare rules regarding graduate 

medical education. In the haste and 

confusion surrounding this 

unprecedented displacement of 

residents, many host hospitals arranged 

for displaced residents to begin training 

in nonhospital sites without first 

establishing a written agreement, as 

specified in § 413.78(e), between the 

hospital and nonhospital site. Similarly, 

home hospitals that may have sent some 

of their residents away to train at host 

hospitals, while continuing to train a 

reduced number of residents in the 

home hospital program, may have found 

that the usual nonhospital sites for the 

residents in that program had also been 

negatively affected by the disaster. 

Consequently, home hospitals may have 

hastily arranged for displaced residents 

to begin training in alternative 

nonhospital sites and, due to the 

reduced administrative capability in the 

aftermath of the disaster, home hospitals 

may not have been able to establish a 

written agreement, as specified in 

§ 413.78(e), with the nonhospital site 

before residents started training in the 

nonhospital site. Also, during the 

unusual circumstances following the 

disaster, many hospitals did not actually 

incur all or substantially all of the costs 

of the training program in the 

nonhospital site in accordance with our 

regulations at § 413.78(e)(3)(i) or (f)(3)(i). 

The November 27, 2007 interim final 

rule with comment period provided 

hospitals that are participating in 

emergency Medicare GME affiliation 

agreements with increased flexibility in 

submitting written agreements relating 

to training that occurs in nonhospital 

sites (72 FR 66893 through 66898). 

Home or host hospitals with valid 

emergency Medicare GME affiliation 

agreements training displaced residents 

in a nonhospital site may submit a copy 

of the written agreement, as specified 

under § 413.78(e)(iii) and (f)(iii) as 

applicable, to the CMS contractor 

servicing the hospital by 180 days after 

the first day the resident began training 

at the nonhospital site. We noted that, 

as with the existing rules for written 

agreements specified at § 413.78(f), 

amendments to the written agreement 

can be made through June 30 of the 

academic year for which it is effective. 

Furthermore, under current rules, 

hospitals that are training residents at 

nonhospital sites have two options as 

specified by the regulations at 

§ 413.78(e) and § 413.78(f). That is, 

hospitals must either have a written 

agreement in place before the training 

occurs or they must pay ‘‘all or 

substantially all’’ of the costs for the 

training program in the nonhospital 

setting attributable to training that 

occurs during a month by the end of the 

third month following the month in 

which the training in the nonhospital 

site occurred. In the November 27, 2007 

interim final rule with comment period, 

we provided additional flexibility in the 

‘‘concurrent payment’’ option for home 

or host hospitals that have emergency 

Medicare GME affiliation agreements 

and are training displaced residents in 

nonhospital sites by extending the time 

allowable for ‘‘concurrent payment’’

from 3 months to 6 months (72 FR 

66893 through 66898). That is, we 

permitted a home or host hospital with 

a valid emergency Medicare GME 

affiliation agreement to incur ‘‘all or 

substantially all’’ of the costs for the 

training program in the nonhospital 

setting attributable to training that 

occurs during a month by the end of the 

sixth month following the month in 

which the training in the nonhospital 

site occurred. 

In the case of the section 1135 

emergency resulting from Hurricanes 

Katrina and Rita, we noted that the time 

limit we adopted to submit written 

agreements or to meet the ‘‘concurrent 

payment’’ requirement may have 

already passed. Therefore, we provided 

that, for residents training in 

nonhospital sites during the period of 

August 29, 2005, to November 1, 2007, 

home or host hospitals with valid 

emergency Medicare GME affiliation 

agreements could submit written 

agreements or incur ‘‘all or substantially 

all’’ of the costs of the training program 

(that is, the ‘‘concurrent payment’’

option) to cover those specific residents 

by April 29, 2008. 

For a detailed discussion of the 

emergency Medicare GME affiliation 

provisions addressed in this section, we 

refer readers to the November 27, 2007 

interim final rule with comment period 

(72 FR 66893 through 66898). 

d. Public Comments Received on the 

April 12, 2006 and November 27, 2007 

Interim Final Rules With Comment 

Period 

In the April 12, 2006 and November 

27, 2007 interim final rules with 

comment period, we revised the 

regulations at § 413.79(f) to provide for 

more flexibility than would have been 

possible under regular Medicare GME 

affiliations to allow home hospitals to 

efficiently find training sites for 

displaced residents. Under the 

flexibility provided by the emergency 

Medicare GME affiliated group 

provisions as specified at § 413.79(f)(6), 

decisions regarding the temporary 

transfers of FTE resident cap slots, 

including how to distribute slots in 

situations where the home hospital was 

training a number of residents in excess 

of its cap before the disaster, as well as 

the tracking of those FTE resident slots, 

were left to the home and host hospitals 

to work out among themselves. 

However, the home and host hospitals 

were required to include much of this 

information in their emergency 

Medicare GME affiliation agreements 

submitted both to CMS and the CMS 

contractor, as specified under 

§ 413.79(f)(6). Furthermore, because 

hospitals were permitted to amend their 

emergency Medicare GME affiliation 

agreements (on or before June 30 of the 

relevant academic year) to reflect the 

actual training situation among the 

hospitals participating in the emergency 

Medicare GME affiliated group, 

hospitals were provided with a great 


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degree of flexibility to accommodate any 

change in residency training 

circumstances within the emergency 

Medicare GME affiliated group. We note 

that the emergency Medicare GME 

affiliation provisions are intended to 

enable and facilitate the continued 

training of residents displaced from a 

section 1135 emergency area. These 

provisions are not intended to provide 

increased flexibility to shift FTE 

resident cap slots to other hospitals in 

the country simply to maximize 

Medicare IME and direct GME 

payments. 

We received a number of comments 

on the interim final rules issued on 

April 12, 2006 and November 27, 2007 

(71 FR 18654 through 18667 and 72 FR 

66893 through 66898, respectively). We 

noted in the November 27, 2007 interim 

final rule with comment period that we 

believed it would be beneficial to 

provide the public with the opportunity 

to submit formal comments to the latest 

changes implemented in the November 

27, 2007 interim final rule, in the 

context of the ongoing training situation 

in the area affected by Hurricanes 

Katrina and Rita, and that we would 

respond to comments submitted and 

finalize our policies relating to both the 

April 12, 2006 and the November 27, 

2007 interim final rules in a subsequent 

final rule. A summary of those public 

comments and our responses follow. 

Comment: Commenting on the April 

12, 2006 interim final rule, one 

commenter noted that the interim final 

rule providing for emergency Medicare 

GME affiliation agreements would have 

been unnecessary if the Medicare FTE 

resident caps were lifted. The 

commenter expressed appreciation for 

CMS’ efforts to use its regulatory 

authority to work within the statutory 

framework for GME. However, the 

commenter noted that the Medicare FTE 

resident caps, implemented a number of 

years ago by the BBA of 1997, have 

generated significant problems for 

teaching hospitals and medical schools 

that sponsor residency programs, and 

have been detrimental to their 

educational policies and decisions. 

Specifically, the commenter noted that, 

to the extent a home hospital is training 

residents in excess of its FTE resident 

caps at the time a disaster occurs, there 

would not be enough cap slots to 

distribute to host hospitals through an 

affiliation agreement after an 

emergency. Furthermore, the 

commenter stated that, ‘‘In other areas, 

decisions to impose a ‘freeze’ are 

temporary in nature. In health care and 

in Medicare in particular, we are 

unaware of policies that have not 

factored in the need for modifications 

after a certain period of time.’’ The 

commenter believed it is time to 

reconsider FTE resident caps and urged 

CMS to work with Congress to address 

this policy. 

Response: The Conference Report for 

the BBA of 1997 indicated that ‘‘the 

Secretary’s flexibility is limited by the 

conference agreement that the aggregate 

number of FTE residents should not 

increase over current levels.’’ (H. Conf. 

Rept. No. 105–217, p. 822.) That is, 

among the GME reforms included in the 

BBA of 1997 was a limit that was placed 

on the number of allopathic and 

osteopathic FTE residents that can be 

included in a hospital’s direct GME and 

IME FTE resident counts for Medicare 

payment purposes. Because there was 

an implicit incentive for hospitals to 

train more FTE residents (the more 

FTEs, the greater the payment), the 

direct GME and IME resident caps were 

implemented to limit the potential for 

increases in GME spending. While the 

commenter asserted that the FTE 

resident caps adopted by the BBA of 

1997 have been detrimental to hospitals’

and medical schools’ educational 

policies and decisions, the FTE cap 

policy was intended to address concerns 

that the system of payment to hospitals 

for GME was encouraging an oversupply 

of physicians, a maldistribution of 

physicians across the country (for 

example, not enough physicians in rural 

areas), and a narrow focus on training 

residents in inpatient settings. In 

general, the BBA of 1997 sought to limit 

the growth of training programs at 

existing teaching hospitals in urban 

areas, while providing flexibility in 

order to encourage residency training 

programs to grow in rural areas. Dental 

and podiatric residents were, and still 

are, exempt from the caps as the 

concerns about an oversupply of 

practitioners did not apply to dentistry 

and podiatry. 

Although the commenter believed 

that other Medicare policies recognize 

the need for modifications over time 

and that the imposition of a permanent 

‘‘freeze’’ on the number of resident slots 

that Medicare would recognize for 

purposes of direct and indirect GME 

payments was inconsistent with that 

general practice, language in the 

Conference Report for the BBA of 1997 

indicated that Congress anticipated the 

need for proper flexibility to respond to 

changing needs, especially given the 

sizeable number of urban hospitals that 

were not teaching hospitals at the time 

the direct GME and IME FTE resident 

caps were implemented, and that might 

elect to initiate new training programs 

in the future (H. Conf. Rept. No. 105–

217, pp. 821–822). Accordingly, the 

statute allows non-teaching hospitals to 

become teaching hospitals and to 

receive direct GME and IME FTE 

resident caps if these hospitals 

participate in training residents in new 

programs that are accredited for the first 

time on or after January 1, 1995. In 

addition, rural hospitals, even those 

with existing teaching programs, may 

receive increases to their IME and direct 

GME FTE resident caps for training 

residents in new programs that are 

accredited for the first time on or after 

January 1, 1999. 

The BBA of 1997 also provided 

flexibility for hospitals that cross-train 

residents to share their respective FTE 

resident caps. The statute authorized the 

Secretary to adopt rules under which 

hospitals could apply the FTE resident 

caps in the aggregate, and the Secretary 

adopted such rules. By entering into 

‘‘Medicare GME affiliation agreements,’’

hospitals may combine their individual 

FTE resident caps to create ‘‘aggregate 

caps’’ for direct GME and IME, 

respectively. In this situation, the 

number of FTE residents that a 

particular hospital is permitted to count 

for direct GME and IME payment 

purposes may vary from the individual 

hospital’s original FTE resident caps. 

However, the aggregate total number of 

FTE residents counted by all the 

hospitals participating in a Medicare 

GME affiliation agreement cannot 

exceed the aggregate total of the 

hospitals’ direct GME and IME FTE 

resident caps. Consistent with the 

statute, in emergency situations, the 

emergency Medicare GME affiliation 

agreement provisions allow home 

hospitals the flexibility to temporarily 

transfer a portion or all of their FTE 

resident caps to host hospitals that are 

training the home hospitals’ displaced 

residents. In contrast to the regular 

Medicare GME affiliation rules, for 

emergency Medicare GME affiliations, 

there is no requirement that the 

hospitals are ‘‘cross-training’’ residents. 

In recent years, members of the GME 

community have asserted that, in 

general and on a national basis, an 

oversupply of physicians is no longer a 

pressing issue, although concerns that 

there is a maldistribution of physicians 

across the country (for example, not 

enough physicians in rural areas) and a 

narrow focus on training residents in 

inpatient settings still continue. In 2005, 

Congress took action to provide some 

relief to hospitals that were in need of 

additional FTE resident cap slots. 

Section 422 of the MMA authorized the 

one-time redistribution of FTE resident 

cap slots from hospitals that were not 

fully utilizing those positions to 

hospitals that demonstrated the 


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likelihood that they could use the FTE 

resident slots in order to expand or 

create new programs or to permit them 

to count FTE residents they were 

already training in excess of their 

existing FTE resident caps, with priority 

given to rural hospitals. This 

redistribution of FTE resident slots to 

support new or existing programs 

facilitated a more effective use of 

Medicare GME funding. In addition, we 

are aware that, even though a number of 

hospitals currently are training a 

number of residents in excess of their 

FTE resident caps, and are not 

permitted to count those FTE residents 

for purposes of Medicare direct and 

indirect GME payments, the hospitals 

are nonetheless effectively training 

residents at levels above their BBA FTE 

resident caps either because alternative 

sources for GME funding have been 

identified to support the training or 

because the hospitals have determined 

that even without Medicare funding 

relating to those slots, the benefits the 

hospitals gain from training those 

additional residents exceed the cost to 

the hospitals. We note that if the 

statutory provisions adopted in the BBA 

of 1997 and the MMA of 2003 are 

revised, we would modify our policies 

accordingly. 

Comment: A number of commenters 

expressed concern that the application 

of a 3-year rolling average FTE resident 

count is detrimental to home hospitals. 

Some commenters disagreed with CMS 

that a home hospital could benefit from 

the 3-year rolling average because, the 

commenters argued, when a hospital 

abruptly closes, it has no Medicare 

patient load and thus cannot receive 

GME reimbursement. The commenters 

suggested that CMS allow home 

hospitals to count FTE residents in a 

fashion similar to the way hospitals are 

permitted to count residents in a new 

program so that home hospitals would 

not be subject to the 3-year rolling 

average FTE resident count for a preset 

number of years while they rebuild their 

GME programs. 

Response: Section 1886(d)(5)(B)(vi)(II) 

of the Act for IME and section 

1886(h)(4)(G) of the Act for direct GME 

require that a hospital’s count of FTE 

residents in the current year be based on 

a 3-year ‘‘rolling average’’ count of FTE 

residents, that is, the average of the 

number of residents in the current year 

and the 2 immediate prior years. This is 

a statutory requirement we believe is 

intended to distribute the impact of 

increasing or decreasing the number of 

residents at a hospital over a 3-year 

period. Thus, if a hospital increases or 

decreases the number of FTE residents 

in a given year, the hospital’s FTE 

resident count and consequent direct or 

indirect GME payment is impacted by 

only one-third of the change in FTEs in 

that year, two-thirds in the second, and 

all of the change only in the third year. 

We note that the 3-year rolling average 

can work to home hospitals’ advantage 

because the effect from the decrease in 

the number of FTE residents a home 

hospital is training after an emergency 

event is spread out over 3 years and the 

home hospitals will be paid based upon 

a higher number of FTE residents than 

they actually train for several years after 

the emergency event. However, we agree 

that, in order for the home hospital to 

benefit from the nature of the 3-year 

rolling average, the home hospital must 

be operating sufficiently to provide 

inpatient care for Medicare 

beneficiaries. We note that Medicare 

GME payments (both direct GME and 

IME) are dependent on a hospital’s 

Medicare patient load because the 

payments are intended to reimburse the 

hospital for Medicare’s share of GME 

costs. We note that even if a hospital 

receives little or no Medicare funding 

for its GME programs due to low or no 

Medicare inpatient utilization, a 

hospital typically supports its training 

programs though a number of funding 

sources which may include universities, 

schools of medicines, and other Federal, 

State, and local grant programs. 

We appreciate the commenter’s 

concern that after an emergency event, 

there is a critical need for home 

hospitals to continue to receive GME 

funding in order to engage in the 

rebuilding of their programs. However, 

the statutory provisions regarding the 

3-year rolling average still apply. In 

response to the commenter that 

suggested we allow home hospitals to 

count FTE residents that return to the 

home hospital’s program (whether they 

are the transferred residents returning 

home from host hospitals or ‘‘new’’

residents starting to train in the 

hospital’s existing programs), without 

subjecting those FTE residents to the 

3-year rolling average, the statute does 

not provide for such an exception to the 

3-year rolling average for residents 

training in an existing program. 

However, we note that following an 

emergency event, home hospitals may 

be eligible for non-Medicare emergency 

relief funds that are specifically 

appropriated and intended to provide 

relief to hospitals for losses incurred 

due to the emergency event. 

Comment: Commenters expressed 

appreciation for the exception from the 

otherwise applicable 3-year rolling 

average resident count for FTE residents 

added as a result of an emergency 

Medicare GME affiliation agreement 

during the period from August 29, 2005, 

to June 30, 2006. The commenters urged 

CMS to extend the exception to the 3- 

year rolling average in the final rule so 

that host hospitals training displaced 

residents could count and thus receive 

payments relating to those FTE 

residents in the same year, rather than 

incrementally over 3 years. The 

commenters believed that host hospitals 

should not be penalized for taking in 

displaced residents, nor should they be 

discouraged from accepting these 

residents because they will not receive 

timely payments. The commenters also 

noted that the current ‘‘closed program’’

regulations at § 413.79(h) provide for an 

exception to the 3-year rolling average 

for hospitals that take in residents from 

a closed program. The majority of 

commenters recommended that CMS 

should extend the 3-year rolling average 

exception, that is, permit host hospitals 

to count displaced residents in full for 

as long as the emergency Medicare GME 

affiliations are effective. Alternatively, 

another commenter suggested that CMS 

extend the exception to the 3-year 

rolling average but with an annual 

reevaluation for its necessity as a 

financial incentive for hospitals to keep 

training displaced residents. 

Response: As we stated in the April 

12, 2006 interim final rule (70 FR 18654 

through 18667), CMS was aware that, 

based on initial guidance from Qs & As 

posted on the CMS Web site shortly 

after Hurricane Katrina, many host 

hospitals took in displaced residents 

under the belief that, under the ‘‘closed 

program’’ regulations, they would not be 

subject to the 3-year rolling average rule 

for training displaced residents after 

Hurricanes Katrina and Rita. In fact, 

because many of the training programs 

in the section 1135 emergency area were 

incrementally reopened in the aftermath 

of Hurricanes Katrina and Rita, the 

‘‘closed program’’ regulations could no 

longer be used. In response, we 

developed the policy for emergency 

Medicare GME affiliation agreements 

and established the regulations in an 

interim final rule with comment period 

on April 12, 2006. Therefore, between 

August 29, 2005 (when Hurricane 

Katrina occurred) and April 12, 2006, it 

is understandable that hospitals might 

have assumed that, based on the ‘‘closed 

program’’ regulations, they would not be 

subject to the 3-year rolling average rule 

for training displaced residents. Because 

we recognized that, as a result of the 

limited options under existing 

regulations and our initial guidance 

immediately following the Gulf Coast 

hurricanes, many host hospitals would 

have expected the application of the 


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‘‘closed program’’ regulations, under 

which the 3-year rolling average rules 

do not apply, we provided for a narrow, 

time-limited exception to the 3-year 

rolling average rule for host hospitals 

that trained displaced residents from 

August 29, 2005, to June 30, 2006 

(pursuant to a valid emergency 

Medicare GME affiliation agreement). 

The April 12, 2006 interim final rule 

with comment period allowed host 

hospitals with valid emergency 

Medicare GME affiliation agreements to 

initially exclude the displaced FTE 

residents training at the host hospital 

from August 29, 2005 to June 30, 2006, 

from their regular 3-year rolling average 

calculation, and instead, to immediately 

add those displaced FTE residents to the 

hospital’s 3-year rolling average FTE 

resident count, with the effect that the 

host hospital could receive GME 

payments relating to the displaced FTE 

residents in the first year rather than 

having them spread over 3 years. 

In response to the commenters who 

requested that the exception to the 3- 

year rolling average be extended past 

June 30, 2006, we note that CMS 

provided for the narrow, time-limited 

exception from the 3-year rolling 

average rules because we recognized 

that host hospitals may have taken on 

displaced residents with the reasonable 

expectation, based on our guidance, that 

the displaced residents would be 

counted pursuant to the ‘‘closed 

program’’ regulations, under which the 

3-year rolling average rules do not 

apply. We do not believe it would be 

appropriate, consistent with the statute, 

to extend the exception beyond the 

period immediately following the 

disaster during which there was a 

change in the rules regarding the 

treatment of displaced residents. We 

note that, in the case of the host 

hospital, application of the 3-year 

rolling average rule for periods after 

June 30, 2006, will result in 2 years of 

residual increases in the hospitals’ FTE 

resident counts, permitting them to 

continue to receive increased GME 

payments relating to displaced residents 

even after the residents leave the host 

hospital. 

Comment: Some commenters 

requested that, in the event an 

emergency situation causes a hospital or 

program to close permanently, CMS 

should grant host hospitals an automatic 

increase in their FTE resident caps to 

allow the residents displaced from the 

closed hospital or program to complete 

their training without requiring 

additional documentation requirements. 

That is, the commenters believed that in 

cases of hospital or program closure due 

to an emergency event, any hospital 

training displaced residents from these 

closed hospitals or programs would not 

need to submit any further 

documentation as currently required by 

either the emergency Medicare GME 

affiliation agreement provisions at 

§ 413.79(f) or the closed program 

regulations at § 413.79(h) in order to 

increase their FTE resident caps to be 

paid for the training of the displaced 

residents. 

Response: In the case where a hospital 

or program is closed permanently, the 

existing ‘‘closed program’’ and ‘‘closed 

hospital’’ regulations apply. We 

originally established the existing 

regulations at § 413.79(h) because 

hospitals indicated a reluctance to 

accept additional residents from a 

closed hospital when they would not be 

permitted to count them for purposes of 

Medicare GME payments without a 

temporary adjustment to their caps. The 

regulations at § 413.79(h) allow a 

temporary adjustment to a hospital’s 

FTE resident cap if the following criteria 

are met: (a) The hospital is training 

additional residents from a hospital that 

closed or from a program that closed on 

or after July 1, 1996 (if the hospital with 

the closed program agrees, in a written 

statement, to temporarily reduce its FTE 

resident cap to offset the displaced 

residents trained by the receiving 

hospital); and (b) the hospital that is 

training the additional residents from 

the closed hospital or closed program 

submits a request to its fiscal 

intermediary/MAC at least 60 days after 

the hospital begins to train the residents 

for a temporary adjustment to its FTE 

cap. The hospital must also document 

that it is eligible for this temporary 

adjustment to its FTE cap by identifying 

the residents who have come from the 

closed hospital or closed program and 

have caused the hospital to exceed its 

cap, and specify the length of time that 

the adjustment is needed. After the 

displaced residents leave the hospital’s 

training program or complete their 

residency program, the temporary cap 

adjustment expires for the hospital that 

received displaced residents, and the 

cap slots would either revert back to the 

original hospital with the closed 

program or, in the case of a closed 

hospital, the cap slots permanently 

expire. Accordingly, after an emergency 

event, in the case of a hospital closure 

as defined at § 413.79(h)(1)(i), any 

hospital that trains displaced residents 

from the closed hospital may be 

permitted to use the ‘‘closed hospital’’

regulations at § 413.79(h)(2) as 

described above. Moreover, in cases 

where a hospital’s program is 

completely closed, as defined at 

§ 413.79(h)(1)(ii), any hospital that 

trains displaced residents from the 

closed program may be permitted to use 

the ‘‘closed program’’ regulations at 

§ 413.79(h)(3). Alternatively, if a section 

1135 emergency area has been declared, 

then hospitals may be permitted to use 

emergency Medicare GME affiliation 

agreement regulations as specified at 

§ 413.79(f). We believe it is necessary to 

require that hospitals training displaced 

residents from closed hospitals and 

closed programs provide documentation 

as specified in the above regulations in 

order to ensure that Medicare payments 

are being paid appropriately and not in 

excess of the FTE caps. 

Comment: Several commenters noted 

that, in the month immediately 

following Hurricane Katrina, many 

residents were not training anywhere. 

That is, while home hospitals were 

incurring significant training costs 

associated with the residents, 

arrangements had not yet been made for 

residents to continue their training at 

any hospital. Therefore, neither home 

hospitals nor host hospitals were 

counting these residents for Medicare 

GME payment purposes during this 

timeframe. Several commenters 

requested that home hospitals be 

allowed to annualize their 11-month 

FTE resident counts to 12 months, or 

alternatively, to attribute the August 

2005 FTE resident counts to September 

2005 as well, so that home hospitals 

could be paid as if residents had been 

training at the home hospital in 

September. 

Response: While we understand that 

resident salaries and other costs may 

continue to be incurred even when the 

residents are prevented from training, as 

is the case after an emergency event that 

closes down their training sites, the 

Medicare statute provides for direct and 

indirect GME payments to hospitals 

only based on the actual time (counted 

in FTEs) that residents spend training at 

hospitals or, under certain 

circumstances, at nonhospital sites. We 

note that, as a result of an emergency 

event, hospitals may receive grants and 

other non-Medicare types of relief 

payments from other authorities to 

address the hospitals’ needs to cover 

losses due to a cessation of operations. 

Comment: Following the April 12, 

2006 interim final rule with comment 

period, commenters urged CMS to 

address the situation where, in the 

confusion after the emergency events, 

home and host hospitals may have 

hastily arranged for displaced residents 

to begin training in nonhospital sites 

without first establishing a written 

agreement, as specified in § 413.78(e), 

between the hospital and nonhospital 


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site. In addition, the commenters 

indicated that, in the confusion and 

haste under which arrangements were 

made for displaced residents to train in 

nonhospital sites, hospitals may not 

have actually incurred all or 

substantially all of the costs of the 

training program in the nonhospital site 

in a timely fashion in accordance with 

our regulations at § 413.78(e)(3)(i) or 

(f)(3)(i). The commenters suggested CMS 

make accommodations for this period of 

confusion and modify the regulations at 

§ 413.78 to allow home and host 

hospitals additional time to comply 

with the written agreement and 

payment requirements required for 

hospitals to count residents training at 

nonhospital sites. 

Response: We acknowledged the 

commenters’ concerns regarding the 

training of displaced residents in 

nonhospital sites after an emergency 

event and addressed this issue in the 

November 27, 2007 interim final rule 

with comment period (72 FR 66893 

through 66898). As we discussed above, 

the November 27, 2007 interim final 

rule with comment period provided 

hospitals that are participating in 

emergency Medicare GME affiliation 

agreements with increased flexibility in 

submitting written agreements relating 

to training that occurs in nonhospital 

sites. Home or host hospitals with valid 

emergency Medicare GME affiliation 

agreements training displaced residents 

in a nonhospital site may submit a copy 

of the written agreement, as specified 

under § 413.78(e)(3)(iii) and (f)(3)(iii) as 

applicable, to the CMS contractor 

servicing the hospital by 180 days after 

the first day the resident began training 

at the nonhospital site. 

Furthermore, because the regulations 

at § 413.78(f) specify two options: (1) 

That hospitals must either have a 

written agreement in place before the 

training occurs or (2) they must pay ‘‘all 

or substantially all’’ of the costs for the 

training program in the nonhospital 

setting attributable to training that 

occurs during a month by the end of the 

third month following the month in 

which the training in the nonhospital 

site occurred, we provided additional 

flexibility in the ‘‘concurrent payment’’

option for home or host hospitals that 

have emergency Medicare GME 

affiliation agreements and are training 

displaced residents in nonhospital sites 

by extending the time allowable for 

‘‘concurrent payment’’ from 3 months to 

6 months. That is, we permit a home or 

host hospital with a valid emergency 

Medicare GME affiliation agreement to 

incur ‘‘all or substantially all’’ of the 

costs for the training program in the 

nonhospital setting attributable to 

training that occurs during a month by 

the end of the sixth month following the 

month in which the training in the 

nonhospital site occurred. 

Finally, in the case of Hurricanes 

Katrina and Rita, we noted that the time 

limit we adopted to submit written 

agreements or to meet the ‘‘concurrent 

payment’’ requirement may have 

already passed. Therefore, we extended 

the deadline so that for residents 

training in nonhospital sites during the 

period of August 29, 2005, to November 

1, 2007, home or host hospitals with 

valid emergency Medicare GME 

affiliation agreements could submit 

written agreements or incur ‘‘all or 

substantially all’’ of the costs of the 

training program (that is, the 

‘‘concurrent payment’’ option) to cover 

those specific residents by April 29, 

2008. 

We did not receive any comments in 

response to our modifications of the 

regulations at § 413.78(e) and (f) as 

specified in the November 27, 2007 

interim final rule. 

Comment: The majority of 

commenters also responded to the April 

12, 2006 interim final rule with a strong 

recommendation that CMS allow 

emergency Medicare GME affiliation 

agreements to continue past the 

maximum of 3 academic years as we 

originally specified in the April 12, 

2006 interim final rule with comment 

period. The commenters stated that a 

residency program can take up to 5 

years to complete, that fluidity in GME 

programs in the emergency area could 

continue for more than 3 years, and that 

GME programs are not likely to reach 

stability until permanent replacement 

facilities are established and functioning 

in the emergency area. The commenters 

recommended that CMS extend the 

effective period of emergency Medicare 

GME affiliation agreements from up to 

3 years to up to 5 years. 

Response: We agreed with the 

commenters’ reasons for the necessity of 

extending the effective period of 

emergency Medicare GME affiliation 

agreements from up to 3 years to up to 

5 years, and have already addressed this 

issue in the November 27, 2007 interim 

final rule with comment period (72 FR 

66893 through 66898). In the November 

27, 2007 interim final rule with 

comment period, we extended the 

permissible effective period for 

emergency Medicare GME affiliations 

from up to 3 years to up to 5 years, 

beginning with the first day of a section 

1135 emergency period, and terminating 

no later than at the end of the fourth 

academic year following the academic 

year during which the section 1135 

emergency period began. However, we 

specified that for an out-of-State host 

hospital (that is, a host hospital located 

in a different state from the home 

hospital), FTE cap adjustments during 

the additional 2 years could apply only 

for the actual residents that were 

displaced immediately following the 

disaster. For host hospitals located in 

the same state as the home hospital, the 

FTE cap adjustments under the 

emergency Medicare GME affiliation 

agreement can apply to new residents 

that were not training in the home 

hospital’s program at the time the 

disaster began. We stated that the 

extension of the permissible effective 

period for emergency Medicare GME 

affiliation agreements is intended to 

allow home hospitals to balance their 

desire to return residents to their 

original training sites as they recover the 

ability to train residents after a disaster, 

with their need to be given the 

opportunity to rebuild their programs 

incrementally. We explained that we 

believed extending the permissible 

effective period for emergency Medicare 

GME affiliation agreements with out-ofState host hospitals for 2 years (for a 

total of up to 5 years), but limiting such 

agreements to residents that were 

displaced from home hospitals 

immediately following a disaster, would 

allow the displaced residents to 

complete their training, while providing 

an incentive for home hospitals to begin 

training new incoming residents locally, 

increasing the likelihood that the 

residents would stay and practice in the 

area after their training is completed. 

We did not receive any public 

comments in response to the 

modification of the effective period for 

emergency Medicare GME affiliation 

agreements as specified in the 

November 27, 2007 interim final rule 

with comment period. 

Comment: The majority of 

commenters requested that CMS 

reconsider the deadline for submission 

of emergency Medicare GME affiliation 

agreements, stating that the deadline 

CMS originally required in the April 12, 

2006 interim final rule with comment 

period was unmanageable. 

Response: In the April 12, 2006 

interim final rule with comment period 

(70 FR 18654 through 18667), we 

required emergency Medicare GME 

affiliation agreements to be submitted to 

CMS with a copy to the CMS fiscal 

intermediary or MAC by the later of 180 

days after the section 1135 emergency 

period begins or by July 1 of the 

academic year in which the emergency 

Medicare GME affiliation agreement is 

effective. However, in response to 

commenters’ immediate request for an 

extension, we issued a final rule on July 


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6, 2006, to address this concern and 

extended the deadline for hospitals 

affected by Hurricanes Katrina and Rita 

to October 9, 2006. Upon further 

reflection and in response to comments 

from hospitals affected by Hurricanes 

Katrina and Rita, we are further 

modifying the deadlines for the 

submission of emergency Medicare 

GME affiliation agreements to apply to 

all future emergency events that result 

in a declaration of an 1135 emergency 

area (§ 413.79(f)(6)(ii)). Effective for 

emergency Medicare GME affiliation 

agreements that would otherwise be 

required to be submitted on or after 

October 1, 2008, home and host 

hospitals are permitted to submit 

emergency Medicare GME affiliation 

agreements by 180 days after the end of 

the academic year in which the 

emergency event occurs; for the second 

academic year, by 180 days after the end 

of the next academic year following the 

academic year in which the section 

1135 emergency was declared; and for 

subsequent academic years, by July 1 of 

each academic year. That is, for 

example, if a section 1135 emergency 

area is declared for an emergency event 

that occurred on March 1, 2009, 

hospitals are permitted to submit an 

emergency Medicare GME affiliation 

agreement for the period from March 1, 

2009, to June 30, 2009 (the first relevant 

academic year) by August 28, 2009. 

Additionally, for an emergency 

Medicare GME affiliation agreement for 

the period from July 1, 2009, to June 30, 

2010 (the second relevant academic 

year), hospitals are permitted to submit 

the emergency Medicare GME affiliation 

agreement by August 28, 2010. For the 

remaining 3 academic years in which 

home and host hospitals are permitted 

to execute emergency Medicare GME 

affiliation agreements, hospitals are 

required to submit emergency Medicare 

GME affiliation agreements on or before 

July 1 of the relevant academic year. 

That is, in this example, for an 

emergency Medicare GME affiliation 

agreement for the period from July 1, 

2010, to June 30, 2011 (the third 

relevant academic year), hospitals must 

submit the emergency Medicare GME 

affiliation agreement on or before July 1, 

2010. We believe these revised 

deadlines will permit home and host 

hospitals sufficient time to respond and 

make adjustments to their GME training 

plans in the immediate aftermath of a 

disaster, and to prepare and submit the 

necessary emergency GME affiliation 

agreements. 

Comment: One commenter on the 

November 27, 2007 interim final rule 

with comment period expressed 

appreciation ‘‘for the efforts made by the 

Agency to deal with the continuing 

situation of displaced residents as a 

result of Hurricanes Katrina and Rita, as 

well as any future emergency 

situations.’’ However, the commenter 

believed strongly that neither the 

residents nor the host hospitals that take 

them on should be penalized by not 

receiving direct GME or IME payments 

because the home hospitals may have 

been training a number of FTE residents 

in excess of their caps prior to the 

emergency event. The commenter urged 

CMS to work with Congress to address 

this issue if CMS could not resolve it 

administratively. 

Response: Emergency Medicare GME 

affiliation agreements provide home 

hospitals with the flexibility to 

temporarily transfer their FTE cap slots 

to other hospitals around the country in 

order to allow host hospitals to receive 

direct GME and IME payments relating 

to training displaced residents from the 

home hospital. However, even though 

Congress granted the Secretary authority 

to provide for rules allowing hospital 

groups to affiliate and apply their FTE 

resident caps on an aggregate basis, the 

BBA of 1997 established a fixed limit on 

the number of allopathic and 

osteopathic FTE residents that can be 

included in the hospitals’ direct GME 

and IME FTE resident counts for 

Medicare payment purposes. Therefore, 

hospitals, even under the permissible 

affiliation rules, are not permitted to 

receive direct GME or IME payments in 

excess of the FTE resident caps. 

Comment: Several commenters 

expressed concern with the definition of 

a home hospital. Specifically, the 

commenters were concerned with the 

requirement that a home hospital 

experience a decrease in inpatient bed 

occupancy of 20 percent. One 

commenter stated it is not appropriate 

to ‘‘test’’ whether a hospital located in 

the section 1135 emergency area 

qualifies as a home hospital. Several 

commenters noted it would not be 

appropriate to review occupancy rates 

because the hospital may actually 

experience an increase in inpatient 

occupancy. One commenter stated that 

despite an increase in occupancy, a 

hospital may determine ‘‘* * * that its 

physician residents are better served in 

being placed in another teaching 

hospital for a period of time or the 

duration of the residents’ training.’’ The 

commenter stated that the complexity 

associated in dealing with an emergency 

situation should not be encumbered by 

such administrative rules which are 

inappropriate in extraordinary 

circumstances. The commenter 

recommended CMS clearly state that 

any teaching hospital located in a 

section 1135 emergency area can be 

considered a home hospital under the 

regulations. Another commenter noted a 

hospital that remains open may 

consider it appropriate to relocate its 

residents due to a variety of reasons 

including structural damage or lack of 

other local services. Some commenters 

noted that adding the additional 

requirement that a home hospital see a 

decrease in inpatient volume of 20 

percent ‘‘* * * is unnecessary and 

could be detrimental.’’ Several 

commenters noted it should be 

sufficient to use a nationally declared 

emergency as a trigger for the Medicare 

GME emergency affiliation agreement 

regulations. The commenters further 

stated that a volume reduction 

requirement would contradict the 

flexibility that CMS is trying to provide 

through the regulations. One commenter 

stated the timeframe provided in the 

April 12, 2006 interim final rule with 

comment period (71 FR 18658) is not a 

sufficient amount of time because 

hospitals may have difficulty obtaining 

documentation to support their 

occupancy rates. The commenter 

recommended that CMS be flexible in 

terms of the time periods used to 

calculate a decrease in inpatient 

occupancy. For example, the commenter 

suggested that if records had been lost, 

the provider could use its last cost 

report submitted to the fiscal 

intermediary/MAC as evidence of the 

occupancy rate prior to the disaster. 

Response: In the April 12, 2006 

interim final rule with comment period 

(71 FR 18658), we stated that, in 

determining whether a hospital in a 

section 1135 emergency area qualifies as 

a home hospital, we believe it is 

appropriate to compare the inpatient 

bed occupancy of the hospital 1 week 

before the earlier of the date the section 

1135 emergency period begins, or the 

date on which the hospital began any 

evacuation efforts in anticipation of an 

event that results in the declaration of 

a section 1135 emergency area, as 

compared to the inpatient bed 

occupancy of the hospital 1 week after 

the section 1135 emergency period 

begins. If the inpatient bed occupancy 

decreases by 20 percent or more 

between these two comparison 

timeframes, we believe that the 

significant drop in occupancy can be 

assumed to be the result of the event 

that led to the declaration of a section 

1135 emergency period. We stated that 

in order to be considered a home 

hospital, a hospital would be required to 

experience a decrease in inpatient bed 

occupancy of 20 percent or more as a 


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result of a section 1135 emergency 

period so that it is unable to train the 

number of residents it originally 

intended to train in that academic year. 

We did consider instituting a higher 

threshold to determine whether a 

hospital can be considered a home 

hospital. However, in consideration of 

hospitals that had not been as severely 

damaged but still needed to move 

residents, we determined that a decrease 

in inpatient occupancy of 20 percent 

would be an appropriate threshold. 

Furthermore, we believe that if we had 

allowed any hospital in the section 1135 

area to be a home hospital, such a policy 

could have been detrimental to the 

attempts to preserve residency training 

within the emergency area. If there was 

no damage threshold established for a 

hospital to be considered a home 

hospital, a higher number of ‘‘displaced 

residents’’ would have been permitted 

to relocate their residency training out 

of state. Furthermore, we note that not 

all hospitals in the section 1135 

emergency area experienced physical 

and structural interruptions 

necessitating the relocation of residency 

training to other facilities. We note that 

the increased flexibility provided by 

emergency Medicare GME affiliation 

agreements is intended to specifically 

help home hospitals that are 

experiencing extraordinary and dire 

conditions that necessitate the 

relocation of residency training. 

In response to the comment that 

hospitals may not have the 

documentation available to calculate 

occupancy rates before and after the 

disaster, if hospitals do not have this 

information available, we will work the 

hospitals on an individual basis so that 

a determination can be made. 

Comment: One commenter proposed 

that CMS assign sponsoring 

organizations the responsibility of 

coordinating between home and host 

hospitals, and require that hospitals 

participating in a Medicare GME 

emergency affiliation agreement obtain 

approval from the sponsoring 

organization before any cap transfers are 

made. The commenter noted that 

involving sponsoring institutions 

‘‘* * * will help ensure that the GME 

funds provided by CMS will be used for 

their intended use—to make certain 

medical residents receive high-quality 

training and are, therefore, able to 

provide high-quality care to program 

beneficiaries.’’ The commenter stated 

that although hospitals affected by 

Hurricanes Katrina and Rita are making 

efforts at rebuilding, there is no 

guarantee that qualified personnel are 

available to mentor and teach the 

residents. The commenter further noted 

that although a hospital may be ready to 

resume residency training, the resident 

may not be adequately prepared to 

return to his or her training at that 

specific hospital. The commenter stated 

medical residencies are very structured 

and rigorous and that residents learn 

and master skills in a specific order. The 

commenter asserted that the resident’s 

sponsoring program director is the only 

individual in a position to evaluate a 

resident’s specific skills and needs and 

must participate in the decision to 

transfer residents between facilities. 

Response: We appreciate the 

commenter’s dedication towards 

ensuring that residents are prepared and 

able to receive a quality education both 

during a disaster and the rebuilding 

process. Although we agree that it is 

important for the various individuals 

involved in a resident’s GME training 

program to be fully aware of the 

resident’s prior and current training and 

skill level, we do not believe it would 

be appropriate for CMS to require that 

sponsoring institutions serve as the 

formal coordinator between the home 

and host hospitals that are involved in 

the organization of a resident’s 

residency training program. By statute, 

CMS only reimburses hospitals for GME 

and therefore the regulations can only 

address hospitals’ requirements. 

However, we encourage sponsoring 

institutions to work closely with 

hospitals to provide the residents with 

the most appropriate training 

experience both during and after a 

disaster. 

Comment: Several commenters had 

questions concerning new teaching 

hospitals created after the date of onset 

of the emergency/disaster, that is, 

teaching hospitals that were 

nonteaching hospitals prior to training 

displaced residents. Two commenters 

stated they appreciated CMS’

recognition that, during emergency 

periods, it may be necessary for a home 

hospital to send its residents to 

nonteaching hospitals to continue their 

training. The commenters stated that 

because the nonteaching hospitals do 

not have caps, they are reimbursed for 

direct GME and IME based on a 

temporary cap which they receive from 

the home hospital through an 

emergency Medicare GME affiliation 

agreement. The commenters requested 

CMS confirm ‘‘* * * that, like 

nonteaching hospitals that enter into 

affiliation agreements in nonemergency 

situations, nonteaching hospitals that 

participate in emergency GME 

affiliation agreements do not lose their 

‘‘nonteaching’’ status for purposes of 

obtaining their own, permanent resident 

cap at some point in the future if they 

choose to start new residency training 

programs.’’ One commenter asked CMS 

to clarify the impact on a nonteaching 

hospital’s base year calculation for 

direct GME payment purposes for a 

nonteaching hospital which is part of an 

emergency Medicare GME affiliation 

agreement. Another commenter 

expressed concern about several 

sections of the interim final rule with 

comment period and current GME 

regulations which have a direct impact 

on a specific hospital that became a 

teaching hospital effective July 1, 2006. 

The commenter stated that CMS’

discussion in the interim final rule with 

comment period on the necessity for 

new teaching hospitals to incur teaching 

costs for purposes of establishing their 

PRAs was helpful. However, the 

commenter noted that new teaching 

hospitals have additional 

responsibilities of which they may be 

unaware. The commenter emphasized 

teaching hospitals that become new 

teaching hospitals once they begin to 

train displaced residents may be 

particularly uninformed on the rules 

relating to training at nonhospital sites. 

The commenter provided a review of 

the regulations addressing training at 

nonhospital sites and noted that if a 

hospital wishes to count residents 

training at a nonhospital site, the 

hospital and nonhospital site(s) must 

enter into a written agreement prior to 

the training taking place. The 

commenter asserted that hospitals failed 

to enter into written agreements prior to 

the training at the nonhospital site 

taking place. The commenter stated that 

the hospital was unaware of the 

requirements and even if the hospital 

had been aware, circumstances were 

such that it would not have been 

possible to secure written agreement 

prior to services being provided. The 

commenter requested that CMS make a 

special exception for the requirements 

at § 413.78 (regulations relating to the 

training at a nonhospital site). The 

commenter requested the regulations be 

modified to allow new teaching 

hospitals to enter into written 

agreements with nonhospital sites 

retroactive to the time when the services 

were provided, if the agreements are 

entered into within one year of the 

provision of services. The commenter 

believed that making theses changes to 

the regulations would not unfairly 

penalize new teaching hospitals for 

their unfamiliarity with the GME rules 

particularly during the ‘‘confusing state 

of affairs.’’ One commenter asked CMS 

to add a regulatory definition of ‘‘new 

host teaching hospital.’’ The commenter 

noted that, as discussed on page 18661 


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of the April 12, 2006 interim final rule 

with comment period (71 FR 18661), 

new host teaching hospitals were 

previously nonteaching hospitals that 

will become new teaching hospitals 

once they begin to train displaced 

residents from home hospitals as part of 

an approved medical residency 

program. 

Response: We agree with the 

commenters that it is essential for 

hospitals to be aware of applicable 

regulations pertaining to GME if they 

are becoming or plan to become a new 

teaching hospital. In the April 12, 2006 

interim final rule with comment period 

(71 FR 18661), we discussed policies 

pertaining to new teaching hospitals. 

We stated that when displaced residents 

are sent to train at hospitals that were 

not previously teaching hospitals, these 

hospitals will become new teaching 

hospitals once they begin to train 

residents from the home hospital as part 

of an approved medical resident 

training program. The following text is 

an excerpt from CMS’ discussion on 

provisions effecting new teaching 

hospitals found on page 18661 of the 

April 12, 2006 interim final rule with 

comment period (71 FR 18661): 

‘‘As a new teaching hospital, such a 

hospital initially will have IME and 

direct GME FTE resident caps of zero 

(based on the number of residents 

training in the 1996 base year for FTE 

resident caps). However, the new 

teaching hospital, by participating in an 

emergency Medicare GME affiliation 

agreement, can receive a temporary cap 

increase in order to count the displaced 

FTE residents for purposes of IME and 

direct GME payments. 

As a new teaching hospital, the 

hospital will not have an existing per 

resident amount for direct GME 

payment purposes. The per resident 

amounts for these hospitals will be 

established as specified at § 413.77(e) 

(just as any other new teaching hospital 

would have its per resident amount 

established). The new teaching 

hospital’s per resident amount is 

established based on the lower of the 

hospital’s direct GME costs per resident 

in its base year, or the updated weighted 

mean value of the per resident amounts 

of all hospitals located in the same 

geographic wage area as specified in the 

regulations at § 413.77. Therefore, it is 

very important for a new teaching host 

hospital to incur direct GME costs in its 

base year and to document all of the 

direct GME costs it incurs (for example, 

the residents’ salaries, fringe benefits, 

any portion of the teaching physician 

salaries attributable to GME, and other 

direct GME costs) for the displaced 

residents it is training; otherwise the 

host hospital risks being assigned a very 

low permanent per resident amount in 

accordance with our regulations. If the 

host, new teaching hospital incurs no 

GME costs in the relevant base year, its 

per resident amount would be zero 

dollars. We advise hospitals to refer to 

the regulations at § 413.77(e) for the 

rules concerning the establishment of a 

new teaching hospital’s per resident 

amount. In accordance with section 

1886(h) of the Act and our regulations, 

once the base year per resident amount 

is established, it is fixed and not subject 

to adjustment to reflect costs incurred in 

years subsequent to the base year that 

might be associated with new programs 

or additional residents.’’

The commenters are not entirely 

correct in stating that ‘‘nonteaching 

hospitals that participate in emergency 

GME affiliation agreements do not lose 

their ‘nonteaching’ status for purposes 

of obtaining their own, permanent 

resident cap at some point in the future 

if they choose to start new residency 

training programs.’’ Once a hospital 

begins training residents, even if it is 

training residents as part of a Medicare 

GME affiliation agreement, that hospital 

will become a teaching hospital and it 

will have a PRA established based on 

the costs it incurs in training those 

residents. Therefore, as we stated in the 

proposed rule, it is important that a new 

teaching hospital incur costs in training 

residents so the hospital is not assigned 

a very low or zero PRA. The 

commenters are correct that host 

hospitals that were not previously 

teaching hospitals, which become new 

teaching hospitals by virtue of training 

displaced residents, receive a temporary 

cap adjustment based upon the 

displaced FTE residents they are 

training. The cap adjustment is 

temporary because it is obtained by 

virtue of the fact that the host hospital 

is participating in a Medicare GME 

emergency affiliation agreement. A new 

teaching hospital could receive a 

permanent adjustment to the hospital’s 

FTE resident caps only if it begins 

training residents in a newly approved 

program. The regulations pertaining to 

the establishment of a permanent cap 

adjustment can be found at § 413.79(e). 

A hospital’s cap is adjusted for new 

programs based on the product of the 

highest number of residents in any 

program year during the third year of 

the first program’s existence for all new 

residency training programs and the 

minimum number of years in which 

residents are expected to complete the 

program based on the accredited length 

for the type of program. A hospital’s 

adjusted cap is applied beginning with 

the fourth year of its first new residency 

training program. We also note that 

direct GME payment is based on a 

rolling average which is calculated 

based on a hospital’s FTE resident 

counts from the current year, and the 

prior two years. However, FTE residents 

training in new teaching hospitals and 

in new residency training programs at 

existing teaching hospitals are excluded 

from the rolling average for the 

minimum accredited length of the 

program (dental and podiatry residents 

are always exempt from the rolling 

average). 

Regarding the commenter’s concerns 

about the regulations governing 

residency training at nonhospital sites, 

we addressed these concerns, providing 

greater flexibility for hospitals to meet 

the written agreement or concurrent 

payment requirements, in the November 

27, 2007 interim final rule with 

comment period (72 FR 66898). In 

response to the commenter who 

requested CMS to add a regulatory 

definition of ‘‘new host teaching 

hospital,’’ we do not believe that a 

regulatory definition is necessary 

because the regulations at § 413.75(b) 

already contain a definition of host 

hospital, which as defined ‘‘means a 

hospital training residents displaced 

from a home hospital.’’ Our policy has 

always been that once a hospital begins 

training residents, the hospital is 

considered a teaching hospital. We urge 

hospitals to contact their fiscal 

intermediary/MAC and CMS if they 

have questions as to how GME 

regulations are applied to hospitals that 

become teaching hospitals as a result of 

training displaced residents. 

Comment: A number of commenters 

were concerned about the effects of the 

decreased number of FTE residents 

training after an emergency event, on 

the potential for a home hospital to 

reopen and receive adequate payments. 

Specifically, some commenters were 

concerned that when a home hospital 

has trained a substantially reduced 

number of FTE residents following a 

disaster, the cap on the interns and 

residents-to-beds (IRB ratio cap), which 

limits the IRB ratio used to calculate a 

hospital’s IME payment calculation to 

the lesser of either the current year’s IRB 

ratio based on the 3-year rolling average 

FTE count subject to the cap or the 

previous year’s IRB ratio, would be 

either zero or very low. This could 

adversely affect a home hospital when 

it reopens operations. One commenter 

presented an example in which the IRB 

ratio cap for a home hospital that has no 

FTEs in FYs 2006 or 2007 would 

prevent the hospital from receiving any 

IME reimbursement in FYs 2006, 2007, 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48649 

or 2008 because the current year IRB 

ratio is always limited to the lesser of 

the current year or the prior year. The 

commenters suggested that CMS allow 

home hospitals to use the higher IRB 

ratio from a year previous to the 

emergency event in order to prevent the 

situation where home hospitals would 

not be paid for IME due to an IRB ratio 

cap of zero. One commenter also 

indicated that host hospitals would be 

negatively impacted by the application 

of the IRB ratio cap which would result 

in a delay in receiving IME payments for 

the training of displaced residents in 

any given year. 

Response: As specified under the 

regulations at § 412.105(1)(a)(i), an IRB 

ratio is calculated for a hospital based 

generally on the ratio of FTE residents 

in the numerator to the number of 

available beds (as described at 

§ 412.105(1)(b)) in the denominator. 

Section 1886(d)(5)(B)(vi)(I) of the Act 

specifies the application of an IRB ratio 

cap, stating that the IRB ratio ‘‘may not 

exceed the ratio of the number of interns 

and residents, subject to the limit under 

clause (v), with respect to the hospital 

for its most recent cost reporting period 

to the hospital’s available beds * * * 

during that cost reporting period 

***’’. Following an emergency event, 

a home hospital’s IRB ratio could be 

affected by a decrease in the numerator 

or denominator, or both. We would 

expect that home hospitals that 

experience a decrease in their patient 

load or close completely could 

document the number of ‘‘available’’

beds (as described at § 412.105(b)) to 

reflect the actual circumstances of the 

home hospital. Depending on the actual 

number of FTE residents that remain 

and the number of beds (if any) 

available for inpatient use, decreases in 

the number of beds in the denominator 

could counterbalance decreases in the 

FTE resident count in the numerator in 

calculating the IRB ratio, producing an 

IRB ratio and an IRB ratio cap that are 

not out of line with the previous years. 

From the comments that we received 

regarding the application of the IRB 

ratio cap, we believe some of the 

commenters may have been confused 

about the difference between the IRB 

ratio calculations for the current and 

prior years and the application of the 

IRB ratio cap based on the comparison 

of the current and prior years’ IRB 

ratios. In accordance with section 

1886(d)(5)(B)(vi)(II) of the Act, for the 

current year’s IRB ratio, the numerator 

is based on the 3-year rolling average 

FTE resident count. In contrast, in 

accordance with section 

1886(d)(5)(B)(vi)(I) of the Act, to 

determine the numerator of the prior 

year’s ratio for purposes of the IRB ratio 

cap, the prior year’s actual FTE resident 

count (subject to the FTE resident limit) 

is used (that is, the rolling average is not 

used to determine the numerator of the 

prior year’s ratio for purposes of 

establishing the IRB ratio cap). The IRB 

ratio cap prescribes that the IRB ratio 

used for to calculate IME payments in 

the current year is the lesser of either 

the current year IRB ratio or the prior 

year IRB ratio as calculated in the 

manner described above. Accordingly, 

in the example presented by the 

commenter in which the home hospital 

is training no residents in FYs 2006 and 

2007, although the commenter stated 

that IME payments would not be 

possible in FY 2006, in fact the hospital 

could receive IME payment in FY 2006 

(assuming the hospital was training 

residents in FY 2005). That is, the 

numerator of the FY 2006 IRB ratio 

would be based on a rolling average 

count of the zero FTEs in FY 2006, and 

the number of FTEs training in FYs 

2005 and 2004. For purposes of 

applying the IRB ratio cap, the 

numerator of the FY 2005 IRB ratio 

would be based on the actual number of 

FTE residents training in FY 2005 

(subject to the FTE resident limit). 

Therefore, the hospital would receive 

IME payment in FY 2006. 

The commenter also expressed 

concern that when home hospitals 

reopen or rebuild their GME programs 

after several years of training no or 

relatively few residents would be 

adversely affected by the IRB ratio cap. 

To continue the example discussed 

previously, if in FY 2008, the home 

hospital trains residents again after 2 

years (2006 and 2007) in which there 

were no residents training at the 

hospital (that is, zero FTEs in the 

numerator of the IRB ratio of the prior 

year), the application of the IRB ratio 

cap would prevent the home hospital 

from receiving IME payment in FY 

2008. We note that because the IRB ratio 

for the current year is based on a rolling 

average FTE count, while the IRB ratio 

for the prior year is based on the actual 

FTE count (subject to the FTE resident 

limit) for that year, the adverse effect of 

the application of the IRB ratio cap is 

limited to 1 year, assuming the hospital 

continues to train residents in the 

following years. We appreciate the 

commenter’s concern that as home 

hospitals resume their training of FTE 

residents, they may be severely 

disadvantaged because of the 1-year lag 

in IME payments produced by 

application of the IRB ratio cap. We 

agree that after an emergency event, 

home hospitals could face a significant 

barrier in reopening or resuming 

previous levels of training in their GME 

programs due to the application of the 

IRB ratio cap, at a time when the home 

hospitals can least afford to have 

Medicare payments reduced. We also 

acknowledge that a host hospital that 

trains displaced residents through an 

emergency Medicare GME affiliation 

agreement could also be adversely 

affected by the application of the IRB 

ratio cap. Since the statute allows for an 

exception in the application of the IRB 

ratio cap for the special circumstances 

for Medicare GME affiliated groups and 

new programs, we are providing for 

home and host hospitals with valid 

emergency Medicare GME affiliation 

agreements an exemption from the 

application of the IRB ratio cap. 

Specifically, we are revising 

§ 412.105(f)(1)(vi) of the regulations to 

specify that effective October 1, 2008, 

IME payments for home and host 

hospitals with valid emergency 

Medicare GME affiliation agreements 

will be calculated using the current 

year’s IRB ratio without application of 

the IRB ratio cap. For example, a home 

hospital that has a valid emergency 

Medicare GME affiliation agreement and 

trains 60 FTE residents in FY 2008 after 

training no residents in FYs 2007 and 

2006. If the IRB ratio cap is applied, the 

IRB ratio cap for FY 2008 would be zero 

(because the hospital trained no 

residents in FY 2007 so the IRB ratio for 

the prior year is zero). However, because 

of this exception to the application of 

the IRB ratio cap, the home hospital’s 

FY 2008 IRB ratio would be based on 20 

FTEs in the numerator ((60+0+0)/3=20). 

Accordingly, the IME payment for the 

home hospital would be based on 20 

FTEs in the numerator of the 2008 IRB 

ratio rather than zero. We note that this 

provision is meant to allow home and 

host hospitals additional flexibility in 

the application of the IRB ratio cap, as 

provided for under section 

1886(d)(5)(B)(viii) of the Act. However, 

we note that the 3-year rolling average 

FTE resident count (used in the 

numerator of the current year’s IRB 

ratio) would still apply. We also note 

that, in accordance with section 

1886(d)(5)((B)(vi)(I) of the Act, no 

adjustment to the IRB ratio is made for 

an increase in dental or podiatry 

residents during the cost reporting 

period in which an increase occurs 

because dental and podiatry residents 

are not included for purposes of 

calculating the IRB ratio. 

Finally, we note that it has been 

several years since the section 1135 

emergency areas were declared due to 

Hurricanes Katrina and Rita. While 


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48650 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

some hospitals in these section 1135 

emergency areas are still using 

emergency Medicare GME affiliation 

agreements in order to facilitate training 

of residents in programs that were 

affected by the hurricanes, other 

hospitals may have decided that they 

could meet the shared rotational 

arrangement and other requirements for 

regular Medicare GME affiliation 

agreements and have consequently 

elected enter into regular Medicare GME 

affiliation agreements rather than 

emergency Medicare GME affiliation 

agreements even though CMS has 

permitted the use of emergency 

Medicare GME affiliation agreements for 

up to 5 academic years (in this case, 

until June 30, 2010). In other cases, 

hospitals have informed us that they are 

waiting for the April 12, 2005 and the 

November 27, 2007 interim final rules 

with comment period to be finalized 

and, in order to preserve their ability to 

respond to any changes we make to the 

emergency Medicare GME affiliation or 

other provisions in the final rule, these 

hospitals have elected to have in place 

both a regular Medicare GME affiliation 

agreement and an emergency Medicare 

GME affiliation agreement. Because we 

recognize that home and host hospitals 

(both previous and current) will want to 

structure their Medicare GME 

affiliations in order to make best use of 

our final rules, we are permitting 

hospitals, for the remaining academic 

years for which emergency Medicare 

GME affiliations are authorized as a 

result of the section 1135 emergency 

relating to Hurricanes Katrina and Rita 

(that is, until June 30, 2010), to amend 

an existing regular Medicare GME 

affiliation agreement by June 30 of the 

relevant academic year in order to 

convert it into an emergency Medicare 

GME affiliation agreement if the 

hospitals submit the amended 

agreements to CMS and their fiscal 

intermediary/MAC by June 30 of the 

relevant academic year. For example, if 

hospitals have a regular Medicare GME 

affiliation agreement in effect for the 

current academic year, July 1, 2008, 

through June 30, 2009, they may amend 

the agreement to convert it to an 

emergency Medicare GME affiliation 

agreement by June 30, 2009. 

e. Provisions of the Final Rule 

Except for the modifications as noted 

below, we are adopting as final the 

policies included in the April 12, 2006 

and November 27, 2007 interim final 

rules with comment period without 

further changes. The modifications to 

the April 12, 2006 and November 27, 

2007 interim final rules that we are 

adopting as final policies include the 

following: 

We are further modifying the deadline 

for the submission of emergency 

Medicare GME affiliation agreements in 

§ 413.79(f)(6)(ii) to apply to all future 

emergency events that result in a 

declaration of an 1135 emergency area. 

Effective for emergency Medicare GME 

affiliation agreements required to be 

submitted on or after October 1, 2008, 

home and host hospitals must submit 

emergency Medicare GME affiliation 

agreements by 180 days after the end of 

the academic year in which the 

emergency event occurs and for the next 

academic year following the emergency 

event. For the remaining 3 academic 

years in which home and host hospitals 

are permitted to execute emergency 

Medicare GME affiliation agreements, 

hospitals are required to submit 

emergency Medicare GME affiliation 

agreements on or before July 1 of the 

relevant academic year. 

We note that we had previously 

modified the submission deadline in the 

July 6, 2006 final rule (71 FR 38264 

through 38266). The July 6, 2006 final 

rule permitted an extension in the 

submission deadlines only for home and 

host hospitals affected by Hurricanes 

Katrina and Rita. For emergency 

Medicare GME affiliation agreements 

that would otherwise be due on or 

before July 1, 2006, the deadline was 

subsequently extended to October 9, 

2006. 

For home and host hospitals with 

valid emergency Medicare GME 

affiliation agreements, we are providing 

for an exemption from application of the 

IRB ratio cap. Specifically, IME 

payments for home and host hospitals 

with valid emergency Medicare GME 

affiliation agreements are calculated 

based on the current year’s IRB ratio 

(subject to the 3-year rolling average 

FTE resident provision and the 

hospital’s Medicare IME cap. 

f. Technical Correction 

In the April 12, 2006 interim final 

rule with comment period (70 FR 18654 

through 18667), we revised § 413.79(f) 

by adding a paragraph (6) to provide 

more flexibility in emergency Medicare 

GME affiliations for home hospitals 

located in section 1135 emergency areas 

to allow the home hospital to efficiently 

find training sites for displaced 

residents. We have discovered that, 

under § 413.79(f)(6)(iv), in our provision 

on the host hospital exception from the 

rolling average for the period from 

August 29, 2005, to June 30, 2006, we 

included an incorrect cross-reference to 

the rolling average requirements for 

direct GME as ‘‘§ 413.75(d)’’. The correct 

cross-reference to the rolling average 

requirement for direct GME is 

§ 413.79(d). As we proposed in the FY 

2009 IPPS proposed rule (73 FR 23667), 

we are correcting the cross-reference 

under § 413.79(f)(6)(iv) to read 

‘‘paragraph (d) of this section’’. 

H. Payments to Medicare Advantage 

Organizations: Collection of Risk 

Adjustment Data (§ 422.310) 

Section 1853 of the Act requires CMS 

to make advance monthly payments to 

a Medicare Advantage (MA) 

organization for each beneficiary 

enrolled in an MA plan offered by the 

organization for coverage of Medicare 

Part A and Part B benefits. Section 

1853(a)(1)(C) of the Act requires CMS to 

adjust the monthly payment amount for 

each enrollee to take into account the 

health status of the MA plan’s enrollees. 

Under the CMS-Hierarchical Condition 

Category (HCC) risk adjustment 

payment methodology, CMS determines 

risk scores for MA enrollees for a year 

and adjusts the monthly payment 

amount using the appropriate enrollee 

risk score. 

Under section 1853(a)(3)(B) of the 

Act, MA organizations are required to 

‘‘submit data regarding inpatient 

hospital services * * * and data 

regarding other services and other 

information as the Secretary deems 

necessary’’ in order to implement a 

methodology for ‘‘risk adjusting’’

payments made to MA organizations. 

Risk adjustments to payments are made 

in order to take into account ‘‘variations 

in per capita costs based on [the] health 

status’’ of the Medicare beneficiaries 

enrolled in an MA plan offered by the 

organization. Submission of data on 

inpatient hospital services has been 

required with respect to services 

beginning on or after July 1, 1997. 

Submission of data on other services has 

been required since July 1, 1998. 

While we initially required the 

submission of comprehensive data 

regarding services provided by MA 

organizations, including comprehensive 

inpatient hospital encounter data, we 

subsequently permitted MA 

organizations to submit an 

‘‘abbreviated’’ set of data. Our 

regulations at 42 CFR 422.310(d)(1) 

currently explicitly provide MA 

organizations with the option of 

submitting an abbreviated data set. 

Under this provision, we currently 

collect limited risk adjustment data 

from MA organizations, primarily 

diagnosis data. 

From calendar years 2000 through 

2006, application of risk adjustment to 

MA payments was ‘‘phased in’’ with an 

increasing percentage of the monthly 


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capitation payment subjected to risk 

adjustment. Beginning with calendar 

year 2007, 100 percent of payments to 

MA organizations are risk-adjusted. 

Given the increased importance of the 

accuracy of our risk adjustment 

methodology, in the FY 2009 IPPS 

proposed rule (73 FR 23667), we 

proposed to amend § 422.310 to provide 

that CMS will collect data from MA 

organizations regarding each item and 

service provided to an MA plan 

enrollee. This will allow us to include 

utilization data and other factors that 

CMS can use in developing the CMS–

HCC risk adjustment models in order to 

reflect patterns of diagnoses and 

expenditures in the MA program. 

Specifically, we proposed to revise 

§ 422.310(a) to clarify that risk 

adjustment data are data used not only 

in the application of risk adjustment to 

MA payments, but also in the 

development of risk adjustment models. 

For example, once encounter data for 

MA enrollees are available, CMS would 

have beneficiary-specific information on 

the utilization of services by MA plan 

enrollees. These data could be used to 

calibrate the CMS–HCC risk adjustment 

models using MA patterns of diagnoses 

and expenditures. 

We proposed to revise §§ 422.310(b), 

(c), (d)(3), and (g) to clarify that the term 

‘‘services’’ includes items and services. 

We proposed to revise § 422.310(d) to 

clarify that CMS has the authority to 

require MA organizations to submit 

encounter data for each item and service 

provided to an MA plan enrollee. The 

proposed revision also would clarify 

that CMS will determine the formats for 

submitting encounter data, which may 

be more abbreviated than those used for 

the fee-for-service claims data 

submission process. 

We proposed to revise § 422.310(f) to 

clarify that one of the ‘‘other’’ purposes 

for which CMS may use risk adjustment 

data collected under this section would 

be to update risk adjustment models 

with data from MA enrollees. In 

addition, when providing that CMS may 

use risk adjustment data for purposes 

other than adjusting payments as 

described at §§ 422.304(a) and (c), we 

proposed to delete the phrase ‘‘except 

for medical records data’’ from 

paragraph (f). Any use of medical 

records data collected under paragraph 

(e) of § 422.310 is governed by the 

Privacy Act and the privacy provisions 

in the HIPAA. Furthermore, there may 

be occasions when we learn from 

analysis of medical record review data 

that some organizations have 

misunderstood our guidance on how to 

implement an operational instruction. 

We want to be able to provide improved 

guidance to MA organizations based on 

any insights that may emerge during 

analysis of the medical record review 

data. 

In addition, we proposed a technical 

correction to § 422.310(f) to clarify that 

risk adjustment data are used not only 

to adjust payments to plans described at 

§§ 422.301(a)(1), (a)(2), and (a)(3) (which 

refer to coordinated care plans and 

private fee-for-service plans), but also to 

adjust payments for ESRD enrollees and 

payments to MSA plans and Religious 

Fraternal Benefit society plans, as 

described at § 422.301(c). 

Under § 422.310(g), we would 

continue to provide that data that CMS 

receives after the final deadline for a 

payment year will not be accepted for 

purposes of the reconciliation. However, 

we proposed to revise paragraph (g)(2) 

of § 422.310 to change the deadline from 

‘‘December 31’’ of the payment year to 

‘‘January 31’’ of the year following the 

payment year. We also proposed to add 

language to provide that CMS may 

adjust deadlines as appropriate. 

Comment: One commenter recognized 

CMS’ interest in modifying the types of 

data collected from MA organization, 

and another commenter supported CMS’

efforts to increase payment accuracy. 

Two commenters were pleased with 

CMS’ plan to collect data on each item 

and service provided to MA plan 

enrollees, and supported the goal of 

more accurately paying MA 

organizations, monitoring the quality of 

care provided by MA organizations, and 

the benefits actually received by 

Medicare beneficiaries in these plans. 

Response: We appreciate the 

commenters’ support for our efforts to 

collect encounter data for services and 

items provided to MA enrollees. 

Comment: Several commenters 

acknowledged CMS’ interest in 

modifying the types of data collected 

from MA organizations in order to refine 

and improve the risk adjustment model 

and risk-adjusted payment, supported in 

principle the goal of improving the risk 

adjustment models to reflect patterns of 

diagnoses and expenditures in the MA 

program, supported CMS’ efforts to 

increase payment accuracy, and 

understood CMS’ need to be able to 

respond to Congressional inquiries, 

especially with respect to use of 

supplemental benefits. 

Response: We appreciate the 

understanding of commenters regarding 

the advantages of our collection of 

encounter data. 

Comment: Commenters expressed 

concern that collection of encounter 

data would have significant 

administrative and resources costs for 

plans and providers, even in an 

abbreviated form, because of the time 

and information technology investments 

needed to modify existing MA 

organization and CMS systems. The 

commenters cited challenges that they 

identified as being inherent in the 

collection of encounter data, including 

systems design, testing, and 

implementation, training for staff and 

providers, and sustained initiatives to 

collect, submit, correct, and resubmit 

data, which have been highly labor 

intensive. One commenter contended 

that reporting supplemental services, 

durable medical equipment, and home 

health services to comply with 

§ 422.310(b) ‘‘each item and service 

provided * * *’’ would significantly 

increase the data reporting burden on 

both providers and plans. Another 

commenter argued that, if CMS required 

the submission of data elements such as 

dental services, vision services, optical 

services, fitness benefits, reporting on 

these items and services would be a 

challenge and would result in extensive 

new data collection that might not now 

exist with providers of some of these 

services. One commenter believed that 

the rule would impose a particular 

burden on prepaid delivery systems that 

have historically operated on a capitated 

payment model, to the extent that this 

proposed requirement effectively 

requires these plans to code every 

service as if they were preparing a bill, 

and argued that this could 

fundamentally alter the way they 

deliver care. One commenter believed 

that renegotiations of provider contracts 

may have downstream implications in 

terms of the MA organizations ability to 

maintain premium levels. Another 

commenter reported that, while the 

commenter might have utilization data 

on services rendered, it did not have it 

in an encounter data or claim format. 

Response: We understand that 

reporting encounter data will be an 

expansion of MA organizations current 

effort to report diagnoses as part of their 

Risk Adjustment Processing System 

(RAPS) submissions and that this 

expanded effort may increase the 

administrative resources and costs that 

MA organizations need to commit to 

their reporting efforts. As we develop 

our plans for the fields to be collected, 

the submission process, and how we 

will use the data, we are committed to 

having discussions with MA 

organizations and other stakeholders to 

obtain feedback regarding the effort 

involved in implementation of 

encounter data collection. 

Comment: Commenters cited 

problems from earlier CMS efforts to 

collect encounter data, including the 

adaptation of the claims submission 


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platform to accommodate MA risk 

adjustment data, which required 

numerous complex changes; some data 

elements, such as Medicare hospital 

provider numbers, that proved 

extremely difficult to submit 

successfully; and errors that do not exist 

in RAPS. 

Response: We will take into account 

the concerns of industry, including 

those based on previous experience, 

when planning our collection efforts. 

Comment: One commenter suggested 

that the burden of reporting was 

undoubtedly taken into account by 

Congress in the process of considering, 

and ultimately adopting, the statutory 

language giving CMS broad authority to 

require reporting of both inpatient and 

outpatient encounter data. Because 

information about the numbers and 

costs of items and services provided is 

already collected by MA organizations 

in the course of their internal 

accounting, reporting such information 

to CMS cannot be a significant 

additional burden on them. 

Response: While we understand that 

plans will need to allocate additional 

resources to collect and report 

encounter data, we agree with the 

commenter that Congress recognized the 

advantages of having these data. 

Comment: Commenters contended 

that the value provided by encounter 

data reporting would be significantly 

outweighed by the burden the new 

requirements would impose and that, 

without a compelling reason, managed 

care organizations should not need to 

produce data at the level of detail called 

for by the proposed regulation. 

Response: We recognize that MA 

organizations will need to devote 

additional resources to the effort of 

reporting encounter data. Because we 

have not yet identified the scope of data 

to be submitted or the process for 

collecting encounter data, we have not 

yet determined how much additional 

effort will be required. In determining 

the scope of encounter data to be 

submitted, we will work closely with 

external stakeholders to ensure that 

administrative costs are minimized to 

the extent possible. 

Comment: One commenter stated that 

providers have experienced burdensome 

disruptions in its practices as a result of 

MA plans or its contractors reviewing 

medical records in its offices and 

recommended that CMS clarify in the 

final rule and any relevant guidance 

that, if an MA plan must review patient 

records, CMS should require the MA 

organization to reimburse the physician 

for the time and expense involved in 

any such review. 

Response: Under the MA program, 

payment arrangements between MA 

organizations and physicians in their 

provider network are governed by the 

contracts negotiated between the 

parties. To the extent providers believe 

such payments are appropriate, they can 

seek to have them provided for under 

their contract. In the case of nonnetwork 

providers, they are entitled to the same 

payment from an MA organization that 

they would receive from Original 

Medicare for a beneficiary not enrolled 

in an MA plan. To the extent that a 

provider already submits claims under 

Original Medicare, we do not see a 

requirement to submit encounter data as 

necessarily burdensome to providers, 

because they would be submitting 

similar data to MA organizations as they 

do to fiscal intermediaries/MAC. 

Comment: Commenters were 

concerned that the collection of 

encounter data would have the potential 

to create significant administrative 

burden and costs for CMS, and such a 

process is likely to be difficult for CMS 

to replicate concurrently with the 

ongoing work to refine the systems 

infrastructure for the Medicare Part D 

Prescription Drug Benefit Program 

without a major new investment in 

staffing and systems development. 

Response: We appreciate the concerns 

expressed by the commenters regarding 

the administrative burden of 

implementing the collection and use of 

encounter data. As we develop the 

schedule for developing and 

implementing the collection of 

encounter data, we will take into 

account the resources of both the MA 

organizations and CMS. 

Comment: Commenters requested that 

CMS allow for sufficient lead time for 

plan implementation of any needed 

changes, including time to analyze 

detailed specifications for any new 

requirements, plan for systems 

modifications, allocate sufficient 

resources to support the resulting 

changes, thoroughly test all of the 

changes, and make appropriate staff 

adjustments, including training and 

hiring before changes are fully 

implemented. The commenters 

requested that CMS coordinate the 

implementation of encounter data 

collection with other major initiatives, 

such as the transition from ICD–9–CM 

to ICD–10, so that organizations can 

incorporate planning for infrastructure 

changes into a comprehensive plan. One 

commenter estimated that, given the 

implementation of UB04, the 

implementation of encounter data 

reporting could take months for its IS 

department to develop and recode the 

current programs followed by a further 

period of months for a testing phase. 

Based on its past experience, the 

commenter offered that the revamping 

of encounter data to RAPS 

implementation took about 4 months. 

Another commenter noted that plans 

will need time to renegotiate provider 

contracts. Another commenter requested 

that CMS consider a phased-in approach 

to implementing changes. 

Response: We recognize that MA 

organizations will need sufficient time 

to schedule system changes needed to 

collect and report encounter data, and 

may need to coordinate the 

implementation of encounter data 

reporting with other initiatives. We will 

consider the scheduling needs of MA 

organizations in our implementation 

timeline for encounter data. 

Comment: Many commenters 

requested that CMS clarify how 

operational and methodological 

guidance will be released. The 

commenters asked that detailed 

information regarding analyses, use of 

data, and collection requirements for 

encounter data be shared and discussed 

early and not just through the annual 

‘‘Advance Notice of Methodological 

Changes’’ process. 

Response: We have not determined 

how we will conduct ongoing written 

communication with health plans, 

although we do not plan to rely solely 

on the annual Advance Notices of 

Methodological Change and annual 

Announcements. We anticipate that we 

will develop a method of regular written 

communication with stakeholders, in 

addition to discussion, in order to share 

and discuss details of our plans for data 

collection requirements and uses of the 

encounter data. 

Comment: Many commenters asked 

CMS to clarify for what ‘‘other 

purposes’’ it might use the data. One 

commenter believed that CMS’ proposal 

to use the data for ‘‘other purposes’’ is 

inappropriately broad. Some 

commenters requested that CMS modify 

the regulatory language in order to limit 

the use of the data to the calculation of 

the risk adjustment factors and the 

updating of risk adjustment models. 

One commenter believed that it would 

be inappropriate for CMS to compare 

plan bid submissions and resulting 

payment rates against actual experience 

in order to assess the legitimacy of bid 

submissions. Other commenters 

supported the use of encounter data to 

conduct analyses, either by CMS itself 

or by external entities, comparing MA 

organizations to each other and to 

traditional Medicare. These commenters 

noted that the collection of beneficiaryspecific information on the utilization of 

services within MA plans has the 


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potential to provide valuable insight to 

the needs and health of MA plan 

enrollees. 

Response: In response to industry 

concern regarding the use of the 

encounter data that will be collected 

under this regulatory authority, and 

specifically to the suggestion that CMS 

clarify for what ‘‘other purposes’’ data 

would be used, in this final rule, we are 

revising the proposed regulatory text at 

§ 422.310(f) to clarify that we will use 

the data for the calculation of risk 

scores, updating risk adjustment 

models, calculating Medicare DSH 

percentages (the DSH percentage 

methodology incorporates hospital days 

for MA plan enrollees), Medicare 

coverage purposes (that is, the 

determination of whether day limits 

have been exhausted and, if so, how 

many such days), and quality review 

and improvement activities. As part of 

the design of our data collection efforts, 

we will clarify how we will use the 

encounter data that we collect for these 

purposes. 

Comment: One commenter argued 

that the Social Security Act only 

authorizes CMS to collect of risk 

adjustment data for risk adjustment 

purposes. Other commenters also 

questioned CMS’ authority to use 

encounter data for purposes other than 

the establishment or maintenance of the 

risk adjustment model. 

Response: Section 1853(a)(3)(B) of the 

Act obligates MA organizations to 

submit inpatient and outpatient 

encounter data for purposes of use in 

implementing a risk adjustment 

methodology. We fully intend to use the 

data collected for these purposes. 

Unlike the case of information collected 

under section 1860D–15 of the Act, 

however, which the statute restricts to 

being used solely for purposes of 

implementing that section (see section 

1860D–15(d)(2)(B) and (f)(2) of the Act), 

section 1853(a)(3)(B) of the Act does not 

impose any restrictions on other 

legitimate uses of the encounter data 

collected. We believe that uses of such 

data to determine the proper amount of 

payments to MA plans to improve the 

calculation of Medicare DSH 

percentages, to determine what benefits 

are covered for a Medicare beneficiary, 

and to monitor and improve the quality 

of services provided to Medicare 

beneficiaries are all legitimate uses of 

encounter data that are collected for 

purposes of risk adjustment. As noted 

above, in response to comments, we are 

revising the regulation text to expressly 

limit the use of encounter data to these 

purposes. 

Comment: Many commenters asked 

which items and services CMS was 

planning to collect encounter data on; 

the commenters noted that the proposed 

rule does not clarify whether encounter 

data for supplemental services, DME, 

and home health services would be 

collected pursuant to § 422.310(b), 

which refers to data on ‘‘each item and 

service provided.’’ The commenters 

asked if CMS planned to collect 

encounter data for non-Medicare 

services, certain supplemental services, 

or for services offered by providers from 

whom CMS does not currently collect 

data. Another commenter urged that, 

because CMS does not currently collect 

encounter data for services furnished by 

providers and suppliers such as SNFs, 

DME suppliers, and HHAs, CMS should 

explain whether or how the agency 

proposes to utilize these data for risk 

adjustment purposes, if CMS requires 

their submission. The commenters 

noted that requiring encounter data for 

some items would potentially require 

data submissions from providers who 

are not currently required to submit 

detailed encounter data, such as 

ancillary providers, facilities, DME 

providers. 

Response: The intent of the proposed 

regulatory change was to restore CMS’

previous authority to collect 

comprehensive encounter data; CMS 

has not yet determined for which items 

and services it will collect such data. 

Comment: Some commenters asked 

CMS to define a core data set that would 

be collected and limit any new required 

data elements to only those needed for 

development of the CMS–HCC risk 

adjustment model. One commenter 

stated that data pertaining to rewards 

and incentives, optional supplemental 

benefits, or over-the-counter benefits 

have no bearing on health status and 

were not useful for calibrating the risk 

adjustment model, and therefore are 

beyond the scope of the authority 

provided by section 1853(a) of the Act. 

The commenters urged that these 

benefits be specifically carved out of the 

definition at § 422.310(d). Another 

commenter contended that the 

collection of encounter data for every 

item and service provided to Medicare 

beneficiaries is unnecessary for 

maintaining and updating the risk 

adjustment model and is redundant 

insofar as it covers data that CMS 

already gathers under the traditional 

fee-for-service program. 

Response: We are still in the process 

of determining which items and services 

we need in order to calibrate the risk 

adjustment model. In designing our data 

collection efforts, we also will be 

sharing with stakeholders how we will 

use the encounter data for the other 

purposes that are now stated in 

regulation: Calculating Medicare DSH 

percentages, conducting quality review 

and improvement activities, and for 

Medicare coverage purposes. 

Comment: Many industry commenters 

objected entirely to changing the 

regulations to restore CMS’ previous 

authority to collect encounter data, and 

a number of them offered alternatives to 

the collection of encounter data or 

suggested further dialog with the 

industry in order to identify and 

evaluate alternative approaches. One 

commenter urged CMS to work with the 

industry to find a mutually acceptable 

reporting mechanism outside of the risk 

adjustment operational framework in 

order to find ways of collecting 

information on benefits that are not 

needed for risk adjustment, but that 

CMS needs for responding to inquiries 

from Congress. Some commenters 

indicated that they could support a 

requirement to submit aggregate 

utilization data on a plan-wide basis at 

the time when bids are due. Two 

commenters suggested a probe study 

and another commenter proposed that 

each MA organization submit a 5 

percent to 10 percent sample of certain 

encounter data to CMS and/or an 

outside contractor who would aggregate 

the data for purposes of reflecting MA 

utilization data for adjustments to the 

MA payment methodology. Another 

commenter suggested that CMS consider 

a pilot project, rather than an immediate 

implementation, in order to develop a 

functioning operational framework for 

the collection and utilization of these 

data. One commenter stated that data 

from traditional Medicare should be an 

adequate reflection of the diagnosis, 

procedures, and services provided in 

the MA program. 

Response: While we appreciate the 

suggestions offered by commenters 

regarding alternatives to the collection 

of beneficiary-level encounter data, we 

note that aggregate level data would not 

be useful in calibrating the risk 

adjustment model. Having the MA 

program’s relative cost patterns is 

essential to CMS in order to improve the 

accuracy of payment to MA plans: these 

program-specific cost patterns will 

allow CMS to reflect appropriate 

relative costs in the risk adjustment 

model by calculating MA-specific risk 

adjustment factors. Regarding the 

sample approach to the reporting of 

encounter data, submission of a subset 

of data would restrict CMS’ use of the 

data for other purposes, particularly 

calculation of Medicare DSH 

percentages. Claims from fee-for-service 

Medicare, which CMS currently uses to 

calibrate the risk adjustment model, are 

inadequate to the extent that MA cost 


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and coding patterns differ from fee-forservice cost patterns. 

Comment: Commenters expressed 

concern that CMS has not adequately 

addressed the issue of protecting 

proprietary data in the proposed rule 

and urged CMS to build regulatory and 

procedural protections prohibiting the 

release of MA encounter data that could 

undermine the competitive nature of the 

MA program. One commenter stated 

that the commercially sensitive nature 

of MA encounter data is similar to that 

of Medicare Part D claims data. 

Response: We appreciate the 

commenters’ concerns regarding data 

privacy. To the extent that encounter 

data submissions contain any 

proprietary information, this 

information would be protected from 

disclosure under the Trade Secrets Act. 

Beneficiary specific information is also 

protected under the Privacy Act, and 

HIPAA, as well as the Federal 

Information Security Management Act 

(FISMA). As we develop our policies 

regarding data usage, we will provide 

opportunity for stakeholder feedback. 

Comment: Many commenters asked 

for additional information regarding 

operational and methodological issues, 

such as what formats CMS plans to use 

to collect encounter data, whether CMS 

will modify RAPS or replace it with a 

new encounter data submission format, 

and how encounter data would be used 

to calibrate the CMS–HCC risk 

adjustment model. 

Response: The purpose of the 

proposed regulatory changes was to 

affirm CMS’ authority to collect 

encounter data only and was not 

intended to address operational or 

methodological issues. Further, we have 

not yet developed the requirements for 

collecting encounter data. As part of our 

discussions and requests for feedback 

from stakeholders, we will be presenting 

details of how we propose to collect the 

data and how we will incorporate 

encounter data into the calibration of 

the risk model. 

Comment: One commenter requested 

clarification that the retention of the 

already existing regulatory language 

regarding ‘‘functional limitations’’ is not 

indicative of a change in how we collect 

such data. The commenter asked if CMS 

planned to continue to collect data 

pertinent to ‘‘functional limitations’’

through the Health Outcomes Survey 

(HOS). Another commenter asked if it 

was CMS’ intent to implement the 

existing provisions under § 422.310(b) 

regarding the characterization of 

functional limitations. The commenter 

believed that the retention of this 

language seems contrary to the phase 

out of the frailty adjustor as it is applied 

to PACE organizations. 

Response: The extant regulatory 

language at § 422.310(b) is intended 

support CMS authority to collect 

various data for use in developing and 

implementing the risk model used in 

the MA program in order to calculate as 

accurate payments as possible. Any 

changes that we would propose to make 

to data collection and methodology 

regarding functional limitations would 

be, at minimum, described in an annual 

Advance Notice of Methodological 

Change in order to provide stakeholders 

with an opportunity for comment. 

Comment: A number of commenters 

were concerned about the impact of 

encounter data collection on PACE 

organizations. The commenters were 

concerned about the administrative 

impact of encounter data reporting on 

PACE programs, as few PACE centers 

code the procedures provided to 

enrollees since payment is made to 

salaried providers and is not based on 

the specific type or number of 

procedures provided and the delivery of 

medical care at a PACE facility does not 

comprise discrete visits or units of care. 

The commenters were concerned about 

the impact of encounter data reporting 

on our PACE programs’ processes of 

care and requested that CMS exempt 

PACE organizations from reporting 

procedure codes for services provided 

by PACE organization staff. 

Response: We appreciate the input of 

PACE organizations regarding the 

implementation of encounter data 

reporting. We will work with PACE 

organizations, as with all stakeholders, 

to obtain their feedback and understand 

better how we can design the encounter 

data collection requirements in a way 

that minimizes the administrative costs 

and operational changes required by 

plans. 

Comment: Some commenters were 

concerned that encounter data reporting 

will not capture the full level of scope 

of services provided by PACE 

organizations because of differences 

between PACE and MA in terms of their 

statutory authorization, size, population 

served, care delivery model, the 

requirement to provide non-Medicare 

services. The commenters stated that 

there were services that were not 

reimbursed by Medicare, although the 

provision of these services substantially 

reduces participants’ utilization of 

Medicare-covered services. The 

commenters were concerned that PACE 

programs will be disadvantaged if 

payment is based on the utilization of 

MA patterns of diagnoses and 

expenditures that do not take into 

account consideration the differences 

between MA and PACE organizations. 

Response: We understand that PACE 

organizations operate under separate 

statutory authority and have a different 

model of care and provide a varied 

range of benefits to its enrolled 

population. However, we also recognize 

that PACE programs are paid for 

Medicare Part A and Part B services 

under section 1853 of the Act, along 

with MA plans, and we are required 

under section 1853(a)(3)(D) of the Act to 

apply risk adjustment uniformly. We are 

committed to working with all 

stakeholders to discuss and clarify how 

any changes in the methodology for 

calibrating the risk adjustment model 

will affect their organization. 

After consideration of the public 

comments received, we are finalizing 

the proposed changes in policies under 

§ 422.310, with one modification. Under 

§ 422.310(f), we are identifying the uses 

of the encounter data that we will 

collect. Specifically, we will use the 

encounter data for calculating risk 

factors, updating risk adjustment 

models, calculating Medicare DSH 

percentages, conducting quality review 

and improvement activities, and for 

Medicare coverage purposes. 

I. Hospital Emergency Services Under 

EMTALA (§ 489.24) 

1. Background 

Sections 1866(a)(1)(I), 1866(a)(1)(N), 

and 1867 of the Act impose specific 

obligations on certain Medicareparticipating hospitals and CAHs. 

(Throughout this section of this final 

rule, when we reference the obligation 

of a ‘‘hospital’’ under these sections of 

the Act and in our regulations, we mean 

to include CAHs as well.) These 

obligations concern individuals who 

come to a hospital emergency 

department and request examination or 

treatment for a medical condition, and 

apply to all of these individuals, 

regardless of whether they are 

beneficiaries of any program under the 

Act. 

The statutory provisions cited above 

are frequently referred to as the 

Emergency Medical Treatment and 

Labor Act (EMTALA), also known as the 

patient antidumping statute. EMTALA 

was passed in 1986 as part of the 

Consolidated Omnibus Budget 

Reconciliation Act of 1985 (COBRA), 

Public Law 99–272. Congress 

incorporated these antidumping 

provisions within the Social Security 

Act to ensure that individuals with 

emergency medical conditions are not 

denied essential lifesaving services. 

Under section 1866(a)(1)(I)(i) of the Act, 


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a hospital that fails to fulfill its 

EMTALA obligations under these 

provisions may be subject to 

termination of its Medicare provider 

agreement, which would result in loss 

of all Medicare and Medicaid payments. 

Section 1867 of the Act sets forth 

requirements for medical screening 

examinations for individuals who come 

to the hospital and request examination 

or treatment for a medical condition. 

The section further provides that if a 

hospital finds that such an individual 

has an emergency medical condition, it 

is obligated to provide that individual 

with either necessary stabilizing 

treatment or an appropriate transfer to 

another medical facility where 

stabilization can occur. 

The EMTALA statute also outlines the 

obligation of hospitals to receive 

appropriate transfers from other 

hospitals. Section 1867(g) of the Act 

states that a participating hospital that 

has specialized capabilities or facilities 

(such as burn units, shock-trauma units, 

neonatal intensive care units, or, with 

respect to rural areas, regional referral 

centers as identified by the Secretary in 

regulation) shall not refuse to accept an 

appropriate transfer of an individual 

who requires these specialized 

capabilities or facilities if the hospital 

has the capacity to treat the individual. 

The regulations implementing section 

1867 of the Act are found at 42 CFR 

489.24. The regulations at 42 CFR 

489.20(l), (m), (q), and (r) also refer to 

certain EMTALA requirements outlined 

in section 1866 of the Act. The 

Interpretive Guidelines concerning 

EMTALA are found at Appendix V of 

the CMS State Operations Manual. 

2. EMTALA Technical Advisory Group 

(TAG) Recommendations 

Section 945 of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), 

Public Law 108–173, required the 

Secretary to establish a Technical 

Advisory Group (TAG) to advise the 

Secretary on issues related to the 

regulations and implementation of 

EMTALA. The MMA specified that the 

EMTALA TAG be composed of 19 

members, including the Administrator 

of CMS, the Inspector General of HHS, 

hospital representatives and physicians 

representing specific specialties, patient 

representatives, and representatives of 

organizations involved in EMTALA 

enforcement. 

The EMTALA TAG’s functions, as 

identified in the charter for the 

EMTALA TAG, were as follows: (1) 

Review EMTALA regulations; (2) 

provide advice and recommendations to 

the Secretary concerning these 

regulations and their application to 

hospitals and physicians; (3) solicit 

comments and recommendations from 

hospitals, physicians, and the public 

regarding the implementation of such 

regulations; and (4) disseminate 

information concerning the application 

of these regulations to hospitals, 

physicians, and the public. The TAG 

met 7 times during its 30-month term, 

which ended on September 30, 2007. At 

its meetings, the TAG heard testimony 

from representatives of physician 

groups, hospital associations, and others 

regarding EMTALA issues and 

concerns. During each meeting, the 

three subcommittees established by the 

TAG (the On-Call Subcommittee, the 

Action Subcommittee, and the 

Framework Subcommittee) developed 

recommendations, which were then 

discussed and voted on by members of 

the TAG. In total, the TAG submitted 55 

recommendations to the Secretary. If 

implemented, some of the 

recommendations would require 

regulatory changes. Of the 55 

recommendations developed by the 

TAG, 5 have already been implemented 

by CMS. A complete list of TAG 

recommendations is available in the 

Emergency Medical Treatment and 

Labor Act Technical Advisory Group 

final report available at the Web site: 

http://www.cms.hhs.gov/FACA/ 

07_emtalatag.asp. The following 

recommendations have already been 

implemented by CMS: 

• That CMS revise, in the EMTALA 

regulations [42 CFR 489.24(b)], the 

following sentence contained in the 

definition of ‘‘labor’’: ‘‘A woman 

experiencing contractions is in true 

labor unless a physician certifies that, 

after a reasonable time of observation, 

the woman is in false labor.’’

We revised the definition of ‘‘labor’’

in the regulations at § 489.24(b) to 

permit a physician, certified nursemidwife, or other qualified medical 

person, acting within his or her scope of 

practice in accordance with State law 

and hospital bylaws, to certify that a 

woman is experiencing false labor. This 

recommendation was adopted with 

modification in the FY 2007 IPPS final 

rule (71 FR 48143). We issued Survey 

and Certification Letter S&C–06–32 on 

September 29, 2006, to clarify the 

regulation change. (The Survey and 

Certification Letter can be found at the 

following Web site: http:// 

www.cms.hhs.gov/ 

SurveyCertificationGenInfo/PMSR/ 

list.asp). 

• That hospitals with specialized 

capabilities (as defined in the EMTALA 

regulations) that do not have a 

dedicated emergency department be 

bound by the same responsibilities 

under EMTALA to accept appropriate 

transfers as hospitals with specialized 

capabilities that do have a dedicated 

emergency department. 

This recommendation was adopted in 

the FY 2007 IPPS final rule (71 FR 

48143). We added language at 

§ 489.24(f) that makes explicit the 

current policy that all Medicareparticipating providers with specialized 

capabilities are required to accept an 

appropriate transfer if they have the 

capacity to treat an individual in need 

of specialized care. We issued Survey 

and Certification Letter S&C–06–32 on 

September 29, 2006, to further clarify 

the regulation change. (The Survey and 

Certification Letter can be found at the 

following Web site: http:// 

www.cms.hhs.gov/ 

SurveyCertificationGenInfo/PMSR/ 

list.asp). 

• That CMS clarify the intent of 

regulations regarding hospital 

obligations under EMTALA to receive 

individuals who arrive by ambulance. 

Specifically, the TAG recommended 

that CMS revise a letter of guidance that 

had been issued by the agency to clarify 

its position on the practice of delaying 

the transfer of an individual from an 

emergency medical service provider’s 

stretcher to a bed in a hospital’s 

emergency department. 

This recommendation was adopted 

with modification by CMS in Survey 

and Certification Letter S&C–07–20, 

which was released on April 27, 2007. 

(The Survey and Certification Letter can 

be found at the following Web site: 

http://www.cms.hhs.gov/ 

SurveyCertificationGenInfo/PMSR/ 

list.asp.) 

• That CMS clarify that a hospital 

may not refuse to accept an individual 

appropriately transferred under 

EMTALA on the grounds that it (the 

receiving hospital) does not approve the 

method of transfer arranged by the 

attending physician at the sending 

hospital (for example, a receiving 

hospital may not require the sending 

hospital to use an ambulance transport 

designated by the receiving hospital). In 

addition, CMS should improve its 

communication of such clarifications 

with its regional offices. 

This recommendation was adopted 

and implemented by CMS in Survey 

and Certification Letter S&C–07–20, 

which was released on April 27, 2007. 

(The Survey and Certification Letter can 

be found at the following Web site: 

http://www.cms.hhs.gov/ 

SurveyCertificationGenInfo/PMSR/ 

list.asp.) 

• That CMS strike the language in the 

Interpretive Guidelines (CMS State 


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Operations Manual, Appendix V) that 

addresses telehealth/telemedicine 

(relating to the regulations at 

§ 489.24(j)(1)) and replace it with 

language that clarifies that the treating 

physician ultimately determines 

whether an on-call physician should 

come to the emergency department and 

that the treating physician may use a 

variety of methods to communicate with 

the on-call physician. A potential 

violation occurs only if the treating 

physician requests that the on-call 

physician come to the emergency 

department and the on-call physician 

refuses. 

This recommendation was adopted 

and implemented by CMS in Survey 

and Certification Letter S&C–07–23, 

which was released on June 22, 2007. 

(The Survey and Certification Letter can 

be found at the following Web site: 

http://www.cms.hhs.gov/ 

SurveyCertificationGenInfo/PMSR/ 

list.asp.) 

We are considering the remaining 

recommendations of the EMTALA TAG 

and may address them through future 

changes to or clarifications of the 

existing regulations or the Interpretive 

Guidelines, or both. 

At the end of its term, the EMTALA 

TAG compiled a final report to the 

Secretary. This report includes, among 

other materials, minutes from each TAG 

meeting as well as a comprehensive list 

of all of the TAG’s recommendations. 

The final report is available at the 

following Web site: http:// 

www.cms.hhs.gov/FACA/ 

07_emtalatag.asp. 

3. Changes Relating to Applicability of 

EMTALA Requirements to Hospital 

Inpatients 

While many issues pertaining to 

EMTALA involve individuals 

presenting to a hospital’s dedicated 

emergency department, questions have 

been raised regarding the applicability 

of the EMTALA requirements to 

inpatients. We have previously 

discussed the applicability of the 

EMTALA requirements to hospital 

inpatients in both the May 9, 2002 IPPS 

proposed rule (67 FR 31475) and the 

September 9, 2003 stand alone final rule 

on EMTALA (68 FR 53243). As we 

stated in both of the aforementioned 

rules, in 1999, the United States 

Supreme Court considered a case 

(Roberts v. Galen of Virginia, 525 U.S. 

249 (1999)) that involved, in part, the 

question of whether EMTALA applies to 

inpatients in a hospital. In the context 

of that case, the United States Solicitor 

General advised the Court that HHS 

would develop a regulation clarifying its 

position on that issue. In the 2003 final 

rule, CMS took the position that a 

hospital’s obligation under EMTALA 

ends when that hospital, in good faith, 

admits an individual with an unstable 

emergency medical condition as an 

inpatient to that hospital. In that rule, 

CMS noted that other patient safeguards 

protected inpatients, including the CoPs 

as well as State malpractice law. 

However, in the 2003 final rule, CMS 

did not directly address the question of 

whether EMTALA’s ‘‘specialized care’’

requirements (section 1867(g) of the 

Act) applied to inpatients. 

As noted in section IV.I.2. of this 

preamble, the EMTALA TAG has 

developed a set of recommendations to 

the Secretary. One of those 

recommendations calls for CMS to 

revise its regulations to address the 

situation of an individual who: (1) 

Presents to a hospital that has a 

dedicated emergency department and is 

determined to have an unstabilized 

emergency medical condition; (2) is 

admitted to the hospital as an inpatient; 

and (3) the hospital subsequently 

determines that stabilizing the 

individual’s emergency medical 

condition requires specialized care only 

available at another hospital. 

We stated in the proposed rule that 

we believed that the obligation of 

EMTALA did not end for all hospitals 

once an individual had been admitted 

as an inpatient to the hospital where the 

individual first presented with a 

medical condition that was determined 

to be an emergency medical condition. 

Rather, once the individual was 

admitted, admission only impacted the 

EMTALA obligation of the hospital 

where the individual first presented. 

(Throughout this section of the 

preamble of this final rule, we refer to 

the hospital where the individual first 

presented as the ‘‘admitting hospital.’’) 

Section 1867(g) of the Act states: 

‘‘Nondiscrimination—A participating 

hospital that has specialized capabilities 

or facilities (such as burn units, shocktrauma units, neonatal intensive care 

units, or (with respect to rural areas) 

regional referral centers as identified by 

the Secretary in regulation) shall not 

refuse to accept an appropriate transfer 

of an individual who requires such 

specialized capabilities or facilities if 

the hospital has the capacity to treat the 

individual.’’ In the proposed rule we 

suggested that section 1867(g) of the Act 

requires a receiving hospital with 

specialized capabilities to accept a 

request to transfer an individual with an 

unstable emergency medical condition 

as long as the hospital has the capacity 

to treat that individual, regardless of 

whether the individual had been an 

inpatient at the admitting hospital. Our 

suggestion was supported by the 

September 9, 2003 final rule (68 FR 

53263), in which we amended the 

regulations at § 489.24(d)(2)(i) to state 

that: ‘‘If a hospital has screened an 

individual under paragraph (a) of this 

section and found the individual to 

have an emergency medical condition, 

and admits that individual in good faith 

in order to stabilize the emergency 

medical condition, the hospital has 

satisfied its special responsibilities 

under this section with respect to that 

individual’’ (emphasis added). In the 

proposed rule we stated that we 

believed that permitting inpatient 

admission at the admitting hospital to 

end EMTALA obligations for another 

hospital to which an unstabilized 

individual was being appropriately 

transferred to receive specialized care 

would seemingly contradict the intent 

of section 1867(g) of the Act to ensure 

that hospitals with specialized 

capabilities provide medical treatment 

to individuals with emergency medical 

conditions in order to stabilize those 

conditions. 

We also noted in the proposed rule 

that, as discussed in the preamble of the 

September 9, 2003 stand-alone final 

rule, notwithstanding any EMTALA 

protections, a hospital inpatient is 

protected under the Medicare CoPs and 

may also have additional protections 

under State law. A hospital that fails to 

provide necessary treatment to such 

individuals could face termination of its 

Medicare provider agreement for a 

violation of the CoPs. We stated in the 

proposed rule that we believe it is 

consistent with the intent of EMTALA 

to limit its protections to individuals 

who need them most; for example, 

individuals who present to a hospital 

but may not have been formally 

admitted as patients and thus are not 

covered by other protections applicable 

to patients of the hospital. We believe 

that, in the case of inpatients, there is 

no need or requirement to also 

supplement the hospital’s obligation to 

its patients under the CoPs in order to 

further the objectives of EMTALA. 

However, the obligations of a hospital 

under the CoPs apply only to that 

hospital’s patients; they do not apply to 

individuals who are not patients. 

Further, there is no CoP that requires a 

hospital to accept the transfer of a 

patient from another facility. Thus, a 

hospital with specialized capabilities 

has no obligations under the CoPs to 

any nonpatients. On the other hand, the 

EMTALA statute, in section 1867(g) of 

the Act, does create an obligation for 

such hospitals to accept appropriate 

transfers of nonpatient individuals if it 


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has the capacity to treat the individuals. 

Therefore, in our proposal, in order to 

ensure an individual the protections 

intended by the EMTALA statute, we 

indicated in the FY 2009 IPPS proposed 

rule (73 FR 23669) that we believed it 

was appropriate to propose to clarify 

that section 1867(g) of the Act 

(obligating a hospital with specialized 

capabilities to accept an appropriate 

transferred individual if it has the 

capacity to treat the individual) 

continues to apply so as to protect even 

an individual who has been admitted as 

an inpatient to an admitting hospital 

despite not being stabilized since 

becoming an inpatient. We stated that 

we believed that this clarification was 

necessary to ensure that EMTALA 

protections are continued for 

individuals who were not otherwise 

protected by the hospital CoPs (with 

respect to the obligation of other 

hospitals to those individuals). (We 

noted that this proposed clarification 

was consistent with the EMTALA TAG’s 

recommendation that EMTALA does not 

apply when an individual is admitted to 

the hospital for an elective procedure 

and subsequently develops an 

emergency medical condition.) 

We recognized that the proposed 

clarification that the obligation to accept 

an appropriate transfer under EMTALA 

applied to a hospital with specialized 

capabilities when an inpatient (who 

presented to the admitting hospital 

under EMTALA) was in need of 

specialized care to stabilize his or her 

emergency medical condition may have 

raised concerns among the provider 

community that such a clarification in 

policy could hypothetically result in an 

increase in the number of transfers. 

However, we stated that the intention of 

this proposed clarification was not to 

encourage patient dumping to hospitals 

with specialized capabilities. Rather, 

even if the hospital with specialized 

capabilities had an EMTALA obligation 

to accept an individual who was an 

inpatient at the admitting hospital, the 

admitting hospital transferring the 

individual should take all steps 

necessary to ensure that it has provided 

needed treatment within its capabilities 

prior to transferring the individual. This 

meant that an individual with an 

unstabilized emergency medical 

condition should only be transferred 

when the capabilities of the admitting 

hospital were exceeded. 

Accordingly, we proposed to revise 

§ 489.24(f) by adding to the existing text 

a provision that specifies that paragraph 

(f) also applies to an individual who has 

been admitted under paragraph (d)(2)(i) 

of the section and who has not been 

stabilized. 

While we did not include the 

following in our proposed clarification, 

we sought public comments on whether 

the EMTALA obligation imposed on 

hospitals with specialized capabilities 

to accept appropriate transfers should 

apply to a hospital with specialized 

capabilities in the case of an individual 

who had a period of stability during his 

or her stay at the admitting hospital and 

is in need of specialized care available 

at the hospital with specialized 

capabilities. CMS takes seriously its 

duty to protect patients with emergency 

medical conditions as required by 

EMTALA. Thus, we sought public 

comments as to whether, with respect to 

the EMTALA obligation on the hospital 

with specialized capabilities, it should 

or should not matter if an individual 

who currently has an unstabilized 

emergency medical condition (which is 

beyond the capability of the admitting 

hospital) (1) remained unstable after 

coming to the hospital emergency 

department or (2) subsequently had a 

period of stability after coming to the 

hospital emergency department. 

In summary, to implement the 

recommendation by the EMTALA TAG 

and clarify our policy regarding the 

applicability of EMTALA to hospital 

inpatients, we proposed to amend 

§ 489.24(f) to add a provision to state 

that when an individual covered by 

EMTALA was admitted as an inpatient 

and remains unstabilized with an 

emergency medical condition, a 

receiving hospital with specialized 

capabilities has an EMTALA obligation 

to accept that individual, assuming that 

the transfer of the individual is an 

appropriate transfer and the 

participating hospital with specialized 

capabilities has the capacity to treat the 

individual. 

Comment: Numerous commenters 

opposed the proposal in the FY 2009 

proposed rule regarding the 

applicability of EMTALA to hospital 

inpatients. Many commenters asserted 

that, rather than being a clarification of 

current regulations, CMS’ proposal 

represents a significant change in policy 

which runs counter to CMS’ policy 

expressed in the September 9, 2003 

Federal Register (68 FR 53222). 

Commenters stated that the current 

regulations at § 489.24(d)(2)(i) provide a 

‘‘bright-line’’ test for EMTALA, which 

‘‘* * * clearly states that once an 

individual presenting to the hospital’s 

emergency department has been 

screened and admitted as an inpatient 

in good faith in order to stabilize the 

emergency medical condition, the 

hospital has satisfied its EMTALA 

obligations for that individual, and 

EMTALA no longer applies to a 

subsequent transfer.’’ Commenters 

stated they believe the proposed rule reopens EMTALA for the admitting 

hospital. They noted the admitting 

hospital, after it has admitted the 

individual, would then be required to 

abide by the regulations governing an 

appropriate transfer when it transfers 

the inpatient to the hospital with 

specialized capabilities. 

Many commenters questioned 

whether such a change in policy was 

necessary since it is unlikely that a 

hospital would knowingly admit an 

individual with an unstabilized 

emergency medical condition who they 

did not have the capability or capacity 

to stabilize. One commenter noted that 

all hospitals which have emergency 

departments should be capable of 

evaluating an individual who presents 

to the emergency department and if the 

hospital does not have the capability to 

appropriately care for the individual, 

the hospital should transfer, rather than 

admit the individual. Another 

commenter stated it was not the intent 

of EMTALA for a hospital to be able to 

transfer any individual whose condition 

worsens after admission. Commenters 

asserted that the proposed rule is 

unnecessary because current statutory 

and regulatory requirements provide 

extensive legal protections separate and 

apart from EMTALA. One commenter 

stated that, in addition to hospital CoPs, 

the Arkansas Rules and Regulations for 

Hospitals and Related Institutions as 

well as the Rules and Regulations for 

Critical Access Hospitals contain 

hundreds of pages of requirements 

concerning hospitals’ care and treatment 

for all patients. 

Commenters asserted that CMS is 

relying on a recommendation of the 

EMTALA TAG to make its policy 

change and the actions of the TAG do 

not justify a need for a change in policy. 

One commenter noted that the TAG vote 

in favor of the recommendation to apply 

EMTALA to hospital inpatients was 10 

to 8 and that 5 of the votes in favor of 

the recommendation came from the U.S. 

Department of Health and Human 

Services. The commenter also noted that 

the vote was taken twice and that the 

recommendation was voted as a ‘‘low’’

priority by the TAG. Commenters stated 

that a discussion of the contentious 

nature of the TAG’s recommendation 

was not included in the preamble to the 

proposed rule. Specifically, the 

commenters noted that CMS failed to 

state that the recommendation was only 

passed by a slim majority with most of 

the physician and hospital 

representatives opposing the 

recommendation. Commenters noted 

that after the TAG meeting, members of 


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the TAG sent the TAG chairman letters 

indicating their concern that if 

implemented, the recommendation 

would adversely affect patient care and 

could increase the number of 

unnecessary patient transfers. 

Furthermore, the commenters stated 

that two physicians who had voted in 

favor of the recommendation 

subsequently sent a letter expressing 

their concern that the recommendation 

could have a potential for abuse, namely 

patient dumping, and that they ‘‘* * * 

fear that the potentially unintended 

consequence may be the transfer of 

EMTALA patients for reasons other than 

those related to emergency care of the 

problem for which the patient was 

originally admitted when these services 

could have been provided at the sending 

hospital.’’

Many commenters were concerned 

that the proposed rule would facilitate 

patient dumping at hospitals with 

specialized capabilities. Commenters 

were concerned the admitting hospital 

would not initially pay sufficient 

attention to the EMTALA requirements 

by not adequately assessing whether it 

actually has the capabilities necessary to 

treat an individual who presents under 

EMTALA. The commenter stated that 

there is no clear mechanism outlined in 

the proposed rule for reporting a 

hospital that fails to treat individuals 

adequately or fails to utilize all available 

resources before transferring an 

individual. One commenter suggested 

that CMS require admitting hospitals, 

which are part of a larger hospital 

system, to look to other system hospitals 

within the geographic area for 

specialized capabilities before 

transferring an individual to a hospital 

located outside of the system (assuming 

it is in the best interests for the patient 

to be transferred). The commenter stated 

such a policy would dissuade hospitals 

from making transfers for financial 

rather than patient care reasons. One 

commenter asked CMS to clarify 

whether it intends for the proposed rule 

to apply to any individual with an 

emergency medical condition, 

regardless of whether or not the 

individual actually goes to the 

emergency department. The commenter 

stated, ‘‘Some patients with an 

emergency medical condition may have 

been a direct admission to the hospital 

by a local physician but never cared for 

initially by the ER; the patient simply 

came through the ER as a direct 

admission. We request CMS clarify 

whether these patients also will be 

covered by EMTALA.’’ Another 

commenter stated that in addition to 

being overwhelmed by transfer requests, 

a receiving hospital will have to 

determine: (1) Whether the inpatient 

originally presented to the requesting 

hospital’s emergency department; (2) 

whether the patient has ever been 

stable; and (3) whether the patient 

requires specialized services not offered 

at the requesting hospital. 

Commenters expressed their concern 

that tertiary care hospitals, urban safety 

net, and teaching hospitals that are 

already providing care to the indigent 

and uninsured patients, may become 

further overburdened by the proposed 

rule. Commenters stated that a sending 

hospital, acting in bad faith, could 

choose to only transfer medically 

complex patients requiring extensive 

lengths of stay, patients who are 

uninsured, and patients who have been 

subject to a medical error. One 

commenter stated that physicians 

expect that transfer requests of 

unresolved emergency medical 

conditions will come on weekends and 

holidays as a convenience measure and 

not a necessity. Another commenter 

stated that it treats more than 80,000 

patients annually at its facility, which is 

the region’s only Level I trauma center. 

The commenter stated it will always 

accept critically ill patients who are 

unable to be stabilized at another 

facility. The commenter stated that, 

under the proposed rule, it would now 

be obligated to accept the patient even 

though it has no ability to weigh in on 

the appropriateness of the transfer, 

which may not be in the best interest of 

the patient. 

Commenters also expressed their 

concern on how the proposed rule 

would affect the care and treatment of 

patients. Commenters were especially 

concerned about the consequences to 

patient health (both physical and 

psychological) and safety due to a 

potential increase in inappropriate/ 

unnecessary transfers and over-triaging. 

One commenter asserted that the 

proposed policy will worsen the 

increase of inappropriate transfers and 

that already too few seriously ill 

patients are receiving appropriate initial 

evaluations at Level I and II trauma 

centers, while too many patients with 

non serious injuries, are presenting to or 

being transferred to those centers. One 

commenter noted that if the policy is 

finalized as proposed, the referring 

hospital may transfer patients who 

deteriorate following admission, thereby 

risking the life of the patient. The 

commenter further noted that patients 

without health insurance may be given 

an incentive to bypass their closest 

emergency department and go to larger 

medical centers offering indigent care. 

The commenter noted that the proposed 

rule would discourage ‘‘savvy’’ patients 

from seeking care at the nearest 

available emergency department and 

encourage them to go to the most 

sophisticated emergency department to 

avoid the possibility of being admitted 

to a hospital lacking the necessary 

capabilities and the possibility of 

eventually being transferred. The 

commenter noted ‘‘Unless and until 

CMS recognizes the magnitude of the 

problem of some hospitals avoiding 

their EMTALA obligations, no EMTALA 

policy can ever be adequate to the task 

of protecting the interests of patients.’’

Commenters expressed their concern 

with the definition of ‘‘stable’’ and 

‘‘unstable’’ and how the interpretation 

of these terms could be affected by the 

proposed rule. One commenter 

highlighted the applicability of the 

proposed rule to the state of Idaho, 

stating that Idaho contains many small 

hospitals that may only employ one 

general surgeon or orthopedic surgeon. 

The commenter noted that, when 

individuals require transfer, often what 

makes the receiving hospital ‘‘the 

hospital with specialized capabilities’’

is that it has an on-call specialist. One 

commenter stated that hospitals will 

have the incentive to stretch the 

definition of ‘‘specialized’’ to make the 

determination that some component of 

care for a particular patient is beyond its 

capability. 

One commenter stated that CMS lacks 

the legal authority to apply EMTALA to 

an inpatient who presented to the 

admitting hospital under EMTALA. The 

commenter stated that the 2003 rule 

established a ‘‘bright line’’ for EMTALA, 

which also made a distinction between 

‘‘individuals’’ and ‘‘patients,’’ (the 

primary distinction being that 

individuals, not patients, are protected 

by EMTALA.) The commenter 

recommended CMS withdraw the 

proposed rule as not authorized under 

the limited scope of the EMTALA 

statute. Additionally, the commenter 

stated that the preamble to the proposed 

rule does not provide sufficient reason 

as to why EMTALA should be expanded 

to apply to inpatients. The commenter 

stated that both the EMTALA 

interpretive guidelines and judicial 

decisions emphasize that EMTALA is 

anti-discrimination and designed to 

ensure that all patients with similar 

signs and symptoms are treated the 

same as recipients of emergency care 

services. The commenter argued that the 

proposed rule is the antithesis of the 

intent of the EMTALA statute and 

creates a dual standard of care for 

patients who require the same level of 

care by permitting inpatients who 

present to the hospital under EMTALA 


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special privileges. The commenter 

stated it would be difficult for a hospital 

to determine what type of inpatient it is 

dealing with, one with or without 

residual EMTALA rights. The 

commenter noted that hospitals and 

physicians are already puzzled by the 

inexact language of EMTALA, including 

the terms ‘‘stabilization,’’ ‘‘resolved’’ (as 

used in the IGs), ‘‘stable,’’ and what is 

meant by a higher level of care. The 

commenter recommended CMS provide 

greater ‘‘specificity’’ and ‘‘clarity’’ as to 

when a patient’s condition is considered 

stabilized. The commenter further stated 

‘‘ * * * there is no guidance as to what 

is an ‘appropriate transfer’ of an 

inpatient with residual EMTALA rights 

that triggers the obligation of a receiving 

hospital to accept the inpatient 

transfer.’’ The commenter stated 

EMTALA is only triggered for the 

accepting hospital, if the transferring 

hospital participates in an ‘‘appropriate 

transfer’’ of an individual. 

Another commenter recommended 

that the rule address requirements for 

the admitting hospital to take all steps 

necessary to ensure that it is providing 

required treatment within its 

capabilities prior to engaging in a 

transfer. The commenter stated that the 

proposed rule treats hospitals unequally 

because it does not impose sanctions on 

the transferring hospital for making an 

inappropriate transfer of an individual 

with residual EMTALA rights. The 

commenter stated that ‘‘If receiving 

hospitals are subject to EMTALA 

sanctions for refusing an appropriate 

transfer of an inpatient with residual 

EMTALA rights, then sending hospitals 

and physicians should have the 

equivalent exposure to sanctions for 

making an improper transfer of an 

inpatient with residual EMTALA 

rights.’’

Response: We thank the commenters 

for expressing their concerns regarding 

our proposal. We agree with the 

commenters that finalizing the proposed 

rule may result in hospitals with 

specialized capabilities experiencing an 

increase in inappropriate transfers. We 

understand that medical institutions 

such as academic medical centers, 

tertiary care centers, and public safety 

net hospitals are already facing 

significant and growing challenges in 

providing emergency services. After 

consideration of the comments, we 

believe that finalizing the policy as 

proposed may negatively impact patient 

care, due to an increase in inappropriate 

transfers which could be detrimental to 

the physical and psychological health 

and well-being of patients. We are 

concerned that finalizing our proposed 

rule could further burden the emergency 

services system and may force hospitals 

providing emergency care to limit their 

services or close, reducing access to 

emergency care. 

We agree with the commenters’

concerns that some hospitals might 

abuse the proposed policy by not 

providing patients with the necessary 

screening examination required under 

EMTALA to determine the nature and 

extent of their emergency medical 

condition. We believe that, in the case 

where an individual is admitted and 

later found to be in need of specialized 

care not available at the admitting 

hospital, hospitals with specialized 

capabilities generally do accept the 

transfer, even in the absence of a legal 

requirement to do so. Furthermore, as 

one commenter pointed out by 

referencing the Arkansas Rules and 

Regulations for Hospitals and Related 

Institutions as well as the Rules and 

Regulations for Critical Access 

Hospitals, some States have 

requirements in addition to the hospital 

CoPs that provide for further protections 

for patients. 

We are very concerned about the 

possible disparate treatment of 

inpatients under the proposed policy. 

Specifically, under the proposed policy, 

an individual who presented to the 

hospital under EMTALA may have 

different transfer rights than an 

inpatient who was admitted for an 

elective procedure. This situation also 

creates operational challenges for 

hospital staff to differentiate which 

inpatient is afforded which transfer 

rights. Determining which individuals 

are covered by transfer rights under 

EMTALA may tie up a hospital’s 

already strained resources. Furthermore, 

we believe that if we finalized the 

proposed rule, the admitting hospital 

may encounter challenges in 

determining whether or not an 

individual has ever been stable, as that 

term is defined in the EMTALA statute, 

because if the individual had any period 

of stability, EMTALA would not require 

acceptance of the transfer by the 

hospital with specialized capabilities. 

We recognize that the EMTALA 

definition of ‘‘stable’’ differs from 

clinical usage of this term. 

We support in principle the 

commenter’s suggestion that hospitals 

that are part of a larger hospital system 

should transfer an individual to a 

system hospital with the required 

specialized capabilities within the same 

geographic area, so long as doing so 

would not result in a significantly 

longer transport for the individual than 

would transfer to a nonsystem hospital. 

However, we cannot mandate that 

individuals only be transferred to 

certain hospitals within a specific 

geographic region. In response to the 

commenter who asked that we clarify 

(in the context of the proposed rule) 

whether EMTALA would apply to an 

individual with an emergency medical 

condition, regardless of whether or not 

the individual went to the emergency 

department, we would like to clarify 

when EMTALA applies. In addition to 

EMTALA applying when an individual 

presents to a hospital emergency 

department and requests examination or 

treatment for a medical condition, or 

has a request made on his or her behalf, 

EMTALA applies when an individual 

presents on hospital property (as 

defined at § 489.24(b)) and requests 

examination or treatment for an 

emergency medical condition, or has a 

request made on his or her behalf. 

We recognize the concern of the 

commenters that the recommendation 

provided by the TAG to apply EMTALA 

to hospital inpatients was accepted by 

the TAG on the narrowest of margins 

and that the majority of hospital 

representatives serving on the TAG were 

opposed to the recommendation. The 

discussion of the TAG’s 

recommendation is provided on the 

CMS Web site under the meeting reports 

link, or link to the EMTALA TAG final 

report at : http://www.cms.hhs.gov/ 

FACA/07_emtalatag.asp. Therefore, in 

this final rule, due to the concerns noted 

above, we are clarifying our policy on 

the EMTALA obligation of a hospital 

with specialized capabilities, by stating 

that if an individual presents to the 

admitting hospital that has a dedicated 

emergency department, is provided an 

appropriate medical screening 

examination and is found to have an 

emergency medical condition, and is 

admitted as an inpatient in good faith 

for stabilizing treatment of an 

emergency medical condition, then the 

admitting hospital has met its EMTALA 

obligation to that individual, even if the 

individual remains unstable. 

Furthermore, in such a case, a hospital 

with specialized capabilities does not 

have an obligation under EMTALA to 

accept a transfer of that individual from 

the referring hospital. Accordingly, we 

have revised the regulation at § 489.24(f) 

to state that it does not apply to an 

individual who has been admitted 

under § 489.24 (d)(2)(i). 

Due to the many concerns that the 

commenters raised which are noted 

above, we believe it is appropriate to 

finalize a policy to state that if an 

individual with an unstable emergency 

medical condition is admitted, the 

EMTALA obligation has ended for the 

admitting hospital and even if the 

individual’s emergency medical 


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condition remains unstabilized and the 

individual requires special services only 

available at another hospital, the 

hospital with specialized capabilities 

does not have an EMTALA obligation to 

accept an appropriate transfer of that 

individual. However, we would like to 

emphasize that if an individual presents 

to a hospital with a dedicated 

emergency department and is found to 

have an emergency medical condition 

that requires stabilizing treatment which 

requires specialized treatment not 

available at the hospital where the 

individual presented, and has not been 

admitted as an inpatient, then another 

Medicare-participating hospital with the 

requisite specialized capabilities is 

obligated under EMTALA to accept the 

appropriate transfer of this individual so 

long as it has the capacity to treat the 

individual. 

Comment: Several commenters 

supported the proposal to apply 

EMTALA to hospital inpatients who 

present under EMTALA, continue to 

have an unstable emergency medical 

condition, and are found to require 

treatment or services only available at 

another hospital with specialized 

capabilities. Commenters stated the 

proposed policy is necessary to protect 

individuals who are not otherwise 

protected by hospital CoPs. One 

commenter stated that hospitals with 

specialized capabilities should not be 

exempt from accepting the transfer of an 

unstable patient from a hospital that 

lacks the specialized capabilities to treat 

that patient. However, the commenter 

stated that the regulation needs to be 

specific in order to minimize the 

potential for multiple interpretations 

and the actual process should be 

monitored for abuse, for example, 

excessive transfers from a hospital. One 

commenter believed hospitals are 

already routinely following the policy 

expressed in the proposed rule. 

Therefore, the commenter believed the 

proposed requirement will only 

formalize existing practice. Another 

commenter stated that the proposal was 

especially important for individuals 

living in rural areas because those 

individuals are routinely denied transfer 

to a regional facility for definitive care 

based on the conclusion that the 

individuals are already at a ‘‘hospital.’’

The commenter noted this scenario has 

been experienced multiple times by 

CAHs. 

Commenters stated that the proposal 

would effectively treat the hospitalized 

inpatient as an individual who comes to 

the hospital with specialized 

capabilities seeking emergency care, 

when the hospital with specialized 

capabilities falls within the conditions 

described under section 1867(g) of the 

Act. The commenter took issue with 

CMS’ 2003 final rule and stated that the 

proposed policy corrects the problem 

introduced by CMS’ 2003 final rule, 

when the agency decided that inpatient 

admission would end EMTALA unless 

a subterfuge can be proven. One 

commenter asserted that the fact of 

whether or not an individual was 

admitted is irrelevant in determining 

whether the individual has an 

emergency medical condition or 

whether the admitting hospital has the 

capability to provide the necessary care. 

Instead, the commenter mentioned the 

aforementioned criteria are ‘‘* * * the 

only operative criteria to whether the 

transfer is justified under EMTALA.’’

The commenter stated that EMTALA 

was conceived because Congress 

recognized that patients needing 

transfers were being denied access to 

higher levels of care. The commenter 

urged CMS to go forward with the 

proposed changes and requested that 

clarifying language be included to 

establish that ‘‘* * * CMS recognizes 

no provisions in paragraph G antidiscrimination provisions that would 

allow a receiving hospital to deny any 

patient on the basis of their admission 

status or physical location at the 

sending facility.’’

Another commenter stated that CMS’

proposal is in the best interests of 

patient care and should be 

implemented. The commenter claimed 

that without clarification, a hospital 

with specialized capabilities could 

legitimately decline a transfer, asserting 

that hospitals’ EMTALA obligations and 

rights end upon admission of an 

individual to a hospital. The commenter 

stated that ‘‘CMS should monitor 

closely the actual experience of 

inpatient emergency transfer to 

specialized care facilities for the first 

two years and then, if warranted, 

consider an appropriate DRG 

reimbursement adjustment for the initial 

admitting hospital’s abbreviated 

admission that resulted in an emergent 

transfer to a specialized acute care 

facility.’’

Response: We appreciate the 

commenters’ emphasis on patient care 

and would like to reinforce that the 

intent of EMTALA was not to provide 

hospitals with a clear indication of the 

point at which their legal responsibility 

towards an individual ends, but rather 

the intent of EMTALA was to provide 

access to emergency care to all 

individuals who present to an 

emergency department and are 

determined to have an emergency 

medical condition, including the 

uninsured. In response to the 

commenter who believed that the policy 

expressed in the proposed rule is 

already routine practice, we also agree, 

as stated previously, that generally 

hospitals with specialized capabilities 

would accept the transfer of an inpatient 

with an unstable emergency medical 

condition, even if there was no legal 

requirement under EMTALA to do so. In 

response to the commenter who 

suggested that CMS monitor inpatient 

transfers to hospitals with specialized 

capabilities for the first 2 years and 

consider appropriate DRG 

reimbursement for the initial hospital’s 

admission, EMTALA requirements are 

separate from Medicare payment policy 

for covered services provided to 

Medicare beneficiaries. Existing policy 

already addresses payment in cases of 

transfer of a beneficiary who is an 

inpatient to another hospital. In 

addition, although commenters 

expressed concerns regarding hospitals 

experiencing difficulties transferring 

patients (which we believe may exist), 

we are concerned with the potential for 

overcrowding that could result at 

academic medical centers, tertiary care 

centers, and public safety net hospitals 

if we were to finalize the proposed 

policy. Furthermore, we would like to 

emphasize that it is essential that the 

hospital to which the individual 

originally presents employ all available 

resources in its attempts to either 

stabilize the individual or transfer him/ 

her, under an appropriate transfer. Not 

only is it a potential EMTALA violation 

for a hospital to provide an individual 

with insufficient medical screening or 

an inappropriate transfer when the 

hospital actually has the capability to 

treat the individual a potential 

EMTALA violation, it may prove to be 

more costly to society because the 

individual’s emergency medical 

condition was not initially treated to the 

extent that it could have been, 

potentially risking the life of the 

individual. We would also like to make 

sure that individuals are aware of their 

resources if they believe they have been 

witness to an EMTALA violation. In 

addition to the investigation of 

EMTALA complaints conducted by 

CMS, individuals should be aware that 

the OIG also enforces EMTALA and may 

levy civil and monetary penalties 

against a physician and/or hospital for 

an EMTALA violation. The law also 

permits individuals to file a private 

right of action. Furthermore, the Act 

provides for whistleblower protection 

for hospital personnel. Section 1867(i) 

of the Act states ‘‘A participating 

hospital may not penalize or take 

adverse action against a qualified 


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medical person described in subsection 

(c)(1)(A)(iii) or a physician because the 

person or physician refuses to authorize 

the transfer of an individual with an 

emergency medical condition that has 

not been stabilized or against any 

hospital employee because the 

employee reports a violation of the 

requirement of this section.’’

Finally, as stated previously, due to 

the concerns that commenters raised, 

we are not finalizing the proposed 

policy. Rather, we are finalizing a policy 

that a hospital with specialized 

capabilities is not required under 

EMTALA to accept the transfer of a 

hospital inpatient. Although we believe 

that the language of section 1867(g) of 

the Act can be interpreted as either 

applying or not applying to inpatients, 

after reviewing the comments raised by 

many commenters, we have serious 

concerns about the impact the proposed 

policy would have had on patient care 

and the possibility that it may 

overburden many hospitals that are 

currently having difficulties providing 

sufficient emergency care. 

Comment: We did not receive any 

public comments in support of our 

request in the proposed rule for 

comment on whether the EMTALA 

obligation imposed on hospitals with 

specialized capabilities to accept 

appropriate transfers should apply to a 

hospital with specialized capabilities in 

the case of an individual who had a 

period of stability during his or her stay 

at the admitting hospital and is in need 

of specialized care available at the 

hospital with specialized capabilities. 

Commenters were concerned that such 

an application would provide for further 

potential for abuse. One commenter 

stated that a period of stability followed 

by instability should not be a reason to 

impose EMTALA obligations on a 

hospital with specialized capabilities. 

Another commenter stated that CMS’

request for comment was based on a 

concept not even contemplated by the 

TAG’s controversial comment. One 

commenter stated that such a policy 

may encourage hospitals to dump 

patients when they receive an especially 

difficult case study. 

Response: We thank the commenters 

for their responses to our question on 

whether EMTALA should apply when 

an individual had a period of stability. 

Comment: Commenters included 

information regarding recent 

publications which communicate the 

dire circumstances facing emergency 

care. Several commenters mentioned the 

2006 Institute of Medicine (IOM) reports 

focused on the future of emergency care. 

One commenter mentioned a report 

recently issued by the House Oversight 

and Government Reform Committee 

titled: ‘‘Hospital Emergency Surge 

Capacity: Not Ready for the Predictable 

Surprise.’’ The commenter also cited a 

testimony made before the Committee 

by J. Wayne Meredith, MD, Professor 

and Chairman of General Surgery, Wake 

Forest University Baptist Hospital. One 

commenter stated that it wished to 

commend the work of the EMTALA 

TAG and stated that most of the TAG’s 

recommendations will help clarify 

current interpretations of EMTALA and 

help improve the delivery of emergency 

medical services. The commenter 

wished to take the opportunity to 

highlight several of the TAG’s 

recommendations, and urged CMS to 

adopt the following recommendations 

as soon as possible: 1, 8, 9, 11, 13, 14, 

19, 27, 52, and 53. (Note: the number of 

the recommendation refers to the 

corresponding number found in final 

report of the EMTALA TAG. The final 

report can be found at the following 

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

FACA/07_emtalatag.asp). The 

commenter also discussed a survey of 

neurosurgeons conducted by the 

American Association of Neurological 

Surgeons (AANS) and Congress of 

Neurological Surgeons (CNS) in 2004, 

which concluded that 45 percent of 

neurosurgeons practicing at either an 

academic health center or Level I or II 

trauma center, experienced an increase 

in the number of neurosurgical 

emergency cases in the previous 2 years. 

Another commenter stated that it 

supported number 53 of the TAG’s 

recommendation, which recommends 

the statute be modified to create a 

funding mechanism for EMTALA. 

Response: We thank the commenters 

for the information on the IOM reports 

and testimony which address the 

current crisis in emergency care as well 

as their support of the TAG and several 

of its recommendations. Although these 

comments pertain to EMTALA, they do 

not directly address the proposed rule. 

Therefore, we are not responding to 

them at this time. 

As stated previously, in this final rule, 

rather than adopting the proposed 

regulation language, we are clarifying 

the EMTALA regulations at § 489.24(f) 

with respect to hospital inpatients by 

stating that once an individual is 

admitted in good faith by the admitting 

hospital, the admitting hospital has 

satisfied its EMTALA obligation with 

respect to that individual even if the 

individual remains unstabilized and a 

hospital with specialized capabilities 

does not have an EMTALA obligation to 

accept an appropriate transfer of that 

individual. We encourage the public to 

make CMS aware if this interpretation of 

section 1867(g) of the Act should result 

in harmful refusals by hospitals with 

specialized capabilities to accept the 

transfer of inpatients whose emergency 

medical condition remains unstabilized, 

or any other unintended consequences. 

4. Changes to the EMTALA Physician 

On-Call Requirements 

a. Relocation of Regulatory Provisions 

During its term, the EMTALA TAG 

dedicated a significant portion of its 

discussion to a hospital’s physician oncall obligations under EMTALA and 

made several recommendations to the 

Secretary regarding physician on-call 

requirements that are included in its 

final report (available at the Web site: 

http://www.cms.hhs.gov/FACA/ 

07_emtalatag.asp). As one 

recommendation, the TAG 

recommended that CMS move the 

regulation discussing the obligation to 

maintain an on-call list from the 

EMTALA regulations at § 489.24(j)(1) to 

the regulations implementing provider 

agreements at § 489.20(r)(2). As we 

stated in the proposed rule, we agree 

with the TAG’s recommendation. The 

requirement to maintain an on-call list 

is found at section 1866(a)(1)(I)(iii) of 

the Act, the section of the Act that refers 

to provider agreements. Section 1867 of 

the Act, which outlines the EMTALA 

requirements, makes no mention of the 

requirement to maintain an on-call list. 

To implement the EMTALA TAG’s 

recommendation, in the FY 2009 IPPS 

proposed rule, we proposed to delete 

the provision relating to maintaining a 

list of on-call physicians from 

§ 489.24(j)(1). We noted that a provision 

for an on-call physician list is already 

included in the regulations as a hospital 

provider agreement requirement at 

§ 489.20(r)(2). We proposed to 

incorporate the language of 

§ 489.24(j)(1) as replacement language 

for the existing § 489.20(r)(2) and amend 

the regulatory language to make it more 

consistent with the statutory language 

found at section 1866(a)(1)(I)(iii) of the 

Act. We proposed that revised 

§ 489.20(r)(2) would read: ‘‘An on-call 

list of physicians on its medical staff 

available to provide treatment necessary 

after the initial examination to stabilize 

individuals with emergency medical 

conditions who are receiving services 

required under § 489.24 in accordance 

with the resources available to the 

hospital.’’

The EMTALA TAG made additional 

recommendations regarding how a 

hospital would satisfy its on-call list 

obligations, including calling for an 

annual plan by the hospital and medical 

staff for on-call coverage that would 


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include an assessment of factors such as 

the hospital’s capabilities and services, 

community need for emergency 

department services as indicated by 

emergency department visits, emergent 

transfers, physician resources, and past 

performance of previous on-call plans. 

The TAG also recommended that a 

hospital have a backup plan for viable 

patient care options when an on-call 

physician is not available, including 

such factors as telemedicine, other staff 

physicians, transfer agreements, and 

regional or community call 

arrangements. While community call 

arrangements are discussed below, we 

intend to address the remainder of the 

TAG recommendations at a later date. 

Comment: Several commenters 

supported our proposal to move and 

amend the regulations text relating to 

maintaining a list of on-call physicians. 

However, the commenters requested 

that CMS explain why the language ‘‘in 

a manner that best meets the needs of 

the hospital’s patients’’ was deleted. 

The commenters stated that this 

explanation is important so 

that ‘‘* * * the change is not 

misconstrued as undermining the ability 

of hospitals to set expectations for 

physicians agreeing to serve on-call to 

the hospital emergency department.’’

Two commenters suggested that the 

entire language of § 489.24(j) be moved 

to § 489.20(r) of the regulations. One 

commenter stated that moving the entire 

language of § 489.24(j) would conform 

the regulations to the statute and that 

consolidating all of the on-call 

requirements under a single regulation, 

would help hospitals more easily 

identify and comply with all applicable 

EMTALA on-call requirements. 

Response: We proposed moving the 

regulatory text because we believe the 

change would make the regulations 

consistent with the statutory language. 

Furthermore, we deleted the ‘‘best meets 

the needs’’ language because we believe 

that the phrase has caused confusion 

among the provider community as to its 

meaning. We believe the language ‘‘in 

accordance with the resources available 

to the hospital’’ provides clarification 

that the hospital should provide on-call 

services based on the resources it has 

available, including the availability of 

specialists. We did not intend to suggest 

that removing the ‘‘best meets the 

needs’’ language would limit, in any 

way, a hospital’s ability to set 

expectations that physicians be on call. 

It is crucial that hospitals are aware of 

their responsibility to ensure that they 

are providing sufficient on-call services 

to meet the needs of their community in 

accordance with the resources they have 

available. A hospital should strive to 

provide adequate specialty on-call 

coverage consistent with the services 

provided at the hospital and the 

resources the hospital has available. We 

are aware that providing specialty oncall coverage can be challenging for a 

hospital because of the limited 

availability of specialty physicians who 

are willing or able to take call. 

Physicians should not perceive the 

change in regulations text as 

confirmation that they should limit their 

on-call availability. In addition, we 

believe the community call provision 

discussed below will help hospitals 

diversify their on-call coverage and ease 

the burden on those physicians who are 

providing continuous on-call coverage. 

Finally, we note that the TAG made 

additional recommendations related to 

on-call coverage that remain under 

consideration by CMS. We may, in the 

future, in response to these 

recommendations, engage in additional 

rulemaking or revise our interpretative 

guidelines to the EMTALA and related 

regulations in 42 CFR part 489. 

In response to the commenters who 

suggested moving all of the language 

currently at § 489.24(j) to § 489.20(r), the 

proposed regulations regarding 

community call and the existing 

regulations that permit on-call 

physicians to serve simultaneous call 

and schedule elective surgery while oncall provide hospitals and physicians 

flexibility in meeting the requirement 

that when an emergency room physician 

requests the appearance of an on-call 

physician, that on-call physician is 

required to appear under EMTALA. We 

believe that the provisions included 

under § 489.24(j) should continue to be 

included under the EMTALA 

regulations and should not be moved to 

the provider agreement regulations at 

§ 489.20(r). 

We are adding the phrase ‘‘who are on 

the hospital’s medical staff, or who have 

privileges at the hospital, or who are on 

staff or have privileges at another 

hospital participating in a formal 

community call plan in accordance with 

§ 489.24(j)(2)(iii)’’ to the regulation text 

to make the regulation text consistent 

with our policy on community call 

plans. The finalized regulation text at 

§ 489.20(r)(2) reads: ‘‘An on-call list of 

physicians who are on the hospital’s 

medical staff, or who have privileges at 

the hospital, or who are on staff or have 

privileges at another hospital 

participating in a formal community call 

plan in accordance with 

§ 489.24(j)(2)(iii) available to provide 

treatment necessary after the initial 

examination to stabilize individuals 

with emergency medical conditions 

who are receiving services required 

under § 489.24 in accordance with the 

resources available to the hospital.’’

b. Shared/Community Call 

As noted in the previous section, 

section 1866(a)(1)(I)(iii) of the Act 

states, as a requirement for participation 

in the Medicare program, that a hospital 

must keep a list of physicians who are 

on call for duty after the initial 

examination to provide treatment 

necessary to stabilize an individual with 

an emergency medical condition. If a 

physician on the list is called by a 

hospital to provide stabilizing treatment 

and either fails or refuses to appear 

within a reasonable period of time, the 

hospital and that physician may be in 

violation of EMTALA as provided for 

under section 1867(d)(1)(C) of the Act. 

Thus, hospitals are required to maintain 

a list of on-call physicians, and 

physicians or hospitals, or both, may be 

held responsible under the EMTALA 

statute if a physician who is on call fails 

or refuses to appear within a reasonable 

period of time. 

In the May 9, 2002 proposed rule (67 

FR 31471), we stated that we were 

aware of hospitals’ increasing concerns 

regarding their physician on-call 

requirements. Specifically, we noted 

that we were aware of reports of 

physicians, particularly specialty 

physicians, severing their relationships 

with hospitals because of on-call 

obligations, especially when those 

physicians belong to more than one 

hospital medical staff. We further noted 

that physician attrition from these 

medical staffs could result in hospitals 

having no specialty physician service 

coverage for their patients. In the 

September 9, 2003 final rule (68 FR 

53264), we clarified the regulations at 

§ 489.24(j) to permit on-call physicians 

to schedule elective surgery during the 

time that they are on call and to permit 

on-call physicians to have simultaneous 

on-call duties. We also specified that 

physicians, including specialists and 

subspecialists, are not required to be on 

call at all times, and that the hospital 

must have policies and procedures to be 

followed when a particular specialty is 

not available or the on-call physician 

cannot respond because of situations 

beyond his or her control. We expected 

these clarifications to help improve 

access to physician services for all 

hospital patients by permitting hospitals 

flexibility to determine how best to 

maximize their available physician 

resources. Furthermore, we expected 

that these clarifications would permit 

hospitals to continue to attract 

physicians to serve on their medical 

staffs, thereby continuing to provide 

services to all patients, including those 


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individuals who are covered by 

EMTALA. 

As part of its recommendations 

concerning physician on-call 

requirements, the EMTALA TAG 

recommended that hospitals be 

permitted to participate in ‘‘community 

call.’’ Specifically, the language of the 

recommendation states: ‘‘The TAG 

recommends that CMS clarify its 

position regarding shared or community 

call: That such community call 

arrangements are acceptable if the 

hospitals involved have formal 

agreements recognized in their policies 

and procedures, as well as backup 

plans. It should also be clarified that a 

community call arrangement does not 

remove a hospital’s obligation to 

perform an MSE [medical screening 

examination].’’ The TAG also 

recommended in a subsequent 

recommendation that ‘‘A hospital may 

satisfy its on-call coverage obligation by 

participation in an approved 

community/regional call coverage 

program (CMS to determine appropriate 

approval process).’’

We believe that community call (as 

described below) would afford 

additional flexibility to hospitals 

providing on-call services and improve 

access to specialty physician services 

for individuals in an emergency 

department. Therefore, in the FY 2009 

IPPS proposed rule, we proposed to 

amend our regulations at § 489.24(j) to 

provide that hospitals may comply with 

the on-call list requirement specified at 

§ 489.20(r)(2) (under our proposed 

revision), by participating in a formal 

community call plan so long as the plan 

meets the elements outlined below. We 

further proposed to revise the 

regulations to state that, 

notwithstanding participation in a 

community call plan, hospitals are still 

required to perform medical screening 

examinations on individuals who 

present seeking treatment and to 

provide for transfer when appropriate. 

We proposed ‘‘community call’’ to be 

a formal on-call plan that permits a 

specific hospital in a region to be 

designated as the on-call facility for a 

specific time period, or for a specific 

service, or both. For example, if there 

are two hospitals that choose to 

participate in community call, Hospital 

A could be designated as the on-call 

facility for the first 15 days of each 

month and Hospital B could be 

designated as the on-call facility for the 

remaining days of each month. 

Alternatively, Hospital A could be 

designated as on-call for cases requiring 

specialized interventional cardiac care, 

while Hospital B could be designated as 

on-call for neurosurgical cases. Based on 

the proposal, we anticipated that 

hospitals and their communities would 

have the flexibility to develop a plan 

that reflects their local resources and 

needs. Such a community on-call plan 

would allow various physicians in a 

certain specialty in the aggregate to be 

on continuous call (24 hours a day, 7 

days a week), without putting a 

continuous call obligation on any one 

physician. We note that, generally, if an 

individual arrives at a hospital other 

than the designated on-call facility, is 

determined to have an unstabilized 

emergency medical condition, and 

requires the services of an on-call 

specialist, the individual would be 

transferred to the designated on-call 

facility in accordance with the 

community call plan. 

As noted above, we proposed that a 

community call plan must be a formal 

plan among the participating hospitals. 

While we do not believe it is necessary 

for the formal community call plan to be 

subject to preapproval by CMS, if an 

EMTALA complaint investigation is 

initiated, the plan will be subject to 

review by CMS. We proposed that, at a 

minimum, hospitals must include the 

following elements when devising a 

formal community call plan: 

• The community call plan would 

include a clear delineation of on-call 

coverage responsibilities, that is, when 

each hospital participating in the plan is 

responsible for on-call coverage. 

• The community call plan would 

define the specific geographic area to 

which the plan applies. 

• The community call plan would be 

signed by an appropriate representative 

of each hospital participating in the 

plan. 

• The community call plan would 

ensure that any local and regional EMS 

system protocol formally includes 

information on community on-call 

arrangements. 

• Hospitals participating in the 

community call plan would engage in 

an analysis of the specialty on-call 

needs of the community for which the 

plan is effective. 

• The community call plan would 

include a statement specifying that even 

if an individual arrives at the hospital 

that is not designated as the on-call 

hospital, that hospital still has an 

EMTALA obligation to provide a 

medical screening examination and 

stabilizing treatment within its 

capability, and hospitals participating in 

community call must abide by the 

EMTALA regulations governing 

appropriate transfers. 

• There would be an annual 

reassessment of the community call 

plan by the participating hospitals. 

We proposed that revised § 489.24(j) 

would read ‘‘Availability of on-call 

physicians. In accordance with the oncall list requirements specified in 

§ 489.20(r)(2), a hospital must have 

written policies and procedures in 

place—(1) To respond to situations in 

which a particular specialty is not 

available or the on-call physician cannot 

respond because of circumstances 

beyond the physician’s control; and (2) 

To provide that emergency services are 

available to meet the needs of 

individuals with emergency medical 

conditions if a hospital elects to—(i) 

Permit on-call physicians to schedule 

elective surgery during the time that 

they are on call; (ii) Permit on-call 

physicians to have simultaneous on-call 

duties; and (iii) Participate in a formal 

community call plan. Notwithstanding 

participation in a community call plan, 

hospitals are still required to perform 

medical screening examinations on 

individuals who present seeking 

treatment and to conduct appropriate 

transfers. The formal community call 

plan must include the following 

elements: [proposed elements noted 

above in the bullets are included in 

regulations text].’’

We welcomed public comments on 

the proposed elements of the formal 

community call plan noted above. We 

also solicited public comments on 

whether individuals believe it is 

important that, in situations where there 

is a governing State or local agency that 

would have authority over the 

development of a formal community 

call plan, the plan be approved by that 

agency. In summary, we proposed that, 

as part of the obligation to have an oncall list, hospitals may choose to 

participate in community call, provided 

that the formal community call plan 

includes, at a minimum, the elements 

noted in bullets above. In addition, we 

proposed that each hospital 

participating in the community call plan 

must have written policies and 

procedures in place to respond to 

situations in which the on-call 

physician is unable to respond due to 

situations beyond his or her control. We 

further proposed that a hospital would 

still be responsible for performing 

medical screening examinations on 

individuals who present to the hospital 

seeking treatment and conducting 

appropriate transfers, regardless of 

which hospital has on-call 

responsibilities on a particular day. 

Comment: The majority of 

commenters supported our proposal to 

permit hospitals to use participation in 

a community call plan as a means of 

meeting their on-call obligation. The 

commenters stated that such an 


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approach would allow communities to 

provide for access to specialty care in a 

more reasoned, expedited and efficient 

manner as well as relieve specialists 

from on-call 24 hours a day, 7 days a 

week, eliminate the need for duplicative 

coverage of nearby hospitals, increase 

physician retention of specialists, and 

regionalize scarce resources. Another 

commenter stated that community call, 

along with telemedicine, is one of the 

few ways limited resources can be used 

efficiently. The commenter noted that 

participation in community call is a 

necessary response to the workforce 

crisis in the emergency department. 

In addition, some commenters stated 

that the community call proposal would 

be particularly important to rural areas 

where physicians are in short supply. 

One commenter specifically addressed 

concerns about on-call coverage for the 

field of neurosurgery. The commenter 

stated that there are approximately 

3,100 board certified neurosurgeons 

actively practicing in the country and 

about 5,000 hospitals with emergency 

departments. The commenter stated it 

is, therefore, impossible to have 

neurosurgical on-call coverage for every 

emergency department 24 hours a day, 

7 days a week, 365 days a year. The 

commenter noted that, in an effort to 

provide as much on-call coverage as 

possible, more than half of the country’s 

neurosurgeons take simultaneous call at 

more than 1 hospital, 28 percent of 

neurosurgeons cover 2 hospitals, 13 

percent cover 3 hospitals, and 10 

percent cover 4 or more hospitals. The 

commenter stated that the Institute of 

Medicine’s (IOM’s) series of reports on 

the future of emergency care addressed 

the shortage of on-call specialists. The 

commenter noted that an IOM 

committee studying the issue of on-call 

specialists identified regionalization of 

specialty services as an approach that 

warrants special consideration. The 

commenter included in its comment 

some language from the IOM committee 

and stated that while not exactly the 

same as regionalization, the idea of 

community call addresses a number of 

the same challenges that hospitals and 

on-call specialists face in their attempt 

to provide on-call coverage. The 

commenter stated that the IOM 

committee also noted that current 

EMTALA rules may be hampering the 

adoption of regional or community call; 

the commenter included language from 

the IOM committee which stated 

‘‘uncertainty surrounding the 

interpretation and enforcement of 

EMTALA remains a damper to the 

development of coordinated, integrated 

emergency care systems.’’ The 

commenter noted that the IOM 

recommended ‘‘that the Department of 

Health and Human Services adopt 

regulatory changes to the Emergency 

Medical Treatment and Active Labor 

Act (EMTALA) * * * so that the 

original goals of the law are preserved 

but integrated systems may further 

develop.’’ The commenter stated that 

[they] are hopeful that because CMS has 

embraced the concept of community 

call and in essence removed the 

EMTALA barrier to organize such plans, 

patient access to timely emergency 

neurosurgical care will improve. 

The commenters cautioned CMS 

against being too prescriptive in the 

requirements imposed on hospitals that 

choose to participate in a community 

call arrangement. In particular, the 

commenters recommended that CMS 

delete the requirement in the proposed 

§ 489.24(j)(2)(iii)(E) requiring ‘‘evidence 

of engagement of the hospitals 

participating in the community call plan 

in an analysis of the specialty on-call 

needs of the community for which the 

plan is effective.’’ One commenter 

encouraged CMS to work with other 

Federal agencies to remove legal and 

financial barriers to facilitate the 

proposed rule. The commenter noted 

that recent efforts to develop a 

community call plan in one county in 

Florida have been promising, although 

complex. The commenter urged CMS to 

provide for as much flexibility as 

possible to ‘‘* * * support models for 

other communities to emulate.’’

Several commenters stated that CMS 

should not require approval of 

community call plans by public 

agencies. Another commenter stated 

that while the development of a 

community call plan is a worthwhile 

goal, developing that plan may be 

challenging, especially in communities 

where there is competition between 

hospitals and hospital systems. The 

commenter supported the proposal that 

the community call remain voluntary. 

Another commenter believed that the 

use of community call plans will 

provide relief to hospitals that are 

struggling to meet their EMTALA 

obligations. The commenter suggested 

CMS consider requiring medical staff to 

take call as a condition of holding 

privileges at a hospital. The commenter 

stated that legally requiring hospitals to 

maintain a call schedule, but placing no 

legal obligation on medical staff to 

participate in on-call, has led to staff 

members refusing to participate, 

participating only if paid, or changing 

their status from ‘‘active’’ to ‘‘courtesy’’

or ‘‘consulting’’ (categories which the 

commenter noted, traditionally, do not 

require a physician to take call). 

One commenter supported the 

proposal to formalize in regulation 

previous subregulatory guidance related 

to unavailability of certain specialists, 

scheduling elective surgery while taking 

call, and simultaneous on-call duties. In 

addition, the commenter ‘‘* * * 

enthusiastically supports any initiative 

that fosters communication and 

cooperation among the hospitals in a 

community.’’ The commenter stated that 

while the proposed regulations on 

community call fall under the EMTALA 

regulations, they are in line with The 

Joint Commission standards for 

emergency management that involve 

community partners in the development 

of emergency management plans as well 

as communication with community 

emergency response agencies and 

directives for timely communication 

with other hospitals during an 

emergency. 

One commenter stated the preamble 

indicated that a community call plan, 

which would qualify under the 

proposed rule, should have in the 

aggregate physicians on continuous call 

(24 hours a day, 7 days a week) and that 

this requirement is too restrictive and 

should be made more flexible. The 

commenter stated that this requirement 

does not appear to be consistent with 

the current regulatory standard that 

allows hospitals to maintain an on-call 

list in accordance with the hospital’s 

resources. 

Response: We appreciate the 

commenters’ support of the proposal to 

allow hospitals to participate in 

community call arrangements in order 

to meet their on-call obligations. We 

believe that providing hospitals with 

flexibility in maintaining on-call will 

allow for, as well as encourage, more 

specialists to participate in on-call for 

hospitals. We agree with the 

commenters that this proposal is 

especially important to rural hospitals 

that may have previously had difficulty 

obtaining specialty coverage for their 

emergency departments. We also 

appreciate the commenter’s shared 

concerns regarding the field of 

neurosurgery and believe that 

community call plans will provide 

individuals with greater access to many 

specialties, such as neurosurgery. 

In response to the commenter who 

requested CMS provide models of 

community call plans for other 

communities to emulate, we stated in 

the proposed rule that we do not believe 

a community call plan needs 

preapproval from CMS. We continue to 

believe that a community call plan does 

not require authorization from CMS 

prior to taking effect. However, we 

encourage hospitals that believe they 


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have an effective community call plan 

to communicate such a plan to other 

hospitals that are interested in 

developing such a plan. We also 

emphasize that participation in a 

community call plan is strictly 

voluntary because the proposed 

regulations at § 489.24(j)(2)(iii) do not 

require hospitals to participate in a 

community call arrangement. Rather, 

our proposal was intended to provide 

hospitals with a tool to use to promote 

an increase in the availability of 

specialty on-call physicians. 

In response to the commenter who 

suggested CMS require medical staff to 

take call as a condition of holding 

privileges at a hospital, we believe that 

would be an overly broad and inflexible 

approach to developing specific on-call 

arrangements for each hospital. 

Hospitals can, if they choose, make 

taking a call a requirement for 

physicians granted privileges at their 

hospital. In response to the commenter 

who supported ‘‘the proposal’’ to 

formalize the subregulatory guidance 

permitting simultaneous call and 

scheduling of elective surgery while oncall, we are clarifying that CMS 

previously finalized these regulations in 

the September 9, 2003 final rule (68 FR 

53264). We did not propose any changes 

to those provisions in the FY 2009 IPPS 

proposed rule. We stated in the 

proposed rule that we believe a 

community call plan will allow various 

physicians in a certain specialty, in the 

aggregate, to be on continuous call (24 

hours a day, 7 days a week) without 

putting a continuous call obligation on 

any one physician. While we are not at 

this time mandating that hospitals 

maintain 24/7 on-call coverage, 

hospitals should carefully consider 

whether they are providing sufficient 

on-call services in line with their 

available resources. In the event of an 

investigation related to the compliance 

of a hospital with regard to an on-call 

list, whether accomplished through a 

community call plan or not, the 

determination, as at present, will be 

based on the specific circumstances of 

that hospital and, if applicable, the 

community call plan. We also note that 

the TAG made additional 

recommendations on the topic of on-call 

requirements which remain under 

consideration by CMS, and which may 

be the subject of future rulemaking or 

revisions of interpretative guidelines. 

With regard to the elements that we 

proposed that must be included in a 

formal community call plan, we agree 

with the commenters that it is not 

necessary for a community call plan to 

include the following proposed 

requirement in proposed 

§ 489.24(j)(2)(iii)(E): ‘‘Evidence of 

engagement of the hospitals 

participating in the community call plan 

in an analysis of the specialty on-call 

needs of the community for which the 

plan is effective.’’ We believe this 

requirement is covered under proposed 

paragraph (G) of § 489.24(j)(2)(iii), 

which requires: ‘‘An annual 

reassessment of the community call 

plan by the participating hospitals.’’

Therefore, we are finalizing the 

community call regulation as proposed, 

with one modification. We are deleting 

the requirement under paragraph (E) of 

the proposed § 489.24(j)(2)(iii). 

Comment: Several commenters were 

concerned with potential liabilities 

under the Sherman Anti-Trust Act if 

they were to engage in a multihospital 

community call plan. Two commenters 

stated ‘‘If a group of hospitals were to 

jointly formulate a community call plan, 

it is conceivable that the hospitals may, 

as a group, choose to contract with a 

physician group for coverage of certain 

emergency services. This could be 

regarded as collusion under certain 

interpretations of Sherman.’’ One 

commenter stated that hospitals are 

presently reluctant to establish 

community call arrangements due to 

‘‘* * * potential Federal or State 

antitrust liability related to unlawful 

market division.’’ The commenter 

recommended CMS support efforts to 

establish antitrust exemptions for 

community call arrangements. Another 

commenter expressed concern that, 

without an arrangement that is 

approved by the Antitrust Division of 

the Department of Justice, competitor 

hospitals could be investigated for 

anticompetitive activities related to the 

division of markets, resulting from 

either a timeframe or service-line 

division of responsibility. The 

commenter recommended that CMS 

obtain guidance from Justice on the 

additional checks and balances that 

might be needed to ensure hospitals can 

safely avail themselves of this added 

flexibility. 

Another commenter requested 

clarification of the application of the 

HIPAA to the proposed policy. The 

commenter asked whether, because 

protected health information of patients 

who may need the services of on-call 

physicians would not be in existence at 

the time of the community call 

agreement, the community call 

agreement would be classified under 

health care operations, an organized 

health care organization, or a business 

relationship. The commenters also 

requested clarification of the proposed 

policy if one or several hospitals that 

were part of a proposed community call 

plan decided not to participate in the 

plan. The commenters requested that 

CMS respond to the following questions 

regarding hospital participation: (1) 

Does nonparticipation of all providers 

invalidate the plans? (2) Is there a 

threshold for participation that must be 

met? (3) Does the presence of a 

community call plan in an area with 

nonparticipating providers partially or 

fully meet the nonparticipating 

hospital’s EMTALA obligation? 

Response: In response to commenters’

concerns pertaining to potential 

antitrust liabilities, we suggest that 

antitrust concerns be directed to the 

U.S. Department of Justice Antitrust 

Division for further review under the 

business review process. As mentioned 

previously, participation in a 

community call plan is strictly 

voluntary. Therefore, there is no 

threshold for participation in a 

community call plan, nor does 

nonparticipation of one or more 

hospitals invalidate the plan. In the 

event of an investigation related to the 

compliance of a hospital with the oncall requirements outlined in 

§ 489.20(r)(2), the determination, as at 

present, will be based on a review of the 

specific circumstances of that hospital, 

including, as applicable, the provisions 

of any community call plan in which it 

participates. 

In response to the commenter who 

expressed concerns about the 

applicability of the HIPAA Privacy Rule 

to the proposed community call 

provisions, the Office for Civil Rights 

(OCR) in the U.S. Department of Health 

and Human Services provides technical 

guidance and enforces the HIPAA 

Privacy Rule. OCR has explained that 

hospitals and other covered health care 

providers with a direct treatment 

relationship with individuals are not 

required to provide their notices to 

patients at the time they are providing 

emergency treatment. In these 

situations, the HIPAA Privacy Rule 

requires only that providers give 

patients a notice when it is practical to 

do so after the emergency situation has 

ended. In addition, where notice is 

delayed by an emergency treatment 

situation, the Privacy Rule does not 

require that providers make a good faith 

effort to obtain the patient’s written 

acknowledgment of receipt of the 

notice. Any questions concerning the 

application of the HIPAA Privacy Rule 

to patients with emergency medical 

conditions should be directed to OCR. 

Comment: Several commenters 

expressed specific concerns regarding 

CMS’s community call proposal. A few 

commenters were concerned that a 

community call plan could actually 


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reduce the amount of specialty services 

provided by a hospital, if hospitals were 

to contract with each other and transfer 

the burden of providing specialty oncall services to public safety net 

hospitals. One commenter urged CMS to 

closely monitor the implementation of 

community call plans as well as changes 

in patterns of on-call coverage. The 

commenter expressed concern that 

‘‘* * * groups of hospitals may misuse 

community call by improperly 

decreasing their community’s access to 

specialty on-call coverage.’’ The 

commenter provided an example in 

which two private hospitals that 

currently provide specialty on-call 

services would enter into a community 

call plan and decrease the amount of 

coverage so that the amount of coverage 

they provide together to the community 

is less than the coverage that was 

provided prior to the plan being in 

effect. The commenter stated that, in 

this case, the community call plan 

would become a tool whereby private 

and other nonprofit hospitals coordinate 

decreasing their on-call coverage at the 

expense of safety net hospitals. 

One commenter requested further 

research on the impact of the proposed 

rule and suggested pilot testing in 

representative communities to 

determine the impact. Another 

commenter stated that while it does 

appear that community call 

arrangements would encourage 

physicians to take call at specific 

hospitals, in most cases there are not 

enough tertiary care hospitals with 

specialized capabilities to manage all of 

the transfer requests. The commenter 

stated that from her experience, a 

community call plan does not stop 

abuse of EMTALA and stated ‘‘It should 

not surprise CMS, and it is an unspoken 

truth, that specialty physicians prefer 

insured patients.’’ The commenter noted 

a difference in the treatment of 

individuals who are uninsured versus 

those who are insured and stated that if 

an individual is uninsured a specialty 

physician may refuse to see that 

individual. The commenter asserted 

that, in such a case, the hospital would 

need to transfer the individual because 

no physician will see him or her and the 

hospital would not be paid for admitting 

the individual. The commenter stated 

that it is very difficult for a receiving 

hospital to charge the transferring 

hospital with an EMTALA violation 

because ‘‘* * * we must take them at 

their professional word that the hospital 

does not have a physician on call for the 

needs of the patient.’’ The commenter 

provided several examples that 

illustrate abuse of EMTALA 

requirements and recommended that, to 

avoid abuse of the community call plan, 

hospitals be ‘‘* * * required to report 

the results of the on-call annual plan 

and the patients that the on-call 

physician accepts on subsequent days, 

but was not on call or available for the 

day the patient came to the ER.’’ In 

addition, the commenter requested that 

CMS address that commenter’s 

suggestion that local emergency rooms 

should make every effort to arrange the 

transportation of an individual to a 

nearby facility before turning to tertiary 

and quaternary care centers. One 

commenter stated that hospitals’ annual 

on-call plans should be made available 

to the public and should include an 

assessment of whether the plan was 

adequate. The commenter also 

suggested the hospitals’ backup plans be 

made available. 

Another commenter stated that the 

proposed policies would have a 

negative impact on patients. The 

commenter stated that a community call 

arrangement, such as the one outlined 

in the proposed rule could ‘‘* * * erode 

an emergency department physician’s 

ability to consult a specialist and may 

require a patient transfer to the hospital 

that the on-call specialist is covering.’’

The commenter stated that it is unfair 

and unsafe to transport an individual 

only for the convenience of the on-call 

specialist. The commenter also noted 

that moving the individual to the on-call 

specialist could delay treatment and 

increase the staffing burden on an 

already-taxed emergency care system 

because it is likely that advanced life 

support as well as a registered nurse 

would be required to accompany the 

individual. Instead of the proposal, the 

commenter urged CMS to adopt the 

recommendation provided by the IOM 

(included in Hospital-Based Emergency 

Care at the Breaking Point 2006), which 

reads: ‘‘The Department of Health and 

Human Services and the National 

Highway Traffic Safety Administration, 

in partnership with professional 

organizations, convene a panel of 

individuals with multidisciplinary 

expertise to develop evidence-based 

categorization systems for emergency 

medical services, emergency 

departments, and trauma centers based 

on adult and pediatric services 

capabilities.’’

Response: We agree with the 

commenters that a community call plan 

should improve patient care by 

providing greater access to specialists 

rather than potentially risking an 

individual’s life by engaging in an 

unnecessary transfer. Furthermore, we 

agree that a hospital that makes an 

appropriate transfer in accordance with 

EMTALA requirements should attempt 

to avoid transporting individuals long 

distances when a shorter transport to a 

hospital with the appropriate 

specialized capabilities and capacity is 

possible. We also remind hospitals and 

medical staff that EMTALA requires a 

hospital to treat an individual regardless 

of his or her insurance status. Therefore, 

if there is evidence of disparate 

treatment based on an individual’s 

insurance coverage, the hospital or 

physician, or both, may be subject to 

penalties for an EMTALA violation. 

Moreover, a hospital that believes it has 

been the recipient of an inappropriate 

transfer of an individual with an 

unstable emergency medical condition 

who is protected under EMTALA is 

obligated to report this to CMS. In 

response to the commenters who 

suggested the effect of community call 

will be to allow certain hospitals to get 

together to reduce their on-call capacity 

and in effect dump individuals on other 

hospitals in their area, we remind 

hospitals that CMS will continue to 

investigate complaints about hospitals’

compliance with EMTALA and related 

requirements, including compliance 

with on-call requirements. 

In response to the commenter who 

suggested that hospitals be ‘‘* * * 

required to report the results of the oncall annual plan and the patients that 

the on-call physician accepts on 

subsequent days, but was not on call or 

available for the day the patient came to 

the ER,’’ we stated in the regulations 

proposed at § 489.24(j)(2)(iii)(G) that 

there must be an ‘‘Annual assessment of 

the community call plan by the 

participating hospitals.’’ However, we 

believe that a requirement for hospitals 

to report the results of their community 

call plans on an annual basis to CMS 

may be too burdensome. Therefore, we 

are not instituting a mandatory 

reporting requirement at this time. 

In response to the commenters who 

suggested further research and adoption 

of the IOM recommendation, we 

anticipate that we will continue to 

present proposals concerning various 

on-call issues in future rulemaking and 

will consider the commenters’

suggestions at that time. 

Comment: One commenter stated that 

the health care district of its county has 

been working for several years with the 

hospital and physician community to 

address the shortage of specialty 

physicians providing on-call coverage in 

the county’s hospital emergency 

departments. The commenter requested 

that CMS consider the following 

comments and questions: 

(1) Will the final regulation address 

whether the shared/community call 


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plan can contain a financial 

arrangement to address how 

participating physicians and/or 

hospitals can be compensated for 

serving as the designated on-call facility 

during an established period of time? 

(2) What parameters will be allowed 

to define the specific geographic area? 

For example, does it have to be set up 

to include an entire county, or could it 

be as small as a city or sub-county 

region? 

(3) Do all hospitals within the defined 

geographic area have to participate in 

the community call plan? 

(4) Will CMS place any safeguards 

into the regulation to prevent hospitals 

from other counties or areas outside the 

defined geographic area from taking 

advantage of the new community call 

plan by transporting patients to the 

designated on-call facility absent a 

transfer agreement? 

(5) Will any entity grant authority to 

community call plans? 

(6) Will the community call plan 

regulation provide any guidance on the 

financial/payer arrangements for 

patients outside the Medicare and 

Medicaid system and the implication of 

patients being transferred to a hospital 

that may not accept their insurance? 

(7) The development of community 

call plans should not impose a 

disproportionate and uncompensated 

obligation on tertiary hospitals that have 

a broader representation of medical 

specialties in limited supply on their 

medical staffs. 

Response: We appreciate the 

commenter’s questions and comments 

regarding the community call plan. In 

response to the question regarding 

compensation for serving as the 

designated on-call facility during an 

established period of time, the financial 

arrangements made between an on-call 

physician and a hospital are between 

that physician and that hospital. CMS is 

not in a position to participate in any 

sort of contractual relationship between 

a physician and a hospital. We do not 

believe any sort of financial agreement 

needs to be included in the community 

call plan. However, if hospitals choose 

to, they are welcome to include this 

information in their community call 

plans. 

In response to the commenters request 

for clarification on defining the 

geographic boundaries of a community 

call plan, we did not specify in the 

proposed rule any geographic 

parameters that a community call plan 

must adhere to; that is, we did not 

specify whether a community call plan 

must cover a city, region, or State, or 

other area because we intended to 

promote flexibility for hospitals in the 

development of community call plans. 

Therefore, we would like to clarify that 

there are no geographic rules that 

hospitals must follow as participants of 

a community call plan. Similarly, not all 

hospitals within a defined geographic 

area need to participate in the 

community call plan. For example, if 

four hospitals are located in a specific 

county and only three of those hospitals 

choose to participate in the community 

call plan, the plan will not be 

invalidated due to lack of participation 

of the fourth hospital in the community 

call plan. 

In response to the commenter’s 

question as to whether CMS will place 

any safeguards into the regulation to 

prevent hospitals not participating in 

the plan from transporting individuals 

to the on-call facility without a transfer 

agreement, we specified in the proposed 

regulation text at § 489.24(j)(2)(iii) that: 

‘‘Notwithstanding participation in a 

community call plan, hospitals are still 

required to perform medical screening 

examinations on individuals who 

present seeking treatment and to 

conduct appropriate transfers’’

(emphasis added). Therefore, if an 

individual presents to a hospital and 

requests treatment for a medical 

condition and it is determined the 

individual has an emergency medical 

condition, the hospital must provide 

stabilizing treatment within its 

capability and capacity, and may make 

an appropriate transfer, consistent with 

the EMTALA regulations governing 

transfer. This obligation remains, 

regardless of whether or not the hospital 

to which the individual presented is 

either participating in the community 

call plan or is designated as the on-call 

facility. If CMS determines through an 

investigation that a hospital, whether or 

not it is participating in a community 

call plan, engaged in an inappropriate 

transfer of an individual with an 

unstable emergency medical condition 

who was protected under EMTALA, that 

hospital would be in violation of 

EMTALA and subject to enforcement 

action. All Medicare-participating 

hospitals with dedicated emergency 

departments, including hospitals that 

are outside a particular geographic 

region or not participating in a formal 

community call plan, can still seek to 

transfer individuals to hospitals that are 

participating in a formal community call 

plan, via an appropriate transfer, 

notwithstanding the absence or 

presence of a transfer agreement and 

regardless of whether the transferring 

hospital is participating in a formal 

community call plan. Neither the 

current EMTALA regulations nor the 

proposed regulations require a hospital 

to have a transfer agreement in place 

prior to seeking to transfer an individual 

to another hospital that is capable of 

providing stabilizing care. 

In the proposed rule, we did not 

propose, but solicited comment, on 

whether community call plans should 

be approved by State or local agencies. 

We did not receive any comments 

supporting preapproval of a community 

call plan by a local or State agency, or 

both. Therefore, at this time, we are not 

requiring local, State, or Federal 

agencies to approve a community call 

plan. 

In response to the commenter’s 

request for guidance as to whether the 

regulations would give guidance on 

financial/payer arrangements to provide 

for individuals not covered by Medicare 

or Medicaid and the implication of 

individuals being transferred to a 

hospital that may not accept their 

insurance, we note that the intent of 

EMTALA is to ensure that an individual 

presenting to a hospital with a 

dedicated emergency department 

receives an appropriate medical 

screening examination to determine 

whether the individual has an 

emergency medical condition and, if 

necessary, receives stabilizing treatment 

or providing for an appropriate transfer 

to another facility, regardless of the 

individual’s method of payment or 

insurance status. Thus, we do not see 

the relevance of providing any guidance 

on financial/payer arrangements outside 

of the EMTALA context. Together with 

the OIG, we issued a Special Advisory 

Bulletin on the Patient Anti-Dumping 

Statute that addresses hospital 

obligations toward individuals under 

EMTALA, including individuals 

covered under managed care plans (64 

FR 61353). We continue to stand by that 

guidance. 

In summary, after consideration of the 

public comments we received, we are 

finalizing the community call provision 

at § 489.24(j)(2)(iii) as proposed, with 

one modification. We are deleting the 

requirement at proposed paragraph 

(j)(2)(iii)(E) ‘‘Evidence of engagement of 

the hospitals participating in the 

community call plan in an analysis of 

the specialty on-call needs of the 

community for which the plan is 

effective.’’

5. Technical Change to Regulations 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47413), we 

revised § 489.24(a)(2) (which refers to 

the nonapplicability of certain EMTALA 

provisions in an emergency area during 

an emergency period) to conform it to 

the changes made to section 1135 of the 


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24Medicare Payment Advisory Commission: 

Report to Congress: Promoting Greater Efficiency in 

Medicare. June 2007, Chapter 5, p. 103. 

Act by the Pandemic and All-Hazards 

Preparedness Act. When we made the 

change to the regulations, we 

inadvertently left out language 

consistent with the following statutory 

language found in section 1135: 

‘‘pursuant to an appropriate State 

emergency preparedness plan; or in the 

case of a public health emergency 

described in subsection (g)(1)(B) that 

involves a pandemic infectious disease, 

pursuant to a State pandemic 

preparedness plan or a plan referred to 

in clause (i), whichever is applicable in 

the State.’’ We also inadvertently left 

out the phrase in section 1135 ‘‘during 

an emergency period’’ when we state 

the nonapplicability of the sanctions in 

an emergency area. As we proposed, we 

are revising the language at 

§ 489.24(a)(2) to include the 

aforementioned language to conform the 

regulation text to the statutory language. 

Proposed revised § 489.24(a)(2) would 

read as follows: ‘‘Nonapplicability of 

provisions of this section. Sanctions 

under this section for an inappropriate 

transfer during a national emergency or 

for the direction or relocation of an 

individual to receive medical screening 

at an alternate location pursuant to an 

appropriate State emergency 

preparedness plan or, in the case of a 

public health emergency that involves a 

pandemic infectious disease, pursuant 

to a State pandemic preparedness plan 

do not apply to a hospital with a 

dedicated emergency department 

located in an emergency area during an 

emergency period, as specified in 

section 1135(g)(1) of the Act. A waiver 

of these sanctions is limited to a 72-hour 

period beginning upon the 

implementation of a hospital disaster 

protocol, except that, if a public health 

emergency involves a pandemic 

infectious disease (such as pandemic 

influenza), the waiver will continue in 

effect until the termination of the 

applicable declaration of a public health 

emergency, as provided for by section 

1135(e)(1)(B) of the Act.’’

Comment: Several commenters 

addressed our proposal to amend the 

regulations at § 489.24(r)(2) so that the 

regulations conform to the statute and to 

the changes made to section 1135 of the 

Act by the Pandemic and All-Hazards 

Preparedness Act. The commenters 

supported the change because it makes 

the regulations consistent with the 

requirements of the statute and allows 

hospitals to provide appropriate care in 

a timely manner during a disaster 

without fear of EMTALA sanctions. 

Response: We appreciate the 

commenters’ support of our proposed 

technical change. We are finalizing the 

technical change to § 489.24(a)(2) as 

proposed. 

J. Application of Incentives To Reduce 

Avoidable Readmissions to Hospitals 

1. Overview 

In the FY 2009 IPPS proposed rule (73 

FR 23673), we discussed the 

development and application of 

evidence-based best practices meant to 

reduce the incidence of avoidable 

hospital readmissions. We note that we 

are not adopting policy in this final rule. 

Rather, we are providing a summary of 

the public comments received on this 

topic. 

A significant portion of Medicare 

spending—$15 billion each year—is 

related to hospital readmissions. 

According to a 2005 MedPAC report,24

nearly 18 percent of beneficiaries who 

are discharged from the hospital are 

readmitted within 30 days, resulting in 

approximately 2 million readmissions 

each year. MedPAC’s analysis 

concluded that over 13 percent of 30- 

day hospital readmissions and an 

associated $12 billion in spending (4⁄5 of 

all Medicare spending for readmissions) 

are potentially avoidable through the 

application of evidence-based best 

practices. 

The FY 2009 IPPS proposed rule (73 

FR 23673) did not propose any specific 

policy regarding readmissions but 

instead highlighted issues related to 

measurement, accountability, and valuebased purchasing (VBP) incentives. 

Specifically, we presented three VBP 

options to reduce costs and improve 

quality related to readmissions: (1) 

Direct adjustments to hospital 

payments; (2) adjustments to hospital 

payments through a performance-based 

payment methodology; and (3) public 

reporting of readmission rates. 

Of the approximately 1,150 comments 

received on the FY 2009 IPPS proposed 

rule, 65 (5.6 percent) addressed 

readmissions to hospitals. Hospital 

associations and hospitals submitted 

over 70 percent of the relevant public 

comments, with medical specialty 

societies comprising the next largest 

group of commenters. A summary of 

these public comments are included 

under the subject topics. 

2. Measurement 

In the FY 2009 IPPS proposed rule, 

we noted certain prerequisites for 

initiatives intended to reduce hospital 

readmission rates, including the 

recognition that routine, valid, and 

reliable measurements are important to 

encourage trust and to engage 

stakeholders. Moreover, measurement 

data should be meaningful and 

actionable for hospitals. 

Risk adjustment is one method for 

achieving more accurate measurement 

of preventable readmissions. The 

proposed rule stated that a zero percent 

readmission rate may not be an 

appropriate goal, as extremely low 

readmission rates could indicate 

restricted access to necessary medical 

services rather than quality health care 

delivery. However, risk adjustment 

could help define expected readmission 

rates for a given patient or patient 

population. 

Informative readmission measurement 

also requires an appropriate timeframe 

between discharge and readmission on 

which to base measures of avoidable 

readmissions. For example, a 30-day 

window is used for readmission 

measures in the RHQDAPU program 

and the 9th Scope of Work for Medicare 

Quality Improvement Organizations 

(QIOs). 

One commenter suggested that CMS 

use QIO data to conduct research and 

develop a knowledge base to help 

answer readmission measure 

specification questions of this type. 

However, the commenter did not 

specifically address the appropriateness 

of the 30-day window. 

In the proposed rule, we also solicited 

comments concerning the appropriate 

scope of readmissions measures, 

querying whether to focus on all 

readmissions or to spotlight higher cost, 

more easily preventable, or most 

frequently occurring readmissions. 

Most commenters urged CMS to 

exclude certain categories of 

readmissions when measuring and 

calculating rates. One commenter stated 

that CMS should not penalize hospitals 

for readmissions that occur if a patient 

returns from a postacute care setting or 

if a readmission is not clearly related to 

the initial admission. Other commenters 

described cases in which readmissions 

are not only foreseeable but planned 

occurrences. For example, if a patient 

has an acute episode just prior to 

elective surgery, the attending physician 

may discharge a patient for a few days 

to ensure that the patient is hydrated 

and infection free before surgery. 

3. Shared Accountability 

In the FY 2009 IPPS proposed rule (73 

FR 23673), we discussed that hospitals 

are accountable for the quality of care 

delivered during hospitalization, which 

may also affect health care quality postdischarges. However, hospitals are not 

the only providers that affect the 

occurrence of readmissions. Other 


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health care entities (such as SNFs, IRFs, 

HHAs, ESRD facilities, and health care 

providers), as well as Medicare 

beneficiaries and their caregivers share 

responsibility for quality health care 

delivery and play important roles in 

preventing readmissions. 

To improve accountability, many 

commenters recommended expanding 

financial accountability to additional 

stakeholders. For example, one 

commenter advocated increasing 

accountability by holding physicians 

financially responsible for high rates of 

risk-adjusted readmissions. In addition, 

many commenters advocated for the 

development of accurate methods to 

attribute accountability. 

Shared accountability makes accurate 

measurement difficult without 

alignment of quality measures across 

care settings. Commenters addressed 

how health care alignment and 

infrastructure impact readmission rates. 

Citing a MedPAC report, one commenter 

noted that hospitals rarely follow up 

with patients after hospital discharge 

and that other health care providers 

have not adequately invested in their 

responsibility to provide effective 

transitional care. 

4. VBP Incentives 

CMS is increasingly promoting 

quality and efficiency of care through 

the application of VBP tools. The VBP 

methodology is meant to promote 

adherence to evidence-based best 

practices by rewarding highachievement. In the context of 

readmissions, we presented in the FY 

2009 IPPS proposed rule three potential 

uses of incentives to encourage 

prevention of avoidable hospital 

readmissions. 

All of the commenters supported 

efforts to reduce avoidable 

readmissions. However, their comments 

were mixed about the appropriateness 

of payment-focused interventions. 

Commenters representing hospital 

associations asked CMS to answer the 

following three questions before 

advancing any particular readmission 

policy: 

• To what extent is it possible to 

identify avoidable readmissions? 

• Are there effective strategies for 

reducing or eliminating these avoidable 

readmissions? 

• What is the likelihood that each 

approach will promote and encourage 

the use of those effective strategies 

while avoiding undesirable 

consequences? 

One commenter urged CMS to focus 

on auditing 30-day readmission outlier 

facilities rather than pursuing payment 

incentive policies to determine if 

clinical interventions and targeted 

readmission denials improve 

readmission rates. 

Other commenters also emphasized 

that reducing readmission rates requires 

more than simple payment incentive 

strategies because of structural 

limitations inherent to the U.S. health 

care system, including the lack of 

coordinated chronic care services and 

the use of hospitals as primary care 

providers. One commenter questioned 

whether readmission data would be 

meaningful or actionable to either CMS 

or hospitals. This commenter asserted 

that readmission rates should not be 

tied to hospital reimbursement because 

such rates more accurately measure 

physician resource use. 

5. Direct Payment Adjustment 

As stated in the FY 2009 IPPS 

proposed rule (73 FR 23674), direct 

payment adjustment for readmissions 

could range from total denial to 

incremental adjustment. The magnitude 

of the payment adjustment could be 

based on patient-specific risk factors or 

on the shared accountability among the 

involved entities. A variation of this 

approach could be adjustment of all 

hospital payments for readmissions, 

nationwide or by some regional 

designation, based on aggregate 

information about avoidable 

readmissions for the relevant Medicare 

population (national or regional) under 

typical circumstances. Under this 

approach, hospitals would receive less 

Medicare payment for readmissions for 

conditions with lower than expected 

rates of readmission and less shared 

responsibility. 

Many commenters favored various 

forms of direct payment adjustment to 

reduce avoidable hospital readmissions. 

Given the number of care settings and 

patient-specific factors that affect 

hospital readmission rates, many 

commenters favored direct payment 

adjustments based on degrees of 

accountability and foreseeable risk. 

Numerous commenters suggested that 

direct payment adjustments should 

account for patient-specific risk factors, 

including age, disease severity, and the 

presence of comorbidities. Commenters 

also noted that a lack of prescription 

drug coverage can reduce patient 

compliance, raising the risk of 

readmission. 

Not all of the public comments that 

addressed direct payment adjustments 

were favorable. None of the commenters 

supported using an all-or-nothing 

approach like the current HAC payment 

provision. The commenters stated that 

this strategy unfairly punishes hospitals 

for readmissions that will occur despite 

strict adherence to best practices. 

Commenters noted that direct payment 

adjustments cannot adequately correct 

for all contributing factors to 

readmission rates. One commenter also 

argued against direct payment 

adjustments in cases where hospitals 

already receive reduced payments for 

transfer patients. 

6. Performance-Based Payment 

Adjustment 

Performance-based adjustments could 

be based on a payment methodology 

such as the Medicare Hospital VBP Plan 

discussed in section IV.C. of the 

proposed rule and this final rule. The 

payment adjustment could reflect a 

comparison between an individual 

hospital’s actual and expected 

readmission rates. 

Many commenters supported some 

form of performance-based payment 

adjustment for readmissions. A number 

of commenters stated that readmission 

quality and cost reduction measures 

should be part of the broader picture of 

value-based purchasing. In contrast, one 

commenter suggested that CMS 

continue to work through QIOs on 

education-based reduction strategies 

before adopting performance-based 

payment adjustments for readmissions. 

7. Public Reporting of Readmission 

Rates 

The third VBP incentive that we 

presented for public comment in the FY 

2009 IPPS proposed rule (73 FR 23675) 

was public reporting of hospitalspecific, risk-adjusted readmission rates. 

The Administration’s Value-Driven 

Health Care Initiative, which stems from 

the President’s Executive Order 

Promoting Quality and Efficient Health 

Care in Federal Government Health Care 

Programs, instructed federal agencies to 

increase transparency of healthcare 

quality and costs. Using the Hospital 

Compare Web site explained in section 

IV.B. of the proposed rule and this final 

rule, patients can compare the quality of 

care provided by hospitals. The 

information supports improve consumer 

decision making through better access to 

healthcare information. 

Many commenters supported public 

reporting of readmission data. All of the 

commenters who were in favor of public 

reporting supported using only the 

Hospital Compare Web site for postings. 

However, many commenters only 

supported public reporting of measures 

endorsed by the NQF and adopted by 

the HQA. Some commenters suggested 

that readmission data remain 

confidential for a period to allow health 

care providers to adjust to collecting 

and reporting readmission measures, 


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which would give hospitals time to 

analyze their data and develop programs 

to improve readmission rates. 

8. Potential Unintended Consequences 

of VBP Incentives 

Some commenters identified potential 

unintended consequences for 

readmission-related VBP incentives. A 

few commenters stated that payments 

tied to readmission rates might lead 

hospitals to direct previous patients to 

other institutions for follow-up care, 

frustrating continuity of care. 

Other commenters addressed the 

potential for increased health care costs. 

One commenter expressed concern that 

linking readmission rates to payment 

would create an incentive for hospitals 

to lengthen costly inpatient stays to 

avoid related readmissions later and 

expose patients to increased hospitalrelated risks without improving quality 

of care. However, another commenter 

noted that Medicare IPPS gives 

hospitals a balancing incentive to not 

prolong length of stay. 

We appreciate all of the public 

comments that we received in response 

to our solicitation. We will take them 

into consideration in any future 

rulemaking efforts that we determine 

may be necessary. 

K. Rural Community Hospital 

Demonstration Program 

In accordance with the requirements 

of section 410A(a) of Public Law 108–

173, the Secretary has established a 5- 

year demonstration program (beginning 

with selected hospitals’ first cost 

reporting period beginning on or after 

October 1, 2004) to test the feasibility 

and advisability of establishing ‘‘rural 

community hospitals’’ for Medicare 

payment purposes for covered inpatient 

hospital services furnished to Medicare 

beneficiaries. A rural community 

hospital, as defined in section 

410A(f)(1), is a hospital that—

• Is located in a rural area (as defined 

in section 1886(d)(2)(D) of the Act) or is 

treated as being located in a rural area 

under section 1886(d)(8)(E) of the Act; 

• Has fewer than 51 beds (excluding 

beds in a distinct part psychiatric or 

rehabilitation unit) as reported in its 

most recent cost report; 

• Provides 24-hour emergency care 

services; and 

• Is not designated or eligible for 

designation as a CAH. 

Section 410A(a)(4) of Public Law 108–

173 states that no more than 15 such 

hospitals may participate in the 

demonstration program. 

As we indicated in the FY 2005 IPPS 

final rule (69 FR 49078), in accordance 

with sections 410A(a)(2) and (a)(4) of 

Public Law 108–173 and using 2002 

data from the U.S. Census Bureau, we 

identified 10 States with the lowest 

population density from which to select 

hospitals: Alaska, Idaho, Montana, 

Nebraska, Nevada, New Mexico, North 

Dakota, South Dakota, Utah, and 

Wyoming (Source: U.S. Census Bureau 

Statistical Abstract of the United States: 

2003). Nine rural community hospitals 

located within these States are currently 

participating in the demonstration 

program. (Of the 13 hospitals that 

participated in the first 2 years of the 

demonstration program, 4 hospitals 

located in Nebraska have become CAHs 

and have withdrawn from the program.) 

In a notice published in the Federal 

Register on February 6, 2008 (73 FR 

6971 through 6973), we announced a 

solicitation for up to six additional 

hospitals to participate in the 

demonstration program. Four additional 

hospitals were selected to participate 

under this solicitation. We are planning 

for each of these hospitals to begin 

under the demonstration payment 

methodology with its first cost report 

year starting on or after July 1, 2008. 

The end date of participation for these 

hospitals is September 30, 2010. The 

February 6, 2008 notice specifies the 

eligibility requirements for the 

demonstration program. 

Under the demonstration program, 

participating hospitals are paid the 

reasonable costs of providing covered 

inpatient hospital services (other than 

services furnished by a psychiatric or 

rehabilitation unit of a hospital that is 

a distinct part), applicable for 

discharges occurring in the first cost 

reporting period beginning on or after 

the October 1, 2004 implementation 

date of the demonstration program (or 

the July 1, 2008 date for the newly 

selected hospitals). Payments to the 

participating hospitals will be the lesser 

amount of the reasonable cost or a target 

amount in subsequent cost reporting 

periods. The target amount in the 

second cost reporting period is defined 

as the reasonable costs of providing 

covered inpatient hospital services in 

the first cost reporting period, increased 

by the inpatient prospective payment 

update factor (as defined in section 

1886(b)(3)(B) of the Act) for that 

particular cost reporting period. The 

target amount in subsequent cost 

reporting periods is defined as the 

preceding cost reporting period’s target 

amount, increased by the inpatient 

prospective payment update factor (as 

defined in section 1886(b)(3)(B) of the 

Act) for that particular cost reporting 

period. 

Covered inpatient hospital services 

are inpatient hospital services (defined 

in section 1861(b) of the Act), and 

include extended care services 

furnished under an agreement under 

section 1883 of the Act. 

Section 410A of Public Law 108–173 

requires that, ‘‘in conducting the 

demonstration program under this 

section, the Secretary shall ensure that 

the aggregate payments made by the 

Secretary do not exceed the amount 

which the Secretary would have paid if 

the demonstration program under this 

section was not implemented.’’

Generally, when CMS implements a 

demonstration program on a budget 

neutral basis, the demonstration 

program is budget neutral in its own 

terms; in other words, the aggregate 

payments to the participating providers 

do not exceed the amount that would be 

paid to those same providers in the 

absence of the demonstration program. 

This form of budget neutrality is viable 

when, by changing payments or aligning 

incentives to improve overall efficiency, 

or both, a demonstration program may 

reduce the use of some services or 

eliminate the need for others, resulting 

in reduced expenditures for the 

demonstration program’s participants. 

These reduced expenditures offset 

increased payments elsewhere under 

the demonstration program, thus 

ensuring that the demonstration 

program as a whole is budget neutral or 

yields savings. However, the small scale 

of this demonstration program, in 

conjunction with the payment 

methodology, makes it extremely 

unlikely that this demonstration 

program could be viable under the usual 

form of budget neutrality. Specifically, 

cost-based payments to participating 

small rural hospitals are likely to 

increase Medicare outlays without 

producing any offsetting reduction in 

Medicare expenditures elsewhere. 

Therefore, a rural community hospital’s 

participation in this demonstration 

program is unlikely to yield benefits to 

the participant if budget neutrality were 

to be implemented by reducing other 

payments for these providers. 

In order to achieve budget neutrality 

for this demonstration program for FY 

2009, as we proposed in the FY 2009 

IPPS proposed rule, we are adjusting the 

national inpatient PPS rates by an 

amount sufficient to account for the 

added costs of this demonstration 

program. We are applying budget 

neutrality across the payment system as 

a whole rather than merely across the 

participants in this demonstration 

program. As we discussed in the FY 

2005, FY 2006, FY 2007 and FY 2008 

IPPS final rules (69 FR 49183; 70 FR 

47462; 71 FR 48100; and 72 FR 47392), 

we believe that the language of the 


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statutory budget neutrality requirements 

permits the agency to implement the 

budget neutrality provision in this 

manner. For FY 2009, using data from 

the cost reports from each of the nine 

currently participating hospitals’ first 

year of participation in the 

demonstration program, that is, cost 

reports for years beginning in CY 2005, 

and estimating the cost of four 

additional hospitals selected based on 

cost report periods that include CY 

2006, we estimate that the additional 

cost will be $22,790,388. This estimated 

adjusted amount reflects the estimated 

difference between the participating 

hospitals’ costs and the IPPS payment 

based on data from the hospitals’ cost 

reports. We discuss the payment rate 

adjustment that is required to ensure the 

budget neutrality of the demonstration 

program for FY 2009 in section II.A.4. 

of the Addendum to this final rule. 

V. Changes to the IPPS for CapitalRelated Costs 

A. Background 

Section 1886(g) of the Act requires the 

Secretary to pay for the capital-related 

costs of inpatient acute hospital services 

‘‘in accordance with a prospective 

payment system established by the 

Secretary.’’ Under the statute, the 

Secretary has broad authority in 

establishing and implementing the IPPS 

for acute care hospital inpatient capitalrelated costs. We initially implemented 

the IPPS for capital-related costs in the 

Federal fiscal year (FY) 1992 IPPS final 

rule (56 FR 43358), in which we 

established a 10-year transition period 

to change the payment methodology for 

Medicare hospital inpatient capitalrelated costs from a reasonable costbased methodology to a prospective 

methodology (based fully on the Federal 

rate). 

FY 2001 was the last year of the 10- 

year transition period established to 

phase in the IPPS for hospital inpatient 

capital-related costs. For cost reporting 

periods beginning in FY 2002, capital 

IPPS payments are based solely on the 

Federal rate for almost all acute care 

hospitals (other than hospitals receiving 

certain exception payments and certain 

new hospitals). The basic methodology 

for determining capital prospective 

payments using the Federal rate is set 

forth in § 412.312 of the regulations. For 

the purpose of calculating payments for 

each discharge, the standard Federal 

rate is adjusted as follows: 

(Standard Federal Rate) × (DRG 

Weight) × (Geographic Adjustment 

Factor (GAF)) × (COLA for hospitals 

located in Alaska and Hawaii) × (1 + 

Capital DSH Adjustment Factor + 

Capital IME Adjustment Factor, if 

applicable). 

Hospitals also may receive outlier 

payments for those cases that qualify 

under the threshold established for each 

fiscal year as specified in § 412.312(c) of 

the regulations. 

1. Exception Payments 

The regulations at § 412.348(f) 

provide that a hospital may request an 

additional payment if the hospital 

incurs unanticipated capital 

expenditures in excess of $5 million due 

to extraordinary circumstances beyond 

the hospital’s control. This policy was 

originally established for hospitals 

during the 10-year transition period, but 

as we discussed in the FY 2003 IPPS 

final rule (67 FR 50102), we revised the 

regulations at § 412.312 to specify that 

payments for extraordinary 

circumstances are also made for cost 

reporting periods after the transition 

period (that is, cost reporting periods 

beginning on or after October 1, 2001). 

Additional information on the exception 

payment for extraordinary 

circumstances in § 412.348(f) can be 

found in the FY 2005 IPPS final rule (69 

FR 49185 and 49186). 

During the transition period, under 

§§ 412.348(b) through (e), eligible 

hospitals could receive regular 

exception payments. These exception 

payments guaranteed a hospital a 

minimum payment percentage of its 

Medicare allowable capital-related costs 

depending on the class of the hospital 

(§ 412.348(c)), but were available only 

during the 10-year transition period. 

After the end of the transition period, 

eligible hospitals can no longer receive 

this exception payment. However, even 

after the transition period, eligible 

hospitals receive additional payments 

under the special exceptions provisions 

at § 412.348(g), which guarantees all 

eligible hospitals a minimum payment 

of 70 percent of its Medicare allowable 

capital-related costs provided that 

special exceptions payments do not 

exceed 10 percent of total capital IPPS 

payments. Special exceptions payments 

may be made only for the 10 years from 

the cost reporting year in which the 

hospital completes its qualifying 

project, and the hospital must have 

completed the project no later than the 

hospital’s cost reporting period 

beginning before October 1, 2001. Thus, 

an eligible hospital may receive special 

exceptions payments for up to 10 years 

beyond the end of the capital IPPS 

transition period. Hospitals eligible for 

special exceptions payments are 

required to submit documentation to the 

intermediary indicating the completion 

date of their project. (For more detailed 

information regarding the special 

exceptions policy under § 412.348(g), 

we refer readers to the FY 2002 IPPS 

final rule (66 FR 39911 through 39914) 

and the FY 2003 IPPS final rule (67 FR 

50102).) 

2. New Hospitals 

Under the IPPS for capital-related 

costs, § 412.300(b) of the regulations 

defines a new hospital as a hospital that 

has operated (under current or previous 

ownership) for less than 2 years. For 

more detailed information, we refer 

readers to the FY 1992 IPPS final rule 

(56 FR 43418). During the 10-year 

transition period, a new hospital was 

exempt from the capital IPPS for its first 

2 years of operation and was paid 85 

percent of its reasonable costs during 

that period. Originally, this provision 

was effective only through the transition 

period and, therefore, ended with cost 

reporting periods beginning in FY 2002. 

Because, as discussed in the FY 2003 

IPPS final rule (67 FR 50101), we 

believe that special protection to new 

hospitals is also appropriate even after 

the transition period, we revised the 

regulations at § 412.304(c)(2) to provide 

that, for cost reporting periods 

beginning on or after October 1, 2002, a 

new hospital (defined under 

§ 412.300(b)) is paid 85 percent of its 

Medicare allowable capital-related costs 

through its first 2 years of operation, 

unless the new hospital elects to receive 

fully prospective payment based on 100 

percent of the Federal rate. (We refer 

readers to the FY 2002 IPPS final rule 

(66 FR 39910) for a detailed discussion 

of the statutory basis for the system, the 

development and evolution of the 

system, the methodology used to 

determine capital-related payments to 

hospitals both during and after the 

transition period, and the policy for 

providing exception payments.) 

3. Hospitals Located in Puerto Rico 

Section 412.374 of the regulations 

provides for the use of a blended 

payment amount for prospective 

payments for capital-related costs to 

hospitals located in Puerto Rico. 

Accordingly, under the capital IPPS, we 

compute a separate payment rate 

specific to Puerto Rico hospitals using 

the same methodology used to compute 

the national Federal rate for capitalrelated costs. In general, hospitals 

located in Puerto Rico are paid a blend 

of the applicable capital IPPS Puerto 

Rico rate and the applicable capital IPPS 

Federal rate. 

Prior to FY 1998, hospitals in Puerto 

Rico were paid a blended capital IPPS 

rate that consisted of 75 percent of the 

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and 25 percent of the capital IPPS 

Federal rate. However, effective October 

1, 1997 (FY 1998), in conjunction with 

the change to the operating IPPS blend 

percentage for hospitals located in 

Puerto Rico required by section 4406 of 

Public Law 105–33, we revised the 

methodology for computing capital IPPS 

payments to hospitals in Puerto Rico to 

be based on a blend of 50 percent of the 

capital IPPS Puerto Rico rate and 50 

percent of the capital IPPS Federal rate. 

Similarly, in conjunction with the 

change in operating IPPS payments to 

hospitals located in Puerto Rico for FY 

2005 required by section 504 of Public 

Law 108–173, we again revised the 

methodology for computing capital IPPS 

payments to hospitals located in Puerto 

Rico to be based on a blend of 25 

percent of the capital IPPS Puerto Rico 

rate and 75 percent of the capital IPPS 

Federal rate effective for discharges 

occurring on or after October 1, 2004. 

B. Revisions to the Capital IPPS Based 

on Data on Hospital Medicare Capital 

Margins 

As noted above, under the Secretary’s 

broad authority under the statute in 

establishing and implementing the IPPS 

for hospital inpatient capital-related 

costs, we have established a standard 

Federal payment rate for capital-related 

costs, as well as the mechanism for 

updating that rate each year. For FY 

1992, we computed the standard 

Federal payment rate for capital-related 

costs under the IPPS by updating the FY 

1989 Medicare inpatient capital cost per 

case by an actuarial estimate of the 

increase in Medicare inpatient capital 

costs per case. Each year after FY 1992, 

we update the capital standard Federal 

rate, as provided at § 412.308(c)(1), to 

account for capital input price increases 

and other factors. Section 412.308(c)(2) 

provides that the capital Federal rate is 

adjusted annually by a factor equal to 

the estimated proportion of outlier 

payments under the capital Federal rate 

to total capital payments under the 

capital Federal rate. In addition, 

§ 412.308(c)(3) requires that the capital 

Federal rate be reduced by an 

adjustment factor equal to the estimated 

proportion of payments for (regular and 

special) exceptions under § 412.348. 

Section 412.308(c)(4)(ii) requires that 

the capital standard Federal rate be 

adjusted so that the effects of the annual 

DRG reclassification and the 

recalibration of DRG weights, and 

changes in the geographic adjustment 

factor are budget neutral. 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47398 through 

47401), based on our analysis of data on 

inpatient hospital Medicare capital 

margins that we obtained through our 

monitoring and comprehensive review 

of the adequacy of the standard Federal 

payment rate for capital-related costs 

and the updates provided under the 

existing regulations, we made changes 

in the payment structure under the 

capital IPPS beginning with FY 2008. 

We summarize these changes below. We 

refer readers to section V.B. of the 

preamble of the FY 2008 final rule with 

comment period (72 FR 47393 through 

47401) for a detailed discussion of the 

data used as a basis for these changes. 

These data showed that hospital 

inpatient Medicare capital margins were 

very high across all hospitals during the 

period from FY 1996 through FY 2004. 

In the FY 2008 IPPS final rule with 

comment period, as background, we 

noted that, in general, under a PPS, 

standard payment rates should reflect 

the costs that an average, efficient 

provider would bear to provide the 

services required for quality patient 

care. Payment rate updates should also 

account for the changes necessary to 

continue providing such services. 

Updates should reflect, for example, the 

increased costs that are necessary to 

provide for the introduction of new 

technology that improves patient care. 

Updates should also take into account 

the productivity gains that, over time, 

allow providers to realize the same, or 

even improved, quality outcomes with 

reduced inputs and lower costs. 

Hospital margins, the difference 

between the costs of actually providing 

services and the payments received 

under a particular system, thus provide 

some evidence concerning whether 

payment rates have been established 

and updated at an appropriate level over 

time for efficient providers to provide 

necessary services. All other factors 

being equal, sustained substantial 

positive margins demonstrate that 

payment rates and updates have 

exceeded what is required to provide 

those services. Under a PPS, it is 

expected that highly efficient providers 

might regularly realize positive margins, 

while less efficient providers might 

regularly realize negative margins. 

However, a PPS that is correctly 

calibrated should not necessarily 

experience sustained periods in which 

providers generally realize substantial 

positive Medicare margins. Under the 

capital IPPS in particular, it seems 

especially appropriate that there should 

not be sustained significant positive 

margins across the system as a whole. 

Prior to the implementation of the 

capital IPPS, Congress mandated that 

the Medicare program pay only 85 

percent of hospitals’ inpatient Medicare 

capital costs. During the first 5 years of 

the capital IPPS, Congress also 

mandated a budget neutrality 

adjustment, under which the standard 

Federal capital rate was set each year so 

that payments under the system as a 

whole equaled 90 percent of estimated 

hospitals’ inpatient Medicare capital 

costs for the year. Finally, Congress has 

twice adjusted the standard Federal 

capital rate (a 7.4 percent reduction 

beginning in FY 1994, followed by a 

17.78 percent reduction beginning in FY 

1998). On the second occasion in 

particular, the specific congressional 

mandate was ‘‘to apply the budget 

neutrality factor used to determine the 

Federal capital payment rate in effect on 

September 30, 1995 * * * to the 

unadjusted standard Federal capital 

payment rate’’ for FY 1998 and beyond. 

(The designated budget neutrality factor 

constituted a 17.78 percent reduction.) 

This statutory language indicates that 

Congress considered the payment levels 

in effect during FYs 1992 through 1995, 

established under the budget neutrality 

provision to pay 90 percent of hospitals’

inpatient Medicare capital costs in the 

aggregate, appropriate for the capital 

IPPS. The statutory history of the capital 

IPPS thus suggests that the system in the 

aggregate should not provide for 

continuous, large positive margins. 

As we also discussed in the FY 2008 

IPPS final rule with comment period, 

we believed that there could be a 

number of reasons for the relatively high 

margins that most IPPS hospitals have 

realized under the capital IPPS. One 

possibility is that the updates to the 

capital IPPS rates have been higher than 

the actual increases in Medicare 

inpatient capital costs that hospitals 

have experienced in recent years. 

Another possible reason for the 

relatively high margins of most capital 

IPPS hospitals may be that the payment 

adjustments provided under the system 

are too high, or perhaps even 

unnecessary. Specifically, the 

adjustments for teaching hospitals, 

disproportionate share hospitals, and 

large urban hospitals appear to be 

contributing to excessive payment levels 

for these classes of hospitals. Since the 

inception of the capital IPPS in FY 

1992, the system has provided 

adjustments for teaching hospitals (the 

IME adjustment factor, under § 412.322 

of the regulations), disproportionate 

share hospitals (the DSH adjustment 

factor, under § 412.320), and large urban 

hospitals (the large urban location 

adjustment factor, under § 412.316(b)). 

The classes of hospitals eligible for 

these adjustments have been realizing 

much higher margins than other 


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hospitals under the system. Specifically, 

at the time of the FY 2008 IPPS final 

rule with comment period, teaching 

hospitals (11.6 percent for FYs 1998 

through 2004), disproportionate share 

hospitals (8.4 percent), and urban 

hospitals (8.3 percent) had significant 

positive margins. Other classes of 

hospitals had experienced much lower 

margins, especially rural hospitals (0.3 

percent for FYs 1998 through 2004) and 

nonteaching hospitals (1.3 percent). The 

three groups of hospitals that had been 

realizing especially high margins under 

the capital IPPS are, therefore, classes of 

hospitals that are eligible to receive one 

or more specific payment adjustment 

under the system. We believed that the 

evidence indicates that these 

adjustments have been contributing to 

the significantly large positive margins 

experienced by the classes of hospitals 

eligible for these adjustments. (We 

discuss our updated margin analysis 

below.) 

Therefore, in the FY 2008 IPPS final 

rule with comment period, we made 

two changes to the structure of 

payments under the capital IPPS, as 

discussed under items 1 and 2 below. 

1. Elimination of the Large Add-On 

Payment Adjustment 

In the FY 2008 IPPS final rule with 

comment period, we determined that 

the data we had gathered on inpatient 

hospital Medicare capital margins 

provided sufficient evidence to warrant 

elimination of the large urban add-on 

payment adjustment starting in FY 2008 

under the capital IPPS. Therefore, for 

FYs 2008 and beyond, we discontinued 

the 3.0 percent additional payment that 

had been provided to hospitals located 

in large urban areas (72 FR 24822). This 

decision was supported by comments 

from MedPAC. 

2. Changes to the Capital IME 

Adjustment 

a. Background and Changes Made for FY 

2008 

In the FY 2008 IPPS proposed rule, 

we noted that margin analysis indicated 

that several classes of hospitals had 

experienced continuous, significant 

positive margins. The analysis indicated 

that the existing payment adjustments 

for teaching hospitals and 

disproportionate share hospitals were 

contributing to excessive payment levels 

for these classes of hospitals. Therefore, 

we stated that it may be appropriate to 

reduce these adjustments significantly, 

or even to eliminate them altogether, 

within the capital IPPS. These payment 

adjustments, unlike parallel adjustments 

under the operating IPPS, were not 

mandated by the Act. Rather, they were 

included within the original design of 

the capital IPPS under the Secretary’s 

broad authority in section 1886(g)(1) of 

the Act to include appropriate 

adjustments and exceptions within a 

capital IPPS. 

In the FY 2008 final rule with 

comment period, we also noted a 

MedPAC recommendation that we 

seriously reexamine the appropriateness 

of the existing capital IME adjustment, 

that the margin analysis indicated such 

adjustment may be too high, and that 

MedPAC’s previous analysis also 

suggested the adjustment may be too 

high. In light of MedPAC’s 

recommendation, we extended the 

margin analysis discussed in the FY 

2008 IPPS proposed rule in order to 

distinguish the experience of teaching 

hospitals from the experience of urban 

and rural hospitals generally. 

Specifically, we isolated the margins of 

urban, large urban, and rural teaching 

hospitals, as opposed to urban, large 

urban, and rural nonteaching hospitals. 

In conducting this analysis, we 

employed updated cost report 

information, which allowed us to 

incorporate the margins for an 

additional year, FY 2005, into the 

analysis. The data on the experience of 

urban, large urban, and rural teaching 

hospitals as opposed to nonteaching 

hospitals provided significant new 

information. As the analysis 

demonstrated, teaching hospitals in 

each class (urban, large urban, and 

rural) performed significantly better 

than comparable nonteaching hospitals. 

For the period covering FYs 1998 

through 2005, urban teaching hospitals 

realized aggregate positive margins of 

11.9 percent, compared to a positive 

margin of 0.9 percent for urban 

nonteaching hospitals. Similarly, large 

urban teaching hospitals realized an 

aggregate positive margin of 12.8 

percent during that period, while large 

urban nonteaching hospitals had an 

aggregate positive margin of only 2.9 

percent. Finally, rural teaching hospitals 

experienced an aggregate positive 

margin of 4.5 percent, as compared to a 

negative 1.3 percent margin for 

nonteaching rural hospitals. We noted 

that the positive margins for teaching 

hospitals did not exhibit a decline to the 

same degree as the margins for all 

hospitals. For example, the positive 

margins for all IPPS hospitals declined 

from 8.7 percent in FY 2002 to 5.3 

percent in FY 2004 and 3.7 percent in 

FY 2005. For urban hospitals, aggregate 

margins decreased from 10.3 percent in 

FY 2002 to 6.4 percent in FY 2004 and 

4.8 percent in FY 2005. Rural hospitals 

experienced a decrease from 1.5 percent 

in FY 2001 to a negative margin of ¥4.2 

percent in FY 2005. In comparison, the 

aggregate margin for teaching hospitals 

was 12.1 percent in FY 2001 and 10.6 

percent in FY 2005. For urban teaching 

hospitals, margins were 12.5 percent in 

FY 2001, 14.0 percent in FY 2002, 13.6 

percent in FY 2003, 11.9 percent in FY 

2004, and 10.9 percent in FY 2005. 

Rural teaching hospital margins were 

more variable, but did not exhibit a 

pattern of significant decline. In FY 

2001, rural teaching hospitals had a 

positive margin of 3.2 percent; in FY 

2002, 8.2 percent; in FY 2003, 4.7 

percent; in FY 2004, 5.7 percent; and in 

FY 2005, 4.0 percent. We are reprinting 

below the table found in the FY 2008 

IPPS final rule with comment period 

showing our analysis (72 FR 47400). 

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As we indicated in the FY 2008 IPPS 

final rule with comment period (72 FR 

47401), the statutory history of the 

capital IPPS suggests that the system in 

the aggregate should not provide for 

continuous, large positive margins. As 

we also indicated, a possible reason for 

the relatively high margins of many 

capital IPPS hospitals may be that the 

payment adjustments provided under 

the system are too high, or perhaps even 

unnecessary. We agreed with MedPAC’s 

recommendation and reexamined the 

appropriateness of the teaching 

adjustment. We concluded that the 

record of relatively high and persistent 

positive margins for teaching hospitals 

under the capital IPPS indicated that the 

teaching adjustment is unnecessary, and 

that it was therefore appropriate to 

exercise our discretion under the capital 

IPPS to eliminate this adjustment. At 

the same time, we believed that we 

should mitigate abrupt changes in 

payment policy and that we should 

provide time for hospitals to adjust to 

changes in the payments that they can 

expect under the program. 

Therefore, in the FY 2008 IPPS final 

rule with comment period, we adopted 

a policy to phase out the capital 

teaching adjustment over a 3-year 

period beginning in FY 2008. 

Specifically, we maintained the 

adjustment for FY 2008, in order to give 

teaching hospitals an opportunity to 

plan and make adjustments to the 

change. During the second year of the 

transition, FY 2009, the formula for 

determining the amount of the teaching 

adjustment was revised so that 

adjustment amounts will be half of the 

amounts provided under the current 

formula. For FY 2010 and after, 

hospitals will no longer receive an 

adjustment for teaching activity under 

the capital IPPS. 

b. Public Comments Received on Phase 

Out of Capital IPPS Teaching 

Adjustment Provisions Included in the 

FY 2008 IPPS Final Rule With Comment 

Period and on the FY 2009 IPPS 

Proposed Rule 

As indicated above, in the FY 2008 

IPPS final rule with comment period, 

we formally adopted as final policy a 

phase out of the capital IPPS teaching 

adjustment over a 3-year period, 

maintaining the current adjustment for 

FY 2008, making a 50-percent reduction 

in FY 2009, and eliminating the 

adjustment for FY 2010 and subsequent 

years. However, because we concluded 

that this change to the structure of 

payments under the capital IPPS was 

significant, we provided the public with 

an opportunity for further comment on 

these provisions through a 90-day 

comment period after publication of the 

FY 2008 IPPS final rule with comment 

period (72 FR 47401). In addition, as we 

indicated in that final rule with 

comment period, to provide a more than 

adequate opportunity for hospitals, 

associations, and other interested 

parties to raise issues and concerns 

related to our policy, we would provide 

additional opportunity for public 

comment during the FY 2009 proposed 

rulemaking cycle for the IPPS (73 FR 

23679). 

We received numerous timely pieces 

of correspondence that commented on 

the policy of phasing out the capital 

IPPS teaching adjustment as described 

in the FY 2008 IPPS final rule with 

comment period. We also received a 

number of public comments on this 

policy during the comment period for 

the FY 2009 IPPS proposed rule. A 

summary of the public comments 

received on both documents and our 

responses follow. 

Comment: A number of commenters 

objected that the proposed elimination 

of the capital IME adjustment would 

have an excessive financial impact on 

hospitals. Many commenters cited 

estimates of payment reductions that 

could be expected for individual 

hospitals or various groups of hospitals. 

Some of these commenters pointed out 

that teaching hospitals maintain high 

levels of advanced services and require 

adequate levels of payment to acquire 

and maintain the new technologies 

required to support these services. Some 

commenters also contended that 

operating and capital IME adjustments 

assist teaching hospitals in maintaining 

underfunded services such as inpatient 

services for the uninsured and other 

kinds of uncompensated care. In 

addition, some commenters contended 

that elimination of the IME adjustment 

would make it much more difficult for 

hospitals to undertake the capital 

improvements required by various state 

mandates, as well as the adoption of the 

information technologies encouraged by 

various Federal initiatives. 

Response: Our margin analysis 

continues to show that teaching 

hospitals are realizing significant 

positive margins under the capital IPPS. 

As noted above, in the aggregate, 

teaching hospitals experienced capital 

IPPS margins of 12.1 percent in FY 

2001, 13.8 percent in FY 2002, 13.2 

percent in FY 2003, 11.5 percent in FY 

2004, 10.8 percent in FY 2005, and 8.4 

percent in FY 2006. For urban teaching 

hospitals, margins were 12.5 percent in 

FY 2001, 14.0 percent in FY 2002, 13.6 

percent in FY 2003, 11.7 percent in FY 

2004, 11.0 percent in FY 2005, and 8.6 


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percent in FY 2006. Rural teaching 

hospital margins were more variable, 

but did not exhibit a pattern of 

significant decline. In FY 2001, rural 

teaching hospitals had a positive margin 

of 3.2 percent. The margins for rural 

teaching hospitals were 8.2 percent in 

FY 2002, 4.7 percent in FY 2003, 6.4 

percent in FY 2004, 4.9 percent in FY 

2005, and 3.1 percent in FY 2006. In 

contrast, the margins for nonteaching 

hospitals were 2.6 percent in FY 2001, 

1.7 percent in FY 2002, 0.0 percent in 

FY 2003, ¥3.1 percent in FY 2004, 

¥5.5 percent in FY 2005, and ¥9.1 

percent in FY 2006. The updated margin 

analysis continues to suggest that the 

capital IPPS has been providing more 

than adequate funding for the capital 

needs of teaching hospitals. We 

anticipate that teaching hospitals will 

continue to have adequate funding even 

in the absence of the IME adjustment. 

Our estimate is that, even if the teaching 

adjustment had been eliminated for FYs 

2004, 2005, and 2006, teaching hospitals 

would continue to experience positive 

capital IPPS margins of 3.9 percent, 3.2 

percent, and 0.4 percent, respectively. 

Our current margin analysis is reflected 

in the table below: 

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Finally, MedPAC’s March 2007 report 

found little evidence to support the 

contention that the operating and 

capital IME adjustments help hospitals 

that have large shares of uncompensated 

care. Specifically, the report found that 

‘‘it appears that the hospitals most 

involved in teaching * * * are not, by 

and large, the ones that devote the most 

resources to treating patients who are 

unable to pay their bills’’ (Report to the 

Congress: Medicare Payment Policy, 

March 2007, page 79). In any event, IME 

payments (operating and capital) were 

never intended to subsidize services for 

the uninsured and other uncompensated 

care. 

Comment: Many commenters 

contended that total Medicare inpatient 

margins, rather than Medicare inpatient 

capital margins, should be employed as 

the basis for evaluating the 

appropriateness of the capital IPPS IME 

and other payment IPPS payment 

adjustments. Other commenters 

objected to employing of margin 

analysis at all as a basis for determining 

whether the payment adjustments are 

warranted. Some commenters noted that 

cost regression analysis was originally 

employed to determine whether an IME 

adjustment was warranted under the 

capital IPPS. Most of these commenters 

contended that revisions to the payment 

adjustments should not be considered 

without updating these original 

regression analyses. Furthermore, these 

commenters emphasized that it would 

only be appropriate to employ total cost 

regressions, as opposed to capital costonly regressions, in these analyses. 

Commenters advocated using total cost 

regressions on the grounds that doing so 

would follow precedent (the analysis 

that supported the original 

establishment of the adjustments 

employed total cost regressions), and 

would be consistent with treating the 

capital IPPS as intrinsically part of a 

broader IPPS embracing both capital 

and operating payments. One 

commenter interpreted the proposal to 

eliminate the capital IPPS IME 

adjustment to represent an attempt to 

wring excess IME payments out of the 

operating PPS. The commenter 

indicated that CMS has no authority to 

change operating IPPS payment 

parameters. MedPAC noted that 

‘‘analysis over the past decade has 

consistently shown that capital and 

operating IME adjustments have been 

set substantially above what can be 

empirically justified, leading to large 

disparities in financial performance 

under Medicare between teaching and 

nonteaching hospitals. The Commission 

in its March 2007 and 2008 reports to 

the Congress recommended that the 

operating IME adjustment be reduced 

from 5.5 percent to 4.5 percent per 10 

percent increment in teaching intensity 

and that the funds obtained from 

reducing the IME adjustment be used to 

fund a quality incentive payment 

program.’’

Response: We do not agree with many 

of the criticisms of our analysis and the 

conclusions that we drew from that 

analysis. A basic principle of 

prospective payment systems is that 

efficient providers should be able to 

realize positive margins from the 

payment structure. However, 

prospective payment systems are 

generally designed to pay at rates 

reflecting the costs of hospitals at 

average levels of efficiency. Under such 

a system, hospitals of above average 

efficiency would be expected to realize 

positive margins, while hospitals of less 

than average efficiency would be 

expected to realize negative margins. 

Therefore, the continuation of 

significant positive margins across a 

prospective payment system (or across 

classes of hospitals that receive specific 

adjustments) is an indication that the 

payment rates (or the adjustments to the 

rates) may be set at a level higher than 

necessary to cover the costs of efficient 

operation. Under such circumstances, 

we believe that it is appropriate to 

revise basic payment rates or payment 

adjustments, or both, to account for 

such evidence. 

We also do not agree that it is 

necessary either to base our 

determination at this time about the 

appropriateness of continuing the 

capital IPPS IME adjustment on updated 

regression analysis, or to employ a total 

cost regression analysis in doing so. We 

adopted approaches on several issues in 

the initial development of the capital 

IPPS that were based on the premise 

that the capital and operating IPPS 

might eventually be merged into one 

system. The two systems have now 

operated separately for 15 years without 

any apparent prospect of integration in 

the near future. Therefore, we believe 

that it is appropriate under the current 

design of the capital and operating 

IPPSs to base proposals for payment 

policies under the capital IPPS on 

analysis that is confined to the data 

regarding the capital IPPS alone, and 

that total IPPS margins should not be 

the controlling factor in the analysis that 

we are now conducting. For this same 

reason, we do not agree with 

commenters who urged us to employ 

updated versions of the total cost 

regressions that were originally used to 

establish the payment adjustments 

under the capital IPPS. In the long run, 

we believe that it makes sense to base 

capital payment adjustments on total 

cost variations only if similar 

adjustments under the operating IPPS 

are also based on total cost regression 

analysis. We do not agree that, in the 

context of the current payment system, 

the capital IPPS should be treated as a 

component of a larger system embracing 

both the capital and operating IPPSs. 

Another reason that we do not believe 

it to be necessary to replicate the 

original total cost regression analysis is 

that MedPAC has, in fact, recently 

conducted such an analysis. Regression 

analyses conducted by MedPAC over 

the last decade have shown that capital 

and operating IME adjustments have 

been set substantially above what can be 

empirically justified, leading to large 

disparities in financial performance 

under Medicare between teaching and 

nonteaching hospitals. In its March 

2007 and 2008 reports to the Congress, 

MedPAC recommended that the 

operating IME adjustment be reduced 

from 5.5 percent to 4.5 percent per 10 

percent increment in teaching intensity. 

In developing our proposal to eliminate 

the capital IPPS IME adjustment over a 

3-year transition period, we did not take 

into account total Medicare IPPS 

margins, Medicare operating IPPS 

margins, or the relationship between the 

statutory operating IPPS IME adjustment 

and the empirically justifiable level of 

operating IPPS IME adjustment. As we 

have previously stated, we believe that 

it is appropriate under the current 

design of the capital and operating IPPS 

to base proposals for payment policies 

under the capital IPPS on analysis that 

is confined to the data regarding the 

capital IPPS alone. However, we also 

believe that it is difficult, in the light of 

the MedPAC analysis, to argue on the 

basis of a total cost regression analysis 

for the continuation of a capital IPPS 

IME adjustment. As we have previously 

observed, MedPAC noted in its 

comment on the proposed rule that its 

‘‘analysis over the past decade has 

consistently shown that capital and 

operating IME adjustments have been 

set substantially above what can be 

empirically justified, leading to large 

disparities in financial performance 

under Medicare between teaching and 

nonteaching hospitals. MedPAC also 

observed in its comment on our 

proposal to eliminate the capital IPPS 

IME adjustment, ‘‘the reduction in IME 

payments from eliminating the capital 

IME adjustment would be smaller than 

the effect of the Commission’s 

recommendation’’ to reduce the 

operating IPPS IME adjustment. 

Comment: Some commenters 

contended that, if CMS proceeds with 


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the elimination of the IME adjustment, 

reductions in hospital capital payments 

for teaching hospitals should be 

implemented in a budget neutral 

fashion, returning the funds to all 

hospitals as a group. Most of these 

commenters cited the recent record of 

negative overall Medicare inpatient 

margins as evidence that the proposed 

elimination of the capital IME 

adjustment is unwarranted. Some 

commenters also noted that overall 

capital IPPS margins have been 

declining and that several classes of 

hospitals have had significant negative 

capital IPPS margins in recent years, 

including nonteaching hospitals and 

rural hospitals. One commenter 

wondered how low capital IPPS margins 

must go before CMS concludes that 

capital payments are marginally 

justified. This commenter opposed not 

only the elimination of the capital IME 

adjustment, but also eliminating the 

adjustment without restoring the IME 

costs to the base rate. 

Response: We believe that the 

evidence continues to support 

eliminating the capital IPPS IME 

adjustment in a way that provides 

savings for the Medicare program. It is 

the case that overall capital IPPS 

margins have declined somewhat in 

recent years, from 7.6 percent in FY 

2003 to 5.3 percent in FY 2004, 3.9 

percent in FY 2005, and 0.9 percent in 

FY 2006. It is also true that rural 

hospitals (¥4.0 percent in FY 2005 and 

¥9.3 percent in FY 2006) and 

nonteaching hospitals (¥5.5 percent in 

FY 2005 and ¥9.1 percent in FY 2006) 

have experienced negative margins in 

recent years. However, over the period 

from 1998 through 2006, overall 

hospital margins have been a healthy 

6.1 percent. Over the same period, rural 

hospitals and nonteaching hospitals 

have experienced capital IPPS margins 

that are only slightly negative: ¥1.3 

percent and ¥0.8 percent, respectively. 

We believe that this experience 

indicates that the capital IPPS will 

remain adequately funded without 

redistributing the payments made under 

the IME adjustment to all hospitals, 

especially in the light of the legislative 

history that we have previously cited. 

Prior to the implementation of the 

capital IPPS, Congress mandated that 

the Medicare program pay only 85 

percent of hospitals’ inpatient Medicare 

capital costs. During the first 5 years of 

the capital IPPS, Congress also 

mandated a budget neutrality 

adjustment, under which the standard 

Federal capital rate was set each year so 

that payments under the system as a 

whole equaled 90 percent of estimated 

hospitals’ inpatient Medicare capital 

costs for the year. Finally, Congress has 

twice adjusted the standard Federal 

capital rate (a 7.4 percent reduction 

beginning in FY 1994, followed by a 

17.78 percent reduction beginning in FY 

1998). On the second occasion in 

particular, the specific congressional 

mandate was ‘‘to apply the budget 

neutrality factor used to determine the 

Federal capital payment rate in effect on 

September 30, 1995 * * * to the 

unadjusted standard Federal capital 

payment rate’’ for FY 1998 and beyond. 

(The designated budget neutrality factor 

constituted a 17.78 percent reduction.) 

This statutory language indicates that 

Congress considered the payment levels 

in effect during FYs 1992 through 1995, 

established under the budget neutrality 

provision to pay 90 percent of hospitals’

inpatient Medicare capital costs in the 

aggregate, appropriate for the capital 

IPPS. This statutory history thus 

suggests that the reduced margins 

experienced in recent years under the 

capital IPPS are not unwarranted. 

Therefore, we are maintaining our 

policy of eliminating the capital IPPS 

IME adjustment without increasing the 

capital IPPS rate to account for this 

change. 

Comment: Many of the commenters 

further contended that the proposals do 

not take sufficient account of the 

cyclical nature of capital spending. 

These commenters pointed out that, 

under the design of the capital IPPS, 

hospitals were expected to reserve 

capital funds in anticipation of future 

capital needs, similar to how funded 

depreciation reserves had been used 

under the prior cost reimbursement 

system. These funds would permit 

future capital investment to be funded 

in part with equity financing rather than 

borrowing. Thus, it is only to be 

expected that hospitals would run 

positive margins during one phase of 

the capital cycle. Some regional hospital 

associations provided evidence 

intended to demonstrate that their 

hospitals have been experiencing 

positive margins because they are in a 

low-spending phase of their capital 

cycles. For example, one association 

representing a major metropolitan area 

submitted an extensive analysis, 

including data on margins and changes 

in unit cost and price, suggesting that its 

member hospitals are in a lowerspending phase of their capital cycle 

than other hospitals may be. Other 

commenters contended that, in order to 

account adequately for the capital 

spending cycle, it would be necessary to 

conduct an analysis over a much longer 

period, such as 20 years. 

Response: We agree with commenters 

that the capital spending of hospitals 

tends to occur in cycles, with periods of 

higher capital investment followed by 

periods in which capital spending tends 

to be lower. As some of the commenters 

noted, we devoted considerable 

attention to the potential implications of 

this capital cycle in developing the 

original design of the capital IPPS. At 

that time, we decided not to build any 

specific feature into the system to 

account for capital cycles, on the 

grounds that hospitals ought to be able 

to manage their spending on the basis of 

the predetermined rates and 

adjustments under the capital IPPS, 

conserving funds during lower spending 

portions of the cycle in order to prepare 

for necessary capital expenditures later. 

We do not agree with those commenters 

who suggested that the existence of a 

capital spending cycle accounts for the 

persistently high margins for some 

classes of hospitals that we have 

observed over the period 1996 through 

2006 nationally. There is no reason to 

suppose that there would be uniformity 

or regularity among hospitals in the 

length of time between major capital 

expenditures or the overall pattern of 

capital spending. To the degree that a 

capital cycle exists, it reflects the 

pattern of spending in individual 

hospitals or, in some cases, groups of 

hospitals where the pattern of spending 

is determined by factors such as 

common ownership, local regulation, or 

other factors. There is no uniform or 

regular capital cycle across IPPS 

hospitals generally or large classes of 

hospitals (for example, teaching 

hospitals) nationally. In any given year, 

the margins of hospitals generally, and 

of large classes of hospitals defined 

nationally, would reflect the experience 

of many hospitals in the lower spending 

portions of their capital cycles, and 

many other hospitals in the higher 

spending portions of their capital 

cycles. Therefore, the existence of the 

persistent positive margins that we 

identified cannot be explained on the 

basis of a ‘‘capital cycle.’’ For the same 

reasons, we do not believe that it is 

necessary to conduct an analysis of a 

period of 20 or more years, as suggested 

by some commenters, in order to 

account fully for the existence of a 

capital cycle. Our analysis covers almost 

half the 20-year period cited by some 

commenters, and we have no reason to 

believe that it is not a representative 

period in which hospitals across the 

system are at various phases of their 

capital cycles. 

Comment: One commenter contended 

that the elimination of the loss on 


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recapture amount by the BBA of 1997 is 

skewing the calculation of the capital 

margins, which therefore should not be 

the basis for our proposals. 

Response: We also do not agree with 

the commenter who suggested that the 

margins are skewed by the elimination 

of the provision to recognize losses or 

gains on sales. Prior to the BBA of 1997, 

the Medicare program recognized losses 

or gains on sales of capital assets in 

relation to the depreciation that the 

program for which the program paid 

under the cost-based payment system. 

Depreciation payments for the years 

prior to a sale were accordingly adjusted 

in the cost report submitted for the year 

of the sale: an additional payment was 

made for Medicare’s portion of the 

depreciation on the asset if the hospital 

experienced a loss on the sale 

(indicating that prior payments for 

depreciation had been too low). 

Conversely, a portion of Medicare’s 

payments for the depreciation of the 

asset was recaptured (by means of 

reducing payments to the hospital) in 

case of a gain on the sale (indicating that 

prior payments for depreciation had 

been too high). The BBA of 1997 

eliminated recognition of such gains 

and losses on sales under Medicare’s 

cost accounting rules, effective 

December 1, 1997. In light of the 

congressional elimination of this 

provision, we do not believe that it 

would be appropriate (even if it were 

possible) to take any account of the 

possible effects of this provision on the 

margin data that we have analyzed. 

However, it is worth noting that 

elimination of the provision to account 

for gains and losses on sales does not 

necessarily ‘‘skew’’ the margin data in 

the manner suggested by the 

commenter. Because the provision 

operated both to increase payments to 

account for losses on sales, and to 

decrease payments to account for gains 

on sales, the overall effect of the 

provision would not necessarily be (as 

implied by the commenter) to reduce 

the positive margins that are evident in 

the data. 

VI. Changes for Hospitals and Hospital 

Units Excluded From the IPPS 

A. Payments to Excluded Hospitals and 

Hospital Units 

Historically, hospitals and hospital 

units excluded from the prospective 

payment system received payment for 

inpatient hospital services they 

furnished on the basis of reasonable 

costs, subject to a rate-of-increase 

ceiling. An annual per discharge limit 

(the target amount as defined in 

§ 413.40(a)) was set for each hospital or 

hospital unit based on the hospital’s 

own cost experience in its base year. 

The target amount was multiplied by 

the Medicare discharges and applied as 

an aggregate upper limit (the ceiling as 

defined in § 413.40(a)) on total inpatient 

operating costs for a hospital’s cost 

reporting period. Prior to October 1, 

1997, these payment provisions applied 

consistently to all categories of excluded 

providers, which included 

rehabilitation hospitals and units (now 

referred to as IRFs), psychiatric 

hospitals and units (now referred to as 

IPFs), LTCHs, children’s hospitals, and 

cancer hospitals. 

Payment for children’s hospitals and 

cancer hospitals that are excluded from 

the IPPS continues to be subject to the 

rate-of-increase ceiling based on the 

hospital’s own historical cost 

experience. (We note that, in accordance 

with § 403.752(a) of the regulations, 

RNHCIs are also subject to the rate-ofincrease limits established under 

§ 413.40 of the regulations.) 

In the FY 2009 IPPS proposed rule, 

we proposed that the percentage 

increase in the rate-of-increase limits for 

cancer and children’s hospitals and 

RNHCIs would be the percentage 

increase in the FY 2009 IPPS operating 

market basket, which was estimated to 

be 3.0 percent. Consistent with our 

historical approach, we proposed that if 

more recent data was available for the 

final rule, we would use the most recent 

data to calculate the IPPS operating 

market basket for FY 2009. For cancer 

and children’s hospitals and RNHCIs, 

the FY 2009 rate-of-increase percentage 

that is applied to FY 2008 target 

amounts in order to calculate FY 2009 

target amounts is 3.6 percent, based on 

Global Insight, Inc.’s 2008 second 

quarter forecast of the IPPS operating 

market basket increase, in accordance 

with the applicable regulations in 42 

CFR 413.40. 

IRFs, IPFs, and LTCHs were paid 

previously under the reasonable cost 

methodology. However, the statute was 

amended to provide for the 

implementation of prospective payment 

systems for IRFs, IPFs, and LTCHs. In 

general, the prospective payment 

systems for IRFs, IPFs, and LTCHs 

provided transition periods of varying 

lengths during which time a portion of 

the prospective payment was based on 

cost-based reimbursement rules under 

Part 413 (certain providers do not 

receive a transition period or may elect 

to bypass the transition period as 

applicable under 42 CFR Part 412, 

Subparts N, O, and P). We note that the 

various transition periods provided for 

under the IRF PPS, the IPF PPS, and the 

LTCH PPS have ended. 

For cost reporting periods beginning 

on or after October 1, 2002, all IRFs are 

paid 100 percent of the adjusted Federal 

rate under the IRF PPS. Therefore, for 

cost reporting periods beginning on or 

after October 1, 2002, no portion of an 

IRF PPS payment is subject to 42 CFR 

Part 413. Similarly, for cost reporting 

periods beginning on or after October 1, 

2006, all LTCHs are paid 100 percent of 

the adjusted Federal prospective 

payment rate under the LTCH PPS. 

Therefore, for cost reporting periods 

beginning on or after October 1, 2006, 

no portion of the LTCH PPS payment is 

subject to 42 CFR Part 413. Likewise, for 

cost reporting periods beginning on or 

after January 1, 2008, all IPFs are paid 

100 percent of the Federal per diem 

amount under the IPF PPS. Therefore, 

for cost reporting periods beginning on 

or after January 1, 2008, no portion of 

an IPF PPS payment is subject to 42 CFR 

Part 413. 

B. IRF PPS 

Section 1886(j) of the Act, as added by 

section 4421(a) of Public Law 105–33, 

provided for a phase-in of a case-mix 

adjusted PPS for inpatient hospital 

services furnished by IRFs for cost 

reporting periods beginning on or after 

October 1, 2000, and before October 1, 

2002, with payments based entirely on 

the adjusted Federal prospective 

payment for cost reporting periods 

beginning on or after October 1, 2002. 

Section 1886(j) of the Act was amended 

by section 125 of Public Law 106–113 

to require the Secretary to use a 

discharge as the payment unit for 

services furnished under the PPS for 

inpatient rehabilitation hospitals and 

inpatient rehabilitation units of 

hospitals (referred to as IRFs), and to 

establish classes of patient discharges by 

functional-related groups. Section 305 

of Public Law 106–554 further amended 

section 1886(j) of the Act to allow IRFs, 

subject to the blended methodology, to 

elect to be paid the full Federal 

prospective payment rather than the 

transitional period payments specified 

in the Act. 

On August 7, 2001, we issued a final 

rule in the Federal Register (66 FR 

41316) establishing the PPS for IRFs, 

effective for cost reporting periods 

beginning on or after January 1, 2002. 

There was a transition period for cost 

reporting periods beginning on or after 

January 1, 2002, and ending before 

October 1, 2002. For cost reporting 

periods beginning on or after October 1, 

2002, payments are based entirely on 

the adjusted Federal prospective 

payment rate determined under the IRF 

PPS. 


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C. LTCH PPS 

On August 30, 2002, we issued a final 

rule in the Federal Register (67 FR 

55954) establishing the PPS for LTCHs, 

effective for cost reporting periods 

beginning on or after October 1, 2002. 

Except for a LTCH that made an election 

under § 412.533(c) or a LTCH that is 

defined as new under § 412.23(e)(4), 

there was a transition period under 

§ 412.533(a) for LTCHs. For cost 

reporting periods beginning on or after 

October 1, 2006, all LTCHs are paid 100 

percent of the adjusted Federal 

prospective payment rate. 

D. IPF PPS 

In accordance with section 124 of 

Public Law 106–113 and section 

405(g)(2) of Public Law 108–173, we 

established a PPS for inpatient hospital 

services furnished in IPFs. On 

November 15, 2004, we issued in the 

Federal Register a final rule (69 FR 

66922) that established the IPF PPS, 

effective for IPF cost reporting periods 

beginning on or after January 1, 2005. 

Under the requirements of that final 

rule, we computed a Federal per diem 

base rate to be paid to all IPFs for 

inpatient psychiatric services based on 

the sum of the average routine 

operating, ancillary, and capital costs 

for each patient day of psychiatric care 

in an IPF, adjusted for budget neutrality. 

The Federal per diem base rate is 

adjusted to reflect certain patient 

characteristics, including age, specified 

DRGs, selected high-cost comorbidities, 

days of the stay, and certain facility 

characteristics, including a wage index 

adjustment, rural location, indirect 

teaching costs, the presence of a fullservice emergency department, and 

COLAs for IPFs located in Alaska and 

Hawaii. 

We established a 3-year transition 

period during which IPFs whose cost 

reporting periods began on or after 

January 1, 2005, and before January 1, 

2008, would be paid a PPS payment, a 

portion of which was based on 

reasonable cost principles and a portion 

of which was the Federal per diem 

payment amount. For cost reporting 

periods beginning on or after January 1, 

2008, all IPFs are paid 100 percent of 

the Federal per diem payment amount. 

E. Determining LTCH Cost-to-Charge 

Ratios (CCRs) Under the LTCH PPS 

In general, we use a LTCH’s overall 

CCR, which is computed based on either 

the most recently settled cost report or 

the most recent tentatively settled cost 

report, whichever is from the latest cost 

reporting period, in accordance with 

§ 412.525(a)(4)(iv)(B) and 

§ 412.529(c)(4)(iv)(B) for high cost 

outliers and short-stay outliers, 

respectively. (We note that, in some 

instances, we use an alternative CCR, 

such as the statewide average CCR in 

accordance with the regulations at 

§ 412.525(a)(4)(iv)(C) and 

§ 412.529(c)(4)(iv)(C), or a CCR that is 

specified by CMS or that is requested by 

the hospital under the provisions of the 

regulations at § 412.525(a)(4)(iv)(A) and 

§ 412.529(c)(4)(iv)(A).) Under the LTCH 

PPS, a single prospective payment per 

discharge is made for both inpatient 

operating and capital-related costs. 

Therefore, we compute a single 

‘‘overall’’ or ‘‘total’’ LTCH-specific CCR 

based on the sum of LTCH operating 

and capital costs (as described in 

Chapter 3, section 150.24, of the 

Medicare Claims Processing Manual 

(CMS Pub. 100–4)) as compared to total 

charges. Specifically, a LTCH’s CCR is 

calculated by dividing a LTCH’s total 

Medicare costs (that is, the sum of its 

operating and capital inpatient routine 

and ancillary costs) by its total Medicare 

charges (that is, the sum of its operating 

and capital inpatient routine and 

ancillary charges). 

Generally, a LTCH is assigned the 

applicable statewide average CCR if, 

among other things, a LTCH’s CCR is 

found to be in excess of the applicable 

maximum CCR threshold (that is, the 

LTCH CCR ceiling). This is because 

CCRs above this threshold are most 

likely due to faulty data reporting or 

entry, and, therefore, these CCRs should 

not be used to identify and make 

payments for outlier cases. Such data 

are clearly errors and should not be 

relied upon. Thus, under our 

established policy, generally, if a 

LTCH’s calculated CCR is above the 

applicable ceiling, the applicable LTCH 

PPS statewide average CCR is assigned 

to the LTCH instead of the CCR 

computed from its most recent (settled 

or tentatively settled) cost report data. 

In the FY 2008 IPPS final rule with 

comment period, in accordance with 

§ 412.525(a)(4)(iv)(C)(2) for high-cost 

outliers and § 412.529(c)(4)(iv)(C)(2) for 

short-stay outliers, using our established 

methodology for determining the LTCH 

total CCR ceiling, based on IPPS total 

CCR data from the March 2007 update 

to the Provider-Specific File (PSF), we 

established a total CCR ceiling of 1.284 

under the LTCH PPS effective October 

1, 2007, through September 30, 2008. 

(For further detail on our methodology 

for annually determining the LTCH total 

CCR ceiling, we refer readers to the FY 

2007 IPPS final rule (71 FR 48117 

through 48121) and the FY 2008 IPPS 

final rule with comment period (72 FR 

47403 through 47404).) 

Our general methodology established 

for determining the statewide average 

CCRs used under the LTCH PPS is 

similar to our established methodology 

for determining the LTCH total CCR 

ceiling (described above) because it is 

based on ‘‘total’’ IPPS CCR data. Under 

the LTCH PPS high-cost outlier policy at 

§ 412.525(a)(4)(iv)(C) and the short-stay 

outlier policy at § 412.529(c)(4)(iv)(C), 

the fiscal intermediary (or MAC) may 

use a statewide average CCR, which is 

established annually by CMS, if it is 

unable to determine an accurate CCR for 

a LTCH in one of the following 

circumstances: (1) A new LTCH that has 

not yet submitted its first Medicare cost 

report (for this purpose, a new LTCH is 

defined as an entity that has not 

accepted assignment of an existing 

hospital’s provider agreement in 

accordance with § 489.18); (2) a LTCH 

whose CCR is in excess of the LTCH 

CCR ceiling (as discussed above); and 

(3) any other LTCH for whom data with 

which to calculate a CCR are not 

available (for example, missing or faulty 

data). (Other sources of data that the 

fiscal intermediary (or MAC) may 

consider in determining a LTCH’s CCR 

include data from a different cost 

reporting period for the LTCH, data 

from the cost reporting period preceding 

the period in which the hospital began 

to be paid as a LTCH (that is, the period 

of at least 6 months that it was paid as 

a short-term acute care hospital), or data 

from other comparable LTCHs, such as 

LTCHs in the same chain or in the same 

region.) 

In the FY 2009 IPPS proposed rule (73 

FR 23681), in accordance with 

§ 412.525(a)(4)(iv)(C)(2) for high-cost 

outliers and § 412.529(c)(4)(iv)(C)(2) for 

short-stay outliers, using our established 

methodology for determining the LTCH 

total CCR ceiling (described above), 

based on IPPS total CCR data from the 

December 2007 update to the PSF, we 

proposed establishing a total CCR 

ceiling of 1.262 under the LTCH PPS, 

effective for discharges occurring on or 

after October 1, 2008, and before 

October 1, 2009. In Table 8C of that 

same proposed rule, we presented the 

proposed LTCH PPS statewide average 

total CCRs for urban and rural hospitals 

that would be effective for discharges 

occurring on or after October 1, 2008, 

and before October 1, 2009. In the 

proposed rule, we stated that if more 

data became available before 

publication of the final rule, we would 

use such data to determine the final 

statewide average total CCRs for urban 

and rural hospitals under the LTCH PPS 

for FY 2009 using our established 

methodology described above. 


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In this final rule, in accordance with 

§ 412.525(a)(4)(iv)(C)(2) for high-cost 

outliers and § 412.529(c)(4)(iv)(C)(2) for 

short-stay outliers, we are finalizing our 

proposal to use our established 

methodology to determine the LTCH 

total CCR ceiling (described above), 

based on the most recent complete IPPS 

total CCR data. Specifically, using data 

from the March 2008 update of the PSF, 

we are establishing a total CCR ceiling 

of 1.242 under the LTCH PPS, effective 

for discharges occurring on or after 

October 1, 2008, and before October 1, 

2009. 

In addition, in this FY 2009 IPPS final 

rule, in accordance with 

§ 412.525(a)(4)(iv)(C) for high-cost 

outliers and § 412.529(c)(4)(iv)(C) for 

short-stay outliers, using our established 

methodology for determining the LTCH 

statewide average CCRs (described 

above), based on the most recent 

complete IPPS total CCR data from the 

March 2008 update of the PSF, we are 

establishing the LTCH PPS statewide 

average total CCRs for urban and rural 

hospitals that are effective for 

discharges occurring on or after October 

1, 2008, and before October 1, 2009, 

presented in Table 8C of the Addendum 

to this final rule. 

We note that, for this final rule, as we 

proposed and as we established when 

we revised our methodology for 

determining the applicable LTCH 

statewide average CCRs in the FY 2007 

IPPS final rule (71 FR 48119 through 

48121), and as is the case under the 

IPPS, all areas in the District of 

Columbia, New Jersey, Puerto Rico, and 

Rhode Island are classified as urban, 

and, therefore, there are no rural 

statewide average total CCRs listed for 

those jurisdictions in Table 8C of the 

Addendum to this final rule. In 

addition, as we proposed and as we 

established when we revised our 

methodology for determining the 

applicable LTCH statewide average 

CCRs in that same final rule, and as is 

the case under the IPPS, although 

Massachusetts has areas that are 

designated as rural, there were no shortterm acute care IPPS hospitals or LTCHs 

located in those areas as of March 2008. 

Therefore, for this final rule, there is no 

rural statewide average total CCR listed 

for rural Massachusetts in Table 8C of 

the Addendum to this final rule. As we 

also proposed and as we established 

when we revised our methodology for 

determining the applicable LTCH 

statewide average CCRs in the FY 2007 

IPPS final rule (71 FR 48120 through 

48121), in determining the urban and 

rural statewide average total CCRs for 

Maryland LTCHs paid under the LTCH 

PPS, we use, as a proxy, the national 

average total CCR for urban IPPS 

hospitals and the national average total 

CCR for rural IPPS hospitals, 

respectively. We use this proxy because 

we believe that the CCR data on the PSF 

for Maryland hospitals may not be 

accurate (as discussed in greater detail 

in that same final rule (71 FR 48120)). 

F. Change to the Regulations Governing 

Hospitals-Within-Hospitals 

On September 1, 1994, we published 

hospital-within-hospital (HwH) 

regulations to address inappropriate 

Medicare payments to LTCHs that were 

effectively units of other hospitals (59 

FR 45330). There was concern that the 

LTCH HwH model was being used by 

some acute care hospitals paid under 

the IPPS as a way of inappropriately 

receiving higher payments for a subset 

of their cases. Moreover, IPPS-exclusion 

of long-term care ‘‘units’’ was and 

remains inconsistent with the statute. 

Therefore, we codified the HwH 

regulations at 42 CFR 412.23 (currently 

at § 412.22(e)) for a LTCH HwH that is 

co-located with another hospital. A colocated hospital is a hospital that 

occupies space in a building also used 

by another hospital or in one or more 

separate buildings located on the same 

campus as buildings used by another 

hospital. The regulations at § 412.23(e) 

required that, to be excluded from the 

IPPS, long-term care HwHs must have a 

separate governing body, chief medical 

officer, medical staff, and chief 

executive officer from that of the 

hospital with which it is co-located. In 

addition, the HwH must meet either of 

the following two criteria: the HwH 

must perform certain specified basic 

hospital functions on its own and not 

receive them from the host hospital or 

a third entity that controls both 

hospitals; or the HwH must receive at 

least 75 percent of its inpatients from 

sources other than the co-located 

hospital. A third option was added to 

the regulations on September 1, 1995 

(60 FR 45778) that allowed HwHs to 

demonstrate their separateness by 

showing that the cost of the services that 

the hospital obtains under contracts or 

other agreements with the co-located 

hospital or a third entity that controls 

both hospitals is no more than 15 

percent of the hospital’s total inpatient 

operating cost. In 1997, we extended 

application of the HwH rules at § 412.22 

to all classes of IPPS excluded hospitals. 

Therefore, effective for cost reporting 

periods beginning on or after October 1, 

1997, psychiatric, rehabilitation, cancer, 

and children’s hospitals that are colocated with another hospital are also 

required to meet the ‘‘separateness’’

criteria at § 412.22(e). Various other 

changes to the HwH regulations have 

been made over the years. 

In addition, a ‘‘grandfathering’’

provision was added to the regulations 

at § 412.22(f), as provided for under 

section 4417 of the Balanced Budget Act 

(BBA) of 1997 (Pub. L. 105–33). This 

provision of the regulations allowed a 

LTCH that was excluded from the IPPS 

on or before September 30, 1995, and 

was a HwH, to retain its IPPS-excluded 

status even if the HwH criteria at 

§ 412.22(e) could not be met, as long as 

the hospital continued to operate under 

the same terms and conditions as were 

in effect on September 30, 1995. 

Consistent with the grandfathering 

provision under the BBA, which 

applied to LTCHs, we extended the 

application of the grandfathering rule to 

the other classes of IPPS-excluded 

hospitals that are HwHs but did not 

meet the criteria at § 412.22(e). (We 

subsequently expanded this provision to 

allow for a grandfathered hospital to 

make specified changes during 

particular timeframes.) 

As we explained in the FY 2009 IPPS 

proposed rule (73 FR 23682), despite 

extending the grandfathering provision 

to all classes of IPPS-excluded hospitals 

and allowing other changes within that 

provision, it appears that there may be 

a gap in our regulations. There remain 

certain HwHs that may be unnecessarily 

restricted from expanding their bed size 

under current rules. These HwHs were 

IPPS-excluded State-owned hospitals 

that were co-located with a State-owned 

hospital and were both under the same 

State governance at the time the criteria 

at § 412.22(e) were implemented. These 

HwHs remain State-owned hospitals 

operating within a State-owned hospital 

and because of State law requirements, 

both hospitals remain under State 

governance. The HwH has retained the 

IPPS-excluded status by virtue of the 

grandfathering provision at § 412.22(f) 

that precludes changes in the terms and 

conditions under which they operate 

except under specific circumstances. 

Where a State law defines the 

structure and authority of the State’s 

agencies and institutions, and the State 

hospital is co-located with another 

hospital that is under State governance, 

each hospital may have control over the 

day-to-day operations of its respective 

facility and have separate management, 

patient intake, and billing systems and 

medical staff, as well as a governing 

board. However, State law may require 

that the legal accountability for the 

budgets and activities of entities 

operating within a State-run institution 

rests with the State. Therefore, the colocated State hospitals may also be 

governed by a common governing body. 


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Because of State law requirements, these 

HwHs cannot meet the existing HwH 

criteria at § 412.22(e)(1)(i) that requires 

the governing body of a co-located 

hospital to be separate from the 

governing body of the hospital with 

which it shares space. Under the HwH 

rules, a HwH’s governing body may not 

be under the control of the hospital 

occupying space in the same building or 

on the same campus, or of any third 

entity that controls both hospitals. 

Currently, there are State HwHs in 

these types of arrangements that have 

been able to retain their IPPS-excluded 

status solely because of the 

grandfathering provision in § 412.22(f). 

These HwHs were IPPS-excluded even 

before the HwH criteria were 

implemented and remain IPPS-excluded 

HwHs only as long as they continue to 

meet the requirements specified under 

§ 412.22(f)(1), (f)(2), and (f)(3), which 

means that these HwHs cannot increase 

their bed size without losing their IPPSexcluded status under the 

grandfathering provisions (§ 412.22(f)). 

Moreover, if a grandfathered State-run 

HwH increased its bed size, it would be 

unable to qualify as an IPPS-excluded 

HwH under § 412.22(e) because it 

cannot meet the HwH criteria at 

§ 412.22(e)(1)(i) as a result of State law 

requirements regarding its 

organizational structure and 

governance. These HwHs are precluded 

from the flexibility to expand their bed 

size, which is available to other HwHs 

whose organizational structure is not 

bound by State law. 

As stated above, the organizational 

arrangements for these HwHs were in 

place even before the HwH regulations 

were adopted. To the extent the 

arrangements are required by State law, 

we believe they do not reflect attempts 

by entities to establish a nominal 

hospital and, in turn, seek inappropriate 

exclusions. As explained in the FY 2009 

proposed rule, we also believe it is 

unnecessary to prevent State hospitals 

that were created before the HwH 

requirements, and that because of State 

statutory requirements cannot meet the 

subsequently issued separate governing 

body requirements, from being excluded 

from the IPPS if they exercised the same 

flexibility available to other IPPSexcluded HwHs to increase their bed 

capacity. Accordingly, as stated in the 

FY 2009 IPPS proposed rule, we 

proposed adding a provision to the 

regulations that would apply only to 

State hospitals that were already in 

existence when the HwH regulations 

were established. This provision would 

not apply to other State hospitals that 

would like to open as a HwH 

subsequent to the establishment of the 

HwH regulations in FY 1994, under an 

organizational structure the same as or 

similar to the one described in this 

section because these hospitals know, in 

advance of becoming a HwH, the 

requirements that must be met in order 

to be an IPPS-excluded HwH, unlike 

those hospitals that existed before the 

HwH regulations were established. 

Instead of opening the IPPS-excluded 

hospital co-located with another State 

hospital, it can open at another site in 

a manner that is consistent with the 

HwH regulations. 

Accordingly, as proposed, we are 

adding a new paragraph (e)(1)(vi) to 

§ 412.22 to provide that if a hospital 

cannot meet the criteria in 

§ 412.22(e)(1)(i) solely because it is a 

State hospital occupying space with 

another State hospital, the HwH can 

nevertheless qualify for an exclusion 

from the IPPS if that hospital meets the 

other applicable criteria in § 412.22(e) 

and–

• Both State hospitals share the same 

building or same campus and have been 

continuously owned and operated by 

the State since October 1, 1995; 

• Is required by State law to be 

subject to the governing authority of the 

State hospital with which it shares 

space or the governing authority of a 

third entity that controls both hospitals; 

and 

• Was excluded from the inpatient 

prospective payment system before 

October 1, 1995, and continues to be 

excluded from the IPPS through 

September 30, 2008. 

We believe the criteria capture the 

segment of State-operated HwHs that 

were in existence prior to the HwH 

regulations and that are unable to meet 

the current HwH rules because of State 

law regarding governance. These HwHs 

were therefore in existence prior to the 

HwH regulations. We emphasize that we 

proposed allowing an exception to the 

criteria in § 412.22(e)(1)(i) only if the 

hospital that meets the criteria above 

cannot meet the separate governing 

body requirement because of State law. 

We are not providing similar treatment 

for hospitals that are not subject to State 

statutory requirements regarding 

governance but instead chose to 

organize in a manner that would not 

allow them to be an IPPS-excluded 

hospital that meets the HwH criteria at 

§ 412.22(e)(1)(i) but were co-located 

prior to October 1, 1995, because these 

hospitals can revise the way they are 

organized to ensure that they meet the 

governance regulations at § 412.22(e). 

Comment: All commenters, with the 

exception of one organization, strongly 

supported our proposal to allow HwHs 

that meet specific criteria to obtain their 

IPPS-excluded status if they are 

precluded from meeting the separate 

governing body criteria of the HwH 

regulations because of State law, but 

meet all other HwH requirements at 

§ 412.22(e). However, two commenters 

requested that CMS also revise the rules 

governing satellite facilities of IPPSexcluded cancer hospitals that preclude 

bed-size expansion. The commenters 

believed that the same rationale that 

CMS provided for exempting children’s 

hospitals from the expansion limitation 

for satellite facilities could be applied to 

cancer hospitals, and viewed the time it 

took for CMS to explain its rationale for 

not including cancer hospitals as 

evidence that belies the soundness of 

this decision. The commenters also 

contended that the provider-based rules 

that apply to satellite facilities would 

protect against inappropriate utilization, 

and that any financial effect on 

Medicare costs from removing the 

expansion restrictions for IPPSexcluded cancer hospitals would be 

negligible because there are only 11 

IPPS-excluded cancer hospitals. 

Response: We appreciate the support 

of the commenters for the HwH 

proposal. Regarding their request that 

we remove the expansion restrictions 

for satellite facilities of IPPS-excluded 

cancer hospitals, we thank the 

commenters for bringing their concerns 

to our attention. However, we did not 

propose any changes to the regulations 

for satellite facilities at § .22(h) and 

these comments are beyond the scope of 

our rule. Therefore, we are not 

addressing those particular comments. 

We refer the commenters to our FY 2007 

IPPS final rule, appearing in the August 

18, 2006 Federal Register (71 FR 48106 

through 48115), that provides detailed 

comments and responses regarding our 

policy with respect to satellite facilities. 

Comment: One commenter suggested 

an alternative approach to our proposal 

that would permanently grandfather 

IPPS-excluded cancer HwHs, allowing 

them to increase their bed size 

regardless of ownership and still retain 

their IPPS-excluded status. The 

commenter believed this would be more 

reflective of congressional intent 

regarding payment to IPPS-excluded 

cancer hospitals because Congress did 

not impose bed size limitations on these 

hospitals and that it would represent 

sound Medicare policy. The commenter 

also believed this approach would level 

the playing field for all IPPS-excluded 

cancer hospitals. 

Response: Our proposal is only with 

respect to the HwH regulations at 

§ 412.22(e) and not to the grandfathered 

provision at § 412.22(f). This comment 

is beyond the scope of our proposal. 


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Therefore, we are not responding to the 

comment in this rule. 

Comment: One commenter had 

numerous objections to our proposal for 

State-operated HwHs. The commenter 

believed CMS was providing special 

treatment to a subset of grandfathered 

HwHs by allowing them to retain their 

grandfathered status, yet increase their 

bed size, which is contrary to its past 

actions regarding grandfathered HwHs; 

that there is no basis for our proposal; 

and that it is inconsistent with the 

legislative intent of the grandfathering 

provisions. The commenter also pointed 

out that all grandfathered HwHs could 

experience the need to add beds, not 

just State-owned HwHs. Furthermore, 

the commenter contended that States 

have the ability to create or change 

ownership arrangements in order to 

meet the HwH criteria. 

Response: The commenter has 

misunderstood our proposal. A 

grandfathered State-owned HwH that is 

precluded from meeting the separate 

governance criteria in § 412.22(e) of the 

regulations because of State statutory 

requirements would lose its 

grandfathered status (in other words, it 

would no longer be exempt from the 

‘‘separateness and control’’ criteria in 

§ 412.22(e) if it added beds). However, 

under the proposal and our final policy, 

such a hospital could remain an HwH 

if it met all of the applicable HwH 

criteria in § 412.22(e) except for the 

separate governance requirement in 

§ 412.22(e)(1)(i). This policy is 

consistent with our longstanding policy 

that grandfathered HwHs cannot add 

beds and remain grandfathered. 

However, HwHs have always remained, 

and continue to remain, free to add beds 

if they meet the applicable HwH criteria 

in § 412.22(e). Furthermore, we are not 

singling out a particular type of HwH 

such as an LTCH HwH. Rather, we 

proposed to allow any type of HwH that 

was in existence prior to the HwH 

regulations and that is precluded by 

State law from meeting the separate 

governance criteria if it is State-owned 

along with the hospital with which it is 

co-located, to be an HwH so long as it 

meets the remaining applicable HwH 

criteria in § 412.22(e). With respect to 

the commenter’s point that all 

grandfathered HwHs, not just Stateowned HwHs, could experience the 

need to add beds, as discussed above, 

we believe the commenter has 

misunderstood our proposed (and thus 

final policy) to mean that a State-owned 

grandfathered HwH is being given 

special treatment under our regulations 

to add beds and remain grandfathered. 

As explained previously, this is not the 

case, as these hospitals will lose their 

grandfathered status to the extent they 

add beds. In general, under our final 

policy, we are merely providing a very 

narrow exception so that hospitals that 

were in existence prior to the HwH 

regulations and that are operating under 

specific arrangements required by State 

law that prevent the hospitals from 

complying with the separate governance 

requirement in § 412.22(e) can continue 

to be HwHs so long as they meet the 

other ‘‘separateness and control’’

policies set forth in the regulations. 

Under this particular circumstance, we 

do not believe the hospitals are acting 

as nominal hospitals and therefore IPPS 

exclusion remains appropriate. 

Furthermore, just as we have broad 

authority under sections 1102 and 1871 

of the Act to create the HwH 

regulations, we equally have broad 

authority under those provisions of the 

statute to create exceptions within those 

regulations as appropriate. 

Comment: One commenter contended 

that being a State-owned provider is not 

an insurmountable obstacle to the 

separate governance criteria because 

States have the latitude to create or 

change governance rules to conform to 

the HwH criteria and that this is no 

more burdensome than promulgating 

regulations is to CMS. The commenter 

also stated that compliance with the 

HwH rules would be impossible for 

grandfathered HwHs and the hospital 

with which it shares space if they are 

commonly owned by religious 

organizations. The commenter indicated 

that these HwHs would not be able to 

change their organizational and 

governance structures to comply with 

the HwH provision because they would 

not be able to change the religion of the 

organizations of which they are a part. 

Response: We disagree that religious 

organizations are precluded from 

complying with the separate governance 

criteria. In this type of situation, 

separate financial control could be 

created without changing religious 

control. 

While not unequivocally disputing 

the commenter’s assertion that States 

have the ability to change governance 

arrangements in order to comply with 

the HwH separateness criteria, we do 

know that the processes required to do 

so could involve a lengthy legislative 

process at the State level and be far 

more onerous than making an exception 

to one of the HwH criteria for a handful 

of HwHs through the rulemaking 

process. We believe that the time 

required for a State to make the changes 

that would allow State-owned facilities 

to meet the HwH criteria could be 

measured in terms of years rather than 

months. Furthermore, there are clearly 

situations, such as a State-run HwH colocated with a State-run university 

hospital, where it is to the benefit of all 

affected parties, including Medicare 

beneficiaries, to continue the 

relationship as it exists. This kind of colocated status provides a venue for 

training medical students and residents, 

as well as attracting physician scientists 

and promoting research efforts. Unlike 

the scenarios that prompted CMS to 

develop the HwH regulations, we see no 

deleterious effects occurring to the 

Medicare program from the adoption of 

our proposal. Therefore, after 

consideration of the public comments 

received and for the reasons explained 

previously throughout this section, we 

are adopting as final our proposal 

without change. 

G. Report of Adjustment (Exceptions) 

Payment 

Section 4419(b) of Public Law 105–33 

requires the Secretary to publish 

annually in the Federal Register a 

report describing the total amount of 

adjustment payments made to excluded 

hospitals and units, by reason of section 

1886(b)(4) of the Act, during the 

previous fiscal year. 

The process of requesting, 

adjudicating, and awarding an 

adjustment payment is likely to occur 

over a 2-year period or longer. First, 

generally, an excluded hospital or 

excluded unit of a hospital must file its 

cost report for a fiscal year in 

accordance with § 413.24(f)(2). The 

fiscal intermediary reviews the cost 

report and issues a Notice of Program 

Reimbursement (NPR). Once the 

hospital receives the NPR, if its 

operating costs are in excess of the 

ceiling, the hospital may file a request 

for an adjustment payment. After the 

fiscal intermediary receives the 

hospital’s request in accordance with 

applicable regulations, the fiscal 

intermediary or CMS, depending on the 

type of adjustment requested, reviews 

the request and determines if an 

adjustment payment is warranted. This 

determination is sometimes not made 

until more than 6 months after the date 

the request is filed because there are 

times when the applications are 

incomplete and additional information 

must be requested in order to have a 

completed application. However, in an 

attempt to provide interested parties 

with data on the most recent 

adjustments for which we do have data, 

we are publishing data on adjustment 

payments that were processed by the 

fiscal intermediary or CMS during FY 

2007. 

The table below includes the most 

recent data available from the fiscal 


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intermediaries and CMS on adjustment 

payments that were adjudicated during 

FY 2007. As indicated above, the 

adjustments made during FY 2007 only 

pertain to cost reporting periods ending 

in years prior to FY 2006. Total 

adjustment payments given to excluded 

hospitals and units during FY 2007 are 

$9,862,685. The table depicts for each 

class of hospitals, in the aggregate, the 

number of adjustment requests 

adjudicated, the excess operating cost 

over ceiling, and the amount of the 

adjustment payments. 

Class of hospital Number Excess cost 

over ceiling 

Adjustment 

payments 

Psychiatric .................................................................................................................................... 13 $8,223,003 $3,756,831 

Long-Term Care .......................................................................................................................... 1 4,962,747 584,150 

Children’s ..................................................................................................................................... 2 1,082,666 824,308 

Cancer ......................................................................................................................................... 2 7,168,945 3,186,072 

Religious Nonmedical Health ...................................................................................................... ........................ ........................ ........................

Care Institution ............................................................................................................................. 11 3,619,026 1,511,324 

Total ...................................................................................................................................... ........................ ........................ 9,862,685 

VII. Disclosure Required of Certain 

Hospitals and Critical Access Hospitals 

(CAHs) Regarding Physician Ownership 

(§ 489.2(u) and (v)) 

Section 1866 of the Act states that any 

provider of services (except a fund 

designated for purposes of sections 

1814(g) and 1835(e) of the Act) shall be 

qualified to participate in the Medicare 

program and shall be eligible for 

Medicare payments if it files with the 

Secretary a Medicare provider 

agreement and abides by the 

requirements applicable to Medicare 

provider agreements. These 

requirements are incorporated into our 

regulations in 42 CFR part 489, subparts 

A and B. 

In the FY 2008 IPPS final rule with 

comment period, we revised our 

regulations governing Medicare 

provider agreements, specifically 

§ 489.20(u), to require a hospital to 

disclose to all patients whether it is 

physician-owned and, if so, the names 

of its physician owners (72 FR 47385 

through 47387). In addition, we added 

a definition of physician-owned 

hospital at § 489.3. (Because the 

definition of physician-owned hospital 

at § 489.3 includes a critical access 

hospital, for ease of reference and 

readability, the term ‘‘hospital,’’ when 

used in the context of a physicianowned hospital, is intended to include 

a CAH.) The disclosure requirement in 

current § 489.20(u), as amended by the 

FY 2008 IPPS final rule with comment 

period, is applicable only to those 

hospitals with physician ownership; we 

neglected to include those hospitals in 

which no physician held an ownership 

or investment interest, but in which an 

immediate family member of a referring 

physician held an ownership or 

investment interest. However, it was 

always our intent to have consistency 

between the disclosure requirements 

and the physician self-referral statute 

and regulations. The physician selfreferral statute and regulations, which 

recognize the potential for program and 

patient abuse where a financial 

relationship exists, are applicable to 

both a physician and the immediate 

family member of the physician. 

Therefore, in the FY 2009 IPPS 

proposed rule, we proposed to revise 

the language in § 489.3 to define a 

‘‘physician-owned hospital’’ as a 

participating hospital in which a 

physician, or an immediate family 

member of a physician (as defined at 

§ 411.351), has an ownership or 

investment interest in the hospital (73 

FR 23683). In this final rule, we are 

finalizing our proposal. We believe that 

it is necessary to revise our definition of 

physician-owned hospital because a 

physician’s potential conflict of interest 

occurs not only in those instances 

where he or she has a financial 

relationship in the form of an ownership 

or investment interest, but also where 

his or her immediate family member has 

a similar interest, and patients should 

be informed of this as part of making an 

informed decision concerning 

treatment. 

Following publication of the FY 2008 

IPPS final rule with comment period, 

we became aware that some physicianowned hospitals have no physician 

owners who refer patients to the 

hospital (for example, in the case of a 

hospital whose physician-owners have 

retired from the practice of medicine). 

In the FY 2009 IPPS proposed rule, we 

proposed to include in § 489.20(v) new 

language to provide for an exception to 

the disclosure requirements for a 

physician-owned hospital (as defined at 

§ 489.3) that does not have any 

physician owners who refer patients to 

the hospital (and that has no referring 

physicians (as defined at § 411.351) who 

have an immediate family member with 

an ownership or investment interest in 

the hospital), provided that the hospital 

attests, in writing, to that effect and 

maintains such attestation in its files for 

review by State and Federal surveyors 

or other government officials (73 FR 

23683). In this final rule, we are 

finalizing our proposal. We believe that 

requiring a hospital with no referring 

physician owners to disclose to all 

patients that it is physician-owned and 

to provide the patients with a list of the 

(nonreferring) physician owners would 

be an unnecessary burden on the 

hospital and of no value in assisting a 

patient in making an informed decision 

as to where to seek treatment. Similarly, 

we do not believe that it is useful to 

require a hospital to make such 

disclosures when no referring physician 

has an immediate family member who 

has an ownership or investment interest 

in the hospital. 

In the FY 2009 IPPS proposed rule, 

we proposed to revise § 489.20(u) to 

specify that a physician-owned hospital 

must furnish to patients the list of 

owners and investors who are 

physicians (or immediate family 

members of physicians) at the time the 

list is requested by or on behalf of the 

patient (73 FR 23683). (Currently, 

§ 489.20(u) provides that a physicianowned hospital must provide a list of its 

owners and investors to patients but 

does not specify when the list must be 

provided.) In this final rule, we are 

finalizing our proposal. We believe that 

it is critical that the patient receives the 

list of names of the relevant owners or 

investors at the time the request is made 

by or on behalf of the patient so that the 

patient may make a determination as to 

whether his or her admitting or referring 

physician has a potential conflict of 

interest. Also, furnishing the list at the 

time the request is made by the patient 

or on behalf of the patient is crucial to 

affording the patient an opportunity to 

make an informed decision before 

treatment is furnished at the physicianowned hospital. 


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In addition, we proposed to add new 

§ 489.20(u)(2) to require a physicianowned hospital to require all physicians 

who are members of the hospital’s 

medical staff to agree, as a condition of 

continued medical staff membership or 

admitting privileges, to disclose in 

writing to all patients whom they refer 

to the hospital any ownership or 

investment interest in the hospital held 

by themselves or by an immediate 

family member (73 FR 23684). We 

proposed to require that physicians 

agree to make such disclosures at the 

time they refer patients to the hospital. 

In this final rule, we are finalizing our 

proposal. We believe that early 

notification of physician ownership or 

investment in the hospital is beneficial 

to the patient’s decision-making 

concerning his or her treatment. 

Requiring a physician to notify patients 

of his or her ownership or investment 

interest at the time of the referral will 

afford patients the opportunity to 

discuss the physician’s ownership or 

investment interest in the hospital and 

make a more informed decision. 

In the FY 2009 IPPS proposed rule, 

we also proposed to revise § 489.53 to 

permit CMS to terminate the Medicare 

provider agreement if a physicianowned hospital fails to comply with the 

provisions of proposed § 489.20(u), 

discussed above, or if a hospital or CAH 

fails to comply with the requirements 

set forth in § 489.20(v) (which we 

proposed to redesignate as § 489.20(w) 

(73 FR 23684 through 23685). (In the FY 

2008 IPPS final rule with comment 

period, we added a new provision at 

§ 489.20(v) to require that hospitals and 

CAHs: (1) Furnish all patients written 

notice at the beginning of their inpatient 

hospital stay or outpatient service if a 

doctor of medicine or a doctor of 

osteopathy is not present in the hospital 

24 hours per day, 7 days per week; and 

(2) describe how the hospital or CAH 

will meet the medical needs of any 

patient who develops an emergency 

medical condition at a time when no 

physician is present in the hospital or 

CAH (72 FR 47387).) In this final rule, 

we are finalizing these proposals. We 

believe that these revisions are 

necessary to enforce the disclosure 

requirements set forth in § 489.20(v) and 

redesignated § 489.20(w). 

We received approximately 20 public 

comments, most of which were 

supportive of our proposals. After 

consideration of the public comments 

received, we are adopting, with some 

modification, our proposals as final. The 

new provisions are codified in revised 

§§ 489.3, 489.20(u), (v), and (w), and 

489.53. We stated in our proposal with 

respect to redesignated § 489.20(w), that 

we were proposing to revise § 489.53 to 

permit CMS to terminate the Medicare 

provider agreement of any hospital or 

CAH that fails to comply with the 

requirements set forth in proposed 

redesignated § 489.20(w) (73 FR 23684). 

This proposal was consistent with the 

current rule’s application to all 

hospitals and CAHs that do not have a 

physician on-site 24 hours per day, 7 

days per week. However, our proposed 

revisions to the regulatory text 

inadvertently were worded so as to 

imply that this enforcement action 

could be taken only in the case of a 

violation by a physician-owned 

hospital. In this final rule, we are 

amending the proposed regulatory text 

of § 489.53(c) by adding language so that 

the provision of paragraph (c) applies to 

all hospitals and CAHs (and not just 

physician-owned hospitals and CAHs) 

covered by redesignated § 489.20(w). In 

response to our solicitation of comments 

regarding whether hospitals and CAHs 

should educate patients about the 

availability of information regarding 

physician ownership under the 

proposed disclosure requirements, we 

are not adopting any such requirement 

at this time. 

Comment: Most commenters strongly 

supported our proposals to: (1) Revise 

the definition of a physician-owned 

hospital to include hospitals in which 

an ownership interest is held by a 

physician or his or her immediate 

family member; (2) require hospitals to 

provide to the patient at the time the list 

is requested, by or on behalf of the 

patient, the names of each physician 

and immediate family member with an 

ownership interest in the hospital; (3) 

create an exception to the disclosure 

requirements for a physician-owned 

hospital (as defined at revised § 489.3) 

that does not have any physician 

owners who refer patients to the 

hospital (and that has no referring 

physicians (as defined at § 411.351) who 

have an immediate family member with 

an ownership or investment interest in 

the hospital); and (4) terminate the 

Medicare provider agreement of a 

hospital that does not comply with the 

disclosure requirements set forth in 

revised §§ 489.20(u)(1) and (u)(2), and 

redesignated § 489.20(w). One 

commenter contended that receiving the 

list of physician owners after admission 

occurs or even at the point of 

registration is too late to provide a 

meaningful period of discussion and 

reflection, and an opportunity for the 

patient to make a choice. The 

commenter asserted that the 

amendments and enhancements in the 

proposed rule will enable informed 

patient decisions and strengthen 

transparency in physician financial 

relationships that may conflict with a 

patient’s best interest. 

Response: We are adopting our 

proposals as final for the reasons stated 

above (see §§ 489.3, 489.20(u)(1) and 

(u)(2), (v), and (w), and 489.53). 

Comment: One commenter, 

supportive of the proposed revisions 

regarding disclosure of a physician’s, or 

his or her immediate family member’s, 

ownership or investment interest in a 

hospital, recommended that we state in 

the final rule that physician financial 

interests in hospitals to which they refer 

patients is viewed positively by patients 

and that such interests should not be 

presumed to be improper or 

inappropriate. 

Response: We are not adopting the 

language suggested by the commenter 

because we do not want to take any 

position as to whether or not patients 

are generally satisfied with physician 

ownership. With respect to the 

commenter’s suggestion that we state 

affirmatively that physician ownership 

should not be presumed to be improper 

or inappropriate, we cannot adopt such 

language. As we stated in the FY 2008 

IPPS final rule with comment period (72 

FR 47388), we believe that the physician 

ownership disclosure requirement 

would permit an individual to make 

more informed decisions regarding his 

or her treatment and to evaluate 

whether the existence of a financial 

relationship, in the form of an 

ownership interest, suggests a conflict of 

interest that is not in the patient’s best 

interest. We believe that our preamble 

language is consistent with the statute 

and there is no basis for incorporating 

the language recommended by the 

commenter. We believe patients will be 

able to make appropriate use of 

information disclosed by hospitals 

regarding ownership by physicians or 

their immediate family members. 

However, disclosure to patients, 

standing alone, does not adequately 

protect against inappropriate referrals 

by health care providers and 

practitioners. 

Comment: Several commenters 

requested that we revisit our 

requirement in § 489.20(v) (now 

redesignated as § 489.20(w)) that a 

hospital that does not have a physician 

on the hospital premises 24 hours per 

day, 7 days per week, disclose this fact 

to all patients and describe how the 

hospital would treat patients with an 

emergency medical condition. The 

commenters suggested that the 

requirement be limited to inpatient 

admissions only and those outpatient 

visits that include surgery, other 


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invasive procedures, use of general 

anesthesia or other high-risk treatment. 

In addition, the commenters 

recommended that emergency 

department services be excluded. One 

commenter contended that the intended 

focus of the requirement was on 

physician-owned specialty hospitals, 

arguing that full-service community 

hospitals are part of a network of care 

and that there is no need for them to be 

subject to this requirement. Two 

commenters objected to the patient 

notification requirements on the basis 

that they are particularly burdensome to 

CAHs and small rural hospitals. 

Response: The issues raised, and the 

suggestions made, by the commenters 

are outside the scope of the provisions 

of the proposed rule, as we did not 

propose to make any changes to the 

patient notification requirements in 

redesignated § 489.20(w). We will take 

into consideration, for purposes of 

possible future rulemaking, the 

comments that the notification 

requirements be limited to inpatient 

admissions only and certain outpatient 

visits, and that emergency department 

services be excluded. We note that we 

do not agree with the commenters who 

asserted that this requirement should be 

applied only to physician-owned 

specialty hospitals, for the reasons that 

we stated in the FY 2008 IPPS final rule 

with comment period (72 FR 47388), 

nor do we agree with the commenter 

that suggested the notification 

requirements should not apply to CAHs 

and small rural hospitals. It is important 

for consumers to be informed whether 

or not a physician is always on site, and 

how emergency medical conditions will 

be handled when no physician is 

available. In this regard, we note that 

there are no restrictions on the types of 

services CAHs and small rural hospitals 

may provide, as compared to other types 

of hospitals. Moreover, we do not 

believe the patient notification 

requirements are onerous for any type or 

size of hospital. 

Comment: One commenter concurred 

that proposed enforcement through the 

possibility of termination of the 

individual physician’s Medicare 

provider agreement for noncompliance 

is appropriate. A second commenter 

recommended that we provide 

clarification of what form of 

investigative and administrative 

procedures CMS will follow in order to 

provide hospitals and CAHs ‘‘due 

process’’ prior to terminating a Medicare 

provider agreement. A third commenter 

requested clarification of CMS’

enforcement mechanism, and urged 

CMS to implement a progressive 

discipline system with termination of 

the Medicare provider agreement as the 

final, rather than the only, step. 

Response: We believe that the 

commenters misunderstood either our 

proposal or our procedures for 

terminating Medicare provider 

agreements. We did not propose to take 

action against individual physicians as 

a result of violations of § 489.20(u) and 

redesignated § 489.20(w). (We note that 

physicians do not enter into Medicare 

provider agreements.) The requirements 

in § 489.20(u) and redesignated § 489.20 

(w) apply to hospitals and CAHs and, 

thus, the termination action provided 

for in § 489.53(c) also applies to 

hospitals and CAHs. When CMS takes 

enforcement action pursuant to 

§ 489.53, it follows the procedures 

described in section 3030 of the State 

Operations Manual. In brief, the CMS 

Regional Office will base its termination 

action on documentation that supports 

a finding that the hospital or CAH is not 

complying with the terms of the 

Medicare provider agreement, in this 

case § 489.20(u)(1) or (u)(2), or 

§ 489.20(w). The CMS Regional Office 

provides a preliminary notice of 

termination to the hospital or CAH by 

letter, giving it time to correct the 

deficiency and come into compliance. If 

the hospital or CAH provides credible 

evidence in a timely manner that the 

cause for termination has been removed, 

CMS does not proceed with formal 

termination action. CMS may or may 

not require a survey of the hospital or 

CAH to confirm the correction of the 

deficient practice. If the hospital or CAH 

fails to come into compliance within the 

allotted timeframe, the CMS Regional 

Office issues a formal termination notice 

to the provider. The public is also 

provided advance notice of CMS’ intent 

to terminate the Medicare provider 

agreement. The notice to the provider 

includes details of the hospital or CAH’s 

appeal rights and information about 

where to file an appeal. This process is 

generally the same one used when CMS 

determines that a hospital or CAH fails 

to comply with a Medicare CoP, or with 

the requirements of the EMTALA. 

Comment: Several commenters 

responded to our solicitation of 

comments regarding whether hospitals 

and CAHs should educate patients 

about the availability of information 

regarding physician ownership under 

the proposed disclosure requirements. 

One commenter questioned the utility of 

mandating additional signage or other 

educational materials. The commenter 

asserted that patients are already 

confronted with visual ‘‘clutter’’ in 

waiting/admitting rooms, and stated 

that any additional requirements to 

educate patients on ownership interests 

are redundant in light of the other 

disclosure proposals included in the FY 

2009 IPPS proposed rule. A second 

commenter also expressed opposition to 

the proposal that hospitals educate 

patients about the availability of 

information regarding physician 

ownership. The commenter opposed the 

education requirement ‘‘due to the lack 

of research that a patient’s knowledge of 

physician ownership of a hospital 

affects a patient’s choice of hospital,’’

and asserted that the proposal would 

represent an unnecessary burden. 

Response: At this time, we are not 

adopting a requirement that hospitals 

educate patients regarding physician 

ownership in hospitals. We believe that 

the provisions in §§ 489.20(u)(1) and 

(u)(2) will provide patients with prompt 

and sufficient notification of a 

physician’s or immediate family 

member’s ownership or investment 

interest in the hospital. 

VIII. Physician Self-Referral Provisions 

(§§ 411.351, 411.352, and 411.354) 

A. General Overview 

1. Statutory Framework and Regulatory 

History 

Section 1877 of the Social Security 

Act (the Act), also known as the 

physician self-referral law: (1) Prohibits 

a physician from making referrals for 

certain ‘‘designated health services’’

(DHS) payable by Medicare to an entity 

with which he or she (or an immediate 

family member) has a financial 

relationship (ownership or 

compensation), unless an exception 

applies; and (2) prohibits the entity from 

filing claims with Medicare (or billing 

another individual, entity, or third party 

payer) for those DHS rendered as a 

result of a prohibited referral. The 

statute establishes a number of specific 

exceptions and grants the Secretary the 

authority to create regulatory exceptions 

for financial relationships that pose no 

risk of program or patient abuse. The 

current version of section 1877 of the 

Act, which applies to referrals for 11 

DHS, has been in effect and subject to 

enforcement since January 1, 1995. The 

following is a chronology of relevant 

physician self-referral rules published 

in the Federal Register. 

• January 9, 1998—Proposed rule (63 

FR 1659) 

• January 4, 2001—Phase I of the final 

rulemaking—(Phase I)—Final rule 

with comment period; effective 

January 4, 2002 (66 FR 856) 

• March 26, 2004—Phase II of the final 

rulemaking—(Phase II)—Interim 

final rule with comment period; 

effective July 26, 2004 (69 FR 

16054) 


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• July 12, 2007—CY 2008 Physician Fee 

Schedule (PFS)—Proposed rule (72 

FR 38122, 38179). This proposed 

rule included the proposals 

regarding the following issues, 

which are finalized in this FY 2009 

IPPS final rule: 

• Alternative Criteria for Satisfying 

Certain Exceptions 

• Percentage-Based Compensation 

Formulae 

• Unit-of-Service (Per-Click) 

Payments in Space and Equipment 

Leases 

• Services Furnished ‘‘Under 

Arrangements’’

• Obstetrical Malpractice Insurance 

Subsidies 

• Burden of Proof 

• Ownership or Investment Interest in 

Retirement Plans 

• September 5, 2007—Phase III of the 

final rulemaking—(Phase III)—Final 

rule; effective December 4, 2007 (72 

FR 51012) 

• November 15, 2007—Final Rule 

delaying effective date of ‘‘stand in 

the shoes’’ provisions for certain 

compensation arrangements (72 FR 

64161) 

• April 30, 2008—FY 2009 Inpatient 

Prospective Payment System—

Proposed rule (73 FR 23683). 

Proposals regarding the following 

issues were included in the FY 

2009 IPPS proposed rule and are 

finalized in this FY 2009 IPPS final 

rule: 

• ‘‘Stand in the Shoes’’ Provisions 

(physician ‘‘stand in the shoes’’

provisions were proposed for the 

first time in the FY 2009 IPPS 

proposed rule; entity ‘‘stand in the 

shoes’’ provisions were re-proposed 

from the CY 2008 PFS proposed 

rule) 

• Period of Disallowance 

• Disclosure of Financial 

Relationships Report (DFRR) 

2. Physician Self-Referral Provisions 

Finalized in This FY 2009 IPPS Final 

Rule 

In this final rule, we make various 

revisions to the physician self-referral 

regulations. Some of the revisions were 

proposed in the CY 2008 PFS proposed 

rule (72 FR 38122, 38179) and some of 

the revisions were proposed in the FY 

2009 IPPS proposed rule (73 FR 23528, 

23683). (We note that one of the 

proposals from the CY 2008 PFS 

proposed rule, our proposal to consider 

a DHS entity to stand in the shoes of an 

entity that it wholly owns or controls, 

was re-proposed in the FY 2009 IPPS 

proposed rule to require a DHS entity to 

stand in the shoes of an organization in 

which it holds a 100 percent ownership 

interest. We are not finalizing either 

proposal regarding the DHS entity 

‘‘stand in the shoes’’ provisions, as 

discussed below in section VIII.B. of 

this preamble.) We are finalizing the 

proposals from the CY 2008 PFS 

proposed rule in this FY 2009 IPPS final 

rule. Many of the proposals from the 

two proposed rules are related, and 

finalizing them in one rulemaking will 

assist the public in understanding the 

final revisions to the regulations and 

analyzing their integrated application to 

financial relationships between DHS 

entities and referring physicians. For 

example, in the CY 2008 PFS proposed 

rule, we proposed an alternative method 

for compliance with certain provisions 

of certain exceptions. In the FY 2009 

IPPS proposed rule, we proposed to 

specify an outside limit on the period of 

disallowance for certain noncompliant 

financial relationships. Together, as 

finalized, these regulations provide 

guidance to parties to a financial 

arrangement who have failed to obtain 

a required signature on a written 

agreement. (See sections VIII.C. and 

VIII.D. of this preamble.) 

In response to our proposals in the CY 

2008 PFS proposed rule, several 

commenters asserted that we should 

further contemplate the issues with 

which we noted concern and propose 

revised regulatory provisions in the CY 

2009 PFS proposed rule if we continue 

to believe that such revisions are 

necessary. We responded in the CY 

2008 PFS final rule that we were not 

inclined to follow the commenters’

suggestion regarding reproposal of the 

physician self-referral provisions in the 

CY 2009 PFS proposed rule. We 

expressed confidence that we have 

sufficient information, both from the 

commenters and our independent 

research, to finalize revisions to the 

physician self-referral regulations 

without the need for new proposals and 

additional public comment. However, 

given the number of physician selfreferral proposals, the significance of 

the provisions both individually and in 

concert with each other, and the volume 

of public comments, in the interest of 

prudence, we did not finalize any of the 

proposals in the CY 2008 PFS final rule 

with comment period (except for the 

proposal for anti-markup provisions for 

diagnostic tests). We stated our intent to 

publish a final rule that addresses the 

following proposals: (1) Burden of 

proof; (2) obstetrical malpractice 

insurance subsidies; (3) unit-of-service 

(per-click) payments in lease 

arrangements; (4) the period of 

disallowance for noncompliant financial 

relationships; (5) ownership or 

investment interests in retirement plans; 

(6) ‘‘set in advance’’ and percentagebased compensation arrangements; (7) 

DHS entity ‘‘stand in the shoes’’

provisions; (8) alternative criteria for 

satisfying certain exceptions; and (9) 

services furnished ‘‘under 

arrangements.’’ We stated further that a 

measured, thoughtful approach to the 

final physician self-referral rules is 

critical, and that the future rulemaking 

would address the public comments and 

present a coordinated, comprehensive 

approach to accomplishing the goals 

described in the proposed rule, namely, 

minimizing the threat of program and 

patient abuse while providing sufficient 

flexibility to enable those who are 

parties to financial relationships to 

satisfy the requirements of, and remain 

in compliance with, the physician selfreferral law and the exceptions thereto. 

Finalizing together the proposals from 

the CY 2008 PFS and the FY 2009 IPPS 

proposed rules is consistent with our 

outlined approach. 

The following chart identifies the 

revisions to the physician self-referral 

regulations included in this final rule 

and indicates the rule in which the 

revisions were proposed. 

FY 2009 

IPPS final 

rule section 

Issue/final rule Rulemaking where proposed 

VIII.B ............ ‘‘Stand in the Shoes’’ Provisions ............................ Physician ‘‘stand in the shoes’’ provisions—FY 2009 IPPS proposed rule 

DHS Entity ‘‘stand in the shoes’’ provisions—CY 2008 PFS proposed 

rule; re-proposed in FY 2009 IPPS proposed rule. 

VIII.C ........... Period of Disallowance ........................................... Solicitation of comments in CY 2008 PFS proposed rule; Proposal in FY 

2009 IPPS proposed rule. 

VIII.D ........... Alternative Method for Compliance with Certain 

Exceptions.

CY 2008 PFS proposed rule. 

VIII.E ............ Percentage-based Compensation Formulae .......... CY 2008 PFS proposed rule. 


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FY 2009 

IPPS final 

rule section 

Issue/final rule Rulemaking where proposed 

VIII.F ............ Unit-of-service (‘‘Per-click’’) Payments in Lease Arrangements.CY 2008 PFS proposed rule. 

VIII.G ........... Services Provided ‘‘Under Arrangements’’ ............. CY 2008 PFS proposed rule. 

VIII.H ........... Exception for Obstetrical Malpractice Insurance 

Subsidies.

CY 2008 PFS proposed rule. 

VIII.I ............. Ownership or Investment Interest in Retirement 

Plans.

CY 2008 PFS proposed rule. 

VIII.J ............ Burden of Proof ....................................................... CY 2008 PFS proposed rule. 

In reviewing and analyzing public 

comments, and revising the physician 

self-referral rules, we carefully consider 

the history and structure of section 1877 

of the Act. We address in this final rule 

many of the industry’s primary 

concerns, and believe that the regulatory 

revisions finalized here are consistent 

with the statute’s goals and directives, 

and protect beneficiaries of Federal 

health care programs. We have 

endeavored to simplify the rules where 

possible and provide additional 

guidance in response to comments, as 

well as to reduce the burden on the 

regulated community by modifying 

exceptions created using the Secretary’s 

authority under section 1877(b)(4) of the 

Act. Detailed descriptions of the 

proposals and regulatory revisions 

included in this final rule are found in 

sections VIII.B. through VIII.J. of this 

preamble and are not repeated in this 

general overview. However, we note the 

following issues of significance that are 

included in this final rule: 

• The provisions regarding ownership 

or investment interests in retirement 

plans, burden of proof, and period of 

disallowance are finalized and effective 

October 1, 2008. 

• Revisions to the physician ‘‘stand in 

the shoes’’ provisions require owners 

(other than titular owners) and permit 

non-owner physicians (and titular 

owners) to stand in the shoes of their 

physician organizations and address the 

application of the rules to the AMC 

exception. These regulations are 

effective October 1, 2008. 

• We are not finalizing the DHS entity 

‘‘stand in the shoes’’ provisions at this 

time. 

• The proposal for an alternative 

method for compliance is finalized with 

a modified, narrow scope of application 

for missing signature requirements only, 

effective October 1, 2008. 

• Percentage-based compensation 

formulae prohibitions are finalized with 

a narrower scope, specifically 

addressing the exceptions applicable to 

office space and equipment lease 

arrangements, with a delayed effective 

date of October 1, 2009. 

• We are finalizing the proposal 

prohibiting certain unit-of-service (‘‘perclick’’) payments in lease agreements 

with a delayed effective date of October 

1, 2009. 

• Revisions to the definition of 

‘‘entity’’ are finalized with a delayed 

effective date of October 1, 2009 (this 

proposal was referred to as ‘‘services 

provided ‘under arrangements’ ’’). 

• Revisions to the exception for 

obstetrical malpractice insurance 

subsidies permit parties to either 

comply with the anti-kickback statute 

safe harbor, or comply with revised 

requirements of § 411.357(r). The 

effective date of the revised exception is 

October 1, 2008. 

3. Solicitations of Comments in the CY 

2008 PFS and FY 2009 IPPS Proposed 

Rules 

In the CY 2008 PFS proposed rule, we 

solicited comments regarding the 

necessity or appropriateness of revisions 

to the exception in § 411.355(b) for inoffice ancillary services. We received 

hundreds of comments in response. We 

made no proposals regarding revisions 

to this exception in either the CY 2008 

PFS or FY 2009 IPPS proposed rules; 

therefore, we are not finalizing revisions 

to the exception in this final rule. In the 

CY 2008 PFS proposed rule, we 

solicited public comments regarding the 

period of disallowance for 

noncompliant financial relationships 

and noted in the CY 2008 PFS final rule 

with comment period our intent to 

finalize it in a future rulemaking. We 

included a proposal on this issue in the 

FY 2009 IPPS proposed rule. We also 

included two solicitations of comments 

in the FY 2009 IPPS proposed rule—one 

requesting comments regarding the need 

for and possible structures for an 

exception to the physician self-referral 

prohibition for gainsharing 

arrangements, and one requesting 

comments regarding the applicability of 

the physician self-referral rules to 

physician-owned medical device and 

other companies and any revisions to 

the rules that might be necessary to 

address program integrity concerns. 

Because these were only solicitations of 

comments, we are not finalizing 

revisions to the physician self-referral 

regulations related to these solicitations, 

nor do we discuss here the comments 

that we received in response to the 

solicitations. We note that, following the 

close of the comment period for the FY 

2009 IPPS proposed rule, in the CY 

2009 PFS proposed rule, we proposed to 

establish an exception to the physician 

self-referral law for incentive payment 

and shared savings programs. We refer 

the reader to 73 FR 38548 for more 

information regarding the proposed 

exception. 

B. ‘‘Stand in the Shoes’’ Provisions 

1. Background 

In the FY 2009 IPPS proposed rule, 

we proposed to revisit the ‘‘stand in the 

shoes’’ provisions issued in Phase III 

due to the potential widespread impact 

of the provisions, as well as the 

considerable industry interest in their 

application (73 FR 23685). As we stated 

there, we believe that a more refined 

approach to the ‘‘stand in the shoes’’

provisions would simplify the analysis 

of many financial arrangements and 

reduce program abuse by bringing more 

financial relationships within the scope 

of the physician self-referral law (such 

as certain potentially abusive 

arrangements between DHS entities and 

physician organizations that may not 

have met the definition of an ‘‘indirect 

compensation arrangement’’). In 

addition, we proposed to take a global 

approach to the ‘‘stand in the shoes’’

provisions, and considered whether to 

establish rules that deem a DHS entity 

to stand in the shoes of an organization 

in which it has an ownership interest or 

over which it exerts control. 

a. Regulatory History of the Physician 

‘‘Stand in the Shoes’’ Rules 

The Phase III ‘‘stand in the shoes’’

rules included provisions under which 

referring physicians are treated as 

standing in the shoes of their physician 

organizations for purposes of applying 

the rules that describe direct and 

indirect compensation arrangements in 


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§ 411.354 (72 FR 51026 through 51030). 

In Phase III, a ‘‘physician organization’’

was defined at § 411.351 as ‘‘a physician 

(including a professional corporation of 

which the physician is the sole owner), 

a physician practice, or a group practice 

that complies with the requirements of 

§ 411.352.’’ Therefore, under this 

definition, when determining whether a 

direct or indirect compensation 

arrangement exists between a physician 

and an entity to which the physician 

refers Medicare patients for DHS under 

the Phase III provisions, the referring 

physician stands in the shoes of: (1) 

Another physician who employs the 

referring physician; (2) his or her 

wholly-owned professional corporation 

(‘‘PC’’); (3) a physician practice (that is, 

a medical practice) that employs or 

contracts with the referring physician or 

in which the physician has an 

ownership interest; or (4) a group 

practice of which the referring 

physician is a member or independent 

contractor. The referring physician is 

considered to have the same 

compensation arrangements (with the 

same parties and on the same terms) as 

the physician organization in whose 

shoes the referring physician stands. 

The industry responded to the ‘‘stand 

in the shoes’’ provisions of Phase III 

with concern as to how the provisions 

would apply to certain stakeholders. 

Academic medical centers (‘‘AMCs’’), 

integrated tax-exempt health care 

delivery systems, and their 

representatives, expressed concern 

about compensation arrangements 

involving ‘‘mission support payments’’

and ‘‘similar payments’’ (‘‘support 

payments’’). The stakeholders asserted 

their view that certain payments did not 

previously trigger application of the 

physician self-referral law but, after 

Phase III, needed to satisfy the 

requirements of an exception. 

According to these stakeholders, 

support payments previously were 

analyzed under the rules regarding 

indirect compensation arrangements 

and, in their view, would have been 

permitted. After Phase III, in their view, 

it is unlikely that support payments 

could satisfy the requirements of an 

available exception, given the nature of 

support payments; that is, support 

payments usually are not tied to specific 

items or services provided by the faculty 

practice plan (FPP) (or group practice 

within an integrated health care 

delivery system), but rather are intended 

to support the overall mission of the 

AMC or maintain operations in an 

integrated health care delivery system. 

For this reason, they asserted that 

support payments likely would not 

satisfy the requirement, present in many 

exceptions, that the compensation be 

fair market value for items or services 

provided. Similarly, some stakeholders 

raised concerns about support payments 

made from FPPs to AMC components. 

We noted that, although AMCs are free 

to use the exception for services 

provided by an AMC in § 411.355(e) 

(which would protect support payments 

made among AMC components if all of 

the conditions of the exception are met), 

industry stakeholders explained that 

many AMCs do not use the exception, 

preferring instead to rely on other 

available exceptions and the rules 

regarding indirect compensation 

arrangements (especially prior to Phase 

III). 

Following publication of the Phase III 

final rule, in order to have time to 

consider these concerns and develop a 

comprehensive response, we issued a 

final rule entitled ‘‘Medicare Program; 

Delay of the Date of Applicability for 

Certain Provisions of Physicians’

Referrals to Health Care Entities With 

Which They Have Financial 

Relationships (Phase III)’’ (72 FR 64164) 

(‘‘November 15, 2007 final rule’’) that 

delayed the effective date of the 

provisions in § 411.354(c)(1)(ii), 

§ 411.354(c)(2)(iv), and § 411.354(c)(3) 

for 12 months after the effective date of 

Phase III (that is, until December 4, 

2008). That final rule was applicable 

only to certain compensation 

arrangements between physician 

organizations and entities. These 

arrangements included: (1) With respect 

to an AMC as described in 

§ 411.355(e)(2), compensation 

arrangements between a faculty practice 

plan and another component of the 

same AMC; and (2) with respect to an 

integrated section 501(c)(3) health care 

system, compensation arrangements 

between an affiliated DHS entity and an 

affiliated physician practice in the same 

integrated section 501(c)(3) health care 

system. Shortly after the publication of 

the November 15, 2007 final rule, other 

industry stakeholders asserted that, in 

addition to section 501(c)(3) health care 

systems, most integrated health care 

delivery systems, including ones 

involving for-profit entities, make 

support payments. These stakeholders 

urged that any approach to addressing 

the impact of the Phase III ‘‘stand in the 

shoes’’ provisions on support payments 

and other monetary transfers within 

integrated health care delivery systems 

should have universal applicability that 

is not dependent on whether the system 

meets the definition of an AMC or has 

a particular status under the rules of the 

Internal Revenue Service. 

In the FY 2009 IPPS proposed rule, 

we proposed two alternative ways to 

address the ‘‘stand in the shoes’’ issues 

described above. The first proposal 

offered a multi-faceted approach for 

revising the existing physician ‘‘stand in 

the shoes’’ rules in § 411.354(c), and 

provided two options for certain 

proposed elements. The second 

proposal involved leaving the Phase III 

‘‘stand in the shoes’’ provisions as 

promulgated and creating a new 

exception using our authority under 

section 1877(b)(4) of the Act for 

nonabusive arrangements that warrant 

protection not available under existing 

exceptions. In this final rule, we are 

finalizing one of our physician ‘‘stand in 

the shoes’’ proposals with modification, 

but are not finalizing our proposals 

regarding the DHS entity ‘‘stand in the 

shoes’’ provisions or the conventions for 

applying the physician ‘‘stand in the 

shoes’’ provisions in concert with the 

DHS entity ‘‘stand in the shoes’’

provisions. 

b. Summary of Proposed Revisions to 

the Physician ‘‘Stand in the Shoes’’

Rules 

(1). Alternative 1: Amend the Phase III 

Physician ‘‘Stand in the Shoes’’

Provisions 

Our first proposal included two 

options for revising the physicians 

‘‘stand in the shoes’’ provisions. The 

first option under this proposal would 

have revised § 411.354(c)(2)(iv) to 

provide that a physician would be 

deemed not to stand in the shoes of his 

or physician organization if the 

compensation arrangement between the 

physician organization and the 

physician satisfies the requirements of 

the exception in § 411.357(c) (for bona 

fide employment relationships), the 

exception in § 411.357(d) (for personal 

service arrangements), or the exception 

in § 411.357(l) (for fair market value 

compensation). The first step in the 

analysis focused on the compensation 

that a referring physician receives from 

his or her physician organization. If the 

compensation arrangement satisfied the 

requirements of § 411.357(c), (d), or (l), 

the referring physician would be 

deemed not to stand in the shoes of the 

physician organization for purposes of 

applying the definitions of and 

provisions related to direct and indirect 

compensation arrangements in 

§ 411.354(c). Arrangements between 

DHS entities and physician 

organizations whose physicians do not 

stand in their shoes could still create 

indirect compensation arrangements 

that would need to satisfy the 

requirements of the exception for 


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indirect compensation arrangements in 

§ 411.357(p). 

The second option under the proposal 

to revise the physician ‘‘stand in the 

shoes’’ provisions would have deemed 

physician owners of a physician 

organization to stand in the shoes of the 

physician organization. We solicited 

public comments on whether 

considering all physician owners of (or 

physician investors in) a physician 

organization to stand in the shoes of the 

physician organization, as they 

currently do under the Phase III ‘‘stand 

in the shoes’’ provisions, might be overinclusive. We were concerned that a 

physician owner of a captive or 

‘‘friendly’’ PC who has no right to the 

distribution of profits and similarly 

situated physician owners would have 

to stand in the shoes of their physician 

organizations even when their 

ownership interest is merely nominal 

(or titular) in nature and their 

compensation arrangement with the 

physician organization satisfies the 

requirements of one of the exceptions in 

§ 411.357(c), (d), or (l). We also solicited 

comments on an approach under which 

only owners of a physician organization 

would stand in the shoes of that 

physician organization (in which case, a 

physician would not stand in the shoes 

of a physician organization unless he or 

she holds an ownership or investment 

interest; under this approach, whether a 

physician ‘‘stands in the shoes’’ would 

not depend on whether the physician’s 

compensation arrangement with the 

physician organization satisfies the 

requirements of § 411.357(c), (d), or (l)). 

Under the first proposal, we also 

proposed to revise § 411.354(c)(3)(ii) to 

clarify that the provisions of 

§§ 411.354(c)(1)(ii) and (c)(2)(iv) do not 

apply when the requirements of 

§ 411.355(e) are satisfied; that is, a 

physician would not stand in the shoes 

of his or her physician organization (for 

example, a faculty practice plan) when 

his or her referral for DHS is protected 

under the exception in § 411.355(e) for 

services provided by an AMC. We also 

proposed a specific revision to the 

regulation in § 411.354(c)(2)(iv) (when a 

physician is deemed to ‘‘stand in the 

shoes’’) and sought public comment as 

to whether this policy related to AMCs 

is better achieved by revising 

§ 411.354(c)(3) to delete the reference to 

applying the exceptions in § 411.355, 

and thereby providing that the ‘‘stand in 

the shoes’’ provisions do not apply 

where the prohibition on referrals is not 

applicable because all of the 

requirements of any of the exceptions in 

§ 411.355 are satisfied. Finally, we 

proposed to revise § 411.354(c)(3)(ii) to 

provide that the provisions of 

§ 411.354(c)(1)(ii) and (c)(2)(iv) do not 

apply when compensation is provided 

by a component of an AMC to a 

physician organization affiliated with 

that AMC through a written contract to 

provide services required to satisfy the 

AMC’s obligations under the Medicare 

GME rules where the contract is limited 

to services necessary to fulfill the GME 

obligations as set forth in 42 CFR Part 

413, Subpart F. We stated in the 

proposed rule that we may provide 

additional guidance on the application 

of the three elements of the definition of 

‘‘indirect compensation arrangement’’ in 

the FY 2009 IPPS final rule. We 

solicited comments regarding ways in 

which we could ensure that the full 

range of potentially abusive 

arrangements between DHS entities and 

physician organizations are 

appropriately addressed in situations 

where physicians do not stand in the 

shoes of their physician organizations. 

(2). Alternative 2: New Exception for 

‘‘Mission Support’’ Payments; No 

Change to Phase III Physician ‘‘Stand in 

the Shoes’’ Provisions 

The alternative proposal in the FY 

2009 IPPS proposed rule that addressed 

the Phase III physician ‘‘stand in the 

shoes’’ provisions was to make no 

revisions to existing §§ 411.354(c)(1)(ii), 

(c)(2)(iv), and (c)(3) and, to the extent 

necessary to protect nonabusive 

arrangements, promulgate a separate 

exception using our authority under 

section 1877(b)(4) of the Act to create 

exceptions for arrangements that do not 

pose a risk of program or patient abuse. 

We solicited comments about this 

proposal, including whether such an 

exception should be limited to ‘‘mission 

support’’ payments, whether other 

specific types of payments or 

compensation arrangements should be 

eligible for such an exception, the types 

of parties that should be permitted to 

use the exception (for example, AMC 

components, physician practices), and 

the conditions that should apply to such 

an exception to ensure that a protected 

compensation arrangement poses no 

risk of program or patient abuse. We 

recognized that the term ‘‘integrated 

health care delivery system’’ is loosely 

used in the industry to describe a wide 

variety of systems, with varying degrees 

of actual integration, and that it may 

prove infeasible to craft a sufficiently 

bounded definition. Due to our concern 

that, in many circumstances, payment 

arrangements between components of 

‘‘integrated health care delivery 

systems,’’ as well as payments from 

‘‘integrated health care delivery 

systems’’ to physicians affiliated with 

those systems are susceptible to fraud 

and abuse, we sought public comment 

about defining a fully integrated health 

care delivery system, what types of 

compensation arrangements should be 

protected (for example, support 

payments), and what conditions should 

be included in an exception that would 

ensure no risk of program or patient 

abuse. 

c. Summary of Proposed DHS Entity 

‘‘Stand in the Shoes’’ Rules 

In the CY 2008 PFS proposed rule (72 

FR 38122), we proposed a corollary 

provision to the Phase III physician 

‘‘stand in the shoes’’ provisions that 

addressed the DHS entity side of 

physician-DHS entity financial 

relationships. Specifically, we proposed 

to amend § 411.354(c) to provide that, 

where a DHS entity owns or controls an 

entity to which a physician refers 

Medicare patients for DHS, the DHS 

entity would stand in the shoes of the 

entity that it owns or controls and 

would be deemed to have the same 

compensation arrangements with the 

same parties and on the same terms as 

does the entity that it owns or controls. 

We solicited public comments as to 

whether and how we would employ a 

‘‘stand in the shoes’’ approach for these 

types of relationships, as well as for 

other types of financial relationships. 

We did not finalize the DHS entity 

‘‘stand in the shoes’’ provisions in the 

CY 2008 PFS final rule published in the 

Federal Register on November 27, 2007 

(72 FR 66222, 66306). Ultimately, as 

explained in the FY 2009 IPPS proposed 

rule, we wanted to undertake a 

comprehensive approach to the ‘‘stand 

in the shoes’’ provisions that addresses 

both physicians and physician 

organizations, as well as DHS entities 

and other entities that they own or 

control. 

In the FY 2009 IPPS proposed rule, 

we proposed a revision to § 411.354(a) 

to provide that an entity that furnishes 

DHS would be deemed to stand in the 

shoes of an organization in which it has 

a 100 percent ownership interest and 

would be deemed to have the same 

compensation arrangements with the 

same parties and on the same terms as 

does the organization that it owns. We 

sought public comments specifically as 

to whether we should consider a DHS 

entity to stand in the shoes of another 

organization in which the DHS entity 

holds less than a 100 percent ownership 

interest and, if so, what amount of 

ownership should trigger application of 

the DHS entity ‘‘stand in the shoes’’

provisions. We also sought comments as 

to whether we should deem a DHS 

entity to stand in the shoes of an 

organization that it controls (for 


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example, an entity would stand in the 

shoes of a nonprofit organization of 

which it is the sole member), noting that 

we would consider a DHS entity to 

control an organization if the DHS entity 

has the power, directly or indirectly, 

significantly to influence or direct the 

actions or policies of the organization. 

Finally, we solicited comment as to 

what level of control should trigger the 

application of the entity ‘‘stand in the 

shoes’’ provisions. 

We also proposed provisions 

outlining the conventions to use when 

applying both the physician ‘‘stand in 

the shoes’’ provisions and the DHS 

entity ‘‘stand in the shoes’’ provisions to 

a chain of financial relationships 

between a physician and a DHS entity. 

The proposed conventions were 

intended to ensure that at least one 

compensation arrangement remains 

between the DHS entity and the 

referring physician for purposes of 

analyzing the chain of relationships 

under the physician self-referral rules. 

No regulation text was proposed at the 

time regarding application of the 

physician and DHS entity ‘‘stand in the 

shoes’’ provisions. 

2. Physician ‘‘Stand in the Shoes’’

Provisions 

Although we received a few comment 

letters suggesting that we not finalize 

any of our proposals related to the 

physician ‘‘stand in the shoes’’

provisions, the majority of commenters 

supported our proposal to revise the 

existing provisions in § 411.354(c), 

which were finalized in Phase III (72 FR 

51012). Some commenters supported 

finalizing both our proposed revisions 

to § 411.354(c) and a new exception to 

the physician self-referral prohibition 

for mission support payments. A few 

commenters urged us to abandon the 

Phase III ‘‘stand in the shoes’’

provisions and instead revise the 

definition of ‘‘indirect compensation 

arrangement’’ and the exception for 

indirect compensation arrangements in 

§ 411.357(p) to address the concerns 

noted in Phase III and the FY 2009 IPPS 

proposed rule (72 FR 51028; 73 FR 

23686 through 23687). In this final rule, 

we are finalizing revisions to the 

physician ‘‘stand in the shoes’’

provisions to deem a physician who has 

an ownership or investment interest in 

a physician organization to stand in the 

shoes of that physician organization. 

Physicians with only a titular 

ownership interest (that is, physicians 

without the ability or right to receive the 

financial benefits of ownership or 

investment, including, but not limited 

to, the distribution of profits, dividends, 

proceeds of sale, or similar returns on 

investment) are not required to stand in 

the shoes of their physician 

organizations. In addition, we are 

permitting non-owner physicians (and 

titular owners) to stand in the shoes of 

their physician organizations and we are 

also clarifying that the physician ‘‘stand 

in the shoes’’ provisions in § 411.354(c) 

do not apply to an arrangement that 

satisfies the requirements of the 

exception in § 411.355(e) for AMCs. We 

are not finalizing our proposal regarding 

compensation arrangements between 

physician organizations and AMC 

components for the provision of services 

required to satisfy the AMC’s 

obligations under the Medicare GME 

rules in 42 CFR Part 413, Subpart F. We 

address below the specific comments 

that we received in response to our 

proposals in the FY 2009 IPPS proposed 

rule. 

Comment: The majority of 

commenters urged us to finalize simple, 

bright line rules for analyzing financial 

relationships involving DHS entities, 

physician organizations and the 

physicians that comprise those 

physician organizations. Although a 

large hospital association and those 

commenters adopting that association’s 

comments asserted that the proposals 

were inconsistent with our stated goal of 

simplification, all of the commenters 

agreed that any final physician ‘‘stand 

in the shoes’’ rule should be guided by 

simplicity. 

Response: We are finalizing revisions 

to the physician ‘‘stand in the shoes’’

provisions in § 411.354(c) that require 

only physician owners of a physician 

organization to stand in the shoes of that 

physician organization. Physicians with 

an ownership or investment interest that 

is titular in nature would not be deemed 

to stand in the shoes of their physician 

organizations. (We describe what we 

mean by ‘‘titular’’ ownership below.) 

We believe that this approach offers the 

best option for achieving our goal in this 

rulemaking of simplifying the analysis 

of many financial arrangements. We are 

also permitting, but not requiring, nonowner physicians (including titular 

owners) to stand in the shoes of their 

physician organizations. We discuss in 

more detail below the application of the 

physician ‘‘stand in the shoes’’

provisions included in this final rule. 

Comment: One commenter suggested 

that we withdraw its proposals 

regarding the physician and DHS entity 

‘‘stand in the shoes’’ provisions and 

issue a separate proposed rule that 

provides greater clarity and detail 

regarding appropriate financial 

arrangements between physicians and 

academic medical centers (AMCs) and 

integrated health care delivery systems 

regarding mission services that benefit 

all patients. Several other commenters 

submitted identical comments urging us 

to review all of our outstanding 

proposals and develop one integrated 

package of proposals in the future. 

Response: We are not, as the first 

commenter suggested, withdrawing the 

proposals contained in the FY 2009 

IPPS proposed rule and issuing a 

separate proposed rule regarding the 

application of the ‘‘stand in the shoes’’

rules with respect to mission support 

payments. As we stated in the FY 2009 

IPPS proposed rule, we proposed and 

solicited comments regarding revisions 

to the physician ‘‘stand in the shoes’’

rules in order to revisit, with public 

input, the physician ‘‘stand in the 

shoes’’ regulatory scheme (73 FR 

23685). Our intent was not merely to 

address the alleged problems that result 

from the application of the physician 

‘‘stand in the shoes’’ rules to mission 

support payments. Further, it is not our 

intention, now or in the future, to 

regulate financial relationships between 

DHS entities and referring physicians by 

making exceptions to rules or 

exceptions within existing exceptions 

simply in response to the complaints or 

concerns of the industry. With respect 

to the other commenters’ suggestions, 

we note that, with the exception of our 

proposal in the CY 2009 PFS proposed 

rule for a new exception for incentive 

payment and shared savings programs 

(73 FR 38548), we have considered all 

of the outstanding proposals for this 

final rule, both standing alone and in 

concert with each other, and we are 

finalizing a set of rules that are wellintegrated and designed to be 

consistent. 

Comment: Some commenters urged us 

not to finalize any of the proposals and, 

instead, ‘‘plot out a more 

comprehensive approach to the larger 

issue of compliant physician 

relationships.’’

Response: As noted above, we are 

finalizing with modification our 

proposal regarding the physician ‘‘stand 

in the shoes’’ provisions in § 411.354(c). 

We continually review our regulations 

to ensure that they serve to protect the 

Medicare program and its beneficiaries 

from program or patient abuse, and may, 

in a future rulemaking subject to notice 

and public comment, propose further 

revisions to our regulations to address 

program integrity concerns as they arise. 

Comment: Many commenters 

supported the proposal to revise the 

physician ‘‘stand in the shoes’’

provisions to deem only physician 

owners of a physician organization to 

stand in the shoes of the physician 

organization. Most of these commenters 


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also urged us to not deem a physician 

to stand in the shoes of his or her 

physician organization if the physician’s 

ownership interest is titular only. 

Commenters asserted that: (1) This 

approach is the most straightforward, 

least intrusive approach, and provides 

the clearest standard for analysis; (2) 

because non-owners generally have no 

control over the financial relationships 

between their employers and providers 

of DHS, it would be inappropriate to 

hold them accountable for financial 

relationships that may violate the 

physician self-referral prohibition; and 

(3) an ownership interest that is truly 

titular only will not result in any of the 

financial risks or rewards to the 

physician (for example, dividends, tax 

benefits, proceeds of sale, and other 

returns on investment) typically 

associated with ownership and 

investment interests. One commenter 

contended that a physician 

organization’s non-owner physician 

employees and contractors are likely to 

have compensation arrangements based 

on fair market value and are highly 

unlikely, if ever, to benefit from the 

infusion of capital into (or a mission 

support payment to) the physician 

organization. 

Response: We agree that the best 

approach for our physician ‘‘stand in 

the shoes’’ rules is to require a 

physician with an ownership or 

investment interest in his or her 

physician organization to stand in the 

shoes of the physician organization, 

excluding from the application of the 

rule any physician whose ownership 

interest is merely titular in nature. (We 

describe in the response to the next 

comment what we mean by a ‘‘titular’’

ownership interest.) We are permitting 

non-owner physicians (and titular 

owners) to stand in the shoes of their 

physician organizations. We do not 

agree with the last commenter’s 

assertions that a physician 

organization’s non-owner (and titularowner) physician employees and 

contractors necessarily are likely to have 

compensation arrangements based on 

fair market value and that they are 

highly unlikely, if ever, to benefit from 

the infusion of capital into (or a mission 

support payment to) the physician 

organization. To the contrary, we are 

aware of situations where non-owner 

physician employees and contractors 

have compensation arrangements that 

are not based on fair market value and 

benefit from payments made to their 

physician organizations from entities to 

which the physician employees and 

contractors refer patients for DHS. We 

remain concerned about such 

compensation arrangements. (We note 

that the rules regarding indirect 

compensation arrangements would 

apply to these arrangements.) In 

addition, depending on the 

circumstances, non-fair market value 

compensation arrangements potentially 

implicate the Federal anti-kickback 

statute (section 1128B(b) of the Act) (the 

‘‘anti-kickback statute’’) and False 

Claims Act. 

Comment: Most commenters asserted 

that a physician whose ownership or 

investment interest in a physician 

organization is merely titular in nature 

should not be deemed to stand in the 

shoes of his or her physician 

organization. Some of these commenters 

added the caveat that the titular owner 

should not stand in the shoes of his or 

her physician organization only where 

his or her compensation arrangements 

with the physician organization satisfy 

the requirements of an applicable 

exception. One commenter suggested 

that nominal, or titular, ownership 

would include any situation in which a 

physician’s ownership interest does not 

afford the physician any ‘‘material’’

right to receive profits from the 

physician organization’s compensation 

arrangement with the DHS entity. 

Response: We are revising 

§ 411.354(c)(1)(ii) and (c)(2)(iv) to 

specify that we do not deem a physician 

to stand in the shoes of his or her 

physician organization if the physician’s 

ownership interest in that physician 

organization is titular in nature, as 

described in § 411.354(c)(3)(ii)(C). We 

consider an ownership or investment 

interest to be titular where the physician 

is not able or entitled to receive any of 

the financial benefits of ownership or 

investment, including, but not limited 

to, the distribution of profits, dividends, 

proceeds of sale, or similar returns on 

investment. We do not believe that 

‘‘nominal’’ or ‘‘titular’’ ownership 

should be decided based on whether a 

physician has a ‘‘material’’ right to 

receive profits from the physician 

organization’s compensation 

arrangement with the DHS entity, but 

rather any right to the financial benefits 

through ownership or investment. In the 

interest of establishing a bright-line rule 

regarding when a physician stands in 

the shoes of a physician organization, 

we are not finalizing, as some 

commenters suggested, a requirement 

that the compensation from a physician 

organization to a titular owner of that 

physician organization must satisfy the 

requirements of an applicable exception 

to avoid application of the physician 

‘‘stand in the shoes’’ rules in 

§ 411.354(c). Titular owners are not 

required to stand in the shoes of their 

physician organizations. 

Comment: Many commenters 

expressed concern regarding the 

application, if finalized, of our proposal 

that all physicians would stand in the 

shoes of their physician organizations 

except a physician whose total 

compensation from his or her physician 

organization for the provision of 

professional physician services satisfied 

the requirements of the exceptions in 

§ 411.357(c), (d) or (l). Commenters 

noted that it is difficult for DHS entities 

to know of ‘‘downstream’’ financial 

relationships between physician 

organizations and physicians. Moreover, 

hospitals and other DHS entities have 

no control over such relationships. To 

address these concerns, one commenter 

urged us to permit a DHS entity to rely 

on information provided by the 

physician organization or physician 

regarding the status of physicians as 

owners, titular owners, or employees or 

contractors. Another commenter urged 

us to not require the DHS entity to 

investigate the relationships between 

the physician organization and its 

physicians if the arrangement between 

the DHS entity and the physician 

organization satisfies the requirements 

of a direct exception. 

One commenter argued that the final 

physician ‘‘stand in the shoes’’

provisions should permit DHS entities 

to assess the availability of an exception 

by considering the compensation 

payable by the DHS entity, rather than 

make the availability of an exception 

dependent on internal compensation 

decisions made by a physician group of 

which the DHS entity may have some 

knowledge, but over which the DHS 

entity has no control. This commenter 

suggested that we permit a DHS entity 

to assume that the physician 

organization has physician owners, 

essentially permitting a DHS entity to 

‘‘opt into’’ the application of the 

physician ‘‘stand in the shoes’’ rules, 

even if the rules would not actually 

apply to the compensation arrangement 

between the DHS entity and the 

physician organization. A different 

commenter suggested that we make the 

direct exceptions applicable where a 

physician organization has a financial 

relationship with a DHS entity, similar 

to the manner in which direct 

exceptions are applicable where a 

physician’s immediate family member 

has a financial relationship with a DHS 

entity. 

Response: We recognize the 

limitations described by the 

commenters in regard to the proposed 

alternative approach. As discussed 

above, we are not finalizing this 


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approach. Rather, we are finalizing an 

approach in which physician owners 

stand in the shoes of their physician 

organizations (with a narrow exception 

for titular owners). We believe that this 

approach comports with the 

commonsense understanding of 

physician relationships and is easier to 

apply in practice. It furthers our goal of 

addressing potential abuses and offers a 

clear, bright line rule. To further our 

goal of simplifying the analysis of 

compensation arrangements, we are also 

finalizing a provision that permits a 

physician who is not an owner or 

investor in his or her physician 

organization to stand in the shoes of the 

physician organization for purposes of 

applying the compensation exceptions. 

In essence, we are modifying the Phase 

III ‘‘stand in the shoes’’ provisions to 

permit, but not require, such physicians 

to stand in the shoes of their physician 

organizations. Thus, for example, 

employees and contractors may stand in 

the shoes of their physician 

organizations for purposes of applying 

the rules regarding direct and indirect 

compensation arrangements. If parties 

treat a physician as standing in the 

shoes of the physician organization, 

they would be required to satisfy the 

requirements of one of the exceptions 

for direct compensation arrangements, 

which generally contain additional or 

stricter requirements, such as a 

minimum 1-year term and 

compensation that is ‘‘set in advance.’’

Under § 411.354(c)(3)(i), a physician 

who stands in the shoes of his or her 

physician organization is deemed to 

have the same compensation 

arrangements (with the same parties and 

on the same terms) as the physician 

organization. Therefore, in order to 

satisfy the requirements of an exception 

in § 411.357 for direct compensation 

arrangements, the parties would 

consider whether the referrals between 

the DHS entity and the physician satisfy 

the applicable requirements of an 

exception. This approach is consistent 

with our longstanding view that parties 

are entitled to use any available 

exception of which they satisfy all of the 

applicable requirements. We believe 

that compliance with an exception for 

direct compensation arrangements, as 

opposed to compliance with the 

exception for indirect compensation 

arrangements or no exception at all if 

the arrangement did not meet the 

definition of ‘‘indirect compensation 

arrangement,’’ would safeguard against 

program and patient abuse. We have 

revised § 411.354(c)(3)(ii), accordingly. 

Although not raised by this 

commenter, we recognize that many 

arrangements that, prior to Phase III, 

would have met the definition of 

‘‘indirect compensation arrangement’’

and been required to satisfy the 

requirements of the exception in 

§ 411.357(p) have been restructured (or 

initially structured) to comply with an 

exception for direct compensation 

arrangements in § 411.355 or § 411.357 

as required under the Phase III ‘‘stand 

in the shoes’’ provisions that went into 

effect on December 4, 2007. 

Arrangements that were not direct 

compensation arrangements and that 

would not have been indirect 

compensation arrangements under the 

provisions in § 411.354(c) prior to Phase 

III have similarly been restructured to 

comply with an exception for direct 

compensation arrangements as required 

under Phase III. The revisions to 

§ 411.354(c)(3)(iii) make it clear that 

such arrangements do not need to be 

restructured to comply with the revised 

physician ‘‘stand in the shoes’’ rules 

finalized in this rulemaking. In 

addition, the new ‘‘stand in the shoes’’

provisions in § 411.354(c)(1)(iii) and 

(c)(2)(iv)(B) that permit non-owners to 

stand in the shoes of their physician 

organizations should also address 

situations in which non-owner 

physicians have been standing in the 

shoes of their physician organizations 

pursuant to the Phase III ‘‘stand in the 

shoes’’ provisions. They may continue 

to do so. 

Comment: A few commenters 

suggested that we adopt more than one 

of our proposals. One of these 

commenters suggested that doing so 

would permit the parties to a 

compensation arrangement to structure 

their arrangement to fit into the best 

option available under applicable State 

laws and existing corporate structures. 

Another commenter argued that, 

because, in its opinion, each proposal 

has its benefits, but also its limitations, 

we should adopt both and permit 

parties to choose their method for 

complying with the physician selfreferral statute. We assume that, by 

stating ‘‘each proposal,’’ this commenter 

was urging us to revise § 411.354(c) and 

also issue a new exception for mission 

support payments. 

Response: We believe that finalizing 

more than one proposal, or revising 

§ 411.354(c) and issuing an exception 

for mission support payments, would 

add complexity and uncertainty, rather 

than simplify the physician ‘‘stand in 

the shoes’’ rules, and we decline to 

adopt these commenters’ suggestions. 

Comment: Three commenters 

suggested that, if we finalize revisions to 

§ 411.354(c) to exempt a physician from 

standing in the shoes of his or her 

physician organization if his or her total 

compensation from that physician 

organization satisfies the requirements 

of § 4111.357(c), (d) or (l), we expand 

the list of exceptions to all 

compensation exceptions. Another 

commenter suggested that we include in 

this ‘‘carveout’’ (or list of exceptions, 

compliance with which would not 

require a physician to stand in the shoes 

of his or her physician organization) the 

exception for in-office ancillary services 

in § 411.355(b). 

Response: We are not finalizing this 

proposal and, in light of our final rule, 

the commenters’ concerns as we 

understand them are moot. 

Comment: One commenter suggested 

an adjunct proposal to our proposal that 

a physician would not stand in the 

shoes of a physician organization if the 

physician’s compensation arrangement 

satisfies the requirements of an 

exception in § 411.357(c), (d) or (l). 

Specifically, the commenter suggested 

that we not deem a physician to stand 

in the shoes of his or her physician 

organization if: (1) The physician is an 

employee or contractor of a group 

practice that satisfies the conditions of 

§ 411.352 (the group practice rules) and 

the physician’s referrals to the group 

practice are protected under the 

exception for in-office ancillary services 

in § 411.355(b); and (2) the physician’s 

compensation from the group practice is 

fair market value for the services 

provided to the group practice. 

Response: As discussed above, we are 

not finalizing the proposal on which the 

commenter’s suggestions are based. We 

believe that this final rule addresses the 

commenter’s concerns, albeit in a 

different manner than requested by the 

commenter. 

Comment: One commenter urged us 

to revise the AMC rules in § 411.355(e) 

to allow faculty practice plans (FPPs) to 

share profits with their physicians in 

the same manner that group practices 

are permitted under § 411.352. The 

commenter asserted that, without such 

a revision, if a FPP shares profits, in 

addition to or in lieu of providing a 

productivity bonus to the physicians in 

the FPP (as could a group practice), the 

exception in § 411.355(e) for AMCs 

cannot be satisfied because the 

compensation to the FPP physicians 

would take into account the volume or 

value of referrals or other business 

generated by the referring physician 

within the AMC. The commenter 

asserted that an alternative under which 

a physician would stand in the shoes of 

his or her physician organization unless 

the physician’s total compensation from 

that physician organization satisfies the 

requirements of § 411.357(c), (d) or (l) 


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would have the effect of prohibiting 

FPPs from compensating their 

physicians like group practices. 

Response: The commenter’s 

suggestion that we revise § 411.355(e) is 

outside the scope of this rulemaking. 

We do not believe that revisions to the 

exception in § 411.355(e) for AMCs are 

warranted or necessary, and we decline 

to adopt the commenter’s 

recommendation. As discussed below, 

we are finalizing our proposal not to 

apply the physician ‘‘stand in the 

shoes’’ provisions within the context of 

the exception in § 411.355(e). Therefore, 

FPP physicians are not required to stand 

in the shoes of the FPP if the 

requirements of § 411.355(e) are 

satisfied. If a FPP elects to compensate 

its physicians in such a way as to 

preclude compliance with the exception 

for AMCs, the FPP should be treated 

like any other group practice under 

§ 411.352 and would not be afforded the 

special protection for physician referrals 

within an AMC that is provided under 

§ 411.355(e). 

Comment: A few commenters 

suggested that we make permanent the 

current ‘‘moratorium’’ on the physician 

‘‘stand in the shoes’’ rules included in 

the November 15, 2007 final rule. Some 

of these commenters suggested revisions 

or expansions to the scope of the 

‘‘moratorium.’’

Response: Given our decision to 

finalize revisions to the physician 

‘‘stand in the shoes’’ rules in this final 

rule, which will be effective October 1, 

2008, it is unnecessary to continue or to 

make permanent the delay in effective 

date of the Phase III physician ‘‘stand in 

the shoes’’ provisions or to expand the 

delay in effective date to additional 

compensation arrangements. We believe 

that, taken in concert, the revisions we 

are finalizing address most, if not all, of 

the concerns brought to our attention by 

industry stakeholders and which the 

November 15, 2007 final rule was 

intended to address. This final rule does 

not affect the continued applicability of 

the November 15, 2007 final rule. The 

delay in effective date of the Phase III 

physician ‘‘stand in the shoes’’

provisions is through December 4, 2008. 

The provisions of this final rule are 

effective October 1, 2008 and, on that 

date, except as provided in 

§ 411.354(c)(3)(iii), compensation 

arrangements must comply with the 

requirements of the revised regulations 

set forth in this final rule. 

Comment: Two commenters asserted 

that a new exception for mission 

support payments holds the most 

promise for solving the problem of 

mission support payments. A few 

commenters provided specific 

suggestions for requirements that we 

should include in such an exception. 

Other commenters opposed the issuance 

of an exception for mission support 

payments, noting that establishing an 

accurate definition for ‘‘mission support 

payments’’ would be extremely 

challenging and may well result in 

complexities that will defeat the 

purpose of developing a simplified 

regulatory scheme, such an exception 

would be unworkable, and it is unlikely 

that an exception could be crafted to 

permit the appropriate range of 

nonabusive arrangements. Another 

commenter noted that an attempt to 

define the universe of nonabusive 

arrangements would be limiting and 

quickly obsolete. 

Response: We agree with the 

commenters that opposed the issuance 

of an exception for mission support 

payments, as well as with the reasons 

stated by those commenters regarding 

the difficulty in crafting a useful 

exception that is easy to understand and 

apply and that does not pose a risk of 

program or patient abuse. We are not 

finalizing a separate exception for 

compensation arrangements involving 

‘‘mission support’’ or similar payments. 

Comment: A few commenters 

recommended that, instead of finalizing 

revisions to the physician ‘‘stand in the 

shoes’’ rules, we revise the rules 

regarding indirect compensation 

arrangements, as this would address 

perceived problems in States that 

enforce a prohibition on the corporate 

practice of medicine. One of these 

commenters suggested that we define 

‘‘indirect compensation arrangement’’ to 

include arrangements between a DHS 

entity and an entity with which the 

physician has a direct financial 

relationship (the ‘‘intervening entity’’) 

that provide for a fixed amount of 

compensation in excess of fair market 

value compensation for the items and 

services provided by the intervening 

entity. Another commenter suggested 

that we revise the definition of ‘‘indirect 

compensation arrangement’’ to establish 

an objective test for whether 

compensation takes into account the 

volume or value of referrals or other 

business generated for a DHS entity; that 

is, the intent of the parties should not 

be used as a basis for finding that the 

arrangement took referrals into account. 

Response: We decline to revise the 

definition of ‘‘indirect compensation 

arrangement’’ as suggested by these 

commenters. Specific proposals and 

regulatory text for revisions to our rules 

regarding indirect compensation 

arrangements (other than revisions to 

the physician ‘‘stand in the shoes’’

provisions proposed in the FY 2009 

IPPS proposed rule and subject to 

public comment), were not included in 

the FY 2009 IPPS proposed rule, and we 

believe that any such revisions would 

benefit from appropriate vetting through 

notice and public comment. With 

respect to the specific comment 

regarding above-fair market value 

compensation arrangements, we note 

that the suggested approach does not 

resolve the perceived problems brought 

to our attention following the 

publication of Phase III and the original 

physician ‘‘stand in the shoes’’ rules. 

The last commenter’s suggestion that we 

revise the definition of ‘‘indirect 

compensation arrangement’’ to 

incorporate a test for whether 

compensation takes into account the 

volume or value of referrals or other 

business generated for a DHS entity is 

outside the scope of this rulemaking. 

Comment: One commenter urged us 

to repeal the physician ‘‘stand in the 

shoes’’ provisions made final in Phase 

III and, instead, revise the definition of 

‘‘indirect compensation arrangement’’ to 

address program integrity concerns. 

(The commenter did not provide 

suggested regulatory text or language for 

a revised definition.) The commenter 

asserted that revisions to the definition 

of ‘‘indirect compensation arrangement’’

could bring within the coverage of the 

physician self-referral rules those 

compensation arrangements that do not 

qualify as direct compensation 

arrangements and that previously may 

not have met the definition of ‘‘indirect 

compensation arrangement,’’ yet would 

not force indirect relationships to satisfy 

the more rigid requirements of the 

personal service arrangements exception 

(or, presumably, other exceptions for 

direct compensation arrangements). 

According to the commenter, this would 

be beneficial because indirect 

compensation arrangements, including 

those covered under a revised definition 

of ‘‘indirect compensation 

arrangement,’’ would need to satisfy the 

requirements of the exception in 

§ 411.357(p), but would not be subject to 

the strict 1-year term and ‘‘set in 

advance’’ requirements in the 

exceptions for direct compensation 

arrangements. The commenter 

contended that the 1-year term and ‘‘set 

in advance’’ requirements are 

unworkable for contracts between DHS 

entities and large physician groups 

because compensation formulae 

employed in such arrangements require 

adjustments that cannot be anticipated 

at the commencement of the 

arrangement due to evolving patient 

care and community needs. The 

commenter offered suggestions for 


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revising the definition of ‘‘set in 

advance.’’ A second commenter echoed 

the concern regarding the impact on 

financial arrangements between DHS 

entities and physician organizations of 

the requirement in the direct 

compensation arrangement exceptions 

that compensation be ‘‘set in advance.’’

The second commenter urged us to 

permit parties to modify a compensation 

arrangement between a DHS entity and 

a physician organization prospectively 

for the balance of the existing term of 

the arrangement to reflect a change in 

services provided by the physician 

organization and its physicians if the 

change in compensation is limited to 

the modified services, represents fair 

market value for the actual change in 

services, and does not take into account 

the volume or value of referrals or other 

business generated between the parties. 

Response: We decline to adopt the 

first commenter’s suggestions regarding 

revisions to the definition of ‘‘set in 

advance’’ at 411.354(d)(1). However, we 

have reconsidered the position we 

stated in the Phase III final rule 

regarding our interpretation of the ‘‘set 

in advance’’ rules with respect to 

modification of the rental charges in an 

agreement for the lease of office space 

or equipment (and the compensation 

terms in an agreement for a physician’s 

personal services) (72 FR 51044). There, 

in response to a comment seeking 

clarification whether the parties to an 

agreement for the rental of office space 

or equipment may amend the agreement 

during the first year of its term, we 

stated that 

Because rental charges, including the 

methodology used to calculate rental charges, 

must be ‘set in advance,’ as defined at 

§ 411.354(d)(1), parties may not change the 

rental charges at any time during the term of 

an agreement. Parties wishing to change the 

rental charges must terminate the agreement 

and enter into a new agreement with 

different rental charges and/or other terms; 

however, the new agreement may be entered 

into only after the first year of the original 

lease term (regardless of the length of the 

original term). In addition, the new lease 

must be for a term of at least 1 year and must 

comply with all other criteria in the relevant 

rental exception. 

(We noted also that personal service 

agreements may be amended in the 

same manner as agreements for the 

rental of office space or equipment (72 

FR 51047).) We agree with the 

commenter that requiring compliance 

with an exception for direct 

compensation arrangements (as would 

be the case where a compensation 

arrangement exists between a DHS 

entity and a physician who stands in the 

shoes of his or her physician 

organization) imposes upon parties 

requirements not present in the 

exception for indirect compensation 

arrangements, including the 1-year term 

and ‘‘set in advance’’ requirements. We 

are sympathetic to the concerns of the 

commenter with respect to 

arrangements between DHS entities and 

physician groups that may require 

modification during the term of the 

arrangement. Moreover, in light of the 

revisions we are finalizing with respect 

to the use of percentage-based and perclick compensation formulae for 

determining rental charges for office 

space and equipment leases (see 

sections VIII.E. and VIII.F. of this 

preamble), we believe that an 

interpretation that permits amendments 

to an agreement between a DHS entity 

and a physician (or physician 

organization) during the term of the 

agreement is consistent with our 

mandate to safeguard against program or 

patient abuse and is consistent with our 

rules regarding compensation that is 

‘‘set in advance,’’ provided that: (1) All 

of the requirements of an applicable 

exception are satisfied; (2) the amended 

rental charges or other compensation (or 

the formula for the amended rental 

charges or other compensation) is 

determined before the amendment is 

implemented and the formula is 

sufficiently detailed so that it can be 

verified objectively; (3) the formula for 

the amended rental charges does not 

take into account the volume or value of 

referrals or other business generated by 

the referring physician; and (4) the 

amended rental charges or 

compensation (or the formula for the 

new rental charges or compensation) 

remain in place for at least 1 year from 

the date of the amendment. We are 

taking the opportunity here to clarify 

that the rule regarding the amendment 

of arrangements between DHS entities 

and physicians (or physician 

organizations) applies to all of the 

exceptions for compensation 

arrangements in 42 CFR, Subpart J that 

include a 1-year term requirement for 

satisfying the exception. 

Comment: Several commenters 

suggested that we repeal the existing 

physician ‘‘stand in the shoes’’

provisions, arguing that they are 

unnecessary. One commenter argued 

that the exception in § 411.357(p) for 

indirect compensation arrangements is 

better designed than the direct 

compensation arrangements exceptions 

to handle the types of complex 

contractual and business relationships 

between DHS entities and physician 

organizations. One commenter 

suggested that we clarify the basic 

analysis under the indirect 

compensation arrangements definition 

and exception without resorting to the 

physician ‘‘stand in the shoes’’

provisions. Another commenter 

suggested that a more focused and 

coherent approach could be achieved by 

proposing changes to the existing 

exception for indirect compensation 

arrangements. 

Response: We are not repealing the 

physician ‘‘stand in the shoes’’

provisions in § 411.354(c). For the 

reasons discussed in Phase III, we 

continue to believe that these provisions 

are both appropriate and necessary to 

safeguard against program and patient 

abuse (72 FR 51027 through 51029). We 

discussed above our determination not 

to revise, at this time, the definition of 

‘‘indirect compensation arrangement.’’

Comment: One commenter suggested 

that, given the serious consequences of 

failing to satisfy the ‘‘set in advance’’

requirement in many of the exceptions 

for direct compensation arrangements 

(which would apply if the 

compensation arrangement between a 

DHS entity and a physician organization 

is deemed to be a direct compensation 

arrangement between the DHS entity a 

physician in the physician 

organization), we allow parties subject 

to § 411.354(c)(1)(ii) and (c)(2)(iv) a ‘‘60- 

day grace period’’ that would permit 

them to consider compensation to be 

‘‘set in advance,’’ even if the written 

agreement embodying the compensation 

arrangement is not signed by the parties 

until 60 days after the commencement 

of the services agreement. The 

commenter asserted that, as long as the 

‘‘grace period’’ is limited to no more 

than 60 days, the parties could not use 

it to recalibrate compensation in a way 

that reflects the volume or value of 

referrals or other business generated 

between the parties. 

Response: We are not revising the 

‘‘stand in the shoes’’ provisions as 

requested by the commenter. We believe 

that new § 411.353(g), discussed below 

in section VIII.D. of this preamble, 

which provides an alternative method 

for compliance when parties fail to 

satisfy a signature requirement, should 

address some of the commenter’s 

concerns. We note that nothing in the 

rules regarding compensation that is 

‘‘set in advance’’ in § 411.354(d)(1) 

requires that signatures be present. 

Comment: One commenter contended 

that analyzing the remaining 

relationships after ‘‘collapsing’’

physicians into their physician 

organizations (or entities into 

organizations that they own) may not 

yield the correct result. According to the 

commenter, if the financial relationship 


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that disappears is the direct 

compensation arrangement closest to 

the referring physician (as a result of 

applying the physician ‘‘stand in the 

shoes’’ rules), the ‘‘stand in the shoes’’

rules may actually invite abuse. 

Response: As we read the 

commenter’s analysis, it appears that 

the commenter is not considering the 

direct financial relationship between the 

physician and his or her physician 

organization which, wholly separate 

from the physician ‘‘stand in the shoes’’

provisions, must be analyzed for 

compliance with an applicable 

exception to the physician self-referral 

prohibition if the physician is to make 

referrals for DHS to the physician 

organization. It appears that the 

commenter misunderstood the 

application of the proposed conventions 

for our ‘‘stand in the shoes’’ rules and 

assumed that relationships between 

‘‘collapsed’’ parties disappear and need 

not be analyzed for compliance with the 

physician self-referral law. The ‘‘stand 

in the shoes’’ provisions are applied for 

purposes of evaluating the relationship 

between a DHS entity and a referring 

physician when a physician 

organization is an intervening link in 

that chain of relationships and linked to 

the physician with no other intervening 

links between. Because we are not 

finalizing the DHS entity ‘‘stand in the 

shoes’’ provisions or the conventions for 

applying those provisions in concert 

with the physician ‘‘stand in the shoes’’

provisions, the commenter’s concerns 

should be resolved. 

Comment: One commenter responded 

to the solicitation of comments 

regarding arrangements that would not 

fall within the ‘‘stand in the shoes’’

provisions but might fall outside of the 

scope of the definition of ‘‘indirect 

compensation arrangement’’ and, thus, 

outside the scope of the physician selfreferral law. The commenter noted that 

such arrangements would be subject to 

the Federal anti-kickback statute. The 

commenter also asserted that the current 

rules regarding indirect compensation 

arrangements allow much-needed 

flexibility in establishing nonabusive 

financial relationships that foster the 

provision of necessary health care 

services. The commenter urged us to 

exercise caution in restricting the rules 

regarding indirect compensation 

arrangements. According to the 

commenter, further revisions to the 

definition of, and limitations of, the 

exception for indirect compensation 

arrangements would likely create 

unintended consequences that, in turn, 

would require additional exceptions—

the very type of complexity, in the 

commenter’s view, that makes 

compliance with the physician selfreferral rules increasingly difficult. 

Response: As discussed above, we are 

not making changes to the definition of 

‘‘indirect compensation arrangement’’

beyond what was proposed in the FY 

2009 IPPS proposed rule with respect to 

the physician ‘‘stand in the shoes’’

provisions in § 411.354(c), nor are we 

revising the exception in § 411.357(p) to 

address the applicability of the 

physician self-referral law to 

compensation arrangements between 

DHS entities and referring physicians 

that involve intervening entities. 

However, as discussed below in sections 

VIII.E. and F. of this preamble, in this 

final rule, we are revising the exception 

in § 411.357(p) to address our concerns 

regarding indirect compensation 

arrangements for the lease of office 

space or equipment. 

Comment: One commenter supported 

our proposal to clarify that the 

physician ‘‘stand in the shoes’’

provisions do not apply where all of the 

requirements of the exception in 

§ 411.355(e) for AMCs are satisfied. The 

commenter noted that, if the exception 

in § 411.355(e) is not considered 

sufficient protection against program 

and patient abuse so as to require the 

application of the physician ‘‘stand in 

the shoes’’ provisions, virtually all 

mission support payments would be in 

danger of violating the physician selfreferral prohibition. 

Response: We are finalizing revisions 

to § 411.354(c)(3)(ii)(B), clarifying that 

the provisions of § 411.354(c)(1)(ii) and 

(c)(2)(iv)(A) do not apply when the 

requirements of § 411.355(e) are 

satisfied. 

Comment: Three commenters 

supported our proposal to not apply the 

physician ‘‘stand in the shoes’’

provisions to a compensation 

arrangement between a physician 

organization and a component of an 

AMC for the provision to that AMC of 

only services required to satisfy the 

AMC’s obligations under the Medicare 

GME rules in 42 CFR part 413, subpart 

F. Commenters stated that analysis 

under the rules regarding indirect 

compensation arrangements would be 

more appropriate for such arrangements, 

including arrangements under which a 

community physician organization 

services as a teaching site for the AMC’s 

residents. 

Response: We are not finalizing our 

proposal. Upon further review, we 

believe that existing exceptions 

(including the exceptions for bona fide 

employment relationships, personal 

service arrangements, fair market value 

compensation arrangements, and 

indirect compensation arrangements) 

provide adequate protection for 

arrangements between physician 

organizations and AMCs for GMErelated services, provided that the 

overall arrangement is fair market value 

(which could include the value to the 

physician organization of the placement 

of the medical resident at the training 

site or other valuable consideration from 

the AMC) for legitimate services that are 

actually performed, and provided that 

all other requirements of an exception 

are satisfied. Hospitals are also free to 

contract directly with individual 

physicians, rather than physician 

organizations, for the oversight and 

training required under the Medicare 

GME and IME rules in order to avoid 

perceived or actual obstacles caused by 

the physician ‘‘stand in the shoes’’

rules. We note also that the final 

physician ‘‘stand in the shoes’’

provisions in § 411.354(c) require only 

physicians with an ownership or 

investment interest (other than titular 

owners) in a physician organization to 

stand in the shoes of that physician 

organization. As stated previously, we 

are permitting non-owners (and titular 

owners) to stand in the shoes of their 

physician organizations. To the extent 

that a compensation arrangement 

between a hospital and a physician 

organization to serve as a teaching site 

for the hospital’s residents does not 

implicate the physician ‘‘stand in the 

shoes rules’’ (because the physician 

organization has no, or only titular, 

physician owners or investors), the rules 

regarding indirect compensation 

arrangements would apply. 

We recognize industry stakeholder 

concerns that compensation to a 

physician organization that is paid in 

accordance with Medicare rules that 

require a hospital to pay ‘‘all or 

substantially all’’ of the costs of training 

a resident and which may be 

determined following completion of a 

hospital’s cost report (and, thus, may 

require a reconciliation payment 

between the parties) may not satisfy the 

‘‘set in advance’’ requirement included 

in many of the exceptions to the 

physician self-referral prohibition. 

However, a properly structured formula 

for the compensation to the community 

physician organization could meet an 

applicable ‘‘set in advance’’ requirement 

if it is determined at the commencement 

of the compensation arrangement, does 

not take into account the volume or 

value of referrals or other business 

generated between the parties, and 

satisfies the other requirements in 

§ 411.354(d)(1). 

Comment: One commenter suggested 

that we also suspend the application of 

the physician ‘‘stand in the shoes’’


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provisions to compensation 

arrangements for the provision of 

services required to satisfy an AMC’s 

obligations under the Medicare rules 

regarding indirect medical education 

(IME) in 42 CFR 412.105. Other 

commenters suggested that we extend 

this protection to all hospitals and not 

limit it to compensation arrangements 

between community physician 

organizations and components of an 

AMC. The commenters noted that nonAMC hospitals provide training for 

medical residents and must comply 

with the Medicare GME (and IME) rules, 

and contended that it is unfair to treat 

similarly situated hospitals differently. 

Response: As discussed in response to 

the previous comment, we are not 

finalizing the proposal regarding the 

application of the physician ‘‘stand in 

the shoes’’ provisions to compensation 

arrangements for the provision of 

services required to satisfy Medicare 

GME requirements; thus, we are not 

making the revision suggested by the 

commenters. 

3. DHS Entity ‘‘Stand in the Shoes’’

Provisions 

Nearly all of the commenters who 

addressed the proposal to deem a DHS 

entity to stand in the shoes of an 

organization in which it has a 100 

percent ownership interest opposed the 

proposal. The few commenters who 

provided ‘‘conditional’’ comments (in 

the event that we finalize the proposal) 

urged us to confine the DHS entity 

‘‘stand in the shoes’’ provisions to 100 

percent ownership interests only. For 

the reasons described below in our 

responses to comments, we are not 

finalizing the DHS entity ‘‘stand in the 

shoes’’ proposal. One purpose for our 

proposal to require a DHS entity to 

stand in the shoes of an organization in 

which it has a 100 percent ownership 

interest was to safeguard further against 

abusive business structures that attempt 

to evade restrictions on payments for 

referrals by using shell organizations 

interposed between the DHS entity and 

referring physicians. We caution that 

such arrangements are highly suspect 

under the fraud and abuse laws and will 

be subject to close scrutiny. Depending 

on the circumstances, such 

arrangements could violate the 

physician self-referral law, constitute 

unlawful circumvention schemes, or 

violate the anti-kickback statute. 

Moreover, structuring an arrangement 

purposefully to evade restrictions on 

payments for referrals may be evidence 

of unlawful intent. 

Comment: Two commenters suggested 

that we not finalize the DHS entity 

‘‘stand in the shoes’’ proposal until the 

implications of the final physician 

‘‘stand in the shoes’’ rules are fully 

understood by the affected health care 

providers and by physicians. One 

commenter contended that, although the 

proposal is clearer than the one 

presented in the CY 2008 PFS proposal 

(72 FR 38184), it may add a new level 

of complexity to an already complex 

regulatory scheme. 

Response: We agree with the first set 

of commenters that a measured 

approach to the overall ‘‘stand in the 

shoes’’ regulatory scheme is warranted 

and appropriate. As suggested, we are 

not finalizing the entity ‘‘stand in the 

shoes’’ provisions. A key goal of our 

proposal in the FY 2009 IPPS proposed 

rule was to simplify the analysis of 

financial relationships between DHS 

entities and referring physicians. We 

believe that this final rule achieves that 

goal. 

Comment: One commenter asserted 

that the DHS entity ‘‘stand in the shoes’’

provisions do not offer any real 

protections to the Medicare program 

relating to the elimination of potentially 

abusive arrangements. This commenter 

further asserted that, to the extent that 

a DHS entity forms a 100 percent owned 

subsidiary with the intent to indirectly 

secure referrals that are otherwise 

prohibited under the self-referral law, 

the arrangement would constitute a 

circumvention scheme prohibited under 

the physician self-referral statute 

(section 1877(g)(4) of the Act). 

According to the commenter, the 

arrangement could also be subject to 

prosecution under the Federal antikickback statute if the parties knowingly 

intended to induce referrals of services 

or the ordering of goods and services 

under Federal health programs. The 

commenter asserted that providers are 

well-aware of the legal risk these 

arrangements pose, and noted its belief 

that most arrangements involving DHS 

entities and subsidiaries are designed to 

treat the DHS entity and the subsidiary 

as the same and to satisfy an exception 

for direct compensation arrangements, 

where applicable, under the current 

physician self-referral rules. The 

commenter contended that, as a result, 

the DHS entity ‘‘stand in the shoes’’

rules would have little meaningful 

impact in limiting program abuse, while 

creating the need for complicated 

conventions for its application that 

could serve as a trap to even the most 

wary DHS entity attempting compliance 

with the physician self-referral law. 

Response: As discussed above, 

arrangements that attempt to evade 

restrictions on payments for referrals by 

using interposed organizations are 

highly suspect under the fraud and 

abuse laws and will be subject to close 

scrutiny. Depending on the 

circumstances, such arrangements could 

violate the physician self-referral law, 

constitute unlawful circumvention 

schemes, or violate the anti-kickback 

statute. Moreover, structuring an 

arrangement purposefully to evade 

restrictions on payments for referrals 

may be evidence of unlawful intent. 

Comment: One commenter contended 

that the proposal to deem a DHS entity 

to stand in the shoes of an organization 

in which it has a 100 percent ownership 

interest is outside the scope of our 

authority under section 1877 of the Act 

because the purpose of the statute is to 

prevent self-referrals involving the 

provision of DHS. According to the 

commenter, the proposal purports to 

regulate relationships between 

organizations that are not DHS entities 

and physicians. Another commenter 

noted its strong opposition to any 

proposal that would permit us to 

regulate non-DHS entities through an 

extension of the physician self-referral 

law. 

Response: Our proposal, if finalized, 

would have governed the relationship 

between DHS entities and the 

physicians who refer to them, which is 

within the scope of our authority under 

section 1877 of the Act. The last 

commenters’ concerns are moot, given 

that we are not finalizing the DHS entity 

‘‘stand in the shoes’’ provisions 

proposed in the FY 2009 IPPS proposed 

rule. 

Comment: A few commenters urged 

us to not finalize any rule that requires 

a DHS entity to stand in the shoes of an 

organization that it owns or controls, 

regardless of the ownership percentage 

or level of control. These commenters 

asserted that the proposed provisions 

are complicated and would result in 

very complex conventions for applying 

the physician ‘‘stand in the shoes’’ rules 

and the DHS entity ‘‘stand in the shoes’’

rules to a chain of financial 

relationships where both sets of 

provisions are implicated. 

Response: We agree with the 

commenters that finalizing the DHS 

entity ‘‘stand in the shoes’’ provisions 

would require that we also issue formal 

rules regarding the application of the 

physician ‘‘stand in the shoes’’

provisions and the DHS entity ‘‘stand in 

the shoes’’ provisions in the event that 

both could apply to the same chain of 

financial relationships between a DHS 

entity and a referring physician. Given 

that we are not finalizing at this time the 

proposed DHS entity ‘‘stand in the 

shoes’’ provisions, there is no need for 

such conventions in this final rule. 


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4. Application of the Physician ‘‘Stand 

in the Shoes’’ and the DHS Entity 

‘‘Stand in the Shoes’’ Provisions 

(‘‘Conventions’’) 

As discussed above, we are not 

finalizing the DHS entity ‘‘stand in the 

shoes’’ provisions. Therefore, it is not 

necessary to finalize the proposed 

conventions for applying the physician 

‘‘stand in the shoes’’ provisions and the 

DHS entity ‘‘stand in the shoes’’

provisions when both potentially would 

have applied. We received no comments 

regarding revisions to the conventions 

proposed in the FY 2009 IPPS proposed 

rule (73 FR 23689). 

5. Definitions: ‘‘Physician’’ and 

‘‘Physician Organization’’

We are finalizing the revisions to the 

definitions of ‘‘physician’’ and 

‘‘physician organization’’ as proposed in 

the FY 2009 IPPS proposed rule (73 FR 

23690) in order to clarify that (1) a 

physician and the PC of which he or she 

is the sole owner are always treated the 

same for purposes of applying the 

physician ‘‘stand in the shoes’’ rules; 

and (2) a physician who stands in the 

shoes of his or her wholly-owned PC 

also stands in the shoes of his or her 

physician organization in accordance 

with revised §§ 411.354(c)(1)(ii) and 

(c)(2)(iv). We received no comments 

regarding the proposed revisions to the 

definitions of ‘‘physician’’ and 

‘‘physician organization.’’

C. Period of Disallowance 

In the CY 2008 PFS proposed rule (72 

FR 38183), we noted that several 

commenters responding to the Phase II 

interim final rule with comment period 

(69 FR 16054) questioned the period of 

time for which a physician could not 

refer DHS to an entity and for which the 

entity could not bill Medicare because 

the financial relationship between the 

referring physician and the entity failed 

to satisfy all of the requirements of an 

exception to the general prohibition on 

physician self-referral. (We refer to this 

period of time as the ‘‘period of 

disallowance.’’) We solicited comments 

addressing how we might, to a practical 

extent, set forth the period of 

disallowance for financial relationships 

that implicate, but fail to satisfy the 

requirements of one or more of the 

various exceptions. We noted that our 

interpretation of the physician selfreferral statute is that the period of 

disallowance begins on the date that a 

financial relationship fails to comply 

with the statute and regulations and 

ends on the date the relationship came 

into compliance or ended. We requested 

comments about whether we should 

allow the period of disallowance to 

terminate where the value or 

consideration has been returned (72 FR 

38183). 

In the FY 2009 IPPS proposed rule (73 

FR 23690, 23704) we discussed the 

comments that we received in response 

to the solicitation of comments in the 

CY 2008 PFS proposed rule, and we 

proposed to amend § 411.353(c) to 

provide that the period of disallowance 

begins at the time the financial 

relationship fails to satisfy the 

requirements of an applicable exception 

and ends no later than: 

(1) Where the noncompliance is 

unrelated to compensation, the date that 

the financial relationship satisfies all of 

the requirements of an applicable 

exception; 

(2) Where the noncompliance is due 

to the payment of excess compensation, 

the date on which the excess 

compensation is returned to the party 

that paid it and the financial 

relationship satisfies all of the 

requirements of an applicable 

exception; 

(3) Where the noncompliance is due 

to the payment of compensation that is 

of an amount insufficient to satisfy the 

requirements of an applicable 

exception, the date on which the 

additional required compensation is 

paid to the party to which it is owed 

such that the financial relationship 

would satisfy all of the requirements of 

the exception as of its date of inception. 

We continue to believe that it is possible 

that a financial relationship may end 

prior to the arrangement being brought 

into compliance. 

Our proposals were intended to place 

an outside limit on the period of 

disallowance in certain circumstances. 

That is, where the reason(s) for 

noncompliance does not relate to 

compensation, the latest the period of 

disallowance would end would be the 

date the arrangement was brought into 

compliance. Where the reason for 

noncompliance is the fact that excess 

compensation was provided or too little 

compensation was paid, the latest the 

period of disallowance would end 

would be the date that the party 

receiving the excess compensation 

returned it to the party that provided it 

or the party owing the shortfall in 

compensation paid it to the party to 

which it was owed (assuming the 

arrangement otherwise satisfies the 

requirements of an applicable 

exception). 

After considering the public 

comments we received, we are 

finalizing the period of disallowance 

proposals, without modification in 

substance. We have revised the 

proposed regulatory text because we 

were concerned that the language ‘‘the 

date on which the additional required 

compensation is paid to the party to 

which it is owed such that the financial 

relationship would satisfy all of the 

requirements of the exception as of its 

date of inception’’ may not have been 

entirely clear. The purpose of the 

quoted language was to emphasize that 

where a party has underpaid 

compensation (such as where a party 

has paid rent in an amount below fair 

market value for each of the months 

1–6 under a lease agreement), it is not 

sufficient for the parties to address the 

noncompliant compensation on a going 

forward basis (such as adjusting the 

compensation for month 7 of the rental 

agreement used in the example), or for 

some partial period (such as making up 

the shortfall for months 4–6 in the lease 

agreement), but rather all additional 

compensation must be paid (that is, in 

the example given, compensation 

required to bring the rental payments for 

months 1–6 up to fair market value must 

be paid). Similarly, under our proposal, 

and as finalized in this rule, it is not 

sufficient for the party receiving excess 

compensation under a financial 

relationship to repay some of the excess 

compensation, but rather the party 

receiving it must repay all of it to the 

party that paid it. Accordingly, we are 

revising the proposed text for language 

for § 411.353(c) to provide that the 

period of disallowance ends no later 

than the date on which all excess 

compensation is returned to the party 

that paid it, or the date on which all 

additional required compensation is 

paid to the party to which it is owed. 

We emphasize that, consistent with our 

proposals, this final rule only prescribes 

the outside period of disallowance for 

certain situations, that is, a date by 

which parties can be assured that 

referrals for DHS are not prohibited 

(provided that compensation on a goingforward basis fully complies with an 

exception). Revised § 411.353(c) does 

not prevent parties from arguing that the 

period of disallowance ended earlier 

than the prescribed outside period, on 

the theory that the financial relationship 

ended at an earlier time. This final rule 

does not purport to define when a 

financial relationship begins or ends. In 

every case, a financial relationship 

begins and ends according to the 

conduct of the parties and the specific 

facts of the case. We further emphasize 

that the beginning and end dates of a 

financial relationship do not necessarily 

coincide with the beginning and end 

dates of a written agreement. 


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We address specifically the comments 

received in response to the FY 2009 

IPPS proposed rule below. 

Comment: Several groups commented 

that, although the proposals attempt to 

offer greater clarity regarding making 

referrals and billing the Medicare 

program in the case of noncompliant 

financial relationships, the proposals 

rely on a ‘‘pay back’’ concept or 

otherwise resort to a specific facts and 

circumstances test in determining the 

period of disallowance. The 

commenters stated that both approaches 

reach beyond the duration of the 

relationship and create consequences far 

into the future in complex ways. 

According to the commenters, the 

proposals would have the effect of 

inhibiting self-reporting and selfcorrection of compliance violations 

rather than establishing the certainty to 

encourage them. 

Response: We disagree in all respects 

with the commenters’ characterization 

of the effects of the proposals, which we 

are adopting. Prior to this final rule, 

there was no express statement in the 

statute, or in our regulations or other 

guidance as to when the period of 

disallowance ends for noncompliant 

relationships. This final rule provides 

assurance that the period of 

disallowance will end no later than: (1) 

Where the noncompliance is not related 

to the payment of compensation, the 

date that the financial relationship 

satisfies all of the requirements of an 

applicable exception; or (2) where the 

noncompliance is related to the 

payment of compensation, as 

applicable, the date on which all excess 

compensation is returned to the party 

that paid it, or the date on which all 

required compensation is paid to the 

party to which it is owed, and the 

financial relationship satisfies all of the 

requirements of an applicable 

exception. As we pointed out in the 

proposed rule (73 FR 23692), and as we 

reiterate here, the proposals were not 

intended to prevent parties from 

attempting to establish that the financial 

relationship, and thus the period of 

disallowance, ended at some earlier 

point. (We recognized in the proposed 

rule that all the terms of an exception 

may never be met, such as where an 

entity discovers that a physician has 

failed to sign an agreement and is never 

successful in obtaining the signature, or 

where excess compensation may never 

be repaid.) We are merely prescribing an 

outside limit on the period of 

disallowance, that is, a means by which 

parties are assured that referrals made 

after a certain date, and claims made 

pursuant to such referrals, will not run 

afoul of the prohibitions in the statute. 

Thus, the proposal, as adopted in this 

final rule, did not reach beyond the 

duration of the financial relationship. 

Similarly, our approach of using a caseby-case analysis for noncompliant 

arrangements that do not satisfy the 

conditions of § 411.353(c)(1) or (c)(2), 

does not reach beyond the duration of 

the relationship. It has long been our 

policy that a financial relationship does 

not necessarily begin with, or end with, 

the opening or closing dates of a written 

agreement. As an example, where excess 

compensation is paid to a physician by 

an entity, the question is raised as to 

whether the excess was intended as a 

reward for referrals that took place prior 

to the beginning date of a written 

agreement and/or was intended as an 

inducement for referrals subsequent to 

the ending date of a written agreement. 

It is not possible for us to specify, 

through rules of general applicability, 

the end date of the period of 

disallowance for this type of situation; 

rather, the same case-by-case analysis 

approach that was in effect prior to the 

proposed rule continues to be in effect. 

Finally, we do not agree that the 

proposals, as adopted, have the effect of 

inhibiting self-reporting and selfcorrection of compliance violations 

rather than establishing the certainty to 

encourage them. The proposals would 

not, and the final rule does not, require 

self-reporting to take advantage of the 

certainty afforded by revised 

§ 411.353(c). Moreover, as explained 

above, the proposals as adopted do 

establish a point at which the parties 

may be certain that the period of 

disallowance has ended. Where an 

entity discovers that it is missing a 

signature on an agreement, for example, 

or that too much or too little 

compensation has been paid, it should 

take steps to bring its relationship(s) 

into compliance. By doing so, the entity 

and the referring physician at issue will 

have the assurance that the period of 

disallowance ended no later than a 

certain date; again, revised § 411.353(c) 

sets only an outer limit on the period of 

disallowance and does not prevent 

parties from attempting to demonstrate 

that the period of disallowance ended 

on some earlier date. 

Comment: One commenter suggested 

that billing should be permitted to 

resume when the financial relationship 

between the physician and the DHS 

entity satisfies the requirements of an 

exception to the physician self-referral 

prohibition. This would not eliminate 

the violation for the time prior to the 

correction and other remedies would be 

applicable to that time period. Although 

the commenter acknowledged that the 

billing prohibition could last 

indefinitely or for some period after 

correction, it believes a better regulation 

to promote correction and compliance 

would be one that ends the billing 

prohibition upon correction of the 

noncompliance and establishment of a 

relationship within an exception. 

Response: We are unsure of the exact 

position of the commenter. We 

understand the commenter as suggesting 

that, in all cases, the prohibition on 

billing should end when the parties 

bring an arrangement into compliance 

with an exception, irrespective of 

whether the parties account for any 

problems with too much or too little 

compensation that may have taken place 

prior to the correction. If that is the 

commenter’s position, we do not agree. 

An example concerning a contract 

between a physician and a hospital for 

personal services should serve to 

illustrate the essential difference 

between the position we are taking in 

this final rule and the position we 

believe the commenter may be 

advocating. Suppose a physician is paid 

excess compensation under a personal 

service agreement for months 1–6 and, 

near the end of month 6, the parties 

discover the error, with the result that, 

on July 1, the physician repays the 

excess compensation for months 1–6 

and the arrangement otherwise complies 

with all of the requirements of an 

applicable exception. The final rule 

provides for an outside period of 

disallowance that will end no later than 

the date a party repays excess 

compensation provided that the 

financial relationship otherwise meets 

all of the requirements of an applicable 

exception. Thus, under the facts of this 

example, the final rule provides that the 

period of disallowance would end no 

later than July 1. The commenter 

appears to agree, that if the excess 

compensation is not repaid, referrals 

from the physician to the hospital for 

DHS during months 1–6 are tainted so 

that claims for such referrals may not be 

paid (and that other penalties may 

attach), but to the extent that the 

commenter is suggesting that the period 

of disallowance should end no later 

than July 1, even if the excess 

compensation is not repaid, simply 

because the parties have brought the 

arrangement into compliance with an 

exception going forward, we do not 

agree. As we stated in the response to 

the immediately preceding comment, 

the beginning and end dates of an 

agreement do not necessarily 

correspond with the beginning and end 

dates of a financial relationship. Thus, 

for example, compensation that does not 

meet the requirements of any exception 


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may establish a financial relationship 

that began prior to, or ended later than, 

the period specified in a written 

agreement between the parties, and the 

fact that a new agreement is entered into 

(or an existing agreement is modified) at 

some point does not, by itself, remove 

the tainted effects of the nonconforming 

compensation. Thus, under the facts of 

the example above, payment of excess 

compensation for months 1–6 may have 

been intended as a reward for referrals 

prior to, during, or after the period 

specified in the agreement, or as 

incentive for referrals past month 6. 

Comment: Commenters expressed 

concern regarding what they perceived 

as the ‘‘seemingly piecemeal approach’’

in addressing the issue of period of 

disallowance, raising doubts about the 

proposal’s clarity and usefulness. To 

support this claim, the commenters 

cited the preamble discussion in the FY 

2009 proposed rule that noted our 

consideration of a related proposed 

‘‘alternative method of compliance’’

from the CY 2008 PFS proposed rule 

that remained under consideration. 

Also, commenters noted that we 

suggested we ‘‘may propose rulemaking 

on [a period of disqualification during 

which the parties to a noncompliant 

financial relationship would be 

prohibited from using a particular 

exception due to that relationship] in 

the future,’’ although this was not 

included in the FY 2009 proposed rule. 

Additionally, these commenters noted 

that the proposal did not address 

whether the anti-kickback statute is 

implicated and/or whether CMPs under 

the physician self-referral statute are 

potentially applicable due to the 

noncompliant financial relationship. 

The commenters urged us to consider 

developing and publishing a more 

comprehensive proposal that would 

allow organizations to consider the full 

impact of proposed changes. These 

commenters recommended that we 

work with OIG to coordinate efforts to 

address the full range of concerns raised 

regarding these arrangements. 

Response: We believe that revised 

§ 411.353(c), adopting the proposal, is 

clear, non-complex and useful to 

physicians and entities, as it sets forth 

bright line rules as to the outside limit 

of the period of disallowance for 

noncompliant financial relationships. 

Also appearing in this final rule is new 

§ 411.353(g), which contains a special 

rule for certain arrangements involving 

noncompliance with signature 

requirements (adopting the ‘‘alternative 

method of compliance’’ proposal 

referred to by the commenters). These 

two rules pertain to missing signatures 

(although the revisions to § 411.353(c) 

address other reasons for 

noncompliance), but they operate 

independently of each other. To 

illustrate, suppose a referring physician 

and a DHS entity enter into a financial 

relationship on January 1, 2009 for the 

lease of office space, and the physician 

initially failed to sign the lease 

agreement, but subsequently signed it. 

Depending on the facts and 

circumstances, new § 411.353(g) may 

operate to keep the arrangement within 

the protection of the lease exception at 

§ 411.357(a). If, however, the 

requirements of new § 411.353(g) are not 

met (because, for example, the 

agreement was signed more than 90 

days after the financial relationship 

began), the arrangement would be 

noncompliant with the lease exception 

at § 411.357(a), and thus there would be 

a period of disallowance. Under revised 

§ 411.353(c), the period of disallowance 

would run from the beginning of the 

financial relationship until no later than 

the date the physician signed the lease 

agreement. (This example assumes that 

the physician subsequently signed the 

lease agreement and the financial 

arrangement continued past the date of 

signing. We recognize that, in some 

cases parties may never bring the 

arrangement back into compliance, such 

as failing to ever get a missing signature. 

That is why we proposed, and we adopt 

as final, a rule that specifies an outside 

date for the period of disallowance.) 

Note that taking action that fixes the 

outside date of the period of 

disallowance under revised § 411.353(c) 

does not vitiate a DHS entity’s 

overpayment for any claims submitted 

during the period of disallowance as a 

result of the prohibited referrals. Note 

also that the revisions to § 411.353(c) do 

not affect the operation of the statutory 

provision for CMPs for knowing 

violations of the physician self-referral 

statute, the anti-kickback statute, the 

False Claims Act, or any other 

applicable statute. That is, section 

411.353(c) prescribes, for certain 

situations involving both knowing and 

inadvertent noncompliance, the outside 

period of disallowance. Section 

411.353(c) does not purport to address 

the complete range of penalties or 

remedies that may be imposed for 

prohibited referrals for DHS during the 

period of disallowance and for the 

submission of claims to Medicare for 

such prohibited referrals. To illustrate, 

suppose an entity and a physician enter 

into a one-year personal service 

arrangement on January 1, and both 

parties are aware that the compensation 

called for under the contract is above 

fair market value and is therefore not 

compliant with any of our exceptions. 

On June 6, the physician repays the 

entity the excess compensation that he 

or she has received. Under revised 

§ 411.353(c), the period of disallowance 

would last from January 1 until June 6. 

Under section 1877(g)(1) of the Act, 

claims submitted by the entity for 

referrals for DHS made during the 

period of disallowance are not payable. 

In addition, however, because the 

parties knowingly violated the 

provisions of the physician self-referral 

statute, CMPs, assessments and 

exclusions could be assessed under the 

authority of section 1877(g)(3) of the Act 

(incorporating by reference section 

1128A of the Act), and liability under 

the False Claims Act could be imposed. 

Further, depending on the facts, one or 

both parties could be guilty of violating 

the anti-kickback statute, or may have 

violated some other criminal or civil 

statute. 

Comment: A commenter 

recommended that we set a 90-day 

‘‘cure’’ period for noncompliance not 

related to the compensation terms of an 

arrangement. If the noncompliance, 

such as a missing signature, is remedied 

within 90 days of when the services 

began, the commenter suggested a 

period of disallowance should not arise. 

The commenter believed that this 

‘‘cure’’ period would encourage 

corrective action by hospitals in the case 

of an inadvertent technical 

noncompliance that is discovered and 

also would encourage diligent 

administrative monitoring to ensure that 

the required signatures are obtained in 

a timely fashion. The commenter 

expressed concern over the harsh effects 

of not obtaining a signature prior to the 

commencement of physician services 

under a valid medical services 

arrangement at fair market value. 

Ensuring that essential medical coverage 

is provided to the community, that is, 

emergency department, surgery, should 

be a higher priority to a hospital and us 

than is assurance that a compliant 

personal services contract is signed by 

the physician in advance of performing 

services. The proposal, if finalized, 

would require the hospital to refuse to 

provide services to Federal health 

program beneficiaries prior to bilateral 

execution of a valid contract. Hospitals 

may be forced to withhold services to 

avoid incurring fraud and abuse fines 

and/or CMPs for knowingly providing 

covered health services to federal health 

program beneficiaries for free which 

would violate OIG limits on allowable 

gratuities to beneficiaries. The 

commenter requested that we clarify 

that a ‘‘valid written agreement’’ is 


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defined by the requirements for an 

enforceable agreement under state law 

where the hospital is located. The 

commenter stated that, in many States, 

a legally enforceable agreement can 

exist even in the absence of every 

required signature. 

The commenter also suggested that, 

when a compensation-related violation 

is detected and the amount of the 

overpayment is de minimis and 

immaterial to the contract as a whole, 

we should exempt such violations from 

a period of disallowance. Materiality, in 

the view of this commenter, should be 

defined as any amount that exceeds 5 

percent of the total payment expected or 

reasonably projected by the parties at 

the outset of the arrangement. This 

would allow for the correction of minor 

payment errors when promptly detected 

and repaid by the party who received 

the overpayment without imposing 

complete disallowance of hospital 

reimbursement for an erroneous 

payment of even $1 above stated limits 

or fair market value. The commenter 

suggested that if we go forward with 

imposing a period of disallowance for 

compensation-related violations that are 

de minimis, the disallowance be limited 

to the amount that matches the 

unearned benefit retained or received by 

the physician. 

Response: The commenter’s 

suggestions are more closely related to 

our proposal in the CY 2008 PFS 

proposed rule for an alternative method 

of compliance than they are with 

respect to our proposal to specify the 

outside period of disallowance for 

certain situations. In this final rule, we 

are finalizing our proposal for an 

alternative method of compliance at 

new § 411.353(g), entitled ‘‘Special rule 

for certain arrangements involving 

noncompliance with signature 

requirements.’’ It provides that a 

financial relationship that otherwise 

would be out of compliance with an 

exception that has a signature 

requirement will remain in compliance 

with that exception (assuming all other 

requirements are satisfied), provided 

that certain conditions are met. 

Specifically, in the case of noninadvertent failures to obtain a 

necessary signature, the parties must 

obtain the missing signature within 30 

days of the beginning of the financial 

relationship. In the case of inadvertent 

failures to obtain a necessary signature, 

the parties must obtain the necessary 

signature within 90 days of the 

beginning of the financial relationship. 

In either case, new § 411.353(g) may be 

used only once every 3 years with 

respect to the same referring physician. 

We are not extending the protection 

afforded by new § 411.353(g) to failures 

to meet compensation requirements 

(such as the requirement that 

compensation be at fair market value or 

not take into account the volume or 

value of referrals), including failures 

that result in ‘‘minor payment errors’’

because we are not confident at this 

time that if we were to do so we would 

meet the requirement in section 

1877(b)(4) of the Act that new 

exceptions, or modifications to existing 

exceptions, not create a risk of program 

or patient abuse. We also note a 

practical difficulty in defining what 

would constitute a ‘‘minor’’ payment 

error or a ‘‘de minimis’’ deviation from 

the compensation requirement. Finally, 

we note that the commenter may be 

referring to section 1128A(a)(5) of the 

Act, which provides for CMPs for 

certain prohibited inducements to 

beneficiaries; if so, it is not clear from 

the comment why the commenter 

believes that hospitals would be at risk 

for violating this section of the Act. 

Comment: One commenter urged us 

to reconsider our ‘‘technical’’ and 

‘‘highly impractical’’ interpretation of 

the physician self-referral prohibition as 

it relates to the period of disallowance 

proposal. The commenter addressed the 

examples we provided for application of 

the period of disallowance rules 

labeling them highly restrictive and 

unrealistic applications of the law. The 

commenter argued that a short delay in 

obtaining a signature should not trigger 

the physician self-referral law, as the 

risk of abuse resulting from a delayed 

signature is so low as to be nonexistent. 

According to the commenter, there is 

nothing in the statute requiring us to 

adopt this interpretation, and doing so 

would only multiply the number of 

potential technical non-abusive 

violations of the physician self-referral 

law. Another commenter requested that, 

in the event a potentially noncompliant 

arrangement is ‘‘cured’’ by repayment of 

money that was paid under an 

arrangement that did not comply with 

all elements of an exception, the ‘‘cure’’

‘‘relate back’’ to the start date of the 

arrangement. That is, no repayment to 

Medicare would be required and no 

other penalties or assessments under 42 

CFR part 411 would occur. 

Response: Under the physician selfreferral statute, a physician may not 

refer DHS to an entity, and the entity 

may not bill Medicare for such referred 

DHS, if the physician (or an immediate 

family member) has a financial 

relationship with the entity, unless an 

exception applies. For purposes of 

determining whether a referral for DHS 

(and the billing of such referred DHS) is 

protected by an exception, we believe 

that the most natural reading of the 

statute is that all of the requirements of 

the exception must be met at the time 

the referral is made. Further, we believe 

that the statute does not contemplate 

that parties have the right to back-date 

arrangements, return compensation, or 

otherwise attempt to turn back the clock 

so as to bring arrangements into 

compliance retroactively. Under section 

1877(b)(4) of the Act, however, we have 

the authority to craft additional 

exceptions, or modify existing 

exceptions, if doing so would pose no 

risk of program or patient abuse. As 

noted above, in response to the 

immediately preceding comment, we 

have finalized our proposal for an 

alternative method of compliance, by 

providing, at new § 411.353(g), that, an 

arrangement that is otherwise compliant 

with an exception but for the fact that 

a signature is missing, nevertheless will 

remain in compliance with the 

exception if certain conditions are met. 

We do not believe that allowing parties 

to ‘‘cure’’ retroactively a noncompliant 

relationship by having one party repay 

another party excess compensation 

would satisfy the requirement in section 

1877(b)(4) that new or modified 

exceptions pose no risk of program 

abuse. 

Comment: A commenter offered 

support of our position that any period 

of disallowance begins when the 

violation of the physician self-referral 

regulation occurs and ends when the 

violation is corrected. However, the 

commenter stated that the provider 

should have the burden of proof to 

establish that a violation was 

inadvertent and resulted in no financial 

harm to the Medicare program. For 

‘‘those violations,’’ a financial penalty 

should apply rather than a period of 

disallowance. 

Response: We believe the proposal, 

which we are adopting without 

modification in this final rule, is fully 

consistent with the physician selfreferral statute. We are unsure of the 

exact position taken by the commenter. 

First, to the extent that the commenter 

believes that it is necessary to require a 

provider or other DHS entity to establish 

that the violation was inadvertent in 

order to avail itself of the rules in 

§ 411.353(c) setting the outside period of 

disallowance, we disagree. We note that, 

under section 1877(g)(3) of the Act, 

knowing violations of the physician 

self-referral statute, irrespective of 

whether harm is caused to the program, 

are punishable by CMPs. Moreover, as 

discussed below, knowing violations of 

the physician self-referral statute may 

also implicate the anti-kickback statute 

at section 1128B(b) of the Act, and/or 


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the False Claims Act, or other Federal 

statute. 

To the extent that the commenter is 

suggesting that if the parties to a 

noncompliant arrangement are able to 

demonstrate to us that the compliance 

was inadvertent and that there was ‘‘no 

financial harm’’ to the Medicare 

program, the parties should be subject to 

some financial penalty rather than a 

period of disallowance, we also 

disagree. The statute provides at section 

1887(a) of the Act that, where a 

physician and an entity have a financial 

relationship that does not comply with 

the requirements of any exception, the 

physician may not refer DHS to the 

entity during the period of the 

noncompliant financial relationship and 

that the entity may not bill Medicare for 

DHS referred to it by the physician 

during that period. Section 1877(g)(1) of 

the Act provides that no claim made 

pursuant to a prohibited referral may be 

paid by Medicare. No finding of 

financial harm to the Medicare program 

is necessary, or even authorized, by the 

statute, in order to trigger the 

prohibition in section 1877(g)(1) of the 

Act on making payment. Moreover, the 

statute does not authorize us to impose 

financial penalties for inadvertent 

violations in lieu of (or in addition to) 

the prohibition on making payment in 

section 1877(g)(1) of the Act. 

Comment: Two commenters objected 

to the proposal on the basis that the 

physician may not have been aware that 

he or she was in violation of one or 

more physician self-referral 

prohibitions. For example, the 

physician may not have known that his 

or her compensation was greater than 

fair market value or exceeded limits for 

such services. The physician may have 

assumed that the entity that contracted 

with him or her had structured the 

relationship in accordance with 

appropriate restrictions and regulations. 

Additionally, according to the 

commenters, ‘‘the typical physician’’

would not know where to find the 

appropriate information that would 

clearly show the relevant values and/or 

limits. Similarly, the entity contracting 

with the physician may not have known 

the appropriate value or limits 

associated with the respective physician 

services. The entity may have difficulty 

determining whether or not the 

arrangement violated certain 

prohibitions, particularly if the entity is 

a small hospital without adequate 

resources or experience. Another 

commenter urged us to not impose 

defined periods of disallowance except 

for the most egregious violations, for 

which clear evidence of intent to 

defraud is found after examination of 

the individualized facts. The commenter 

also encouraged a stay of the period of 

disallowance if the arrangement’s facts 

meet the temporary period of 

noncompliance exception authorized in 

§ 411.353(f). According to this 

commenter, the proposed rule imposes 

potential penalties that are far in excess 

of either the value of the loss, if any, to 

the public fisc or the wrongfulness of 

the violation and also presents concerns 

of unintended consequences such as 

jeopardizing essential patient care for 

federal health program beneficiaries. 

Response: The physician self-referral 

statute is a strict liability statute, 

meaning that a financial relationship 

that does not meet a relevant exception 

because the compensation was above or 

below fair market value (or because of 

any other reason) is noncompliant, 

regardless of whether one or both 

parties to the arrangement were 

unaware of the defect. (As noted above 

in response to another comment, 

however, certain penalties or remedies 

beyond claims denials are potentially 

applicable to knowing violations of the 

physician self-referral statute.) New 

§ 411.353(g) allows parties to remain in 

compliance with an exception, under 

certain circumstances, despite a missing 

signature, if the parties later obtain the 

signature. Section 411.353(g) does not 

provide protection for arrangements in 

which too little or too much 

compensation is paid because we are 

concerned that there would a risk of 

program or patient abuse if we were to 

provide such protection. Section 

411.353(f) provides relief for temporary 

noncompliance in certain situations, but 

one condition that must be met is that 

the noncompliance must be for reasons 

beyond the control of the entity. We 

believe that the payment of 

compensation below, or above fair 

market value would rarely, if ever, be 

beyond the control of the entity. 

Comment: Two commenters objected 

that the period of disallowance as 

proposed could be extended 

unreasonably into the future, possibly 

beyond the relationship of the parties. 

The two commenters also objected that 

the same period of disallowance would 

apply to all compensation related 

violations regardless of the violation 

being the first such violation for the 

given entity or if it is an occurrence 

reflecting a pattern of violations for the 

entity. One of the commenters suggested 

that we apply a lighter period of 

disallowance to the first compensationrelated violation than where the 

violation is not the first for either the 

physician or the entity. 

Response: We disagree that, under the 

proposal, the period of disallowance 

could be extended unreasonably into 

the future, possibly beyond the 

relationship. Revised § 411.353(c), 

consistent with the statute (and with the 

proposal) does not attempt to set the 

period of disallowance beyond the end 

of the financial relationship. Rather, it 

provides clear guidance that, under 

certain circumstances, the period of 

disallowance ends no later than the date 

parties to a noncompliant financial 

relationship take certain, specified 

action. 

We fail to see why one rule should 

apply for a first violation and a different 

rule should apply for a repeat violation. 

Revised § 411.353 sets forth what we 

believe is the natural reading of the 

statute, that is, the period of 

disallowance begins when a financial 

relationship becomes noncompliant and 

ends when the noncompliance is 

rectified. Our rule provides that the 

period of disallowance ends no later 

than a certain time, in order to provide 

assurance to parties that referrals after 

that time and claims submitted pursuant 

to those referrals will not be tainted by 

the previous noncompliance. We 

reiterate that parties are free, in any 

given case, to assert that the financial 

relationship (and, hence, the period of 

disallowance) ended at a time prior to 

the correction of a noncompliant 

condition, and such assertions will be 

evaluated on a case-by-case basis. As 

noted above, certain penalties or 

remedies beyond claims denials are 

reserved only for knowing violations of 

the physician self-referral statute, and if 

the same parties repeat the same types 

of noncompliance it may raise questions 

as to whether the noncompliance was 

deliberate. 

Comment: A commenter expressed 

concern regarding whether the proposed 

period of disallowance was truly 

bilateral and applied to all parties in a 

multi-party agreement that is found to 

be in violation of the self-referral 

prohibition. The commenter requested 

that we state clearly in the final rule that 

any period of disallowance resulting 

from the final rule applies equally to all 

enrolled providers seeking federal 

health program reimbursement for DHS 

provided to Federal health program 

beneficiaries pursuant to an agreement 

found to be out of compliance with the 

physician self referral prohibition. The 

commenter stated that the physician 

involved in a noncompliant financial 

relationship should also be disallowed 

from billing federal health programs 

during the period of disallowance and 

should be required to refund any 

professional services reimbursement 

received from federal health programs 

during the same period that is 


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applicable to the improper agreement to 

which he or she is a party. To hold only 

the hospital liable during the period of 

disallowance would be arbitrary and 

capricious, whereas aligning 

compliance incentives for all parties to 

an agreement likely would be more 

effective than punishing the hospital 

only. 

Response: The physician self-referral 

statute, at section 1877(a) of the Act, 

provides for two types of prohibitions 

with respect to unexcepted financial 

relationships between a physician (or 

the physician’s immediate family 

member) and an entity. First, the 

physician is prohibited from making 

referrals for DHS to the entity, and 

second, the entity is prohibited from 

billing Medicare for DHS referred by the 

physician. We believe the proposal was, 

and revised § 411.353(c) is, clear that 

the period of disallowance refers to the 

period that the physician is prohibited 

from making referrals as well as the 

period the entity is prohibited from 

billing Medicare. We decline to adopt 

the commenter’s suggestion that the 

physician party to a noncompliant 

financial relationship be disallowed 

from billing Federal health programs 

during the period of disallowance and 

to refund any professional services 

reimbursement received from federal 

health programs during that same 

period that is applicable to the improper 

agreement to which he or she is a party. 

We understand the commenter as 

alluding to the physician in the capacity 

of making prohibited referrals to a DHS 

entity such as a hospital and not in the 

capacity as a DHS entity (although 

sometimes physicians do act in the 

capacity of a DHS entity). Thus 

understood, we have no authority under 

the statute to impose such penalties as 

a matter of course on a physician who 

makes prohibited referrals. As noted 

above, where a physician or DHS entity 

knowingly violates the physician selfreferral statute, under authority of 

section 1877(g)(3) of the Act, certain 

penalties and the remedy of exclusion 

may be imposed. If a physician is 

excluded, he or she is prohibited from 

participating in any Federal health care 

program. We refer readers to section 

1128 of the Act. 

Comment: One commenter requested 

clarification, with respect to the 

situation in which a physician receives 

excess compensation from an entity, as 

to whether the physician may repay the 

excess compensation by negotiating a 

promissory note to the hospital, at 

commercially reasonable interest rates 

and is current on all loan payments 

under that note; and if so, whether one 

missed loan payment by the physician 

under the terms of the promissory note 

commences a period of disallowance 

that continues until all overdue 

payments, including any interest on the 

missed payment(s) per the terms of the 

note, are made current. 

Response: Revised § 411.353(c) is 

applicable where the party that has 

received excess compensation has, in 

fact, repaid the excess compensation. 

Revised § 411.353(c) places no 

restriction on the source of the funds 

that the physician uses to repay excess 

compensation (or to make up a shortfall 

in compensation), and thus, the 

physician may pay the funds out-ofpocket, or may obtain a loan from a 

commercial lender, private party or 

even from the entity itself, in order to 

repay the excess compensation (or make 

up the shortfall in compensation). 

However, where a physician receives 

excess compensation from an entity and 

then obtains a loan from the entity to 

repay the entity the excess 

compensation that he or she received, 

the question is raised whether the 

physician has in fact repaid the excess 

compensation through the use of a bona 

fide, commercially reasonable loan, or 

whether the loan transaction is a sham. 

We question the commercial 

reasonableness of any loan made to a 

referring physician by an entity to assist 

the physician in repaying funds owed to 

the entity, and we note that such a loan 

would be highly suspect under the antikickback statute. Entities, therefore, 

should be very cautious before offering 

to make such loans. Moreover, hospitals 

or other entities that do make loans to 

physicians (particularly for the purpose 

of allowing a physician to repay excess 

compensation or make up a shortfall in 

compensation following the discovery 

of a noncompliant financial 

relationship) would be well-advised to 

make reasonable efforts to enforce the 

terms of the loan agreement, lest the 

failure to do so raises questions as to 

whether the agreement was a sham 

arrangement. We also note that the 

granting of a loan by the entity to the 

physician would itself create a financial 

relationship, and thus the loan 

arrangement itself must meet an 

exception. 

D. Alternative Method for Compliance 

With Signature Requirements in Certain 

Exceptions 

In the CY 2008 PFS proposed rule, we 

stated that, although we do not have 

discretion to waive violations of the 

physician self-referral statute, we were 

considering whether to amend some of 

the exceptions that appear in §§ 411.355 

through 411.357 to provide an alternate 

method for satisfying certain 

requirements of the exceptions (72 FR 

38185). We cautioned that our proposal 

was intended to address only 

inadvertent violations in which a 

financial relationship fails to satisfy a 

procedural or ‘‘form’’ requirement of an 

exception in the statute or regulations. 

In addition, we stated that we did not 

intend to apply the alternative method 

for compliance to other requirements, 

such as compensation that must be fair 

market value, not related to the volume 

or value of referrals, or be set in 

advance. We cited the example of a 

situation in which parties are missing a 

signature but satisfy every other 

requirement of the exception for 

personal service arrangements in 

§ 411.357(d). Section 1877(b)(4) of the 

Act provides that the Secretary may 

promulgate additional exceptions 

regarding financial relationships that 

pose no risk of program or patient 

abuse. We proposed to rely on our 

authority under this provision of the Act 

to implement this policy. We proposed 

eight criteria that, if satisfied, would 

allow a financial relationship that did 

not satisfy all of the existing 

‘‘prescribed’’ criteria of an exception 

nevertheless to meet the exception. 

They were: (1) The facts and 

circumstances of the financial 

relationship are self-disclosed by the 

parties to us; (2) we determine that the 

financial relationship satisfied all but 

the prescribed procedural or ‘‘form’’

requirements of the exception at the 

time of the referral for the DHS at issue 

and at the time of the claim(s) for such 

DHS; (3) the failure to meet all of the 

prescribed criteria of the exception was 

inadvertent; (4) the referral for the DHS 

and the claim(s) for the DHS were not 

made with knowledge that one or more 

of the prescribed criteria of the 

exception were not met (consistent with 

other exceptions, we would apply the 

same knowledge standard as that 

applicable under the False Claims Act); 

(5) the parties have brought (or will 

bring as soon as possible) the financial 

relationship into complete compliance 

with the prescribed criteria of the 

exception or have terminated (or will 

terminate as soon as possible) the 

financial relationship between or among 

them; (6) the financial relationship did 

not pose a risk of program or patient 

abuse; (7) no more than a set amount of 

time had passed since the time of the 

original noncompliance with the 

prescribed criteria; and (8) the financial 

relationship at issue is not the subject of 

an ongoing Federal investigation or 

other proceeding (including, but not 

limited to, an enforcement matter). We 

proposed no regulatory text. 


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Commenters were generally 

supportive of the policies underlying 

the proposal, but most contended that 

the proposal was too restrictive. In 

particular, the commenters stated that 

we should not require parties to selfdisclose that a procedural or ‘‘form’’

requirement was not met in order to be 

eligible for the alternative method for 

compliance. 

We are adopting the proposal, with 

modification. Specifically, we are not 

adopting most of the proposed eight 

criteria, including the requirements that 

parties self-disclose a noncompliant 

financial relationship and that we 

determine that the financial relationship 

satisfied all but the prescribed 

procedural or ‘‘form’’ requirements of an 

exception. Under new paragraph (g) of 

§ 411.353, payment may be made to an 

entity that submits a claim or bill for 

DHS if the financial relationship 

between the entity and the referring 

physician fully complied with an 

applicable exception under § 411.357, 

except with respect to a signature 

requirement, and the following 

conditions are met: (1) If the failure to 

comply with the signature requirement 

was inadvertent, the entity rectifies the 

failure to comply with the signature 

requirement within 90 days after the 

commencement of the financial 

relationship (without regard to whether 

any referrals have occurred or 

compensation has been paid during 

such 90-day period); or (2) if the failure 

to comply with the signature 

requirement was not inadvertent, the 

entity rectifies the failure to comply 

with the signature requirement within 

30 days after the commencement of the 

financial relationship (without regard to 

whether any referrals have occurred or 

compensation has been paid during 

such 30-day period). In order to take 

advantage of the alternative method for 

compliance in § 411.353(g), the financial 

relationship at issue must, at the 

commencement of the financial 

relationship, satisfy all of the 

requirements (except the signature 

requirement) of an applicable exception. 

For example, if the applicable exception 

includes a requirement that the 

financial relationship not violate the 

Federal anti-kickback statute (section 

1128B(b) of the Act), the alternative 

method for compliance with the 

exception would not be available to the 

parties unless this requirement was 

satisfied. New paragraph (g) of § 411.353 

may be used by an entity only once 

every 3 years with respect to the same 

referring physician. 

We decline, at this time, to extend the 

relief offered by the proposal to failures 

to meet other prescribed procedural or 

‘‘form’’ criteria. Commenters have not 

identified other procedural or ‘‘form’’

criteria to which the final rule should 

apply. We are reluctant to expand the 

relief addressed in the proposed rule, 

particularly in light of the fact that we 

are not requiring entities to self-disclose 

the failure to meet the prescribed 

criteria, and are not requiring that we 

make a determination that alternative 

criteria are met. 

We address below the specific 

comments that we received in response 

to our proposal in the CY 2008 PFS 

proposed rule. 

Comment: One commenter stated that 

the proposed list of requirements that 

parties would need to satisfy in order to 

be eligible for the alternative method for 

compliance appeared reasonable and 

that we should not dilute the 

requirements if we finalize the proposal. 

Although the exception might have 

limited utility, it would provide 

flexibility when it is clear that the 

noncompliance with the substantive 

criteria was caused by an inadvertent 

error. One commenter stated that the 

proposal was cumbersome and 

ultimately would not benefit physicians 

because of the inordinate number of 

requirements that would have to be 

satisfied before an entity could take 

advantage of the alternative method for 

compliance. Another commenter 

expressed concern that the proposal was 

so burdened by cautions and 

reservations that it may be less viable 

than it otherwise could be. One 

commenter stated that requiring us to 

make individual determinations for 

each self-disclosure would provide an 

enormous administrative burden on 

both us and providers. The commenter 

suggested that, if providers meet the 

alternative criteria to comply with 

certain exceptions, they should be able 

to self-correct within 30 days of 

noncompliance and not be required to 

self-disclose. This structure, the 

commenter contended, would eliminate 

the administrative burden, yet provide 

ample protections against abuse, 

because the alternative criteria we set 

forth in the proposed rule are clear. 

Another commenter said that, in light of 

the potential tremendous penalties and 

the black-and-white nature of the 

prohibition, there should be a means 

specified in the regulations to rectify 

inadvertent violations internally, and 

for us or another agency to exercise 

discretion upon later review, without 

subjecting parties to the burden and 

expense of a self-disclosure. Another 

commenter stated that DHS entities 

would be unlikely to submit to (or be 

counseled to submit to) an ‘‘uncertain’’

process that exposes their mistakes. 

Two commenters complained that it 

was unfair to require a voluntary 

disclosure to use this method for 

compliance. Several commenters stated 

that the proposal for us to retain sole 

authority to determine whether a 

financial relationship failed to satisfy all 

of the prescribed procedural or ‘‘form’’

criteria of an exception would give the 

agency too much control. Several other 

commenters expressed dissatisfaction 

that the decision of whether the 

alternative criteria were met would not 

be subject to further administrative or 

judicial review. One of these 

commenters claimed that the proposed 

lack of administrative or judicial review, 

coupled with the proposed option of not 

making a decision, would be a 

perversion of due process. 

Response: We recognize that our 

proposal contained a significant number 

of requirements. In order not to 

discourage providers and suppliers from 

taking advantage of the opportunity to 

remain in compliance with an exception 

through an alternative method for 

compliance, we have decided to 

eliminate the requirement that we must 

make a determination that alternative 

criteria are met, as well as the 

requirement that DHS entities must selfdisclose the failure to meet the 

prescribed criteria. We are modifying 

§ 411.353 to provide what is essentially 

an adjunct to the relief offered by the 

special rule in § 411.353(f) for 

temporary noncompliance. New 

paragraph (g) of § 411.353 provides that, 

notwithstanding that a financial 

relationship did not satisfy all of the 

requirements of an exception in 

§ 411.357 due to a missing signature on 

a written agreement, payment may be 

made to an entity that submits a claim 

or bill for a designated health service if 

the financial relationship between the 

entity and the referring physician fully 

complied with an applicable exception 

under § 411.357, except with respect to 

the signature requirement (described 

below), and the following conditions are 

met: (1) The failure to comply with the 

signature requirement was inadvertent; 

and (2) the entity rectifies the 

noncompliance with the signature 

requirement within 90 days after the 

commencement of the financial 

relationship (without regard to whether 

any referrals have occurred or 

compensation has been paid during 

such 90-day period). (We describe in the 

next comment and response the 

provisions in this final rule for an 

alternative method for compliance 

where the failure to obtain a required 

signature was not inadvertent (that is, 

the failure was ‘‘knowing’’).) For 


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purposes of new paragraph (g) of 

§ 411.353, the relevant signature 

requirements are found in 

§ 411.357(a)(1), § 411.357(b)(1), 

§ 411.357(d)(1)(i), § 411.357(e)(1)(i), 

§ 411.357(e)(4)(i), § 411.357(l)(1), 

§ 411.357(p)(2), § 411.357(q) 

(incorporating the requirement 

contained in § 1001.952(f)(4)), new 

§ 411.357(r)(2)(ii), § 411.357(t)(1)(ii) and 

(t)(2)(iii) (both incorporating the 

requirement contained in 

§ 411.357(e)(1)(i)), § 411.357(v)(7)(i), and 

§ 411.357(w)(7)(i). New § 411.353(g) 

may be used by an entity only once 

every 3 years with respect to the same 

referring physician. 

In this final rule, we have eliminated 

the proposed requirement of selfdisclosure, as well as the proposed 

requirement that we make an advance 

determination that the alternative 

criteria were satisfied, but we 

emphasize that we have done so only 

for the purpose of encouraging entities 

to take advantage of the alternative 

method for compliance. Because the 

final rule is narrow in scope, applying 

to missing signatures only, we believe 

that we can eliminate these proposed 

requirements and still meet the statutory 

mandate under section 1877(b)(4) of the 

Act that any additional exception that 

we create by regulation under that 

authority, or any revisions to existing 

regulations created under such authority 

not pose a risk of program or patient 

abuse. 

Comment: A few commenters 

suggested that a financial relationship 

should not be considered noncompliant 

for failure to get a signature on an 

agreement, even if the failure was not 

inadvertent. One commenter asserted 

that there is no risk of fraud or abuse 

with respect to a missing signature. 

Another commenter emphasized that it 

is difficult sometimes for parties to 

obtain all necessary signatures prior to 

the time that a physician must begin 

providing services to the hospital. A 

third commenter recommended a 60- 

day grace period for financial 

relationships that begin prior to the time 

that all necessary signatures are 

obtained. (These comments were 

submitted in response to our proposals 

on period of disallowance and the 

physician ‘‘stand in the shoes’’

provisions discussed in sections VIII.B 

and VIII.C of this preamble.) 

Response: We are distinguishing 

between inadvertent and knowing 

failures to comply with a signature 

requirement by allowing 90 days to 

obtain the missing signature for 

inadvertent noncompliance and 30 days 

for noncompliance that is not 

inadvertent (that is, noncompliance that 

is ‘‘knowing’’). We understand that 

parties may not obtain all signatures and 

that referrals may be made despite the 

missing signature(s). We also recognize 

that, on occasion, a hospital or other 

entity may need to retain a physician’s 

services on very short notice (such as 

obtaining emergency on-call coverage 

from a physician who is substituting for 

another physician) and that the entity is 

faced with choosing to begin a financial 

relationship without the physician’s 

signature on the agreement or to forego 

using the physician’s services, thus 

possibly adversely affecting patient care. 

However, we want to incent parties to 

exercise diligence with our rules, and 

we believe that 90 days after the 

beginning of an otherwise fully 

compliant financial relationship is 

sufficient time for parties to exercise 

diligence and discover whether a 

signature is missing, and, where an 

entity has knowingly entered into an 

otherwise fully compliant financial 

relationship despite a missing signature, 

30 days after the beginning of the 

financial relationship is sufficient time 

for such entity to procure the signature. 

Comment: One commenter asserted 

that our proposal was not an alternative 

method for compliance, but was instead 

a method for us or OIG to grant 

immunity in connection with a selfdisclosure. 

Response: We disagree that the 

proposal was a method to grant 

immunity. As we explained in the 

proposed rule, we do not have the 

authority to waive or grant immunity for 

a violation of the physician self-referral 

law or regulations (72 FR 38185). Using 

our authority under section 1877(b)(4) 

of the Act, we proposed to amend our 

physician self-referral rules in order to 

keep within the exceptions certain 

financial relationships that, but for the 

proposed change, would be out of 

compliance with the rules. 

Comment: One commenter stated that 

the physician self-referral regulations 

are complex and that we should focus 

only on those parties that intentionally 

disregard the requirements, and not on 

those that missed a signature on a single 

document while attempting to comply 

with the rules. Another commenter 

stated that the proposal was a positive 

first step toward recognition that 

‘‘innocent and trivial’’ violations of the 

statute should not be treated the same 

as those that involve intentional 

violations of the statute. The commenter 

believed, however, that the proposal 

was tailored far too narrowly and that it 

is unlikely that providers would submit, 

or be counseled to submit, to such an 

uncertain process that exposes them for 

‘‘innocent’’ mistakes. The commenter 

urged us to focus only on those parties 

that intentionally disregard the 

physician self-referral law. 

Response: As we stated in the 

proposed rule, we do not have the 

authority to waive violations of the 

physician self-referral law, regardless of 

their nature. We have the authority 

under section 1877(b)(4) of the Act to 

create (or modify) regulatory exceptions 

only to the extent that there is no risk 

of program or patient abuse. We do not 

believe that providing an alternative 

method for compliance that permits 

parties that inadvertently failed to 

obtain a required signature to correct 

this failure at any time during the term 

of the arrangement, as recommended by 

the commenter, would meet the ‘‘no risk 

of program or patient abuse’’ standard. 

Thus, we are proceeding in a cautious 

manner in order to guard against the 

possibility of abuse and, as discussed 

above, are permitting parties to use the 

alternative method for compliance for 

up to 90 days when the failure to obtain 

a required signature was inadvertent 

and up to 30 days when such failure 

was not inadvertent. We will evaluate 

our experience with new § 411.353(g) 

and may propose modifications, either 

less or more restrictive in nature, at a 

later date. 

Comment: One commenter suggested 

that an alternative to ‘‘formal 

compliance’’ should be permitted if: (1) 

The provider can identify 

contemporaneous written 

documentation that provides evidence 

that the key terms of the financial 

relationship complied with the 

substantive elements of the applicable 

exception; and (2) the provider brings 

the financial relationship into 

compliance with the procedural and 

substantive requirements of the 

exception. The commenter further 

stated that, if the provider is unable to 

identify contemporaneous written 

documentation, it should terminate the 

financial relationship and seek 

repayment of compensation from the 

physician of the amount that was paid 

to the physician in excess of that 

permitted or required under the 

physician self-referral law. If the 

physician will not repay the 

compensation, the commenter suggested 

that the provider should be required to 

submit an amount of money to us equal 

to the payment made in excess of the 

amount of money permitted or required 

by the physician self-referral law and 

regulations. 

Response: We decline to adopt the 

suggestions of the commenter. We do 

not believe that it is appropriate to 

protect the failure to comply with the 

substantive requirements of an 


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exception, as the commenter suggests. 

The commenter’s suggestion that the 

entity be allowed to terminate a 

financial relationship and either collect 

from the physician the amount of excess 

compensation paid to the physician or 

pay such excess amount to the program 

does not address our concerns. Payment 

of excess compensation, even if 

ultimately repaid by the party that 

received it, could induce or reward 

referrals for at least the period of time 

before repayment is made. Without 

additional restrictions, the commenter’s 

suggested approach is subject to abuse. 

The commenter’s suggestion regarding 

repayment to the program by the 

provider that made the excess payment 

is not authorized by, or consistent with, 

the statute. 

Comment: One commenter stated that 

it was generally supportive of the 

proposal, but was concerned that 

hospitals will be hesitant to self-report 

violations unless we clarify certain 

issues. First, the commenter was 

concerned that, if a hospital were to 

have multiple ‘‘technical violations’’ or 

have such violations over a sustained 

period of time, it could be subject to 

civil monetary penalties. Therefore, the 

commenter requested additional 

guidance regarding the specific 

circumstances in which the hospital 

could make an allowed correction. 

Second, the commenter requested 

guidance as to what hospitals would be 

permitted to do during three time 

intervals: (1) The time period between 

when the violation is discovered and 

when it is reported to us; (2) the time 

period between when the violation is 

reported to us and when we issue a 

determination; and (3) the time period 

between when the determination is 

issued and when the financial 

relationship is brought back into 

compliance. Without this guidance, the 

commenter contended, many hospitals 

will not self-report. 

Response: We believe that the 

commenter’s concerns are addressed by 

the fact that the final rule does not 

require hospitals or other entities to selfreport in order to take advantage of the 

relief offered under new § 411.353(g). In 

order to encourage entities to monitor 

vigilantly their financial relationships 

with physicians, this final rule provides 

that entities must rectify inadvertent 

noncompliance with a signature 

requirement within 90 days after the 

commencement of the financial 

relationship (without regard to whether 

any referrals have occurred or 

compensation has been paid during 

such 90-day period), and must rectify 

knowing noncompliance with a 

signature requirement within 30 days 

after the commencement of the financial 

relationship (without regard to whether 

any referrals have occurred or 

compensation has been paid during 

such 30-day period). New § 411.353(g) 

may be used by an entity only once 

every 3 years with respect to the same 

referring physician. A civil monetary 

penalty may be issued only for a 

knowing violation of the statute. By 

definition, an arrangement that 

complies fully with new § 411.353(g) is 

not in violation of the statute. 

Comment: One commenter offered a 

number of criticisms and 

recommendations in response to the 

proposed alternative compliance 

criteria. First, requiring a provider to 

disclose to us the ‘‘facts and 

circumstances’’ of the inadvertent 

failure to satisfy procedural or ‘‘form’’

requirements of an exception will 

require resources to be allocated to this 

process by both the providers and us. 

The commenter expressed concern that 

we would be flooded with disclosures of 

‘‘technical’’ violations, which may make 

us unable to respond in a timely 

fashion. The commenter suggested that 

we establish reasonable timeframes for 

our response so that providers are not 

awaiting a decision for a long period of 

time. Second, the commenter requested 

additional guidance regarding what 

constitutes an ‘‘innocent or 

unintentional mistake,’’ noting that this 

could be confusing for providers who 

seek to make a disclosure. Third, the 

commenter asserted that determining 

whether a provider complied with all 

requirements of an exception other than 

procedural or ‘‘form’’ requirements 

appears to be outside of the 

Department’s normal course of business 

and would require significant resources 

and may require the use of outside 

experts. Fourth, the commenter claimed 

that it is not clear how we would 

evaluate whether the referral for DHS 

was made without knowledge that one 

or more of the exception’s prescribed 

criteria were not met. The commenter 

contended that, if any knowledge 

requirement is used by us, it should be 

actual knowledge. Fifth, the commenter 

suggested that we remove the condition 

that no more than a set amount of time 

could pass following the time of the 

original noncompliance with the 

prescribed criteria, because this would 

exclude many financial relationships 

that otherwise would satisfy the 

alternative criteria (as many physician 

self-referral violations are unintentional 

and not discovered immediately). 

Response: We believe that the final 

rule, which does not contain most of the 

conditions specified in the proposed 

rule, will satisfy some, but not all, of the 

commenter’s concerns. With respect to 

the commenter’s first and second 

criticisms, the final rule does not 

require that the entity self-disclose the 

facts and circumstances of the financial 

relationship in order to use the 

alternative method for compliance. We 

note also that the final rule provides for 

protection both in the situation in 

which the failure to comply with the 

signature requirement is inadvertent (for 

which there is a 90-day period to rectify 

the noncompliance) as well as the 

situation in which the failure to comply 

with the signature requirement was not 

inadvertent or ‘‘knowing’’ (for which 

there is a 30-day period to rectify the 

noncompliance). We do not believe that 

it is necessary to define ‘‘inadvertent;’’

parties should attach the ordinary 

meaning to ‘‘inadvertent.’’ We provide 

the following example of what we 

consider a knowing failure to comply 

with the signature requirement: A 

compensation arrangement under which 

a hospital contracts with a physician to 

provide medical directorship of a 

service at the hospital beginning January 

1; the physician begins providing 

services on January 1 and refers patients 

to the hospital for DHS; the physician 

does not sign the written agreement 

until January 15, when it is returned 

from the physician’s attorney following 

legal review; and, at all times up to 

January 15, both the physician and the 

hospital are aware that the physician 

had not signed the agreement. In regard 

to the commenter’s third and fourth 

criticisms, the final rule does not 

require an advance determination from 

us that the financial relationship 

satisfied all but the signature 

requirement of the exception at the time 

of the referral for the DHS at issue and 

at the time of the claim for such DHS. 

However, we note that a financial 

relationship that an entity believes 

complied with all criteria except the 

signature requirement, like all financial 

relationships that implicate the statute, 

is still subject to scrutiny; that is, 

nothing absolves the entity from 

otherwise having to satisfy the 

remaining requirements of the 

exception. As for the commenter’s fifth 

criticism, the final rule requires that the 

entity rectify the noncompliance with 

the signature requirement within 90 

days after the beginning of the financial 

relationship in the case of an 

inadvertent failure to comply with the 

signature requirement, or within 30 

days after the beginning of the financial 

relationship in the case of knowing 

failure to comply with the signature 

requirement (without regard to whether 

any referrals have occurred or 


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compensation has been paid during 

such 90-day or 30-day period). The 

condition that the entity promptly 

rectify the noncompliance is similar to 

that contained in existing 

§ 411.353(f)(2), as our approach in this 

final rule is to pattern the alternative 

method for compliance after the 

exception for certain arrangements 

involving temporary noncompliance in 

§ 411.353(f). We believe that it is 

appropriate to put a limit on the period 

during which parties may take 

advantage of the alternative method for 

compliance in order to encourage them 

to monitor diligently financial 

relationships for compliance with the 

prescribed criteria. The alternative 

method for compliance is designed to 

alleviate, under certain circumstances, 

the consequences that would otherwise 

result from the failure to obtain a 

signature as required by an exception; it 

is not intended to become the default 

means by which parties comply with 

the conditions of exceptions. For this 

reason, we have also placed a limit on 

the use of the alternative method for 

compliance. The final rule provides that 

new § 411.353(g) may be used by an 

entity only once every 3 years with 

respect to the same referring physician, 

similar to the limit in existing 

§ 411.353(f)(3). 

E. Percentage-Based Compensation 

Formulae 

In the CY 2008 PFS proposed rule, we 

proposed clarifications to our 

regulations regarding compensation that 

is ‘‘set in advance’’ (72 FR 38184). As 

discussed in the CY 2008 PFS proposed 

rule, our proposal would have affected 

numerous compensation arrangements, 

as the requirement that compensation be 

‘‘set in advance’’ (or ‘‘fixed in advance’’) 

appears throughout our regulations—in 

both regulations implementing the 

statutory exceptions and in exceptions 

issued using our authority under section 

1877(b)(4) of the Act. Specifically, we 

proposed to clarify that compensation 

determined using a percentage-based 

formula: (1) May be used only for 

paying for personally performed 

physician services; and (2) must be 

based on the revenues directly resulting 

from the physician services rather than 

based on some other factor such as a 

percentage of the savings by a hospital 

department (which is not directly or 

indirectly related to the physician 

services provided). 

Under our regulations in § 411.354(d), 

compensation is considered ‘‘set in 

advance’’ if the aggregate compensation, 

a time-based or per-unit amount, or a 

specific formula for calculating the 

compensation, is set forth in an 

agreement between the parties before 

the furnishing of the items or services 

for which the compensation is to be 

paid. In Phase I, the regulation in 

§ 411.354(d)(1) read: ‘‘[p]ercentage 

compensation arrangements do not 

constitute compensation that is ‘set in 

advance’ in which the percentage 

compensation is based on fluctuating or 

indeterminate measures or in which the 

arrangement results in the seller 

receiving different payment amounts for 

the same service from the same 

purchaser’’ (66 FR 959). Following 

publication of Phase I, we received 

anecdotal accounts about contracts for 

physician services pursuant to which 

payment is calculated based on a 

percentage of the revenue billed or 

collected as a result of the physician’s 

own professional services. We delayed 

the effective date of the final sentence 

of § 411.354(d)(1) through five Federal 

Register notices to allow us to 

reconsider the provision (66 FR 60154; 

67 FR 70322; 68 FR 20347; 68 FR 74491; 

and 69 FR 35529). Ultimately, we did 

not finalize the last sentence of 

§ 411.354(d)(1), explaining in Phase II 

that we were persuaded that our original 

position was overly restrictive and that, 

as a result of us not finalizing this 

language, independent contractor 

physicians, like their group practice and 

employee counterparts, may receive 

certain limited forms of percentage 

compensation under section 1877 of the 

Act (69 FR 16068). We noted also that 

the same is true for academic physicians 

under the exception for academic 

medical centers, which also contains the 

‘‘set in advance’’ requirement (69 FR 

16068). In explaining our action, we 

stated that ‘‘[w]e considered 

maintaining the Phase I definition of ‘set 

in advance,’ but realized that hospitals, 

academic medical centers, and other 

entities would have to renegotiate 

numerous legitimate contracts for 

physician services, potentially causing 

significant disruption within the health 

care industry without a corresponding 

program integrity benefit’’ (69 FR 16124 

through 16125, emphasis added). We 

also noted our concern that such 

disruption might unnecessarily 

inconvenience beneficiaries. 

In Phase II, we also addressed the 

concerns of commenters to Phase I that 

pointed out that, under section 1877 of 

the Act, group practices are not subject 

to the ‘‘set in advance’’ restriction when 

paying profit shares or productivity 

bonuses to group practice physicians, 

nor are employers so restricted in their 

payments to employed physicians under 

the exception for bona fide employment 

relationships. We discussed percentagebased compensation formulae in the 

context of contrasting the rules 

regarding compensation to physicians 

within a group practice (which evidence 

a statutory preference) and 

compensation outside of the group 

practice context, noting that we 

attempted to equalize the most 

important requirements in the other 

main physician compensation 

exceptions (that is, the exceptions for 

bona fide employment relationships, 

personal service arrangements, fair 

market value compensation 

arrangements, and academic medical 

centers) (69 FR 16066). We stated that, 

under these exceptions, physicians can 

be paid a percentage of revenues or 

collections for personally performed 

services, receive a productivity bonus 

on any personally performed services, 

and participate in a physician incentive 

plan related to health plan enrollees (69 

FR 16066, emphasis added). 

We noted in the CY 2008 PFS 

proposed rule that, despite our stated 

intent that percentage-based 

compensation formulae be used only for 

compensating physicians for the 

physician services they personally 

perform, it had come to our attention 

that arrangements involving percentagebased compensation formulae are being 

used for the rental of office space or for 

the provision of items and services, 

such as the rental of equipment (72 FR 

38184). With respect to arrangements for 

the rental of office space or equipment, 

the rental charges for the office space or 

equipment are determined as a 

percentage of the revenues raised in the 

office space or by the equipment. With 

respect to billing agent or management 

agreements, the compensation is often 

set as a percentage of collections or 

revenues of the party for whom the 

services are provided. 

Although we proposed to revise 

§ 411.354(d) to specify that 

compensation determined using a 

percentage-based formula may be used 

for paying for personally performed 

physician services only, at this time, we 

are finalizing a targeted approach for 

addressing our primary concerns 

regarding percentage-based 

compensation formulae that are used to 

determine compensation outside the 

context of personally performed 

physician services. Specifically, relying 

on our authority in sections 

1877(e)(1)(A)(vi), 1877(e)(1)(B)(vi), and 

1877(b)(4) of the Act, we are revising 

§ 411.357(a), § 411.357(b), § 411.357(l) 

and § 411.357(p) to prohibit the use of 

percentage-based compensation 

formulae in the determination of rental 

charges for the lease of office space or 

equipment. We continue to believe that 


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the use of percentage-based 

compensation formulae to determine 

rental charges for office space or 

equipment poses a heightened risk of 

program and patient abuse. For 

example, lease payments based on a 

percentage of revenues earned by the 

lessee provide incentive for the lessor to 

increase DHS referrals to the lessee so 

as to increase potentially the rental 

payment under the lease. In addition, 

fluctuating rental payments determined 

using a percentage-based formula may 

not result in fair market value payments 

(even if the formula itself is arguably 

reasonable), which also poses an 

increased risk of program or patient 

abuse. In Phase III, we discussed this 

concern in connection with compliance 

with the exception for indirect 

compensation arrangements in 

§ 411.357(p), which requires that 

compensation received by the referring 

physician (or immediate family 

member) is fair market value for the 

services and items provided. There, we 

noted that a compensation arrangement 

based on a percentage of collections 

may not, depending on how the actual 

collections progress, result in fair 

market value received by the referring 

physician (or immediate family 

member) (72 FR 51063). With respect to 

an indirect compensation arrangement 

involving, for example, the rental of 

equipment between a physician lessor 

and a DHS entity lessee, compensation 

based on a percentage of collections for 

the services performed on the 

equipment may not result in fair market 

value, depending on how the collections 

actually materialize. 

For a more detailed description of our 

concerns, we refer the reader to sections 

VIII.F and VIII.G of this preamble. We 

intend to continue to monitor 

compensation formulae in arrangements 

between DHS entities and referring 

physicians and, if appropriate, may 

further restrict percentage-based 

formulae in a future rulemaking. We 

refer the reader to section VIII.B of this 

preamble for a discussion of our 

interpretation of compensation that is 

‘‘set in advance’’ as it applies to the 

modification of rental charges in office 

space or equipment leases. We address 

below the specific comments that we 

received in response to our proposal in 

the CY 2008 PFS proposed rule. 

Comment: One commenter expressed 

its support of the proposal to continue 

to allow percentage-based compensation 

for personally performed physician 

services. The commenter asserted that 

finalizing the proposal would curtail 

potentially abusive percentage 

compensation arrangements to 

physicians for non-professional 

services. Another commenter supported 

the elimination of percentage-based 

lease arrangements for office space and 

imaging equipment. The commenter 

asserted that such arrangements are 

prone to abuse and should be 

eliminated. The commenter further 

asserted that lease arrangements 

featuring flat-rate payments that are not 

tied to volume are less susceptible to 

abuse. Two other commenters suggested 

that, if our most significant concern is 

with the use of percentage-based 

compensation formulae for determining 

rental charges for office space and 

equipment rentals, a more effective 

solution would be to prohibit such 

formulae under the specific exceptions 

applicable to the rental of office space 

and equipment. 

Response: As discussed above, we are 

finalizing our proposal with the 

modifications suggested by the third 

and fourth commenters, which also 

reflect generally the second 

commenter’s recommendation. 

Specifically, we are amending the 

exceptions for the rental of office space 

(§ 411.357(a)), the rental of equipment 

(§ 411.357(b)), fair market value 

compensation arrangements 

(§ 411.357(l)), and indirect 

compensation arrangements 

(§ 411.357(p)) to prohibit the use of 

compensation formulae based on a 

percentage of the revenue raised, 

earned, billed, collected, or otherwise 

attributable to the services performed or 

business generated in the leased office 

space or to the services performed on or 

business generated by the use of the 

leased equipment. We are finalizing a 

narrow, targeted approach to address 

our most significant concerns with 

percentage-based compensation 

formulae. We are revising § 411.357(a), 

§ 411.357(b), § 411.357(l) and 

§ 411.357(p) to prohibit the use of 

percentage-based compensation 

formulae in the determination of rental 

charges for the lease of office space or 

equipment. Although we are not 

extending, at this time, the prohibition 

on the use of percentage-based 

compensation formulae to arrangements 

for any non-professional service (such 

as management or billing services), we 

reiterate our intention to continue to 

monitor arrangements for nonprofessional services that are based on 

a percentage of revenue raised, earned, 

billed, collected, or otherwise 

attributable to a physician’s (or 

physician organization’s) professional 

services. 

Comment: One commenter urged that 

we continue to permit percentage-based 

fee arrangements for billing and 

collection services, even if this causes 

some variability in physician 

compensation. According to the 

commenter, percentage-based fee 

arrangements are the most common 

method of compensation for billing and 

collections services, and provide 

appropriate incentives for quality and 

accuracy. The commenter asserted that 

these fees should be set at fair market 

value. Two other commenters expressed 

similar concerns, arguing that practice 

management agreements (in which a 

manager provides administrative and 

other management services to 

physicians, typically in exchange for a 

percentage of the physician’s revenues 

or collections, which could include 

ancillary revenue) and billing services 

agreements that are negotiated using 

percentage-based compensation 

formulae promote positive management 

or administrative practices without a 

risk of program or patient abuse. 

Another commenter asserted that the 

proposal would call into question a 

whole host of percentage-based 

compensation arrangements (for 

example, lease agreements, practice 

management agreements, and pay-forperformance incentives) that have little 

or no risk of abuse. 

Response: We disagree with the last 

commenter’s assertion that all of the 

percentage-based compensation 

arrangements it cited pose little or no 

risk of program or patient abuse. As 

described above, due to our concerns 

regarding the use of percentage-based 

compensation formulae to determine 

rental charges for office space and 

equipment lease arrangements, the final 

rule prohibits such compensation 

formulae. We note that our 

determination to limit the prohibition to 

arrangements for the rental of office 

space and equipment only should not be 

construed as agreement with any of the 

commenters’ other assertions, and we 

intend to continue to monitor 

compensation formulae in financial 

relationships between DHS entities and 

referring physicians. We may further 

restrict percentage-based formulae in a 

future rulemaking if appropriate to 

safeguard against program or patient 

abuse. 

Comment: Several commenters 

expressed concern that the proposal, if 

finalized, would prohibit a hospital (or 

other DHS entity) that leases office 

space in its medical office building from 

charging the physician tenants a pro 

rata share of real estate taxes and other 

costs associated with common areas of 

the property. 

Response: It appears that the 

commenters assume that charging a 

tenant a pro rata share of expenses 

related to the office space leased by a 


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tenant is equivalent to utilizing a 

percentage-based compensation formula 

for rental charges. We believe that there 

is a difference between determining 

rental charges using a percentage-based 

formula and assessing a tenant (lessee) 

for the expenses incurred that are 

related to the space leased by the tenant 

(lessee). The revised regulation text 

prohibits determining rental charges 

using a formula based on a percentage 

of the revenue raised, earned, billed, 

collected, or otherwise attributable to 

the services performed or business 

generated in the office space. We do not 

consider a percentage of expenses 

imposed or levied by a third party, such 

as property taxes or utilities, to be 

prohibited percentage compensation. 

Moreover, we do not interpret the 

revisions to § 411.357(a) (or to 

§ 411.357(b), § 411.357(l) and 

§ 411.357(p)) as prohibiting a lessor 

from charging a lessee a pro rata share 

of expenses incurred that are 

attributable to that portion of the 

medical office building or other space 

(or the equipment) that is leased by the 

lessee. 

Comment: One commenter asserted 

that percentage compensation lease 

arrangements are used by parties to 

circumvent the physician self-referral 

law. The commenter argued that our 

proposal does not go far enough to meet 

our objective because it permits 

percentage-based compensation lease 

arrangements through indirect 

compensation arrangements, the 

exception for which does not require 

that compensation be set in advance. 

According to the commenter, parties 

simply could structure an equipment 

lease as an indirect compensation 

arrangement that qualifies for the 

exception for indirect compensation 

arrangements. The commenter asserted 

that physicians often do not directly 

lease equipment; therefore, most 

equipment leasing arrangements are 

indirect compensation arrangements. 

The commenter recommended that we 

revise the exception for indirect 

compensation arrangements in 

§ 411.357(p) to require that 

compensation be set in advance. 

Response: As noted above, we 

proposed to prohibit the use of 

percentage-based compensation 

formulae for any arrangement other than 

an arrangement for personally 

performed physician services. However, 

in this final rule, we are prohibiting the 

use of such compensation formulae with 

respect to office space and equipment 

lease arrangements only. We agree with 

the commenter that our concerns 

regarding potentially abusive 

percentage-based compensation 

arrangements for office space or 

equipment are not fully addressed if 

parties could restructure an (office space 

or) equipment lease arrangement as an 

indirect compensation arrangement that 

would qualify for the exception in 

§ 411.357(p). Accordingly, we are 

making corresponding changes to the 

exception in § 411.357(p) to prohibit the 

use of percentage-based compensation 

formulae in the determination of rental 

charges for office space and equipment 

lease arrangements. We are also making 

corresponding changes to § 411.357(l), 

the fair market value exception, to 

prohibit the use of percentage-based 

compensation formulae in the 

determination of rental charges for 

equipment lease arrangements (which is 

potentially applicable for equipment 

leases of less than a year.) 

We note also that our proposal in the 

CY 2008 PFS proposed rule and this 

commenter’s letter pre-dated the 

publication of the Phase III ‘‘stand in the 

shoes’’ provisions in § 411.354(c) (72 FR 

51012). To the extent that a physician 

organization, rather than an individual 

referring physician or joint venture, 

leases office space or equipment to or 

from a DHS entity, the physician may 

stand in the shoes of the physician 

organization, and the arrangement 

between the DHS entity and the 

referring physician is analyzed as if it 

were a lease arrangement between the 

DHS entity and the referring physician. 

Comment: A large number of 

commenters expressed concern that the 

proposal, if finalized, would have a 

chilling effect on, or prohibit outright, 

various gainsharing arrangements and 

other incentive payment (or pay-forperformance) programs. These 

commenters urged us not to finalize our 

proposal to clarify that compensation 

determined using a percentage-based 

formula must be based on the revenues 

directly resulting from physician 

services rather than based on some other 

factor such as a percentage of the 

savings by a hospital department. 

Several commenters, in similar or 

identical letters, stated that prohibiting 

percentage-based compensation (unless 

for personally performed physician 

services) fails to recognize the important 

role that financial incentives play in 

achieving the goals that the Institute of 

Medicine (IOM) has set for all of health 

care, including payments based on 

achieving quality measures, patient 

satisfaction, or efficiencies. Some of the 

commenters also asserted that the 

proposal, if finalized, would work 

against achieving clinical integration 

and coordination. According to several 

commenters, the proposed changes are 

out of sync with the relationships that 

are developing and need to evolve to 

meet the public policy goals for health 

care delivery. The commenters noted 

that, the financial model for integrated 

care delivery, through recognizing the 

challenges set by the IOM and 

responding to the use of financial 

incentives by the government and other 

payers, has come to rely on sharing 

revenue in appropriate ways as a 

mechanism to incent appropriate 

behavior. The commenters argued that 

these efforts will be frustrated if 

percentage-based compensation 

formulae can be used only for 

personally performed physician 

services. Many of these commenters 

recommended that we should permit 

certain types of percentage-based 

compensation arrangements such as: (1) 

Sharing of cost savings from 

efficiencies; (2) incentives to meet 

quality indicators, even when cost 

savings do not accrue to the hospital; (3) 

incentives to clinically integrate 

services and coordinate care across 

settings; (4) sharing of pay-forperformance bonuses from payers; (5) 

service contracts to build new service 

capacities; and (6) management 

contracts. 

Response: We have addressed the 

commenters’ concerns by finalizing a 

narrow, targeted approach that does not 

require percentage-based formula used 

to determine physician compensation 

for personally performed services to be 

based on the revenues directly resulting 

from the physician’s services rather than 

based on some other factor, such as a 

percentage of the savings by a hospital 

department. We share the commenters’

interest in the permissibility of properly 

structured, nonabusive incentive 

payment and shared savings programs. 

We refer the reader to the CY 2009 PFS 

proposed rule (73 FR 38502) in which 

we proposed a new exception for certain 

incentive payment and shared savings 

programs (which may include 

gainsharing arrangements) (73 FR 

38548). We also note that, although we 

are not, at this time, prohibiting 

percentage-based compensation for 

personally performed physician services 

that is calculated based on a percentage 

of the savings of a hospital department, 

we refer the reader specifically to our 

discussion at 73 FR 38551 regarding 

whether such payments would meet 

necessarily the fair market value 

requirement present in the various 

exceptions that may be applicable to 

gainsharing and similar arrangements. 

Comment: A commenter representing 

academic medical centers (AMCs) and 

faculty practice plans (FPPs) expressed 

concern that the proposed changes, if 

finalized, would cause compensation 


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models within an AMC to fail to meet 

the requirements of the AMC exception. 

According to the commenter, some 

formulae compensate FPP physicians in 

a way in which some of the 

compensation is attributable to services 

performed by other physicians within 

the same FPP. The commenter asserted 

that stripping AMCs of the availability 

of such compensation formulae would 

have severe consequences with respect 

to an AMC’s ability to achieve its 

teaching, research and community 

service mission. 

Response: The narrow, targeted 

approach we take in this final rule 

prohibits the use of percentage-based 

compensation formulae in the 

determination of rental charges for the 

lease of office space or equipment. The 

commenter discussed the compensation 

of FPP physicians in describing its 

concerns, but did not specify whether 

such compensation is related solely to 

physician services or includes other 

compensation to the FPP physicians, 

such as compensation for the rental of 

office space or equipment by the AMC 

(where the FPP physicians are or the 

FPP is the lessor). To the extent that the 

commenter’s concerns relate to the use 

of percentage-based compensation 

formulae in the determination of 

compensation to physicians for 

physician services, rather than for the 

rental of office space or equipment, this 

commenter’s concerns are moot. In this 

final rule, we are not finalizing any new 

prohibitions or limitations on the use of 

percentage-based compensation 

formulae to pay physicians for their 

physician services. If a compensation 

formula for physician compensation for 

items or services—other than the rental 

of office space or equipment—was 

permissible prior to October 1, 2009 (the 

effective date of the prohibition on the 

use of percentage-based compensation 

formulae for determining rental charges 

in arrangements for the lease of office 

space or equipment), that formula 

would not be made impermissible by 

this final rule. 

Comment: Several commenters 

asserted that percentage-based fee 

arrangements facilitate access to costly 

treatment modalities, often with 

predicted low volume, by allowing for 

the apportionment of risk of low or no 

volume for new or costly therapeutic 

modalities. According to two other 

commenters, prohibiting percentagebased compensation formulae would 

make new technology and equipment 

beyond the reach of all but the largest 

hospitals or government-sponsored 

hospitals. A number of commenters 

argued that beneficiary access will be 

impacted negatively if compensation 

arrangements cannot be structured with 

percentage-based compensation 

formulae. One commenter asserted that 

percentage fee arrangements are fair and 

the best option for vendors and for 

hospitals. Several other commenters 

agreed generally with this assertion, 

stating that percentage-based 

compensation formulae are used to 

spread risk, allowing hospitals and 

equipment vendors to share in market 

risks. Other commenters advocated that 

percentage-based compensation 

formulae can encourage the proper use 

of resources, sharing financial risk 

among the physicians in a group 

practice. According to some of these 

commenters, hospitals are able to avoid 

large financial risk by paying 

compensation as a percentage of 

reimbursement for a certain procedure. 

Several commenters argued that 

permitting percentage-based 

compensation formulae would ensure 

that a hospital never makes an 

equipment rental payment in an amount 

greater than what it collects for the 

services, from even the lowest paying 

insurer. One commenter questioned 

whether there are any distinct 

advantages inherent in flat-fee 

arrangements to reduce the potential for 

abuse that are not also apparent in other 

variable-fee arrangements. 

Response: Parties are free to structure 

arrangements using other permissible 

compensation methodologies, including 

flat-fee payments set at fair market value 

and, unless otherwise prohibited as 

described in section VIII.F. of this 

preamble, per-procedure compensation. 

We do not believe that prohibiting 

percentage-based compensation 

formulae for determining the rental 

charges for office space and equipment 

lease arrangements should limit 

beneficiary access to needed services 

because other compensation structures 

for office space and equipment leases 

remain available to contracting parties. 

Sharing of financial risk among 

parties does not eliminate necessarily 

the risk of program or patient abuse. As 

we described above, we believe that the 

use of percentage-based compensation 

formulae to determine rental charges for 

office space and equipment may provide 

significant incentive for parties to 

increase referrals in order to increase 

the rental payments that are based on 

revenues generated by those referrals. 

With respect to the comments regarding 

the ability of a hospital to ensure that it 

does not make a rental payment that is 

greater than the reimbursement it 

receives for the particular service for the 

particular patient, we note that rental 

charges must be set at fair market value. 

Reimbursement from an insurer does 

not correlate necessarily to fair market 

value, and rental charges based on a 

percentage of the amount reimbursed for 

a particular service may not result in 

fair market value rental charges for the 

equipment leased. 

As explained in section VIII.F. of this 

preamble, we are concerned that entities 

may enter into per-use equipment lease 

arrangements, even though they may 

have sufficient volume to justify 

purchasing the equipment, because they 

are afraid of losing the referral stream 

from the physician lessor. Similarly, we 

are concerned that entity lessees may 

enter into percentage-based office space 

or equipment leases instead of flat-rate 

compensation lease arrangements 

because they are afraid of losing the 

referral stream from the physician 

lessor. We note that, although these 

commenters (which are either 

physicians or representatives of 

physicians) emphasized the benefits of 

percentage-based compensation 

arrangements for hospitals, no hospital 

or hospital association commented in 

support of this view. 

Comment: One commenter explained 

that requiring a flat-fee compensation 

methodology may result in a DHS entity 

paying more for services than such 

services are worth (that is, if the 

assumptions on which the fair market 

value assessment obtained at the 

commencement of the compensations 

arrangement was based do not bear out, 

the physicians may get paid more than 

their effort merits or more than the 

value of the service to the DHS entity). 

The commenter gave the example of a 

hospital that pays physicians to help 

develop a spine center and, despite their 

best efforts, the spine center is not 

utilized by patients. 

Response: This final rule does not 

prohibit the use of percentage-based 

compensation formulae outside of the 

context of determining the rental 

charges for the lease of office space and 

equipment. The commenter appears to 

be concerned about the use of a 

percentage-based compensation formula 

for paying physicians for their personal 

services, which would not be prohibited 

under this final rule, provided that all 

of the requirements of an applicable 

exception to the physician self-referral 

law are satisfied. 

Comment: According to one 

commenter, we would be adopting a 

superfluous provision if we limit the 

definition of ‘‘set in advance’’ to allow 

percentage compensation arrangements 

in connection with the services 

‘‘personally performed’’ by the 

physician. The commenter asserted that 

it would never be necessary for a 

physician who receives compensation 


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related to services that he or she is 

personally performing even to need to 

take advantage of an exception that 

includes a ‘‘set in advance’’

requirement, as personally performed 

services are not referrals. 

Response: It is true that no exception 

is required for a financial relationship 

between a DHS entity and a physician 

if the physician is not making any 

‘‘referrals’’ (as defined at § 411.351) to 

the entity. However, if a physician who 

is compensated for his or her personally 

performed physician services on a 

percentage basis by a DHS entity makes 

DHS referrals to the entity, the financial 

relationship would need to satisfy an 

exception. Moreover, we note that the 

proposal would have restricted 

percentage-based compensation 

formulae to personally performed 

physician services. Physicians 

personally perform services other than 

physician services, such as medical 

directorship, management and other 

administrative services. 

Comment: One commenter asserted 

that continually changing the scope of 

permissible arrangements is very 

disruptive to established, long-term 

arrangements. 

Response: In finalizing our proposal 

regarding percentage-based 

compensation formulae, as well as the 

other proposals finalized in this final 

rule, we have balanced the need for 

regulatory certainty to foster compliance 

against the risk of program and patient 

abuse from potential overutilization. 

The fact that a financial relationship is 

‘‘established’’ or long-term does not 

guarantee that it presents no risk of 

program or patient abuse. The 

restrictions on the use of percentagebased compensation formulae finalized 

here are necessary to address our 

concerns regarding the risks of 

overutilization and program or patient 

abuse when such formulae are used to 

determine rental charges for the lease of 

office space or equipment. 

Comment: One commenter suggested 

that we delay the effective date of the 

final rule. Another commenter asserted 

that the proposed change to the 

regulations would have complex and 

significant implications for sleep 

medicine as many specialists and 

hospitals have joint venture and lease 

management agreements that would 

require complete restructuring or 

possible termination. 

Response: For the reasons discussed 

above, the final restrictions regarding 

the use of percentage-based 

compensation formulae for determining 

rental charges for the lease of office 

space and equipment are effective 

October 1, 2009. We recognize that the 

revisions to § 411.357(a), § 411.357(b), 

§ 411.357(l) and § 411.357(p) in this 

final rule may require restructuring or 

termination of arrangements for the 

rental of office space and equipment. 

We expect that the delayed effective 

date of the revisions will provide parties 

with sufficient time to review existing 

arrangements and restructure them as 

necessary. 

F. Unit of Service (Per Click) Payments 

in Lease Arrangements 

In the CY 2008 PFS proposed rule, we 

stated that arrangements involving a 

physician lessor to an entity lessee 

under which the physician lessor 

receives unit-of-service (also known as 

per-click or per-use) payments are 

inherently susceptible to abuse because 

the physician lessor has an incentive to 

profit from referring a higher volume of 

patients to the lessee. Therefore, we 

proposed that such arrangements would 

not qualify for the exceptions at 

§ 411.357(a) and (b) for space and 

equipment leases. We also solicited 

comments on the question of whether 

we should prevent per-click payments 

in situations in which the physician is 

the lessee and a DHS entity is the lessor. 

We received a few comments on the 

latter issue, all of which were in favor 

of answering the question in the 

affirmative. 

We received many comments in favor 

of the proposals that such per click 

arrangements do not qualify for the 

exceptions at § 411.357(a) and (b) for 

space and equipment leases. Some of 

these commenters asserted that per-click 

leases with physicians for lithotripters 

are abusive, and that hospitals are 

effectively coerced into leases with 

physicians for fear that if they contract 

with non-physicians, their referral 

stream will dry up. We also received 

many comments opposed to our 

proposals, the great majority of which 

came from urologists, and from 

associations and law firms that 

represent urologists. Many of these 

commenters stated that lithotripsy is not 

a DHS, and that in any event there is no 

risk of overutilization because 

lithotripters and other equipment leased 

by urologists are for therapeutic, and not 

diagnostic, procedures. These 

commenters also emphasized that 

hospitals are either unwilling or unable 

to purchase lithotripters, lasers and 

other equipment, and that if it were not 

for physicians, including joint ventures 

among urology groups, patients would 

not have the benefit of advanced 

technology at all, or at best would have 

to travel longer distances to obtain it. 

These commenters also stated that 

instead of encouraging abuse, the perclick payment methodology was the 

fairest way to compensate the physician 

lessors. Many of these commenters also 

stated that the Congress intended that 

per-click leases be allowed. 

Many of the commenters in favor of, 

or in opposition to, the proposal also 

commented on the proposal to amend 

the definition of ‘‘entity’’ at § 411.351 to 

clarify that a person or entity is 

considered to be ‘‘furnishing’’ DHS if 

the person or entity is performing 

services that are billed as DHS, 

notwithstanding that another person or 

entity actually billed the services as 

DHS (see section VIII.G. of this final rule 

for a discussion of that proposal) and, in 

many cases, the comments made 

specifically with respect to one proposal 

were applicable to the other. In some 

cases, it was not clear on which 

proposal the commenters were 

commenting. Because we believe that 

the issues are intertwined, in finalizing 

the ‘‘per-click’’ proposal, we considered 

the comments to both the ‘‘per-click’’

and ‘‘under arrangements’’ proposals, 

and considered also some of the 

comments submitted in response to the 

CY 2008 PFS proposed rule solicitation 

of comments on possible changes to the 

in-office ancillary services exception (72 

FR 38181). We read carefully and 

considered each comment. Space 

limitations prevent us from 

summarizing each comment; however, 

we discuss below all of the significant 

points raised by commenters in favor of, 

or in opposition to, our proposal. A 

discussion of specific comments is 

presented below. 

At this time we are adopting our 

proposal to prohibit per-click payments 

to physician lessors for services 

rendered to patients who were referred 

by the physician lessor. We continue to 

have concerns that such arrangements 

are susceptible to abuse, and we also 

rely on our authority under sections 

1877(e)(1)(A)(vi) and 1877(e)(l)(B)(vi) of 

the Act to disallow them. Because 

physicians themselves may bill for DHS, 

we have the same concerns with respect 

to per-click lease arrangements in which 

a DHS entity is the lessor and receives 

a per-click payment from a physician 

lessee for space or equipment used by 

the physician in the provision of 

services to patients who were referred 

by the entity lessor to the physician 

lessee. The final rule revises the lease 

exceptions at §§ 411.357(a)(5) and 

411.357(b)(4), as well as the fair market 

value exception at 411.357(l), and the 

exception for indirect compensation 

arrangements at § 411.357(p), and 

provides that per unit-of-service rental 

charges are not allowed to the extent 

that such charges reflect services 


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provided to patients referred by the 

lessor to the lessee. The prohibition on 

per-click payments for space or 

equipment used in the treatment of a 

patient referred to the lessee by a 

physician applies regardless of whether 

the physician himself or herself is the 

lessor or whether the lessor is an entity 

in which the referring physician has an 

ownership or investment interest. The 

prohibition also applies where the 

lessor is a DHS entity that refers patients 

to a physician lessee or a physician 

organization lessee. 

We are delaying the effective date of 

the amendments to §§ 411.357(a)(5) and 

411.357(b)(4) until October 1, 2009, in 

order to afford parties adequate time to 

restructure arrangements. 

We are also taking this opportunity to 

remind parties to per-use leasing 

arrangements that the existing 

exceptions include the requirements 

that the leasing agreement be at fair 

market value (§ 411.357(a)(4) and 

§ 411.357(b)(4)) and that it be 

commercially reasonable even if no 

referrals were made between the parties 

(§ 411.357(a)(6) and § 411.357(b)(5)). For 

example, we do not consider an 

agreement to be at fair market value if 

the lessee is paying a physician 

substantially more for a lithotripter or 

other equipment and a technologist than 

it would have to pay a non-physicianowned company for the same or similar 

equipment and service. As a further 

example, we would also have a serious 

question as to whether an agreement is 

commercially reasonable if the lessee is 

performing a sufficiently high volume of 

procedures, such that it would be 

economically feasible to purchase the 

equipment rather than continuing to 

lease it from a physician or physician 

entity that refers patients to the lessee 

for DHS. Such agreements raise the 

questions of whether the lessee is 

paying the lessor more than what it 

would have to pay another lessor, or is 

leasing equipment rather than 

purchasing it, because the lessee wishes 

to reward the lessor for referrals and/or 

because it is concerned that, absent such 

a leasing arrangement, referrals from the 

lessor would cease. In some cases, 

depending on the circumstances, such 

arrangements may also implicate the 

anti-kickback statute. 

1. Support for Proposal 

Comment: Many commenters, 

including a national provider of 

diagnostic imaging services, an 

association of practitioners, an 

association of radiologists, an 

association of radiology group practice 

managers, a radiation oncologists and 

several radiology group practices, stated 

that they supported the proposal to 

revise the space and equipment rental 

exceptions to prohibit per-click 

payments in those situations in which a 

physician leases space to a DHS entity, 

such as a hospital or IDTF, and the DHS 

entity utilizes the leased space or 

equipment to furnish services to 

patients referred by the physician lessor. 

These commenters believed that our 

proposed revision is consistent with the 

goal of eliminating, or at least reducing, 

the ability of a referring physician to 

profit directly from his or her own 

referrals for DHS, thereby reducing the 

risk of overutilization and abuse. 

Another commenter, a provider of 

diagnostic imaging services, stated that 

we can prevent a significant area of 

abuse by restricting the availability of 

unit-of-service based payments to a 

physician lessor for services rendered 

by a lessee to patients referred by the 

lessor to the lessee. Another commenter, 

an association of radiologists, stated that 

it strongly supports banning unit-ofservice based leases. The commenter 

maintains that such leases fuel an 

incentive to order unnecessary 

examinations and that this practice is as 

potent as if the ordering physician is a 

partner in a joint venture. 

One commenter, a radiation 

oncologist, said that some leasing 

arrangements are abusive and provide 

incentives to physicians to narrow their 

choice of treatment options to those for 

which they will realize a profit. Similar 

concerns were expressed by two 

companies that lease lasers, and 

individuals who apparently are 

employed by one of the companies. One 

of the commenters stated that: Financial 

motivation is driving treatment choices 

(that is, whereas options exist for the 

treatment of diseases, physician 

ownership of equipment plays a key 

role in influencing what the patient 

ultimately will be prescribed); 

physicians sometimes steer patients to 

facilities that are willing to lease 

equipment from the physicians; 

overutilization is created by practices 

that, due to physician ownership, use 

treatments that yield lower efficacy 

outcomes and causes the need for retreatment; and, physicians pressure 

hospitals to use their leasing company 

despite not being the low cost provider. 

Another of the commenters also 

expressed concern that the utilization of 

antiquated or lesser technology in order 

to contain cost and keep profitability as 

high as possible, may result in the 

patient not receiving the best possible 

procedure, and leasing arrangements 

involving physician lessors may lead to 

increased insurance claims. An 

individual employed by one of the laser 

companies said that he has seen gross 

abuses of the current physician selfreferral law, following the proliferation 

of urologist-owned LLCs, which include 

investments in treatments beyond 

lithotripsy, such as laser treatments, 

brachytherapy, and cryotherapy. The 

abuses claimed by the commenter 

include: Physicians threatening 

hospitals into using the physician’s 

company; hospitals violating contracts 

because they believe that the 

consequences of a broken contract will 

be less severe than not letting the 

physician have his or her way; and 

physicians steering patients to 

equipment they own, rather than use a 

third party for which the hospital has 

contracted, even if it means having the 

patient travel to a non-convenient 

hospital. The commenter alleges that 

hospital administrators are aware of 

steerage, but fear that reporting the 

physicians will result only in more lost 

business. 

A supplier of medical equipment said 

that it provides its equipment on a perclick basis, and also provides a clinical 

support technician to operate the 

equipment. It said that it has seen an 

increase in the number of equipment 

providers that are owned by physicians, 

and that physician-owned leasing 

groups are anti-competitive and 

undermine a hospital’s independence. 

The commenter alleged that if a hospital 

demands that its business will be 

awarded to the lowest bidder of 

equivalent services, physician-owned 

leasing groups will threaten to move the 

cases that its physician owners control 

to another hospital. The commenter 

stated that in one instance a hospital 

that had been dealing with a physicianowned leasing company switched its 

business to the commenter with the 

result that many of the referrals went to 

other hospitals that dealt with the 

physician-owned company. The 

commenter also alleged that a physician 

group that has no equipment, but which 

controls the referral of cases, can say to 

a hospital’s current equipment provider 

that it must be the physician group’s 

subcontractor under a new contract 

between the physician group and the 

hospital. The commenter asserted that it 

had been approached by a physician 

that was assembling a group of 

urologists to join a physician-owned 

entity that would provide equipment 

and technicians for urological 

procedures. According to the 

commenter, its company would have 

acted as the subcontractor for the 

physician-owned entity; that is, it 


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would have been the actual supplier of 

the equipment. 

An individual who owns a business 

that leases lasers for urological 

procedures stated that his company has 

obtained new technology lasers that 

offer improved clinical results and other 

benefits to patients, but that his 

company sometimes has difficulties in 

persuading physicians to allow the 

newer technology lasers to be brought 

into a hospital because the physicians 

have no ownership in the equipment. A 

medical sales representative stated that 

he has witnessed unethical business 

conduct due to physician ownership in 

surgical laser devices. According to the 

commenter, surgical lasers make up a 

large portion of per-click leasing 

arrangements. 

An association that represents 

employers urged us to prohibit per-click 

payments to physician lessors for 

services rendered to patients referred by 

the physician lessors. The commenter 

considered such payments to be based 

on the volume of referrals or other 

business generated by the parties, and 

said that such payments provide 

incentives to overutilize services, 

increase costs and reduce competition. 

A few commenters, including an 

organization that represents 

rehabilitation therapists, stated that 

clinical efficacy, not financial gain, 

should be the motivating factor in 

patient care, and that the proposed rule 

would reinstate balanced competition, 

promote competitive pricing, factoring 

in of quality of care, and would help to 

reduce healthcare costs. 

MedPAC stated that it believes that 

the financial incentives of leasing 

arrangements involving physician 

lessors could lead to overutilization of 

imaging services. MedPAC 

recommended that we prohibit these 

arrangements by expanding the 

definition of physician ownership to 

include interest in an entity that derives 

a substantial proportion of its revenue 

from DHS providers. (See page 167 of 

MedPAC’s March 2005 Report to the 

Congress, available at http:// 

www.medpac/publications/ 

congressional_Reports/ 

Mar05_TOC.pdf ). 

Response: We are finalizing our 

proposal due, in part, to many of the 

concerns expressed by commenters 

regarding lease arrangements that 

provide for per-click payments to a 

physician lessor for services provided to 

patients referred to the entity lessee by 

the physician lessor. We believe that 

such lease arrangements create the 

incentive for overutilization, because 

the more referrals the physician lessor 

makes, the more revenue he or she earns 

through the lease arrangement. We are 

also concerned that such agreements 

provide the incentive for the physician 

lessor to refer patients to the lessee of 

the physician’s space or equipment, 

rather than to entities that may employ 

a different, and possibly more 

efficacious or appropriate, treatment 

modality (and in some cases, the 

appropriate course of action may be no 

treatment at all). We are also concerned 

that such lease agreements may foster 

anti-competitive behavior because 

entities may enter into such agreements 

due to fears of losing the physician 

lessor’s referrals. 

We decline to adopt the approach 

recommended by MedPAC, by which 

we would expand the definition of 

physician ownership to include an 

interest in an entity that derives a 

substantial proportion of its revenue 

from DHS providers. We believe that 

attempting to define what would 

constitute a ‘‘substantial’’ proportion of 

an entity’s revenue, for purposes of 

whether to consider it a DHS entity, 

may be difficult, both in terms of 

implementation and enforcement. 

Moreover, MedPAC’s recommended 

approach may be both underinclusive 

and overinclusive in some instances. 

That is, under the MedPAC approach, a 

physician-owned entity would be 

considered to be a DHS entity only if a 

substantial proportion of its revenue is 

derived from DHS entities. Such an 

approach could be underinclusive in 

situations in which, as a minor part of 

its business, a physician-owned entity 

leases equipment to a hospital but also, 

as the much greater portion of its 

business, owns and manages real estate. 

Also, MedPAC’s approach could, in 

effect, allow overutilization and 

restrictions on competition provided 

that such effects were but a relatively 

small part of an entity’s enterprise. On 

the other hand, we believe MedPAC’s 

approach would be overinclusive with 

respect to a physician-owned entity that 

only leases equipment to a DHS entity 

(thereby meeting the ‘‘derives a 

substantial proportion of its revenue’’

test) but which does not lease the 

equipment on a per-click basis. 

(Additional discussion of MedPAC’s 

approach is contained below, in section 

VII.G. of this preamble.) 

2. Authority for Proposal 

Comment: Several commenters said 

that Congress specifically intended to 

permit per-click leases and, therefore, 

we should not prohibit them. One 

commenter said that if Congress has 

spoken on an issue in legislative history, 

an agency’s contrary interpretation must 

be set aside. One commenter said that 

it recognizes the potential for abuse but 

believes that per-click leases may be 

clearly permissible under the statute 

and current regulations. Another 

commenter said that although we 

possess authority under section 

1877(e)(1) of the Act to impose 

requirements for space and equipment 

leases to protect against program or 

patient abuse, it is questionable whether 

that authority allows us to override a 

clear Congressional mandate. Some 

commenters noted that in the Phase I 

final rule with comment period (66 FR 

876), we cited the Conference Report to 

the 1993 amendments to the physician 

self-referral law as support for the 

proposition that Congress intended that 

per-click payment was an accepted 

compensation method under the 

statutory space and equipment lease 

exceptions. A few commenters stated 

that we said in the CY 2008 PFS 

proposed rule that the statute does not 

expressly forbid per-click payments to a 

lessor for patients referred to the lessee. 

Another commenter said that it 

recognizes our concerns, but that perclick payments of the type addressed in 

the proposed rule may be clearly 

permissible under the statute, and, 

therefore, we should conduct further 

analysis prior to moving forward with 

any specific changes. 

Response: Although we agree that 

Congress specifically intended to permit 

certain per-click leases, we disagree that 

Congress intended an unqualified 

exception for per-click leases under the 

physician self-referral statute. We 

recognize that in the Phase I final rule, 

we stated that the legislative history of 

the space and equipment lease 

exceptions led us to the conclusion that 

Congress clearly intended to permit 

leases that included per-click payments 

even for services provided to patients 

referred by the physician lessor. 

However, upon further analysis of the 

legislative history, we no longer believe 

that the interpretation we adopted in the 

Phase I final rule is the only reasonable 

interpretation of the statute and 

legislative history. 

In order for a space or equipment 

lease to satisfy the exceptions under 

§§ 1877(e)(1)(A)(iv) or (e)(1)(B)(iv), the 

rental charges over the term of the lease 

must not be ‘‘determined in a manner 

that takes into account the volume or 

value of any referrals or other business 

generated between the parties.’’ The 

Conference Report to the 1993 

amendments to the physician selfreferral statute explains the intent 

underlying these provisions as follows: 

‘‘[t]he conferees intend that charges for 

space and equipment leases may be 

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based rates, or rates based on units-ofservice furnished, so long as the amount 

of the time-based or units-of-service 

rates does not fluctuate during the 

contract period based on the volume or 

value of referrals between the parties to 

the lease or arrangement.’’ H. Conf. Rep. 

No. 103–213 at 814 (1993). Where the 

total amount of rent (that is, the rental 

charges) over the term of the lease is 

directly affected by the number of 

patients referred by one party to the 

other, those rental charges can arguably 

be said to ‘‘take into account’’ or 

‘‘fluctuate during the contract period 

based on’’ the volume or value of 

referrals between the parties. Thus, both 

the statutory language and the 

Conference Report can reasonably be 

interpreted to exclude from the space 

and lease exceptions leases that include 

per-click payments for services 

provided to patients referred from one 

party to the other. 

We rely on our authority under 

§§ 1877(e)(1)(A)(vi) and (e)(1)(B)(vi) to 

impose upon space and equipment 

leases additional requirements for per 

click leases needed to protect against 

program or patient abuse. In reaching 

our decision to prohibit certain per click 

payments for space and equipment 

leases under §§ 1877(e)(1)(A)(vi) and 

(e)(1)(B)(vi), we begin with the clear, 

overarching purpose of the statute. As 

we noted in the 1998 proposed rule (63 

FR 1661), a number of studies prior to 

enactment of section 1877 consistently 

found that physicians who had financial 

relationships with entities to which they 

referred ordered more services than 

physicians without such financial 

relationships. Congress recognized that 

a physician’s financial incentive to refer 

can affect utilization, patient choice, 

and competition. 135 Cong. Rec. H240 

(Feb. 9, 1989) (statement of Rep. Stark). 

Congress chose a preventive approach to 

the self-referral problem: it essentially 

prohibited many abusive financial 

relationships between physicians and 

DHS entities and imposed strict liability 

on the DHS entity for claims submitted 

in violation of the statute (knowing 

violations of the statute by DHS entities 

and referring physicians are subject to 

additional sanctions). 

The statute—with its significant 

financial sanctions—is far-reaching in 

its effect on the health care industry, 

touching virtually all major industry 

sectors. As stated in the Phase I 

preamble (66 FR 860), while the statute 

must be implemented to achieve its 

intent, we should be cautious in 

interpreting its reach so broadly as to 

prohibit potentially beneficial financial 

arrangements, and thus we would focus 

our regulations on financial 

relationships that may result in 

overutilization. We also indicated that 

we would ‘‘continue to monitor 

financial arrangements in the health 

care industry and will revisit particular 

regulatory decisions if we determine 

that there is abuse or overutilization (66 

FR 860). 

The statute responds to the context of 

the times in which it was enacted (by 

addressing known risks of 

overutilization and, in particular, by 

creating exceptions for common 

business arrangements), and also 

incorporates sufficient flexibility to 

adapt to changing circumstances and 

developments in the health care 

industry. For example, in section 

1877(b)(4), Congress authorized the 

Secretary to protect additional 

beneficial arrangements by 

promulgating new regulatory 

exceptions. In addition, Congress 

included the means to address evolving 

fraud risks by inserting into many of the 

exceptions—and notably, for our 

purposes, in the lease exceptions—

specific authority for the Secretary to 

add conditions as needed to protect 

against abuse. See §§ 1877(b)(2), 

(e)(1)(A)(vi), (e)(1)(B)(vi), (e)(2)(D), 

(e)(3)(A)(vii), (e)(5)(C), (e)(6)(B), and 

(e)(7)(A)(vii). This design reflects a 

recognition that a fraud and abuse law 

with sweeping coverage over most of the 

health care industry could not achieve 

its purpose over the long term if it were 

frozen in time. In short, the statute 

evidences Congress’ foresight in 

anticipating that the nature of fraud and 

abuse—and of beneficial industry 

arrangements—might change over time. 

The evidence on the issue of 

overutilization and anti-competitive 

behavior persuades us that the lease 

exceptions need to be modified at this 

time to address a burgeoning risk of 

abuse and increased costs to the 

Medicare program. In our earlier 

rulemaking, we had been hopeful that 

risk of overutilization would be 

adequately controlled by the other 

conditions in the lease exceptions and 

by our interpretation permitting only 

those per-service (and similar) payments 

that are immutable and fair market 

value. With the passage of time, we are 

persuaded otherwise. Addressing this 

growing risk now is fully consistent 

with the statutory design and purpose. 

3. Hospitals as Risk-Averse and Access 

to Care 

Comment: Commenters stated that 

physician joint ventures have brought 

new, innovative therapeutic technology 

to communities because physicians 

were willing to bear the risk of failure. 

According to the commenters, hospitals 

are risk-averse and per-click 

arrangements with physicians are 

necessary to alleviate hospitals’

concerns over low volume. Some 

commenters explained that to 

accommodate hospitals’ fear of failure, 

urology groups have created joint 

ventures to purchase state-of-the-art 

equipment and lease it on a per-click 

basis to hospitals. The commenters 

asserted that by doing so, the urology 

joint ventures take the entrepreneurial 

risks and the hospitals are able to avoid 

the risk that the volume will be lower 

than projected. One urologist gave the 

example of how his physician group 

practice raised its own capital to 

purchase a DaVinci robot and 

lithotripsy machine when hospitals 

refused to purchase them. Many other 

urologists contended that sometimes the 

patient will need a procedure that is less 

often performed and it is difficult to 

factor this into the compensation 

arrangement. 

One commenter said that per-click 

arrangements create efficiencies because 

they permit expensive equipment to be 

utilized by multiple parties. Without 

these types of arrangements, certain 

services may be unavailable to patients, 

particularly in rural areas where 

practices are too small to independently 

purchase such equipment. Another 

commenter said that he co-owns a 

lithotripter that travels around the state, 

including to rural hospitals where 

procedure volume may be too low to 

allow for a fixed monthly rental. 

Another commenter said that per-click 

fees work well with both low and high 

volume facilities and allow for smaller, 

rural hospitals to offer services locally 

to patients with little or no risk and 

with adequate compensation. The 

commenter contended that a weekly, 

monthly or yearly rental fee would not 

work given the great disparity of case 

loads and effectiveness of treatment. 

One commenter said that our proposal 

would force hospitals to bear the risk of 

leasing equipment, and would 

effectively eliminate the provision of 

certain part-time or mobile health care 

services, including mobile lithotripsy 

services, thereby eliminating access to 

health care in smaller communities 

where there is not sufficient volume to 

support the full-time provision of such 

modalities. One commenter stated that 

the proposal will have a negative impact 

on the healthcare system. The 

commenter’s group practice asserted 

that it was able to purchase a lithotripter 

at a cost in excess of $400,000 and there 

is not enough need at the various 

hospitals for a full time machine. 

Further, per-click arrangements are vital 

to the provision of lithotripsy services 


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as they are infrequent and often require 

additional treatments. 

One commenter said that the 

prohibition on per-click payments 

would limit the efficacy of care. Another 

commenter said that because lithotripsy 

equipment is portable, it makes very 

little sense to have an expensive piece 

of equipment sitting in a hospital seven 

days a week when it is used only two 

or three days a week. Another 

commenter stated that although some 

per-click arrangements may be 

susceptible to abuse, many agreements 

provide enormous community benefit 

and have safeguards built in to prevent 

abuse. 

Another commenter stated that it 

expects that physician-owned ventures 

and lobbies will seek to delay the 

implementation of the proposal by 

claiming disruption to clinical services, 

but that, based on its experience, there 

are numerous independent businesses 

ready to service and purchase the 

equipment and take over contracts 

without creating an interruption of 

services. A radiation oncologist stated 

that the argument in support of joint 

ventures with regard to ancillary 

services such as diagnostic testing, 

radiation therapy and pathology 

services generally centers on improved 

access to care. However, the commenter 

contended, there are no access issues 

with respect to radiation therapy 

services, as very few patients are not 

within a reasonable distance of a 

radiation oncology center. The 

commenter further explained that the 

decision with regard to the most 

appropriate therapy for patients with 

localized prostate cancer must remain 

independent of financial incentives. 

Response: We are not convinced that 

per-click arrangements of the type that 

we are disallowing through this final 

rule are necessary to bring innovative 

technology to communities. We believe 

that, to the extent that hospitals or other 

DHS entities do not wish to purchase 

new technology, there will be a 

sufficient number of non-physician 

entities willing to lease the technology 

to them on a per-use or other basis. 

(Also, where it is not economically 

feasible for all hospitals in a given area 

to purchase the equipment, one hospital 

could purchase it and contract with the 

other hospitals to enable them to 

provide the service under 

arrangements.) Likewise, we believe that 

current leasing arrangements with 

physician lessors can be restructured on 

a block time or other basis. We further 

observe that the adoption of the 

proposal does not mean that physicians 

are prohibited from leasing to entities 

equipment or space on a per-use basis 

with respect to services rendered to 

patients that were referred by others; 

rather, consistent with the statutory 

directive that rental fees not take into 

account the volume or value of referrals 

or other business generated between the 

parties, a physician lessor may not 

receive per-use rental fees for services 

that were rendered to patients that he or 

she referred for DHS. Thus, if a 

physician wishes to lease equipment or 

space to an entity and refer patients for 

DHS to that entity, it may be possible for 

the parties to structure the arrangement 

so that the physician would receive peruse fees for services rendered to patients 

referred by others, but would receive 

compensation calculated on some other 

basis for services that were rendered to 

patients who were referred by the 

physician. We caution that leases that 

are structured to provide for a per-click 

payment methodology only with respect 

to those services that were furnished to 

patients who were not referred to the 

lessee by the lessor can implicate the 

anti-kickback statute. Regardless of the 

lease structure, in order to comply with 

the exception for space leases or the 

exception for equipment leases, 

payments under the agreement must be 

at fair market value (see § 411.357(a)(4) 

and § 411.357(b)(4)) and the agreement 

must be commercially reasonable even 

if no referrals were made between the 

parties (see § 411.357(a)(6) and 

§ 411.357(b)(5)). 

With respect to the commenters’

assertion that physicians are willing to 

take risks in bringing new technology to 

communities and hospitals are riskaverse, to the extent that this is true, it 

begs the question of whether physicians 

are less concerned about risk because 

they can control the referral stream and 

whether hospitals are more concerned 

about risk because they fear that 

referrals will go to their competitors if 

they either purchase the equipment or 

refuse to enter into per-click leasing 

arrangements with physician lessors. 

We believe that the proposal as finalized 

will create a more level playing field 

between hospitals and physicians and 

also among hospital competitors. We 

note that although many of the 

physician commenters touted the 

benefits of per-click arrangements for 

hospitals, only one hospital commented 

and echoed this view. To the contrary, 

a large hospital association supported 

our proposal, as did two hospitals. 

4. Evidence of Overutilization: 

Therapeutic Versus Diagnostic 

Procedures 

Comment: Several commenters, 

including a radiologist, an association 

representing cardiologists, a 

pulmonologist, and a law firm objected 

to our proposals. They stated that our 

concerns are theoretical and no data has 

been presented that per-click 

arrangements involving radiology have 

resulted in overutilization of services, 

abusive practices, or otherwise threaten 

program integrity. One commenter said 

that there is insufficient support for the 

contention that per-click payments in 

space and equipment leases result in 

abusive practices. The commenter 

believes that the current requirements in 

the regulations provide sufficient 

safeguards; that is, the lease payments 

must be at fair market value and the 

equipment or space being leased must 

be reasonable and necessary for the 

legitimate purposes of the lease. 

We also received many comments 

from urologists and others who stated 

that therapeutic procedures do not lend 

themselves to overutilization. Several of 

these commenters distinguished 

lithotripsy and other urological 

procedures from radiological procedures 

on the basis that the former are 

therapeutic procedures and thus do not 

pose the risk of overutilization that 

diagnostic radiological procedures do. 

For example, one commenter said that 

lithotripsy services present virtually no 

risk of overutilization. According to the 

commenter, this is so for two reasons. 

First, lithotripsy is a therapeutic, not a 

diagnostic, procedure. The commenter 

quoted us as having stated ‘‘the 

procedure itself apparently documents 

the medical necessity to prescribe it. As 

we understand ESWL, the kidney stone 

is located, identified, and the progress 

of the therapy is recorded as part of the 

visualization process’’ (63 FR 1682). 

Second, the commenter asserted that 

lithotripsy cannot be overutilized 

because of the strict standards of care 

for the use of a lithotripter. The 

commenter stated that, after a stone has 

been diagnosed, there are clearly 

defined guidelines for physicians to 

follow in the treatment of ureteral and 

kidney stones, based on the size and 

location of a stone and the clinical 

status of the patient. In addition, the 

commenter stated that there are formal 

protocols for the appropriate 

management of stone disease, all 

accredited lithotripsy facilities have 

thorough utilization review and quality 

assurance programs in place to ensure 

physician treatments are appropriate, 

and many facilities incorporate 

physician and staff review of each case 

prior to treatment to confirm its 

appropriateness and likely clinical 

efficacy. An association of urologists 

said that procedures such as green light 

laser procedures and cryotherapy also 


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would be affected by the proposed 

change to the space and lease 

equipment exception, and that, as with 

lithotripsy, these are therapeutic 

services, and there is little or no risk 

that these types of services will be 

overutilized. In contrast, one hospital 

stated that per-click arrangements for 

lithotripsy services are among the most 

abusive, and another hospital stated that 

per-click arrangements between 

hospitals and physicians are grounds for 

potential abuse. 

Response: As noted above, per-click 

leases create the incentive for 

overutilization because the more 

referrals the physician lessor makes, the 

more revenue he or she earns through 

the lease arrangement. Even in the case 

of leases for therapeutic, rather than 

diagnostic equipment, there remains the 

potential for a physician lessor, in order 

to protect his or her investment or gain 

additional profits, to refer to the lessee 

of that equipment instead of referring to 

another entity that utilizes the same or 

different (and perhaps more efficacious) 

technology to treat the patient’s 

condition, or to refer to the lessee 

instead of making no referral where the 

best course of action is no treatment. In 

this regard we note that we received 

comments from a radiation oncologist 

who stated that one must assume that 

the recent interest in radiation oncology 

facility ownership by urologists is 

largely, if not solely, due to the potential 

financial benefit in referring patients for 

Intensity Modulated Radiation Therapy 

(IMRT) because of the favorable 

reimbursement IMRT receives as a new 

technology. Similarly, we have also 

received informal public comments 

from a professional advocacy 

organization concerned about the 

potential for overuse of IMRT that is 

provided in urology practices using the 

in-office ancillary services exception. 

This commenter notes that the 

incentives may be greater for these 

physicians to prescribe IMRT to the vast 

majority, if not all, of their patients and 

that patients should not be steered to a 

specific treatment based on physicians’

financial incentives. We are also 

concerned about the potential for anticompetitive behavior that exists for 

entities to enter into leasing 

arrangements with physician-owned 

companies instead of entering into 

leasing arrangements with nonphysician-owned companies, or instead 

of purchasing their own space or 

equipment, because of a real or 

perceived fear of losing referrals from 

the physician lessor. 

We also do not believe that it is 

necessary for us to have actual evidence 

of abuse involving lithotripsy or other 

therapeutic procedures in order to 

regulate per-click leasing arrangements; 

rather, we believe that the potential for 

abuse inherent in such arrangements, 

regardless of the nature of the service, 

allows us to issue a prophylactic rule. 

Several studies have established a link 

between physician self-referral and 

increased utilization. As an example of 

overutilized therapeutic treatments, we 

note that a large hospital system settled 

a case against several of their physicians 

who were accused of performing 

unnecessary cardiac surgeries. Federal 

officials alleged that the physicians 

entered a scheme to cause patients to 

undergo unneeded, invasive, cardiac 

procedures such as artery bypass and 

heart valve replacement surgeries. The 

hospital system agreed to pay $54 

million to settle the Federal case. 

5. Per-Click Payments as Best Measure 

of Fair Market Value 

Comment: One commenter claimed 

that, under per-click leasing 

arrangements, the amount of payment 

per service is the same irrespective of 

how many patients are referred and, in 

practice, compensation to the physician 

owner does not take into consideration 

the actual number of patients referred, 

but is based on a per capita distribution 

of RVUs performed by each physician. 

The commenter further stated that perclick leases are often the best measure 

of fair market value as they ensure that 

payment is made only for actual 

services provided, and also allow fixed 

costs to be appropriately spread out over 

all clicks, thus providing a more 

accurate reflection of fair market value. 

Furthermore, per-click arrangements are 

common in the industry, not only for 

physician-owned entities, but for nonphysician-owned entities as well. The 

commenter also asserted that per-click 

arrangements also may reduce 

overutilization, as a lessee who must 

pay a fixed amount lease may be more 

likely to use the equipment to ensure 

that the lease costs are covered. A 

second commenter stated that per-click 

arrangements result in more accurate 

and fairer allocations of risk and 

compensation than flat rate lease 

arrangements. The commenter 

contended that referrals for therapeutic 

procedures ebb and flow by the week, 

by the month and by the year. In 

addition, the commenter stated, 

hospitals are unwilling to commit to an 

amount that may be too high for the 

services received and physician 

ventures are unwilling to commit to an 

amount that would be too low for the 

services rendered. Another commenter 

stated that the per-click methodology is 

the fairest manner for hospitals to 

contract for devices and services for 

which their capital budget prevents 

them from acquiring. The commenter 

believed that if a hospital were to 

contract for 200 procedures, it would be 

paying twice the fair market value if 

only 100 procedures were in fact 

performed. The commenter argued that 

in such a situation, the hospital’s 

overpayment for the services could be 

considered an inducement for urologists 

to refer their patients to the hospital, 

and that per-click arrangements prevent 

this sort of abuse. 

Response: The points raised by the 

first commenter fail to address our 

concerns. Even though the amount of 

payment per service may not vary, the 

incentive for overutilization remains 

because the greater number of referrals, 

the greater amount of revenue realized 

by the lessor. Whether a physician 

receives a per-click payment directly or 

whether the entity in which the 

referring physician has an ownership or 

investment interest receives the 

payment, and revenues, profits and 

bonuses are then distributed to the 

various physician owners/investors, it 

remains true that the lessor has an 

incentive for overutilization. The 

potential for anti-competitive behavior 

is even more of a concern with respect 

to physician entity lessors, as such 

entities typically have more leverage 

over referral streams than do individual 

physicians. With respect to the 

statements that per-click leases are often 

the best measure of fair market value, 

we believe other types of arrangements 

can satisfy the fair market value 

requirement of the lease exceptions 

without presenting the same risk of 

overutilization or other abuse. (Again, 

we note that whereas the commenters 

emphasize the benefits of per-click 

leasing arrangements to hospitals, those 

entities and their associations generally 

have not echoed this view.) Moreover, 

in practice, per-click leases may be, in 

some cases, antithetical to fair market 

value compensation. That is because an 

entity leasing space or equipment on a 

per-use basis may pay willingly a 

significantly higher amount in per-click 

rental fees to a physician-owned entity, 

rather than leasing comparable space or 

equipment from a non-physician entity, 

because the lessee may still be realizing 

a profit, or breaking even, on services 

that are the subject of the lease and may 

not wish to risk losing referrals for those 

services and referrals for other services 

if it contracts with a non-physician 

lessor. Likewise, the physician entity 

lessor may be unwilling to enter into an 

arrangement under which the rental 

charges are reasonably based on the cost 


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of the equipment and its maintenance 

and its useful life, because it may earn 

much more through per-click fees where 

it has the ability to steer referrals to the 

hospital. The fact that per-click 

arrangements are common for 

physician-owned entities does not 

alleviate our concern of overutilization, 

but rather intensifies it. Nor does the 

fact that such agreements are commonly 

used mean that they are at fair market 

value. Finally, we are not persuaded by 

the statement that per-click 

arrangements may reduce 

overutilization, which is based on the 

theory that a lessee who must pay a 

fixed amount lease may be more likely 

to use the equipment to ensure that the 

lease costs are covered, because in 

many, if not most, cases the lessee is not 

in a position to refer patients for the 

service. 

We are similarly unpersuaded by the 

second commenter. We disagree with 

the contention that fair market value 

necessarily is best reflected in the 

number of procedures performed where 

a lessee has exclusive possession of 

equipment or space that may be used 

very sparingly, the per-click payments 

by the lessee may be less than fair 

market value taking into consideration 

the cost of the equipment or space 

involved and the amount of rent that 

would be charged under a block time or 

other arrangement. Conversely, where a 

lessee has exclusive use of equipment or 

space that is used very frequently, the 

per-click payments made by the lessee 

may be above fair market value, taking 

into consideration the cost of the 

equipment or space involved and the 

amount of rent that would be charged 

under a block time or other 

arrangement. 

We note that we are not prohibiting 

per-click arrangements involving nonphysician-owned lessors to the extent 

that such lessors are not referring 

patients for DHS, nor are we prohibiting 

per-click payments to physician lessors 

for services rendered to patients who 

were not referred to the lessee by the 

physician lessors, because such 

arrangements do not carry with them 

risk under the physician self-referral 

statute. Of course, such arrangements 

must still satisfy all the requirements of 

the lease exceptions, including the 

requirements that they be at fair market 

value and be commercially reasonable. 

6. Lithotripsy as not DHS 

Comment: Some commenters wanted 

to know whether we consider 

lithotripsy to be a DHS, and cited the 

district court decision of Am. 

Lithotripsy Soc. v. Thompson, 215 F. 

Supp. 2d 23 (D.D.C. 2002), in which the 

court held that lithotripsy is not a DHS. 

A commenter noted that we did not 

address the above-referenced court 

decision in prior rulemakings. It stated 

that it assumes that the decision is 

binding only for lithotripsy services 

provided to Medicare beneficiaries in 

the District of Columbia, and that 

outside of that jurisdiction, lithotripsy 

services remain a DHS, because they are 

billed as inpatient or outpatient hospital 

services. Another commenter said that 

the rule should specify that lithotripsy 

is not a DHS. Other commenters wanted 

to know how the proposal would apply 

to per-use arrangements for lithotripsy 

services, given that lithotripsy services 

have been held not to be DHS. One 

commenter said that although we are 

concerned with per-click arrangements 

for DHS, the proposal would apply the 

ban more broadly to all physicianowned services. The commenter 

provided the example of a patient 

undergoing lithotripsy who may need a 

stent placed or removed or a 

ureteroscopy to push a stone into a more 

favorable position. 

Response: We presently do not 

consider lithotripsy to be a DHS. An 

arrangement under which a physician 

would refer patients to an entity for 

lithotripsy services (or other services 

not classified as DHS) and receive a peruse rental fee for such patients would 

not, by itself, constitute a violation of 

the physician self-referral law and 

regulations. However, a lessor/lessee 

relationship between a physician and an 

entity creates a compensation 

arrangement regardless of whether the 

lease involves the provision of DHS or 

other services (or no services at all). 

Therefore, a lease arrangement for the 

lease of a lithotripter in exchange for 

per-click fees that are prohibited by this 

final rule that is entered into on or after 

October 1, 2009, will constitute a nonexcepted compensation arrangement, 

and, as a result, the physician would not 

be able to refer patients to the entity for 

DHS unless those referrals meet some 

other exception under the physician 

self-referral law or regulations. 

7. Time-Based Rental Arrangements 

Comment: A hospital association 

stated that we should consider 

prohibiting time-based rental 

arrangements only when they permit 

payment for the use of leased space or 

equipment ‘‘on demand.’’ The 

commenter stated that if the aggregate 

amount of time for which space or 

equipment is available is not set in 

advance, but instead, the space or 

equipment is available on demand, the 

physician can pay to lease the space or 

equipment only when the physician 

needs it to provide specific patient care 

services. On the other hand, the 

commenter contended that, if the total 

amount of time leased by the physician 

is set in advance, the arrangement 

should be permitted because it would 

not fluctuate based on referrals and the 

physician would have financial 

responsibility for the rental payments 

without regard to the volume of services 

the physician provides using that space 

or equipment. An association of 

radiologists said that we should ban all 

time-based leasing arrangements. One 

commenter recommended that we not 

distinguish between per-click and timebased leasing arrangements. The 

commenter stated that although 

payments to a physician lessor would 

not increase directly through the referral 

of additional patients, as it would under 

a per-click agreement, the physician 

nevertheless has a financial incentive to 

refer patients to the provider in 

exchange for the fixed payment. 

Another commenter asked us to clarify 

that time-based rental payments, such as 

‘‘block time’’ leases (for example, $1,000 

per month) would be acceptable. 

Another commenter, which objected to 

our proposal, stated that if we were to 

require a ‘‘flat fee’’ lease, it would be 

almost impossible to comply with the 

requirement that the rental charges not 

take into account the volume or value of 

referrals. 

Response: We agree that ‘‘on demand’’

rental agreements are problematic. We 

believe that they are essentially a peruse or per-click type of arrangement, 

and consider them to be covered by our 

revisions in this final rule. We decline 

to accept, at this time, the commenter’s 

suggestion that we prohibit all timebased leasing arrangements. We also 

disagree with the comment that parties 

to a ‘‘flat fee’’ leasing arrangement, 

which we interpret as an agreement in 

which the rental charges over a period 

of time are fixed and are thus unaffected 

by the usage of the equipment (or, in 

other words, a time-based lease), will 

find it very difficult to avoid having the 

rental charges reflect the volume or 

value of any referrals or other business 

generated between the parties. We 

believe that time-based rental payments, 

such as block time leases, depending on 

how they are structured, may meet the 

requirements of the space and 

equipment lease exceptions, including 

the requirements that the agreement be 

at fair market value and be 

commercially reasonable, even if no 

referrals were made between the lessee 

and the lessor, and that they not take 

into account the volume or value of any 

referrals or other business generated 


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between the parties. We believe that the 

same concerns we identified above with 

respect to certain per-click lease 

arrangements can exist with certain 

time-based leasing arrangements, 

particularly those in which the lessee is 

leasing the space or equipment in small 

blocks of time (for example, once a week 

for 4 hours), or for a very extended time 

(which may indicate the lessee is 

leasing space or equipment that it does 

not need or cannot use in order to 

compensate the lessor for referrals). We 

will continue to study the ramifications 

of ‘‘block time’’ leasing arrangements 

and may propose rulemaking in the 

future. Parties entering into block leases 

should structure them carefully, taking 

into account the anti-kickback statute. 

8. Physician Entities as Lessors 

Comment: One commenter stated that 

because leasing arrangements are 

usually between a DHS entity and a 

physician group practice or investment 

entity owned by a group of physicians 

rather than individual physicians, in 

order for the proposed revision to have 

any real effect on overutilization 

through physician self-referrals, we 

would need to eliminate or modify the 

indirect compensation exception or 

carry through on our proposal to 

develop some type of ‘‘stand in the 

shoes’’ provision for physician 

investors. Two commenters stated that, 

although they were in support of the 

proposal, we need to go further and 

prohibit unit-of-service based payments 

that reflect services furnished to 

patients referred to the lessee by a 

physician lessor or any physician owner 

or investor in the lessor. Another 

commenter suggested that we clarify 

that the proposed prohibition on 

physician lessors would apply to a 

referring physician and any entity with 

which the physician has a financial 

relationship. 

Response: We agree that the 

prohibition on per-click payments for 

space or equipment, to the extent that 

such payments reflect services provided 

to patients referred by the lessor to the 

lessee, should apply regardless of 

whether the physician himself or herself 

is the lessor or whether the lessor is an 

entity in which the referring physician 

has an ownership or investment 

interest. We agree with the commenter 

that our concerns with per-click 

payments for office space or equipment 

are not fully addressed if parties could 

structure an equipment or office space 

lease arrangement as an indirect 

compensation arrangement that would 

qualify for the exception in § 411.357(p). 

Likewise, we do not believe that parties 

should be able to circumvent the 

prohibition by using the fair market 

value exception at § 411.357(l) (which is 

applicable to equipment leases). 

Accordingly, we are making 

corresponding changes to the exception 

in § 411.357(p) to prohibit the use of 

per-click payments in the determination 

of rental charges for office space and 

equipment arrangements, and to the 

exception in § 411.357(l) to prohibit the 

use of per-click payments in the 

determination of rental charges for 

equipment. We decline, at this time, to 

adopt the commenter’s suggestion that 

we clarify that the prohibition on perclick payments to physician lessors 

would apply to a referring physician 

and any entity with which the physician 

has a financial relationship. We 

understand the commenter’s suggestion 

as encompassing the situation in which 

a physician, employed by Entity A, 

refers a patient to Hospital B for a 

procedure that uses equipment owned 

and leased by Entity A to Hospital B 

(with the physician having no 

ownership interest in Entity A). We 

understand that the potential for abuse 

exists in this situation for the 

physician’s employer to direct or 

influence the physician to refer patients 

to a lessee that pays per-click rental 

charges to the employer, but are 

concerned that adopting the 

commenter’s suggestion would not be a 

logical outgrowth of the proposed rule. 

Instead, we may propose rulemaking on 

this issue in the future, and we caution 

that if we make and finalize such a 

proposal we may not provide a lengthy 

delayed effective date. 

9. Physicians and Physician Entities as 

Lessees 

Comment: A hospital association 

stated that per unit-of-service payments 

should be prohibited when the 

physician is the lessee and the DHS 

entity is the lessor. A large association 

of radiologists also supported 

prohibiting per-click payments made by 

physician lessees to entity lessors. It 

said that most leasing arrangements are 

economically driven, do not contribute 

to patient convenience or any other 

attributes that promote better patient 

care and generally drive up utilization. 

It was particularly concerned with the 

‘‘scheme’’ by which a referring 

physician leases space on a unit-ofservice or per diem basis from an MRI 

facility and then submits a claim to 

Medicare for the global fee. A radiology 

group practice said that we should 

prohibit a physician from leasing 

equipment from a hospital for use on a 

patient that the physician has referred, 

because one should anticipate that some 

physicians and attorneys might scheme 

with a hospital to set up ‘‘cross referral’’

arrangements. The commenter stated 

that the only sure mechanism to prevent 

abuse is to prohibit entirely unit-ofservice lease arrangements for 

physicians who are either lessors or 

lessees directly, or indirectly as owners 

of a lessee or lessor entity. 

One commenter, a radiology practice, 

said that, in its experience, the situation 

in which a DHS entity leases space and/ 

or equipment to a referring physician to 

perform and bill for the technical 

component services the physician 

orders for his or her patients, is also 

prevalent and can lead to overutilization 

if the rental is based on a per-click 

payment to the DHS entity, because the 

physician pockets the difference 

between the lease fee and the 

reimbursement from Medicare. 

Therefore, the commenter urged us to 

prohibit per-click lease payments by 

physician lessees. A radiology benefits 

management company said we should 

develop a prohibition on per-click or 

time-based payments by physicians. An 

association that represents employers 

said unit-of-service lease arrangements 

should be prohibited when the referring 

physician is either the lessor or the 

lessee. 

Response: In the proposed rule, we 

stressed the situation in which a 

physician is the lessor and the DHS 

entity is the lessee; however, we 

solicited comments on the issue of 

whether we should prohibit time-based 

or unit-of-service based payments to an 

entity lessor by a physician lessee, to 

the extent that such payments reflect 

services rendered to patients sent to the 

physician lessee by the entity lessor (72 

FR 38183). After considering the 

comments and after studying the matter 

further, we have decided to adopt a 

symmetrical approach. That is, because 

physicians themselves may submit 

claims for DHS, there is the potential for 

overutilization and for anti-competitive 

behavior where patients are referred to 

physician (or physician organization) 

lessees by an entity lessor that receives 

a per-click payment each time the 

physician uses space or equipment in 

treating the referred patient. We note 

that the language of the proposed rule 

(‘‘Per unit-of-service rental charges are 

not allowed to the extent that such 

charges reflect services provided to 

patients referred by the lessor to the 

lessee’’) was neutral insofar as it did not 

specify ‘‘physician’’ lessors, and, thus, 

we believe it is not necessary to 

substantively revise this language to 

accommodate the policy that the 

prohibition on certain per-click 

payments applies to both physician 

lessors and other entity lessors. We are 


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not, at this time, extending the 

prohibition to time-based leasing 

arrangements (other than ‘‘on-demand’’

time-based arrangements, as discussed 

above in this section of the preamble). 

10. Effective Date 

Comment: One commenter that 

supported the proposal stated that if we 

finalize the proposal, we should provide 

an appropriate grace period before the 

change would take effect, in order to 

allow parties time to restructure or 

unwind existing lease arrangements. 

The commenter was concerned that if 

an appropriate transition period is not 

provided, patient access to important 

services would be jeopardized and 

hospitals could be subjected 

unnecessarily to potential liability for 

services. A second commenter that 

supported the proposal said that there 

should be a one-year period in which 

parties can unwind current 

arrangements. A third commenter urged 

us not to adopt the proposal because 

frequent changes in regulatory standards 

are extremely disruptive to the 

continued provision of services. A 

fourth commenter stated that, in the 

event we impose a ‘‘blanket 

prohibition’’ on per-click payment 

agreements, existing arrangements 

should be grandfathered. 

Response: Our revisions to 

§ 411.357(a) and § 411.357(b), 

concerning per-click fees, are effective 

for lease payments made on or after 

October 1, 2009. We believe this 

delayed effective date will provide 

parties sufficient time to restructure 

existing compensation arrangements or 

to unwind lease arrangements. We are 

not providing for grandfathering of 

existing per-click arrangements that are 

otherwise prohibited by this final rule 

given the concerns we have expressed 

above. We reiterate that the final rule 

does not impose a blanket prohibition 

on per-click payments, but rather 

prohibits per-click payments to the 

extent that such payments reflect 

services provided by the lessee to 

patients referred to the lessee by the 

lessor. 

G. Services Provided ‘‘Under 

Arrangements’’ (Services Performed by 

an Entity Other Than the Entity That 

Submits the Claim) 

In the CY 2008 PFS proposed rule, we 

proposed to revise the definition of 

‘‘entity’’ at § 411.351 so that a person or 

entity is considered to be furnishing 

DHS if it is the person or entity that has 

performed the DHS or presented a claim 

or caused a claim to be presented for 

Medicare benefits for the DHS (72 FR 

38186–38187). In this final rule, we are 

finalizing that proposal with 

modification. We also proposed in the 

CY 2008 PFS proposed rule that an 

‘‘entity’’ would not include a physician 

organization that bills for the 

professional component (PC) of a 

diagnostic test where the anti-markup 

provisions of § 414.50 are applicable to 

the PC and the physician organization 

bills in accordance with the antimarkup provisions. We finalized that 

proposal in the CY 2008 PFS final rule 

with comment period (72 FR 66400). 

The physician self-referral rules 

prohibit a physician from making 

referrals for DHS to an entity with 

which the physician (or an immediate 

family member) has a financial 

relationship, and prohibits the entity 

from billing Medicare for the DHS, 

unless an exception applies. Under the 

Phase I revision to the definition of 

‘‘entity’’ at § 411.351, an ‘‘entity’’

includes only the person or entity that 

bills Medicare for the DHS, and not the 

person or entity that performs the DHS 

where the person or entity performing 

the DHS is not the person or entity 

billing for it. 

In the CY 2008 PFS proposed rule, we 

noted our continuing concern about the 

risk of overutilization with respect to 

services provided ‘‘under arrangements’’

to hospitals and other providers because 

the risk of overutilization that we 

identified in the 1998 proposed rule has 

continued, particularly with respect to 

hospital outpatient services for which 

Medicare pays on a per-service basis (72 

FR 38186). We proposed to revise our 

definition of entity at § 411.351 to 

include both the person or entity that 

performs the DHS, as well as the person 

or entity that submits claims or causes 

claims to be submitted to Medicare for 

the DHS. 

We received many comments both in 

favor of, and in opposition to, the 

proposal. We read carefully and 

considered each comment. Space 

limitations prevent us from 

summarizing each comment; however 

we discuss below all of the significant 

points raised by commenters in favor of, 

or in opposition to, our proposal. 

Commenters in favor of the proposal 

stated that they believed that existing 

contractual arrangements between 

physician-owned service providers and 

hospitals are inconsistent with the 

purpose of the physician self-referral 

law and are susceptible to abuse. 

Notably, two large national hospital 

associations expressed support for the 

proposal, whereas only a few hospitals 

were opposed to it. Many of the 

commenters in support of the proposal 

pointed to the potential for 

overutilization and anti-competitive 

behavior with respect to all types of 

procedures, including therapeutic 

services such as radiation oncology 

services used in the treatment of 

prostate cancer. The commenters 

opposed to the proposal largely were 

physician organizations and physicians, 

many of whom are urologists and 

cardiologists. These commenters argued 

that hospitals are unable or unwilling to 

invest in technology to provide services 

directly, and that their joint ventures 

provide care in an efficient manner, 

meet a community need, and offer good 

quality. They asserted that patient 

access would be negatively impacted if 

we adopted our proposal. Urologists 

engaged in joint ventures with hospitals 

for the treatment of prostate conditions, 

including prostate cancer, stressed their 

view that, unlike the case with imaging, 

there is no risk of overutilization with 

therapeutic services. 

Many of the commenters in favor of 

or in opposition to the proposal also 

commented on the proposal to disallow 

‘‘per-click’’ lease payments in certain 

circumstances (see section VIII.F. of this 

final rule for a discussion of that 

proposal) and, in many cases, the 

comments made specifically with 

respect to one proposal were applicable 

to the other. In some cases, it was not 

clear on which proposal the 

commenters were commenting. Because 

we believe that the issues are 

intertwined, in finalizing the ‘‘under 

arrangements’’ proposal, we considered 

the comments to both the ‘‘under 

arrangements’’ and ‘‘per-click’’

proposals. 

In this final rule, we are adopting our 

proposal with modification and 

amending the definition of ‘‘entity’’ at 

§ 411.351 to clarify that a person or 

entity is considered to be ‘‘furnishing’’

DHS if it is the person or entity that has 

performed the DHS, (notwithstanding 

that another person or entity actually 

billed the services as DHS) or presented 

a claim for Medicare benefits for the 

DHS. Note that where one entity 

performs a service that is billed by 

another entity, both entities are DHS 

entities with respect to that service. We 

are delaying the effective date of the 

amendment to the definition of ‘‘entity’’

at § 411.351 until October 1, 2009 in 

order to afford parties an adequate time 

to restructure arrangements. A 

discussion of specific comments is 

presented below. 

1. Support for Proposal 

Comment: Many commenters 

supported the proposal. An association 

of radiologists stated that it shares our 

concerns that referring physicians have 

profited from joint venturing with 


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hospitals for imaging services provided 

‘‘under arrangements’’ with hospitals. 

According to these commenters, these 

arrangements are essentially thinlyveiled substitutes for the imaging 

centers that were the original target of 

the physician self-referral law. 

Moreover, many of these arrangements 

do not appear to improve clinical 

quality or value, yet they may increase 

costs to the Medicare program and its 

beneficiaries. An organization that 

represents imaging providers and 

professionals and imaging equipment 

and supply vendors stated its belief that 

the proposed change to the definition of 

‘‘entity’’ would preclude referrals that 

are based upon financial incentives and 

result in overutilization. An association 

that represents radiology practice 

managers and other radiology business 

professionals supported the proposal, 

asserting that the change is necessary 

because the existing definition of 

‘‘entity’’ runs counter to the plain intent 

of the physician self-referral law. A 

radiology group practice contended that 

physician-hospital arrangements are an 

attempt to extort more money out of an 

already underfunded system. According 

to that commenter, it is particularly 

egregious where the hospital has the 

ability to provide the service. A 

different radiology group practice 

described its firsthand experience with 

what it believed to be the type of 

abusive arrangement described in the 

proposed rule. The commenter asserted 

that if a hospital or a freestanding 

imaging center has a solid business 

model and provides good services, only 

in rare circumstances would it need the 

capital of referring physicians to finance 

its operations. According to the 

commenter, we should consider such 

arrangements to be thinly-disguised 

forms of kickbacks and ban them 

entirely. One commenter asserted that 

the proposal, if finalized, will contribute 

importantly to closing the perceived 

‘‘under arrangements’’ loophole that has 

been used inappropriately to 

circumvent the physician self-referral 

prohibition. 

A nonprofit organization that 

represents large employers stated that it 

strongly supports the proposal, asserting 

that services performed in a nonhospital setting on registered hospital 

outpatients, under a contract between 

the hospital and the separate provider, 

present conflicts of interest and provide 

incentives for overutilization when the 

referring physicians have an ownership 

interest in the separate provider. 

One commenter, a urologist, stated 

that although some joint ventures 

certainly improve access to care and 

new technology, joint ventures have 

been abused and that intensity 

modulated radiation therapy (IMRT) for 

prostate cancer treatment is an example 

of how ‘‘under arrangements’’ contracts 

are being abused. According to the 

commenter, because the profit margin is 

$15,000 per patient, numerous joint 

ventures have been established purely 

to capture this passive income. Another 

commenter, a radiation oncologist, 

wrote that he was compelled to 

comment on our proposal because of his 

recent experiences in dealing with 

referring physicians and because of the 

‘‘call for action’’ that has been 

forwarded by a urological association to 

its members, urging them to comment 

on how proposed changes will impact 

negatively their practices. The 

commenter stated that the proposed 

changes will not have a negative or 

serious effect on the way urology is 

practiced. The commenter’s view of the 

argument in support of joint ventures 

with regard to ancillary services such as 

diagnostic testing, radiation therapy and 

pathology services is that it generally 

centers on improved access to care. The 

commenter attempted to discredit this 

argument by asserting, with respect to 

radiation therapy services, there are no 

access issues, as very few patients are 

not within a reasonable distance of a 

radiation oncology center. The 

commenter noted further that urology 

practices’ interest in external beam 

services is a relatively new 

phenomenon, although the use of 

external beam radiation therapy in the 

treatment of patients with prostate 

cancer is not. The commenter also 

stated that IMRT, a sophisticated form 

of external beam radiation, has become 

the new standard of care with respect to 

external beam therapy for patients with 

localized prostate cancer. According to 

the commenter, as a new technology, 

IMRT has a favorable reimbursement 

profile. In addition, the commenter 

stated that because the reimbursement is 

the only variable that has changed, the 

recent interest in radiation oncology 

facility ownership by urologists is 

largely, if not solely, due to the potential 

financial benefit in referring patients for 

IMRT at the urologist’s own facility. The 

commenter emphasized that the 

decision regarding the most appropriate 

therapy for patients with localized 

prostate cancer must remain 

independent of financial incentives. 

One commenter, an association of 

radiation oncologists, endorsed the 

position of the Agency for Health Care 

Research and Quality (AHRQ), that no 

single therapy can be considered the 

preferred treatment for localized 

prostate cancer due to limitations in the 

evidence, as well as the likely tradeoffs 

an individual patient must make 

between estimated treatment 

effectiveness, necessity and adverse 

effects. The commenter asserted that 

prostatectomy, IMRT, and 

brachytherapy are equivalent treatments 

for local prostate cancer; that the right 

treatment for any particular prostate 

cancer patient depends on the patient’s 

interests, age, concerns, disease status, 

and physiology; and that sometimes the 

best treatment might be no treatment at 

all. The commenter expressed its 

concern that, whereas some may argue 

that therapeutic services cannot be 

overused, because of inappropriate 

financial incentives, prostate cancer 

patient choice is being eroded and 

overutilization may be occurring. The 

commenter recounted reports from its 

members of instances where patients 

who might otherwise appropriately be 

monitored for disease progression (that 

is, watchful waiting) are being treated in 

urology practices with IMRT (which is 

permissible under the in-office ancillary 

services exception). Thus, the 

commenter believed, patients who 

might choose to monitor disease 

progression are undergoing significant 

procedures and treatment because the 

diagnosing physician is influenced by 

financial incentives. 

One commenter, a radiation 

oncologist, stated that since a large 

group practice in his county, consisting 

of about 38 urologists and 2 radiation 

oncologists purchased a freestanding 

radiation oncology practice, with two 

linear accelerators, IMRT has been used 

in lieu of other types of treatment (or in 

lieu of no treatment, which is 

sometimes appropriate). In particular, 

the commenter contended that 

brachytherapy, an equally efficacious 

but significantly less expensive 

alternative to IMRT, is performed at a 

fraction of its past volume in his county. 

He also reported that community-based 

surgery is occurring significantly less 

than in the past. According to the 

commenter, because every cancer 

surgeon in his county and many in 

another county have been approached to 

join the group practice, hospitals have 

been forced to propose various ‘‘under 

arrangements’’ contracts or joint 

ventures to stem the tide of business lost 

to the group practice. The commenter 

concluded that, in his county, patients 

with prostate cancer who are treated by 

physicians in the group practice are 

being steered primarily in one direction 

to a single treatment, IMRT, at a single 

facility. In his opinion, the quality of 

prostate cancer treatment in his county 


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has been impacted negatively by 

inappropriate financial incentives. 

A commenter representing a medical 

equipment company asserted that 

hospitals use physician-owned vendors 

instead of other vendors simply because 

of the physicians’ ownership even 

though other companies competing for 

the business had better service, 

equipment and pricing. The commenter 

contended that competition is stifled 

where a physician’s investment is taken 

into account when deciding a service 

issue. The commenter also claimed 

knowledge of a situation in which 

patients are not able to get the best 

technology and service available 

because a physician will use only 

equipment from the company in which 

he or she is invested. 

One commenter offered its strong 

support for our proposal, as it would 

correct abuses that occur due to the 

increasingly prevalent use of providing 

services ‘‘under arrangements.’’ The 

commenter asserted that, historically, 

services were furnished ‘‘under 

arrangements’’ as a means to provide 

access to patients for necessary services 

without having multiple parties acquire 

and operate the same specialized 

services and technology. In addition, the 

commenter stated that the increasing 

frequency of ‘‘under arrangements’’

contracts, coupled with greater 

Medicare payment for hospital services 

(as opposed to payment for the same 

service under the Medicare physician 

fee schedule), provides what may be an 

irresistible financial incentive for 

physicians to refer patients to the entity 

contracted to provide the services 

‘‘under arrangements’’ to the hospital or 

other provider. The commenter, a large 

health benefits company, also stated 

that, because hospitals use the same 

billing system for both Medicare and 

private commercial payers, hospitals are 

frequently reimbursed where services 

were performed by entities under 

contract with the hospital to provide 

services, such as ASCs. Because the 

commenter’s contractual reimbursement 

rate is higher for hospitals than for 

ASCs, in an ‘‘under arrangements’’

situation, the commenter sometimes 

inadvertently provides excessive 

reimbursement for the actual cost of 

care rendered, thereby inflating the cost 

of medical care. 

A commenter asserted that the 

number of physician-owned entities 

providing services ‘‘under 

arrangements,’’ including cardiac 

catheterization laboratories, have 

proliferated in recent years, presumably 

because of the physician self-referral 

rules. The commenter supported our 

proposal and opined that there appears 

to be no legitimate reason for these 

arranged services other than to allow 

referring physicians an opportunity to 

share revenue from referrals they make 

for separately payable services. 

One commenter, a national hospital 

association, offered support for our 

proposal, recognizing the legitimate 

concerns that may exist when a 

physician-owned joint venture provides 

the same services to a hospital ‘‘under 

arrangements’’ that the hospital 

previously provided directly, without 

expanding the type of services provided, 

upgrading the facility or the equipment, 

or otherwise contributing to the 

improvement of healthcare quality or 

accessibility in the community. 

According to the commenter, the ‘‘under 

arrangements’’ concept, which 

originally was solely a payment 

concept, has been used in recent years 

as a way to work around the physician 

self-referral rules, as growing numbers 

of physicians and hospitals have 

exploited what amounts to a loophole in 

the regulations. The commenter asserted 

that we are ‘‘clamping down’’

appropriately on these abusive 

arrangements, which, when unraveled, 

are quite often merely a sophisticated 

way of circumventing the basic purpose 

of the physician self-referral law. 

Another national hospital association 

and two state hospital associations 

noted their support of our effort to 

ensure that services provided ‘‘under 

arrangements’’ meet a community need, 

that individual patients receive care in 

the setting most medically appropriate 

to their needs, and that only those 

arrangements that foster needed 

improvements in the delivery system, 

sustain community access to essential 

services, promote clinical integration or 

enhance efficiencies should be 

permitted. However, these commenters 

were concerned that our proposal 

unintentionally may eliminate hospitalphysician joint ventures designed to 

achieve those goals. 

MedPAC commented on the CY 2008 

PFS proposal, asserting that the ‘‘under 

arrangements’’ model was used 

originally by hospitals to provide 

certain services to their patients that 

were not available at the hospital 

because they were required 

infrequently. It shared our concern 

regarding the growth of services 

provided ‘‘under arrangements’’ to 

hospitals by physician-owned entities, 

and stated that our proposal, if adopted, 

would be an effective way to address 

this issue. 

Response: We are adopting our 

proposal with modification. Our 

conclusion that the Congress intended 

an entity that performs services that are 

billed as DHS to be a DHS entity, 

notwithstanding that the entity 

contracts with another to bill Medicare, 

is supported by both the language of the 

physician self-referral statute and its 

underlying purpose. Section 1877(a) of 

the Act contains two basic prohibitions 

with respect to physician self-referral. 

First, under section 1877(a)(1)(A) of the 

Act, if a physician (or an immediate 

family member) has a financial 

relationship with an ‘‘entity,’’ it may not 

make a referral to the entity for the 

‘‘furnishing’’ of DHS, unless the 

financial relationship meets an 

exception. Second, under section 

1877(a)(1)(B) of the Act, an entity that 

receives a prohibited referral may not 

present or cause to be presented a claim 

to Medicare, and also may not bill any 

individual, third party payor, or other 

entity. 

Section 1877(a)(1)(A) of the Act does 

not define ‘‘entity’’ as any particular 

type of organization but rather defines it 

in a functional sense, that is, an 

organization that furnishes DHS. Our 

current definition of ‘‘entity’’ at 

§ 411.351 similarly provides that an 

‘‘entity’’ is any type of organization, 

regardless of form of ownership (for 

example, partnership, LLC or 

corporation) that ‘‘furnishes’’ DHS. We 

believe that furnishing DHS includes 

performing services that are billed as 

DHS to the Medicare program, 

irrespective of whether the entity 

performing the services submits the 

claim or whether some other entity 

(such as a hospital providing the 

services ‘‘under arrangements’’) submits 

the claim. In this regard, we note that 

section 1877(a)(1)(B) of the Act provides 

that an entity that furnishes DHS may 

not present, or cause to be presented, a 

Medicare claim. This language 

demonstrates that the Congress intended 

that furnishing DHS encompasses not 

only the entity that bills for the DHS, 

but also the entity that performs it, if 

those are not the same entities; 

otherwise there would be no need to 

include the language ‘‘cause to be 

presented.’’

Our conclusion is also consistent with 

the purpose of the statute. A basic 

premise of the physician self-referral 

statute is that, subject to some specific 

exceptions in section 1877(d) of the Act, 

a physician may not refer a patient to an 

entity in which he or she (or an 

immediate family member) has an 

ownership or investment interest. The 

general prohibition on self-referral to an 

entity in which the physician has an 

ownership or investment interest is not 

predicated upon a showing by us of 

actual or potential abuse; rather, the 

Congress has made a policy decision to 


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disallow self-referrals involving an 

ownership or investment interest, 

except in a few specified instances. We 

fail to see why the Congress would have 

intended to prohibit a physician from 

referring patients to a freestanding 

laboratory or imaging facility that he or 

she owns, but would have wanted to 

permit the physician to make such a 

referral simply because the laboratory or 

imaging service is sold to another entity 

that does the billing for it. (Likewise, we 

fail to see why the Congress would have 

intended that the general prohibition on 

physician referrals to entities in which 

they have an ownership or investment 

interest could be circumvented merely 

by arranging for the service provider to 

reassign to another, for a fee, the right 

to receive Medicare payment.) 

We also note that, in enacting the 

exception in section 1877(d)(3) of the 

Act for ownership or investment in a 

hospital, the Congress admonished that 

the exception is unavailable where the 

ownership or investment interest is in 

‘‘merely a subdivision of the hospital.’’

If a physician may not purchase an 

interest in the radiology department of 

a hospital, refer patients to the hospital 

for radiology procedures, and claim the 

benefit of the hospital exception in 

section 1877(d)(3) of the Act, he or she 

should not be allowed to enter into a 

joint venture with the hospital through 

which the hospital effectively moves its 

radiology department (or part of its 

radiology department) outside of the 

hospital and into a facility in which the 

physician has an ownership interest and 

to which the physician refers patients 

for DHS that are billed ‘‘under 

arrangements.’’ Finally, we believe that 

the fact that Congress enacted an 

ownership exception for in-office 

ancillary services (which does not 

include inpatient or outpatient hospital 

services, and which has specific 

requirements as to where the services 

can be performed) is further indication 

that Congress did not intend to protect 

generally a physician’s ownership in an 

entity that performs services that are 

then billed to Medicare as DHS by a 

hospital ‘‘under arrangements.’’ See 66 

FR at 894. 

2. MedPAC Approach 

In the CY 2008 PFS proposed rule, we 

noted that MedPAC recommended in its 

March 2005 Report to Congress that a 

physician should be prohibited from 

referring patients for DHS to an entity if 

that entity derives a ‘‘substantial 

portion’’ of its revenue from a provider 

of DHS (hereinafter referred to as the 

‘‘MedPAC approach’’). There, we stated 

that we believed that our proposed 

approach—that an entity is considered 

to be a DHS entity if it performs the DHS 

or bills for it—was more straightforward 

than MedPAC’s approach (which we 

believe is more difficult to apply and to 

enforce), but we solicited comment as to 

whether we should adopt MedPAC’s 

approach, either in lieu of, or in 

addition to, our proposed approach (72 

FR 38187). 

Comment: Two commenters believed 

that the MedPAC approach was 

preferable to our proposal. The first 

commenter asserted that the MedPAC 

approach would permit legitimate 

businesses to provide services to a 

referral source, and referrals would be 

prohibited only if that entity derives a 

substantial portion of its revenue from 

the DHS provider, whereas our proposal 

would prohibit any level of business 

activity with a DHS provider, without 

any investigation into the circumstances 

that cause some ‘‘under arrangements’’

joint ventures to be abusive. The second 

commenter argued that our proposal 

should be limited only to diagnostic 

services and should incorporate 

MedPAC’s proposed approach. 

Most commenters disagreed with the 

MedPAC approach. For example, one 

commenter was concerned that the 

MedPAC approach virtually would 

eliminate ‘‘under arrangements’’ service 

contracts between hospitals and 

physicians or physician groups, 

potentially disrupting access and 

prompting duplication of investment in 

facilities and equipment. One 

commenter, although opposed to our 

proposal, contended that we would 

have difficulty defining ‘‘substantial 

proportion of its revenue’’ under the 

MedPAC approach. Another commenter 

that disagreed with our proposal said 

that MedPAC’s ‘‘substantial proportion 

of revenue’’ test is overbroad and would 

have unintended and far-reaching 

consequences. According to the 

commenter, the MedPAC approach is 

not limited to entities performing, 

furnishing or billing for DHS, but 

instead effectively prohibits physician 

ownership of entities providing any 

service to a provider of DHS, if the 

service results in revenue significant 

enough to trigger the test’s application. 

A commenter suggested that the most 

significant difference between our 

proposal and the MedPAC approach 

appears to be that our proposal would 

affect only companies that perform DHS 

in their own right, whereas the MedPAC 

approach would also affect companies 

that provide only ‘‘inputs’’ into the 

DHS, or indeed, services that have no 

relationship whatsoever to DHS. One 

commenter asserted that our proposal 

was ambiguous and could contribute to 

confusion in the industry and stated 

that the MedPAC approach was clear, 

but that its adoption would impact 

many other types of arrangements 

between physicians and hospitals, such 

as lease arrangements that comply with 

the physician self-referral rules and that 

do not present an incentive for 

overutilization. Finally, a commenter 

disagreed with both our proposal and 

the MedPAC approach, contending that 

the MedPAC approach is contrary to the 

basic tenets of a hospital’s right to 

furnish services ‘‘under arrangements.’’

Response: At this time, we decline to 

adopt the ‘‘substantial proportion of 

revenue’’ test suggested by MedPAC. In 

addition to our concerns that such a test 

would be difficult to administer and 

enforce, we are concerned that entities 

that do not directly perform a service or 

otherwise cause a claim to be presented, 

but rather have only tangential 

connection to the service by providing 

another entity with supplies or 

equipment could be included within the 

test. We question whether such a result 

is appropriate policy, as well as whether 

we would have the authority to adopt 

such a test. We note that in its 

comments on our proposal, MedPAC 

offered its support and merely noted 

that it had recommended that we 

expand the definition of ‘‘physician 

ownership’’ to include interests in an 

entity that derives a substantial 

proportion of its revenue from a 

provider of DHS. 

3. Authority for Proposal 

Comment: A large association 

representing internists and medical 

students claimed that we lacked 

authority to expand the scope of the 

statute to apply to entities that do not 

bill the Medicare or Medicaid programs 

for DHS. 

Response: We disagree. For the 

reasons stated above, we believe our 

decision to clarify that an entity that 

performs services that are billed as DHS 

is a DHS entity, is consistent with both 

the language and the purpose of the 

physician self-referral statute. As stated 

above, section 1877(a)(1)(A) of the Act 

does not define ‘‘entity’’ as any 

particular type of organization; rather, 

the prohibition applies to any entity that 

‘‘furnishes’’ DHS. Again, we note that 

section 1877(a)(1)(B) of the Act provides 

that an entity that furnishes DHS may 

not present, or cause to be presented, a 

Medicare claim. Accordingly, an entity 

that ‘‘furnishes’’ DHS can include more 

than just the entity that bills for the 

DHS. We believe that ‘‘furnishing’’ DHS 

should include performing services that 

are billed as DHS to the Medicare 

program, irrespective of whether the 

entity performing the services submits 


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the claim or whether some other entity 

(such as a hospital providing the 

services ‘‘under arrangements’’) submits 

the claim. 

Comment: Several commenters 

alleged that the proposal was contrary to 

the Congress’s decision, and/or our 

decision, to treat an ‘‘under 

arrangements’’ relationship as a 

compensation arrangement, rather than 

an ownership interest, between the 

parties. A few commenters believed that 

the statutory compensation exception 

for ‘‘under arrangements’’ services at 

section 1877(e)(7) of the Act indicated 

that we have questionable authority to 

promulgate regulations that would 

contradict this expression of 

Congressional intent. The commenters 

also believed that in enacting 

amendments to the physician selfreferral law in 1993, the Congress 

determined that such service 

arrangements with group practices 

should be protected as compensation 

arrangements if certain standards are 

satisfied. According to one commenter, 

the Congress unequivocally decided that 

the physicians’ ownership interest in 

the ‘‘under arrangements’’ service 

provider is not an ownership interest in 

an entity furnishing DHS services, and 

that the only financial arrangement that 

triggers the physician self-referral law is 

the service agreement between the 

hospital and the under arrangements 

service provider. The commenter argued 

that this interpretation is supported by 

the exception’s plain meaning and other 

sources. According to the commenter, if 

the Congress thought there was any 

ownership interest created under the 

physician self-referral law with these 

types of arrangements, it would have 

placed such an exception in section 

1877(b) of the statute, which contains 

all the exceptions that protect both 

ownership and compensation. Also, the 

commenter asserted that to meet the 

exception at section 1877(e)(7) of the 

Act, physicians participating in the 

arrangement must refer substantially all 

of their similar cases through the 

arrangement, and, therefore, our stated 

concern about the abusive incentives we 

see with arranged-for services cannot be 

reconciled with the Congress’s comfort 

in requiring a high level of self-referral. 

Response: We disagree that, in 

enacting section 1877(e)(7) of the Act, 

the Congress determined that ownership 

in the entity performing DHS under 

arrangements is not ownership in a DHS 

entity. The commenters confuse which 

financial relationships our proposal 

addressed. Contrary to their arguments, 

there is no indication in either the text 

of the statute or its legislative history 

that the Congress intended to except 

ownership interests in the entity 

performing the service on behalf of the 

hospital. Instead the language of section 

1877(e)(7) of the Act clearly says that a 

group practice will not have a 

prohibited compensation arrangement 

with a hospital, if certain conditions are 

met; it does not address whether a 

referring physician has a prohibited 

ownership interest in the entity 

performing the service. Moreover, the 

plain language of section 1877(e)(7) of 

the Act demonstrates that the Congress 

intended to protect compensation from 

a hospital to physicians performing 

services ‘‘under arrangements’’ only in 

very narrow circumstances. The 

exception at section 1877(e)(7) of the 

Act (and at § 411.357(h) of our 

regulations) protects compensation from 

hospitals to group practices only (that 

is, not to individual physicians or to 

physician organizations not meeting the 

definition of a ‘‘group practice’’ as 

defined at section 1877(h)(4) of the Act 

and § 411.352 of our regulations), and 

with respect to only inpatient services 

billed by the hospital (that is, not with 

respect to outpatient hospital services or 

other types of DHS). Also, in order to be 

protected, the arrangement with the 

hospital had to have begun prior to 

December 19, 1989 (the date of 

enactment of the Omnibus Budget 

Reconciliation Act of 1989, Pub. L. 101–

239) and must have continued without 

interruption since that time. We also do 

not agree with the commenter that 

Congress was comfortable in requiring a 

high level of self-referral, because, 

according to the commenter, in order to 

meet the exception at section 1877(e)(7) 

of the Act, physicians participating in 

the arrangement must refer substantially 

all of their similar cases through the 

arrangement. The exception requires 

only that substantially all of the under 

arrangement services furnished to 

patients of the hospital must be 

furnished by the group under the 

arrangement; the exception does not 

require the group physicians to refer 

their patients to the hospital. In sum, we 

believe that, to the extent that section 

1877(e)(7) of the Act evinces any intent 

of the Congress toward physician 

ownership in entities that provide 

services for a hospital to bill under 

arrangement, the fact that the Congress 

enacted such a narrow compensation 

exception would indicate that the 

Congress was not favorably disposed to 

protecting physician ownership in such 

entities. 

Comment: Two commenters asserted 

that, in the 2001 Phase I final rule with 

comment period, we stated that we 

would not consider an ‘‘under 

arrangement’’ relationship to constitute 

an ownership interest for several 

reasons: (i) To do so would disrupt 

patient care; (ii) such relationships 

easily could be structured to comply 

with the personal services arrangements 

or fair market value exceptions; and (iii) 

there was precedent in the statute for 

treating such financial relationships as 

creating a compensation arrangement. 

The commenter stated that it was 

unaware of anything that had occurred 

over the years to mitigate the reasons 

stated in Phase I for treating ‘‘under 

arrangements’’ relationships as 

compensation arrangements, rather than 

ownership interests. 

Response: We do not believe that the 

proposal is inconsistent with the 

position we took in Phase I. The 

preamble discussion in the Phase I rule 

referred to by the commenters focused 

on the relationship between physicians 

and a hospital. There, we stated that we 

were concerned that the provision of 

services ‘‘under arrangements’’ could be 

used to circumvent the prohibition in 

section 1877(c)(3) of the Act of 

physician ownership of parts of 

hospitals. We said that we understood 

that some hospitals were leasing 

hospital space to physician groups, 

which the groups then used to provide 

services ‘‘under arrangements’’ that the 

hospital had previously provided 

directly, and that these arrangements 

raised significant issues under section 

1877 of the Act, as well as the antikickback statute. We said that, although 

the physician self-referral statute could 

reasonably be interpreted to prohibit 

‘‘under arrangements’’ relationships as 

constituting prohibited ownership 

interests in a part of a hospital, we 

declined to do so at that time. However, 

we cautioned that we would monitor 

‘‘under arrangements’’ relationships and 

that we might reconsider our decision if 

it appears that the arrangements are 

abused (66 FR 942). In contrast to the 

preamble discussion in the Phase I rule, 

our proposal did not focus on the 

financial relationship between a 

physician and a hospital (or other 

entity) that bills Medicare for services 

furnished ‘‘under arrangements’’. 

Rather, it focused on the ownership 

interest that a physician has with an 

entity that performs DHS that are 

furnished ‘‘under arrangements’’ with a 

hospital or other entity that bills 

Medicare for the DHS. We believe that 

where a physician has an ownership or 

investment in an entity that performs 

DHS, the application of the physician 

self-referral statute should not be 

avoided simply by having another entity 

bill Medicare for the DHS. 


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We also believe that the preamble 

discussion in the 1995 final rule 

demonstrates that we recognized a 

distinction between the question of 

whether a physician or group practice 

has an ownership (as opposed to a 

compensation) relationship with a 

hospital and the question of whether a 

physician has an ownership interest in 

a service provider that contracts with a 

hospital for the billing of services 

‘‘under arrangements.’’ There, we noted 

that a commenter believed that, if there 

is an under arrangement agreement 

between a hospital and a group practice 

for the group practice to provide 

laboratory services to hospital patients 

under section 1861(w)(1) of the Act, it 

is the hospital and not the group 

practice physicians that is making a 

referral for the purposes of the selfreferral proscription found in section 

1877 of the Act. We responded that we 

did not believe that the Congress 

intended to allow physicians to 

circumvent the referral prohibition by 

imputing their referrals to an operating 

entity such as a clinic, hospital, or other 

institution. We acknowledged that ‘‘the 

exception in section 1877(e)(7) of the 

Act could apply to allow referrals based 

on part of this scenario’’ but 

[t]here is, however, a complicating factor in 

the commenter’s scenario. That is, the group 

practice physicians are referring to their own 

group practice laboratory. It is likely that 

these physicians are receiving compensation 

from the group practice that owns the 

laboratory or that they own some portion of 

the group practice and the laboratory. The 

compensation or ownership interests 

involved here would require a separate 

exception in order to allow the group 

practice physicians to refer. The services 

could, for example, be excepted under the inoffice ancillary services exception in section 

1877(b)(2) of the Act, which allows a group 

practice to refer to its own laboratory if 

certain criteria are met (66 FR 41941). 

4. Suggested Changes and Clarifications 

to Definition of ‘‘Performs the Service’’

Comment: One commenter, although 

supporting generally the proposal, was 

concerned that the proposal that an 

entity that ‘‘performs’’ the DHS is a DHS 

entity within the meaning of § 411.351, 

may not have its desired effect because 

of the potential ambiguity of the 

meaning of ‘‘performs.’’ The commenter 

suggested that the final rule give a 

specific definition of ‘‘performs.’’ One 

commenter stated that the proposed 

language in the definition ‘‘has 

performed the DHS’’ was ambiguous, 

and questioned whether it included 

individuals, management companies, 

lessors or vendors. Two commenters 

asked us to provide a clear definition of 

performing DHS. A commenter said that 

it is very common, with respect to a 

variety of healthcare participants, for 

equipment to be leased from one party, 

space to be leased from another, and 

personnel employed, leased or 

contracted from or by multiple 

organizations. Two commenters said 

that the meaning of the phrase ‘‘person 

or entity that has performed the DHS’’

is unclear because the phrase could 

apply to the physician who performs the 

service, the location where the services 

are performed, the person or entity that 

owns the equipment with which a DHS 

is performed, or possibly some other 

person. 

Another commenter cautioned that 

further guidance may be necessary to 

better define who ‘‘performs’’ DHS in 

fact patterns in which billing entities 

acquire inputs from multiple sources to 

deliver DHS. A commenter that 

supported the proposal suggested that a 

better way to define ‘‘entity’’ would be 

to specify ‘‘entity’’ as any business 

arrangement, and provide one exception 

for physician investment in a large 

publicly traded corporation. Another 

commenter that supported the proposal 

said that the definition could be 

improved if, in addition to including the 

person or entity that furnished the 

service or billed for it, we also included 

‘‘the person or entity that owns or leases 

the space or equipment to either of the 

above.’’ One commenter questioned 

whether the definition of entity would 

extend to entities that provide billing 

staff or equipment used in furnishing 

DHS, because neither of these activities 

constitutes providing DHS. A 

commenter stated that it is unclear 

whether an entity that performs a 

component of DHS ‘‘performs’’ the DHS. 

The commenter stated it does not 

believe that an entity that provides 

management services performs DHS 

within the meaning of the proposed 

definition. Another commenter stated 

that although it believes that providing 

only some of the components of DHS 

should not be considered performing 

DHS or causing a claim to be submitted, 

the proposed rule created a level of 

uncertainty. The commenter stated that, 

taken to its extreme, the proposed 

definition of ‘‘entity’’ could be viewed 

as making any equipment lessor or 

entity that performs services for a DHS 

entity, even a provider of linens or food 

services, into a DHS entity itself. The 

commenter further stated that the 

provision of equipment and customized 

devices for a medical procedure and/or 

the services of a technician to monitor 

the equipment should not be defined as 

‘‘performing the DHS.’’ A large 

association representing group practices 

said that if we were to adopt the 

proposal, we should make clear that the 

new provision does not apply to 

companies that merely lease equipment. 

Response: We decline to provide a 

specific definition of ‘‘perform,’’ but 

rather intend that it should have its 

common meaning. We note that the 

language ‘‘performing’’ a service, or 

‘‘perform’’ a service, or ‘‘performed’’ a 

service, or ‘‘services performed’’ appears 

numerous times in title XVIII of the Act 

and in our regulations, without a 

definition of what ‘‘perform’’ or any of 

its derivations means. For example, 

section 1861(q) of the Act defines 

‘‘physicians’ services’’ as ‘‘professional 

services performed by physicians’’

without elaboration as to what 

‘‘performed’’ means. Physicians and 

other suppliers and providers generally 

know when they have performed a 

service and when they are entitled to 

bill for it. By way of example only, we 

consider a service to have been 

‘‘performed’’ by a physician or 

physician organization service if the 

physician or physician organization 

does the medical work for the service 

and could bill for the service, but the 

physician or physician organization has 

contracted with a hospital and the 

hospital bills for the service instead. We 

do not mean to imply that a physician 

service provider can escape the reach of 

the physician self-referral statute by 

doing substantially all of the necessary 

medical work for a service, and 

arranging for the billing entity or some 

other entity to complete the service. We 

do not consider an entity that leases or 

sells space or equipment used for the 

performance of the service, or furnishes 

supplies that are not separately billable 

but used in the performance of the 

medical service, or that provides 

management, billing services, or 

personnel to the entity performing the 

service, to perform DHS. 

Comment: Commenters addressed the 

issue of whether physician-owned 

implant or other medical device 

companies should or should not be 

considered to be an entity within the 

meaning of § 411.351. One commenter 

noted that orthopedic surgeons may 

have an ownership interest in a 

manufacturer of spinal implants that 

sells its implants to the hospital where 

the surgeon performs his or her 

surgeries. The commenter also stated 

that, because the proposed definition of 

‘‘entity’’ would extend to an entity that 

‘‘performs the DHS,’’ arguably the 

manufacturer could be considered to be 

an ‘‘entity’’ under § 411.351. This 

commenter urged us to exclude such 

manufacturers from the definition of 

‘‘entity.’’ It stated that the indirect types 


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of arrangements involving spinal 

implants would still trigger the selfreferral prohibition if they are not at fair 

market value. Comments submitted on 

behalf of a manufacturer of spinal 

implants asserted that, despite 

superficial similarities, joint ventures 

involving medical devices differ in 

many material ways from the types of 

arrangements over which we expressed 

concern. This commenter also said that 

the meaning of ‘‘has performed the 

DHS’’ is unclear and that we should 

clarify that the proposal applied only to 

‘‘true’’ under arrangement relationships 

with hospitals, but that, in any event, 

implantable devices are not DHS. The 

commenter further stated that, even if 

implantable devices were deemed to be 

DHS, the rigorous physician self-referral 

exceptions (for example, the indirect 

compensation exception) are still 

available to protect the arrangement, 

and that if we were to interpret the 

proposal as applying beyond formal 

‘‘under arrangement’’ relationships, we 

would be sliding down an 

impermissibly slippery slope if we in 

fact intend our approach to be different 

than the one that was proposed by 

MedPAC. 

After the comment period closed for 

the CY 2008 PFS proposed rule, we 

received a comment from a large 

medical device manufacturer that 

requested that we examine the current 

prevalence of physician-owned implant 

companies and the impact that these 

ventures have on program or patient 

abuse, as well as what it considered to 

be the negative impact on competition 

among physician investor ventures and 

non-physician ventures. The commenter 

suggested that we deem physicianowned implant companies to be DHS 

entities under certain circumstances. 

The commenter also suggested that a 

physician-owned implant company 

should not be considered to have caused 

a claim to be presented where the 

referring physician is named as an 

inventor on an issued patent for the 

implantable item and the physician 

does not receive any remuneration from 

the company based on the value or 

volume of referrals, or where the 

physician’s investment interest meets 

the requirements of § 411.356(a) for 

large, publicly traded entities. 

Response: In this final rule, we are not 

adopting the position that physicianowned implant or other medical device 

companies necessarily ‘‘perform the 

DHS’’ and are therefore an ‘‘entity’’ on 

that basis. In the FY 2009 IPPS proposed 

rule, we solicited comments as to 

whether such companies should be 

considered to be an ‘‘entity’’ within the 

meaning of § 411.351. We may decide to 

issue proposed rulemaking on this issue 

in the future. 

5. Cause Claim To Be Submitted 

Comment: Some commenters were 

concerned with the aspect of the 

proposal that would include ‘‘a person 

or entity that causes claims to be 

submitted’’ within the definition of 

‘‘entity.’’ Another commenter stated that 

the term ‘‘causes a claim to be 

submitted’’ is unclear and is susceptible 

to varying interpretations. One 

commenter asserted that our 

interpretation would make all vendors 

DHS entities. A commenter maintained 

that we did not indicate which entities 

would be subject to the physician selfreferral prohibition as an individual or 

entity ‘‘that causes claims to be 

submitted.’’ An association that 

represents oncologists was concerned 

that the proposed definition could be 

read to include management and billing 

companies. Because billing and 

management companies submit claims 

for DHS on behalf of their physician or 

provider clients, arguably they ‘‘cause a 

claim to be presented’’ for DHS. The 

commenter stated that it believed that 

we did not foresee or intend this result. 

Response: The proposed rule would 

have amended the definition of ‘‘entity’’

in § 411.351 to provide that ‘‘[a] person 

or entity is considered to be furnishing 

DHS if it—(i) Is the person or entity that 

has performed the DHS, or (ii) Presented 

a claim or caused a claim to be 

presented for Medicare benefits for the 

DHS.’’ We are not revising the definition 

of ‘‘entity’’ in § 411.351 to include the 

‘‘or cause a claim to be presented’’

language in proposed paragraph (ii). As 

noted above, section 1877(a)(1)(A) of the 

Act and our regulations define ‘‘entity’’

as any organization that is ‘‘furnishing’’

DHS, and section 1877(a)(1)(B) of the 

Act and § 411.353(b) of our regulations 

prohibits an entity that receives a 

prohibited referral from presenting a 

claim to Medicare or causing such a 

claim to be presented. In this final rule 

we are revising the definition of 

‘‘entity’’ to clarify that a person or entity 

that is performing DHS is furnishing 

DHS (as is a person or entity that 

presents a claim for Medicare benefits 

for DHS). We believe that an entity that 

performs services that are billed as DHS 

is furnishing DHS and, therefore, is a 

DHS entity. Under section 1877(a)(1) of 

the Act, and in accordance with our 

current regulations at § 411.353, once a 

person or entity has furnished DHS, and 

therefore is considered to be a DHS 

entity with respect to that service, the 

person or entity is prohibited from 

either presenting a claim or causing a 

claim to be submitted if the referral for 

the DHS was prohibited. We do not 

believe it is practical to attempt to 

define, through general rulemaking, 

what does or does not constitute causing 

a claim to be submitted. Rather, such a 

determination must be made, through 

adjudication, on a case-by-case basis. 

6. Proposal Based on Anecdotal 

Evidence 

Comment: A large association 

representing internists and medical 

students stated that, whereas it fully 

understands and shares concerns about 

inappropriate utilization of certain 

services, completely restricting the 

ability of physicians to invest in their 

own industry is far from the answer. 

The commenter noted that throughout 

the proposal, we continued to cite 

anecdotal evidence of arrangements that 

are at risk for fraud and abuse, yet 

provided no actual evidence of program 

abuse. Other commenters stated that we 

have not substantiated our concerns 

with comprehensive analyses or 

objective data. One commenter, an 

association of cardiologists, stated that 

its members can demonstrate that 

collaborations between physicians and 

hospitals reduce duplication of services 

and competition for technical staff 

within local service areas, thus reducing 

practice expense and equipment costs 

for Medicare providers and the 

Medicare program. 

Response: We are finalizing the 

proposal because we believe that it 

would be inconsistent with Congress’s 

intent to not consider an entity that 

performs DHS as a DHS entity. In 

addition, we have concerns that 

contractual arrangements between 

physician-owned service providers and 

hospitals may lead to overutilization 

and anti-competitive behavior. These 

concerns are based on studies that show 

an increase in utilization where 

physician ownership of services is 

involved, as well as anecdotal evidence. 

7. Community Benefit and Access to 

Care 

Comment: One commenter stated that, 

in contrast to past policy statements, the 

proposed rule did not in any way 

recognize the positive role of arrangedfor services in today’s health care 

system, but instead seems to condemn 

them all with one-size-fits-all sweeping 

claims. According to the commenter, in 

the Phase I rule, we recognized that 

under arrangement relationships ‘‘are 

pervasive in the hospital industry’’ and 

that many help ‘‘avoid unnecessary 

duplication of costs and 

underutilization of expensive 

equipment.’’ (66 FR 942). One 

commenter stated that, although the 


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proposed rule discusses anecdotal 

reports related to ‘‘under arrangements’’

ventures that are presumably abusive, 

there is no suggestion that these 

concerns are equally applicable to all 

types of services, and yet, the proposed 

changes would eliminate completely 

this significant option utilized by 

hospitals, particularly those without 

significant financial resources, to bring 

certain services, such as new 

technology, to their community. The 

commenter believed that before we 

implement any changes to the physician 

self-referral regulations that will restrict 

or eliminate ‘‘under arrangements’’

ventures with entities that are owned in 

whole or in part by physician referral 

sources, it is imperative that we assess 

the potentially significant impact such a 

change will have on the quality and 

scope of care offered by many 

institutions. 

One commenter stated that many 

organized independent medical groups 

have fostered good working 

relationships with hospitals that benefit 

the community. A regional state-of-theart cancer center that is a joint venture 

between physicians and a hospital 

allows Medicare beneficiaries to receive 

high quality, cost effective care in one 

setting. This type of arrangement is in 

contrast to one where each physician 

group in the community buys 

duplicative cancer technology, 

competes directly with the hospital, and 

little collaboration among providers 

exists. 

A health system stated that in 

circumstances where particular services 

are needed, but not frequently 

performed, having one provider develop 

consistent practices and expertise may 

afford a higher quality of care for 

patients seeking the service and ‘‘under 

arrangements’’ contracts prevent 

multiple health care providers from 

purchasing the same types of equipment 

in any given community, and as a result, 

the cost of care is actually reduced 

because of efficient resource 

management. One commenter stated 

that many of the ‘‘under arrangements’’

contracts result in significant 

community benefit and patient benefit, 

and avoid duplication of services, thus 

producing cost savings to the program. 

Another commenter, representing a 

public hospital district, stated that there 

are compelling and legitimate reasons 

for public hospitals and local physicians 

to create collaborative arrangements to 

deliver care in the community. It 

asserted that participation in 

collaborative ventures with local 

physicians reduces the operating burden 

on public hospitals. 

Another commenter said that 

hospitals that enter into ‘‘under 

arrangements’’ relationships are relieved 

of the burden of maintaining or 

expanding a particular service line, 

while still being able to provide much 

needed services to members of its 

community. This frees hospital capital 

to be spent on other needed services and 

space and other resources within the 

hospital to be used on other services. 

The commenter said that it has been its 

experience that hospitals have found 

themselves unable to keep up with the 

demand for outpatient surgery capacity 

and have found investing in ASCs to be 

a better use of their resources as 

compared to building and staffing larger 

outpatient surgery areas within the 

hospitals. 

Two commenters stated that we 

should encourage ‘‘under arrangements’’

contracts between physicians and 

hospitals. They stated that, in many 

instances, it can make financial and 

clinical sense to enter into a venture 

with a partner that can provide capital, 

shared risk, and operational expertise to 

a hospital striving to improve its 

specialty services and programs. The 

commenters further stated that the fact 

that physicians can sometimes bring 

these resources to a hospital should not 

exclude them automatically as 

participants in these efforts, and in 

many ways physicians are ideal hospital 

partners and offer benefits to hospitals 

beyond mere referral of patients, such as 

careful cost control and quality 

improvement expertise. Another 

commenter stated that it appeared 

incongruous that we appear to support 

gainsharing but also appear ready to 

prohibit economic models that seeks to 

align physician incentives with those of 

hospitals. 

Many commenters also expressed 

concern that if we finalize the proposal 

access to care will be disrupted, 

particularly in underserved or rural 

areas. A large association representing 

group practices commented that if we 

finalize our proposal, we should clarify 

that the ‘‘new restriction’’ will not 

impact the exception available for rural 

markets. The commenter further 

asserted that it would be an ironic result 

and an unfortunate policy if a 

physician’s referral to a rural hospital 

were prohibited because of an ‘‘under 

arrangements’’ contract between the 

hospital and an entity in which the 

physician had an interest, when the 

same physician’s referral to the same 

entity would be clearly protected. A 

rural hospital commented that, in its 

market, provider-based entities protect 

against unnecessary duplication of 

services, equipment, staff and facilities 

and offer several other advantages. 

Some urologists complained that the 

proposal would prohibit providing 

lithotripsy and other services to rural 

patients. For example, one urologist said 

that adoption of the proposal would 

prohibit the provision of many services, 

including, but not limited to, laser 

services, cryotherapy services and 

IMRT, as well as the newer services 

transurethral microwave therapy 

(TUMT) and transurethral needle 

ablation of the prostate, which, more 

often than not, are performed in the 

office. Other physicians, primarily 

urologists, and an organization whose 

members form joint ventures with 

urologists, commented that physician 

joint ventures have provided Medicare 

beneficiaries with access to effective 

treatments that they otherwise would 

not have had and/or have saved 

Medicare millions of dollars. 

Comments submitted on behalf of a 

large multi-specialty physician group 

asserted that many ‘‘under 

arrangements’’ relationships have 

existed for many years and benefit both 

the hospital and the patient. The 

comments maintained that the hospital 

is able to secure services that it 

otherwise could not provide efficiently, 

through contracting with an outside 

supplier that often is an expert in these 

services. In addition, the comments 

stated that not all ‘‘under arrangements’’

relationships result in higher Medicare 

reimbursement levels, but where this is 

true, we should address any incentives 

due to differences in reimbursement 

between the PFS and OPPS by 

eliminating those differences in 

reimbursement rather than by revising 

the definition of entity. Finally, 

comments stated that independent 

physician groups cannot be further 

disadvantaged to the benefit of hospital 

system providers that enjoy special 

privileges of significantly higher 

reimbursement for similar services, 

wide latitude to create built-in referral 

relationships by employing physicians 

and, in many instances, the financial 

benefit of tax-exempt status. 

Response: We recognize that in some 

circumstances, providing services 

‘‘under arrangements’’ may be beneficial 

to patients, providers and the program. 

We are not prohibiting services to be 

furnished ‘‘under arrangements.’’

We are finalizing the proposal 

because we believe that it would be 

inconsistent with the Congress’s intent 

to not consider an entity that performs 

DHS as a DHS entity. We note that in 

enacting ownership exceptions, the 

Congress did not provide for an 

exception based on lack of access per se, 

but rather enacted an exception only for 


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rural providers. With respect to service 

providers that furnish services to rural 

patients, our proposal as adopted in this 

final rule does not alter the availability 

of the exception for an ownership 

interest in a rural provider. However, as 

clarified in this final rule, as a DHS 

entity, a physician owner/investor in 

such a service provider would need an 

ownership exception (such as the rural 

provider exception) in order to protect 

his or her referrals to the service 

provider. 

With respect to ownership/investment 

interests that will not qualify for the 

rural provider exception because of the 

patient population they serve, we do not 

believe that patient access will be 

significantly disrupted, for several 

reasons. First, we are not prohibiting 

physician group practices or other 

physician organizations from 

contracting with hospitals for the 

provision of services ‘‘under 

arrangements.’’ Any physician that has 

a compensation arrangement with, but 

not an ownership/investment interest 

in, the physician group practice or other 

physician organization (such as an 

employee or contractor physician with 

the group practice or other physician 

organization) may refer patients for 

services that are provided by a hospital 

‘‘under arrangements’’ provided that 

one of the compensation exceptions is 

met. Also, the definition of ‘‘referral’’ at 

§ 411.351 excepts services that are 

personally performed by the referring 

physician. Thus, to the extent that an 

owner/investor in the physician service 

provider has referred the patient for a 

service but then personally performs the 

service, there is no ‘‘referral’’ within the 

meaning of § 411.351 and the physician 

self-referral law is not implicated. (Note 

that if there is a technical component to 

a service or a facility fee, that is billed 

by a provider ‘‘under arrangements,’’ the 

fact that the referring physician 

performs the professional component, 

and thus there is no ‘‘referral’’ for the 

professional component, does not alter 

the fact that there is a ‘‘referral’’ for the 

TC or the facility fee. Note also that the 

definition of ‘‘referral’’ states that DHS 

is not personally performed or provided 

by the referring physician if it is 

performed or provided by any other 

person, including, but not limited to, 

the referring physician’s employees, 

independent contractors, or group 

practice members. See, e.g., 66 FR 941.) 

Also, we expect that hospitals that have 

not been furnishing services directly, 

but rather have been furnishing them 

‘‘under arrangements,’’ will begin doing 

so. We believe that, in some instances, 

hospitals would prefer to furnish 

services directly but have been 

concerned about losing referral streams 

if they compete with physician service 

providers. (In this regard we note that 

we received very few comments from 

hospitals objecting to our proposal, and 

instead two major hospital associations 

were generally supportive of it.) We also 

believe that, conversely, in many cases 

physician groups could provide the 

services and bill for them directly, that 

is, without the need to contract with a 

hospital to provide them ‘‘under 

arrangements’’, and that, to the extent 

the services would be DHS when 

performed and billed by the physician 

group, referrals to the physician entity 

could be protected by the in-office 

ancillary services exception or another 

exception. We also note that to the 

extent that the physician service 

providers are furnishing lithotripsy (and 

based on the comments we received it 

appears that lithotripsy makes up a 

significant portion of the services 

furnished ‘‘under arrangements’’), we 

presently do not consider lithotripsy to 

be a DHS. Finally, the delayed effective 

date of the revision to § 411.351, that is 

October 1, 2009, will provide sufficient 

time for arrangements to be 

restructured. 

8. Hospitals as Risk-Averse 

Comment: Several urologists objected 

to what they perceive as our view that 

physicians who invest in joint ventures 

to provide services ‘‘under 

arrangements’’ do so at the expense of 

good patient care. These commenters 

and others stated that hospitals balk at 

investing in new technology because of 

the risk of obsolescence (that is, what is 

new technology today may be soon 

outmoded) and because doing so will 

result in lesser use of other services that 

they currently provide. Also, a single 

hospital often does not have the volume 

to justify the expense of a large capital 

investment. Joint ventures involve 

physicians so that usage can be spread 

among several hospitals. 

One urologist stated that urologic 

joint ventures have been able to offer 

state-of-the-art services to the 

community while lowering costs and 

improving care. An association that 

represents urologists stated that state-ofthe-art equipment made available by 

physician-owned companies fills the 

critical gap between what advances the 

latest technology can offer and what 

hospitals can afford. 

Response: With respect to the 

commenters’ assertions that physicians 

are willing to take risks in bringing 

services to communities and that 

hospitals are risk averse, to the extent 

that this is true, it begs the question of 

whether physicians are less concerned 

about risk because they can control the 

referral stream and whether hospitals 

are more concerned about risk because 

they fear that referrals will go to their 

competitors if they do not enter into 

contractual arrangements with 

physician groups. We believe that the 

proposal as finalized will create a more 

level playing field between hospitals 

and physicians and also among hospital 

competitors. We note that, although 

many of the physician commenters 

emphasized the benefits to hospitals of 

contracting with physician groups to 

provide services ‘‘under arrangements,’’

the hospital associations and hospitals 

that commented on the proposal 

generally did not support this view. 

9. Cardiac Catheterization and 

Personally Performed Services 

Comment: Several commenters 

stressed the efficiency and quality of 

services offered by their joint ventures 

with hospitals for the provision of 

cardiac catheterization services. Some 

commenters stated that the vast bulk of 

the services provided to the hospital are 

based on flat fees for specific categories 

of services, which include the full costs 

for these services, and thus, the joint 

venture assumes the risk of all costs of 

providing the services. They further 

stated that the agreed-upon fees are 

reviewed periodically by a third-party 

valuation company to ensure that the 

fees are at fair market value. Other 

commenters stated that the physicians 

can provide the service at a lower cost 

than the hospital, that the physicians 

desire a greater level of clinical 

excellence by becoming more involved 

in the management of the service, and 

the service is not a priority for the 

hospital but is a priority for the 

physicians. 

Several commenters stated that the 

proposed rule made no attempt to 

distinguish under arrangement services 

involving personally performed services 

as opposed to other services. Another 

commenter stated that if services such 

as cardiac catheterizations or outpatient 

surgery were performed in an ASC or 

physician’s practice, they would not 

qualify as DHS and therefore would not 

be subject to the physician self-referral 

law. Commenters recommended that we 

should clarify that these services 

constitute personally performed services 

excepted from the definition of 

‘‘referral’’ or exclude these types of 

service providers from the definition of 

‘‘entity.’’

Response: This final rule does not 

prohibit physician group practices and 

other physician organizations from 

furnishing cardiac catheterization 


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services. Where a group practice or 

other physician organization provides 

the service and bills for it, the service 

is not DHS and the physician selfreferral statute will not apply. Where a 

group practice or other physician 

organization provides the service and, 

pursuant to a contractual arrangement, a 

hospital bills for it as an outpatient or 

inpatient service, the service is DHS and 

therefore the group practice or other 

physician organization would be a DHS 

entity with respect to that service. If the 

referral to the group practice or other 

physician organization is made by a 

physician owner/investor, an ownership 

exception would be needed to protect 

the referral. If the referral is made by a 

non-owner/investor physician who has 

a compensation relationship with the 

group practice or other physician 

organization (that is a physician 

employee or contractor), a 

compensation exception would be 

needed to protect the referral. The 

definition of ‘‘referral’’ at § 411.351 

excepts services that are personally 

performed by the referring physician. 

Note that the definition of ‘‘referral’’

states that DHS is not personally 

performed or provided by the referring 

physician if it is performed or provided 

by any other person, including, but not 

limited to, the referring physician’s 

employees, independent contractors, or 

group practice members. (Note also that 

if there is a technical component to a 

service or a facility fee, that is billed by 

a provider ‘‘under arrangements,’’ the 

fact that the referring physician 

performs the professional component, 

and thus there is no ‘‘referral’’ for the 

professional component, does not alter 

the fact that there is a ‘‘referral’’ for the 

TC or the facility fee.) 

10. Lithotripsy and Therapeutic Versus 

Diagnostic Procedures 

Comment: Several commenters stated 

that, because we do not consider 

lithotripsy to be a DHS because of the 

district court decision of Am. 

Lithotripsy Soc. v. Thompson, 215 F. 

Supp. 2d 23 (D.D.C. 2002), they cannot 

be deemed to be performing DHS or 

causing a claim to be submitted when 

performing lithotripsy procedures. 

Some commenters stated that because 

the American Lithotripsy Society case 

held that lithotripsy is not DHS, 

common sense would dictate that other 

therapeutic procedures performed by 

urologists would also not be DHS. Other 

commenters requested that we clarify 

that lithotripsy would not be subject to 

the proposal. Another commenter stated 

that, generally, the physician who refers 

a patient for lithotripsy is the same 

physician who performs the service. 

Response: We presently do not 

consider lithotripsy to be a DHS, 

regardless of whether it is performed by 

a physician-owned service provider and 

billed by that provider, or whether it is 

sold by such a provider to a hospital 

that bills for it. Because the American 

Lithotripsy Society case was limited to 

lithotripsy, we see no reason to except 

other therapeutic services from being 

DHS if they are billed by a hospital as 

outpatient or inpatient hospital services. 

As noted in the response to the previous 

comment, the definition of ‘‘referral’’

excepts services that are personally 

performed by the referring physician. 

Comment: Many urologists asserted 

that, unlike diagnostic testing, 

lithotripsy and other urological 

procedures, such as BPH, do not present 

a risk of overutilization because they are 

therapeutic procedures. For example, 

the presence of kidney stones can be 

objectively determined, therefore 

lithotripsy is only used when needed by 

the patient. One commenter said that it 

is quite clear that if a patient does not 

have a stone, lithotripsy would not be 

appropriate. Another commenter said 

that urology joint ventures are not 

amenable to abuse unless fraud is being 

perpetrated. One commenter stated that, 

in 1992, Florida studied therapeutic 

versus diagnostic services and 

concluded that there was no 

overutilization where physicians have 

ownership in and render therapeutic 

services. Other commenters said that 

there has been no objective proof of 

overutilization of lithotripsy and other 

therapeutic urologic procedures. One 

commenter stated that because the 

procedure is done in a hospital, there is 

additional scrutiny, including peer 

review, which guards against 

overutilization. An organization whose 

members form joint ventures with 

urologists stated that our perspective is 

overly cynical. This organization 

asserted that in the late 1990s many of 

the urologists who formed joint ventures 

to purchase first generation TUMT units 

came to realize that the older surgical 

approach for BPH was better for most of 

their patients and therefore did not use 

the TUMT partnership equipment 

despite their financial investment, and 

as a result, the joint ventures failed. The 

commenter also stated that, despite the 

fact that laser ventures are only 

minimally profitable, urologists are 

willing to invest in newer equipment to 

more effectively treat their patients. 

Finally, the commenter stated that, 

although a significant number of its 

members purchased one type of laser, 

they purchased newer and more 

expensive higher-powered lasers, 

despite having a significant investment 

in the older model, despite still owing 

money on loans for the older model, and 

despite being advised that there was no 

resale market for the older model. 

Response: As stated above, we believe 

that the Congress intended that an entity 

that performs services that are billed as 

DHS is a DHS entity, irrespective of 

whether it or some other entity does the 

billing for the services. The Congress 

did not provide for a general ownership 

exception for therapeutic procedures. 

Inpatient and outpatient hospital 

services are DHS, and thus subject to the 

general prohibition on ownership/ 

investment interests in a DHS facility, 

regardless of whether the service is 

surgical or medical, or therapeutic or 

diagnostic. Although we do not doubt 

that the great majority of physicians are 

honest and honorable, the profit 

potential inherent in self-referral can 

corrupt medical decision-making both 

through deliberate and less-conscious 

behavior. In a self-disclosure case, a 

hospital agreed to pay $270,000 to 

maintain its existing compliance 

program and to undertake certain 

integrity obligations for a three-year 

period to resolve its liability under the 

CMP provisions applicable to kickbacks. 

The OIG alleged that the hospital 

entered into a series of contracts with an 

entity owned by urologists under which 

the hospital paid the entity in excess of 

fair market value for the lease of a 

lithotripter and contracted lithotripsy 

services. The OIG alleged that the 

hospital’s payments were made to 

induce Federal healthcare program 

referrals from the urologists who owned 

the lithotripsy entity. 

In an example of overutilized 

therapeutic treatments, we note that a 

large hospital system settled a case 

against several of their physicians who 

were accused of performing unnecessary 

cardiac surgeries. Federal officials 

alleged that the physicians entered a 

scheme to cause patients to undergo 

unneeded, invasive, cardiac procedures 

such as artery bypass and heart valve 

replacement surgeries. The hospital 

system agreed to pay $54 million to 

settle the Federal case. 

We are also mindful of the comments 

we received on this proposal, our 

proposal on ‘‘per-click’’ lease payments, 

and our solicitation of comments on the 

in-office ancillary services exception, 

that self-referral of therapeutic 

procedures is abusive at times, because 

patients are being steered to one type of 

procedure when another procedure may 

be more appropriate or less costly, and 

because in some cases it is appropriate 

that patients have no procedure at all. 


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Comment: Several commenters stated 

that the proposal would ban legitimate 

physician joint ventures from 

contracting with hospitals to provide 

therapeutic services that are DHS only 

because they are performed in a hospital 

setting. According to the commenters, 

such therapeutic procedures include a 

variety of laser procedures for benign 

prostate disease and cryotherapy for 

cancer of the prostate. Some 

commenters asserted that we want to 

ban services furnished ‘‘under 

arrangements’’ because it has heard of 

questionable diagnostic imaging 

arrangements. Commenters further 

argued that the Congress made 

diagnostic imaging DHS regardless of 

the setting in which the imaging is 

performed, due to overutilization and 

improper referrals as identified in 

studies, and that we do not identify any 

overuse of, or improper referrals for, 

other services, such as laser services or 

other urological procedures. According 

to some commenters, simple fairness 

dictates that the proposal should not 

apply to services that are not DHS if 

they are not furnished in a hospital. 

Other commenters stated that it would 

be helpful if we excepted other 

procedures that are not DHS when not 

performed ‘‘under arrangements’’ from 

the proposed changes. One commenter 

stated that the applicable physician 

referral triggering the physician selfreferral law is the referral for inpatient 

and outpatient hospital services. 

According to the commenter, inherent 

in this logic is that the hospital is the 

entity furnishing DHS, which contrasts 

with the proposed rule that attempts to 

invoke physician self-referral law 

jurisdiction on the ‘‘under 

arrangements’’ service provider by 

declaring it is an entity furnishing DHS. 

Response: As discussed above, we 

believe that a more reasonable, (and 

perhaps the better), reading of the 

statute is that an entity that performs 

DHS is a DHS entity, as is the entity that 

submits the claim for the DHS (which 

continues under our regulations to be 

treated as an entity that has furnished 

the DHS). Also as discussed above, we 

have program integrity concerns relating 

to services provided ‘‘under 

arrangements’’, and these concerns are 

not limited to diagnostic imaging. We 

disagree that it is unfair that an entity 

that performs services should be 

considered to have performed DHS if 

those services are billed as outpatient or 

inpatient hospital services. Where an 

entity performs services that are billed 

as DHS, we believe that it is appropriate 

and consistent with Congressional 

intent to consider the entity to have 

furnished DHS and to be a DHS entity 

with respect to such services. 

11. Professional Fee Greater Than 

Incremental Return for Technical 

Component 

Comment: Several urologists and a 

law firm representing urologists stated 

that when urologists refer patients for 

therapeutic procedures that the 

urologists perform, the fee the urologist 

receives for performing the professional 

component of the procedure is greater 

than the incremental increase in the 

profit distribution to the urologist as a 

result of his or her participation in the 

joint venture. Therefore, the 

commenters maintained, the referring 

physician is not likely to be induced to 

refer based on the portion of the 

technical fee he or she will earn in 

distributions from the investment, and, 

accordingly, we should not prohibit 

services to be furnished ‘‘under 

arrangements’’ where the investor 

physician performs the professional 

portion of the procedure. An association 

whose members form joint ventures 

with urologists offered similar 

comments and stated further that 

underlying the proposal is our sense 

that surgeons in general, and urologists 

in particular, recommend a particular 

surgical procedure based on the 

professional fee they will receive rather 

than because the patient needs the 

procedure. 

Response: The arguments raised by 

the commenters would seem to be 

applicable to physician ownership in 

any DHS entity, including those that bill 

Medicare, yet Congress did not except 

professional fees for ownership/ 

investment interests in DHS entities. In 

the Phase I rule, we stated that creating 

an exception for implants furnished in 

an ASC would not increase the risk of 

overutilization beyond what is already 

presented by the surgeon’s professional 

fee and was consistent with Congress’s 

decision not to include ASC services as 

a specific DHS. However, we noted 

there that in creating the exception we 

were motivated by our desire not to 

cause a site of service shift for implants 

to the more expensive setting of hospital 

outpatient services, and we specifically 

declined to allow the exception for 

implants in a setting other than an ASC 

(66 FR 934). In contrast, services 

provided ‘‘under arrangements’’ by a 

hospital are, by definition, billed at the 

outpatient or inpatient rate. 

12. Existing Exceptions Are Sufficient 

Protection 

Comment: Several commenters said 

that it is not necessary to adopt the 

proposal and revise the definition of 

‘‘entity’’ because the existing 

protections in our physician self-referral 

rules and the anti-kickback safe harbors 

are adequate. Some of these commenters 

pointed specifically to the indirect 

compensation exception at § 411.357(p). 

One commenter stated that the indirect 

compensation exception strikes an 

appropriate balance between permitting 

physician investment in entities that do 

business with hospitals and ensuring 

that physician-owned businesses are not 

overpaid by hospitals and other DHS 

entities to which they refer. Another 

commenter said that any profit a 

referring physician could make through 

his ownership of the entity that 

provides DHS to an entity that bills for 

the DHS would be limited to fair market 

value under the current physician selfreferral exceptions, as well as under the 

anti-kickback statute. 

Response: For the reasons explained 

above, we believe that under the statute, 

an entity that performs a service and 

contracts with a hospital or other 

provider in order for the hospital or 

other provider to furnish the services as 

DHS ‘‘under arrangements,’’ is properly 

considered a DHS entity. The statute 

requires referrals from a physician who 

has (or whose immediate family 

member has) an ownership/investment 

interest in a DHS entity to be protected 

by an ownership exception. In addition, 

we note that some of the protections 

contained in the compensation 

exceptions, such as the requirement that 

the compensation be at fair market value 

and not determined on the basis of the 

volume or value of referrals, would not 

provide protection against 

overutilization or anti-competitive 

behavior caused by inappropriate 

referrals from physician owners. The 

potential for overutilization or anticompetitive behavior that exists where a 

physician refers patients for DHS to an 

entity in which he or she has an 

ownership/investment interest and 

which perform DHS under contract for 

a hospital or other provider occurs 

because of the returns on investment 

such physician stands to earn, 

regardless of whether the physician also 

has a compensation arrangement with 

the hospital that is at fair market value. 

Commenter: A commenter agreed that 

the proposed rule identified a number of 

potentially abusive arrangements, but 

said such troubling arrangements clearly 

violate the existing physician selfreferral rules, the anti-kickback statute 

or our ‘‘under arrangement’’ payment 

rules. The commenter further stated 

that, because the proposed rule fails to 

identify any loopholes that need to be 

closed, we should enforce the physician 

self-referral rules and not create more 


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regulations. With respect to the 

physician self-referral rules, the 

commenter stated that the most 

applicable exception is the fair market 

value exception. The commenter noted 

that, to be in compliance with that 

exception, the arrangement must, among 

other things, be commercially 

reasonable but for referrals, with the 

compensation consistent with fair 

market value, and the arrangements 

described in the proposed rule fail these 

tests. With respect to the anti-kickback 

statute, the commenter acknowledged 

that determining whether there is a 

violation of that statute is difficult and 

fact-intensive, but asserted that the 

arrangements described in the proposed 

rule would likely be investigated by the 

OIG and the Department of Justice as 

they appear to be driven by referrals 

without any bona fide clinical reasons. 

Response: With respect to the 

comment that the arrangements 

described in the proposed rule 

necessarily violate the existing 

physician self-referral rules, the antikickback statute or our ‘‘under 

arrangement’’ payment rules, we do not 

agree. We did not suggest in the 

proposed rule that the compensation 

relationship between physician-owned 

service providers and hospitals are not 

at fair market value, or that they violate 

the anti-kickback statute. To the 

contrary, we assume that in the great 

majority of cases the compensation 

relationships between physicians and 

hospitals or other providers are at fair 

market value, and again, the fact that a 

compensation interest is at fair market 

value does not address the Congress’s 

general prohibition on physician 

ownership in DHS entities and the 

potential for abuse that exists through 

the returns on equity. Likewise, we 

assume that the great majority of 

arrangements between physicians and 

hospitals or other providers do not 

involve illegal kickback schemes. Also, 

irrespective of whether the 

arrangements described in the proposed 

rule could violate the anti-kickback 

statute (and we express no opinion on 

the matter), we would be abrogating our 

statutory authority under the physician 

self-referral statute if we were to refrain 

from attempting to regulate what we see 

are potentially abusive arrangements 

simply because we might believe that 

the government might be able to prove 

that certain conduct violates the antikickback statute. 

13. Differences in Payment For Services 

Rendered in Hospital Setting Versus 

Payment for Same Services in ASC 

Setting 

Comment: Two commenters stated 

that the proposal was inconsistent with 

the legislative intent to allow physicians 

to refer patients to ASCs in which they 

have ownership or investment interests, 

which is allowed based on the evidence 

that surgical cases are by nature not 

subject to unnecessary referrals. A third 

commenter said that several urologic 

procedures such as lithotripsy, green 

light photo vaporization of the prostate, 

and cryotherapeutic ablation of the 

prostate can be easily, safely and more 

cost effectively performed on an 

outpatient basis in an ASC, yet 

inequities in the present reimbursement 

rules make it cost prohibitive to perform 

these procedures in an ASC, and thus 

they must be performed in a hospital 

setting. In addition, the commenter 

stated, hospitals encourage a one-day 

stay for cryotherapeutic ablation of the 

prostate patients, because outpatient 

PPS reimbursement is not sufficient to 

cover the cost of the procedure. A fourth 

commenter, an association that 

represents urologists, stated that 

therapeutic services provided ‘‘under 

arrangements’’ can be provided only in 

the hospital or a provider-based 

department of a hospital, and therefore, 

our concern that patients are receiving 

services in a less medically-intensive 

setting than a hospital is misplaced with 

respect to therapeutic services. 

Response: In the Phase I rule we 

agreed that prosthetic devices implanted 

in a Medicare-certified ASC by the 

referring physician or a member of the 

referring physician’s group practice 

should be protected. We stated that we 

were taking this position because 

implanted prosthetic devices, implanted 

prosthetics and implanted DME are not 

included in the bundled ASC payment 

rate (and thus would not fall under the 

exception to the definition of DHS for 

items paid under a composite rate such 

as the ASC payment rate), and that, as 

a practical matter, the absence of an 

exception for these items implanted in 

an ASC was likely to result in these 

procedures moving to more costly 

outpatient settings (66 FR 934). As we 

noted in the proposed rule, we are 

concerned that services that are 

relatively less resource intensive are 

being furnished ‘‘under arrangements’’

in order to secure higher 

reimbursement. The third commenter, 

although opposed to the proposal, 

reinforced this concern through its 

statements. We believe that the 

reimbursement under the ASC payment 

system is fair and adequate, and that it 

is inappropriate for us to provide an 

incentive to game the system by 

allowing self-referral for services 

furnished through an ‘‘under 

arrangements’’ contract with a hospital 

that otherwise would be safely and 

effectively performed in an ASC or 

similar setting. Likewise, we do not 

believe it is appropriate for hospitals to 

admit a patient, in order to gain the 

higher inpatient reimbursement, for a 

procedure than can be safely and 

effectively performed on an outpatient 

basis. The fourth commenter is correct 

that, under § 410.27 of our regulations, 

therapeutic procedures (urologic or 

otherwise) that are furnished ‘‘under 

arrangements’’ by a hospital must be 

performed in the hospital or in space 

that we designate as a department of a 

hospital. 

14. Exceptions to Definition of DHS 

Entity 

Comment: Several commenters stated 

that if we were to adopt the proposal it 

should create one or more exceptions, 

so that not all physician-owned service 

entities are considered DHS entities. 

Two commenters stated that we should 

craft an exception for DHS that are 

furnished by a physician-owned entity, 

where the DHS involve a technology 

that requires a considerable capital 

investment and where the risk of 

overutilization is minimal because the 

number of patients to be treated with 

the technology is relatively small. One 

of these commenters stated that the 

exception could be narrowed further by 

requiring the technology or service to be 

used in the treatment of a serious or lifethreatening illness or injury. Another 

commenter urged us to institute a 

degree of materiality into the existing 

‘‘under arrangements’’ payment rules, 

rather than revise the definition of 

‘‘entity.’’ The commenter stated that, for 

example, we could require that if some 

material portion of the service (perhaps 

50 percent) is outsourced to a provider 

in a less intensive setting, the hospital 

will be reimbursed at a reduced rate for 

the service rather than the higher 

provider-based rate. Another commenter 

suggested that if we adopt the proposal 

we should either prohibit physicians 

from owning or operating certain 

ancillary service providers, thereby 

ensuring sufficient demand for the 

hospital service, or devise an exception 

that will allow hospitals and physicians 

to provide services to their respective 

patients on a cost-sharing basis. 

Another commenter recommended an 

exception for high cost, low volume 

procedures such as lithotripsy, dialysis, 

radiation therapy, and cardiac 


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catheterization labs. This commenter 

pointed out that in 2001–2003, 60.6 

percent of stable angina patients who 

received cardiac catheterization 

immediately underwent a percutaneous 

coronary intervention. Another 

commenter stated that we should 

consider applying the proposal only to 

entities that provide services ‘‘under 

arrangements’’ for a fixed fee that does 

not vary based on the volume of services 

provided. 

One commenter stated that although it 

would be desirable to carve out an 

exception to the proposed definition in 

the case of arms-length transactions in 

areas that are underserved, in practice, 

if a physician owns any part of an entity 

(other than a publicly traded entity) that 

provides products or services to a 

facility, he or she will benefit from 

referrals. 

Response: As noted above, we are 

finalizing the proposal in part because 

we believe the better reading of the 

statute is that an entity that performs 

services that are billed as DHS is a DHS 

entity, as is the entity that submits the 

claim for the DHS (which continues 

under our regulations to be treated as an 

entity that has furnished the DHS. Also 

as noted above, we are delaying the date 

of applicability for revised § 411.351 

until October 1, 2009 because we wish 

to give parties time to restructure 

arrangements if necessary. We have 

authority under section 1877(b)(4) of the 

Act to create exceptions in addition to 

those specified in the statute only where 

we conclude there is no risk of program 

or patient abuse. We are not establishing 

an ownership exception for ownership/ 

investment interests in one or more 

types of physician-owned service 

providers because we do not have 

sufficient information to persuade us 

that such an exception is necessary or 

to allow us to craft appropriate 

conditions for such an exception. In any 

event, if we were to create such an 

exception at this time we might be 

proceeding outside the scope of the 

proposed rulemaking. We welcome 

comments on whether we should create 

such an exception, and if so, what 

conditions for the exception should be 

included. We may issue a proposed 

rulemaking for such an exception in the 

future. 

15. Outpatient Services Treated 

Differently Than Inpatient Services 

Comment: Commenters stated that, in 

several places, the proposal expressed a 

higher level of concern about the 

incentives inherent with arranged-for 

outpatient hospital services than with 

respect to inpatient hospital services. 

The commenters inferred that we might 

decide to regulate such outpatient 

hospital services differently from 

inpatient services, and that any 

differentiation would be misguided. 

Response: The final rule makes no 

distinction between outpatient and 

inpatient hospital services. If an entity 

performs services that, pursuant to a 

contractual arrangement with a hospital 

or other provider, are ultimately billed 

as DHS, the entity will be considered to 

have furnished DHS, regardless of 

whether the services are billed as 

outpatient hospital services, inpatient 

hospital services, or some other category 

of DHS. 

16. Miscellaneous Services 

Comment: One commenter stated that 

the proposal would require a large 

number of sleep centers to restructure or 

unwind their ‘‘under arrangements’’

joint ventures, which would create a 

patient access problem. 

Response: Services performed at 

freestanding sleep centers generally are 

not DHS. Therefore, to the extent that 

sleep centers wish to perform sleep 

study services as well as bill for them, 

the physician self-referral statute will 

not be implicated. However, if the 

services are sold to a hospital for the 

hospital to bill for them as hospital 

services, the services will be DHS, 

because Congress included all inpatient 

and outpatient hospital services as DHS, 

and referrals from physician owners/ 

investors in a sleep center will need to 

be protected by an ownership exception. 

As noted above, referrals from nonowner/investor physicians to a 

physician-owned service provider 

should be able to fit within a 

compensation exception. Also as 

discussed above, we believe that most 

services currently performed by a 

physician-owned service provider but 

sold to a hospital could continue to be 

performed by the physician-owned 

service provider and billed by that 

provider. In this regard, we note that the 

commenter provided no explanation as 

to why it believes that the final rule will 

create an access problem for patients in 

need of sleep studies. 

Comment: One commenter stated that, 

in many rural areas, hospitals do not 

have either the technical or financial 

ability to provide dialysis services, 

especially if the need is only 

intermittent or involves a small number 

of patients, and that such hospitals need 

to be able to provide dialysis services to 

inpatients. The commenter further 

stated that because hospitals lose money 

on inpatient care furnished to ESRD 

patients, a hospital would not maintain 

a dialysis service simply to encourage 

admissions of ESRD patients, and that it 

is difficult to overutilize dialysis 

because the need for dialysis is very 

well defined. 

Response: The physician self-referral 

statute applies only to referrals for DHS. 

One category of DHS is inpatient 

hospital services. However, the 

definition of inpatient hospital services 

at § 411.351 excludes dialysis furnished 

by a hospital that is not certified to 

provide ESRD services under subpart U 

of 42 CFR part 405. We believe the 

exclusion addresses the commenter’s 

concerns. 

17. Effective Date 

Comment: One commenter stated that 

the proposal, if adopted, would result in 

a significant restructuring of a number 

of arrangements currently in effect and 

would have a significant impact on both 

DHS providers and physicians. Another 

commenter stated that it would be 

unfair for us to reverse our position after 

years of reliance on it by the industry 

and that it would require the unwinding 

and dissolution of numerous 

arrangements that have heretofore 

constituted lawful co-ownership of nonDHS entities. A national hospital 

association, while supporting our 

proposal, urged us to consider a phasein of any changes, which would permit 

the termination or restructuring of 

existing relationships and arrangements 

before absolute compliance is triggered. 

Three commenters asked that we 

grandfather all arrangements existing at 

the time the proposed rule was 

published, because it would be unfair to 

apply the changes ‘‘retroactively.’’

Response: We are providing a delayed 

effective date until October 1, 2009. We 

are interested in receiving comments on 

whether we should create any exception 

for physician ownership/investment 

interests in physician service providers, 

and if so, what conditions the exception 

should contain, for consideration in any 

future rulemaking. We are not 

grandfathering existing arrangements 

because we believe it is inconsistent 

with the statute to treat an entity that 

performs DHS as something other than 

a DHS entity. 

H. Exceptions for Obstetrical 

Malpractice Insurance Subsidies 

In Phase II, we rejected the wholesale 

importation of the anti-kickback statute 

safe harbors into the physician selfreferral law exceptions, but, using our 

authority under section 1877(b)(4) of the 

Act, we determined that exceptions for 

referral services and obstetrical 

malpractice insurance subsidies could 

be established by incorporating the 

corresponding safe harbors in 

§ 1001.952(f) and (o), respectively (69 


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48734 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

FR 16115, 16141). Accordingly, we 

created a new exception in § 411.357(r) 

for arrangements involving the 

provision of obstetrical malpractice 

insurance subsidies that complied with 

the anti-kickback statute safe harbor for 

such arrangements. In response to Phase 

II, we received a comment asserting that 

the exception in § 411.357(r) is too 

narrow. The commenter noted that even 

an agreement that received a favorable 

advisory opinion from OIG, despite not 

fitting within the safe harbor, would fail 

to satisfy the requirements of 

§ 411.357(r) and, thus, would be 

prohibited under the physician selfreferral law. 

Our conclusion in Phase II that the 

wholesale importation of safe harbors 

would be problematic was based, in 

part, on our recognition that the antikickback statute safe harbors and the 

physician self-referral law exceptions 

appropriately diverge in some instances 

for reasons attributable to the difference 

in the scope of the statutes, core 

prohibited conduct, or liability 

standards (69 FR 16115). We continue to 

believe that differences in the antikickback and physician self-referral 

regulatory schemes are appropriate and 

sometimes necessary. We further believe 

that, upon revisiting the exception in 

§ 411.357(r) and reviewing the 

comments received in response to our 

proposal in the CY 2008 PFS proposed 

rule, the physician self-referral law 

exception need not incorporate by 

reference without modification the safe 

harbor in § 1001.952(o) in order to 

provide adequate protection against 

program and patient abuse. 

In the CY 2008 PFS proposed rule, we 

expressed concern that the current 

exception for obstetrical malpractice 

insurance subsidies may be too narrow, 

and proposed revising the exception in 

§ 411.357(r) to list specifically the 

conditions that we believe are 

appropriate to safeguard against 

program or patient abuse when 

remuneration is provided by a hospital 

to a physician in the form of an 

obstetrical malpractice insurance 

subsidy (72 FR 38182). As with the 

Phase III revisions to the exceptions for 

retention payments and physician 

recruitment noted above, concern 

regarding beneficiary access to services 

was a significant basis for our proposal. 

We requested comments regarding 

barriers to patient access to obstetrical 

care in communities in which 

obstetrical malpractice insurance 

premiums are relatively high. We also 

requested recommendations for revising 

the exception without creating a risk of 

program or patient abuse. 

We received 14 comment letters in 

response to our proposal to revise the 

exception in § 411.357(r) for obstetrical 

malpractice insurance subsidies. All 

commenters agreed with the concerns 

that we expressed in the CY 2008 PFS 

proposed rule that the current exception 

for obstetrical malpractice insurance 

subsidies is unnecessarily restrictive. 

Many commenters stated that the 

existing exception is unlikely to have 

the effect of increasing access to 

obstetrical care. Commenters generally 

supported revisions to the exception, 

and offered various suggestions for 

requirements we might include in a 

revised exception. 

After consideration of the public 

comments received, in this final rule we 

are revising § 411.357(r) to (1) retain the 

provisions of the current exception 

(renumbered as § 411.357(r)(1)); and (2) 

provide an alternative set of 

requirements under which hospitals, 

federally qualified health centers, and 

rural health clinics (but not other 

entities) may provide obstetrical 

malpractice insurance subsidies (new 

§ 411.357(r)(2)). We believe that the 

provisions in new § 411.357(r)(2) will 

reduce perceived obstacles to 

maintaining or improving patient access 

to needed obstetrical services by 

providing flexibility for the provision to 

qualifying physicians of obstetrical 

malpractice insurance subsidies. New 

§ 411.357(r)(2) allows hospitals, 

federally qualified health centers, and 

rural health clinics to provide an 

obstetrical malpractice insurance 

subsidy to a physician who regularly 

engages in obstetrical practice as a 

routine part of a medical practice that is: 

(1) Located in a primary care HPSA, 

rural area, or area with a demonstrated 

need, as determined by the Secretary in 

an advisory opinion; or (2) is comprised 

of patients at least 75 percent of whom 

reside in a medically underserved area 

(MUA) or are part of a medically 

underserved population (MUP). The 

expansion to additional practice 

locations and patient populations is 

found also in the requirements 

regarding the composition of the patient 

population treated by the physician 

under the coverage of the malpractice 

insurance and the determination of 

‘‘costs of malpractice insurance 

premiums.’’ Where possible, we 

maintain parallel structure and 

conditions in the exceptions to the 

physician self-referral law. In Phase III, 

we similarly revised the exception for 

retention payments in underserved 

areas in § 411.357(t) to incorporate 

criteria that are based on the patient 

population served by the physician 

receiving the retention payment, rather 

than focusing the requirements of the 

exception solely on the location of the 

hospital making the retention payment 

(72 FR 51065 through 51068). Our 

concerns regarding beneficiary access to 

services was a significant basis for this 

revision, as well as for the revisions to 

the exception for physician recruitment 

in § 411.357(e) with respect to the 

allocation of certain costs where a 

physician is recruited into a practice in 

a rural area or HPSA to replace a retired, 

relocated, or deceased physician (72 FR 

51047 through 51054). 

We are not revising the exception to 

adopt only the provisions in new 

§ 411.357(r)(2) and to discard the 

provisions of the current exception, 

because the current exception, through 

its incorporation of § 1001.952(o), 

applies to subsidies provided by a 

‘‘hospital or other entity,’’ and we did 

not propose in the CY 2008 PFS 

proposed rule to limit the types of 

entities that may provide subsidies 

under the exception. On the other hand, 

we are unwilling to extend the 

provisions in new § 411.357(r)(2) to 

entities beyond hospitals, federally 

qualified health centers, and rural 

health clinics, because we are not 

persuaded that, if we did so, there 

would be no risk of program or patient 

abuse (as required under section 

1877(b)(4) of the Act for new exceptions 

or modifications to existing exceptions). 

(We note that, although the provisions 

of new § 411.357(r)(2) apply to 

hospitals, federally qualified health 

centers, and rural health clinics, for ease 

of reference and readability, we refer 

throughout the discussion below to all 

three types of entities as ‘‘hospitals.’’) 

Finally, our revisions to the exception 

in § 411.357(r) for obstetrical 

malpractice insurance subsidies should 

not be construed as having any effect on 

the safe harbor under the anti-kickback 

statute for obstetrical malpractice 

insurance subsidies in § 1001.952(o), 

nor as a commentary on what we 

believe is or is not permitted under the 

anti-kickback statute. We discuss below 

the specific comments that we received 

in response to our proposal in the CY 

2008 PFS proposed rule. 

Comment: Several commenters 

asserted that conditioning the 

availability of an obstetrical malpractice 

insurance subsidy on the location of the 

physician’s medical practice in a 

primary care HPSA disadvantages 

patients. Numerous commenters 

questioned the link between a hospital’s 

ability to provide an obstetrical 

malpractice insurance subsidy and the 

lack of primary care physicians in a 

particular area. (The exception in 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48735 

§ 411.357(r), by incorporating 

§ 1001.952(o), requires that the 

physician’s medical practice be located 

in a primary care HPSA.) These 

commenters noted that a community 

may be underserved with respect to 

obstetrical services, even if it is not 

underserved with respect to primary 

care services; in fact, an increase in 

primary care physicians in an area 

could cause the area to lose its HPSA 

designation, despite no corresponding 

increase in obstetrical services. Many of 

the commenters suggested that the 

exception should condition a hospital’s 

ability to provide an obstetrical 

malpractice insurance subsidy on the 

location of the physician’s practice in an 

area that has a shortage of obstetrical 

services. One commenter provided 

possible criteria for determining 

whether an area is an ‘‘obstetrician 

shortage area.’’

Response: We agree generally with the 

commenters that asserted that, rather 

than be restricted to providing 

obstetrical malpractice insurance 

subsidies only in situations where the 

physician’s practice is located in a 

primary care HPSA, a hospital should 

be able to provide a subsidy to 

physicians who serve underserved areas 

or patient populations. We share the 

commenters’ concern that an increase in 

primary care physicians in an area 

could cause the area to lose its HPSA 

designation, thus making all physicians 

in the area ineligible to receive a needed 

obstetrical malpractice insurance 

subsidy. However, we continue to 

believe that designation as a primary 

care HPSA is one appropriate way to 

establish need for additional obstetrical 

patient care services, because obstetrics 

is one of the specialties included by 

HRSA in its determination regarding 

whether an area should be designated as 

a primary care HPSA (together with 

general family practice, general internal 

medicine, pediatrics, and gynecology). 

In this final rule, we provide greater 

flexibility for hospitals (and federally 

qualified health centers and rural health 

clinics, as discussed above) to facilitate 

continued patient access to obstetrical 

patient care services through the 

provision of needed obstetrical 

malpractice insurance subsidies. Under 

new § 411.357(r)(2), a physician who 

engages in obstetrical practice as a 

routine part of his or her medical 

practice will be eligible for receipt of an 

obstetrical malpractice insurance 

subsidy if his or her medical practice is: 

(1) Located in a primary care HPSA, a 

rural area, or an area with demonstrated 

need for the physician’s obstetrical 

services, as determined by the Secretary 

in an advisory opinion; or (2) is 

comprised of patients, at least 75 

percent of whom reside in a MUA or are 

members of a MUP. We are not adopting 

the commenter’s suggestion that we 

adopt a definition for ‘‘obstetrician 

shortage area’’ and permit the provision 

of obstetrical malpractice insurance 

subsidies in such an area. We believe 

that it would be difficult to define 

‘‘obstetrician shortage area’’ (and 

maintain updates to the definition), and 

that our policy as finalized here affords 

sufficient flexibility for physicians and 

for hospitals, federally qualified health 

centers, and rural health clinics. 

Comment: Two commenters suggested 

that we remove all requirements in the 

exception relating to the location of the 

physician practice receiving the 

subsidy. Three commenters suggested 

that we impose no limitations at all on 

the location of the hospital providing 

the obstetrical malpractice insurance 

subsidy. Another commenter suggested 

that the exception permit obstetrical 

malpractice insurance subsidies where 

there is no other facility to which the 

physician receiving the subsidy could 

refer his or her obstetrical patients. 

Response: We agree with the 

commenters with respect to not 

including requirements for the location 

of the hospital making the obstetrical 

malpractice insurance subsidy payment, 

but disagree with the commenters that 

a practice location restriction on the 

eligibility for receipt of an obstetrical 

malpractice insurance subsidy is 

unnecessary or inappropriate. The 

provision of obstetrical malpractice 

insurance (or a contribution towards its 

cost) is a valuable benefit to a physician, 

and we believe that the requirement that 

the physician provide obstetrical 

services in an underserved area (that is, 

a primary care HPSA, rural area, or area 

of designated need) or to an 

underserved population is necessary to 

help ensure that this valuable benefit is 

provided only to maintain or improve 

patient access to needed obstetrical 

services, rather than as an inducement 

for referrals to the hospital providing 

the subsidy. This requirement, in 

combination with the other 

requirements in new § 411.357(r)(2), is 

necessary to satisfy the mandate of 

section 1877(b)(4) of the Act that any 

exception issued using such authority 

pose no risk of program or patient 

abuse. As we described in the previous 

response, although we continue to 

include requirements with respect to the 

location of a physician’s medical 

practice as a determining factor for 

eligibility for receipt of an obstetrical 

malpractice insurance subsidy, we are 

permitting subsidies to physicians who 

provide obstetrical services in medical 

practices located in areas other than a 

primary care HPSA and to patient 

populations that reside in areas other 

than a primary care HPSA. 

We disagree with the commenter that 

advocated permitting obstetrical 

malpractice insurance subsidies to 

physicians where there is no other 

facility to which the physician could 

refer his or her obstetrical patients. We 

believe that the commenter is arguing 

that there is no risk of program or 

patient abuse if a hospital provides an 

obstetrical malpractice insurance 

subsidy payment to a physician who 

would have referred all of his or her 

obstetrical patients to the hospital 

regardless of the existence of the 

subsidy. We do not believe that the risk 

of program or patient abuse is reduced 

merely because the physician would 

have referred his or her obstetrical 

patients to the hospital regardless of the 

subsidy. The subsidy could serve as an 

inducement for referrals to the hospital 

of other DHS. 

Comment: One commenter urged that 

the exception in § 411.357(r) be revised 

to permit a hospital located in a rural 

area to provide an obstetrical 

malpractice insurance subsidy, 

regardless of the location of the 

physician’s medical practice. The 

commenter argued that there would be 

no risk of program or patient abuse if we 

adopt this suggestion given the nature of 

obstetrical services; that is, according to 

the commenter, obstetricians have no 

ability to increase the number of 

deliveries that they perform because the 

volume of deliveries is determined by 

the number of pregnancies in the area, 

and not based on the therapy choice of 

a physician. The commenter contrasted 

this with the risk of program and patient 

abuse in other specialties where a 

physician who wishes to increase his or 

her revenue could do so by increasing 

the number of procedures that he or she 

performs. 

Response: We do not agree necessarily 

with the commenter’s assertion 

regarding the relative risk of program or 

patient abuse between obstetrical 

services and other medical specialties, 

and we decline to adopt the 

commenter’s suggestion. We believe that 

a restriction on the location of the 

hospital providing the obstetrical 

malpractice insurance subsidy, by itself, 

does not guarantee an improvement to 

or the maintenance of access to 

obstetrical services to patients most in 

need of the services. Rather, we believe 

that the location or composition of the 

physician’s medical practice is a better 

indicator of which physicians are 

providing obstetrical services to the 

patient populations we believe would 


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48736 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

be harmed if the physician discontinued 

his or her obstetrical medical practice. 

We continue to require that the location 

or composition of the physician’s 

obstetrical medical practice determine 

the availability of the exception in 

§ 411.357(r), although we have 

expanded the exception to cover 

obstetrical medical practices located in 

rural areas. With respect to the 

commenter’s point that obstetricians 

have no ability to increase the number 

of deliveries that they perform because 

the volume of deliveries is determined 

by the number of pregnancies in the 

area, we reiterate that obstetrical 

malpractice insurance subsidies can 

serve as an inducement for referrals of 

other DHS. 

Comment: Some commenters 

suggested that we revise or eliminate the 

requirement that 75 percent of the 

patients treated under the subsidy 

reside in a HPSA or MUA, or be part of 

a MUP. Two commenters asserted that 

this requirement imposes a substantial 

administrative burden on physicians, as 

the determination of whether a patient 

resides in a HPSA or MUA must be 

completed manually; that is, there is no 

automated, simple way to determine the 

information needed to make the 

certification required in 

§ 1001.952(o)(2), as incorporated by 

reference in § 411.357(r). Moreover, 

according to one of the commenters, 

determining the exact location or 

boundaries of a HPSA is difficult 

because HPSAs are registered by census 

tract with boundaries that are not easily 

defined. According to the other 

commenter, physician practice 

management systems are not configured 

so that the physician can abstract HPSA 

or MUA status from patient records. 

Rather, systems are equipped to capture 

zip code information, not the census 

data that delineate HPSAs and MUAs. 

One commenter suggested that the 

exception require only that a physician 

who receives an obstetrical malpractice 

insurance subsidy from a hospital 

certify initially that his or her medical 

practice is in or near a HPSA, and that 

more than one half of his or her patients 

are expected to reside in a MUA or be 

part of a MUP. This commenter and 

another suggested that certification be 

required less frequently than annually. 

Response: We continue to believe that 

this requirement is necessary to ensure 

that arrangements that satisfy the 

requirements of the exception in 

§ 411.357(r) (whether under renumbered 

§ 411.357(r)(1) or new § 411.357(r)(2)) 

pose no risk of program or patient 

abuse. We understand the commenters’

assertions regarding administrative 

burden. However, particularly in light of 

the expansion of the exception to permit 

the inclusion of patients who live in 

rural areas in the calculation of patients 

treated under the subsidized 

malpractice insurance coverage, we do 

not believe that this requirement is an 

undue burden for a physician where the 

physician is receiving a valuable benefit 

in the form of an obstetrical malpractice 

insurance subsidy. For purposes of 

satisfying the exception under the new 

alternative requirements in 

§ 411.357(r)(2), we are permitting the 

inclusion of patients who reside in a 

rural area when calculating whether at 

least 75 percent of the patients treated 

under the coverage of the subsidized 

malpractice insurance reside in an 

underserved area (that is, a HPSA or 

MUA) or are part of a MUP. We believe 

that doing so adds needed flexibility 

without posing a risk of program or 

patient abuse. We have made no other 

changes to this requirement, however. 

(We note that ‘‘rural area’’ is defined at 

§ 411.351 as an area that is not an urban 

area. ‘‘Urban area’’ is defined at 

§ 412.62(f)(1)(ii) as a Metropolitan 

Statistical Area (MSA) or New England 

County Metropolitan Area (NECMA), as 

defined by the Executive Office of 

Management and Budget (or certain 

New England counties specified in the 

regulation.) Determining whether a 

patient lives in a rural area should be 

simple and not pose an undue 

administrative burden.) Given our 

concerns regarding the maintenance or 

improvement of patient access to 

needed obstetrical services described 

above, we believe that it is important to 

require the continued provision of 

services to the neediest patients in 

exchange for a physician’s receipt of an 

obstetrical malpractice insurance 

subsidy. 

Comment: Several commenters argued 

that the requirement that 75 percent of 

the physician’s obstetrical patients be 

treated under the coverage of the 

malpractice insurance for which the 

subsidy is provided may be too high, 

given the low reimbursement rates for 

obstetrical services and the high cost of 

malpractice insurance. One commenter 

suggested that the obstetrical patient 

treatment requirement be lowered to 25 

percent of the physician’s obstetrical 

patients treated under the coverage of 

the malpractice insurance. 

Response: We disagree with the 

commenters. We believe that requiring 

less than 75 percent of the physician’s 

obstetrical patients to be treated under 

the coverage of the malpractice 

insurance for which the subsidy is 

provided may be insufficient to ensure 

continued access to obstetrical services 

for the neediest patients. We also 

believe that the 75 percent threshold, in 

combination with the other 

requirements of the exception, ensures 

that arrangements protected by the 

exception pose no risk of program or 

patient abuse. 

Comment: Numerous commenters 

urged us to expand the scope of the 

exception in § 411.357(r) to permit 

malpractice insurance subsidies to 

specialties other than obstetrics. The 

commenters’ arguments in support of 

such an expansion include the increase 

in malpractice insurance premiums 

generally; an expansion would be in 

keeping with guidance provided by OIG 

regarding malpractice insurance 

assistance (specifically, OIG’s Letter on 

Hospital Corporation’s Malpractice 

Insurance Assistance Program, its 

Compliance Guidance for Hospitals, and 

OIG Advisory Opinion 04–19); and the 

lack of statutory authority to limit any 

exception to certain medical specialties, 

rural areas, or HPSAs. 

One commenter asserted that, because 

malpractice insurance is unaffordable in 

some geographic locations, some 

physicians practice medicine without 

any professional malpractice insurance 

coverage. According to the commenter, 

this disadvantages patients and other 

providers, because insurers’ costs in 

defending malpractice claims against 

physicians with no insurance coverage 

are passed on disproportionately to 

hospitals (because hospitals are named 

as co-defendants). The commenter 

suggested that we expand the exception 

to include other physician specialties, 

and recommended that the subsidy be 

available only to a physician practicing 

in a particular specialty that is 

identified by an independent third party 

as having a demonstrated shortage of 

physicians practicing in that particular 

specialty in the geographic area served 

by the hospital providing the 

malpractice insurance subsidy. In 

addition, according to the commenter, 

the amount of the subsidy could be 

capped at the amount that the average 

premium for that specialty in the 

hospital’s community exceeds the 

national average for that specialty. The 

commenter suggested further protection 

against program and patient abuse, for 

example, a requirement that hospitals 

not provide malpractice insurance 

subsidies in a targeted, preferential or 

discriminating manner, or in a manner 

that takes into account the volume or 

value of referrals or other business 

generated by the referring physician. 

One commenter suggested that we 

permit a hospital to provide a 

malpractice insurance subsidy to any 

member of the hospital’s medical staff, 

regardless of the physician’s specialty. 


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Another commenter suggested that we 

permit hospitals to provide malpractice 

insurance subsidies to physicians who 

practice in any specialty in a State in 

which malpractice premiums are 

‘‘relatively high,’’ and suggested that we 

could compare the percentage increase 

of malpractice insurance premiums to 

the salary of the average physician in 

that specialty to determine this 

relativity. A different commenter 

suggested that, if we expand the 

exception to cover all medical 

specialties, we could impose a cost 

sharing requirement similar to that 

included in our exception for the 

donation of electronic health records 

items and services in § 411.357(w). 

Response: In Phase III, we addressed 

the issue of our statutory authority to 

limit the exception in § 411.357(r) to 

physician practices in HPSAs (72 FR 

51064). There, we stated: 

Section 1877(b)(4) of the Act allows us to 

create additional exceptions to the general 

prohibition on physician self-referral where 

doing so would not result in a risk of 

program or patient abuse. It does not require 

us, where we exercise such authority, to 

make the additional exceptions available to 

all types of entities and physicians, or make 

them applicable in all areas. The Congress 

and CMS have long recognized the special 

needs and character of rural, urban, and 

underserved areas. Malpractice insurance 

availability in HPSAs poses specific concerns 

not present in other areas and supports a 

targeted exception. 

Our position with respect to limiting 

the exception to physician practices in 

certain identified locations has not 

changed, nor are we persuaded by the 

commenters’ similar argument regarding 

our statutory authority to limit the 

applicability of the exception to 

obstetrical malpractice insurance only 

(rather than to permit subsidies of 

malpractice insurance for all specialties 

or for certain specified medical 

specialties). 

We decline to expand the exception to 

cover the provision of malpractice 

insurance subsidies to physicians 

practicing in other medical specialties, 

as suggested by many of the 

commenters. The commenters did not 

provide us with information indicating 

that, without an expansion of the 

exception, beneficiary access to 

necessary medical services is hindered, 

nor are we independently aware of such 

data. Such information would be 

helpful to ensuring that an expansion of 

the exception to other (or all) medical 

specialties would not pose a risk of 

program or patient abuse. We note also 

that we addressed this issue in Phase III 

in response to a comment urging us to 

expand the exception to all specialties 

and hospitals (72 FR 51063). There, we 

stated: 

The exception in § 411.357(r) is one of 

several exceptions that allow DHS entities to 

provide assistance with malpractice 

insurance. Other exceptions that permit DHS 

entities to provide such assistance are the fair 

market value compensation exception (as 

discussed above in response to the previous 

comment) in § 411.357(l), the exception for 

bona fide employment relationships in 

§ 411.357(c), and the exception for personal 

service arrangements in § 411.357(d) 

(provided that the value of the assistance is 

commensurate with the value of actual 

services furnished to the hospital by the 

physician). These exceptions allow any DHS 

entity to provide assistance with malpractice 

insurance, without regard to the specialty of 

the physician or the area in which the 

physician practices. 

We believe that the exceptions to the 

physician self-referral prohibition 

discussed in our Phase III response 

provide sufficient flexibility for 

hospitals that desire to provide 

assistance with the costs of malpractice 

insurance coverage. 

Comment: According to one 

commenter, it would be more costeffective for hospitals to subsidize 

malpractice premiums to retain 

physicians than to lose those physicians 

and have to pay expensive recruitment 

packages to recruit new physicians to 

the area. 

Response: We assume that the 

commenter is arguing that the exception 

should be expanded in light of the 

commenter’s assertion regarding the 

cost-effectiveness of providing 

malpractice insurance subsidies versus 

recruitment packages to replace 

physicians who leave the geographic 

area due to high malpractice insurance 

costs. Regardless of whether the 

commenter’s assertion regarding costeffectiveness is accurate, cost 

effectiveness is not an indicator that an 

arrangement is without risk of program 

or patient abuse, and we are obliged to 

follow the mandate in section 1877(b)(4) 

of the Act that new exceptions that we 

create under that authority, or 

modifications of existing exceptions 

created under that authority, must not 

pose a risk of program or patient abuse. 

We believe that the provisions of new 

§ 411.357(r)(2) will enable hospitals to 

subsidize obstetrical malpractice 

premiums for some physicians who 

would not have qualified for them 

under our previous rules. 

I. Ownership or Investment Interest in 

Retirement Plans 

In the CY 2008 proposed rule we 

proposed to revise § 411.354(b)(3)(i) to 

clarify that the exclusion from the 

definition of ‘‘ownership or investment 

interest’’ of an interest in a retirement 

plan pertains only to an interest in an 

entity arising from a retirement plan 

offered by that entity to the physician 

(or the physician’s immediate family 

member) through the physician’s (or 

immediate family member’s) 

employment with that entity (72 FR 

38224). That is, where a physician has 

an interest in a retirement plan offered 

by Entity A, through the physician’s (or 

immediate family member’s) 

employment with Entity A, we intended 

to except from the definition of 

‘‘ownership or investment interest’’ any 

interest the physician would have in 

Entity A by virtue of his or her interest 

in the retirement plan; we did not 

intend to exclude from the definition of 

‘‘ownership or investment interest’’ any 

interest the physician may have in 

Entity B through the retirement plan’s 

purchase of an interest in Entity B. 

As we explained in the CY 2008 PFS 

proposed rule, we made our proposal 

because we were concerned that some 

physicians may be using retirement 

plans to purchase or invest in other 

entities (that is, entities other than the 

one that is sponsoring the retirement 

plan) to which they refer patients for 

DHS (72 FR 38183). After consideration 

of the public comments, we are 

adopting our proposal. We address 

below the specific comments we 

received in response to out proposal in 

the CY 2008 PFS proposed rule. 

Comment: Three commenters agreed 

with the proposed revision. Another 

commenter stated that the proposal 

‘‘represented another example of our 

broad-brush approach to physician 

practices by punishing and restricting 

all physicians based on negligible and 

likely unsubstantiated, anecdotal 

evidence of questionable physician 

investment.’’

Response: The commenter that did 

not agree with our proposal offered no 

reason why the exclusion from the 

definition of ‘‘ownership and 

investment interest’’ in § 411.354(b)(3)(i) 

should pertain to a physician’s (or 

immediate family member’s) interest in 

an entity that is purchased by the 

retirement plan in which the physician 

(or immediate family member) has an 

interest by virtue of the physician’s (or 

immediate family member’s) 

employment, regardless of how frequent 

or infrequent such purchases by 

retirement plans take place. The 

purpose of the original exclusion in 

§ 411.354(b)(3)(i), and as clarified in this 

final rule, is to exclude automatically a 

physician’s (or immediate family 

member’s) interest in a retirement plan 

offered by an entity as a result of the 

physician’s (or immediate family 


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member’s) employment from being 

considered an ‘‘ownership or 

investment interest’’ in that entity. 

Without such a per se exclusion, a 

physician’s ability to refer patients for 

DHS to an entity that extends a 

retirement plan to the physician (or his 

or her immediate family member) as a 

result of the physician’s (or immediate 

family member’s) employment without 

running afoul of the physician selfreferral rules would be in doubt in some 

cases, because what would otherwise be 

a compensation arrangement (based on 

the physician’s or immediate family 

member’s employment) could be 

considered to be an ownership or 

investment interest. Where a retirement 

plan offered by the entity that employs 

the physician (or his or her immediate 

family member) purchases or invests in 

another DHS entity, however, we see no 

need to exclude per se the physician’s 

(or immediate family member’s) interest 

in the retirement plan from being 

considered an ownership or investment 

interest in the other entity. To do 

otherwise would create the potential for 

abuse. For example, assume that a group 

practice offers a retirement plan to its 

members and, through the assets of the 

retirement plan, purchases or invests in 

an imaging facility to which the 

members of the group practice refer 

patients for DHS. Had the members of 

the group practice purchased or 

invested directly in the imaging facility, 

the requirements of an exception (such 

as the rural provider exception) would 

need to be satisfied in order for the 

physicians to refer patients to the 

imaging facility for DHS. If, however, 

the members of the group practice used 

the assets of the retirement plan to 

purchase the imaging facility, in the 

absence of the regulatory provision 

finalized here, the members of the group 

practice would have effectively skirted 

the general prohibition on ownership in 

entities to which they refer patients for 

DHS. 

J. Burden of Proof 

In the CY 2008 PFS proposed rule, we 

proposed to add a new regulatory 

provision to clarify that, consistent with 

our existing procedures with respect to 

claims denials, in any appeal of a denial 

of payment for a designated health 

service that was made on the basis that 

the service was furnished pursuant to a 

prohibited referral, the burden is on the 

entity submitting the claim for payment 

to establish that the service was not 

furnished pursuant to a prohibited 

referral (72 FR 38224). That is, the 

burden of proof is not on us or our 

contractors to establish that the service 

was furnished pursuant to a prohibited 

referral. 

We received several public comments 

objecting to our proposal as unfair or 

inconsistent with the current rules. 

After consideration of the public 

comments, we are adopting our 

proposal as final and clarifying that the 

burden of proof (otherwise known as the 

burden of persuasion) is on the claimant 

throughout the course of the appellate 

proceeding (and at each level of appeal), 

whereas the burden of production 

initially is on the claimant but may shift 

to us or our contractor during the course 

of the proceeding. The new provision is 

codified in revised § 411.353(c)(2) in 

this final rule. We address below the 

specific comments that we received in 

response to our proposals in the CY 

2008 PFS proposed rule. 

Comment: Many commenters 

expressed concern regarding the 

statement in the CY 2008 PFS proposed 

rule that, in an appeal brought by a 

provider, the burden of proof is on the 

entity submitting the claim for payment 

to establish that a service was not 

furnished pursuant to a prohibited 

referral. Some commenters asserted that 

the burden of proof should be on us 

because, according to these commenters, 

the law historically places the burden 

on the party that makes the rules. The 

commenters concluded that we are in a 

better position to determine whether 

actions were illegal, as we draft the 

regulations that provide interpretations 

of whether these actions are legal. Other 

commenters asserted that placing the 

burden on providers makes us ‘‘the 

judge and jury,’’ fails to adhere to the 

fundamental principle that people are 

‘‘innocent until proven guilty,’’ or 

amounts to us taking an 

unconstitutional action. Some 

commenters concluded that the 

proposed language amounts to a 

‘‘hidden tax’’ requiring physicians to 

prove that they conducted their actions 

legally. One commenter expressed 

concern that providers already render 

healthcare services for the prices we set, 

and placing the burden of proof on 

providers is an additional onus that 

impacts them unfairly. 

Response: Our proposal was intended 

only to clarify existing procedures with 

respect to the Medicare claims appeals 

process (which is the administrative 

remedy for providers and suppliers, 

regardless of whether the denial is for 

physician self-referral reasons, lack of 

medical necessity grounds, or some 

other reason). The claimant traditionally 

has borne the ultimate burden of proof 

in the Medicare claims appeals process, 

which is set forth in 42 CFR Part 405, 

Subpart I of our regulations (and which 

formerly appeared in 42 CFR Part 405, 

Subparts G and H), as well as in the 

Social Security beneficiary claims 

appeals process, which is set forth in 20 

CFR Part 404, Subpart J (and which is 

the model upon which the Medicare 

claims appeals process is based). 

Because government funds are at issue, 

it is appropriate to place the burden on 

providers and suppliers to show that 

they are entitled to payments from the 

public fisc, and not on the government 

to show that the provider or supplier is 

not entitled to such payments. Our 

regulations expressly state that the 

provider, supplier or beneficiary must 

furnish sufficient information for our 

contractors to determine whether 

payment is due and the amount of such 

payment. (See 42 CFR 424.5(a)(6); see 

also section 1833(e) of the Act.) We note 

also that section 205(a) of the Act, as 

incorporated into title XVIII by section 

1872 of the Act, gives the Secretary 

broad authority to allocate the burden of 

proof. The Supreme Court has noted 

that the general rule is that the burden 

of proof lies with the party seeking 

relief, and that the Congress expressed 

its approval of the general rule when it 

chose to apply it to administrative 

proceedings under the Administrative 

Procedure Act (5 U.S.C. 556(d)). (See 

Shaffer v. West, 546 U.S. 49, 57–58 

(2005).) We do not agree that, because 

we draft the physician self-referral 

regulations, the burden of proof should 

be on us and the Medicare program. 

Comment: One commenter stated that, 

because many exceptions to the 

physician self-referral prohibition 

require compliance with the antikickback statute, the proposal would 

require a provider to satisfy the burden 

of proving that it: (1) Meets an antikickback statute safe harbor; (2) has 

received a favorable advisory opinion 

from OIG; or (3) otherwise does not 

violate the anti-kickback statute. The 

commenter concluded that providers 

will have the unreasonable burden of 

having to ‘‘prove a negative,’’ even 

though the government has the burden 

to prove intent under the anti-kickback 

statute. Two other commenters 

expressed similar concerns, and stated 

that the language in the proposed 

regulation would shift the burden from 

the government to the provider with 

respect to the anti-kickback statute. 

Other commenters expressed concerns 

about having to ‘‘prove a negative’’ with 

respect to other requirements of 

exceptions for certain compensation 

arrangements, such as the requirements 

that: (1) Compensation does not take 

into account the volume or value of 

referrals or other business between the 


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parties; (2) equipment or space is not 

shared by others; (3) an arrangement 

would be commercially reasonable even 

in the absence of referrals; and (4) no 

payment is made directly or indirectly 

as an inducement to reduce or limit 

medically necessary services. 

Response: Section 1877(b)(4) of the 

Act authorizes us to create additional 

exceptions to the physician self-referral 

statute, provided that such exceptions 

do not pose a risk of program or patient 

abuse. All of the exceptions for financial 

relationships promulgated using our 

authority in section 1877(b)(4) of the 

Act include the requirement that the 

financial relationship covered by the 

exception not violate the anti-kickback 

statute, which is an intent-based 

criminal statute, or any Federal or State 

law or regulation governing billing or 

claims submission. Similarly, most of 

the exceptions applicable to 

compensation arrangements, including 

those prescribed by statute and those 

created using our authority in section 

1877(b)(4) of the Act, contain a 

requirement that the compensation not 

take into account the volume or value of 

referrals or other business generated 

between the parties. We recognize that 

requiring claimants to prove that they 

did not violate the anti-kickback statute 

may, in some cases, be difficult. 

However, our proposal and this final 

rule pertain to the ultimate burden of 

proof (or burden of persuasion) and not 

to the burden of production (or burden 

of going forward with evidence). 

As explained by courts and legal 

commentators, the burden of proof 

remains on the same party throughout 

the appellate proceeding, whereas the 

burden of production on a particular 

issue or element may shift from one 

party to another (and even back to the 

first party) as evidence is put forth. We 

believe it is appropriate that the burden 

of production be on the claimant 

initially with respect to all requirements 

in our physician self-referral 

regulations. The claimant may produce 

evidence in such quantity or quality so 

as to shift the burden of production to 

the Medicare program requiring us to 

show that the requirement was not met. 

Thus, although a claimant would have 

the initial burden to show that it did not 

violate the anti-kickback statute, the 

claimant may produce evidence that is 

conclusive on the issue (such as 

showing that the arrangement satisfied a 

safe harbor to the anti-kickback statute) 

or is sufficient to shift the burden of 

production to the government to show 

that the financial relationship at issue 

did violate the anti-kickback statute. We 

decline to attempt to prescribe by 

regulation what type or quantity of 

evidence is sufficient to shift the burden 

of production to us on any given 

requirement of our physician selfreferral regulations, as this would be 

impractical, if not impossible, to do 

given the infinite factual variations that 

may be present. We instead leave to the 

adjudicators that hear the appeals the 

question of whether the burden of 

production has shifted. 

Comment: Several commenters 

asserted that it will be difficult for 

providers to prove that compensation 

arrangements were made at fair market 

value because valuation experts may 

disagree about what constitutes fair 

market value. A few commenters stated 

that hospitals may contract with 

physicians at a rate that was low in an 

effort not to have the arrangement 

questioned, and complained that 

requiring a hospital to prove fair market 

value will further disadvantage parties 

negotiating rates under hospitalphysician contractual arrangements. 

Response: In Phase III, we addressed 

requests for us to comment on fair 

market valuation methodologies. There, 

we stated ‘‘[n]othing precludes parties 

from calculating fair market value using 

any commercially reasonable 

methodology that is appropriate under 

the circumstances and otherwise fits the 

definition at section 1877(h) of the Act 

and § 411.351. Ultimately, fair market 

value is determined based on facts and 

circumstances. The appropriate method 

will depend on the nature of the 

transaction, its location, and other 

factors’’ (72 FR 51015 through 51016). 

We believe that, in most instances, 

what constitutes fair market value for an 

item or service will be expressed as a 

range and, accordingly, claimants 

should not face significant difficulty in 

establishing fair market value, provided 

that they use a methodology that is 

reasonable under the facts and 

circumstances, determine a payment 

amount that is within the range that the 

methodology yields, and maintain 

documentation regarding the 

determination of fair market value that 

was created at the time of the financial 

relationship. We disagree that codifying 

burden of proof obligations should have 

the negative impact on business 

arrangements claimed by the 

commenters, these are the procedures 

that claimants must currently follow. 

Comment: One commenter expressed 

concern that large fines may be imposed 

upon any party whom we believe 

violates the physician self-referral law. 

Another commenter asserted that the 

proposed provision should not affect the 

burden of proof that is applicable to 

other governmental sanction and 

enforcement provisions (including civil 

monetary penalties and exclusions). 

Response: Our proposal (now 

finalized in § 411.353(c)(2) in this final 

rule) related only to administrative 

appeals of claims denials under the 

appeals process in 42 CFR Part 405, 

Subpart I of our regulations. Appeals of 

civil monetary penalties, exclusions or 

other remedies imposed because of a 

determination that a DHS entity or a 

physician knowingly violated the selfreferral statute or regulations involve 

other appeals processes. 

Comment: One commenter asked if 

the proposed regulation would trump 

evidentiary rules that may exist 

elsewhere, including under the False 

Claims Act. 

Response: No, it would not. Our 

proposal was not intended to have any 

impact on the evidentiary rules in False 

Claims Act cases or in other types of 

cases, but instead was intended only to 

clarify existing procedures with respect 

to the Medicare claims appeals process. 

New § 411.353(c)(2) does not establish 

any standards of knowledge or other 

evidentiary rules, but merely clarifies 

that, in any case in which a claim is 

denied for failure to comply with the 

physician self-referral rules, the 

ultimate burden of proof (that is, the 

burden of persuasion) is on the claimant 

to demonstrate compliance and not on 

the Medicare program to demonstrate 

noncompliance. Thus, for example, if a 

claim is denied and a DHS entity 

appeals on the basis that it did not know 

the identity of the referring physician, 

the current standard of knowledge in 

§ 411.353(e) (that is, the entity did not 

have actual knowledge of, and did not 

act in reckless disregard or deliberate 

ignorance of, the identity of the referring 

physician) continues to be applicable. 

The claimant would have the burden of 

persuasion that it did not know the 

identity of the referring physician, using 

the standard contained in § 411.353(e). 

Comment: One commenter asked if 

the burden of proof remains on the 

provider at every level of appeal. 

Response: At every level of appeal, 

the burden of proof (that is, the burden 

of persuasion) remains on the entity that 

submitted the claim. 

Comment: One commenter suggested 

that, although providers have the 

burden to prove that services they 

provided are covered by Medicare, the 

same standard should not apply to 

compliance with the physician selfreferral law and regulations. The 

commenter argued that an appeal of a 

claim that was denied due to lack of 

medical necessity differs from an appeal 

of a claim denied due to noncompliance 

with the physician self-referral law, 


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because the congressional intent 

underlying the two types of appeals is 

different and the potential consequences 

of failure to comply with the physician 

self-referral statute are significant. 

Response: We do not agree that the 

allocation of the burden of proof should 

vary depending on the underlying 

reason for the claim denial. We note that 

the Congress has not indicated any 

intent to make such a differentiation. 

With respect to the commenter’s 

statement that the potential 

consequences of failure to comply with 

the physician self-referral statute are 

significant, the same can be said for 

medical necessity denials and other 

types of coverage denials. Where a 

financial relationship between an entity 

and one or more referring physicians is 

found to fail to meet an exception, a few 

or many claims may be at issue, 

depending on the circumstances. 

Likewise, a contractor’s denial, on 

medical necessity or other grounds, may 

affect a few claims of a supplier or 

provider or may affect an entire class of 

claims. 

Comment: Several commenters 

reasoned that, because the physician 

self-referral law is a strict liability 

statute, it is even more important for the 

burden of proof to be on the 

government. One of these commenters 

asserted that we have the ‘‘weight of the 

Federal bureaucracy behind [us]’’ and 

that we should prove our case if a 

benefit is denied. 

Response: We reiterate that the 

language finalized in § 411.353(c)(2) of 

this final rule is entirely consistent with 

the allocation of the burden of proof in 

appeals of Medicare claims denied for 

reasons other than due to a prohibited 

referral. Virtually all coverage rules 

carry with them ‘‘strict liability,’’ and, 

where a claim is denied, the burden of 

proof is on the claimant to establish 

coverage and not on the government to 

prove noncoverage. (We note an 

exception to the strict liability rule in 

section 1879 of the Act, under which 

Medicare may pay the provider or 

supplier if the provider or supplier can 

establish that neither it nor the 

beneficiary knew or reasonably should 

have known that the item or service was 

not covered. The Congress has not 

authorized such limitation of liability 

protection for physician self-referral 

denials.) 

Comment: Two commenters disagreed 

that the proposal is consistent with our 

general policy and procedures regarding 

the appeals of claims denials. The 

commenters asserted that, when a claim 

is denied (in circumstances other than 

when a prohibited referral occurred), all 

that the provider must do to receive 

payment is produce a medical record 

that indicates that the service was 

provided and, in combination with 

accepted standards of care, was 

reasonable and necessary. In these 

circumstances, according to the 

commenters, each appeal is for only a 

single claim. The commenters 

contended that, when we do not pay a 

claim due to a violation of the physician 

self-referral law, thousands of claims are 

at stake, a huge fine is possible, and 

exclusion from Federal health care 

programs may occur. 

Response: The Congress has enacted a 

general prohibition against physician 

self-referral that is subject to certain 

exceptions (most created under our 

regulatory authority in section 

1877(b)(4) of the Act). We believe that 

it is appropriate to require a provider or 

supplier to be prepared to demonstrate 

that its financial relationship with a 

referring physician does, in fact, satisfy 

an exception and that the claims at issue 

should be paid. Also, in most instances, 

the question of whether a provider or 

supplier meets an exception will be a 

factual one. The documentation 

containing the particulars of the 

financial relationship at issue will be in 

the possession of the provider or 

supplier (and most often will not be in 

the possession of us or our contractors). 

Although the commenters claim that 

appeals of claims denied for reasons 

other than alleged violations of the 

physician self-referral rules involve a 

single claim each and that the claimants 

need only produce the medical record to 

demonstrate medical necessity, many 

such appeals involve large numbers of 

aggregated claims and complex coverage 

issues. In addition, it is not true 

necessarily that any claims denial based 

on an alleged violation of the physician 

self-referral rules will involve thousands 

of claims or complex issues. In any 

event, it is not apparent to us why the 

number of claims, the amount of money 

involved, or the complexity of the issues 

should cut in favor of the government 

having the burden of proof, rather than 

the claimant. Finally, with respect to the 

commenters’ point that the burden of 

proof should be on the government 

because an alleged violation of the 

physician self-referral rules may lead to 

a large fine and exclusion from Federal 

health care programs, the proposal, 

which is finalized in § 411.353(c)(2) in 

this final rule, relates only to appeals of 

claims denials, not to appeals of the 

imposition of civil monetary penalties, 

exclusion or other remedies. 

Comment: Two commenters stated 

that the proposed rule will provide 

greater incentive for Medicare 

contractors to deny claims based on 

alleged violations of the physician selfreferral law. 

Response: We disagree with the 

commenters’ assertion that the proposal, 

which is finalized in § 411.353(c)(2) in 

this final rule, will induce our 

contractors to deny claims based on 

physician self-referral violations. The 

burden has always been on the party 

seeking Medicare payment to prove 

entitlement to payment if the claim is 

denied, and we assume that our 

contractors have been aware of this 

longstanding policy. Contractors should 

make determinations to deny claims 

based on the merits of the case and not 

based on concerns as to who bears the 

burden of proof. However, to the extent 

that any contractor, prior to this final 

rule, may have been less inclined to 

deny a claim due to its mistaken belief 

that it would bear the burden of proof, 

it is appropriate that it be apprised of 

the proper allocation of the burden of 

proof. 

IX. Financial Relationships Between 

Hospitals and Physicians 

Most, if not all, hospitals have 

financial relationships with referring 

physicians. These financial 

relationships may involve ownership or 

investment interests, compensation 

arrangements, or both. The financial 

relationships may be direct or they may 

be indirect (such as through a physician 

group practice or limited liability 

company). The physician self-referral 

statute was first enacted in 1989, and 

the reporting requirements in the 

regulations in § 411.361 were first 

implemented in our December 3, 1991 

interim final rule with comment period, 

published in the Federal Register at 56 

FR 61374. Since that time, we have not 

engaged in a comprehensive reporting 

initiative to examine financial 

relationships between hospitals and 

physicians. Consistent with 

Congressional intent in enacting the 

physician self-referral statute, we 

believe it is important to query hospitals 

concerning their financial relationships 

with physicians. 

To assist in enforcement of the 

physician self-referral statute and 

implementing regulations, we created 

an information collection instrument, 

referred to as the Disclosure of Financial 

Relationships Report (‘‘DFRR’’). The 

DFRR is designed to collect information 

concerning the ownership and 

investment interests and compensation 

arrangements between hospitals and 

physicians. In the FY 2009 IPPS 

proposed rule, using our authority 

under section 1877(f) of the Act and 

§ 411.361, we proposed to send the 

DFRR to 500 hospitals, (both general 


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acute care hospitals and specialty 

hospitals), a number that we believe is 

necessary to provide us with sufficient 

information: (1) To identify 

arrangements that potentially may not 

be in compliance with the physician 

self-referral statute and implementing 

regulations; and (2) to identify practices 

that may assist us in any future 

rulemaking concerning the reporting 

requirements and other physician selfreferral provisions (73 FR 23697). We 

note that to the extent we do not find 

a physician self-referral violation based 

on the results of the DFRR, this should 

not be taken as an affirmative statement 

that the financial relationships are in 

compliance, and the government will 

not be estopped from determining that 

there is a violation based on further 

review of information collected as part 

of the DFRR or additional different 

information. At this time we are 

proceeding with our proposal to send 

the DFRR to 500 hospitals (both general 

acute care hospitals and specialty 

hospitals). However, based on further 

review and comments we may receive 

in response to the revised Paperwork 

Reduction Act (PRA) package that will 

be published separately in the Federal 

Register, we may decide to decrease 

(but not increase) the number of 

hospitals to which we would send the 

DFRR. 

In the FY 2009 IPPS proposed rule, 

we provided a discussion of the 

potential burden associated with 

completing the DFRR, including an 

analysis that provided estimates of the 

burden for small, medium, and large 

hospitals. In the proposed rule, based on 

a review of the DFRR by 33 hospitals, 

we estimated that the average number of 

hours to complete the DFRR was 31 

hours. In addition, we sought comment 

on the accuracy of the time and burden 

estimates associated with this 

information collection instrument. 

Because the DFRR requires information 

that hospitals already should be keeping 

in the normal course of their business 

activities (even apart from the need to 

document compliance with the 

physician self-referral law), we 

anticipated that the majority of the time 

spent completing the DFRR would be 

spent by administrative staff. We 

believed that the tasks involved would 

include retrieving the information and 

printing it from electronic files or 

copying it from hard files, which largely 

should involve administrative 

personnel. In addition, the review and 

organization of the materials would also 

impose burden on the respondent. 

Nevertheless, in order to err on the side 

of more potential burden rather than 

less, we calculated costs using an hourly 

rate for accountants (73 FR 23697). 

As discussed more thoroughly below, 

we have revised our estimate of the time 

it will take each hospital to complete 

the DFRR from 31 hours to 100 hours 

and concluded that many hospitals may 

choose to involve accounting staff and 

attorneys for legal review. Therefore, the 

costs per hospital, associated with 

completing the DFFR has increased 

from $1,550 to $4,080. We have 

calculated a revised total burden for 500 

hospitals to be $2,040,000. A more 

detailed discussion of the aggregate 

burden may be found in the PRA 

section, section XI., of the preamble of 

this final rule. A revised PRA notice 

will be published separately in the 

Federal Register. The revised PRA 

notice will set forth a public comment 

period of 30 days from the date of 

display. 

In the FY 2009 IPPS proposed rule, 

we proposed that the DFRR be 

completed, certified by the appropriate 

officer of the hospital, and received by 

us within 60 days of the date that 

appears on the cover letter or e-mail 

transmission of the DFRR. We solicited 

comments on the proposed 60-day 

timeframe for completing the DFRR (73 

FR 23697). Although we received a few 

comments objecting to the proposed 60- 

day timeframe, we are adopting the 

proposed 60-day limit for completing 

the DFRR. In the FY 2009 IPPS 

proposed rule, we noted that 

§ 411.361(f) provides that failure to 

submit timely the requested information 

concerning an entity’s ownership, 

investment, and compensation 

arrangements may result in civil 

monetary penalties of up to $10,000 for 

each day beyond the deadline 

established for disclosure. Although we 

have the authority to impose civil 

monetary penalties, we indicated in the 

proposed rule that we seek not to invoke 

this authority and will work with 

entities to comply with the reporting 

requirements. Prior to imposing a civil 

monetary penalty in any amount, we 

would issue a letter to any hospital that 

does not return the completed DFRR, 

inquiring as to why the hospital did not 

return timely the completed DFRR. In 

addition, a hospital may, upon a 

demonstration of good cause, receive an 

extension of time to submit the 

requested information (73 FR 23697). 

Although we did not make a specific 

proposal concerning the imposition of 

civil money penalties, we are informing 

the public in this final rule that, before 

imposing any civil money penalties, we 

will follow the procedures described 

above. 

In the FY 2009 IPPS proposed rule, 

we solicited comments on the DFRR 

information collection instrument as 

follows: 

• Whether the DFRR should be 

recurring, and, if so, whether it should 

be implemented on an annual or some 

other periodic basis; 

• Whether the DFRR collects too 

much or not enough information, and 

whether it collects the correct (or 

incorrect) type of information; 

• The amount of time it will take 

hospitals to complete the DFRR, the 

costs associated with completing the 

DFRR, and the amount of time we 

should give hospitals to complete and 

return their responses to us; 

• Whether we should direct the 

collection instrument to all hospitals, 

and, if so, whether we should stagger 

the collection so that only a certain 

number of hospitals are subject to it in 

any given year; 

• Whether hospitals, once having 

completed the DFRR, should have to 

send us yearly updates and report only 

changed information. 

After consideration of the public 

comments we received, we are not 

adopting a regular reporting or 

disclosure process at this time, and 

thus, the DFRR will be used, at this 

time, as a one-time collection effort. 

(Depending on the information we 

receive on the DFRR and other factors, 

we may propose future rulemaking to 

use the DFRR or some other instrument 

as a periodic or regular collection 

instrument.) We have concluded that we 

are collecting the correct type and 

appropriate amount of information, and 

thus, we are finalizing the DFRR, as 

proposed, with minor modifications. 

(We refer readers to the revised PRA 

notice that will be published separately 

in the Federal Register which will offer 

the public the opportunity to comment 

on the proposed collection of 

information.) As discussed more 

thoroughly below and in section XI. of 

the preamble of this final rule, we are 

increasing the amount of time it will 

take hospitals to complete the DFRR 

from 31 hours to 100 hours, and the 

costs associated with completing the 

DFRR are being increased from $1,550 

to $4,080 per hospital. We are finalizing 

our timeframe of 60 days to complete, 

certify, and return the DFRR to us. 

We respond to specific comments 

below. 

Comment: Several commenters 

asserted that neither the Deficit 

Reduction Act (DRA) of 2005, nor 

section 1877(f) of the Act, nor § 411.361 

grants us the authority to impose ‘‘such 

a far-reaching request,’’ especially 

without the articulation of a specific 


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compliance problem to be addressed 

related to community hospitals. The 

commenters encouraged us to limit the 

scope of the DFRR to physician-owned 

specialty hospitals, as directed by the 

DRA. The commenters stated that, 

alternatively, and at the very least, the 

burden of the demand should be 

significantly reduced and the request be 

narrowly tailored to result in 

information aimed at addressing a 

clearly defined compliance problem. 

Response: Our authority for the DFRR 

is not based on the DRA. We believe 

section 1877(f) of the Act and § 411.361 

of our regulations give us authority to 

collect this information. These 

provisions provide that entities must 

submit to us information concerning 

their financial relationships with 

referring physicians in the form, manner 

and at the times we specify. Nor do we 

agree that the DRA directed us to 

confine the scope of the DFRR (which 

did not exist at the time of the DRA), or 

any other collection instrument, to 

physician-owned specialty hospitals. As 

stated above, since the enactment of the 

physician self-referral statute, we have 

not engaged in a comprehensive 

reporting initiative to examine financial 

relationships between hospitals and 

physicians, and consistent with section 

1877(f) of the Act, we believe it is 

important to query hospitals concerning 

their financial relationships with 

physicians. Section 5006 of the Deficit 

Reduction Act of 2005 required the 

Secretary to develop a strategic and 

implementing plan to address certain 

issues relating to physician-owned 

specialty hospitals. The strategic and 

implementing plan that was included in 

our ‘‘Final Report to the Congress and 

Strategic and Implementing Plan 

Required under Section 5006 of the 

Deficit Reduction Act of 2005’’ issued 

on August 8, 2006, is available on our 

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

PhysicianSelfReferral/ 

06a_DRA_Reports.asp (hereinafter 

referred to as the ‘‘DRA Report to 

Congresss.’’. We also refer to the DRA 

Report to Congress, at page 69, wherein 

we stated that we would require 

hospitals to provide us information on 

a periodic basis concerning their 

investment and compensation 

relationships with physicians. 

Comment: One commenter stated that 

we incorrectly asserted that section 

1877(f) of the Act gives us the authority 

to obtain information about 

compensation arrangements that comply 

with an exception. The commenter 

stated that instead, section 1877(f) of the 

Act allows us to seek information only 

about compensation arrangements that 

do not meet an exception in section 

1877(e) of the Act. The commenter 

further stated that section 1877(f) of the 

Act states that we may require 

information concerning compensation 

arrangements that are ‘‘described in 

subsection (a)(2)(B) of [section 1877 of 

the Act].’’ The commenter contended 

that section 1877(a)(2)(B) of the Act 

describes compensation arrangements 

that do not meet any of the exceptions 

contained in section 1877(e) of the Act. 

The commenter concluded that by 

including certain information that 

entities must report, Congress 

effectively excluded other information 

from our authority. 

Response: We believe that Congress 

did not intend to limit our ability to 

capture information about 

compensation arrangements that meet 

an exception. Section 1877(f) of the Act 

states that ‘‘each entity * * * shall 

provide the Secretary with the 

information concerning entity’s * * * 

compensation arrangements * * * 

including the names and [UPINs] of all 

physicians with a compensation 

arrangement (as described in subsection 

(a)(2)(B)) * * *’’ (emphasis added). We 

believe Congress’ use of the word 

‘‘including’’ meant that it was providing 

only examples of the type of 

information that we may require. To 

read the statute otherwise would 

effectively negate our ability to make 

fully informed decisions about the 

extent to which entities are complying 

with the physician self-referral law and 

instead, allow entities to report 

information only about those 

compensation relationships that they 

self-determine are out of compliance. 

Comment: Most commenters stated 

that our estimated burden of 31 hours 

still fell short of what will be required 

within a facility to complete the DFRR. 

They indicated that steps a hospital will 

likely engage in are: (1) Identification of 

the relevant contracts; (2) retrieval of the 

contracts; (3) review and analysis of the 

contracts to determine the appropriate 

response to the DFRR; (4) review by an 

attorney for accuracy; (5) copying for 

submission; and (6) CEO certification. 

The commenters noted, anecdotally, the 

burden estimates for hospitals include 

at least 200 hours just to identify and 

assemble all the relevant contracts, 4 

weeks to fully prepare responses, 3 

months to respond with 1 FTE’s time. 

Another commenter, a 232 bed hospital, 

identified similar steps (including the 

creation of an ad hoc committee), and 

provided a total estimate of 120 hours. 

Another commenter suggested that the 

burden hours were underestimated and 

that we should either abandon the DFRR 

or redesign the tool to reduce the scope 

of the information requested. 

Response: Some of the commenters 

have identified an additional, selfimposed step in the process that, if 

taken into account, would increase the 

time and burden estimate, namely, legal 

review of all supporting documentation 

(including contracts). The DFRR 

requires hospitals to supply certain 

information and documentation 

concerning existing ownership/ 

investment and compensation 

relationships with physicians, which 

relationships, presumably, underwent 

legal review prior to their inception. 

The information and documentation 

required by the DFRR is that which 

hospitals should already be keeping in 

the normal course of their business 

activities (even apart from the need to 

document compliance with the 

physician self-referral law), and 

therefore, the only burden imposed by 

the DFRR is the time needed to locate 

and compile the information and 

documentation. Notwithstanding our 

view that the true burden of responding 

to the DFRR does not properly include 

time for legal or other professional 

review, we have increased our time and 

burden estimates from 31 to 100 hours 

to complete and submit the DFRR. With 

respect to the suggestion that we either 

abandon the DFRR or reduce the scope 

of the information requested, we are 

adopting the DFRR as final, with some 

modification. (We refer readers to the 

revised PRA notice that will be 

published separately in the Federal 

Register.) We believe that each piece of 

information requested in the various 

worksheets of the DFRR is necessary to 

assist us in identifying arrangements 

between hospitals and physicians that 

may not be compliant with the 

physician self-referral prohibition 

regulations, and to identify examples 

and areas of noncompliance that may 

assist us in future rulemaking 

concerning our existing, and potentially 

new, exceptions. We remind the reader 

that to the extent we do not find a 

physician self-referral violation based 

on results of the DFRR, this should not 

to be taken as an affirmative statement 

that the financial relationships are in 

compliance, and the government will 

not be estopped from determining that 

there is a violation based on further 

review of information collected as part 

of the DFRR, or additional, different 

information. 

Comment: One commenter believed 

that we continue to underestimate the 

burdensomeness and costs associated 

with completing the DFRR. For 

example, the commenter believes that 

the estimated hours to respond will 

range between 50 hours for a smaller 


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facility to over 200 hours for a larger 

facility. Cost estimates for personnel 

needed to complete the work, which 

would include clerical, administrative, 

accounting and legal support, would 

range from $5,000 to $15,000. The 

estimate of $50 an hour, based on 

accounting personnel, underestimates 

the manpower costs of fully and 

accurately completing the survey 

document and that accountants and 

legal counsel will review all 

documentation related to the DFRR so 

their involvement should be considered 

when calculating the burden. Several 

commenters asserted that some 

questions require information on 

arrangements of which a simple review 

of the agreement will not be sufficient. 

Another commenter expressed a similar 

objection stating that administrative 

staff would not be able to complete 

Worksheet 7 with the instruction that 

reads ‘‘ For those compensation 

arrangements listed in Columns A 

through D, include not only those that 

you believe fit within an exception in 42 

CFR 411.357, but those that are 

implicated by the referenced 

exception.’’ Several comments argued 

that knowing which specific exception 

an arrangement relied on, when more 

than one may be applicable, will not 

necessarily be noted in the contract. The 

commenters further stated that only an 

attorney’s review will allow a hospital 

to determine that information 

Response: As noted above, we have 

taken into account the time and costs 

involved for hospitals to involve 

attorneys in the process of completing 

and submitting the DFRR to ensure that 

all supporting documentation satisfies 

the specific exception(s) upon which 

the arrangement relied on when the 

agreement was executed. Therefore, we 

have revised the costs associated with 

completing the DFRR. As discussed 

more thoroughly in section XI. of the 

preamble of this final rule, we have 

increased the time and burden estimate 

(per hospital) from 31 to 100 hours. In 

addition, we have calculated costs using 

an hourly rate for accountants and 

attorneys. Specifically, we are 

attributing 60 hours to administrative 

and accounting staff that will assemble 

relevant documentation, and we are 

allotting an additional 40 hours to 

account for the burden associated with 

hospitals that voluntarily seek input 

from legal counsel. We are revising our 

average cost per hospital to $4,080. A 

more detailed analysis of the total time 

and burden estimate associated with the 

DFRR may be found in section XI. of the 

preamble of this final rule and in the 

revised PRA notice that will be 

published separately in the Federal 

Register. 

Comment: A commenter 

recommended that if the DFRR is 

implemented, it be initially tested as a 

targeted pilot program. The commenter 

stated that the pilot should be limited to 

a minimum number of hospitals needed 

to test the accuracy of the survey 

instrument and its effectiveness in 

securing the information sought. 

Response: We do not believe that 

testing the DFRR with a pilot group of 

hospitals is necessary. As we stated in 

the FY 2009 IPPS proposed rule, we 

proposed to send the DFRR to 500 

hospitals, a number that we believe is 

necessary to provide us with sufficient 

information: (1) To identify 

arrangements that potentially may not 

be in compliance with the physician 

self-referral statute and implementing 

regulations; and (2) to identify practices 

that may assist us in future rulemaking. 

As stated earlier, we note to the extent 

we do not find a physician self-referral 

violation based on the results of the 

DFRR, this should not be taken as an 

affirmative statement that the financial 

relationships are in compliance, and the 

government will not be estopped from 

determining that there is a violation 

based on further review of information 

collected as part of the DFRR or 

additional, different information. At this 

time, we are proceeding with our 

proposal to send the DFRR to 500 

hospitals. However, based on further 

review and comments we may receive 

in response to the revised PRA package 

that will be published separately in the 

Federal Register, we may decide to 

decrease (but not increase) the number 

of hospitals that we would send the 

DFRR. With respect to the commenter’s 

concern about the accuracy of the 

instrument, the DFRR builds upon 

information that was previously 

requested in the voluntary DRA survey, 

and thus, should help increase the 

accuracy of the instrument. In addition, 

as a result of public comments received 

in response to our PRA packages 

published in the Federal Register on 

May 18, 2007 (72 FR 28056), and 

September 14, 2007 (72 FR 52568), 

respectively, we have revised the DFRR 

instructions and worksheets to address 

ambiguities. 

Comment: Many commenters noted 

that the DFRR requires information on 

nine different categories of 

compensation arrangements. These 

commenters stated that, depending on 

the size of the hospital, documents will 

be required for hundreds or thousands 

of contracts. Another commenter, a 300 

bed hospital, estimated that it would 

spend approximately 80 hours to gather 

data from 224 agreements with 

physicians to complete Worksheets 7 

and 8. The commenter stated that the 

hours would be much less if the 

proposed DFRR were to address only 

compensation arrangements that involve 

a physician owner. 

Response: We acknowledge that the 

DFRR would take less time to complete 

if we required hospitals to report only 

compensation arrangements involving a 

physician owner. However, confining 

the DFRR to such relationships would 

significantly reduce the scope of the 

collection instrument and, therefore, 

potentially fail to capture much needed 

information. Moreover, so restricting the 

DFRR would be inconsistent with the 

commitment we made at page 69 of the 

DRA Report to Congress to require 

hospitals to provide us information on 

a periodic basis concerning their 

investment and compensation 

relationships with physicians. As stated 

above, the DFRR is designed to identify 

arrangements between hospital and 

physicians that may not be in 

compliance with the physician selfreferral statute and regulations and to 

assist with our statutory obligation to 

ensure that no payment is made for a 

prohibited referral. In addition, in the 

DRA Report to Congress at page 69, we 

noted that a physician may be just as 

likely to refer patients to a hospital with 

which he or she has a compensation 

relationship, given that the physician 

may see a direct and immediate 

financial benefit from the compensation 

arrangement. To adopt the commenter’s 

suggestion would have the effect of 

disproportionately impacting physicianowned hospitals. 

Comment: Several commenters argued 

that under the current rule at § 411.361, 

routine mandatory reporting is not 

required. They stated that it was 

included in the 1998 proposed rule on 

reporting, and after receiving comments 

that routine mandatory reporting would 

be unduly burdensome, we decided not 

to use that approach. They further stated 

that the proposed rule on reporting also 

made clear that we were not developing 

any forms or recordkeeping 

requirements specific to reporting. They 

concluded that the DFRR, therefore, 

would circumvent our own rulemaking 

decision. Another commenter urged us 

to return to the position taken in the 

Phase II regulations in 2004 and not 

require each and every provider to 

supply the information required by the 

DFRR but merely to request information 

on a case-by-case basis. 

Response: In the correction notice of 

the interim final rule with comment 

period entitled, Physicians’ Referrals to 

Health Care Entities With Which They 


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Have Financial Relationships (Phase II); 

published in the Federal Register on 

April 6, 2004 (72 FR 17934), we stated 

that we did not intend at that time to 

develop any forms for the submission of 

information. The language referenced by 

the commenter referred to the creation 

of forms for a regular reporting process. 

At this time, we are not creating forms 

for a regular reporting process. Rather, 

we are pursuing a one-time collection 

effort which involves the use of the 

DFRR. Thus, we believe it would be best 

to proceed with sending the DFRR to the 

hospitals, and upon completion of the 

reviews, decide whether to issue a 

notice of proposed rulemaking 

concerning both the frequency of a 

reporting or disclosure process and any 

revisions to the DFRR to focus upon 

certain types of financial relationships 

or certain hospitals. We believe the use 

of a uniform information collection 

instrument is more efficient than a caseby-case approach because we are 

capturing the same type of information 

and analyzing it in the same manner. 

We disagree that proceeding with the 

DFRR is, in any way, inconsistent with, 

or circumvents, a prior ‘‘rulemaking 

decision.’’

Comment: One commenter 

recommended that the DFRR should not 

require paper submission of any kind, 

but rather all data should be scanned 

and submitted electronically to save 

hospitals significant unfunded 

administrative burden, as well as to 

spare us the storage capacity required 

for millions of paper pages. However, 

most commenters stated that 

recordkeeping is predominantly 

manual, not electronic, documents are 

decentralized, not centralized; there is 

no ‘‘self-referral law’’ filing system 

required, and of course the number of 

physicians on staff will affect the 

number of potential contracts. Thus, the 

commenters asserted that the burden 

estimate and our description of what a 

response will require are at odds with 

current recordkeeping processes in 

hospitals. 

Response: We considered requiring 

hospitals to scan documents and submit 

them electronically, but we concluded 

that there was great variation in the 

recordkeeping systems of most 

hospitals. Therefore, we chose to 

encourage, but not require, that an 

electronic copy of the DFRR worksheets 

be submitted. We recognize that many 

hospitals will submit paper copies of all 

supporting documentation, and we have 

made arrangements for storage of the 

information collected. In response to an 

earlier comment, we have increased the 

time and burden estimate, which should 

assist in affording hospitals time in 

which to locate all required 

documentation. 

Comment: Several commenters stated 

that under any new reporting initiative 

there will be a necessary ‘‘learning 

curve’’ for hospitals to determine the 

type of data necessary to accurately 

complete the report. The commenters 

asserted that this is especially true for 

the DFRR, as it will only be sent to a 

small subset of hospitals, and the 

hospitals will not know it is coming 

until it arrives. The commenters 

requested that we adopt a 5-month due 

date for the report, consistent with the 

time frame for completion of the 

Medicare cost report. 

Response: We are not adopting the 

commenter’s suggestions. The DFRR is 

not as complex as the Medicare cost 

report; and we believe that the 60-day 

timeframe specified in the proposed 

rule provides hospitals with sufficient 

time to complete and submit the DFRR 

to us. In addition, we will grant 

extensions of time beyond the 60 days 

to complete the DFRR in appropriate 

cases. 

Comment: Many commenters also 

recommended that the DFRR be a onetime data collection effort, until we have 

fully evaluated responses from the 

initial reports filed. One of the 

commenters opposed an annual DFRR 

filing requirement, and supported a 

periodic or staggered filing requirement. 

The commenter also stated that where a 

pattern or history of problems was 

known to exist, more frequent reporting 

might be warranted. 

Response: At this time we believe it 

is best to proceed with sending the 

DFRR to the hospitals, and upon 

completion of the reviews, decide 

whether to issue a notice of proposed 

rulemaking concerning both the 

frequency of a reporting or disclosure 

process and any revisions to the DFRR 

to focus upon certain types of financial 

relationships or certain hospitals. 

Comment: One commenter 

recommended that hospitals should not 

have to submit a signed copy of each 

agreement related to Worksheet 7, 

unless we deem it necessary. If copies 

of agreement must be submitted, the 

commenter suggested that we permit 

hospitals to submit copies of uniform 

rental or recruitment agreements in 

those instances where a uniform rental 

or recruitment agreement has been 

prepared by the hospital and all of the 

elements present are materially the 

same. 

Response: We are revising Worksheet 

7 of the DFRR and the corresponding 

instructions to permit hospitals to 

submit one copy of a uniform rental or 

recruitment agreement. (Worksheet 7 

also allows parties to submit one copy 

of a uniform personal services 

agreement.) We caution, however, that 

we consider an agreement to be 

‘‘uniform’’ only if all material terms are 

the same. The following examples may 

prove helpful. 

Example 1: Hospital has entered into 

lease agreements with different 

physicians or physician practices for 

space in the same medical office 

building (MOB A), and the value of the 

space is not materially different from 

one office to the next, the price per 

square foot charged to the physician or 

physician practice by the hospital is the 

same in all agreements (notwithstanding 

that amount of square footage, and thus, 

the monthly rental charges, may differ 

from office to office), and the rights and 

obligations are the same under each 

lease agreement. Under these facts, we 

would consider the agreements to be 

uniform for purposes of the DFRR and 

the hospital would need to transmit 

only one copy of the agreement 

(although it would be required to 

identify the other physicians who have 

entered into the similar agreements). 

Example 2: Same facts as Example 1, 

with the additional facts that Hospital 

also owns medical office buildings B, C, 

and D (MOBs B, C, and D), which it also 

leases to physicians or physician 

practices. Within each building, the 

lease terms are materially the same, as 

described in Example 1, from office 

tenant to office tenant, although the 

lease terms vary significantly from MOB 

to MOB (for example, the price per 

square foot is much less for MOB C than 

it is for MOB D). Under these facts, we 

would consider the lease agreements to 

be uniform with respect to each MOB, 

but not uniform across all MOBs. 

Therefore, in responding to the DFRR, 

the hospital would need to send one 

copy of the lease agreement for MOB A, 

one copy of the lease agreement for 

MOB B, one copy of the lease agreement 

for MOB C, and one copy of the lease 

agreement for MOB D. 

Example 3: Same facts as Example 1, 

except that the price per square foot 

varies slightly from office to office, with 

no two offices having the same price per 

square foot. In this case, we do not 

consider there to be a uniform 

agreement; therefore, in responding to 

the DFRR, the hospital would need to 

send a copy of the lease agreement for 

each physician or physician practice. 

Comment: One commenter stated that 

the data requested would contain 

confidential information, and despite 

the reference to the Federal Trade 

Secrets Act (18 U.S.C. 1905) and the 

Freedom of Information Act (5 U.S.C. 

552(b)(6)), which prevent information 


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provided to us from being released, 

expressed concern as to the specific 

safeguards in place to prevent such a 

release from occurring. 

Response: We have established 

numerous safeguards to physically 

house the data provided to us. In 

addition, we will release such 

information, where appropriate, to 

federal law enforcement agencies such 

as the HHS’s Office of Inspector General 

(OIG) and the Department of Justice 

(DOJ). We will not release information 

contained in the DFRR as matter of 

course to law enforcement agencies, but 

rather will do so only where we believe 

a specific referral to the OIG, DOJ, or 

other agency is warranted. Our policy is 

not to release any confidential business 

information or FOIA-protected 

personally identifiable information to 

the public. More detailed information 

concerning our disclosure policy is set 

forth in the general instructions 

accompanying the DFRR. We note that 

whereas the Trade Secrets Act prohibits 

federal agencies from releasing certain 

information under certain 

circumstances, the FOIA does not 

prohibit federal agencies from releasing 

information—rather, the FOIA allows us 

to withhold certain information under 

certain circumstances. 

Comment: One commenter questioned 

the placement of the DFRR within the 

FY 2009 IPPS proposed rule and stated 

that the DFRR should be evaluated and 

approved by OMB and be consistent 

with the PRA. In addition, the 

commenter stated that we should 

contact physicians directly, rather than 

requesting that hospitals gather this 

information from each of their 

physicians. 

Response: Our aim in including the 

DFRR in the FY 2009 IPPS proposed 

rule was to increase the likelihood that 

the general public would be aware of 

our proposed information collection 

request and submit comments 

concerning it. Therefore, we outlined 

the proposed requirements of the DFRR 

in the preamble, included a discussion 

of the costs associated with the DFRR in 

the Collection of Information section 

(section XI.B.) of the preamble of the 

proposed rule, and sent forth to OMB a 

PRA package concerning the DFRR. 

Pursuant to procedures required by the 

PRA, a revised PRA package, reflecting 

the changes to the DFRR that we have 

made based on comments received thus 

far, has been sent to OMB for its review 

and approval. The revised PRA notice 

will be published separately in the 

Federal Register. The revised PRA 

notice will set forth a public comment 

period of 30 days from the date of 

display. 

X. MedPAC Recommendations 

We are required by section 

1886(e)(4)(B) of the Act to respond to 

MedPAC’s recommendations regarding 

hospital inpatient payments in our 

annual proposed and final IPPS rules. 

Having reviewed both MedPAC’s March 

2008 ‘‘Report to the Congress: Medicare 

Payment Policy’’ and its June 2007 

‘‘Report to Congress: Promoting Greater 

Efficiency in Medicare,’’ we have given 

those reports careful consideration in 

conjunction with the policies set forth 

in this document. 

Recommendation 2A–1: MedPAC’s 

March 2008 Report to Congress states 

that ‘‘The Congress should increase 

payment rates for the acute inpatient 

and outpatient prospective payment 

systems in 2009 by the projected rate of 

increase in the hospital market basket 

index, concurrent with implementation 

of a quality incentive payment 

program.’’ This recommendation is 

discussed in Appendix B to this final 

rule. 

Recommendation 2A–2: MedPAC also 

recommended that ‘‘The Congress 

should reduce the indirect medical 

education adjustment in 2009 by 1 

percentage point to 4.5 percent per 10 

percent increment in the resident-to-bed 

ratio. The funds obtained by reducing 

the indirect medical education 

adjustment should be used to fund a 

quality incentive payment program.’’

Response to Recommendation 2A–2: 

Redirecting funds obtained by reducing 

the IME adjustment to fund a quality 

incentive payment program is consistent 

with the VBP initiatives to improve the 

quality of care and, therefore, merits 

consideration. However, section 502(a) 

of Public Law 108–173 modified the 

formula multiplier (c) to be used in the 

calculation of the IME adjustment 

beginning midway through FY 2004 and 

provided for a new schedule of formula 

multipliers for FYs 2005 and thereafter. 

Consequently, CMS does not have the 

authority to implement MedPAC’s 

recommendation to reduce the IME 

adjustment in 2009. We note that 

included in the President’s FY 2009 

budget proposal was a proposal to 

reduce the IME adjustment from 5.5 

percent to 2.2 percent over 3 years, 

starting in FY 2009, in order to better 

align IME payments with the estimated 

costs per case that teaching hospitals 

may face. 

In its June 2007 Report to Congress, 

MedPAC made recommendations 

concerning the Medicare hospital wage 

index. Section 106(b)(1) of the MIEA–

TRHCA (Pub. L. 109–432) required 

MedPAC to submit to Congress, not later 

than June 30, 2007, a report on the 

Medicare hospital wage index 

classification system applied under the 

Medicare IPPS, including any 

alternatives that MedPAC recommended 

to the method to compute the wage 

index under section 1886(d)(3)(E) of the 

Act. In addition, section 106(b)(2) of the 

MIEA–TRHCA required the Secretary 

taking into account MedPAC’s 

recommendations on the Medicare 

hospital wage index classification 

system, to include in this FY 2009 IPPS 

proposed rule one or more policies to 

revise the wage index adjustment 

applied under section 1886(d)(3)(E) of 

the Act for purposes of the IPPS. The 

MedPAC recommendations and our 

policies concerning the Medicare 

hospital wage index are discussed in 

section III.B. of the preamble of the FY 

2009 IPPS proposed rule and this final 

rule. 

For further information relating 

specifically to the MedPAC reports or to 

obtain a copy of the reports, visit 

MedPAC’s Web site at: http:// 

www.medpac.gov. 

XI. Other Required Information 

A. Requests for Data From the Public 

In order to respond promptly to 

public requests for data related to the 

prospective payment system, we have 

established a process under which 

commenters can gain access to raw data 

on an expedited basis. Generally, the 

data are available in computer tape or 

cartridge format. However, some files 

are available on diskette as well as on 

the Internet at: http://www.cms.hhs.gov/ 

providers/hipps. We listed the data files 

and the cost for each file, if applicable, 

in the FY 2009 IPS proposed rule (73 FR 

23698 through 23700). 

Commenters interested in discussing 

any data used in constructing the 

proposed rule or this final rule should 

contact Nisha Bhat at (410) 786–5320. 

B. Collection of Information 

Requirements 

1. Legislative Requirement for 

Solicitation of Comments 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 


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• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

2. Requirements in Regulatory Text 

In the FY 2009 IPPS proposed rule (73 

FR 23700 through 23702), we solicited 

public comment on each of the issues 

listed under section XI.B.1. of this 

preamble for the following sections of 

this document that contain information 

collection requirements (ICRs). We 

discuss and respond to any public 

comments we received in each 

individual sections. 

a. ICRs Regarding Reporting 

Requirements (§ 411.361) 

Section 411.361(a) of the regulations 

states that, except for entities that 

furnish 20 or fewer Part A and Part B 

services during a calendar year, or for 

Medicare covered services furnished 

outside the United States, all entities 

furnishing services for which payment 

may be made under Medicare must 

submit information to CMS or to the 

Office of the Inspector General (OIG) 

concerning their reportable financial 

relationships (any ownership or 

investment interest, or compensation 

arrangement) in the form, manner, and 

within the timeframe that CMS or OIG 

specifies. As described in section IX.C. 

of the preamble of this final rule and in 

accordance with its authority under 

§ 411.361(e), we are requiring that 

hospitals provide information 

concerning their ownership, investment, 

and compensation arrangements with 

physicians by completing the DFRR 

instrument. 

An information collection request 

concerning the DFRR was previously 

submitted to OMB for approval. We 

announced and sought public comment 

on the information collection request in 

both 60-day and 30-day Federal 

Register notices that were published on 

May 18, 2007 (72 FR 28056), and 

September 14, 2007 (72 FR 52568), 

respectively. In the FY 2009 IPPS 

proposed rule (73 FR 23695 and 23700), 

we discussed the requirement for 

submission of information using the 

DFRR instrument and the time and cost 

burden associated with completing and 

submitting the instrument. 

As further discussed in section IX.C. 

of the preamble of this final rule, we 

have decided to obtain additional input 

from the public concerning the time and 

cost burden associated with completing 

and submitting the DFRR instrument. In 

addition to the discussion of the revised 

burden estimates for the DFRR 

information collection request included 

in the preamble of this final rule and 

below in this collection of information 

section, we will publish, under a 

separate notice and comment period, a 

30-day Federal Register notice for the 

associated information collection 

request prior to submitting the 

information collection request to OMB 

for review and approval. 

We believe that hospital accounting 

personnel will be responsible for: (1) 

Ensuring that the appropriate data or 

supporting documentation is retrieved; 

(2) completing the DFRR instrument; 

and (3) submitting the DFRR to the 

Chief Executive Officer, Chief Financial 

Officer, or comparable officer of the 

hospital for his or her signature on the 

certification statement. 

Initially, CMS would require (no 

greater than) 500 hospitals to complete 

and submit the DFRR instrument. Based 

on public comments we received, we 

have revised our estimated completion 

time for the DFRR that we presented in 

the proposed rule. The estimated 

amount of time needed to comply with 

this information collection request is 

100 hours for each of the hospitals. 

Thus, the total number of burden hours 

required for 500 hospitals to complete 

the DFRR instrument is 50,000 hours. 

b. ICRs Regarding Risk Adjustment Data 

(§ 422.310) 

As discussed in section IV.H. of the 

preamble of the proposed rule and this 

final rule, § 422.310(b) states that each 

MA organization must submit to CMS 

(in accordance with CMS instructions) 

the data necessary to characterize the 

context and purposes of each item and 

service provided to a Medicare enrollee 

by a provider, supplier, physician, or 

other practitioner. In addition, 

§ 422.310(b) states that CMS may collect 

data necessary to characterize the 

functional limitations of enrollees of 

each MA organization. Section 

422.310(c) lists the nature of the data 

elements to be submitted to CMS. 

For the proposed rule, we estimated 

the burden associated with these 

requirements to be the time and effort 

necessary for the MA organization to 

submit the necessary data to CMS. 

These requirements are subject to the 

PRA and the associated burden is 

currently approved under OMB control 

number 0938–0878. However, we noted 

that under notice and comment periods 

separate from the proposed rule, we 

intended to revise the currently 

approved information collection request 

to include burden estimates as they 

pertain to § 422.310. The preliminary 

burden estimate for the proposed rule 

was as follows: Currently, there are 676 

MA organizations. Assuming that 99 

percent of encounter data claims are 

submitted electronically and 1 percent 

are submitted manually, we estimated 

that it would take 1,089 hours annually 

for submission of electronic claims and 

73,335 hours annually for submission of 

manual claims. The estimated annual 

burden associated with these 

requirements was an annual average of 

110 hours per MA organization. 

Comment: A few commenters stated 

that the burden estimates in the 

proposed rule were inadequate to 

capture the time associated with 

collecting and submitting risk 

adjustment data. Another commenter 

stated that CMS’ estimate did not 

account for the impact on a plan’s 

already-existing verification processes 

and procedures, including internal audit 

processes, which are undertaken to 

ensure the ‘‘completeness, truthfulness 

and accuracy’’ of the data. One 

commenter requested that CMS discuss 

in more detail the current impact 

analysis before finalizing the rule. One 

commenter noted that, while the 

estimates in the proposed rule gauged 

that an MA plan would spend less than 

110 hours annually to comply with this 

request, its plan’s RAPS transmission 

takes about 2 hours each month to run. 

Another commenter stated that CMS’

preliminary estimate that 99 percent of 

claims are assumed to be electronic is 

inaccurate for the majority of PACE 

organizations. One commenter 

estimated that the cost of submitting 

encounter data would be no less than 

2,000 hours a year in addition to having 

to retool internal systems as well as 

change or amend provider contracts. 

Response: We appreciate the input of 

the commenters on their plans regarding 

the time and effort involved in their 

data collection efforts. While we will 

take these commenters’ concerns into 

account, we also plan to obtain feedback 

from a wide variety of MA organizations 

regarding the work that would be 

involved in implementing and reporting 

encounter data. Because we want to 

wait until we have designed our 

reporting process and have obtained 

specific information about what work 

will be needed on the part of MA 

organizations to report such data, in this 

final rule, we are not changing our 

preliminary burden estimates presented 

in the FY 2009 IPPS proposed rule. 

Instead, we will address the issue in the 

PRA information collection request that 

will be released for public comment 


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prior to the implementation of 

encounter data collection. 

c. ICRs Regarding Basic Commitments of 

Providers (§ 489.20) 

As discussed in section IV.I. of the 

preamble of this final rule, § 489.20(r)(2) 

states that a hospital, as defined in 

§ 489.24(b), must maintain an on-call 

list of physicians on its medical staff 

who are available to provide treatment 

necessary to stabilize patients who are 

receiving services required under 

§ 489.24 in accordance with the 

resources available to the hospital. The 

burden associated with this requirement 

is the time and effort necessary to draft, 

maintain, and periodically update the 

list of on-call physicians. We estimate 

that it will take 3 hours for each 

Medicare-participating hospitals 

(including CAHs) to comply with this 

recordkeeping requirement. The 

estimated annual burden associated 

with this requirement is 300 hours. 

However, after further review, we 

have determined that maintenance of a 

list of on-call physicians is a usual and 

customary business practice as hospitals 

routinely maintain the required 

information. Hospitals are required to 

maintain an on-call list of physicians to 

comply with the section 1866(a)(1)(I)(iii) 

of the Act. In accordance with 5 CFR 

1320.3(b)(2), we are removing the 

aforementioned 300-hour annual burden 

associated with this requirement. As 

stated in 5 CFR 1320.3(b)(2), the burden 

associated with the time, effort, and 

financial resources necessary to comply 

with an ICR that would be incurred by 

persons in the normal course of their 

activities (that is, in compiling and 

maintaining business records) is exempt 

from the PRA. 

As discussed in section VII. of the 

preamble of this final rule, 

§ 489.20(u)(1) states that, in the case of 

a physician-owned hospital as defined 

in § 489.3, the hospital must furnish 

written notice to all patients at the 

beginning of their hospital stay or 

outpatient visit that the hospital is a 

physician-owned facility. In addition, 

patients must be advised that a list of 

the hospital’s owners or investors who 

are physicians (or immediate family 

members of physicians) is available 

upon request. Upon receiving the 

request of the patient or an individual 

on behalf of the patient, a hospital must 

immediately disseminate the list to the 

requesting patient. 

The burden associated with the 

requirements in this section is the time 

and effort necessary for a hospital to 

furnish written notice to all patients that 

the hospital is a physician-owned 

hospital. Because this requirement is 

subject to the PRA, the associated 

burden is currently approved under 

OMB control number 0938–1034, with 

an expiration date of February 28, 2011. 

In addition, there is burden associated 

with furnishing a patient with the list of 

the hospital’s owners or investors who 

are physicians (or immediate family 

members of physicians) at the time of 

the patient’s request. However, CMS has 

no way to accurately quantify the 

burden because we cannot estimate the 

number of this type of requests that a 

hospital may receive. We solicited 

public comments on the annual number 

of requests a hospital may receive for 

lists of physician owners and investors 

in the FY 2009 IPPS proposed rule (73 

FR 23528). However, we did not receive 

any public comments to assist us in our 

burden analysis. While we acknowledge 

that there is a burden associated with 

this ICR, we also acknowledge that we 

have no way to quantify this 

requirement’s burden. For that reason, 

we are assigning 1 token burden hour to 

this requirement until such a time that 

we can conduct an accurate burden 

analysis for this information collection 

requirement. 

Section 489.20(u)(2) requires 

disclosure of physician ownership as a 

condition of continued medical staff 

membership or admitting privileges. 

The burden associated with this 

requirement is the time and effort 

required for a hospital to develop, draft, 

and implement changes to its medical 

staff bylaws and other policies 

governing admitting privileges. 

Approximately 175 physician-owned 

hospitals will be required to comply 

with this requirement. We estimate that 

it will require a hospital’s general 

counsel 4 hours to revise a hospital’s 

medical staff bylaws and policies 

governing admitting privileges. 

Therefore, the total annual hospital 

burden is 700 hours. 

In addition, § 489.20(u)(2) imposes a 

burden on physicians. As stated earlier, 

all physicians who are also members of 

the hospital’s medical staff must agree, 

as a condition of continued medical 

staff membership or admitting 

privileges, to disclose, in writing, to all 

patients they refer to the hospital any 

ownership or investment interest in the 

hospital held by themselves or by an 

immediate family member. The 

disclosure must be made at the time the 

referral is made. The burden associated 

with this requirement is the time and 

effort necessary for a physician to draft 

a disclosure notice and to provide it to 

the patient at the time the referral is 

made to the physician-owned hospital. 

We estimate that it will take each 

physician, or designated office staff 

member, 1 hour to develop a disclosure 

notice and make copies that will be 

distributed to patients. In addition, we 

estimate that it will take 30 seconds to 

provide the disclosure notice to each 

patient and an additional 30 seconds to 

record proof of disclosure in each 

patient’s medical record. 

Although we can estimate the number 

of physician-owned hospitals, we are 

unable to quantify the numbers of 

physicians (or their immediate family 

members) that possess an ownership or 

investment interest in hospitals. There 

is limited data available concerning 

physician ownership in hospitals. The 

studies to date, including those by CMS 

and the GAO, pertain to physician 

ownership in specialty hospitals 

(cardiac, orthopedic, and surgical 

hospitals). These specialty hospital 

studies published data concerning the 

average percentage of shares of direct 

ownership by physicians (less than 2 

percent), indirect ownership through 

group practices, and the aggregate 

percentage of physician ownership, but 

did not publish the number of physician 

owners in these types of hospitals. More 

importantly, § 489.20(u)(2) applies to 

physician ownership in any type of 

hospital. Our other research involved a 

review of enrollment data. However, the 

CMS Medicare enrollment application 

(CMS 855) requires that physicians 

report ownership interests that exceed 5 

percent or greater, and, thus, most 

physician ownership is not captured. 

While we acknowledge there is a burden 

associated with this ICR, we also 

acknowledge that we have no way to 

quantify this requirement’s burden. For 

that reason, we are assigning 1 token 

burden hour to this requirement until 

such a time that we can conduct an 

accurate burden analysis for this 

information collection requirement. 

Section 489.20(v) states that the 

aforementioned requirements in 

§ 489.20(u)(1) and (u)(2) do not apply to 

a physician-owned hospital that does 

not have at least one referring physician 

who has an ownership or investment 

interest in the hospital, or who has an 

immediate family member who has an 

ownership or investment interest in the 

hospital. To comply with this exception, 

an eligible hospital must sign an 

attestation to that effect and maintain 

the document in its records. Therefore, 

the number of hospitals that are subject 

to the disclosure requirement would be 

slightly reduced. However, there may be 

a minimal burden attributable to the 

requirement that the hospital maintain 

an attestation statement in its records. 

The burden associated with this 

requirement is limited to those 

physician-owned hospitals that do not 


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have at least one referring physician 

who has an ownership or investment 

interest in the hospital, or who has an 

immediate family member who has an 

ownership or investment interest in the 

hospital. The burden includes the time 

and effort for these hospitals to develop, 

sign, and maintain the attestations in 

their records. We estimate that 10 

percent, or approximately 18, of the 

estimated 175 physician-owned 

hospitals will be subject to this 

requirement. We estimate that it will 

take each of these physician-owned 

hospitals an average of 1 hour to 

develop, sign, and maintain the 

attestation in its records. The estimated 

annual burden associated with this 

requirement is 18 hours. However, we 

have no way of knowing for certain the 

number of physician-owned hospitals 

that do not have at least one referring 

physician who has an ownership or 

investment interest in the hospital, or 

who has an immediate family member 

who has an ownership or investment 

interest in the hospital. 

In the FY 2009 IPPS proposed rule (73 

FR 23528), we solicited public 

comments on the number of physicianowned hospitals that do not have at 

least one referring physician who has an 

ownership or investment interest in the 

hospital, or who has an immediate 

family member who has an ownership 

or investment interest in the hospital. 

However, we did not receive any public 

comments to assist us in our burden 

analysis. Therefore, we are submitting 

the burden estimate for this requirement 

as it appeared in the proposed rule. 

Section 489.20(w) requires all 

hospitals, as defined in § 489.24(b), to 

furnish all patients notice, in 

accordance with § 482.13(b)(2), at the 

beginning of their hospital stay or 

outpatient visit if a doctor of medicine, 

or a doctor of osteopathy, is not present 

in the hospital 24 hours per day, 7 days 

per week. The notice must indicate how 

the hospital will meet the medical needs 

of any inpatient who develops an 

emergency medical condition, as 

defined in § 489.24(b), at a time when 

there are no physicians present in the 

hospital. The burden associated with 

this requirement is the time and effort 

necessary for each hospital to develop a 

standard notice to furnish to its patients. 

Because this requirement is subject to 

the PRA, the associated burden is 

approved under OMB control number 

0938–1034, with a current expiration 

date of February 28, 2011. 

ESTIMATED ANNUAL REPORTING AND RECORDKEEPING BURDEN

Regulation section(s) OMB control No. Respondents Responses 

Burden per 

response 

(hours) 

Total annual 

burden 

(hours) 

§ 411.361 ........................................... 0938–New ........................................ 500 500 100 *50,000 

§ 422.310(b) ...................................... 0938–0878 ....................................... 676 676 110 **74,424 

§ 489.20(u)(1) and (w) ....................... 0938–1034 ....................................... 2,679 49,735,635 *** 839,599 

§ 489.20(u)(2) .................................... 0938–New ........................................ 175 175 4 700 

§ 489.20(v) ......................................... 0938–New ........................................ 18 18 1 18 

Total ........................................... ........................................................... ........................ ........................ ........................ 964,741 

*For a comprehensive summary of our rationale for modifying these burden estimates, we refer readers to section IX.C. of the preamble of this 

final rule. 

**Burden estimate is based on revisions to the currently approved OMB control number. 

*** There are multiple requirements associated with the regulation section approved under this OMB control number. There is no uniform estimate of the burden per response. 

3. Associated Information Collections 

Not Specified in Regulatory Text 

As we indicated in the FY 2009 IPPS 

proposed rule, this final rule imposes 

ICRs as outlined in the regulation text 

and specified above. However, this rule 

also makes reference to several 

associated information collections that 

are not discussed in the regulation text. 

The following is a discussion of these 

collections, which have received OMB 

approval. 

a. Present on Admission (POA) 

Indicator Reporting 

Section II.F.8 of the preamble of this 

final rule discusses the POA indicator 

reporting requirements. As stated 

earlier, POA indicator information is 

necessary to identify which conditions 

are acquired during hospitalization for 

the hospital-acquired condition (HAC) 

payment provision, and for broader 

public health uses of Medicare data. 

Through Change Request No. 5499 

(released May 11, 2007), CMS issued 

instructions that require IPPS hospitals 

to submit POA indicator data for all 

diagnosis codes on Medicare claims. 

The burden associated with this 

requirement is the time and effort 

necessary to place the appropriate POA 

indicator codes on Medicare claims. 

Because the requirement is subject to 

the PRA; the associated burden is 

approved under OMB control number 

0938–0997, with an expiration date of 

August 31, 2009. 

b. Add-On Payments for New Services 

and Technologies 

Section II.J. of the preamble of the FY 

2009 IPPS proposed rule and this final 

rule discusses add-on payments for new 

services and technologies. Specifically, 

this section states that applicants for 

add-on payments for new medical 

services or technologies for FY 2010 

must submit a formal request. A formal 

request includes a full description of the 

clinical applications of the medical 

service or technology and the results of 

any clinical evaluations demonstrating 

that the new medical service or 

technology represents a substantial 

clinical improvement. In addition, the 

request must contain a significant 

sample of the data to demonstrate that 

the medical service or technology meets 

the high-cost threshold. 

We detailed the burden associated 

with this requirement in the September 

7, 2001 IPPS final rule (66 FR 46902). 

As stated in that final rule, we believe 

the associated burden is exempt from 

the PRA as stipulated under 5 CFR 

1320.3(h)(6). Collection of the 

information for this requirement is 

conducted on individual case-by-case 

basis. 

c. Reporting of Hospital Quality Data for 

Annual Hospital Payment Update 

As noted in section IV.B. of the 

preamble of the proposed rule and this 

final rule, the RHQDAPU program was 

originally established to implement 

section 501(b) of Public Law 108–173, 

thereby expanding our voluntary HQI. 

The RHQDAPU program originally 

consisted of a ‘‘starter set’’ of 10 quality 

measures. OMB approved the collection 

of data associated with the original 


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starter set of quality measures under 

OMB control number 0938–0918, with a 

current expiration date of January 31, 

2010. 

We added additional quality measures 

to the RHQDAPU program and 

submitted the information collection 

request to OMB for approval. This 

expansion of the RHQDAPU measures 

was part of our implementation of 

section 5001(a) of the DRA. Section 

1886(b)(3)(B)(viii)(III) of the Act, added 

by section 5001(a) of the DRA, requires 

that the Secretary expand the ‘‘starter 

set’’ of 10 quality measures that were 

established by the Secretary as of 

November 1, 2003, to include measures 

‘‘that the Secretary determines to be 

appropriate for the measurement of the 

quality of care furnished by hospitals in 

inpatient settings.’’ The burden 

associated with these reporting 

requirements is currently approved 

under OMB control number 0938–1022 

with a current expiration date of June 

30, 2011. 

However, for FY 2009, we submitted 

to OMB for approval a revised 

information collection request using the 

same OMB control number (0938–1022). 

In the revised request, we added three 

new RHQDAPU quality measures that 

we adopted for the FY 2009 RHQDAPU 

program to the PRA process. These three 

measures are as follows: 

• Pneumonia 30-day Mortality 

(Medicare patients); 

• SCIP Infection 4: Cardiac Surgery 

Patients with Controlled 6AM 

Postoperative Serum Glucose; and 

• SCIP Infection 6: Surgery Patients 

with Appropriate Hair Removal 

The revised information collection 

request was announced in the Federal 

Register via an emergency notice on 

January 28, 2008 (73 FR 4868). The 

burden associated with these reporting 

requirements has been approved under 

OMB control number 0938–1022, with a 

current expiration date of June 30, 2011. 

However, as stated in section IV.V.2. of 

this final rule, we are submitting 

another revised information collection 

request to obtain approval for the 13 

new RHQDAPU program measures 

listed below; 

• SCIP Cardiovascular 2: Surgery 

Patients on a Beta Blocker Prior to 

Arrival Who Received a Beta Blocker 

During the Perioperative Period 

• Heart Failure (HF) 30–Day Risk 

Standardized Readmission Measure 

• Death among surgical patients with 

treatable serious complications 

(Medicare patients) 

• Iatrogenic pneumothorax, adult 

(Medicare patients) 

• Postoperative wound dehiscence 

(Medicare patients) 

• Accidental puncture or laceration 

(Medicare patients) 

• Abdominal aortic aneurysm (AAA) 

mortality rate (with or without volume) 

(Medicare patients) 

• Hip fracture mortality rate 

(Medicare patients) 

• Mortality for selected surgical 

procedures (composite) (Medicare 

patients) 

• Complication/patient safety for 

selected indicators (composite) 

(Medicare patients) 

• Mortality for selected medical 

conditions (composite) (Medicare 

patients) 

• Failure to Rescue (Medicare claims 

only) 

• Participation in a Systematic 

Database for Cardiac Surgery 

Section IV.B.5. of the preamble of the 

proposed rule and this final rule also 

discusses the requirements for the 

continuous collection of HCAHPS 

quality data. The HCAHPS survey is 

designed to produce comparable data 

regarding the patient’s perspective on 

care that allows objective and 

meaningful comparisons between 

hospitals on domains that are important 

to consumers. We also added the 

HCAHPS survey to the PRA process in 

the information collection request 

currently approved under OMB control 

number 0938–1022, with a current 

expiration date of June 30, 2011. 

Section IV.B.9. of the preamble of the 

FY 2009 IPPS proposed rule and this 

final rule addresses the reconsideration 

and appeal procedures for a hospital 

that we believe did not meet the 

RHQDAPU program requirements. If a 

hospital disagrees with our 

determination, it may submit a written 

request to CMS requesting that we 

reconsider our decision. The hospital’s 

letter must explain the reasons why it 

believes it did meet the RHQDAPU 

program requirements. While this is a 

reporting requirement, the burden 

associated with it is not subject to the 

PRA under 5 CFR 1320.4(a)(2). The 

burden associated with information 

collection requirements imposed 

subsequent to an administrative action 

is not subject to the PRA. 

d. Occupational Mix Adjustment to the 

FY 2009 Index (Hospital Wage Index 

Occupational Mix Survey) 

Section III. of the preamble of this 

final rule details the changes to the 

hospital wage index. Specifically, 

section III.D. addresses the occupational 

mix adjustment to the FY 2009 wage 

index. While the preamble does not 

contain any new ICRs, it is important to 

note that there is an OMB approved 

information collection request 

associated with the hospital wage index. 

Section 304(c) of Public Law 106–554 

amended section 1886(d)(3)(E) of the 

Act to require CMS to collect data at 

least once every 3 years on the 

occupational mix of employees for each 

short-term, acute care hospital 

participating in the Medicare program 

in order to construct an occupational 

mix adjustment to the wage index. We 

collect the data via the occupational mix 

survey. 

The burden associated with this 

information collection requirement is 

the time and effort required to collect 

and submit the data in the Hospital 

Wage Index Occupational Mix Survey to 

CMS. Because this burden is subject to 

the PRA, it is approved under OMB 

control number 0938–0907, with an 

expiration date of February 28, 2011. 

C. Waiver of Proposed Rulemaking, 

Waiver of Delay in Effective Date, and 

Retroactive Effective Date 

1. Requirements for Waivers and 

Retroactive Rulemaking 

We ordinarily publish a notice of 

proposed rulemaking in the Federal 

Register to provide for public comment 

before the provisions of a rule take effect 

in accordance with section 553(b) of the 

Administrative Procedure Act (APA). 

However, we can waive notice and 

comment procedures if the Secretary 

finds, for good cause, that the notice and 

comment process is impracticable, 

unnecessary, or contrary to the public 

interest, and incorporates a statement of 

the finding and the reasons therefore in 

the rule. Section 553(d) of the APA also 

ordinarily requires a 30-day delay in 

effective date of final rules after the date 

of their publication. However, this 30- 

day delay in effective date can be 

waived if an agency finds for good cause 

that the delay is impracticable, 

unnecessary, or contrary to the public 

interest, and the agency incorporates a 

statement of the findings and its reasons 

in the rule issued. Moreover, section 

1871(e)(1)(A) of the Act generally 

prohibits the Secretary from making 

retroactive substantive changes in 

policy unless retroactive application of 

the change is necessary to comply with 

statutory requirements or failure to 

apply the change retroactively would be 

contrary to the public interest. 

2. FY 2008 Puerto Rico-Specific Rates 

We are waiving notice-and-comment 

procedures and the 30-day delay in 

effective date with respect to the 

application of the documentation and 

coding adjustment to the Puerto Ricospecific operating standardized amounts 


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and the Puerto Rico specific capital 

payment rate for FY 2008. As discussed 

in section II.D.3. of this final rule, the 

documentation and coding adjustment 

established in the FY 2008 final rule 

with comment period relied upon our 

authority under section 

1886(d)(3)(A)(vi) of the Act, which 

provides the authority to adjust ‘‘the 

standardized amounts computed under 

this paragraph’’ to eliminate the effect of 

changes in coding or classification that 

do not reflect real change in case-mix. 

We believe that the application of the 

documentation and coding adjustment 

to the Puerto-Rico specific rates in the 

FY 2008 IPPS final rule was not 

consistent with the plain meaning of 

section 1886(d)(3)(A)(vi) of the Act. 

Therefore, we are revising the PuertoRico specific rates for FY 2008 to 

remove the application of the 

documentation and coding adjustment. 

We are waiving notice and comment 

procedures with respect to this policy 

change because we believe it would be 

unnecessary and contrary to the public 

interest to undertake notice-andcomment procedures prior to changing 

our policy to make the policy consistent 

with the plain meaning of the section of 

the statute upon which the policy was 

based. For the same reasons, we are 

waiving the 30-day delay in effective 

date because we believe it would be 

unnecessary and contrary to the public 

interest to delay the policy change 

beyond the October 1, 2007 effective 

date of the FY 2008 IPPS final rule. We 

are also applying this policy change 

retroactive to October 1, 2007, under 

section 1871(e)(1)(A)(i) of the Act 

because it would be contrary to the 

public interest for our policy not to be 

consistent with the plain meaning of the 

section of the statute upon which the 

policy was based. 

3. Rebasing of Payments to SCHs 

We are waiving notice-and-comment 

procedures with respect to the 

provisions relating to the rebasing of 

payments to SCHs discussed in section 

IV.D.2. of the preamble of this final rule. 

As discussed in that section, section 122 

of the Medicare Improvements for 

Patients and Providers Act of 2008 (Pub. 

L. 110–275) provides that, for cost 

reporting periods beginning on or after 

January 1, 2009, SCHs will be paid 

based on an FY 2006 hospital-specific 

rate (that is, based on their updated 

costs per discharge based on their 12- 

month cost reporting period beginning 

during Federal fiscal year 2006), if this 

results in the greatest payment to the 

SCH. Therefore, effective with cost 

reporting periods beginning on or after 

January 1, 2009, SCHs will be paid 

based on the rate that results in the 

greatest aggregate payment using either 

the Federal rate or their hospitalspecific rate based on their 1982, 1987, 

1996, or 2006 costs per discharge. This 

statutory provision is selfimplementing. Therefore, we are 

waiving notice-and-comment 

procedures with respect to 

incorporating this change in our 

regulations. We believe it is unnecessary 

and contrary to the public interest to 

undertake notice-and-comment 

procedures prior to incorporating the 

policy in the regulations, consistent 

with the provisions of the statute. 

4. Technical Change to Regulations 

Governing Payments to Hospitals With 

High Percentage of ESRD Discharges 

As discussed in section II.G.12.g. of 

the preamble of this final rule, the 

existing regulation at § 412.104 specifies 

the rules for an additional payment to 

hospitals where 10 percent or more of 

their patients who are discharged 

receive dialysis treatment during an 

inpatient stay. However, there are 

specific DRGs cited in the regulation 

that are excluded from this additional 

payment. Because, beginning in FY 

2008, we adopted MS–DRGs to replace 

the DRGs cited in the regulation, we are 

making a technical change to cite the 

appropriate replacement MS–DRGs. We 

believe that it is unnecessary and 

contrary to the public interest to 

undertake notice and comment 

procedures for this technical 

conforming change. 

5. Changes to Regulations at 42 CFR 

412.230, 412.232, and 412.234 Relating 

to Procedures for Terminating and 

Withdrawing Certain Reclassifications 

Our changes to 42 CFR 412.230, 

412.232, and 412.234 will be effective 

on September 2, 2008, the deadline for 

hospitals to submit applications for 

reclassifications for the FY 2010 wage 

index. In addition, the procedures we 

have described in section III.I.7. of the 

preamble of this final rule will be 

effective upon publication. It is in the 

public interest of hospitals for the 

changes to the reclassification 

thresholds to be in place at the time 

their applications are due to the MGCRB 

for FY 2010. This provides confidence 

to hospitals that the applications they 

are filing are using correct thresholds. It 

also is unnecessary for the changes to 

§§ 412.230, 412.232, and 412.234 to 

have a delayed effective date, as the 

changes to these regulatory provisions 

will have no effect on FY 2009 

reclassifications but rather will affect 

only FY 2010 reclassifications. Thus, in 

the most practical sense, hospitals have 

more than a year’s worth of notice 

regarding the standards that will be 

applied for FY 2010. Finally, even if the 

thresholds were effective at a later date, 

the MGCRB would use the thresholds 

that are in effect at the time it makes its 

reclassification decisions. 

The rules discussed in section III.I.7. 

of the preamble of this final rule are 

simply procedural and thus are not 

subject to any delay in effective date. 

Even if they were, however, it is in the 

public interest to make them effective 

upon publication, as they provide a 

necessary and expeditious timetable for 

both CMS and hospitals to respond to 

intervening MIPPA legislation. In 

addition, we view these rules as 

‘‘relieving a restriction’’ under 5 U.S.C. 

553(d)(1), as they allow affected 

hospitals another opportunity to 

withdraw or terminate reclassifications 

in response to the intervening MIPPA 

legislation. Finally, we note that section 

1871(b)(2)(B) of the Act allows for 

waiver of notice and comment 

rulemaking when a statute creates a 

deadline for implementation that is less 

than 150 days after the date of 

enactment of the statute. The time 

between MIPPA enactment (July 15, 

2008) and the date by which the 

extended reclassifications and special 

exceptions must take effect (October 1, 

2008) is less than 150 days. 

List of Subjects 

42 CFR Part 411 

Kidney diseases, Medicare, Physician 

referral, Reporting and recordkeeping 

requirements. 

42 CFR Part 412 

Administrative practice and 

procedure, Health facilities, Medicare, 

Puerto Rico, Reporting and 

recordkeeping requirements. 

42 CFR Part 413 

Health facilities, Kidney diseases, 

Medicare, Puerto Rico, Reporting and 

recordkeeping requirements. 

42 CFR Part 422 

Administrative practice and 

procedure, Grant programs—health, 

Health care, Health insurance, Health 

maintenance organizations (HMO), Loan 

programs—health, Medicare, Reporting 

and recordkeeping requirements. 

42 CFR Part 489 

Health facilities, Medicare, Reporting 

and recordkeeping requirements. 

■ For the reasons stated in the preamble 

of this final rule, the Centers for 

Medicare & Medicaid Services is 

amending 42 CFR Chapter IV as follows: 


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PART 411—EXCLUSIONS FROM 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT 

■ 1. The authority citation for part 411 

continues to read as follows: 

Authority: Secs. 1102, 1860D–1 through 

1860D–42, 1871, and 1877 of the Social 

Security Act (42 U.S.C. 1302, 1395w–101 

through 1395w–152, 1395hh, and 1395nn). 

■ 2. Section 411.351 is amended by—

■ a. Revising paragraph (1) of the 

definition of ‘‘entity’’. 

■ b. Revising the definition of 

‘‘physician’’. 

■ c. Revising the definition of 

‘‘physician organization’’. 

The revisions read as follows: 

§ 411.351 Definitions. 

* * * * * 

Entity means—

(1) A physician’s sole practice or a 

practice of multiple physicians or any 

other person, sole proprietorship, public 

or private agency or trust, corporation, 

partnership, limited liability company, 

foundation, nonprofit corporation, or 

unincorporated association that 

furnishes DHS. An entity does not 

include the referring physician himself 

or herself, but does include his or her 

medical practice. A person or entity is 

considered to be furnishing DHS if it—

(i) Is the person or entity that has 

performed services that are billed as 

DHS; or 

(ii) Is the person or entity that has 

presented a claim to Medicare for the 

DHS, including the person or entity to 

which the right to payment for the DHS 

has been reassigned in accordance with 

§ 424.80(b)(1) (employer) or (b)(2) 

(payment under a contractual 

arrangement) of this chapter (other than 

a health care delivery system that is a 

health plan (as defined at § 1001.952(l) 

of this title), and other than any 

managed care organization (MCO), 

provider-sponsored organization (PSO), 

or independent practice association 

(IPA) with which a health plan contracts 

for services provided to plan enrollees). 

* * * * * 

Physician means a doctor of medicine 

or osteopathy, a doctor of dental surgery 

or dental medicine, a doctor of podiatric 

medicine, a doctor of optometry, or a 

chiropractor, as defined in section 

1861(r) of the Act. A physician and the 

professional corporation of which he or 

she is a sole owner are the same for 

purposes of this subpart. 

* * * * * 

Physician organization means a 

physician, a physician practice, or a 

group practice that complies with the 

requirements of § 411.352. 

* * * * * 

■ 3. Section 411.353 is amended by—

■ a. Revising paragraph (c). 

■ b. Adding a new paragraph (g). 

The revision and addition read as 

follows: 

§ 411.353 Prohibition on certain referrals 

by physicians and limitations on billing. 

* * * * * 

(c) Denial of payment for services 

furnished under a prohibited referral. 

(1) Except as provided in paragraph 

(e) of this section, no Medicare payment 

may be made for a designated health 

service that is furnished pursuant to a 

prohibited referral. The period during 

which referrals are prohibited is the 

period of disallowance. For purposes of 

this section, with respect to the 

following types of noncompliance, the 

period of disallowance begins at the 

time the financial relationship fails to 

satisfy the requirements of an applicable 

exception and ends no later than—

(i) Where the noncompliance is 

unrelated to compensation, the date that 

the financial relationship satisfies all of 

the requirements of an applicable 

exception; 

(ii) Where the noncompliance is due 

to the payment of excess compensation, 

the date on which all excess 

compensation is returned, by the party 

that received it, to the party that paid it 

and the financial relationship satisfies 

all of the requirements of an applicable 

exception; or 

(iii) Where the noncompliance is due 

to the payment of compensation that is 

of an amount insufficient to satisfy the 

requirements of an applicable 

exception, the date on which all 

additional required compensation is 

paid, by the party that owes it, to the 

party to which it is owed and the 

financial relationship satisfies all of the 

requirements of an applicable 

exception. 

(2) When payment for a designated 

health service is denied on the basis that 

the service was furnished pursuant to a 

prohibited referral, and such payment 

denial is appealed—

(i) The ultimate burden of proof 

(burden of persuasion) at each level of 

appeal is on the entity submitting the 

claim for payment to establish that the 

service was not furnished pursuant to a 

prohibited referral (and not on CMS or 

its contractors to establish that the 

service was furnished pursuant to a 

prohibited referral); and 

(ii) The burden of production on each 

issue at each level of appeal is initially 

on the claimant, but may shift to CMS 

or its contractors during the course of 

the appellate proceeding, depending on 

the evidence presented by the claimant. 

* * * * * 

(g) Special rule for certain 

arrangements involving temporary 

noncompliance with signature 

requirements. (1) An entity may submit 

a claim or bill and payment may be 

made to an entity that submits a claim 

or bill for a designated health service 

if—

(i) The compensation arrangement 

between the entity and the referring 

physician fully complied with an 

applicable exception in § 411.355, 

§ 411.356 or § 411.357, except with 

respect to the signature requirement in 

§ 411.357(a)(1), § 411.357(b)(1), 

§ 411.357(d)(1)(i), § 411.357(e)(1)(i), 

§ 411.357(e)(4)(i), § 411.357(l)(1), 

§ 411.357(p)(2), § 411.357(q) 

(incorporating the requirement 

contained in § 1001.952(f)(4)), 

§ 411.357(r)(2)(ii), § 411.357(t)(1)(ii) or 

(t)(2)(iii) (both incorporating the 

requirement contained in 

§ 411.357(e)(1)(i)), § 411.357(v)(7)(i), or 

§ 411.357(w)(7)(i); and 

(ii) The failure to comply with the 

signature requirement was—

(A) Inadvertent, and the parties obtain 

the required signature(s) within 90 

consecutive calendar days immediately 

following the date on which the 

compensation arrangement becomes 

noncompliant (without regard to 

whether any referrals occur or 

compensation is paid during such 90- 

day period) and the compensation 

arrangement otherwise complies with 

all criteria of the applicable exception; 

or 

(B) Not inadvertent, and the parties 

obtain the required signature(s) within 

30 consecutive calendar days 

immediately following the date on 

which the compensation arrangement 

becomes noncompliant (without regard 

to whether any referrals occur or 

compensation is paid during such 30- 

day period) and the compensation 

arrangement otherwise complies with 

all criteria of the applicable exception. 

(2) Paragraph (g)(1) of this section 

may be used by an entity only once 

every 3 years with respect to the same 

referring physician. 

* * * * * 

■ 4. Section 411.354 is amended by—

■ a. Revising paragraph (b)(3)(i). 

■ b. Revising paragraph (c)(1)(ii). 

■ c. Revising paragraph (c)(2)(iv). 

■ d. Revising paragraph (c)(3)(ii). 

■ e. Adding paragraphs (c)(3)(iii). 

The revisions and additions read as 

follows: 

§ 411.354 Financial relationship, 

compensation, and ownership or 

investment interest. 

(b) * * * 

(3) * * * 


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(i) An interest in an entity that arises 

from a retirement plan offered by that 

entity to the physician (or a member of 

his or her immediate family) through 

the physician’s (or immediate family 

member’s) employment with that entity; 

* * * * * 

(c) * * * 

(1) * * * 

(ii) Except as provided in paragraph 

(c)(3)(ii)(C) of this section, a physician 

is deemed to stand in the shoes of his 

or her physician organization and have 

a direct compensation arrangement with 

an entity furnishing DHS if—

(A) The only intervening entity 

between the physician and the entity 

furnishing DHS is his or her physician 

organization; and 

(B) The physician has an ownership 

or investment interest in the physician 

organization. 

(iii) A physician (other than a 

physician described in paragraph 

(c)(1)(ii)(B) of this section) is permitted 

to ‘‘stand in the shoes’’ of his or her 

physician organization and have a direct 

compensation arrangement with an 

entity furnishing DHS if the only 

intervening entity between the 

physician and the entity furnishing DHS 

is his or her physician organization. 

(2) * * * 

(iv)(A) For purposes of paragraph 

(c)(2)(i) of this section, except as 

provided in paragraph (c)(3)(ii)(C) of 

this section, a physician is deemed to 

‘‘stand in the shoes’’ of his or her 

physician organization if the physician 

has an ownership or investment interest 

in the physician organization. 

(B) For purposes of paragraph (c)(2)(i) 

of this section, a physician (other than 

a physician described in paragraph 

(c)(2)(iv)(A) of this section) is permitted 

to ‘‘stand in the shoes’’ of his or her 

physician organization. 

(3) * * * 

(ii) The provisions of paragraphs 

(c)(1)(ii) and (c)(2)(iv)(A) of this 

section—

(A) Need not apply during the original 

term or current renewal term of an 

arrangement that satisfied the 

requirements of § 411.357(p) as of 

September 5, 2007 (see 42 CFR Parts 

400–413, revised as of October 1, 2007); 

(B) Do not apply to an arrangement 

that satisfies the requirements of 

§ 411.355(e); and 

(C) Do not apply to a physician whose 

ownership or investment interest is 

titular only. A titular ownership or 

investment interest is an ownership or 

investment interest that excludes the 

ability or right to receive the financial 

benefits of ownership or investment, 

including, but not limited to, the 

distribution of profits, dividends, 

proceeds of sale, or similar returns on 

investment. 

(iii) An arrangement structured to 

comply with an exception in § 411.357 

(other than § 411.357(p)), but which 

would otherwise qualify as an indirect 

compensation arrangement under this 

paragraph as of August 19, 2008, need 

not be restructured to satisfy the 

requirements of § 411.357(p) until the 

expiration of the original term or current 

renewal term of the arrangement. 

* * * * * 

■ 5. Section 411.357 is amended by—

■ a. Republishing the introductory text 

of the section. 

■ b. Revising paragraph (a). 

■ c. Revising paragraph (b). 

■ d. Revising paragraph (l). 

■ e. Revising paragraph (p)(1). 

■ f. Revising paragraph (r). 

The revisions read as follows: 

§ 411.357 Exceptions to the referral 

prohibition related to compensation 

arrangements. 

For purposes of § 411.353, the 

following compensation arrangements 

do not constitute a financial 

relationship: 

(a) Rental of office space. Payments 

for the use of office space made by a 

lessee to a lessor if there is a rental or 

lease agreement that meets the following 

requirements: 

(1) The agreement is set out in 

writing, is signed by the parties, and 

specifies the premises it covers. 

(2) The term of the agreement is at 

least 1 year. To meet this requirement, 

if the agreement is terminated during 

the term with or without cause, the 

parties may not enter into a new 

agreement during the first year of the 

original term of the agreement. 

(3) The space rented or leased does 

not exceed that which is reasonable and 

necessary for the legitimate business 

purposes of the lease or rental and is 

used exclusively by the lessee when 

being used by the lessee (and is not 

shared with or used by the lessor or any 

person or entity related to the lessor), 

except that the lessee may make 

payments for the use of space consisting 

of common areas if the payments do not 

exceed the lessee’s pro rata share of 

expenses for the space based upon the 

ratio of the space used exclusively by 

the lessee to the total amount of space 

(other than common areas) occupied by 

all persons using the common areas. 

(4) The rental charges over the term of 

the agreement are set in advance and are 

consistent with fair market value. 

(5) The rental charges over the term of 

the agreement are not determined—

(i) In a manner that takes into account 

the volume or value of any referrals or 

other business generated between the 

parties; or 

(ii) Using a formula based on—

(A) A percentage of the revenue 

raised, earned, billed, collected, or 

otherwise attributable to the services 

performed or business generated in the 

office space; or 

(B) Per-unit of service rental charges, 

to the extent that such charges reflect 

services provided to patients referred 

between the parties. 

(6) The agreement would be 

commercially reasonable even if no 

referrals were made between the lessee 

and the lessor. 

(7) A holdover month-to-month rental 

for up to 6 months immediately 

following the expiration of an agreement 

of at least 1 year that met the conditions 

of paragraphs (a)(1) through (a)(6) of this 

section satisfies the requirements of 

paragraph (a) of this section, provided 

that the holdover rental is on the same 

terms and conditions as the 

immediately preceding agreement. 

(b) Rental of equipment. Payments 

made by a lessee to a lessor for the use 

of equipment under the following 

conditions: 

(1) A rental or lease agreement is set 

out in writing, is signed by the parties, 

and specifies the equipment it covers. 

(2) The equipment rented or leased 

does not exceed that which is 

reasonable and necessary for the 

legitimate business purposes of the lease 

or rental and is used exclusively by the 

lessee when being used by the lessee 

and is not shared with or used by the 

lessor or any person or entity related to 

the lessor. 

(3) The agreement provides for a term 

of rental or lease of at least 1 year. To 

meet this requirement, if the agreement 

is terminated during the term with or 

without cause, the parties may not enter 

into a new agreement during the first 

year of the original term of the 

agreement. 

(4) The rental charges over the term of 

the agreement are set in advance, are 

consistent with fair market value, and 

are not determined—

(i) In a manner that takes into account 

the volume or value of any referrals or 

other business generated between the 

parties; or 

(ii) Using a formula based on—

(A) A percentage of the revenue 

raised, earned, billed, collected, or 

otherwise attributable to the services 

performed on or business generated by 

the use of the equipment; or 

(B) Per-unit of service rental charges, 

to the extent that such charges reflect 

services provided to patients referred 

between the parties. 


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(5) The agreement would be 

commercially reasonable even if no 

referrals were made between the parties. 

(6) A holdover month-to-month rental 

for up to 6 months immediately 

following the expiration of an agreement 

of at least 1 year that met the conditions 

of paragraphs (b)(1) through (b)(5) of 

this section satisfies the requirements of 

paragraph (b) of this section, provided 

that the holdover rental is on the same 

terms and conditions as the 

immediately preceding agreement. 

* * * * * 

(l) Fair market value compensation. 

Compensation resulting from an 

arrangement between an entity and a 

physician (or an immediate family 

member) or any group of physicians 

(regardless of whether the group meets 

the definition of a group practice set 

forth in § 411.352) for the provision of 

items or services (other than the rental 

of office space) by the physician (or an 

immediate family member) or group of 

physicians to the entity, or by the entity 

to the physician (or an immediate 

family member) or a group of 

physicians, if the arrangement is set 

forth in an agreement that meets the 

following conditions: 

(1) The arrangement is in writing, 

signed by the parties, and covers only 

identifiable items or services, all of 

which are specified in the agreement. 

(2) The writing specifies the 

timeframe for the arrangement, which 

can be for any period of time and 

contain a termination clause, provided 

that the parties enter into only one 

arrangement for the same items or 

services during the course of a year. An 

arrangement made for less than 1 year 

may be renewed any number of times if 

the terms of the arrangement and the 

compensation for the same items or 

services do not change. 

(3) The writing specifies the 

compensation that will be provided 

under the arrangement. The 

compensation must be set in advance, 

consistent with fair market value, and 

not determined in a manner that takes 

into account the volume or value of 

referrals or other business generated by 

the referring physician. Compensation 

for the rental of equipment may not be 

determined using a formula based on—

(i) A percentage of the revenue raised, 

earned, billed, collected, or otherwise 

attributable to the services performed or 

business generated through the use of 

the equipment; or 

(ii) Per-unit of service rental charges, 

to the extent that such charges reflect 

services provided to patients referred 

between the parties. 

(4) The arrangement is commercially 

reasonable (taking into account the 

nature and scope of the transaction) and 

furthers the legitimate business 

purposes of the parties. 

(5) The arrangement does not violate 

the anti-kickback statute (section 

1128B(b) of the Act), or any Federal or 

State law or regulation governing billing 

or claims submission. 

(6) The services to be performed 

under the arrangement do not involve 

the counseling or promotion of a 

business arrangement or other activity 

that violates a Federal or State law. 

* * * * * 

(p) Indirect compensation 

arrangements. Indirect compensation 

arrangements, as defined at 

§ 411.354(c)(2), if all of the following 

conditions are satisfied: 

(1)(i) The compensation received by 

the referring physician (or immediate 

family member) described in 

§ 411.354(c)(2)(ii) is fair market value 

for services and items actually provided 

and not determined in any manner that 

takes into account the volume or value 

of referrals or other business generated 

by the referring physician for the entity 

furnishing DHS. Compensation for the 

rental of office space or equipment may 

not be determined using a formula 

based on—

(A) A percentage of the revenue 

raised, earned, billed, collected, or 

otherwise attributable to the services 

performed or business generated in the 

office space or to the services performed 

or business generated through the use of 

the equipment; or 

(B) Per-unit of service rental charges, 

to the extent that such charges reflect 

services provided to patients referred 

between the parties. 

(ii) The compensation arrangement 

described in § 411.354(c)(2)(ii) is set out 

in writing, signed by the parties, and 

specifies the services covered by the 

arrangement, except in the case of a 

bona fide employment relationship 

between an employer and an employee, 

in which case the arrangement need not 

be set out in a written contract, but must 

be for identifiable services and be 

commercially reasonable even if no 

referrals are made to the employee; and 

(iii) The compensation arrangement 

does not violate the anti-kickback 

statute (section 1128B(b) of the Act), or 

any Federal or State law or regulation 

governing billing or claims submission. 

* * * * * 

(r) Obstetrical malpractice insurance 

subsidies. Remuneration that meets all 

of the conditions of paragraph (r)(1) or 

(2) of this section. 

(1) Remuneration that meets all of the 

conditions set forth in § 1001.952(o) of 

this title. 

(2) A payment from a hospital, 

federally qualified health center, or 

rural health clinic that is used to pay for 

some or all of the costs of malpractice 

insurance premiums for a physician 

who engages in obstetrical practice as a 

routine part of his or her medical 

practice, if all of the following 

conditions are met: 

(i)(A) The physician’s medical 

practice is located in a rural area, a 

primary care HPSA, or an area with 

demonstrated need for the physician’s 

obstetrical services as determined by the 

Secretary in an advisory opinion issued 

in accordance with section 1877(g)(6) of 

the Act; or 

(B) At least 75 percent of the 

physician’s obstetrical patients reside in 

a medically underserved area or are 

members of a medically underserved 

population. 

(ii) The arrangement is set out in 

writing, is signed by the physician and 

the hospital, federally qualified health 

center, or rural health clinic providing 

the payment, and specifies the 

payments to be made by the hospital, 

federally qualified health center, or 

rural health clinic and the terms under 

which the payments are to be provided. 

(iii) The arrangement is not 

conditioned on the physician’s referral 

of patients to the hospital, federally 

qualified health center, or rural health 

clinic providing the payment. 

(iv) The hospital, federally qualified 

health center, or rural health clinic does 

not determine (directly or indirectly) the 

amount of the payment based on the 

volume or value of any actual or 

anticipated referrals by the physician or 

any other business generated between 

the parties. 

(v) The physician is allowed to 

establish staff privileges at any 

hospital(s), federally qualified health 

center(s), or rural health clinic(s) and to 

refer business to any other entities 

(except as referrals may be restricted 

under an employment arrangement or 

services contract that complies with 

§ 411.354(d)(4)). 

(vi) The payment is made to a person 

or organization (other than the 

physician) that is providing malpractice 

insurance (including a self-funded 

organization). 

(vii) The physician treats obstetrical 

patients who receive medical benefits or 

assistance under any Federal health care 

program in a nondiscriminatory 

manner. 

(viii) The insurance is a bona fide 

malpractice insurance policy or 

program, and the premium, if any, is 

calculated based on a bona fide 

assessment of the liability risk covered 

under the insurance. 


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(ix)(A) For each coverage period (not 

to exceed 1 year), at least 75 percent of 

the physician’s obstetrical patients 

treated under the coverage of the 

obstetrical malpractice insurance during 

the prior period (not to exceed 1 year)—

(1) Resided in a rural area, HPSA, 

medically underserved area, or an area 

with a demonstrated need for the 

physician’s obstetrical services as 

determined by the Secretary in an 

advisory opinion issued in accordance 

with section 1877(g)(6) of the Act; or 

(2) Were part of a medically 

underserved population. 

(B) For the initial coverage period (not 

to exceed 1 year), the requirements of 

paragraph (r)(2)(ix)(A) of this section 

will be satisfied if the physician certifies 

that he or she has a reasonable 

expectation that at least 75 percent of 

the physician’s obstetrical patients 

treated under the coverage of the 

malpractice insurance will—

(1) Reside in a rural area, HPSA, 

medically underserved area, or an area 

with a demonstrated need for the 

physician’s obstetrical services as 

determined by the Secretary in an 

advisory opinion issued in accordance 

with section 1877(g)(6) of the Act; or 

(2) Be part of a medically underserved 

population. 

(x) The arrangement does not violate 

the anti-kickback statute (section 

1128B(b) of the Act), or any Federal or 

State law or regulation governing billing 

or claims submission. 

(3) For purposes of paragraph (r)(2) of 

this section, costs of malpractice 

insurance premiums means: 

(i) For physicians who engage in 

obstetrical practice on a full-time basis, 

any costs attributable to malpractice 

insurance; or 

(ii) For physicians who engage in 

obstetrical practice on a part-time or 

sporadic basis, the costs attributable 

exclusively to the obstetrical portion of 

the physician’s malpractice insurance, 

and related exclusively to obstetrical 

services provided—

(A) In a rural area, primary care 

HPSA, or an area with demonstrated 

need for the physician’s obstetrical 

services, as determined by the Secretary 

in an advisory opinion issued in 

accordance with section 1877(g)(6) of 

the Act; or 

(B) In any area, provided that at least 

75 percent of the physician’s obstetrical 

patients treated in the coverage period 

(not to exceed 1 year) resided in a rural 

area or medically underserved area or 

were part of a medically underserved 

population. 

* * * * * 

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

■ 6. The authority citation for part 412 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh), and sec. 124 of Public Law 106–113 

(113 Stat. 1501A–332). 

■ 7. Section 412.22 is amended by—

■ a. In the introductory text of 

paragraph (e), removing the phrase 

‘‘paragraph (f) of this section’’ and 

adding in its place ‘‘paragraphs (e)(1) 

(vi) and (f) of this section’’. 

■ b. Adding a new paragraph (e)(1)(vi). 

The addition reads as follows: 

§ 412.22 Excluded hospitals and hospital 

units: General rules. 

* * * * * 

(e) * * * 

(1) * * * 

(vi) Effective October 1, 2008, if a 

State hospital that is occupying space in 

the same building or on the same 

campus as another State hospital cannot 

meet the criterion under paragraph 

(e)(1)(i) of this section solely because its 

governing body is under the control of 

the State hospital with which it shares 

a building or a campus, or is under the 

control of a third entity that also 

controls the State hospital with which it 

shares a building or a campus, the State 

hospital can nevertheless qualify for an 

exclusion if it meets the other 

applicable criteria in this section and—

(A) Both State hospitals occupy space 

in the same building or on the same 

campus and have been continuously 

owned and operated by the State since 

October 1, 1995; 

(B) Is required by State law to be 

subject to the governing authority of the 

State hospital with which it shares 

space or the governing authority of a 

third entity that controls both hospitals; 

and 

(C) Was excluded from the inpatient 

prospective payment system before 

October 1, 1995, and continues to be 

excluded from the inpatient prospective 

payment system through September 30, 

2008. 

* * * * * 

■ 8. Section 412.64 is amended by—

■ a. Republishing the introductory text 

of paragraph (b)(1)(ii) and revising 

paragraph (b)(1)(ii)(A). 

■ b. Revising paragraph (e)(1)(ii). 

■ c. Adding a new paragraph (e)(4). 

■ d. In the introductory text of 

paragraph (h)(4), removing the date 

‘‘September 30, 2008’’ and adding in its 

place ‘‘September 30, 2011’’. 

The revisions and additions read as 

follows: 

§ 412.64 Federal rates for inpatient 

operating costs for Federal fiscal year 2005 

and subsequent fiscal years. 

* * * * * 

(b) * * * 

(1) * * * 

(ii) The term urban area means—

(A) A Metropolitan Statistical Area or 

a Metropolitan division (in the case 

where a Metropolitan Statistical Area is 

divided into Metropolitan Divisions), as 

defined by the Executive Office of 

Management and Budget; or 

* * * * * 

(e) * * * 

(1) * * * 

(ii) Except as provided in paragraph 

(e)(4) of this section, the annual updates 

and adjustments to the wage index 

under paragraph (h) of this section are 

made in a manner that ensures that 

aggregate payments are not affected; and 

* * * * * 

(4) CMS makes an adjustment to the 

wage index to ensure that aggregate 

payments after implementation of the 

rural floor under section 4410 of the 

Balanced Budget Act of 1997 (Pub. L. 

105–33) and the imputed floor under 

paragraph (h)(4) of this section are equal 

to the aggregate prospective payments 

that would have been made in the 

absence of such provisions. Beginning 

October 1, 2008, such adjustment will 

transition from a nationwide to a 

statewide adjustment, with a statewide 

adjustment fully in place by October 1, 

2010. 

* * * * * 

§ 412.78 [Redesignated] 

■ 9. Section 412.78 is redesignated as 

§ 412.76. 

■ 10. A new § 412.78 is added to read 

as follows: 

§ 412.78 Determination of the hospitalspecific rate for inpatient operating costs 

for sole community hospitals based on a 

Federal fiscal year 2006 base period. 

(a) Applicability. (1) This section 

applies to a hospital that has been 

designated as a sole community 

hospital, as described in § 412.92. If the 

2006 hospital-specific rate exceeds the 

rate that would otherwise apply, that is, 

either the Federal rate under § 412.64 or 

the hospital-specific rates for either FY 

1982 under § 412.73, FY 1987 under 

§ 412.75 or FY 1996 under § 412.77, this 

2006 rate will be used in the payment 

formula set forth in § 412.92(d)(1). 

(2) This section applies only to cost 

reporting periods beginning on or after 

January 1, 2009. 

(3) The formula for determining the 

hospital-specific costs for hospitals 

described under paragraph (a)(1) of this 


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section is set forth in paragraph (f) of 

this section. 

(b) Based costs for hospitals subject to 

fiscal year 2006 rebasing—(1) General 

rule. Except as provided in paragraph 

(b)(2) of this section, for each hospital 

eligible under paragraph (a) of this 

section, the intermediary determines the 

hospital’s Medicare Part A allowable 

inpatient operating costs, as described 

in § 412.2(c), for the 12-month or longer 

cost reporting period ending on or after 

September 30, 2006, and before 

September 30, 2007, and computes the 

hospital-specific rate for purposes of 

determining prospective payment rates 

for inpatient operating costs as 

determined under § 412.92(d). 

(2) Exceptions. (i) If the hospital’s last 

cost reporting period ending before 

September 30, 2007 is for less than 12 

months, the base period is the hospital’s 

most recent 12-month or longer cost 

reporting period ending before the short 

period report. 

(ii) If the hospital does not have a cost 

reporting period ending on or after 

September 30, 2006 and before 

September 30, 2007, and does have a 

cost reporting period beginning on or 

after October 1, 2005 and before October 

1, 2006, that cost reporting period is the 

base period unless the cost reporting 

period is for less than 12 months. If that 

cost reporting period is for less than 12 

months, the base period is the hospital’s 

most recent 12-month or longer cost 

reporting period ending before the short 

cost reporting period. If a hospital has 

no cost reporting period beginning in 

fiscal year 2006, the hospital will not 

have a hospital-specific rate based on 

fiscal year 2006. 

(c) Costs on a per discharge basis. The 

intermediary determines the hospital’s 

average base-period operating cost per 

discharge by dividing the total operating 

costs by the number of discharges in the 

base period. For purposes of this 

section, a transfer as defined in 

§ 412.4(b) is considered to be a 

discharge. 

(d) Case-mix adjustment. The 

intermediary divides the average baseperiod cost per discharge by the 

hospital’s case-mix index for the base 

period. 

(e) Updating base-period costs. For 

purposes of determining the updated 

base-period costs for cost reporting 

periods beginning in Federal fiscal year 

2006, the update factor is determined 

using the methodology set forth in 

§ 412.73(c)(15). 

(f) DRG adjustment. The applicable 

hospital-specific cost per discharge is 

multiplied by the appropriate DRG 

weighting factor to determine the 

hospital-specific base payment amount 

(target amount) for a particular covered 

discharge. 

(g) Notice of hospital-specific rates. 

The intermediary furnishes a hospital 

eligible for rebasing a notice of the 

hospital-specific rate as computed in 

accordance with this section. The notice 

will contain a statement of the hospital’s 

Medicare Part A allowable inpatient 

operating costs, the number of Medicare 

discharges, and the case-mix index 

adjustment factor used to determine the 

hospital’s cost per discharge for the 

Federal fiscal year 2006 base period. 

(h) Right to administrative and 

judicial review. An intermediary’s 

determination under this section of the 

hospital-specific rate for a hospital is 

subject to administrative and judicial 

review in accordance with § 412.77(h). 

(i) Modification of hospital-specific 

rate. The intermediary recalculates the 

hospital-specific rate determined under 

this section in the manner set forth in 

§ 412.77(i). 

(j) Maintaining budget neutrality. 

CMS makes an adjustment to the 

hospital-specific rate determined under 

this section in the manner set forth in 

§ 412.77(j). 

■ 11. Section 412.87 is amended by—

■ a. Revising paragraph (b)(1). 

■ b. Adding a new paragraph (c). 

The revision and addition read as 

follows: 

§ 412.87 Additional payment for new 

medical services and technologies: General 

provisions. 

* * * * * 

(b) * * * 

(1) A new medical service or 

technology represents an advance that 

substantially improves, relating to 

technologies previously available, the 

diagnosis or treatment of Medicare 

beneficiaries. 

* * * * * 

(c) Announcement of determinations 

and deadline for consideration of new 

medical service or technology 

applications. CMS will consider 

whether a new medical service or 

technology meets the eligibility criteria 

specified in paragraph (b) of this section 

and announce the results in the Federal 

Register as part of its annual updates 

and changes to the IPPS. CMS will only 

consider, for add-on payments for a 

particular fiscal year, an application for 

which the new medical service or 

technology has received FDA approval 

or clearance by July 1 prior to the 

particular fiscal year. 

■ 12. Section 412.92 is amended—

■ a. Republishing the introductory text 

of paragraph (d)(1). 

■ b. Adding a new paragraph (d)(1)(v). 

The addition reads as follows: 

§ 412.92 Special treatment: Sole 

community hospitals. 

* * * * * 

(d) Determining prospective payment 

rates for inpatient operating costs for 

sole community hospitals—(1) General 

rule. For cost reporting periods 

beginning on or after April 1, 1990, a 

sole community hospital is paid based 

on whichever of the following amounts 

yields the greatest aggregate payment for 

the cost reporting period. 

* * * * * 

(v) For cost reporting periods 

beginning on or after January 1, 2009, 

the hospital-specific rate as determined 

under § 412.78. 

* * * * * 

■ 13. Section 412.104 is amended by 

revising paragraph (a) to read as follows: 

§ 412.104 Special treatment: Hospitals 

with high percentages of ESRD discharges. 

(a) Criteria for classification. CMS 

provides an additional payment to a 

hospital for inpatient services provided 

to ESRD beneficiaries who receive a 

dialysis treatment during a hospital 

stay, if the hospital has established that 

ESRD beneficiary discharges, excluding 

discharges classified into MS–DRG 652 

(Renal Failure), MS–DRG 682 (Renal 

Failure with MCC), MS–DRG 683 (Renal 

Failure with CC), MS–DRG 684 (Renal 

Failure without CC/MCC) and MS–DRG 

685 (Admit for Renal Dialysis), where 

the beneficiary received dialysis 

services during the inpatient stay, 

constitute 10 percent or more of its total 

Medicare discharges. 

* * * * * 

■ 14. Section 412.105 is amended by 

revising paragraph (f)(1)(vi) to read as 

follows: 

§ 412.105 Special treatment: Hospitals that 

incur indirect costs for graduate medical 

education programs. 

* * * * * 

(f) * * * 

(1) * * * 

(vi) Hospitals that are part of the same 

Medicare GME affiliated group or 

emergency Medicare GME affiliated 

group (as defined in § 413.75(b) of this 

subchapter) may elect to apply the limit 

specified in paragraph (f)(1)(iv) of this 

section on an aggregate basis, as 

specified in § 413.79(f) of this 

subchapter. Effective beginning on or 

after October 1, 2008, home and host 

hospitals with valid emergency 

Medicare GME affiliation agreements 

are exempt from the application of the 

ratio cap specified in paragraph (a)(1)(i) 

of this section. 

* * * * * 

■ 15. Section 412.230 is amended by—


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■ a. Revising paragraph (d)(1)(iv)(C). 

■ b. Adding new paragraphs 

(d)(1)(iv)(D) and (d)(1)(iv)(E). 

The additions and revision read as 

follows: 

§ 412.230 Criteria for an individual hospital 

seeking redesignation to another rural area 

or an urban area. 

* * * * * 

(d) * * * 

(1) * * * 

(iv) * * * 

(C) With respect to redesignations for 

fiscal years 2002 through 2009, the 

hospital’s average hourly wage is equal 

to, in the case of a hospital located in 

a rural area, at least 82 percent, and in 

the case of a hospital located in an 

urban area, at least 84 percent of the 

average hourly wage of hospitals in the 

area to which it seeks redesignation. 

(D) With respect to redesignations for 

fiscal year 2010, the hospital’s average 

hourly wage is equal to, in the case of 

a hospital located in a rural area, at least 

84 percent, and in the case of a hospital 

located in an urban area, at least 86 

percent of the average hourly wage of 

hospitals in the area to which it seeks 

redesignation. 

(E) With respect to redesignations for 

fiscal year 2011 and later fiscal years, 

the hospital’s average hourly wage is 

equal to, in the case of a hospital located 

in a rural area, at least 86 percent, and 

in the case of a hospital located in an 

urban area, at least 88 percent of the 

average hourly wage of hospitals in the 

area to which it seeks redesignation. 

* * * * * 

■ 16. Section 412.232 is amended by—

■ a. Revising paragraph (c)(1). 

■ b. Revising paragraph (c)(2). 

■ c. Adding a new paragraph (c)(3). 

The revisions and addition read as 

follows: 

§ 412.232 Criteria for all hospitals in a rural 

county seeking urban redesignation. 

* * * * * 

(c) * * * 

(1) Aggregate hourly wage for fiscal 

years before fiscal year 2010. 

(i) Aggregate hourly wage. With 

respect to redesignations effective 

beginning fiscal year 1999 and before 

fiscal year 2010, the aggregate average 

hourly wage for all hospitals in the rural 

county must be equal to at least 85 

percent of the average hourly wage in 

the adjacent urban area. 

(ii) Aggregate hourly wage weighted 

for occupational mix. For redesignations 

effective before fiscal year 1999, the 

aggregate hourly wage for all hospitals 

in the rural county, weighed for 

occupational categories, is at least 90 

percent of the average hourly wage in 

the adjacent urban area. 

(2) Aggregate hourly wage for fiscal 

year 2010. With respect to 

redesignations effective for fiscal year 

2010, the aggregate average hourly wage 

for all hospitals in the rural county must 

be equal to at least 86 percent of the 

average hourly wage in the adjacent 

urban area. 

(3) Aggregate hourly wage for fiscal 

year 2011 and later fiscal years. With 

respect to redesignations effective for 

fiscal year 2011 and later fiscal years, 

the aggregate average hourly wage for all 

hospitals in the rural county must be 

equal to at least 88 percent of the 

average hourly wage in the adjacent 

urban area. 

* * * * * 

■ 17. Section 412.234 is amended by—

■ a. Revising paragraph (b)(1). 

■ b. Revising paragraph (b)(2). 

■ c. Adding a new paragraph (b)(3). 

The revisions and addition read as 

follows: 

§ 412.234 Criteria for all hospitals in an 

urban county seeking redesignation to 

another urban area. 

* * * * * 

(b) * * * 

(1) Aggregate hourly wage for fiscal 

years before fiscal year 2010. 

(i) Aggregate hourly wage. With 

respect to redesignations effective 

beginning fiscal year 1999 and before 

fiscal year 2010, the aggregate average 

hourly wage for all hospitals in the 

urban county must be at least 85 percent 

of the average hourly wage in the urban 

area to which the hospitals in the 

county seek reclassification. 

(ii) Aggregate hourly wage weighted 

for occupational mix. For redesignations 

effective before fiscal year 1999, the 

aggregate hourly wage for all hospitals 

in the county, weighed for occupational 

categories, is at least 90 percent of the 

average hourly wage in the adjacent 

urban area. 

(2) Aggregate hourly wage for fiscal 

year 2010. With respect to 

redesignations effective for fiscal year 

2010, the aggregate average hourly wage 

for all hospitals in the urban county 

must be at least 86 percent of the 

average hourly wage in the urban area 

to which the hospitals in the county 

seek reclassification. 

(3) Aggregate hourly wage for fiscal 

year 2011 and later fiscal years. With 

respect to redesignations effective for 

fiscal year 2011 and later fiscal years, 

the aggregate average hourly wage for all 

hospitals in the urban county must be 

at least 88 percent of the average hourly 

wage in the urban area to which the 

hospitals in the county seek 

reclassification. 

* * * * * 

PART 413—PRINCIPLES OF 

REASONABLE COST 

REIMBURSEMENT; PAYMENT FOR 

END-STAGE RENAL DISEASE 

SERVICES; PROSPECTIVELY 

DETERMINED PAYMENT RATES FOR 

SKILLED NURSING FACILITIES 

■ 18. The authority citation for part 413 

continues to read as follows: 

Authority: Secs. 1102, 1812(d), 1814(b), 

1815, 1833(a), (i), and (n), 1861(v), 1871, 

1881, 1883, and 1886 of the Social Security 

Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 

1395g, 1395l(a), (i), and (n), 1395x(v), 

1395hh, 1395rr, 1395tt, and 1395ww); and 

sec. 124 of Public Law 106–133 (113 Stat. 

1501A–332). 

■ 19. Section 413.79 is amended by—

■ a. Adding a heading to paragraph 

(f)(6)(i). 

■ b. Revising paragraph (f)(6)(ii). 

■ c. In paragraph (f)(6)(iv), removing the 

cross-reference ‘‘§ 413.75(d)’’ and 

adding the cross-reference ‘‘paragraph 

(d) of this section’’ in its place. 

The revisions read as follows: 

§ 413.79 Direct GME payments: 

Determination of the weighted number of 

FTE residents. 

* * * * * 

(f) * * * 

(6) * * * 

(i) Requirements for submission of 

emergency Medicare GME affiliation 

agreements. * * * 

(ii) Deadline for submission of the 

emergency Medicare GME affiliation 

agreement. Each participating home and 

host hospital must submit an emergency 

Medicare GME affiliation agreement to 

CMS and submit a copy to the CMS 

fiscal intermediary/MAC by the 

applicable due date. 

(A) For emergency Medicare GME 

affiliation agreements that would 

otherwise be required to be submitted 

by June 30, 2006, or July 1, 2006, each 

participating host and home hospital 

must submit an emergency Medicare 

GME affiliation agreement to CMS and 

submit a copy to its CMS intermediary/ 

MAC on or before October 9, 2006. 

(B) Except for emergency Medicare 

GME affiliation agreements specified in 

paragraph (f)(6)(ii)(A) of this section, for 

emergency Medicare GME affiliation 

agreements that would otherwise be 

required to be submitted prior to 

October 1, 2008, the following due dates 

are applicable: 

(1) First year. The later of 180 days 

after the section 1135 emergency period 

begins or by June 30 of the academic 

year in which the section 1135 

emergency was declared; or 

(2) Subsequent academic years. The 

later of 180 days after the section 1135 


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emergency period begins, or by July 1 of 

each academic year. 

(C) For emergency Medicare GME 

affiliation agreements that would 

otherwise be required to be submitted 

after October 1, 2008, the following due 

dates are applicable: 

(1) First year. By 180 days after the 

end of the academic year in which the 

section 1135 emergency was declared; 

(2) Second academic year. By 180 

days after the end of the next academic 

year following the academic year in 

which the section 1135 emergency was 

declared; or 

(3) Subsequent academic years. By 

July 1 of each academic year. 

* * * * * 

PART 422—MEDICARE ADVANTAGE 

PROGRAM 

■ 20. The authority citation for part 422 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh). 

■ 21. Section 422.310 is revised to read 

as follows: 

§ 422.310 Risk adjustment data. 

(a) Definition of risk adjustment data. 

Risk adjustment data are all data that are 

used in the development and 

application of a risk adjustment 

payment model. 

(b) Data collection: Basic rule. Each 

MA organization must submit to CMS 

(in accordance with CMS instructions) 

the data necessary to characterize the 

context and purposes of each item and 

service provided to a Medicare enrollee 

by a provider, supplier, physician, or 

other practitioner. CMS may also collect 

data necessary to characterize the 

functional limitations of enrollees of 

each MA organization. 

(c) Sources and extent of data. 

(1) To the extent required by CMS, 

risk adjustment data must account for 

the following: 

(i) Items and services covered under 

the original Medicare program. 

(ii) Medicare covered items and 

services for which Medicare is not the 

primary payer. 

(iii) Other additional or supplemental 

benefits that the MA organization may 

provide. 

(2) The data must account separately 

for each provider, supplier, physician, 

or other practitioner that would be 

permitted to bill separately under the 

original Medicare program, even if they 

participate jointly in the same service. 

(d) Other data requirements. 

(1) MA organizations must submit 

data that conform to CMS’ requirements 

for data equivalent to Medicare fee-forservice data, when appropriate, and to 

all relevant national standards. CMS 

may specify abbreviated formats for data 

submission required of MA 

organizations. 

(2) The data must be submitted 

electronically to the appropriate CMS 

contractor. 

(3) MA organizations must obtain the 

risk adjustment data required by CMS 

from the provider, supplier, physician, 

or other practitioner that furnished the 

item or service. 

(4) MA organizations may include in 

their contracts with providers, 

suppliers, physicians, and other 

practitioners, provisions that require 

submission of complete and accurate 

risk adjustment data as required by 

CMS. These provisions may include 

financial penalties for failure to submit 

complete data. 

(e) Validation of risk adjustment data. 

MA organizations and their providers 

and practitioners will be required to 

submit a sample of medical records for 

the validation of risk adjustment data, as 

required by CMS. There may be 

penalties for submission of false data. 

(f) Use of data. CMS uses the data 

obtained under this section to determine 

the risk adjustment factors used to 

adjust payments, as required under 

§§ 422.304(a) and (c). CMS also may use 

the data for updating risk adjustment 

models, calculating Medicare DSH 

percentages, conducting quality review 

and improvement activities, and for 

Medicare coverage purposes. 

(g) Deadlines for submission of risk 

adjustment data. Risk adjustment 

factors for each payment year are based 

on risk adjustment data submitted for 

items and services furnished during the 

12-month period before the payment 

year that is specified by CMS. As 

determined by CMS, this 12-month 

period may include a 6-month data lag 

that may be changed or eliminated as 

appropriate. CMS may adjust these 

deadlines, as appropriate. 

(1) The annual deadline for risk 

adjustment data submission is the first 

Friday in September for risk adjustment 

data reflecting items and services 

furnished during the 12-month period 

ending the prior June 30, and the first 

Friday in March for data reflecting 

services furnished during the 12-month 

period ending the prior December 31. 

(2) CMS allows a reconciliation 

process to account for late data 

submissions. CMS continues to accept 

risk adjustment data submitted after the 

March deadline until January 31 of the 

year following the payment year. After 

the payment year is completed, CMS 

recalculates the risk factors for affected 

individuals to determine if adjustments 

to payments are necessary. Risk 

adjustment data that are received after 

the annual January 31 late data 

submission deadline will not be 

accepted for the purposes of 

reconciliation. 

PART 489—PROVIDER AGREEMENTS 

AND SUPPLIER APPROVAL 

■ 22. The authority citation for part 489 

continues to read as follows: 

Authority: Secs. 1102, 1819, 1820(e), 1861, 

1864(m), 1866, 1869, and 1871 of the Social 

Security Act (42 U.S.C. 1302, 1395i–3, 1395x, 

1395aa(m), 1395cc, 1395ff, and 1395hh). 

■ 23. Section 489.3 is amended by 

revising the definition of ‘‘physicianowned hospital’’ to read as follows: 

§ 489.3 Definitions. 

* * * * * 

Physician-owned hospital means any 

participating hospital (as defined in 

§ 489.24) in which a physician, or an 

immediate family member of a 

physician (as defined in § 411.351 of 

this chapter), has an ownership or 

investment interest in the hospital. The 

ownership or investment interest may 

be through equity, debt, or other means, 

and includes an interest in an entity that 

holds an ownership or investment 

interest in the hospital. This definition 

does not include a hospital with 

physician ownership or investment 

interests that satisfy the requirements at 

§ 411.356(a) or (b) of this chapter. 

* * * * * 

■ 24. Section 489.20 is amended by—

■ a. Revising paragraph (r)(2). 

■ b. Revising paragraph (u). 

■ c. Redesignating paragraphs (v) and 

(w) as paragraphs (w) and (x), 

respectively. 

■ d. Adding a new paragraph (v). 

The revisions and addition read as 

follows: 

§ 489.20 Basic commitments. 

* * * * * 

(r) * * * 

(2) An on-call list of physicians who 

are on the hospital’s medical staff or 

who have privileges at the hospital, or 

who are on the staff or have privileges 

at another hospital participating in a 

formal community call plan, in 

accordance with § 489.24(j)(2)(iii), 

available to provide treatment necessary 

after the initial examination to stabilize 

individuals with emergency medical 

conditions who are receiving services 

required under § 489.24 in accordance 

with the resources available to the 

hospital; and 

* * * * * 

(u) Except as provided in paragraph 

(v) of this section, in the case of a 


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physician-owned hospital as defined at 

§ 489.3—

(1) To furnish written notice to each 

patient at the beginning of the patient’s 

hospital stay or outpatient visit that the 

hospital is a physician-owned hospital, 

in order to assist the patient in making 

an informed decision regarding his or 

her care, in accordance with 

§ 482.13(b)(2) of this subchapter. The 

notice should disclose, in a manner 

reasonably designed to be understood 

by all patients, the fact that the hospital 

meets the Federal definition of a 

physician-owned hospital specified in 

§ 489.3 and that the list of the hospital’s 

owners or investors who are physicians 

or immediate family members (as 

defined at § 411.351 of this chapter) of 

physicians is available upon request and 

must be provided to the patient at the 

time the request for the list is made by 

or on behalf of the patient. For purposes 

of this paragraph (u)(1), the hospital stay 

or outpatient visit begins with the 

provision of a package of information 

regarding scheduled preadmission 

testing and registration for a planned 

hospital admission for inpatient care or 

an outpatient service. 

(2) To require each physician who is 

a member of the hospital’s medical staff 

to agree, as a condition of continued 

medical staff membership or admitting 

privileges, to disclose, in writing, to all 

patients the physician refers to the 

hospital any ownership or investment 

interest in the hospital that is held by 

the physician or by an immediate family 

member (as defined at § 411.351 of this 

chapter) of the physician. Disclosure 

must be required at the time the referral 

is made. 

(v) The requirements of paragraph (u) 

of this section do not apply to any 

physician-owned hospital that does not 

have at least one referring physician (as 

defined at § 411.351 of this chapter) 

who has an ownership or investment 

interest in the hospital or who has an 

immediate family member who has an 

ownership or investment interest in the 

hospital, provided that such hospital 

signs an attestation statement to that 

effect and maintains such attestation in 

its records. 

* * * * * 

■ 25. Section 489.24 is amended by—

■ a. Revising paragraph (a)(2). 

■ b. Revising paragraph (f). 

■ c. Revising paragraph (j). 

The revisions read as follows: 

§ 489.24 Special responsibilities of 

Medicare hospitals in emergency cases. 

(a) * * * 

(2) Nonapplicability of provisions of 

this section. Sanctions under this 

section for an inappropriate transfer 

during a national emergency or for the 

direction or relocation of an individual 

to receive medical screening at an 

alternate location pursuant to an 

appropriate State emergency 

preparedness plan or, in the case of a 

public health emergency that involves a 

pandemic infectious disease, pursuant 

to a State pandemic preparedness plan 

do not apply to a hospital with a 

dedicated emergency department 

located in an emergency area during an 

emergency period, as specified in 

section 1135(g)(1) of the Act. A waiver 

of these sanctions is limited to a 72-hour 

period beginning upon the 

implementation of a hospital disaster 

protocol, except that, if a public health 

emergency involves a pandemic 

infectious disease (such as pandemic 

influenza), the waiver will continue in 

effect until the termination of the 

applicable declaration of a pubic health 

emergency, as provided for by section 

1135(e)(1)(B) of the Act. 

* * * * * 

(f) Recipient hospital responsibilities. 

A participating hospital that has 

specialized capabilities or facilities 

(including, but not limited to, facilities 

such as burn units, shock-trauma units, 

neonatal intensive case units, or, with 

respect to rural areas, regional referral 

centers (which, for purposes of this 

subpart, mean hospitals meeting the 

requirements of referral centers found at 

§ 412.96 of this chapter)) may not refuse 

to accept from a referring hospital 

within the boundaries of the United 

States an appropriate transfer of an 

individual who requires such 

specialized capabilities or facilities if 

the receiving hospital has the capacity 

to treat the individual. 

(1) The provisions of this paragraph 

(f) apply to any participating hospital 

with specialized capabilities, regardless 

of whether the hospital has a dedicated 

emergency department. 

(2) The provisions of this paragraph 

(f) do not apply to an individual who 

has been admitted to a referring hospital 

under the provisions of paragraph 

(d)(2)(i) of this section. 

* * * * * 

(j) Availability of on-call physicians. 

In accordance with the on-call list 

requirements specified in § 489.20(r)(2), 

a hospital must have written policies 

and procedures in place—

(1) To respond to situations in which 

a particular specialty is not available or 

the on-call physician cannot respond 

because of circumstances beyond the 

physician’s control; and 

(2) To provide that emergency 

services are available to meet the needs 

of individuals with emergency medical 

conditions if a hospital elects to—

(i) Permit on-call physicians to 

schedule elective surgery during the 

time that they are on call; 

(ii) Permit on-call physicians to have 

simultaneous on-call duties; and 

(iii) Participate in a formal 

community call plan. Notwithstanding 

participation in a community call plan, 

hospitals are still required to perform 

medical screening examinations on 

individuals who present seeking 

treatment and to conduct appropriate 

transfers. The formal community plan 

must include the following elements: 

(A) A clear delineation of on-call 

coverage responsibilities; that is, when 

each hospital participating in the plan is 

responsible for on-call coverage. 

(B) A description of the specific 

geographic area to which the plan 

applies. 

(C) A signature by an appropriate 

representative of each hospital 

participating in the plan. 

(D) Assurances that any local and 

regional EMS system protocol formally 

includes information on community oncall arrangements. 

(E) A statement specifying that even if 

an individual arrives at a hospital that 

is not designated as the on-call hospital, 

that hospital still has an obligation 

under § 489.24 to provide a medical 

screening examination and stabilizing 

treatment within its capability, and that 

hospitals participating in the 

community call plan must abide by the 

regulations under § 489.24 governing 

appropriate transfers. 

(F) An annual assessment of the 

community call plan by the 

participating hospitals. 

■ 26. Section 489.53 is amended by 

revising paragraph (c) to read as follows: 

§ 489.53 Termination by CMS. 

* * * * * 

(c) Termination of agreements with 

hospitals that fail to make required 

disclosures. In the case of a physicianowned hospital, as defined at § 489.3, 

CMS may terminate the provider 

agreement if the hospital failed to 

comply with the requirements of 

§ 489.20(u) or (w). In the case of other 

participating hospitals, as defined at 

§ 489.24, CMS may terminate the 

provider agreement if the participating 

hospital failed to comply with the 

requirements of § 489.20(w). 

* * * * * 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 


sroberts on PROD1PC70 with RULES
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48759 

Dated: July 24, 2008. 

Kerry Weems, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Dated: July 31, 2008. 

Michael O. Leavitt, 

Secretary. 

Editorial Note: The following Addendum 

and appendixes will not appear in the Code 

of Federal Regulations. 

Addendum—Schedule of Standardized 

Amounts, Update Factors, and Rate-ofIncrease Percentages Effective With 

Cost Reporting Periods Beginning On or 

After October 1, 2008 

I. Summary and Background 

In 2007, Congress passed the MMSEA, 

Public Law 108–173, and section 117 of that 

Act extended section 508 wage index 

reclassifications and certain special 

exceptions through FY 2008, with the special 

reclassifications and exceptions scheduled to 

expire September 30, 2008. However, before 

these reclassifications and exceptions could 

expire, on July 15, 2008, Congress enacted 

Public Law 110–275 (MIPPA). Section 124 of 

that Act further extended the 508 

reclassifications and special exceptions 

through the end of FY 2009—or September 

30, 2009. As a result of this intervening 

legislation, section 508 or special exception 

hospitals that would have otherwise been 

reclassified under section 1886 of the Act 

will no longer be considered as such, thus 

affecting the wage index calculations. We did 

not have sufficient time between the passage 

of the legislation and the deadline for 

publication of this final rule to recalculate 

wage indices based on the new 

reclassification data. Therefore, we are not 

able to provide all of the final FY 2009 wage 

index tables, payment rates, or impacts in 

this final rule. Because the wage data affect 

the calculation of the outlier threshold as 

well as the outlier offset and budget 

neutrality factors that are applied to the 

standardized amounts, we are only able to 

provide tentative figures at this time. These 

tentative amounts will be revised once 

section 124 of Public Law 110–275 is 

implemented and as a result the wage index 

will be finalized. Subsequent to this final 

rule, we will publish a Federal Register 

document listing the final standardized 

amounts, outlier offsets, and budget 

neutrality factors that are effective October 1, 

2008, for FY 2009. The final data also will 

be published on the CMS Web site. 

In this Addendum, we are setting forth a 

final description of the methods and data we 

used to determine the prospective payment 

rates for Medicare hospital inpatient 

operating costs and Medicare hospital 

inpatient capital-related costs. We are also 

setting forth the rate-of-increase percentages 

for updating the target amounts for certain 

hospitals and hospital units excluded from 

the IPPS. We note that, because certain 

hospitals excluded from the IPPS are paid on 

a reasonable cost basis subject to a rate-ofincrease ceiling (and not by the IPPS), these 

hospitals are not affected by the tentative 

figures for standardized amounts, offsets, and 

budget neutrality factors. Therefore, in this 

final rule, we are finalizing the rate-ofincrease percentages for updating the target 

amounts for certain hospitals and hospital 

units excluded from the IPPS that are 

effective for cost reporting periods beginning 

on or after October 1, 2008. 

In general, except for SCHs, MDHs, and 

hospitals located in Puerto Rico, each 

hospital’s payment per discharge under the 

IPPS is based on 100 percent of the Federal 

national rate, also known as the national 

adjusted standardized amount. This amount 

reflects the national average hospital cost per 

case from a base year, updated for inflation. 

Currently, SCHs are paid based on 

whichever of the following rates yields the 

greatest aggregate payment: the Federal 

national rate; the updated hospital-specific 

rate based on FY 1982 costs per discharge; 

the updated hospital-specific rate based on 

FY 1987 costs per discharge; or the updated 

hospital-specific rate based on FY 1996 costs 

per discharge. For cost reporting periods 

beginning on or after January 1, 2009, section 

122 of Public Law 110–275 amended section 

1886(b)(3) of the Act and added the updated 

hospital-specific rate based on the FY 2006 

costs per discharge to determine the rate that 

yields the greatest aggregate payment. We 

refer readers to section IV.D.2. of this final 

rule for a discussion of this provision. 

Under section 1886(d)(5)(G) of the Act, 

MDHs historically have been paid based on 

the Federal national rate or, if higher, the 

Federal national rate plus 50 percent of the 

difference between the Federal national rate 

and the updated hospital-specific rate based 

on FY 1982 or FY 1987 costs per discharge, 

whichever was higher. (MDHs did not have 

the option to use their FY 1996 hospitalspecific rate.) However, section 5003(a)(1) of 

Public Law 109–171 extended and modified 

the MDH special payment provision that was 

previously set to expire on October 1, 2006, 

to include discharges occurring on or after 

October 1, 2006, but before October 1, 2011. 

Under section 5003(b) of Public Law 109–

171, if the change results in an increase to 

an MDH’s target amount, we must rebase an 

MDH’s hospital-specific rates based on its FY 

2002 cost report. Section 5003(c) of Public 

Law 109–171 further required that MDHs be 

paid based on the Federal national rate or, if 

higher, the Federal national rate plus 75 

percent of the difference between the Federal 

national rate and the updated hospitalspecific rate. Further, based on the provisions 

of section 5003(d) of Public Law 109–171, 

MDHs are no longer subject to the 12-percent 

cap on their DSH payment adjustment factor. 

For hospitals located in Puerto Rico, the 

payment per discharge is based on the sum 

of 25 percent of an updated Puerto Ricospecific rate based on average costs per case 

of Puerto Rico hospitals for the base year and 

75 percent of the Federal national rate. (We 

refer readers to section II.D.3. of this 

Addendum for a complete description.) 

As discussed below in section II. of this 

Addendum, we are making changes in the 

determination of the prospective payment 

rates for Medicare inpatient operating costs 

for FY 2009. In section III. of this Addendum, 

we discuss our policy changes for 

determining the prospective payment rates 

for Medicare inpatient capital-related costs 

for FY 2009. Section IV. of this Addendum 

sets forth our changes for determining the 

rate-of-increase limits for certain hospitals 

excluded from the IPPS for FY 2009. The 

tables to which we refer in the preamble of 

this final rule are presented in section V. of 

this Addendum of this final rule. Some of 

these tables are based upon tentative data, 

and the final tables will be presented in a 

separate document that will be published on 

the CMS Web site, as well as in the Federal 

Register after publication of this final rule 

but prior to October 1, 2008. 

II. Changes to Prospective Payment Rates for 

Hospital Inpatient Operating Costs for FY 

2009 

The basic methodology for determining 

prospective payment rates for hospital 

inpatient operating costs for FY 2005 and 

subsequent fiscal years is set forth at 

§ 412.64. The basic methodology for 

determining the prospective payment rates 

for hospital inpatient operating costs for 

hospitals located in Puerto Rico for FY 2005 

and subsequent fiscal years is set forth at 

§§ 412.211 and 412.212. Below we discuss 

the factors used for determining the 

prospective payment rates. 

In summary, the tentative standardized 

amounts set forth in Tables 1A, 1B, and 1C, 

of section VI. of this Addendum reflect—

• Equalization of the standardized 

amounts for urban and other areas at the 

level computed for large urban hospitals 

during FY 2004 and onward, as provided for 

under section 1886(d)(3)(A)(iv) of the Act, 

updated by the applicable percentage 

increase required under sections 

1886(b)(3)(B)(i)(XX) and 1886(b)(3)(B)(viii) of 

the Act. 

• The labor-related share that is applied to 

the tentative standardized amounts and 

tentative Puerto Rico-specific standardized 

amounts to give the hospital the highest 

payment, as provided for under sections 

1886(d)(3)(E), and 1886(d)(9)(C)(iv) of the 

Act. 

• Final updates of 3.6 percent for all areas 

(that is, the estimated full market basket 

percentage increase of 3.6 percent), as 

required by section 1886(b)(3)(B)(i)(XX) of 

the Act, as amended by section 5001(a)(1) of 

Public Law 109–171, and reflecting the 

requirements of section 1886(b)(3)(B)(viii) of 

the Act, as added by section 5001(a)(3) of 

Public Law 109–171, to reduce the applicable 

percentage increase by 2.0 percentage points 

for a hospital that fails to submit data, in a 

form and manner specified by the Secretary, 

relating to the quality of inpatient care 

furnished by the hospital. 

• A final update of 3.6 percent to the 

tentative Puerto Rico-specific standardized 

amount (that is, the full estimated rate-ofincrease in the hospital market basket for 

IPPS hospitals), as provided for under 

§ 412.211(c), which states that we update the 

Puerto Rico-specific standardized amount 

using the percentage increase specified in 

§ 412.64(d)(1), or the percentage increase in 

the market basket index for prospective 

payment hospitals for all areas. 

• An adjustment to the standardized 

amount to ensure budget neutrality for DRG 


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48760 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 

recalibration and reclassification, as provided 

for under section 1886(d)(4)(C)(iii) of the Act. 

• An adjustment to ensure the wage index 

update and changes are budget neutral, as 

provided for under section 1886(d)(3)(E) of 

the Act. 

• An adjustment to ensure the effects of 

geographic reclassification are budget 

neutral, as provided for in section 

1886(d)(8)(D) of the Act, by removing the FY 

2008 budget neutrality factor and applying a 

revised factor. 

• An adjustment to remove the FY 2008 

outlier offset and apply an offset for FY 2009 

as provided for in section 1886(d)(3)(B) of the 

Act. 

• An adjustment to ensure the effects of 

the rural community hospital demonstration 

required under section 410A of Public Law 

108–173 are budget neutral, as required 

under section 410A(c)(2) of Public Law 108–

173. 

• An adjustment to eliminate the effect of 

coding or classification changes that do not 

reflect real changes in case-mix, as provided 

for in section 1886(d)(3)(A)(vi) of the Act and 

as discussed below and in section II.D. of the 

preamble to this final rule. 

We note that, beginning in FY 2008, we 

applied the budget neutrality adjustment for 

the rural floor to the hospital wage indices 

rather than the standardized amount. For FY 

2009, we are continuing to apply the rural 

floor budget neutrality adjustment to hospital 

wage indices rather than the standardized 

amount. In addition, instead of applying the 

budget neutrality adjustment for the imputed 

floor adopted under section 1886(d)(3)(E) of 

the Act to the standardized amounts, 

beginning with FY 2009, we are applying the 

imputed floor budget neutrality adjustment 

to the wage indices. Beginning in FY 2009, 

we are also applying the budget neutrality 

adjustments for the rural floor and imputed 

rural floor at the State level rather than the 

national level. For a complete discussion of 

the budget neutrality changes concerning the 

rural floor and the imputed floor, including 

the within-State budget neutrality 

adjustment, we refer readers to section 

III.B.2.b. of the preamble to this final rule. 

A. Calculation of the Tentative Adjusted 

Standardized Amount 

1. Standardization of Base-Year Costs or 

Target Amounts 

In general, the national standardized 

amount is based on per discharge averages of 

adjusted hospital costs from a base period 

(section 1886(d)(2)(A) of the Act), updated 

and otherwise adjusted in accordance with 

the provisions of section 1886(d) of the Act. 

For Puerto Rico hospitals, the Puerto Ricospecific standardized amount is based on per 

discharge averages of adjusted target amounts 

from a base period (section 1886(d)(9)(B)(i) of 

the Act), updated and otherwise adjusted in 

accordance with the provisions of section 

1886(d)(9) of the Act. The September 1, 1983 

interim final rule (48 FR 39763) contained a 

detailed explanation of how base-year cost 

data (from cost reporting periods ending 

during FY 1981) were established for urban 

and rural hospitals in the initial development 

of standardized amounts for the IPPS. The 

September 1, 1987 final rule (52 FR 33043 

and 33066) contains a detailed explanation of 

how the target amounts were determined and 

how they are used in computing the Puerto 

Rico rates. 

Sections 1886(d)(2)(B) and (d)(2)(C) of the 

Act require us to update base-year per 

discharge costs for FY 1984 and then 

standardize the cost data in order to remove 

the effects of certain sources of cost 

variations among hospitals. These effects 

include case-mix, differences in area wage 

levels, cost-of-living adjustments for Alaska 

and Hawaii, indirect medical education 

costs, and costs to hospitals serving a 

disproportionate share of low-income 

patients. 

In accordance with section 1886(d)(3)(E) of 

the Act, the Secretary estimates, from timeto-time, the proportion of hospitals’ costs that 

are attributable to wages and wage-related 

costs. In general, the standardized amount is 

divided into labor-related and nonlaborrelated amounts; only the proportion 

considered to be the labor-related amount is 

adjusted by the wage index. Section 

1886(d)(3)(E) of the Act requires that 62 

percent of the standardized amount be 

adjusted by the wage index, unless doing so 

would result in lower payments to a hospital 

than would otherwise be made. (Section 

1886(d)(9)(C)(iv)(II) of the Act extends this 

provision to the labor-related share for 

hospitals located in Puerto Rico.) 

For FY 2009, we are not changing the 

national and Puerto Rico-specific laborrelated and nonlabor-related shares from the 

percentages established for FY 2008. 

Therefore, the labor-related share continues 

to be 69.7 percent for the national 

standardized amounts and 58.7 percent for 

the Puerto Rico-specific standardized 

amount. Consistent with section 

1886(d)(3)(E) of the Act, we are applying the 

wage index to a labor-related share of 62 

percent for all non-Puerto Rico hospitals 

whose wage indexes are less than or equal to 

1.0000. For all non-Puerto Rico hospitals 

whose wage indices are greater than 1.0000, 

we are applying the wage index to a laborrelated share of 69.7 percent of the national 

standardized amount. For hospitals located 

in Puerto Rico, we are applying a laborrelated share of 58.7 percent if its Puerto 

Rico-specific wage index is less than or equal 

to 1.0000. For hospitals located in Puerto 

Rico whose Puerto Rico-specific wage index 

values are greater than 1.0000, we are 

applying a labor share of 62 percent. 

The tentative standardized amounts for 

operating costs appear in Table 1A, 1B, and 

1C of the Addendum to this final rule. 

2. Computing the Tentative Average 

Standardized Amount 

Section 1886(d)(3)(A)(iv)(II) of the Act 

requires that, beginning with FY 2004 and 

thereafter, an equal standardized amount be 

computed for all hospitals at the level 

computed for large urban hospitals during FY 

2003, updated by the applicable percentage 

update. Section 1886(d)(9)(A)(ii)(II) of the 

Act equalizes the Puerto Rico-specific urban 

and rural area rates. Accordingly, we are 

calculating FY 2009 national and Puerto Rico 

standardized amounts irrespective of 

whether a hospital is located in an urban or 

rural location. 

3. Updating the Tentative Average 

Standardized Amount 

In accordance with section 

1886(d)(3)(A)(iv)(II) of the Act, we are 

updating the equalized standardized amount 

for FY 2008 by the full estimated market 

basket percentage increase for hospitals in all 

areas, as specified in section 

1886(b)(3)(B)(i)(XX) of the Act, as amended 

by section 5001(a)(1) of Public Law 109–171. 

The percentage change in the market basket 

reflects the average change in the price of 

goods and services comprising routine, 

ancillary, and special care unit inpatient 

hospital services. The most recent forecast of 

the hospital market basket increase for FY 

2009 is 3.6 percent. Thus, for FY 2009, the 

update to the average standardized amount is 

3.6 percent for hospitals in all areas. The 

market basket increase of 3.6 percent is based 

on the 2008 second quarter forecast of the 

hospital market basket increase (as discussed 

in Appendix B of this final rule). 

Section 1886(b)(3)(B) of the Act specifies 

the mechanism to be used to update the 

standardized amount for payment for 

inpatient hospital operating costs. Section 

1886(b)(3)(B)(viii) of the Act, as added by 

section 5001(a)(3) of Public Law 109–171, 

provides for a reduction of 2.0 percentage 

points from the update percentage increase 

(also known as the market basket update) for 

FY 2007 and each subsequent fiscal year for 

any ‘‘subsection (d) hospital’’ that does not 

submit quality data, as discussed in section 

IV.A. of the preamble of this final rule. The 

tentative standardized amounts in Tables 1A 

through 1C of section V. of the Addendum 

to this final rule reflect these differential 

amounts. 

Section 412.211(c) states that we update 

the Puerto Rico-specific standardized amount 

using the percentage increase specified in 

§ 412.64(d)(1) or the percentage increase in 

the market basket index for prospective 

payment hospitals for all areas. We are 

applying the full rate-of-increase in the 

hospital market basket for IPPS hospitals to 

the Puerto Rico-specific standardized 

amount. Therefore, the update to the Puerto 

Rico-specific standardized amount is 3.6 

percent. 

Although the update factors for FY 2009 

are set by law, we are required by section 

1886(e)(4) of the Act to recommend, taking 

into account MedPAC’s recommendations, 

appropriate update factors for FY 2009 for 

both IPPS hospitals and hospitals and 

hospital units excluded from the IPPS. Our 

recommendation on the update factors 

(which is required by sections 1886(e)(4)(A) 

and (e)(5)(A) of the Act) is set forth in 

Appendix B of this final rule. 

We note that the implementation of section 

124 of Public Law 110–275 will have no 

affect on the market basket increase factor of 

3.6 percent. Therefore, the update factors of 

3.6 and 1.6 percent are final and not 

tentative. These update factors (3.6 and 1.6 

percent) are one element that will be used to 

determine the FY 2009 standardized 

amounts. Other factors, such as the outlier 

offset and the rural floor budget neutrality 

factors, are yet to be determined pending the 

implementation of section 124 of Public Law 

110–275. (We note that the rural floor budget 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48761 

neutrality adjustment is applied to the wage 

index and not the standardized amount as 

explained below). The market basket increase 

of 3.6 percent is based on the second quarter 

forecast of the hospital market basket 

increase by Global Insight, Inc. (as discussed 

in Appendix B of this final rule). 

4. Other Adjustments to the Average 

Standardized Amount 

As in the past, we are adjusting the FY 

2009 standardized amount to remove the 

effects of the FY 2008 geographic 

reclassifications and outlier payments before 

applying the FY 2009 updates. We then 

applied budget neutrality offsets for outliers 

and geographic reclassifications to the 

standardized amount based on FY 2009 

payment policies. 

We do not remove the prior year’s budget 

neutrality adjustments for reclassification 

and recalibration of the DRG weights and for 

updated wage data because, in accordance 

with sections 1886(d)(4)(C)(iii) and 

1886(d)(3)(E) of the Act, estimated aggregate 

payments after updates in the DRG relative 

weights and wage index should equal 

estimated aggregate payments prior to the 

changes. If we removed the prior year’s 

adjustment, we would not have satisfied 

these conditions. 

Budget neutrality is determined by 

comparing aggregate IPPS payments before 

and after making changes that are required to 

be budget neutral (for example, changes to 

DRG classifications, recalibration of the DRG 

relative weights, updates to the wage index, 

and different geographic reclassifications). 

We included outlier payments in the 

simulations because they may be affected by 

changes in these parameters. 

We are also adjusting the standardized 

amount this year by an estimated amount to 

ensure that aggregate IPPS payments do not 

exceed the amount of payments that would 

have been made in the absence of the rural 

community hospital demonstration program, 

as required under section 410A of Public Law 

108–173. This demonstration is required to 

be budget neutral under section 410A(c)(2) of 

Public Law 108–173. For FY 2009, we are no 

longer applying budget neutrality for the 

imputed floor to the standardized amount, 

and to apply it instead to the wage index, as 

discussed in section of II.B.2. of the preamble 

to this final rule. For FY 2009, we are also 

applying an adjustment to eliminate the 

effect of coding or classification changes that 

do not reflect real changes in case-mix using 

the Secretary’s authority under section 

1886(d)(3)(A)(vi) of the Act, by the 

percentage specified in section 7 of Public 

Law 110–90. 

a. Recalibration of DRG Weights and Updated 

Wage Index—Budget Neutrality Adjustment 

Section 1886(d)(4)(C)(iii) of the Act 

specifies that, beginning in FY 1991, the 

annual DRG reclassification and recalibration 

of the relative weights must be made in a 

manner that ensures that aggregate payments 

to hospitals are not affected. As discussed in 

section II. of the preamble of this final rule, 

we normalized the recalibrated DRG weights 

by an adjustment factor so that the average 

case weight after recalibration is equal to the 

average case weight prior to recalibration. 

However, equating the average case weight 

after recalibration to the average case weight 

before recalibration does not necessarily 

achieve budget neutrality with respect to 

aggregate payments to hospitals because 

payments to hospitals are affected by factors 

other than average case weight. Therefore, as 

we have done in past years, we made a 

budget neutrality adjustment to ensure that 

the requirement of section 1886(d)(4)(C)(iii) 

of the Act is met. 

Section 1886(d)(3)(E) of the Act requires us 

to update the hospital wage index on an 

annual basis beginning October 1, 1993. This 

provision also requires us to make any 

updates or adjustments to the wage index in 

a manner that ensures that aggregate 

payments to hospitals are not affected by the 

change in the wage index. Consistent with 

current policy, for FY 2009, we are adjusting 

100 percent of the wage index factor for 

occupational mix. We describe the 

occupational mix adjustment in section III.D. 

of the preamble to this final rule. 

To comply with the requirement that DRG 

reclassification and recalibration of the 

relative weights and the updated wage index 

be budget neutral, we used FY 2007 

discharge data to simulate payments and 

compared aggregate payments using the FY 

2008 relative weights and wage indices to 

aggregate payments using the proposed FY 

2009 relative weights and wage indices. The 

same methodology was used for the FY 2008 

budget neutrality adjustment. Based on this 

comparison, we computed a budget 

neutrality adjustment factor equal to 

0.999580 to be applied to the national 

standardized amount. As we have done in 

the past, we also adjusted the Puerto Ricospecific standardized amount for the effect of 

DRG reclassification and recalibration. We 

computed a budget neutrality adjustment 

factor of 0.998795 to be applied to the Puerto 

Rico-specific standardized amount. These 

budget neutrality adjustment factors are 

applied to the standardized amounts for FY 

2008 without removing the prior year’s 

budget neutrality adjustments. In addition, as 

discussed in section IV. of this Addendum, 

we applied the same DRG reclassification 

and recalibration budget neutrality factor of 

0.998795 to the hospital-specific rates that 

will be effective for cost reporting periods 

beginning on or after October 1, 2008. We 

note that the preceding budget neutrality 

adjustment factors use pre-reclassified wage 

indices and are not affected by the 

implementation of section 124 of Public Law 

110–275, therefore, these budget neutrality 

factors are final and not tentative. 

b. Reclassified Hospitals—Tentative Budget 

Neutrality Adjustment 

Section 1886(d)(8)(B) of the Act provides 

that, effective with discharges occurring on 

or after October 1, 1988, certain rural 

hospitals are deemed urban. In addition, 

section 1886(d)(10) of the Act provides for 

the reclassification of hospitals based on 

determinations by the MGCRB. Under section 

1886(d)(10) of the Act, a hospital may be 

reclassified for purposes of the wage index. 

Under section 1886(d)(8)(D) of the Act, the 

Secretary is required to adjust the 

standardized amount to ensure that aggregate 

payments under the IPPS after 

implementation of the provisions of sections 

1886(d)(8)(B) and (C) and 1886(d)(10) of the 

Act are equal to the aggregate prospective 

payments that would have been made absent 

these provisions. We note that the wage 

index adjustments provided under section 

1886(d)(13) of the Act are not budget neutral. 

Section 1886(d)(13)(H) of the Act provides 

that any increase in a wage index under 

section 1886(d)(13) shall not be taken into 

account ‘‘in applying any budget neutrality 

adjustment with respect to such index’’

under section 1886(d)(8)(D) of the Act. To 

calculate the tentative budget neutrality 

factor for FY 2009, we used FY 2007 

discharge data to simulate payments, and 

compared total IPPS payments prior to any 

reclassifications under sections 1886(d)(8)(B) 

and (C) and 1886(d)(10) of the Act to total 

IPPS payments after such reclassifications. 

Based on these simulations, we calculated a 

tentative adjustment factor of 0.991339 to 

ensure that the effects of these provisions are 

budget neutral, consistent with the statute. 

The tentative adjustment factor is applied 

to the standardized amount after removing 

the effects of the FY 2008 budget neutrality 

adjustment factor. We note that the FY 2009 

tentative adjustment reflects FY 2009 wage 

index reclassifications approved by the 

MGCRB or the Administrator. (Section 

1886(d)(10)(D)(v) of the Act makes wage 

index reclassifications effective for 3 years. 

As we note earlier in this final rule, we have 

yet to implement section 124 of Public Law 

110–275. Therefore, we will calculate the 

final budget neutrality adjustments for 

geographic reclassification subsequent to this 

final rule, but prior to October 1, 2008, and 

will make this information available with the 

wage indices and final IPPS rates. 

c. Rural and Imputed Floor Budget Neutrality 

As discussed in the preamble in section 

III.B.2.b. of the preamble of this final rule, we 

are adopting as final our proposal for State 

level budget neutrality for the rural and 

imputed floors in this rule, to be effective 

beginning with the FY 2009 wage index. 

However, in response to the public’s 

concerns and taking into account the 

potentially significant payment cuts that 

could occur to hospitals in some States if we 

implement this change with no transition, we 

have decided to phase in, over a 3-year 

period, the transition from the national rural 

floor budget neutrality adjustment on the 

wage index to the State level rural floor 

budget neutrality adjustment on the wage 

index. In FY 2009, hospitals will receive a 

blended wage index that is comprised of 20 

percent of the wage index adjusted by 

applying the State level rural and imputed 

floor budget neutrality adjustment and 80 

percent of the wage index adjusted by 

applying the national budget neutrality 

adjustment. In FY 2010, the blended wage 

index will be determined by adding 50 

percent of the wage index adjusted by 

applying the State level budget neutrality 

adjustment and 50 percent of the wage index 

adjusted by applying the national budget 

neutrality adjustment. In FY 2011, the 

adjustment will be completely transitioned to 

the State level methodology, such that the 

wage index will be determined by applying 

100 percent of the State level budget 


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neutrality adjustment. We note that the rural 

floor budget neutrality adjustment is applied 

to the wage index and not the standardized 

amount. However, because these blended 

wage indices reflecting the 20 percent State 

rural and imputed floor budget neutrality 

adjustment and the 80 percent national rural 

and imputed floor budget neutrality 

adjustment are used in calculating the FY 

2009 outlier threshold (as discussed below), 

we are explaining our calculation of the rural 

floor budget neutrality adjustments (in this 

section) below. 

In order to compute a budget neutral wage 

index that is a blend of 20 percent of the 

wage index adjusted by the State level rural 

and imputed floor budget neutrality 

adjustment and 80 percent of the index 

adjusted by the national rural and imputed 

floor budget neutrality adjustment, similar to 

our calculation of the FY 2008 wage index 

(72 FR 47329), we used FY 2007 discharge 

data and FY 2009 wage indices to simulate 

IPPS payments. First, we compared the 

national simulated payments without the 

rural and imputed floors applied to national 

simulated payments with the rural and 

imputed floors applied to determine the 

national rural and imputed floor budget 

neutrality adjustment factor of 0.996355. This 

national adjustment was then applied to the 

wage indices to produce a national rural and 

imputed floor budget neutral wage index, 

which was used in determining the FY 2009 

blended wage indices for the first year of the 

transition (as described below). We then used 

the same methodology to determine each 

State’s rural or imputed floor budget 

neutrality adjustment by comparing each 

State’s total simulated payments with and 

without the rural or imputed floor applied. 

These State level rural and imputed floor 

budget neutrality factors were then applied to 

the wage indices to produce a State level 

rural and imputed floor budget neutral wage 

index, which was used in determining the FY 

2009 blended wage indices for the first year 

of the transition (as described below). (As 

noted above, the final adjustment factors 

used for each state will be published in a 

forthcoming notice in the Federal Register 

implementing section 124 of Pub. L. 110–

275). 

To determine the FY 2009 wage indices for 

the first year of the transition, we then 

blended the national and State level wage 

index values (computed above) by taking 80 

percent of the national rural and imputed 

floor budget neutral wage index and 20 

percent of the State level rural and imputed 

floor budget neutral wage index. Because of 

interactive effects between the payment 

factors applied under the IPPS and/or 

rounding issues, the blended wage index 

calculated above does not necessarily result 

in overall budget neutrality. That is, 

aggregate IPPS payments simulated using the 

blended budget neutral wage index may not 

be equal to aggregate IPPS payments 

simulated using the wage index prior to the 

application of the rural and imputed floors. 

Therefore, in order to ensure that national 

payments overall remain budget neutral after 

application of the rural and imputed floor, an 

additional adjustment factor of 0.999923 

must be applied to the blended wage indexes 

calculated as described above. We note that, 

because we have yet to determine the final 

geographic wage index reclassifications as a 

result of Public Law 110–275, we will 

publish the final rural floor budget neutrality 

adjustment factors in a subsequent notice in 

the Federal Register. 

d. Case-Mix Budget Neutrality Adjustment 

As stated earlier, beginning in FY 2008, we 

adopted the new MS–DRG patient 

classification system for the IPPS to better 

recognize severity of illness in Medicare 

payment rates. In the FY 2008 IPPS final rule 

with comment period, we indicated that we 

believe the adoption of the MS–DRGs had the 

potential to lead to increases in aggregate 

payments without a corresponding increase 

in actual patient severity of illness due to the 

incentives for improved documentation and 

coding. In that final rule, using the 

Secretary’s authority under section 

1886(d)(3)(A)(vi) of the Act to maintain 

budget neutrality by adjusting the national 

standardized amounts to eliminate the effect 

of changes in coding or classification that do 

not reflect real change in case-mix, we 

established prospective documentation and 

coding adjustments of ¥1.2 percent for FY 

2008, ¥1.8 percent for FY 2009, and ¥1.8 

percent for FY 2010. On September 29, 2007, 

Public Law 110–90 was enacted. Section 7 of 

Public Law 110–90 included a provision that 

reduces the documentation and coding 

adjustment for the MS–DRG system that we 

adopted in the FY 2008 IPPS final rule with 

comment period to ¥0.6 percent for FY 2008 

and ¥0.9 percent for FY 2009. To comply 

with the provision of section 7 of Public Law 

110–90, in a final rule that appeared in the 

Federal Register on November 27, 2007 (72 

FR 66886), we changed the IPPS 

documentation and coding adjustment for FY 

2008 to ¥0.6 percent, and revised the FY 

2008 national standardized amounts (as well 

as other payment factors and thresholds) 

accordingly, with these revisions effective 

October 1, 2007. For FY 2009, section 7 of 

Public Law 110–90 requires a documentation 

and coding adjustment of ¥0.9 percent 

instead of the ¥1.8 percent adjustment 

specified in the FY 2008 IPPS final rule with 

comment period. As required by statute, we 

are applying a documentation and coding 

adjustment of ¥0.9 percent to the FY 2009 

IPPS national standardized amounts. The 

documentation and coding adjustments 

established in the FY 2008 IPPS final rule 

with comment period are cumulative. As a 

result, the ¥0.9 percent documentation and 

coding adjustment in FY 2009 is in addition 

to the ¥0.6 percent adjustment in FY 2008, 

yielding a combined effect of ¥1.5 percent. 

As discussed in more detail in section II.D. 

of the preamble of this final rule, in 

calculating the FY 2008 Puerto Rico 

standardized amount, we made an 

inadvertent error and applied the 

documentation and coding adjustment 

established using our authority in section 

1886(d)(3)(A)(vi) of the Act (which only 

applies to the national standardized 

amounts) to the Puerto Rico-specific 

standardized amount. Therefore, we are 

correcting this inadvertent error by removing 

the ¥0.6 percent documentation and coding 

adjustment from the FY 2008 Puerto Ricospecific rates. The revised FY 2008 Puerto 

Rico-specific operating standardized amounts 

are: $1,471.10 labor share and $901.64 

nonlabor share for a hospital with a wage 

index greater than 1; and $1,392.80 labor 

share and $979.94 nonlabor share for a 

hospital with a wage index less than or equal 

to 1. The revised FY 2008 Puerto Rico capital 

payment rate is $202.89. These revised rates 

are effective October 1, 2007, for FY 2008. As 

discussed in section II.D. of the preamble of 

this final rule, we are not applying the 

documentation and coding adjustment to the 

Puerto Rico-specific standardized amount for 

FY 2009, but we may consider doing so for 

the FY 2010 Puerto Rico-specific 

standardized amount in the FY 2010 

rulemaking. In calculating the FY 2009 

Puerto Rico-specific standardized amount for 

this final rule, we have removed the ¥0.6 

percent documentation and coding 

adjustment that was inadvertently applied to 

the FY 2008 Puerto Rico-specific 

standardized amount. 

We note that the implementation of 

Section 124 of Public Law 110–275 will have 

no affect on the document and coding 

adjustment factor. Therefore, the document 

and coding adjustment factor is final and not 

tentative. 

e. Outliers 

Section 1886(d)(5)(A) of the Act provides 

for payments in addition to the basic 

prospective payments for ‘‘outlier’’ cases 

involving extraordinarily high costs. To 

qualify for outlier payments, a case must 

have costs greater than the sum of the 

prospective payment rate for the DRG, any 

IME and DSH payments, any new technology 

add-on payments, and the ‘‘outlier 

threshold’’ or ‘‘fixed loss’’ amount (a dollar 

amount by which the costs of a case must 

exceed payments in order to qualify for an 

outlier payment). We refer to the sum of the 

prospective payment rate for the DRG, any 

IME and DSH payments, any new technology 

add-on payments, and the outlier threshold 

as the outlier ‘‘fixed-loss cost threshold.’’ To 

determine whether the costs of a case exceed 

the fixed-loss cost threshold, a hospital’s CCR 

is applied to the total covered charges for the 

case to convert the charges to estimated costs. 

Payments for eligible cases are then made 

based on a marginal cost factor, which is a 

percentage of the estimated costs above the 

fixed-loss cost threshold. The marginal cost 

factor for FY 2009 is 80 percent, the same 

marginal cost factor we have used since FY 

1995 (59 FR 45367). 

In accordance with section 

1886(d)(5)(A)(iv) of the Act, outlier payments 

for any year are projected to be not less than 

5 percent nor more than 6 percent of total 

operating DRG payments plus outlier 

payments. Section 1886(d)(3)(B) of the Act 

requires the Secretary to reduce the average 

standardized amount by a factor to account 

for the estimated proportion of total DRG 

payments made to outlier cases. Similarly, 

section 1886(d)(9)(B)(iv) of the Act requires 

the Secretary to reduce the average 

standardized amount applicable to hospitals 

located in Puerto Rico to account for the 

estimated proportion of total DRG payments 

made to outlier cases. More information on 

outlier payments may be found on the CMS 


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

AcuteInpatientPPS/04_outlier.asp#

TopOfPage. 

(1) FY 2009 Tentative Outlier Fixed-Loss 

Cost Threshold 

As stated above, some of the wage index 

tables, rates, and impacts will not be final in 

this final rule because we have not 

implemented section 124 of Public Law 110–

275. Therefore, we are only able to provide 

tentative standardized amounts, relative 

weights, offsets, and budget neutrality factors 

in this final rule. The same circumstances 

apply to the outlier threshold. Without final 

wage index data, final standardized amounts, 

final offsets and final budget neutrality 

factors, we are only able to provide a 

tentative fixed loss outlier threshold in this 

final rule. Subsequent to this final rule, we 

will publish a final fixed-loss outlier 

threshold that will be effective for discharges 

on and after October 1, 2008, for FY 2009. 

However, in this final rule, we are adopting 

as final the methodology we will use to 

calculate the final outlier fixed-loss cost 

threshold. 

For FY 2009, we proposed to continue to 

use the same methodology used for FY 2008 

(72 FR 47417) to calculate the outlier 

threshold. Similar to the methodology used 

in the FY 2008 final rule with comment 

period, for FY 2009, we proposed to apply an 

adjustment factor to the CCRs to account for 

cost and charge inflation (as explained 

below). As we have done in the past, to 

calculate the proposed FY 2009 outlier 

threshold, we simulated payments by 

applying FY 2009 rates and policies using 

cases from the FY 2007 MedPAR files. 

Therefore, in order to determine the 

proposed FY 2009 outlier threshold, we 

inflate the charges on the MedPAR claims by 

2 years, from FY 2007 to FY 2009. 

We proposed to continue to use a refined 

methodology that takes into account the 

lower inflation in hospital charges that are 

occurring as a result of the outlier final rule 

(68 FR 34494), which changed our 

methodology for determining outlier 

payments by implementing the use of more 

current CCRs. Our refined methodology uses 

more recent data that reflect the rate-ofchange in hospital charges under the new 

outlier policy. 

Using the most recent data available, we 

calculated the 1-year average annualized rateof-change in charges-per-case from the last 

quarter of FY 2006 in combination with the 

first quarter of FY 2007 (July 1, 2006 through 

December 31, 2006) to the last quarter of FY 

2007 in combination with the first quarter of 

FY 2008 (July 1, 2007 through December 31, 

2007). This rate of change was 5.84 percent 

(1.0585) or 12.03 percent (1.1204) over 2 

years. 

As we have done in the past, we 

established the proposed FY 2009 outlier 

threshold using hospital CCRs from the 

December 2007 update to the ProviderSpecific File (PSF)—the most recent available 

data at the time of the proposed rule. This 

file includes CCRs that reflected 

implementation of the changes to the policy 

for determining the applicable CCRs that 

became effective August 8, 2003 (68 FR 

34494). 

As discussed in the FY 2007 final rule (71 

FR 48150), we worked with the Office of 

Actuary to derive the methodology described 

below to develop the CCR adjustment factor. 

For FY 2009, we proposed to continue to use 

the same methodology to calculate the CCR 

adjustment by using the FY 2007 operating 

cost per discharge increase in combination 

with the actual FY 2007 operating market 

basket increase determined by Global Insight, 

Inc., as well as the charge inflation factor 

described above to estimate the adjustment to 

the CCRs. (We note that the FY 2007 actual 

(otherwise referred to as ‘‘final’’) operating 

market basket increase reflects historical data 

whereas the published FY 2007 operating 

market basket update factor was based on 

Global Insight, Inc.’s 2006 second quarter 

forecast with historical data through the first 

quarter of 2007.) By using the operating 

market basket rate-of-increase and the 

increase in the average cost per discharge 

from hospital cost reports, we are using two 

different measures of cost inflation. For FY 

2009, we determined the adjustment by 

taking the percentage increase in the 

operating costs per discharge from FY 2005 

to FY 2006 (1.0538) from the cost report and 

dividing it by the final operating market 

basket increase from FY 2006 (1.0420). This 

operation removes the measure of pure price 

increase (the market basket) from the 

percentage increase in operating cost per 

discharge, leaving the nonprice factors in the 

cost increase (for example, quantity and 

changes in the mix of goods and services). 

We repeated this calculation for 2 prior years 

to determine the 3-year average of the rate of 

adjusted change in costs between the 

operating market basket rate-of-increase and 

the increase in cost per case from the cost 

report (FY 2003 to FY 2004 percentage 

increase of operating costs per discharge of 

1.0629 divided by FY 2004 final operating 

market basket increase of 1.0400, FY 2004 to 

FY 2005 percentage increase of operating 

costs per discharge of 1.0565 divided by FY 

2005 final operating market basket increase 

of 1.0430). For FY 2009, we averaged the 

differentials calculated for FY 2004, FY 2005, 

and FY 2006, which resulted in a mean ratio 

of 1.0154. We multiplied the 3-year average 

of 1.0154 by the FY 2007 final operating 

market basket percentage increase of 1.0340, 

which resulted in an operating cost inflation 

factor of 5.0 percent or 1.05. We then divided 

the operating cost inflation factor by the 1- 

year average change in charges (1.058474) 

and applied an adjustment factor of 0.9920 to 

the operating CCRs from the PSF. 

As stated in the FY 2008 final rule with 

comment period, we continue to believe it is 

appropriate to apply only a 1-year adjustment 

factor to the CCRs. On average, it takes 

approximately 9 months for fiscal 

intermediaries (or, if applicable, the MAC) to 

tentatively settle a cost report from the fiscal 

year end of a hospital’s cost reporting period. 

The average ‘‘age’’ of hospitals’ CCRs from 

the time the fiscal intermediary or the MAC 

inserts the CCR in the PSF until the 

beginning of FY 2008 is approximately 1 

year. Therefore, as stated above, we believe 

a 1-year adjustment factor to the CCRs is 

appropriate. 

We used the same methodology for the 

capital CCRs and determined the adjustment 

by taking the percentage increase in the 

capital costs per discharge from FY 2005 to 

FY 2006 (1.0462) from the cost report and 

dividing it by the final capital market basket 

increase from FY 2006 (1.0090). We repeated 

this calculation for 2 prior years to determine 

the 3-year average of the rate of adjusted 

change in costs between the capital market 

basket rate-of-increase and the increase in 

cost per case from the cost report (FY 2003 

to FY 2004 percentage increase of capital 

costs per discharge of 1.0315 divided by FY 

2004 final capital market basket increase of 

1.0050, FY 2004 to FY 2005 percentage 

increase of capital costs per discharge of 

1.0311 divided by FY 2005 final capital 

market basket increase of 1.0060). For FY 

2009, we averaged the differentials calculated 

for FY 2004, FY 2005, and FY 2006, which 

resulted in a mean ratio of 1.0294. We 

multiplied the 3-year average of 1.0294 by 

the FY 2007 final capital market basket 

percentage increase of 1.0120, which resulted 

in a capital cost inflation factor of 4.17 

percent or 1.0417. We then divided the 

capital cost inflation factor by the 1-year 

average change in charges (1.058474) and 

applied an adjustment factor of 0.9842 to the 

capital CCRs from the PSF. We are using the 

same charge inflation factor for the capital 

CCRs that was used for the operating CCRs. 

The charge inflation factor is based on the 

overall billed charges. Therefore, we believe 

it is appropriate to apply the charge factor to 

both the operating and capital CCRs. 

For purposes of estimating the proposed 

outlier threshold for FY 2009, we assume 3.0 

percent case-mix growth in FY 2009 

compared with our FY 2007 claims data (that 

is, a 1.2 percent increase in FY 2008 and an 

additional 1.8 percent increase in FY 2009). 

The 3 percent case-mix growth was projected 

by the Office of the Actuary as the amount 

case-mix is expected to increase in response 

to adoption of the MS–DRGs as a result of 

improvements in documentation and coding 

that do not reflect real changes in patient 

severity of illness. It is necessary to take the 

3 percent expected case-mix growth into 

account when calculating the outlier 

threshold that results in outlier payments 

being 5.1 percent of total payments for FY 

2009. If we did not take this 3 percent 

projected case-mix growth into account, our 

estimate of total payments would be too low, 

and as a result, our estimate of the outlier 

threshold would be too high. While we 

assume 3 percent case-mix growth for all 

hospitals in our outlier threshold 

calculations, the FY 2009 national 

standardized amounts used to calculate the 

outlier threshold reflect the statutorily 

mandated documentation and coding 

adjustment of ¥0.9 percent for FY 2009, on 

top of the ¥0.6 percent adjustment for FY 

2008. 

Using this methodology, we calculated a 

proposed outlier fixed-loss cost threshold for 

FY 2009 equal to the prospective payment 

rate for the DRG, plus any IME and DSH 

payments, and any add-on payments for new 

technology, plus $21,025. 

Comment: Many commenters, including 

major hospital associations, commented that 

CMS currently projects that outlier payments 

in FY 2008 are estimated at 4.8 percent of 


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total payments. The commenters commended 

CMS for making refinements such as 

applying an adjustment factor to CCRs when 

computing the outlier threshold but noted 

that, because CMS is still not reaching the 5.1 

percent target, there is still room for 

improvement. Specifically, the commenters 

suggested that the methodology to develop 

the adjustment factor to the CCRs is 

unnecessarily complicated and does not lead 

to a more accurate result. The commenters 

urged CMS to adopt a methodology that uses 

recent historical industry wide average rate 

of change, similar to the methodology used 

to develop the charge inflation factor. 

Further, in addition to applying an 

adjustment to the CCRs based on historical 

data, the commenters suggested that the 

CCRs should be projected over different 

periods of time, some less or more than one 

year, based on variations in hospital fiscal 

year ends. The commenters believed this 

methodology would more accurately project 

the decline in CCRs. In addition, the 

commenters noted that CMS used the 

December 2007 CCR update for the proposed 

rule and has historically used the March 

update for the final rule. The commenters 

urged CMS to use the June 2008 update 

instead of the March 2008 update for the 

final rule. 

Response: Similar to our response in the 

FY 2008 final rule (72 FR 47418), in response 

to the comment that CCRs should be 

projected over different periods of time, as 

we have mentioned in the past, it is possible 

that some of the CCRs in the March PSF will 

be used in FY 2009 for actual outlier 

payments, while other CCRs may be one year 

old. Therefore, we apply a 1-year adjustment 

to the CCRs. However, once we have a 

complete FY 2008 MedPAR claims database 

to determine the actual FY 2008 outlier 

percentage (as opposed to the current 

estimate of the FY 2008 outlier percentage in 

this final rule which is based on FY 2007 

MedPAR claims), we will closely study and 

consider the commenters’ proposal for the 

future. 

With respect to the comment on our 

methodology used to adjust the CCRs, as we 

stated in the FY 2008 IPPS final rule with 

comment period (72 FR 47418), we continue 

to believe this calculation of an adjustment 

to the CCRs is more accurate and stable than 

the commenter’s methodology because it 

takes into account the costs per discharge 

and the market basket percentage increase 

when determining a cost adjustment factor. 

There are times where the market basket and 

the cost per discharge will be constant, while 

other times these values will differ from each 

other, depending on the fiscal year. 

Therefore, as mentioned above, using the 

market basket in conjunction with the cost 

per discharge takes into account two sources 

that measure potential cost inflation and 

ensures a more accurate and stable cost 

adjustment factor. Additionally, we are 

continuing to use the March update of the 

PSF for the final rule because the June PSF 

update will not be ready for use until the end 

of July, which is beyond the timetable 

necessary for us to compute the outlier 

threshold and publish this final rule with 

comment period by August 1. 

Because we are not making any changes to 

our methodology for this final rule, for FY 

2009, we are using the same methodology we 

proposed to calculate the outlier threshold. 

We used the blended wage indices (as 

discussed above) when we simulated 

payments in our outlier modeling to 

determine the tentative outlier threshold for 

FY 2009. Using the most recent data 

available, we calculated the 1-year average 

annualized rate-of-change in charges per case 

from the first quarter of FY 2007 in 

combination with the second quarter of FY 

2007 (October 1, 2006 through March 31, 

2007) to the first quarter of FY 2008 in 

combination with the second quarter of FY 

2008 (October 1, 2007 through March 31, 

2008). This rate of change was 5.7549 percent 

(1.057549) or 11.841 percent (1.11841) over 

2 years. 

As we have done in the past, we 

established the tentative FY 2009 outlier 

threshold using hospital CCRs from the 

March 2008 update to the PSF—the most 

recent available data at the time of this final 

rule with comment period. This file includes 

CCRs that reflected implementation of the 

changes to the policy for determining the 

applicable CCRs that became effective August 

8, 2003 (68 FR 34494). 

For FY 2009, we calculated the CCR 

adjustment by using the operating cost per 

discharge increase in combination with the 

market basket increase determined by Global 

Insight, Inc., as well as the charge inflation 

factor described above to estimate the 

adjustment to the CCRs. We determined the 

operating CCR adjustment by taking the 

percentage increase in the operating costs per 

discharge from FY 2005 to FY 2006 (1.0550) 

from the cost report and dividing it by the 

final market basket increase from FY 2006 

(1.042). This operation removes the measure 

of pure price increase (the market basket) 

from the percentage increase in operating 

cost per discharge, leaving the non-price 

factors in the cost increase (that is, quantity 

and changes in the mix of goods and 

services) to increase the projected market 

basket for estimating the future cost increase. 

We repeated this calculation for 2 prior years 

to determine the 3-year average of the rate of 

adjusted change in costs between the market 

basket rate-of-increase and the increase in 

cost per case from the cost report (FY 2003 

to FY 2004 percentage increase of operating 

costs per discharge of 1.0622 divided by FY 

2004 final market basket increase of 1.040, 

FY 2004 to FY 2005 percentage increase of 

operating costs per discharge of 1.0571 

divided by FY 2005 final market basket 

increase of 1.043). For FY 2009, we averaged 

the differentials calculated for FY 2004, FY 

2005, and FY 2006 which resulted in a mean 

ratio of 1.0158. We multiplied the 3-year 

average of 1.0158 by the FY 2007 final market 

basket percentage increase of 1.034, which 

resulted in an operating cost inflation factor 

of 5.03 percent or 1.0503. We then divided 

the operating cost inflation factor by the 1- 

year average change in charges (1.057549) 

and applied an adjustment factor of 0.9932 to 

the operating CCRs from the PSF. 

We used the same methodology for the 

capital CCRs and determined the adjustment 

by taking the percentage increase in the 

capital costs per discharge from FY 2005 to 

FY 2006 (1.0446) from the cost report and 

dividing it by the final capital market basket 

increase from FY 2006 (1.0090). We repeated 

this calculation for 2 prior years to determine 

the 3-year average of the rate of adjusted 

change in costs between the capital market 

basket rate-of-increase and the increase in 

cost per case from the cost report (FY 2003 

to FY 2004 percentage increase of capital 

costs per discharge of 1.0307 divided by FY 

2004 final capital market basket increase of 

1.0050, FY 2004 to FY 2005 percentage 

increase of capital costs per discharge of 

1.0324 divided by FY 2005 final capital 

market basket increase of 1.0060). For FY 

2009, we averaged the differentials calculated 

for FY 2004, FY 2005, and FY 2006, which 

resulted in a mean ratio of 1.0290. We 

multiplied the 3-year average of 1.0290 by 

the FY 2007 final capital market basket 

percentage increase of 1.0120, which resulted 

in a capital cost inflation factor of 4.14 

percent or 1.0414. We then divided the 

capital cost inflation factor by the 1-year 

average change in charges (1.057549) and 

applied an adjustment factor of 0.9847 to the 

capital CCRs from the PSF. We are using the 

same charge inflation factor for the capital 

CCRs that was used for the operating CCRs. 

The charge inflation factor is based on the 

overall billed charges. Therefore, we believe 

it is appropriate to apply the charge factor to 

both the operating and capital CCRs. 

Similar to the proposed rule, for purposes 

of estimating the tentative outlier threshold 

for FY 2009, we assume 3.0 percent case-mix 

growth in FY 2009 compared with our FY 

2007 claims data (that is, a 1.2 percent 

increase in FY 2008 and an additional 1.8 

percent increase in FY 2009). The 3 percent 

case-mix growth was projected by the Office 

of the Actuary as the amount case-mix is 

expected to increase in response to adoption 

of the MS–DRGs as a result of improvements 

in documentation and coding that do not 

reflect real changes in patient severity of 

illness. It is necessary to take the 3 percent 

expected case-mix growth into account when 

calculating the outlier threshold that results 

in outlier payments being 5.1 percent of total 

payments for FY 2009. If we did not take this 

3 percent projected case-mix growth into 

account, our estimate of total payments 

would be too low, and as a result, our 

estimate of the outlier threshold would be too 

high. While we assume 3 percent case-mix 

growth for all hospitals in our tentative 

outlier threshold calculations, the FY 2009 

national standardized amounts used to 

calculate the outlier threshold reflect the 

statutorily mandated documentation and 

coding adjustment of ¥0.9 percent for FY 

2009, on top of the ¥0.6 percent adjustment 

for FY 2008. 

Using this methodology, we calculated a 

tentative outlier fixed-loss cost threshold for 

FY 2009 equal to the prospective payment 

rate for the DRG, plus any IME and DSH 

payments, and any add-on payments for new 

technology, plus $20,185. With this 

threshold, we project that outlier payments 

will equal 5.1 percent of total IPPS payments. 

We note that, in this final rule, we are 

adopting this methodology to compute the 

final outlier fixed-loss cost threshold for FY 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48765 

25These figures represent 3.0 standard deviations 

from the mean of the log distribution of CCRs for 

all hospitals. 

2009, although the final dollar amount of the 

outlier threshold will be published in a 

subsequent Federal Register document. 

As we did in establishing the FY 2008 

outlier threshold (72 FR 47419), in our 

projection of FY 2009 outlier payments, we 

are not making any adjustments for the 

possibility that hospitals’ CCRs and outlier 

payments may be reconciled upon cost report 

settlement. We continue to believe that, due 

to the policy implemented in the outlier final 

rule (68 FR 34494, June 9, 2003), CCRs will 

no longer fluctuate significantly and, 

therefore, few hospitals will actually have 

these ratios reconciled upon cost report 

settlement. In addition, it is difficult to 

predict the specific hospitals that will have 

CCRs and outlier payments reconciled in any 

given year. We also noted that reconciliation 

occurs because hospitals’ actual CCRs for the 

cost reporting period are different than the 

interim CCRs used to calculate outlier 

payments when a bill is processed. Our 

simulations assume that CCRs accurately 

measure hospital costs based on information 

available to us at the time we set the outlier 

threshold. For these reasons, we are not 

making any assumptions about the effects of 

reconciliation on the outlier threshold 

calculation. 

We also note that there are some factors 

that contributed to a lower tentative fixed 

loss outlier threshold for FY 2009 compared 

to FY 2008. First, the case-weighted national 

average operating CCR declined by 

approximately an additional 1.3 percentage 

points from the March 2007 update (used to 

calculate the FY 2008 outlier threshold) to 

the March 2008 update of the PSF (used to 

calculate the FY 2009 outlier threshold). In 

addition, as discussed in sections II.C. and 

II.H. of the preamble of this final rule, we 

began a 2-year phase-in of the MS–DRGs in 

FY 2008, with the DRG relative weights 

based on a 50 percent blend of the CMS 

DRGs and MS–DRGs in FY 2008 and based 

on 100 percent of the MS–DRGs beginning in 

FY 2009. Better recognition of severity of 

illnesses with the MS–DRGs means that 

regular operating IPPS payments will 

compensate hospitals for the higher costs of 

some cases that previously received outlier 

payments. As cases are paid more accurately, 

in order to meet the 5.1 percent target, we 

need to decrease the fixed-loss outlier 

threshold so that more cases qualify for 

outlier payments. In addition, as noted 

previously, in our modeling of the tentative 

outlier threshold, we included a 3-percent 

adjustment for expected case-mix growth 

between FY 2007 and FY 2009. Finally, the 

market basket estimate increased from 3.0 

percent in the proposed rule to 3.6 percent 

for this final rule. Adding an extra 0.6 

percent to the standardized amount increases 

funds to typical cases and requires that we 

lower the outlier threshold to increase the 

amount of atypical cases in order to reach the 

5.1 percent target. Together, we believe that 

the above factors cumulatively contributed to 

a lower tentative fixed-loss outlier threshold 

in FY 2009 compared to FY 2008. 

Comment: One commenter recommended 

that CMS make a midyear change to the 

outlier threshold if it appears that the 5.1 

percent target will not be met. The 

commenter suggested that CMS use more 

recent CCR data for a midyear correction to 

the outlier threshold and use thresholds such 

as if outlier payments less than 95 percent or 

greater than 105 percent of the 5.1 percent 

target to trigger a midyear adjustment. Other 

commenters recommended that CMS further 

lower the threshold because CMS did not 

spend the total allocated pool of cost outlier 

funds allocated for outlier payments in FYs 

2005, 2006, and 2007. 

Response: With respect to these comments, 

we have responded to similar comments in 

the FY 2006 IPPS final rule (70 FR 47495). 

We refer readers to that final rule. 

Comment: One commenter stated that it 

may be time for CMS to reconsider the 

appropriateness of continuing with a yearly 

target of 5.1 percent outlier payments. The 

commenter explained that the introduction of 

MS–DRGs has increased the accuracy of DRG 

payments representing fair estimates of the 

costs of treating particular diagnosis and has 

resulted in the significant decline in the 

outlier threshold since implementation of the 

MS–DRGs. The commenter noted that CMS is 

bound by language in the Act that requires 

payments be between 5 and 6 percent of total 

DRG payments. As a result, the commenter 

urged CMS to consider this issue and seek 

from Congress a change in the statutory 

requirement that would allow for a lower 

outlier target percentage. 

Response: We thank the commenter for the 

comment. However, as noted above and by 

the commenter, section 1886(d)(5)(A)(iv) of 

the Act requires outlier payments to be not 

less than 5 percent nor more than 6 percent 

of total estimated or projected payments. 

(2) Other Changes Concerning Outliers 

As stated in the FY 1994 IPPS final rule (58 

FR 46348), we establish an outlier threshold 

that is applicable to both hospital inpatient 

operating costs and hospital inpatient 

capital-related costs. When we modeled the 

combined operating and capital outlier 

payments, we found that using a common 

threshold resulted in a lower percentage of 

outlier payments for capital-related costs 

than for operating costs. We project that the 

thresholds for FY 2009 will result in outlier 

payments that will equal 5.1 percent of 

operating DRG payments and 5.35 percent of 

capital payments based on the Federal rate. 

In accordance with section 1886(d)(3)(B) of 

the Act, we are reducing the FY 2009 

standardized amount by the same percentage 

to account for the projected proportion of 

payments paid as outliers. 

The tentative outlier adjustment factors 

that are applied to the standardized amount 

for the FY 2009 outlier threshold are as 

follows: 

Operating 

standardized 

amounts 

Capital federal 

rate 

National .................................................................................................................................................................... 0.948975 0.946457 

Puerto Rico .............................................................................................................................................................. 0.954561 0.93139 

We are applying the tentative outlier 

adjustment factors to the tentative FY 2009 

rates after removing the effects of the FY 

2008 outlier adjustment factors on the 

standardized amount. 

To determine whether a case qualifies for 

outlier payments, we apply hospital-specific 

CCRs to the total covered charges for the 

case. Estimated operating and capital costs 

for the case are calculated separately by 

applying separate operating and capital 

CCRs. These costs are then combined and 

compared with the outlier fixed-loss cost 

threshold. 

The outlier final rule (68 FR 34494) 

eliminated the application of the statewide 

average CCRs for hospitals with CCRs that 

fell below 3 standard deviations from the 

national mean CCR. However, for those 

hospitals for which the fiscal intermediary or 

MAC computes operating CCRs greater than 

1.196 or capital CCRs greater than 0.145, or 

hospitals for whom the fiscal intermediary or 

MAC is unable to calculate a CCR (as 

described at (412.84(i)(3) of our regulations), 

we still use statewide average CCRs to 

determine whether a hospital qualifies for 

outlier payments.25 Table 8A in this 

Addendum contains the statewide average 

operating CCRs for urban hospitals and for 

rural hospitals for which the fiscal 

intermediary or MAC is unable to compute 

a hospital-specific CCR within the above 

range. Effective for discharges occurring on 

or after October 1, 2008, these statewide 

average ratios will replace the ratios 

published in the IPPS final rule for FY 2008 

(72 FR 48126–48127). Table 8B in this 

Addendum contains the comparable 

statewide average capital CCRs. Again, the 

CCRs in Tables 8A and 8B will be used 

during FY 2009 when hospital-specific CCRs 

based on the latest settled cost report are 

either not available or are outside the range 

noted above. For an explanation of Table 8C, 

we refer readers to section V. of this 

Addendum. 

We finally note that we published a 

manual update (Change Request 3966) to our 

outlier policy on October 12, 2005, which 

updated Chapter 3, Section 20.1.2 of the 

Medicare Claims Processing Manual. The 

manual update covered an array of topics, 

including CCRs, reconciliation, and the time 

value of money. We encourage hospitals that 

are assigned the statewide average operating 


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and/or capital CCRs to work with their fiscal 

intermediaries (or MAC, if applicable) on a 

possible alternative operating and/or capital 

CCR as explained in Change Request 3966. 

Use of an alternative CCR developed by the 

hospital in conjunction with the fiscal 

intermediary or MAC can avoid possible 

overpayments or underpayments at cost 

report settlement, thus ensuring better 

accuracy when making outlier payments and 

negating the need for outlier reconciliation. 

We also note that a hospital may request an 

alternative operating or capital CCR ratio at 

any time as long as the guidelines of Change 

Request 3966 are followed. To download and 

view the manual instructions on outlier and 

cost-to-charge ratios, visit the Web site: 

http://www.cms.hhs.gov/manuals/ 

downloads/clm104c03.pdf. 

Comment: One commenter stated that it 

was unable to replicate the estimated FY 

2009 capital outlier percentage of 5.73 

percent cited in the proposed rule (73 FR 

23711 and 23718). Instead, its analysis 

resulted in a somewhat lower capital outlier 

percentage. Consequently, the commenter 

recommended that CMS reevaluate its 

calculations to ensure that the estimated 

capital outlier percentage for FY 2009 is 

correct. 

Response: Section 412.312(c) of our 

regulations establishes a unified outlier 

payment methodology for inpatient operating 

and inpatient capital-related costs. A single 

set of thresholds is used to identify outlier 

cases for both operating IPPS and capital 

IPPS payments. The outlier threshold is set 

so that operating IPPS outlier payments are 

projected to be 5.1 percent of total operating 

IPPS payments. 

In the proposed rule (73 FR 23711), we 

discussed that for purposes of estimating the 

proposed outlier threshold for FY 2009, we 

assumed 3.0 percent case-mix growth in FY 

2009 compared with our FY 2007 claims data 

(that is, a 1.2 percent increase in FY 2008 and 

an additional 1.8 percent increase in FY 

2009), based on the Office of the Actuary’s 

estimate of the amount that hospitals’ casemix is expected to increase in response to the 

adoption of the MS–DRGs due to 

improvements in documentation and coding 

that do not reflect real changes in patient 

severity of illness. As discussed above, it is 

necessary to take the 3 percent expected casemix growth into account when establishing 

an outlier threshold for FY 2009 that would 

result in operating IPPS outlier payments 

being between 5 and 6 percent of total 

operating IPPS payments in accordance with 

section 1886(d)(5)(A)(iv) of the Act. If we did 

not take this 3 percent projected case-mix 

growth into account, our estimate of total 

operating IPPS payments would be too low, 

and, as a result, our estimate of the outlier 

threshold for FY 2009 would be too high. 

Upon review of our calculations of the 

proposed FY 2009 outlier fixed-loss amount, 

we realized that, while we had discussed 

applying the 3.0 percent expected case-mix 

increase adjustment, in actuality, we 

unintentionally neglected to apply the 

assumed 3.0 percent case-mix growth for FY 

2009. We appreciate the commenter bringing 

this inadvertent error in our outlier 

calculations to our attention, and we have 

revised our outlier calculations for this final 

rule accordingly. As discussed above, in this 

final rule, based on more recent data and the 

rates and policies finalized in this final rule, 

we are establishing a tentative fixed-loss 

amount for FY 2009 of $20,185. We are 

projecting that this outlier threshold for FY 

2009 will result in outlier payments that will 

equal 5.1 percent of operating IPPS DRG 

payments and 5.35 percent of capital IPPS 

payments based on the Federal rate. 

(3) FY 2007 and FY 2008 Outlier Payments 

In the FY 2008 IPPS final rule (72 FR 

47420), we stated that, based on available 

data, we estimated that actual FY 2007 

outlier payments would be approximately 4.6 

percent of actual total DRG payments. This 

estimate was computed based on simulations 

using the FY 2006 MedPAR file (discharge 

data for FY 2006 bills). That is, the estimate 

of actual outlier payments did not reflect 

actual FY 2007 bills, but instead reflected the 

application of FY 2007 rates and policies to 

available FY 2006 bills. 

Our current estimate, using available FY 

2007 bills, is that actual outlier payments for 

FY 2007 were approximately 4.64 percent of 

actual total DRG payments. Thus, the data 

indicate that, for FY 2007, the percentage of 

actual outlier payments relative to actual 

total payments is lower than we projected 

before FY 2007. Consistent with the policy 

and statutory interpretation we have 

maintained since the inception of the IPPS, 

we do not plan to make retroactive 

adjustments to outlier payments to ensure 

that total outlier payments for FY 2007 are 

equal to 5.1 percent of total DRG payments. 

We currently estimate that actual outlier 

payments for FY 2008 will be approximately 

4.7 percent of actual total DRG payments, 0.4 

percentage points lower than the 5.1 percent 

we projected in setting the outlier policies for 

FY 2008. This estimate is based on 

simulations using the FY 2007 MedPAR file 

(discharge data for FY 2007 bills). We used 

these data to calculate an estimate of the 

actual outlier percentage for FY 2008 by 

applying FY 2008 rates and policies, 

including an outlier threshold of $22,185 to 

available FY 2007 bills. We note that the FY 

2007 MedPAR file does not contain claims 

that account for upcoding. As a result, in our 

simulation of the estimate of the FY 2008 

outlier percentage, it was necessary to 

increase the charges on the claims by 1.2 

percent to account for one year of upcoding. 

Comment: Some commenters simulated the 

FY 2008 estimate and calculated an estimate 

of 4.3 percent of outlier payments for that 

year. The commenters noted this percentage 

was very different from the 4.8 percent 

estimate CMS calculated in the proposed 

rule. The commenters requested that CMS 

revisit its calculation and publish an 

explanation of its estimate. 

Response: We verified our calculation of 

the FY 2008 estimate and did not find any 

discrepancies that would result in an 

estimate similar to the commenters. We 

believe we have explained our process above 

with one minor adjustment from the 

proposed rule. The difference from the 

proposed rule to this final rule is that we 

inflated the claims by 1.2 percent to account 

for upcoding which slightly changed our FY 

2008 estimate from 4.8 percent in the 

proposed rule to 4.7 percent in this final rule. 

As stated above, we will monitor the FY 2008 

outlier payout once the FY 2008 MedPAR 

claims database is available and will then 

consider and evaluate the commenters 

comments on modifiying the outlier 

threshold methodology. 

e. Tentative Rural Community Hospital 

Demonstration Program Adjustment (Section 

410A of Pub. L. 108–173) 

Section 410A of Public Law 108–173 

requires the Secretary to establish a 

demonstration that will modify 

reimbursement for inpatient services for up 

to 15 small rural hospitals. Section 

410A(c)(2) of Public Law 108–173 requires 

that ‘‘in conducting the demonstration 

program under this section, the Secretary 

shall ensure that the aggregate payments 

made by the Secretary do not exceed the 

amount which the Secretary would have paid 

if the demonstration program under this 

section was not implemented.’’ As discussed 

in section IV.H. of the preamble to this final 

rule with comment period, we have satisfied 

this requirement by adjusting national IPPS 

rates by a factor that is sufficient to account 

for the added costs of this demonstration. We 

estimate that the average additional annual 

payment that will be made to each 

participating hospital under the 

demonstration will be approximately 

$1,753,106. We based this estimate on the 

recent historical experience of the difference 

between inpatient cost and payment for 

hospitals that are participating in the 

demonstration program. For 13 participating 

hospitals, the total annual impact of the 

demonstration program for FY 2009 is 

$22,790,388. The required tentative 

adjustment to the Federal rate used in 

calculating Medicare inpatient prospective 

payments as a result of the demonstration is 

0.999764. 

In order to achieve budget neutrality, we 

adjust the tentative national IPPS rates by a 

tentative amount sufficient to account for the 

added costs of this demonstration. In other 

words, we apply budget neutrality across the 

payment system as a whole rather than 

merely across the participants of this 

demonstration, consistent with past practice. 

We believe that the language of the statutory 

budget neutrality requirement permits the 

agency to implement the budget neutrality 

provision in this manner. The statutory 

language requires that ‘‘aggregate payments 

made by the Secretary do not exceed the 

amount which the Secretary would have paid 

if the demonstration * * * was not 

implemented,’’ but does not identify the 

range across which aggregate payments must 

be held equal. 

5. Tentative FY 2009 Standardized Amount 

The tentative adjusted standardized 

amount is divided into labor-related and 

nonlabor-related portions. Tables 1A and 1B 

of this Addendum contain the tentative 

national standardized amounts that we are 

applying to all hospitals, except hospitals 

located in Puerto Rico, for FY 2009. The 

tentative Puerto Rico-specific amounts are 

shown in Table 1C of this Addendum. The 

tentative amounts shown in Tables 1A and 


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1B differ only in that the labor-related share 

applied to the tentative standardized 

amounts in Table 1A is 69.7 percent, and 

Table 1B is 62 percent. In accordance with 

sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) 

of the Act, we apply a labor-related share of 

62 percent, unless application of that 

percentage would result in lower payments 

to a hospital than would otherwise be made. 

In effect, the statutory provision means that 

we apply a labor-related share of 62 percent 

for all hospitals (other than those in Puerto 

Rico) whose wage indexes are less than or 

equal to 1.0000. 

In addition, Tables 1A and 1B include 

tentative standardized amounts reflecting the 

full 3.6 percent update for FY 2009, and 

tentative standardized amounts reflecting the 

2.0 percentage point reduction to the update 

(a 1.6 percent update) applicable for 

hospitals that fail to submit quality data 

consistent with section 1886(b)(3)(B)(viii) of 

the Act. 

Under section 1886(d)(9)(A)(ii) of the Act, 

the Federal portion of the Puerto Rico 

payment rate is based on the dischargeweighted average of the national large urban 

standardized amount (this amount is set forth 

in Table 1A). The tentative labor-related and 

nonlabor-related portions of the national 

average standardized amounts for Puerto 

Rico hospitals for FY 2009 are set forth in 

Table 1C of this Addendum. This table also 

includes the tentative Puerto Rico 

standardized amounts. The labor-related 

share applied to the tentative Puerto Rico 

specific standardized amount is 58.7 percent, 

or 62 percent, depending on which provides 

higher payments to the hospital. (Section 

1886(d)(9)(C)(iv) of the Act, as amended by 

section 403(b) of Public Law 108–173, 

provides that the labor-related share for 

hospitals located in Puerto Rico be 62 

percent, unless the application of that 

percentage would result in lower payments 

to the hospital.) 

We note that, in this final rule, we are not 

supplying a table that illustrates the changes 

from the FY 2008 national average 

standardized amount. Because we are only 

setting the standardized amounts tentatively, 

we do not believe it is appropriate to include 

this table in this final rule. However, we will 

publish a table in the subsequent notice to 

this final rule that details the calculation of 

the final standardized amounts. 

B. Tentative Adjustments for Area Wage 

Levels and Cost-of-Living 

Tables 1A through 1C, as set forth in this 

Addendum, contain the tentative laborrelated and nonlabor-related shares that we 

used to calculate the prospective payment 

rates for hospitals located in the 50 States, 

the District of Columbia, and Puerto Rico for 

FY 2009. This section addresses two types of 

adjustments to the tentative standardized 

amounts that were made in determining the 

prospective payment rates as described in 

this Addendum. 

1. Tentative Adjustment for Area Wage 

Levels 

Sections 1886(d)(3)(E) and 

1886(d)(9)(C)(iv) of the Act require that we 

make an adjustment to the labor-related 

portion of the national and Puerto Rico 

prospective payment rates, respectively, to 

account for area differences in hospital wage 

levels. This adjustment is made by 

multiplying the labor-related portion of the 

adjusted standardized amounts by the 

appropriate wage index for the area in which 

the hospital is located. In section III. of the 

preamble to this final rule, we discuss the 

data and methodology for the FY 2009 wage 

index. We note that because we have not 

implemented section 124 of Public Law 110–

275, we will not be publishing Tables 4A, 4B, 

4C, 4D–1, 4D–2, 4E, and 4F in this final rule. 

However, we will publish these tables in a 

subsequent Federal Register notice and post 

them on the CMS Web site once all the data 

are finalized and prior to October 1, 2008. 

2. Final Adjustment for Cost-of-Living in 

Alaska and Hawaii 

Section 1886(d)(5)(H) of the Act authorizes 

the Secretary to make an adjustment to take 

into account the unique circumstances of 

hospitals in Alaska and Hawaii. Higher laborrelated costs for these two States are taken 

into account in the adjustment for area wages 

described above. For FY 2009, we adjusted 

the payments for hospitals in Alaska and 

Hawaii by multiplying the nonlabor-related 

portion of the standardized amount by the 

applicable adjustment factor contained in the 

table below. 

TABLE OF COST-OF-LIVING ADJUSTMENT FACTORS: ALASKA AND HAWAII

HOSPITALS

Area 

Cost of living 

adjustment 

factor 

Alaska: 

City of Anchorage and 80- 

kilometer (50-mile) radius by road ................... 1.24 

City of Fairbanks and 80- 

kilometer (50-mile) radius by road ................... 1.24 

City of Juneau and 80-kilometer (50-mile) radius 

by road .......................... 1.24 

Rest of Alaska ............... 1.25 

Hawaii: 

City and County of Honolulu ................................. 1.25 

County of Hawaii ............... 1.18 

County of Kauai ................ 1.25 

County of Maui and County of Kalawao ................. 1.25 

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

Management.) 

C. MS–DRG Relative Weights 

As discussed in section II.H. of the 

preamble of this final rule, we have 

developed relative weights for each MS–DRG 

that reflect the resource utilization of cases 

in each MS–DRG relative to Medicare cases 

in other MS–DRGs. Table 5 of this 

Addendum contains the relative weights that 

we will apply to discharges occurring in FY 

2009. These factors have been recalibrated as 

explained in section II. of the preamble of 

this final rule. 

D. Calculation of the Prospective Payment 

Rates 

General Formula for Calculation of the 

Prospective Payment Rates for FY 2009. 

In general, the operating prospective 

payment rate for all hospitals paid under the 

IPPS located outside of Puerto Rico, except 

SCHs and MDHs, for FY 2009 equals the 

Federal rate. 

Currently, SCHs are paid based on 

whichever of the following rates yields the 

greatest aggregate payment: The Federal 

national rate; the updated hospital-specific 

rate based on FY 1982 costs per discharge; 

the updated hospital-specific rate based on 

FY 1987 costs per discharge; or the updated 

hospital-specific rate based on FY 1996 costs 

per discharge. For cost reporting periods 

beginning on or after January 1, 2009, section 

124 of Public Law 110–275 amended section 

1886(b)(3) of the Act and added the updated 

hospital-specific rate based on the FY 2006 

costs per discharge to determine the rate that 

yields the greatest aggregate payment. This 

provision is discussed in detail in section 

IV.D.2. of the preamble of this final rule. 

The prospective payment rate for SCHs for 

FY 2009 equals the higher of the applicable 

Federal rate, or the hospital-specific rate as 

described below. The prospective payment 

rate for MDHs for FY 2009 equals the higher 

of the Federal rate, or the Federal rate plus 

75 percent of the difference between the 

Federal rate and the hospital-specific rate as 

described below. The prospective payment 

rate for hospitals located in Puerto Rico for 

FY 2009 equals 25 percent of the Puerto Rico 

rate plus 75 percent of the applicable 

national rate. 

1. Federal Rate 

The Federal rate is determined as follows: 

Step 1—Select the applicable average 

standardized amount depending on whether 

the hospital submitted qualifying quality data 

(full update for qualifying hospitals, update 

minus 2.0 percentage points for 

nonqualifying hospitals). 

Step 2—Multiply the labor-related portion 

of the standardized amount by the applicable 

wage index for the geographic area in which 

the hospital is located or the area to which 

the hospital is reclassified. 

Step 3—For hospitals in Alaska and 

Hawaii, multiply the nonlabor-related 

portion of the standardized amount by the 

applicable cost-of-living adjustment factor. 

Step 4—Add the amount from Step 2 and 

the nonlabor-related portion of the 

standardized amount (adjusted, if applicable, 

under Step 3). 

Step 5—Multiply the final amount from 

Step 4 by the relative weight corresponding 

to the applicable MS–DRG (see Table 5 of 

this Addendum). 

The Federal rate as determined in Step 5 

is then further adjusted if the hospital 

qualifies for either the IME or DSH 

adjustment. In addition, for hospitals that 

qualify for a low-volume payment adjustment 

under section 1886(d)(12) of the Act and 42 

CFR 412.101(b), the payment in Step 5 is 

increased by 25 percent. 


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2. Hospital-Specific Rate (Applicable Only to 

SCHs and MDHs) 

a. Calculation of Hospital-Specific Rate 

Section 1886(b)(3)(C) of the Act provides 

that for cost reporting periods beginning 

prior to January 1, 2009, SCHs are paid based 

on whichever of the following rates yields 

the greatest aggregate payment: The Federal 

rate; the updated hospital-specific rate based 

on FY 1982 costs per discharge; the updated 

hospital-specific rate based on FY 1987 costs 

per discharge; or the updated hospitalspecific rate based on FY 1996 costs per 

discharge. As discussed above, for cost 

reporting periods beginning on or after 

January 1, 2009, section 124 of Public Law 

110–275 amended section 1886(b)(3) of the 

Act and added the updated hospital-specific 

rate based on the FY 2006 costs per discharge 

to determine the rate that yields the greatest 

aggregate payment. We refer readers to 

section IV.D.2. of the preamble of this final 

rule for further discussion of this provision. 

As discussed previously, we are required 

to rebase MDHs hospital-specific rates to 

their FY 2002 cost reports if doing so results 

in higher payments. In addition, effective for 

discharges occurring on or after October 1, 

2006, MDHs are to be paid based on the 

Federal national rate or, if higher, the Federal 

national rate plus 75 percent (changed from 

50 percent) of the difference between the 

Federal national rate and the greater of the 

updated hospital-specific rates based on 

either FY 1982, FY 1987 or FY 2002 costs per 

discharge. Further, MDHs are no longer 

subject to the 12-percent cap on their DSH 

payment adjustment factor. 

Hospital-specific rates have been 

determined for each of these hospitals based 

on the FY 1982 costs per discharge, the FY 

1987 costs per discharge, or, for SCHs, the FY 

1996 costs per discharge and for MDHs, the 

FY 2002 cost per discharge. For a more 

detailed discussion of the calculation of the 

hospital-specific rates, we refer the reader to 

the FY 1984 IPPS interim final rule (48 FR 

39772); the April 20, 1990, final rule with 

comment (55 FR 15150); the FY 1991 IPPS 

final rule (55 FR 35994); and the FY 2001 

IPPS final rule (65 FR 47082). In addition, for 

both SCHs and MDHs, the hospital-specific 

rate is adjusted by the budget neutrality 

adjustment factor as discussed in section III. 

of this Addendum. The resulting rate is used 

in determining the payment rate an SCH or 

MDH will receive for its discharges beginning 

on or after October 1, 2008. 

b. Updating the FY 1982, FY 1987, FY 1996, 

and FY 2002 Hospital-Specific Rates for FY 

2009 

We are increasing the hospital-specific 

rates by 3.6 percent (the hospital market 

basket percentage increase) for FY 2009 for 

those SCHs and MDHs that submit qualifying 

quality data and by 1.6 percent for SCHs and 

MDHs that fail to submit qualifying quality 

data. Section 1886(b)(3)(C)(iv) of the Act 

provides that the update factor applicable to 

the hospital-specific rates for SCHs is equal 

to the update factor provided under section 

1886(b)(3)(B)(iv) of the Act, which, for SCHs 

in FY 2008, is the market basket rate-ofincrease for hospitals that submit qualifying 

quality data and the market basket rate-ofincrease minus 2 percent for hospitals that 

fail to submit qualifying quality data. Section 

1886(b)(3)(D) of the Act provides that the 

update factor applicable to the hospitalspecific rates for MDHs also equals the 

update factor provided for under section 

1886(b)(3)(B)(iv) of the Act, which, for FY 

2009, is the market basket rate-of-increase for 

hospitals that submit qualifying quality data 

and the market basket rate-of-increase minus 

2 percent for hospitals that fail to submit 

qualifying quality data. 

3. General Formula for Calculation of 

Prospective Payment Rates for Hospitals 

Located in Puerto Rico Beginning On or After 

October 1, 2008, and Before October 1, 2009 

Section 1886(d)(9)(E)(iv) of the Act 

provides that, effective for discharges 

occurring on or after October 1, 2004, 

hospitals located in Puerto Rico are paid 

based on a blend of 75 percent of the national 

prospective payment rate and 25 percent of 

the Puerto Rico-specific rate. 

a. Puerto Rico Rate 

The Puerto Rico prospective payment rate 

is determined as follows: 

Step 1—Select the applicable average 

standardized amount considering the 

applicable wage index (Table 1C of this 

Addendum). 

Step 2—Multiply the labor-related portion 

of the standardized amount by the applicable 

Puerto Rico-specific wage index. 

Step 3—Add the amount from Step 2 and 

the nonlabor-related portion of the 

standardized amount. 

Step 4—Multiply the amount from Step 3 

by the applicable MS–DRG relative weight 

(Table 5 of this Addendum). 

Step 5—Multiply the result in Step 4 by 25 

percent. 

b. National Rate 

The national prospective payment rate is 

determined as follows: 

Step 1—Select the applicable average 

standardized amount. 

Step 2—Multiply the labor-related portion 

of the standardized amount by the applicable 

wage index for the geographic area in which 

the hospital is located or the area to which 

the hospital is reclassified. 

Step 3—Add the amount from Step 2 and 

the nonlabor-related portion of the national 

average standardized amount. 

Step 4—Multiply the amount from Step 3 

by the applicable MS–DRG relative weight 

(Table 5 of this Addendum). 

Step 5—Multiply the result in Step 4 by 75 

percent. 

The sum of the Puerto Rico rate and the 

national rate computed above equals the 

prospective payment for a given discharge for 

a hospital located in Puerto Rico. This rate 

is then further adjusted if the hospital 

qualifies for either the IME or DSH 

adjustment. 

III. Changes to Payment Rates for Acute Care 

Hospital Inpatient Capital-Related Costs for 

FY 2009 

The PPS for acute care hospital inpatient 

capital-related costs was implemented for 

cost reporting periods beginning on or after 

October 1, 1991. Effective with that cost 

reporting period, hospitals were paid during 

a 10-year transition period (which extended 

through FY 2001) to change the payment 

methodology for Medicare acute care hospital 

inpatient capital-related costs from a 

reasonable cost-based methodology to a 

prospective methodology (based fully on the 

Federal rate). 

The basic methodology for determining 

Federal capital prospective rates is set forth 

in the regulations at 42 CFR 412.308 through 

412.352. Below we discuss the factors that 

we used to determine the capital Federal rate 

for FY 2009, which will be effective for 

discharges occurring on or after October 1, 

2008. We note that, as discussed in detail in 

section III.I. of the preamble of this final rule, 

section 124 of newly enacted Public Law 

110–275 extends, through FY 2009, wage 

index reclassifications under section 508 of 

Public Law 108–173 (the MMA) and the 

special exceptions contained in the final rule 

published in the Federal Register on August 

11, 2004 (69 FR 49105, 49107) and extended 

under section 117 of the MMSEA of 2007 

(Pub. L. 110–173). As a result, we cannot 

finalize the FY 2009 capital rates, including 

the GAF/DRG adjustment factor, the outlier 

payment adjustment factor, and the outlier 

threshold, until we recompute the wage 

indices for FY 2009 as a result of these 

extensions. Therefore, the capital Federal 

rate, the GAF/DRG adjustment factor, and the 

outlier payment adjustment factor for FY 

2009 discussed below are tentative. The final 

capital rates and factors for FY 2009, 

reflecting the extension of the reclassification 

provisions noted above, will be published in 

a forthcoming notice in the Federal Register. 

The 10-year transition period ended with 

hospital cost reporting periods beginning on 

or after October 1, 2001 (FY 2002). Therefore, 

for cost reporting periods beginning in FY 

2002, all hospitals (except ‘‘new’’ hospitals 

under § 412.304(c)(2)) are paid based on the 

capital Federal rate. For FY 1992, we 

computed the standard Federal payment rate 

for capital-related costs under the IPPS by 

updating the FY 1989 Medicare inpatient 

capital cost per case by an actuarial estimate 

of the increase in Medicare inpatient capital 

costs per case. Each year after FY 1992, we 

update the capital standard Federal rate, as 

provided at § 412.308(c)(1), to account for 

capital input price increases and other 

factors. The regulations at § 412.308(c)(2) 

provide that the capital Federal rate be 

adjusted annually by a factor equal to the 

estimated proportion of outlier payments 

under the capital Federal rate to total capital 

payments under the capital Federal rate. In 

addition, § 412.308(c)(3) requires that the 

capital Federal rate be reduced by an 

adjustment factor equal to the estimated 

proportion of payments for (regular and 

special) exceptions under § 412.348. Section 

412.308(c)(4)(ii) requires that the capital 

standard Federal rate be adjusted so that the 

effects of the annual DRG reclassification and 

the recalibration of DRG weights and changes 

in the geographic adjustment factor (GAF) are 

budget neutral. 

For FYs 1992 through 1995, § 412.352 

required that the capital Federal rate also be 

adjusted by a budget neutrality factor so that 

aggregate payments for inpatient hospital 


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capital costs were projected to equal 90 

percent of the payments that would have 

been made for capital-related costs on a 

reasonable cost basis during the respective 

fiscal year. That provision expired in FY 

1996. Section 412.308(b)(2) describes the 7.4 

percent reduction to the capital Federal rate 

that was made in FY 1994, and 

§ 412.308(b)(3) describes the 0.28 percent 

reduction to the capital Federal rate made in 

FY 1996 as a result of the revised policy for 

paying for transfers. In FY 1998, we 

implemented section 4402 of Public Law 

105–33, which required that, for discharges 

occurring on or after October 1, 1997, the 

budget neutrality adjustment factor in effect 

as of September 30, 1995, be applied to the 

unadjusted capital standard Federal rate and 

the unadjusted hospital-specific rate. That 

factor was 0.8432, which was equivalent to 

a 15.68 percent reduction to the unadjusted 

capital payment rates. An additional 2.1 

percent reduction to the rates was effective 

from October 1, 1997 through September 30, 

2002, making the total reduction 17.78 

percent. As we discussed in the FY 2003 

IPPS final rule (67 FR 50102) and 

implemented in § 412.308(b)(6), the 2.1 

percent reduction was restored to the 

unadjusted capital payment rates effective 

October 1, 2002. 

To determine the appropriate budget 

neutrality adjustment factor and the regular 

exceptions payment adjustment during the 

10-year transition period, we developed a 

dynamic model of Medicare inpatient 

capital-related costs; that is, a model that 

projected changes in Medicare inpatient 

capital-related costs over time. With the 

expiration of the budget neutrality provision, 

the capital cost model was only used to 

estimate the regular exceptions payment 

adjustment and other factors during the 

transition period. As we explained in the FY 

2002 IPPS final rule (66 FR 39911), beginning 

in FY 2002, an adjustment for regular 

exception payments is no longer necessary 

because regular exception payments were 

only made for cost reporting periods 

beginning on or after October 1, 1991, and 

before October 1, 2001 (see § 412.348(b)). 

Because payments are no longer made under 

the regular exception policy effective with 

cost reporting periods beginning in FY 2002, 

we discontinued use of the capital cost 

model. The capital cost model and its 

application during the transition period are 

described in Appendix B of the FY 2002 IPPS 

final rule (66 FR 40099). 

Section 412.374 provides for blended 

payments to hospitals located in Puerto Rico 

under the IPPS for acute care hospital 

inpatient capital-related costs. Accordingly, 

under the capital PPS, we compute a separate 

payment rate specific to hospitals located in 

Puerto Rico using the same methodology 

used to compute the national Federal rate for 

capital-related costs. In accordance with 

section 1886(d)(9)(A) of the Act, under the 

IPPS for acute care hospital operating costs, 

hospitals located in Puerto Rico are paid for 

operating costs under a special payment 

formula. Prior to FY 1998, hospitals located 

in Puerto Rico were paid a blended operating 

rate that consisted of 75 percent of the 

applicable standardized amount specific to 

Puerto Rico hospitals and 25 percent of the 

applicable national average standardized 

amount. Similarly, prior to FY 1998, 

hospitals located in Puerto Rico were paid a 

blended capital rate that consisted of 75 

percent of the applicable capital Puerto Ricospecific rate and 25 percent of the applicable 

capital Federal rate. However, effective 

October 1, 1997, in accordance with section 

4406 of Public Law 105–33, the methodology 

for operating payments made to hospitals 

located in Puerto Rico under the IPPS was 

revised to make payments based on a blend 

of 50 percent of the applicable standardized 

amount specific to Puerto Rico hospitals and 

50 percent of the applicable national average 

standardized amount. In conjunction with 

this change to the operating blend 

percentage, effective with discharges 

occurring on or after October 1, 1997, we also 

revised the methodology for computing 

capital payments to hospitals located in 

Puerto Rico to be based on a blend of 50 

percent of the Puerto Rico capital rate and 50 

percent of the national capital Federal rate. 

As we discussed in the FY 2005 IPPS final 

rule (69 FR 49185), section 504 of Public Law 

108–173 increased the national portion of the 

operating IPPS payments for hospitals 

located in Puerto Rico from 50 percent to 

62.5 percent and decreased the Puerto Rico 

portion of the operating IPPS payments from 

50 percent to 37.5 percent for discharges 

occurring on or after April 1, 2004 through 

September 30, 2004 (see the March 26, 2004 

One-Time Notification (Change Request 

3158)). In addition, section 504 of Public Law 

108–173 provided that the national portion of 

operating IPPS payments for hospitals 

located in Puerto Rico is equal to 75 percent 

and the Puerto Rico-specific portion of 

operating IPPS payments is equal to 25 

percent for discharges occurring on or after 

October 1, 2004. Consistent with that change 

in operating IPPS payments to hospitals 

located in Puerto Rico, for FY 2005 (as we 

discussed in the FY 2005 IPPS final rule), we 

revised the methodology for computing 

capital payments to hospitals located in 

Puerto Rico to be based on a blend of 25 

percent of the Puerto Rico-specific capital 

rate and 75 percent of the national capital 

Federal rate for discharges occurring on or 

after October 1, 2004. 

A. Determination of Federal Hospital 

Inpatient Capital-Related Prospective 

Payment Rate Update 

In the FY 2008 IPPS final rule with 

comment period (72 FR 66886 through 

66888), we established a capital Federal rate 

of $426.14 for FY 2008. In the FY 2009 IPPS 

proposed rule (73 FR 23720), we proposed to 

establish a capital Federal rate of $421.29 for 

FY 2009. In the discussion that follows, we 

explain the factors that we used to determine 

the FY 2009 capital Federal rate in this final 

rule. In particular, we explain why the FY 

2009 capital Federal rate will decrease 

approximately 0.51 percent, compared to the 

FY 2008 capital Federal rate. However, taking 

into account an estimated increase in 

Medicare fee-for-service discharges in FY 

2009 as compared to FY 2008, as well as the 

estimated increase in payments due to 

documentation and coding (discussed in 

section VIII. of Appendix A to this final rule), 

we estimate that aggregate capital payments 

will increase during this same period 

(approximately $40 million). Total payments 

to hospitals under the IPPS are relatively 

unaffected by changes in the capital 

prospective payments. Because capital 

payments constitute about 10 percent of 

hospital payments, a 1-percent change in the 

capital Federal rate yields only about a 0.1 

percent change in actual payments to 

hospitals. As noted above, aggregate 

payments under the capital IPPS are 

projected to increase in FY 2009 compared to 

FY 2008. 

1. Projected Capital Standard Federal Rate 

Update 

a. Description of the Update Framework 

Under § 412.308(c)(1), the capital standard 

Federal rate is updated on the basis of an 

analytical framework that takes into account 

changes in a capital input price index (CIPI) 

and several other policy adjustment factors. 

Specifically, we have adjusted the projected 

CIPI rate-of-increase as appropriate each year 

for case-mix index-related changes, for 

intensity, and for errors in previous CIPI 

forecasts. The update factor for FY 2009 

under that framework is 0.9 percent based on 

the best data available at this time. The 

update factor under that framework is based 

on a projected 1.4 percent increase in the 

CIPI, a 0.0 percent adjustment for intensity, 

a 0.0 percent adjustment for case-mix, a ¥0.5 

percent adjustment for the FY 2007 DRG 

reclassification and recalibration, and a 

forecast error correction of 0.0 percent. As 

discussed below in section III.C. of the 

Addendum to this final rule, we continue to 

believe that the CIPI is the most appropriate 

input price index for capital costs to measure 

capital price changes in a given year. We also 

explain the basis for the FY 2009 CIPI 

projection in that same section of this 

Addendum. In addition, as also noted below, 

the capital rates will be further adjusted to 

account for documentation and coding 

improvements under the MS–DRGs 

discussed in section II.D. of the preamble of 

this final rule. Below we describe the policy 

adjustments that we are applying in the 

update framework for FY 2009 presented in 

this final rule. 

The case-mix index is the measure of the 

average DRG weight for cases paid under the 

IPPS. Because the DRG weight determines 

the prospective payment for each case, any 

percentage increase in the case-mix index 

corresponds to an equal percentage increase 

in hospital payments. 

The case-mix index can change for any of 

several reasons: 

• The average resource use of Medicare 

patients changes (‘‘real’’ case-mix change); 

• Changes in hospital coding of patient 

records result in higher weight DRG 

assignments (‘‘coding effects’’); and 

• The annual DRG reclassification and 

recalibration changes may not be budget 

neutral (‘‘reclassification effect’’). 

We define real case-mix change as actual 

changes in the mix (and resource 

requirements) of Medicare patients as 

opposed to changes in coding behavior that 

result in assignment of cases to higher 


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weighted DRGs but do not reflect higher 

resource requirements. The capital update 

framework includes the same case-mix index 

adjustment used in the former operating IPPS 

update framework (as discussed in the May 

18, 2004 IPPS proposed rule for FY 2005 (69 

FR 28816)). (We no longer use an update 

framework to make a recommendation for 

updating the operating IPPS standardized 

amounts as discussed in section II. of 

Appendix B in the FY 2006 IPPS final rule 

(70 FR 47707).) 

Absent the projected increase in case-mix 

resulting from documentation and coding 

improvements under the adoption of the MS–

DRGs, as we presented in the proposed rule, 

for FY 2009, we are projecting a 1.0 percent 

total increase in the case-mix index. We 

estimate that the real case-mix increase will 

also equal 1.0 percent for FY 2009. The net 

adjustment for change in case-mix is the 

difference between the projected real 

increase in case-mix and the projected total 

increase in case-mix. Therefore, as we 

proposed, the net adjustment for case-mix 

change in FY 2009 is 0.0 percentage points. 

The capital update framework also 

contains an adjustment for the effects of DRG 

reclassification and recalibration. This 

adjustment is intended to remove the effect 

on total payments of prior year’s changes to 

the DRG classifications and relative weights, 

in order to retain budget neutrality for all 

case-mix index-related changes other than 

those due to patient severity. Due to the lag 

time in the availability of data, there is a 2- 

year lag in data used to determine the 

adjustment for the effects of DRG 

reclassification and recalibration. For 

example, we are adjusting for the effects of 

the FY 2007 DRG reclassification and 

recalibration as part of our update for FY 

2009. As we presented in the proposed rule, 

we estimate that FY 2007 DRG 

reclassification and recalibration resulted in 

a 0.5 percent change in the case-mix when 

compared with the case-mix index that 

would have resulted if we had not made the 

reclassification and recalibration changes to 

the DRGs. Therefore, as we proposed, we are 

making a ¥0.5 percent adjustment for DRG 

reclassification in the update for FY 2009 to 

maintain budget neutrality. 

The capital update framework also 

contains an adjustment for forecast error. The 

input price index forecast is based on 

historical trends and relationships 

ascertainable at the time the update factor is 

established for the upcoming year. In any 

given year, there may be unanticipated price 

fluctuations that may result in differences 

between the actual increase in prices and the 

forecast used in calculating the update 

factors. In setting a prospective payment rate 

under the framework, we make an 

adjustment for forecast error only if our 

estimate of the change in the capital input 

price index for any year is off by 0.25 

percentage points or more. There is a 2-year 

lag between the forecast and the availability 

of data to develop a measurement of the 

forecast error. A forecast error of 0.10 

percentage point was calculated for the FY 

2007 update. That is, current historical data 

indicate that the forecasted FY 2007 CIPI (1.1 

percent) used in calculating the FY 2007 

update factor slightly understated the actual 

realized price increases (1.2 percent) by 0.1 

percentage point. This slight underprediction 

was mostly due to the incorporation of newly 

available source data for fixed asset prices 

and moveable asset prices into the market 

basket. However, because this estimation of 

the change in the CIPI is less than 0.25 

percentage points, it is not reflected in the 

update recommended under this framework. 

Therefore, as we proposed, we are making a 

0.0 percent adjustment for forecast error in 

the update for FY 2009. 

Under the capital IPPS update framework, 

we also make an adjustment for changes in 

intensity. We calculate this adjustment using 

the same methodology and data that were 

used in the past under the framework for 

operating IPPS. The intensity factor for the 

operating update framework reflects how 

hospital services are utilized to produce the 

final product, that is, the discharge. This 

component accounts for changes in the use 

of quality-enhancing services, for changes 

within DRG severity, and for expected 

modification of practice patterns to remove 

noncost-effective services. 

We calculate case-mix constant intensity as 

the change in total charges per admission, 

adjusted for price level changes (the CPI for 

hospital and related services) and changes in 

real case-mix. The use of total charges in the 

calculation of the intensity factor makes it a 

total intensity factor; that is, charges for 

capital services are already built into the 

calculation of the factor. Therefore, we have 

incorporated the intensity adjustment from 

the operating update framework into the 

capital update framework. Without reliable 

estimates of the proportions of the overall 

annual intensity increases that are due, 

respectively, to ineffective practice patterns 

and the combination of quality-enhancing 

new technologies and complexity within the 

DRG system, we assume that one-half of the 

annual increase is due to each of these 

factors. The capital update framework thus 

provides an add-on to the input price index 

rate of increase of one-half of the estimated 

annual increase in intensity, to allow for 

increases within DRG severity and the 

adoption of quality-enhancing technology. 

We have developed a Medicare-specific 

intensity measure based on a 5-year average. 

Past studies of case-mix change by the RAND 

Corporation (Has DRG Creep Crept Up? 

Decomposing the Case Mix Index Change 

Between 1987 and 1988 by G. M. Carter, 

J. P. Newhouse, and D. A. Relles, R–4098–

HCFA/ProPAC (1991)) suggest that real casemix change was not dependent on total 

change, but was usually a fairly steady 

increase of 1.0 to 1.5 percent per year. 

However, we used 1.4 percent as the upper 

bound because the RAND study did not take 

into account that hospitals may have induced 

doctors to document medical records more 

completely in order to improve payment. 

We calculate case-mix constant intensity as 

the change in total charges per admission, 

adjusted for price level changes (the CPI for 

hospital and related services), and changes in 

real case-mix. As we noted above, in 

accordance with § 412.308(c)(1)(ii), we began 

updating the capital standard Federal rate in 

FY 1996 using an update framework that 

takes into account, among other things, 

allowable changes in the intensity of hospital 

services. For FYs 1996 through 2001, we 

found that case-mix constant intensity was 

declining, and we established a 0.0 percent 

adjustment for intensity in each of those 

years. For FYs 2002 and 2003, we found that 

case-mix constant intensity was increasing, 

and we established a 0.3 percent adjustment 

and 1.0 percent adjustment for intensity, 

respectively. For FYs 2004 and 2005, we 

found that the charge data appeared to be 

skewed (as discussed in greater detail below), 

and we established a 0.0 percent adjustment 

in each of those years. Furthermore, we 

stated that we would continue to apply a 0.0 

percent adjustment for intensity until any 

increase in charges can be tied to intensity 

rather than attempts to maximize outlier 

payments. 

As noted above, our intensity measure is 

based on a 5-year average, and therefore, as 

we explained in the proposed rule, the 

intensity adjustment for FY 2009 is based on 

data from the 5-year period beginning with 

FY 2003 and extending through FY 2007. 

There continues to be a substantial increase 

in hospital charges for 3 of those 5 years 

without a corresponding increase in the 

hospital case-mix index. Most dramatically, 

for FY 2003, the change in hospitals’ charges 

is over 16 percent, which is reflective of the 

large increases in charges that we found in 

the 4 years prior to FY 2003 and before our 

revisions to the outlier policy in 2003 

(discussed below). For FY 2004 and FY 2005, 

the change in hospitals’ charges is somewhat 

lower in comparison to FY 2003, but is still 

significantly large. For FY 2006 and FY 2007, 

the change in hospitals’ charges appears to be 

slightly moderating. However, the change in 

hospitals’ charges for FYs 2003 and 2004 and 

to a somewhat lesser extent FY 2005 remains 

similar to the considerable increase in 

hospitals’ charges that we found when 

examining hospitals’ charge data in 

determining the intensity factor in the update 

recommendations for the past few years, as 

discussed in the FY 2004 IPPS final rule 

(68 FR 45482), the FY 2005 IPPS final rule 

(69 FR 49285), the FY 2006 IPPS final rule 

(70 FR 47500), the FY 2007 IPPS final rule 

(72 FR 47500), and the FY 2008 IPPS final 

rule with comment period (72 FR 47426). If 

hospitals were treating new or different types 

of cases, which would result in an 

appropriate increase in charges per 

discharge, then we would expect hospitals’

case-mix to increase proportionally. As we 

discussed most recently in the FY 2008 IPPS 

final rule with comment period (72 FR 

47426), because our intensity calculation 

relies heavily upon charge data and we 

believe that these charge data may be 

inappropriately skewed, we established a 

0.0 percent adjustment for intensity for FY 

2008 just as we did for FYs 2004 through 

2007. 

On June 9, 2003, we published in the 

Federal Register revisions to our outlier 

policy for determining the additional 

payment for extraordinarily high-cost cases 

(68 FR 34494 through 34515). These revised 

policies were effective on August 8, 2003, 

and October 1, 2003. While it does appear 

that a response to these policy changes is 


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beginning to occur, that is, the increase in 

charges for FYs 2004 and 2005 are somewhat 

less than the previous 4 years, they still show 

a significant annual increase in charges 

without a corresponding increase in hospital 

case-mix. Specifically, the increases in 

charges in FY 2004 and FY 2005 

(approximately 12 percent and 8 percent, 

respectively), for example, which, while less 

than the increase in the previous 3 years, are 

still much higher than increases in years 

prior to FY 2001. In addition, these increases 

in charges for FYs 2003, FY 2004, and FY 

2005 significantly exceed the respective casemix increases for the same period. Based on 

the significant increases in charges for FYs 

2003 through 2005 that remain in the 5-year 

average used for the intensity adjustment, as 

we discussed in the proposed rule, we 

believe residual effects of hospitals’ charge 

practices prior to the implementation of the 

outlier policy revisions established in the 

June 9, 2003 final rule continue to appear in 

the data, because it may have taken hospitals 

some time to adopt changes in their behavior 

in response to the new outlier policy. Thus, 

we believe that the FY 2003, FY 2004, FY 

2005 charge data may still be skewed. 

Although it appears that the change in 

hospitals’ charges is more reasonable because 

the intensity adjustment is based on a 5-year 

average, and although the new outlier policy 

was generally effective in FY 2004, we 

believe the effects of hospitals attempting to 

maximize outlier payments, while lessening 

costs, continue to skew the charge data. 

Therefore, as we proposed, we are making 

a 0.0 percent adjustment for intensity for FY 

2009. In the past (FYs 1996 through 2001) 

when we found intensity to be declining, we 

believed a zero (rather than negative) 

intensity adjustment was appropriate. 

Similarly, we believe that it is appropriate to 

apply a zero intensity adjustment for FY 2009 

until any increase in charges during the 

5-year period upon which the intensity 

adjustment is based can be tied to intensity 

rather than to attempts to maximize outlier 

payments. 

Above, we described the basis of the 

components used to develop the 0.9 percent 

capital update factor under the capital update 

framework for FY 2009 as shown in the table 

below. 

CMS FY 2009 UPDATE FACTOR TO

THE CAPITAL FEDERAL RATE

Capital Input Price Index .................... 1.4 

Intensity: ............................................. 0.0 

Case-Mix Adjustment Factors: 

Real Across DRG Change .............. ¥1.0 

Projected Case-Mix Change ........... 1.0 

Subtotal ....................................... 1.4 

Effect of FY 2007 Reclassification 

and Recalibration ............................ ¥0.5 

Forecast Error Correction ................... 0.0 

Total Update ................................ 0.9 

b. Comparison of CMS and MedPAC Update 

Recommendation 

In its March 2008 Report to Congress, 

MedPAC did not make a specific update 

recommendation for capital IPPS payments 

for FY 2009. However, in that same report, 

in assessing the adequacy of current 

payments and costs, MedPAC recommended 

an update to the hospital inpatient and 

outpatient PPS rates equal to the increase in 

the hospital market basket in FY 2009, 

concurrent with a quality incentive program. 

(MedPAC’s Report to the Congress: Medicare 

Payment Policy, March 2008, Section 2A). 

2. Outlier Payment Adjustment Factor 

Section 412.312(c) establishes a unified 

outlier payment methodology for inpatient 

operating and inpatient capital-related costs. 

A single set of thresholds is used to identify 

outlier cases for both inpatient operating and 

inpatient capital-related payments. Section 

412.308(c)(2) provides that the standard 

Federal rate for inpatient capital-related costs 

be reduced by an adjustment factor equal to 

the estimated proportion of capital-related 

outlier payments to total inpatient capitalrelated PPS payments. The outlier thresholds 

are set so that operating outlier payments are 

projected to be 5.1 percent of total operating 

IPPS DRG payments. 

In the FY 2008 IPPS final rule with 

comment (72 FR 66887), we estimated that 

outlier payments for capital will equal 4.77 

percent of inpatient capital-related payments 

based on the capital Federal rate in FY 2008. 

Based on the thresholds as set forth in 

section II.A. of this Addendum, we estimate 

that outlier payments for capital-related costs 

will equal 5.35 percent for inpatient capitalrelated payments based on the capital 

Federal rate in FY 2009. Therefore, we are 

applying an outlier adjustment factor of 

0.9465 to the capital Federal rate. Thus, we 

estimate that the percentage of capital outlier 

payments to total capital standard payments 

for FY 2009 will be higher than the 

percentages for FY 2008. This increase is 

primarily due to the decrease to the fixedloss amount, which is discussed in section 

II.A. of this Addendum. 

The outlier reduction factors are not built 

permanently into the capital rates; that is, 

they are not applied cumulatively in 

determining the capital Federal rate. The FY 

2009 outlier adjustment of 0.9465 is a ¥0.61 

percent change from the FY 2008 outlier 

adjustment of 0.9523. Therefore, the net 

change in the outlier adjustment to the 

capital Federal rate for FY 2009 is 0.9939 

(0.9465/0.9523). Thus, the outlier adjustment 

decreases the FY 2009 capital Federal rate by 

0.61 percent compared with the FY 2008 

outlier adjustment. 

3. Budget Neutrality Adjustment Factor for 

Changes in DRG Classifications and Weights 

and the GAF 

Section 412.308(c)(4)(ii) requires that the 

capital Federal rate be adjusted so that 

aggregate payments for the fiscal year based 

on the capital Federal rate after any changes 

resulting from the annual DRG 

reclassification and recalibration and changes 

in the GAF are projected to equal aggregate 

payments that would have been made on the 

basis of the capital Federal rate without such 

changes. Because we implemented a separate 

GAF for Puerto Rico, we apply separate 

budget neutrality adjustments for the 

national GAF and the Puerto Rico GAF. We 

apply the same budget neutrality factor for 

DRG reclassifications and recalibration 

nationally and for Puerto Rico. Separate 

adjustments were unnecessary for FY 1998 

and earlier because the GAF for Puerto Rico 

was implemented in FY 1998. 

In the past, we used the actuarial capital 

cost model (described in Appendix B of the 

FY 2002 IPPS final rule (66 FR 40099)) to 

estimate the aggregate payments that would 

have been made on the basis of the capital 

Federal rate with and without changes in the 

DRG classifications and weights and in the 

GAF to compute the adjustment required to 

maintain budget neutrality for changes in 

DRG weights and in the GAF. During the 

transition period, the capital cost model was 

also used to estimate the regular exception 

payment adjustment factor. As we explain in 

section III.A. of this Addendum, beginning in 

FY 2002, an adjustment for regular exception 

payments is no longer necessary. Therefore, 

we will no longer use the capital cost model. 

Instead, we are using historical data based on 

hospitals’ actual cost experiences to 

determine the exceptions payment 

adjustment factor for special exceptions 

payments. 

To determine the factors for FY 2009, we 

compared (separately for the national capital 

rate and the Puerto Rico capital rate) 

estimated aggregate capital Federal rate 

payments based on the FY 2008 DRG relative 

weights and the FY 2008 GAF to estimated 

aggregate capital Federal rate payments based 

on the FY 2009 relative weights and the FY 

2009 GAFs. We established the final FY 2008 

budget neutrality factors of 0.9902 for the 

national capital rate and 0.9955 for the 

Puerto Rico capital rate. In making the 

comparison, we set the exceptions reduction 

factor to 1.00. To achieve budget neutrality 

for the changes in the national GAFs, based 

on calculations using updated data, we are 

applying an incremental budget neutrality 

adjustment of 1.0016 for FY 2009 to the 

previous cumulative FY 2008 adjustments of 

0.9902, yielding an adjustment of 0.9918, 

through FY 2009. For the Puerto Rico GAFs, 

we are applying an incremental budget 

neutrality adjustment of 1.0010 for FY 2009 

to the previous cumulative FY 2008 

adjustment of 0.9955, yielding a cumulative 

adjustment of 0.9965 through FY 2009. 

We then compared estimated aggregate 

capital Federal rate payments based on the 

FY 2008 DRG relative weights and the FY 

2009 GAFs to estimated aggregate capital 

Federal rate payments based on the 

cumulative effects of the FY 2009 DRG 

relative weights and the FY 2009 GAFs. The 

incremental adjustment for DRG 

classifications and changes in relative 

weights is 0.9995 both nationally and for 

Puerto Rico. The cumulative adjustments for 

DRG classifications and changes in relative 

weights and for changes in the GAFs through 

FY 2009 are 0.9995 both nationally and for 

Puerto Rico. The cumulative adjustments for 

DRG classifications and changes in relative 

weights and for changes in the GAFs through 

FY 2009 are 0.9912 (calculated with 

unrounded numbers) nationally and 0.9960 

for Puerto Rico. The following table 

summarizes the adjustment factors for each 

fiscal year: 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

The methodology used to determine the 

recalibration and geographic adjustment 

factor (DRG/GAF) budget neutrality 

adjustment is similar to the methodology 

used in establishing budget neutrality 

adjustments under the IPPS for operating 

costs. One difference is that, under the 

operating IPPS, the budget neutrality 

adjustments for the effect of geographic 

reclassifications are determined separately 

from the effects of other changes in the 

hospital wage index and the DRG relative 

weights. Under the capital IPPS, there is a 

single DRG/GAF budget neutrality 

adjustment factor (the national capital rate 

and the Puerto Rico capital rate are 

determined separately) for changes in the 

GAF (including geographic reclassification) 

and the DRG relative weights. In addition, 

there is no adjustment for the effects that 

geographic reclassification has on the other 

payment parameters, such as the payments 

for DSH or IME. 

In the FY 2008 IPPS correction notice 

(72 FR 57636), we calculated a GAF/DRG 

budget neutrality factor of 0.9996 for FY 


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2008. For FY 2009, we are establishing a 

GAF/DRG budget neutrality factor of 1.0010. 

The GAF/DRG budget neutrality factors are 

built permanently into the capital rates; that 

is, they are applied cumulatively in 

determining the capital Federal rate. This 

follows the requirement that estimated 

aggregate payments each year be no more or 

less than they would have been in the 

absence of the annual DRG reclassification 

and recalibration and changes in the GAFs. 

The incremental change in the adjustment 

from FY 2008 to FY 2009 is 1.0010. The 

cumulative change in the capital Federal rate 

due to this adjustment is 0.9912 (the product 

of the incremental factors for FYs 1994 

though 2008 and the incremental factor of 

1.0010 for FY 2009). (We note that averages 

of the incremental factors that were in effect 

during FYs 2004 and 2005, respectively, were 

used in the calculation of the cumulative 

adjustment of 0.9912 for FY 2009.) 

The factor accounts for DRG 

reclassifications and recalibration and for 

changes in the GAFs. It also incorporates the 

effects on the GAFs of FY 2009 geographic 

reclassification decisions made by the 

MGCRB compared to FY 2008 decisions. 

However, it does not account for changes in 

payments due to changes in the DSH and 

IME adjustment factors. 

4. Exceptions Payment Adjustment Factor 

Section 412.308(c)(3) of our regulations 

requires that the capital standard Federal rate 

be reduced by an adjustment factor equal to 

the estimated proportion of additional 

payments for both regular exceptions and 

special exceptions under § 412.348 relative to 

total capital PPS payments. In estimating the 

proportion of regular exception payments to 

total capital PPS payments during the 

transition period, we used the actuarial 

capital cost model originally developed for 

determining budget neutrality (described in 

Appendix B of the FY 2002 IPPS final rule 

(66 FR 40099)) to determine the exceptions 

payment adjustment factor, which was 

applied to both the Federal and hospitalspecific capital rates. 

An adjustment for regular exception 

payments is no longer necessary in 

determining the FY 2009 capital Federal rate 

because, in accordance with § 412.348(b), 

regular exception payments were only made 

for cost reporting periods beginning on or 

after October 1, 1991 and before October 1, 

2001. Accordingly, as we explained in the FY 

2002 IPPS final rule (66 FR 39949), in FY 

2002 and subsequent fiscal years, no 

payments are made under the regular 

exceptions provision. However, in 

accordance with § 412.308(c), we still need to 

compute a budget neutrality adjustment for 

special exception payments under 

§ 412.348(g). We describe our methodology 

for determining the exceptions adjustment 

used in calculating the FY 2008 capital 

Federal rate below. 

Under the special exceptions provision 

specified at § 412.348(g)(1), eligible hospitals 

include SCHs, urban hospitals with at least 

100 beds that have a disproportionate share 

percentage of at least 20.2 percent or qualify 

for DSH payments under § 412.106(c)(2), and 

hospitals with a combined Medicare and 

Medicaid inpatient utilization of at least 70 

percent. An eligible hospital may receive 

special exceptions payments if it meets the 

following criteria: (1) A project need 

requirement as described at § 412.348(g)(2), 

which, in the case of certain urban hospitals, 

includes an excess capacity test as described 

at § 412.348(g)(4); (2) an age of assets test as 

described at § 412.348(g)(3); and (3) a project 

size requirement as described at 

§ 412.348(g)(5). 

Based on information compiled from our 

fiscal intermediaries, six hospitals have 

qualified for special exceptions payments 

under § 412.348(g). One of these hospitals 

closed in May 2005. Because we have cost 

reports ending in FY 2006 for all five of these 

hospitals, we calculated the adjustment 

based on actual cost experience. Using data 

from cost reports ending in FY 2006 from the 

March 2008 update of the HCRIS data, we 

divided the capital special exceptions 

payment amounts for the five hospitals that 

qualified for special exceptions by the total 

capital PPS payment amounts (including 

special exception payments) for all hospitals. 

Based on the data from cost reports ending 

in FY 2006, this ratio is rounded to 0.0001. 

We also computed the ratio for FY 2005, 

which rounds to 0.0002, and the ratio for FY 

2004, which rounds to 0.0003. Because the 

ratios are trending downward, we are making 

an adjustment of 0.0001. Because special 

exceptions are budget neutral, we are 

offsetting the capital Federal rate by 0.01 

percent for special exceptions payments for 

FY 2009. Therefore, the exceptions 

adjustment factor is equal to 0.9999 

(1¥0.0001) to account for special exceptions 

payments in FY 2009. 

In the FY 2008 IPPS final rule with 

comment period (72 FR 47430), we estimated 

that total (special) exceptions payments for 

FY 2008 would equal 0.03 percent of 

aggregate payments based on the capital 

Federal rate. Therefore, we applied an 

exceptions adjustment factor of 0.9997 

(1¥0.0003) to determine the FY 2008 capital 

Federal rate. As we stated above, we estimate 

that exceptions payments in FY 2009 will 

equal 0.01 percent of aggregate payments 

based on the FY 2009 capital Federal rate. 

Therefore, we are applying an exceptions 

payment adjustment factor of 0.9999 to the 

capital Federal rate for FY 2009. The 

exceptions adjustment factor for FY 2009 is 

somewhat lower than the factor used in 

determining the FY 2008 capital Federal rate 

in the FY 2008 IPPS final rule. The 

exceptions reduction factors are not built 

permanently into the capital rates; that is, the 

factors are not applied cumulatively in 

determining the capital Federal rate. 

Therefore, the net change in the exceptions 

adjustment factor used in determining the FY 

2009 capital Federal rate is 1.0002 (0.9999/ 

0.9997). 

5. Capital Standard Federal Rate for FY 2009 

In the FY 2008 IPPS final rule with 

comment period (72 FR 66888), we 

established a capital Federal rate of $426.14 

for all hospitals for FY 2008. In the FY 2009 

IPPS proposed rule, we proposed an update 

of 0.7 percent in determining the proposed 

FY 2009 capital Federal rate. In this final 

rule, we are establishing an update of 0.09 

percent in determining the FY 2009 capital 

Federal rate. In the proposed rule, under the 

statutory authority at section 

1886(d)(3)(A)(vi) of the Act, and as specified 

in section 7 of Public Law 110–90, we 

proposed to make an additional 0.9 percent 

reduction to the standardized amounts for 

both capital and operating Federal payment 

rates in FY 2009. 

Comment: A few commenters expressed 

opposition to the proposal to apply the 0.9 

percent adjustment for FY 2009 for 

improvements in documentation and coding 

that do not reflect real changes in patient 

severity of illness in response to the adoption 

of the MS–DRGs. These commenters argued 

that they have already committed funds 

toward various capital projects with the 

expectation that Medicare funding would be 

available to reimburse a portion of the cost 

of those expenses, and that a reduction in 

this funding would impede their ability to 

maintain their facilities while providing 

necessary technological upgrades. Therefore, 

the commenters recommended that CMS do 

not apply the 0.9 percent adjustment and 

provide the full update in determining the 

capital Federal rate for FY 2009. 

Response: In the FY 2008 IPPS final rule 

with comment period (72 FR 47186), we 

established a documentation and coding 

adjustment for FY 2008, FY 2009, and FY 

2010. The establishment of these 

documentation and coding adjustments was 

subject to notice and comment rulemaking, 

and when we established these adjustments, 

we carefully considered the concerns 

expressed by commenters on the proposal 

presented in the FY 2008 IPPS proposed rule 

and provided detailed responses to those 

comments in the FY 2008 IPPS final rule 

with comment period (72 FR 47175 through 

47186). Subsequently, Congress enacted 

Public Law 110–90, which mandated that the 

documentation and coding adjustments 

established in the FY 2008 IPPS final rule 

with comment period be changed to ¥0.6 

percent for FY 2008 and ¥0.9 percent for FY 

2009 (72 FR 66886 through 66887). As we 

discussed in the FY 2009 IPPS proposed rule 

(73 FR 23720), consistent with section 7 of 

Public Law 110–90, we proposed the 

additional 0.9 percent reduction to the 

proposed standardized amounts for both 

capital and operating Federal payment rates 

in FY 2009. 

As we discussed in greater detail in the FY 

2008 IPPS final rule with comment period 

(72 FR 23710), beginning in FY 2008, we 

adopted the new MS–DRG patient 

classification system for the IPPS to better 

recognize severity of illness in Medicare 

payment rates. In that same final rule, we 

indicated that we believe the adoption of the 

MS–DRGs had the potential to lead to 

increases in aggregate payments without a 

corresponding increase in actual patient 

severity of illness due to the incentives for 

improved documentation and coding. 

Without a documentation and coding 

adjustment, the changes to MS–DRGs would 

not be budget neutral. As explained in the 

same final rule (72 FR 47179), substantial 

evidence supports our conclusion that the 

case-mix will increase as a result of adoption 

of MS–DRGs without corresponding growth 

in patient severity. We provided evidence 


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from studies going back over 20 years that 

show that hospitals respond to incentives 

when payment classifications are changed to 

improve documentation and coding to 

receive higher payments. In addition, in its 

public comments on the FY 2008 IPPS 

proposed rule, MedPAC indicated that the 

increases in payments that result from 

improvements in documentation and coding 

are not warranted because the increase in 

measured case-mix does not reflect any real 

change in illness severity or the cost of care 

for the patients being treated. (72 FR 47181) 

Therefore, offsetting adjustments to the IPPS 

payment rates are needed to maintain budget 

neutrality and if the assumed increase in 

hospitals’ case-mix is realized, even with the 

0.9 percent offset to the capital Federal rate, 

aggregate capital IPPS payments would 

remain at the same level they would have 

been had the MS–DRGs not been adopted. 

Consequently, we continue to believe it is 

necessary and appropriate to apply an 

adjustment to the national capital Federal 

payment rate for FY 2009 to account for 

changes in documentation and coding due to 

the adoption of the MS–DRGs. Therefore, in 

this final rule, as proposed, the national 

capital Federal payment rate was determined 

by applying the 0.9 percent reduction for FY 

2009. As discussed in greater detail above in 

section III.A.1.a. of Addendum to this final 

rule, in accordance with the analytical 

framework set forth at § 412.308(c)(1), the 

update to the capital Federal rate for FY 2009 

is 0.9 percent. This analytical update 

framework takes into account changes in the 

CIPI and several other policy adjustment 

factors; however, it does not include the 

adjustment to account for changes in 

documentation and coding, which is applied 

separately in the determination of the FY 

2009 capital Federal rate. As discussed in the 

proposed rule (73 FR 23720 through 23721), 

although the 0.9 percent reduction is outside 

the established process for developing the 

capital Federal payment rate, it nevertheless 

is a factor in the final prospective payment 

rate to hospitals for capital-related costs. For 

that reason, the national capital Federal 

payment rate in this final rule was 

determined by applying the 0.9 percent 

reduction. (As discussed below in section 

II.A.6.of this Addendum, we are not applying 

the 0.9 percent reduction in developing the 

FY 2009 Puerto Rico-specific capital rate.) As 

a result of the 0.90 percent update and other 

budget neutrality factors discussed above, we 

are establishing a capital Federal rate of 

$423.96 for FY 2009. The capital Federal rate 

for FY 2009 was calculated as follows: 

• The FY 2009 update factor is 1.0090, that 

is, the update is 0.90 percent. 

• The FY 2009 budget neutrality 

adjustment factor that is applied to the 

capital standard Federal payment rate for 

changes in the DRG relative weights and in 

the GAFs is 1.0010. 

• The FY 2009 outlier adjustment factor is 

0.9465. 

• The FY 2009 (special) exceptions 

payment adjustment factor is 0.9999. 

• The FY 2009 reduction for 

improvements in documentation and coding 

under the MS–DRGs is 0.9 percent. 

Because the capital Federal rate has 

already been adjusted for differences in casemix, wages, cost-of-living, indirect medical 

education costs, and payments to hospitals 

serving a disproportionate share of lowincome patients, we are not making 

additional adjustments in the capital 

standard Federal rate for these factors, other 

than the budget neutrality factor for changes 

in the DRG relative weights and the GAFs. As 

noted above, section 124 of Public Law 110–

275 extends, through FY 2009, wage index 

reclassifications under section 508 of Public 

Law 108–173 (the MMA) and special 

exceptions contained in the final rule 

published in the Federal Register on August 

11, 2004 (69 FR 49105, 49107) and extended 

under section 117 of the MMSEA of 2007 

(Pub. L. 110–173). As a result, we cannot 

finalize the FY 2009 capital rates, including 

the GAF/DRG adjustment factor, the outlier 

payment adjustment factor, and the outlier 

threshold, until we recompute the wage 

indices for FY 2009 as a result of these 

extensions. (A complete discussion on the 

extension of these provisions can be found in 

section III.I. of the preamble to this final 

rule). Therefore, the capital Federal rate, 

GAF/DRG adjustment factor and the outlier 

payment adjustment factor for FY 2009 

discussed in this section are tentative. The 

final capital rates and factors for FY 2009, 

reflecting the extension of the reclassification 

provisions noted above, will be published in 

a forthcoming notice in the Federal Register. 

We are providing the following chart that 

shows how each of the factors and 

adjustments for FY 2009 affected the 

computation of the tentative FY 2009 capital 

Federal rate in comparison to the FY 2008 

capital Federal rate. The FY 2009 update 

factor has the effect of increasing the capital 

Federal rate by 0.90 percent compared to the 

FY 2008 capital Federal rate. The GAF/DRG 

budget neutrality factor has the effect of 

increasing the capital Federal rate by 0.09 

percent. The FY 2009 outlier adjustment 

factor has the effect of decreasing the capital 

Federal rate by 0.61 percent compared to the 

FY 2008 capital Federal rate. The FY 2009 

exceptions payment adjustment factor has 

the effect of increasing the capital Federal 

rate by 0.02 percent. The adjustment for 

improvements in documentation and coding 

under the MS–DRGs has the effect of 

decreasing the FY 2009 capital Federal rate 

by 0.9 percent as compared to the FY 2008 

capital Federal rate. The combined effect of 

all the changes decreases the capital Federal 

rate by 0.51 percent compared to the FY 2008 

capital Federal rate. 

COMPARISON OF FACTORS AND ADJUSTMENTS: FY 2008 CAPITAL FEDERAL RATE AND TENTATIVE FY 2009 CAPITAL

FEDERAL RATE

FY 2008 FY 2009 4 Change Percent 

change 5

Update Factor 1 ................................................................................................................ 1.0090 1.0090 1.0090 0.90 

GAF/DRG Adjustment Factor 1 ........................................................................................ 0.9996 1.0010 1.0010 0.10 

Outlier Adjustment Factor 2 .............................................................................................. 0.9523 0.9465 0.9939 ¥0.61 

Exceptions Adjustment Factor 2 ....................................................................................... 0.9997 0.9999 1.0002 0.02 

MS–DRG Coding and Documentation Improvements Adjustment Factor 3 .................... 0.9940 0.9910 0.9910 ¥0.90 

Capital Federal Rate ........................................................................................................ $426.14 $423.96 0.9949 ¥0.51 

1The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental 

change from FY 2008 to FY 2009 resulting from the application of the 1.0010 GAF/DRG budget neutrality factor for FY 2009 is 1.0010. 2The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not 

applied cumulatively in determining the capital rates. Thus, for example, the net change resulting from the application of the FY 2009 outlier adjustment factor is 0.9465/0.9523, or 0.9939. 3Adjustment to FY 2009 IPPS rates to account for documentation and coding improvements expected to result from the adoption of the MS–

DRGs, as discussed above in section III.D. of the Addendum to this final rule. 4Factors for FY 2009, as discussed above in section III. of this Addendum. The GAF/DRG adjustment factor, outlier adjustment factor and 

capital Federal rate for FY 2009 are tentative pending the implementation of section 124 of Public Law 110–275, as discussed above. 5Percent change of individual factors may not sum due to rounding. 

We are also providing the following chart 

that shows how the tentative final FY 2009 

capital Federal rate differs from the proposed 

FY 2009 capital Federal rates s as presented 

in the FY 2009 IPPS proposed rule (72 FR 

23721). 


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COMPARISON OF FACTORS AND ADJUSTMENTS: PROPOSED FY 2009 CAPITAL FEDERAL RATE AND TENTATIVE FINAL FY 

2009 CAPITAL FEDERAL RATE

Proposed 

FY 2009 

Final FY 

2009* Change** Percent change** 

Update Factor .................................................................................................................. 1.0070 1.0090 0.02 0.20 

GAF/DRG Adjustment Factor .......................................................................................... 1.0007 1.0010 1.0003 0.03 

Outlier Adjustment Factor ................................................................................................ 0.9427 0.9465 1.0040 0.40 

Exceptions Adjustment Factor ......................................................................................... 0.9998 0.9999 1.0001 0.01 

MS–DRG Upcoding Adjustment Factor ........................................................................... 0.9910 0.9910 1.0000 0.00 

Capital Federal Rate ........................................................................................................ $421.29 $423.96 1.0063 0.63 

* The GAF/DRG adjustment factor, outlier adjustment factor and capital Federal rate for FY 2009 are tentative pending the implementation of 

section 124 of Public Law 110–275, as discussed above. 

** Percent change of individual factors may not sum due to rounding. 

6. Special Capital Rate for Puerto Rico 

Hospitals 

a. General 

Section 412.374 provides for the use of a 

blended payment system for payments to 

hospitals located in Puerto Rico under the 

PPS for acute care hospital inpatient capitalrelated costs. Accordingly, under the capital 

PPS, we compute a separate payment rate 

specific to hospitals located in Puerto Rico 

using the same methodology used to compute 

the national Federal rate for capital-related 

costs. Under the broad authority of section 

1886(g) of the Act, as discussed in section V. 

of the preamble of this final rule, beginning 

with discharges occurring on or after October 

1, 2004, capital payments to hospitals located 

in Puerto Rico are based on a blend of 25 

percent of the Puerto Rico capital rate and 75 

percent of the capital Federal rate. The 

Puerto Rico capital rate is derived from the 

costs of Puerto Rico hospitals only, while the 

capital Federal rate is derived from the costs 

of all acute care hospitals participating in the 

IPPS (including Puerto Rico). 

To adjust hospitals’ capital payments for 

geographic variations in capital costs, we 

apply a GAF to both portions of the blended 

capital rate. The GAF is calculated using the 

operating IPPS wage index, and varies 

depending on the labor market area or rural 

area in which the hospital is located. We use 

the Puerto Rico wage index to determine the 

GAF for the Puerto Rico part of the capitalblended rate and the national wage index to 

determine the GAF for the national part of 

the blended capital rate. Because we 

implemented a separate GAF for Puerto Rico 

in FY 1998, we also apply separate budget 

neutrality adjustments for the national GAF 

and for the Puerto Rico GAF. However, we 

apply the same budget neutrality factor for 

DRG reclassifications and recalibration 

nationally and for Puerto Rico. 

In computing the payment for a particular 

Puerto Rico hospital, the Puerto Rico portion 

of the capital rate (25 percent) is multiplied 

by the Puerto Rico-specific GAF for the labor 

market area in which the hospital is located, 

and the national portion of the capital rate 

(75 percent) is multiplied by the national 

GAF for the labor market area in which the 

hospital is located (which is computed from 

national data for all hospitals in the United 

States and Puerto Rico). In FY 1998, we 

implemented a 17.78 percent reduction to the 

Puerto Rico capital rate as a result of Public 

Law 105–33. In FY 2003, a small part of that 

reduction was restored. 

b. Revised Puerto Rico-Specific Rate for FY 

2008 

As noted above, Puerto Rico hospitals are 

paid based on 75 percent of the national 

capital Federal rate and 25 percent of the 

Puerto Rico-specific capital rate. As 

discussed in section II.D.3. of the preamble 

of this final rule, the documentation and 

coding adjustment we adopted in the FY 

2008 IPPS final rule with comment period 

relied upon our authority under section 

1886(d)(3)(A)(vi) of the Act, which provides 

the authority to adjust ‘‘the standardized 

amounts computed under this paragraph’’ to 

eliminate the effect of changes in coding or 

classification that do not reflect real changes 

in case-mix. Section 1886(d)(3)(A)(vi) of the 

Act applies to the national operating 

standardized amounts computed under 

section 1886(d)(3) of the Act, but does not 

apply to the Puerto Rico-specific 

standardized amount computed under 

section 1886(d)(9)(C) of the Act. In 

calculating the FY 2008 payment rates, we 

made an inadvertent error and applied the 

FY 2008 ¥0.6 percent documentation and 

coding adjustment to the Puerto Rico-specific 

operating standardized amount, relying on 

our authority under section 1886(d)(3)(A)(vi) 

of the Act which does not apply to the 

Puerto-Rico-specific standardized amount. In 

this final rule, consistent with the correction 

to the Puerto Rico-specific operating 

standardized amount for FY 2008 presented 

in section II.D.3. of the preamble of this final 

rule, we are correcting this inadvertent error 

by removing the ¥0.6 percent 

documentation and coding adjustment from 

the FY 2008 Puerto Rico-specific rates. The 

revised FY 2008 Puerto Rico capital rate, 

effective October 1, 2007, is $202.89. The 

statute gives broad authority to the Secretary 

under section 1886(g) of the Act, with respect 

to the development of and adjustments to a 

capital PPS. As we discussed in the proposed 

rule (73 FR 23721), although we would not 

be outside the authority of section 1886(g) of 

the Act in applying the documentation and 

coding adjustment to the Puerto Rico-specific 

portion of the capital payment rate, we have 

historically made changes to the capital PPS 

consistent with those changes made to the 

IPPS. Thus, we are removing the 

documentation and coding adjustment from 

the FY 2008 Puerto Rico-specific capital rate, 

consistent with its removal from the Puerto 

Rico-specific operating standardized amount. 

c. Puerto Rico-Specific Rate for FY 2009 

As noted above, capital payments to 

hospitals located in Puerto Rico are based on 

a blend of 25 percent of the Puerto Rico 

capital rate and 75 percent of the capital 

Federal rate. As also noted previously, 

because we implemented a separate GAF for 

Puerto Rico in FY 1998, we also apply 

separate budget neutrality adjustments for 

the national GAF and for the Puerto Rico 

GAF. However, we apply the same budget 

neutrality factor for DRG reclassifications and 

recalibration nationally and for Puerto Rico. 

As we stated above in section III.A.4. of this 

Addendum, for Puerto Rico, for FY 2009, the 

GAF budget neutrality factor is 1.0010, while 

the DRG adjustment is 0.9995, for a 

combined cumulative adjustment of 1.0004. 

For FY 2008, before application of the 

GAF, the special capital rate for hospitals 

located in Puerto Rico was $201.67 for 

discharges occurring on or after October 1, 

2007, through September 30, 2008 (72 FR 

66888). However, as discussed above, in this 

final rule, we are revising this rate retroactive 

to October 1, 2007, to remove the application 

of the 0.6 percent documentation and coding 

adjustment for FY 2008, consistent with the 

correction to the Puerto Rico specific 

standardized amount for FY 2008. The 

revised FY 2008 Puerto Rico capital rate, 

effective October 1, 2007, is $202.89. 

Consistent with our development of the 

Puerto Rico-specific operating standardized 

amount, we are not applying the 0.9 percent 

documentation and coding adjustment to the 

FY 2009 Puerto Rico-specific capital rate. 

However, as also discussed in section II.D.3. 

of the preamble of this final rule, we may 

propose to apply such an adjustment to the 

Puerto Rico operating and capital rates in the 

future. With the changes we are making to 

the other factors used to determine the 

capital rate, the FY 2009 special capital rate 

for hospitals in Puerto Rico is $198.84. 

B. Calculation of the Inpatient CapitalRelated Prospective Payments for FY 2009 

Because the 10-year capital PPS transition 

period ended in FY 2001, all hospitals 

(except ‘‘new’’ hospitals under § 412.324(b) 

and under § 412.304(c)(2)) are paid based on 

100 percent of the capital Federal rate in FY 

2007. The applicable capital Federal rate was 

determined by making the following 

adjustments: 


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• For outliers, by dividing the capital 

standard Federal rate by the outlier reduction 

factor for that fiscal year; and 

• For the payment adjustments applicable 

to the hospital, by multiplying the hospital’s 

GAF, DSH adjustment factor, and IME 

adjustment factor, when appropriate. 

For purposes of calculating payments for 

each discharge during FY 2009, the capital 

standard Federal rate is adjusted as follows: 

(Standard Federal Rate) × (DRG weight) × 

(GAF) × (COLA for hospitals located in 

Alaska and Hawaii) × (1 + DSH Adjustment 

Factor + IME Adjustment Factor, if 

applicable). The result is the adjusted capital 

Federal rate. 

Hospitals also may receive outlier 

payments for those cases that qualify under 

the thresholds established for each fiscal 

year. Section 412.312(c) provides for a single 

set of thresholds to identify outlier cases for 

both inpatient operating and inpatient 

capital-related payments. The outlier 

thresholds for FY 2009 are in section II.A. of 

this Addendum. For FY 2009, a case qualifies 

as a cost outlier if the cost for the case plus 

the IME and DSH payments is greater than 

the prospective payment rate for the MS–

DRG plus the fixed-loss amount of $20,185. 

An eligible hospital may also qualify for a 

special exceptions payment under 

§ 412.348(g) up through the 10th year beyond 

the end of the capital transition period if it 

meets the following criteria: (1) A project 

need requirement described at 

§ 412.348(g)(2), which in the case of certain 

urban hospitals includes an excess capacity 

test as described at § 412.348(g)(4); and (2) a 

project size requirement as described at 

§ 412.348(g)(5). Eligible hospitals include 

SCHs, urban hospitals with at least 100 beds 

that have a DSH patient percentage of at least 

20.2 percent or qualify for DSH payments 

under § 412.106(c)(2), and hospitals that have 

a combined Medicare and Medicaid inpatient 

utilization of at least 70 percent. Under 

§ 412.348(g)(8), the amount of a special 

exceptions payment is determined by 

comparing the cumulative payments made to 

the hospital under the capital PPS to the 

cumulative minimum payment level. This 

amount is offset by: (1) Any amount by 

which a hospital’s cumulative capital 

payments exceed its cumulative minimum 

payment levels applicable under the regular 

exceptions process for cost reporting periods 

beginning during which the hospital has 

been subject to the capital PPS; and (2) any 

amount by which a hospital’s current year 

operating and capital payments (excluding 75 

percent of operating DSH payments) exceed 

its operating and capital costs. Under 

§ 412.348(g)(6), the minimum payment level 

is 70 percent for all eligible hospitals. 

During the transition period, new hospitals 

(as defined under § 412.300) were exempt 

from the capital IPPS for their first 2 years 

of operation and were paid 85 percent of 

their reasonable costs during that period. 

Effective with the third year of operation 

through the remainder of the transition 

period, under § 412.324(b), we paid the 

hospitals under the appropriate transition 

methodology (if the hold-harmless 

methodology were applicable, the holdharmless payment for assets in use during the 

base period would extend for 8 years, even 

if the hold-harmless payments extend beyond 

the normal transition period). 

Under § 412.304(c)(2), for cost reporting 

periods beginning on or after October 1, 

2002, we pay a new hospital 85 percent of 

its reasonable costs during the first 2 years 

of operation unless it elects to receive 

payment based on 100 percent of the capital 

Federal rate. Effective with the third year of 

operation, we pay the hospital based on 100 

percent of the capital Federal rate (that is, the 

same methodology used to pay all other 

hospitals subject to the capital PPS). 

C. Capital Input Price Index 

1. Background 

Like the operating input price index, the 

capital input price index (CIPI) is a fixedweight price index that measures the price 

changes associated with capital costs during 

a given year. The CIPI differs from the 

operating input price index in one important 

aspect—the CIPI reflects the vintage nature of 

capital, which is the acquisition and use of 

capital over time. Capital expenses in any 

given year are determined by the stock of 

capital in that year (that is, capital that 

remains on hand from all current and prior 

capital acquisitions). An index measuring 

capital price changes needs to reflect this 

vintage nature of capital. Therefore, the CIPI 

was developed to capture the vintage nature 

of capital by using a weighted-average of past 

capital purchase prices up to and including 

the current year. 

We periodically update the base year for 

the operating and capital input price indexes 

to reflect the changing composition of inputs 

for operating and capital expenses. The CIPI 

was last rebased to FY 2002 in the FY 2006 

IPPS final rule (70 FR 47387). 

2. Forecast of the CIPI for FY 2009 

Based on the latest forecast by Global 

Insight, Inc. (second quarter of 2008), we are 

forecasting the CIPI to increase 1.4 percent in 

FY 2009. This reflects a projected 2.1 percent 

increase in vintage-weighted depreciation 

prices (building and fixed equipment, and 

movable equipment), and a 2.9 percent 

increase in other capital expense prices in FY 

2009, partially offset by 2.6 percent decline 

in vintage-weighted interest expenses in FY 

2009. The weighted average of these three 

factors produces the 1.4 percent increase for 

the CIPI as a whole in FY 2009. 

IV. Changes to Payment Rates for Excluded 

Hospitals and Hospital Units: Rate-ofIncrease Percentages 

Historically, hospitals and hospital units 

excluded from the prospective payment 

system received payment for inpatient 

hospital services they furnished on the basis 

of reasonable costs, subject to a rate-ofincrease ceiling. An annual per discharge 

limit (the target amount as defined in 

§ 413.40(a)) was set for each hospital or 

hospital unit based on the hospital’s own 

cost experience in its base year. The target 

amount was multiplied by the Medicare 

discharges and applied as an aggregate upper 

limit (the ceiling as defined in § 413.40(a)) on 

total inpatient operating costs for a hospital’s 

cost reporting period. Prior to October 1, 

1997, these payment provisions applied 

consistently to all categories of excluded 

providers (rehabilitation hospitals and units 

(now referred to as IRFs), psychiatric 

hospitals and units (now referred to as IPFs), 

LTCHs, children’s hospitals, and cancer 

hospitals). 

Payment for services furnished in 

children’s hospitals and cancer hospitals that 

are excluded from the IPPS continues to be 

subject to the rate-of-increase ceiling based 

on the hospital’s own historical cost 

experience. (We note that, in accordance 

with § 403.752(a), RNHCIs are also subject to 

the rate-of-increase limits established under 

§ 413.40 of the regulations.) 

In the FY 2009 IPPS proposed rule, we 

proposed that the FY 2009 rate-of-increase 

percentage for cancer and children’s 

hospitals and RNHCIs was the percentage 

increase in the FY 2009 IPPS operating 

market basket, estimated to be 3.0 percent. 

For this final rule, we are using the most 

recent data available for the IPPS hospital 

market basket. For cancer and children’s 

hospitals and RNHCIs, the FY 2009 rate-ofincrease percentage that is applied to FY 

2008 target amounts in order to calculate the 

FY 2009 target amounts is based on Global 

Insight, Inc.’s second quarter 2008 forecast of 

the IPPS operating market basket increase, 

which is estimated to be 3.6 percent, in 

accordance with the applicable regulations at 

42 CFR 413.40. 

IRFs, IPFs, and LTCHs were previously 

paid under the reasonable cost methodology. 

However, the statute was amended to provide 

for the implementation of prospective 

payment systems for IRFs, IPFs, and LTCHs. 

In general, the prospective payment systems 

for IRFs, IPFs, and LTCHs provide 

transitioning periods of varying lengths of 

time during which a portion of the 

prospective payment is based on cost-based 

reimbursement rules under 42 CFR Part 413 

(certain providers do not receive a 

transitioning period or may elect to bypass 

the transition as applicable under 42 CFR 

Part 412, Subparts N, O, and P.) We note that 

the various transitioning periods provided for 

under the IRF PPS, the IPF PPS, and the 

LTCH PPS have ended. For cost reporting 

periods beginning on or after October 1, 

2002, all IRFs are paid 100 percent of the 

adjusted Federal rate under the IRF PPS. 

Therefore, for cost reporting periods 

beginning on or after October 1, 2002, no 

portion of an IRF PPS payment is subject to 

42 CFR Part 413. Similarly, for cost reporting 

periods beginning on or after October 1, 

2006, all LTCHs are paid 100 percent of the 

adjusted Federal prospective payment rate 

under the LTCH PPS. Therefore, for cost 

reporting periods beginning on or after 

October 1, 2006, no portion of the LTCH PPS 

payment is subject to 42 CFR Part 413. 

Likewise, for cost reporting periods 

beginning on or after January 1, 2008, all IPFs 

are paid 100 percent of the Federal per diem 

amount under the IPF PPS. Therefore, for 

cost reporting periods beginning on or after 

January 1, 2008, no portion of an IPF PPS 

payment is subject to 42 CFR Part 413. 


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Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48777 

V. Tables 

This section contains a majority of the 

tables referred to throughout the preamble to 

this final rule and in this Addendum. 

The following tables, which contain data 

relating to the FY 2009 wage indices and the 

hospital reclassifications and payment 

amounts for operating and capital-related 

costs that are affected by Public Law 110–

275, which extends through September 30, 

2009 (FY 2009) section 508 wage index 

reclassifications as discussed in section 

III.I.7. of this final rule, will be posted on the 

CMS Web site and published in a subsequent 

Federal Register notice prior to October 1, 

2008: 

Table 2.—Hospital Case-Mix Indexes for 

Discharges Occurring in Federal Fiscal Year 

2007; Hospital Wage Indexes for Federal 

Fiscal Year 2009; Hospital Average Hourly 

Wages for Federal Fiscal Years 2007 (2003 

Wage Data), 2008 (2004 Wage Data), and 2009 

(2005 Wage Data); and 3-Year Average of 

Hospital Average Hourly Wages. 

Table 4A.—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Urban Areas by CBSA and by State—FY 

2009. 

Table 4B.—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Rural Areas by CBSA and by State—FY 2009. 

Table 4C.—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Hospitals That Are Reclassified by CBSA and 

by State—FY 2009. 

Table 4D–1.—Rural Floor Budget 

Neutrality Factors—FY 2009. 

Table 4D–2.—Urban Areas with Hospitals 

Receiving the Statewide Rural Floor or 

Imputed Floor Wage Index—FY 2009. 

Table 4E.—Urban CBSAs and Constituent 

Counties—FY 2009. 

Table 4F.—Puerto Rico Wage Index and 

Capital Geographic Adjustment Factor (GAF) 

by CBSA—FY 2009. 

The following tables are included in this 

final rule as tentative tables and do not 

reflect the final calculation of the wage 

indices based on the extension of section 508 

wage index reclassifications through FY 

2009. Additional information appears with 

each table. Revised tables reflecting the final 

calculation of the FY 2009 wage indices will 

be posted on the CMS Web site and 

published in a subsequent Federal Register 

notice prior to October 1, 2008: 

Table 1A.—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor (69.7 

Percent Labor Share/30.3 Percent Nonlabor 

Share If Wage Index Is Greater Than 1). 

Table 1B.—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor (62 

Percent Labor Share/38 Percent Nonlabor 

Share If Wage Index Is Less Than or Equal 

To 1). 

Table 1C.—Adjusted Operating 

Standardized Amounts for Puerto Rico, 

Labor/Nonlabor. 

Table 1D.—Capital Standard Federal 

Payment Rate. 

Table 2.—Hospital Case-Mix Indexes for 

Discharges Occurring in Federal Fiscal Year 

2007; Hospital Average Hourly Wages for 

Federal Fiscal Years 2007 (2003 Wage Data), 

2008 (2004 Wage Data), and 2009 (2005 Wage 

Data); and 3–Year Average of Hospital 

Average Hourly Wages. 

Table 4J.—Out-Migration Adjustment—FY 

2009. 

Table 9A.—Hospital Reclassifications and 

Redesignations—FY 2009. 

Table 9C.—Hospitals Redesignated as 

Rural under Section 1886(d)(8)(E) of the 

Act—FY 2009. 

Table 10.—Tentative Geometric Mean Plus 

the Lesser of .75 of the National Adjusted 

Operating Standardized Payment Amount 

(Increased to Reflect the Difference Between 

Costs and Charges) or .75 of One Standard 

Deviation of Mean Charges by Medicare 

Severity Diagnosis-Related Group (MS–

DRG)—July 2008. 

The following tables are final and not 

subject to revision based on the final 

calculation of the FY 2009 wage index 

because of the extension of section 508 wage 

index reclassifications through FY 2009: 

Table 3A.—FY 2009 and 3-Year Average 

Hourly Wage for Urban Areas by CBSA. 

Table 3B.—FY 2009 and 3-Year Average 

Hourly Wage for Rural Areas by CBSA. 

Table 5.—List of Medicare Severity 

Diagnosis-Related Groups (MS–DRGs), 

Relative Weighting Factors, and Geometric 

and Arithmetic Mean Length of Stay. 

Table 6A.—New Diagnosis Codes. 

Table 6B.—New Procedure Codes. 

Table 6C.—Invalid Diagnosis Codes. 

Table 6D.—Invalid Procedure Codes. 

Table 6E.—Revised Diagnosis Code Titles. 

Table 6F.—Revised Procedure Code Titles. 

Table 7A.—Medicare Prospective Payment 

System Selected Percentile Lengths of Stay: 

FY 2007 MedPAR Update—March 2008 

GROUPER V25.0 MS–DRGs. 

Table 7B.—Medicare Prospective Payment 

System Selected Percentile Lengths of Stay: 

FY 2007 MedPAR Update—March 2008 

GROUPER V26.0 MS–DRGs. 

Table 8A.—Statewide Average Operating 

Cost-to-Charge Ratios—July 2008. 

Table 8B.—Statewide Average Capital 

Cost-to-Charge Ratios—July 2008. 

Table 8C.—Statewide Average Total Costto-Charge Ratios for LTCHs—July 2008. 

Table 11.—FY 2009 MS–LTC–DRGs, 

Relative Weights, Geometric Average Length 

of Stay, and Short-Stay Outlier (SSO) 

Threshold. 

The following tables discussed in section 

II. of the preamble of this final rule are 

available only through the Internet on the 

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

AcuteInpatientPPS/: 

Table 6G.—Additions to the CC Exclusions 

List. 

Table 6H.—Deletions from the CC 

Exclusions List. 

Table 6I.—Complete List of Complication 

and Comorbidity (CC) Exclusions Table 6J.—

Major Complication and Comorbidity (MCC) 

List. 

Table 6K.—Complication and Comorbidity 

(CC). 

BILLING CODE 4120–01–P 


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48872 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.109</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48873 


sroberts on PROD1PC70 with RULESER19AU08.110</MATH>
48874 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.111</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48875 


sroberts on PROD1PC70 with RULESER19AU08.112</MATH>
48876 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.113</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48877 


sroberts on PROD1PC70 with RULESER19AU08.114</MATH>
48878 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.115</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48879 


sroberts on PROD1PC70 with RULESER19AU08.116</MATH>
48880 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.117</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48881 


sroberts on PROD1PC70 with RULESER19AU08.119</MATH>
48882 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.120</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48883 


sroberts on PROD1PC70 with RULESER19AU08.121</MATH>
48884 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.122</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48885 


sroberts on PROD1PC70 with RULESER19AU08.123</MATH>
48886 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.124</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48887 


sroberts on PROD1PC70 with RULESER19AU08.125</MATH>
48888 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.126</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48889 


sroberts on PROD1PC70 with RULESER19AU08.127</MATH>
48890 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.128</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48891 


sroberts on PROD1PC70 with RULESER19AU08.129</MATH>
48892 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.130</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48893 


sroberts on PROD1PC70 with RULESER19AU08.131</MATH>
48894 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.132</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48895 


sroberts on PROD1PC70 with RULESER19AU08.133</MATH>
48896 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.134</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48897 


sroberts on PROD1PC70 with RULESER19AU08.135</MATH>
48898 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.136</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48899 


sroberts on PROD1PC70 with RULESER19AU08.137</MATH>
48900 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.138</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48901 


sroberts on PROD1PC70 with RULESER19AU08.139</MATH>
48902 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.140</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48903 


sroberts on PROD1PC70 with RULESER19AU08.141</MATH>
48904 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.142</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48905 


sroberts on PROD1PC70 with RULESER19AU08.143</MATH>
48906 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.144</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48907 


sroberts on PROD1PC70 with RULESER19AU08.145</MATH>
48908 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.146</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48909 


sroberts on PROD1PC70 with RULESER19AU08.147</MATH>
48910 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.148</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48911 


sroberts on PROD1PC70 with RULESER19AU08.149</MATH>
48912 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.150</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48913 


sroberts on PROD1PC70 with RULESER19AU08.151</MATH>
48914 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.152</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48915 


sroberts on PROD1PC70 with RULESER19AU08.153</MATH>
48916 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.154</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48917 


sroberts on PROD1PC70 with RULESER19AU08.155</MATH>
48918 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.156</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48919 


sroberts on PROD1PC70 with RULESER19AU08.157</MATH>
48920 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.158</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48921 


sroberts on PROD1PC70 with RULESER19AU08.159</MATH>
48922 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.160</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48923 


sroberts on PROD1PC70 with RULESER19AU08.161</MATH>
48924 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.162</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48925 


sroberts on PROD1PC70 with RULESER19AU08.163</MATH>
48926 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.164</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48927 


sroberts on PROD1PC70 with RULESER19AU08.165</MATH>
48928 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.166</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48929 


sroberts on PROD1PC70 with RULESER19AU08.167</MATH>
48930 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.168</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48931 


sroberts on PROD1PC70 with RULESER19AU08.169</MATH>
48932 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.170</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48933 


sroberts on PROD1PC70 with RULESER19AU08.171</MATH>
48934 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.172</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48935 


sroberts on PROD1PC70 with RULESER19AU08.173</MATH>
48936 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.174</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48937 


sroberts on PROD1PC70 with RULESER19AU08.175</MATH>
48938 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.176</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48939 


sroberts on PROD1PC70 with RULESER19AU08.177</MATH>
48940 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.178</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48941 


sroberts on PROD1PC70 with RULESER19AU08.179</MATH>
48942 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.180</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48943 


sroberts on PROD1PC70 with RULESER19AU08.182</MATH>
48944 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.183</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48945 


sroberts on PROD1PC70 with RULESER19AU08.184</MATH>
48946 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.185</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48947 


sroberts on PROD1PC70 with RULESER19AU08.186</MATH>
48948 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.187</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48949 


sroberts on PROD1PC70 with RULESER19AU08.188</MATH>
48950 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.189</MATH> ER19AU08.190</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48951 


sroberts on PROD1PC70 with RULESER19AU08.191</MATH>
48952 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.192</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48953 


sroberts on PROD1PC70 with RULESER19AU08.193</MATH>
48954 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.194</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48955 


sroberts on PROD1PC70 with RULESER19AU08.195</MATH>
48956 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.196</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48957 


sroberts on PROD1PC70 with RULESER19AU08.197</MATH>
48958 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.198</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48959 


sroberts on PROD1PC70 with RULESER19AU08.199</MATH>
48960 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.200</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48961 


sroberts on PROD1PC70 with RULESER19AU08.201</MATH>
48962 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.202</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48963 


sroberts on PROD1PC70 with RULESER19AU08.203</MATH>
48964 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.204</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48965 


sroberts on PROD1PC70 with RULESER19AU08.205</MATH>
48966 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.206</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48967 


sroberts on PROD1PC70 with RULESER19AU08.207</MATH>
48968 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.208</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48969 


sroberts on PROD1PC70 with RULESER19AU08.209</MATH>
48970 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.210</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48971 


sroberts on PROD1PC70 with RULESER19AU08.211</MATH>
48972 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.212</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48973 


sroberts on PROD1PC70 with RULESER19AU08.213</MATH>
48974 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.214</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48975 


sroberts on PROD1PC70 with RULESER19AU08.215</MATH>
48976 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.216</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48977 


sroberts on PROD1PC70 with RULESER19AU08.217</MATH>
48978 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.218</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48979 


sroberts on PROD1PC70 with RULESER19AU08.219</MATH>
48980 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.220</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48981 


sroberts on PROD1PC70 with RULESER19AU08.221</MATH>
48982 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.222</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48983 


sroberts on PROD1PC70 with RULESER19AU08.223</MATH>
48984 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.224</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48985 


sroberts on PROD1PC70 with RULESER19AU08.225</MATH>
48986 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.226</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48987 


sroberts on PROD1PC70 with RULESER19AU08.227</MATH>
48988 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.228</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48989 


sroberts on PROD1PC70 with RULESER19AU08.229</MATH>
48990 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.230</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48991 


sroberts on PROD1PC70 with RULESER19AU08.231</MATH>
48992 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.232</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48993 


sroberts on PROD1PC70 with RULESER19AU08.233</MATH>
48994 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.234</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48995 


sroberts on PROD1PC70 with RULESER19AU08.235</MATH>
48996 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.236</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48997 


sroberts on PROD1PC70 with RULESER19AU08.237</MATH>
48998 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.238</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 48999 


sroberts on PROD1PC70 with RULESER19AU08.239</MATH>
49000 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.240</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49001 


sroberts on PROD1PC70 with RULESER19AU08.241</MATH>
49002 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.242</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49003 


sroberts on PROD1PC70 with RULESER19AU08.243</MATH>
49004 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.244</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49005 


sroberts on PROD1PC70 with RULESER19AU08.245</MATH>
49006 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.246</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49007 


sroberts on PROD1PC70 with RULESER19AU08.247</MATH>
49008 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.248</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49009 


sroberts on PROD1PC70 with RULESER19AU08.249</MATH>
49010 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.250</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49011 


sroberts on PROD1PC70 with RULESER19AU08.251</MATH>
49012 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.252</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49013 


sroberts on PROD1PC70 with RULESER19AU08.253</MATH>
49014 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.254</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49015 


sroberts on PROD1PC70 with RULESER19AU08.255</MATH>
49016 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.256</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49017 


sroberts on PROD1PC70 with RULESER19AU08.257</MATH>
49018 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.258</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49019 


sroberts on PROD1PC70 with RULESER19AU08.259</MATH>
49020 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.260</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49021 


sroberts on PROD1PC70 with RULESER19AU08.261</MATH>
49022 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.262</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49023 


sroberts on PROD1PC70 with RULESER19AU08.263</MATH>
49024 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.264</MATH>
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49025 


sroberts on PROD1PC70 with RULESER19AU08.265</MATH>
49026 Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 


sroberts on PROD1PC70 with RULESER19AU08.266</MATH>
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BILLING CODE 4120–01–C 

Appendix A: Regulatory Impact Analysis 

I. Overall Impact 

We have examined the impacts of this final 

rule as required by Executive Order 12866 

(September 1993, Regulatory Planning and 

Review) and 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 by 

Executive Order 13258) 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). 

We have determined that this final rule is 

a major rule as defined in 5 U.S.C. 804(2). We 

estimate that the changes for FY 2009 

operating and capital payments will 

redistribute in excess of $100 million among 

different types of inpatient cases. The market 

basket update to the IPPS rates required by 

the statute, in conjunction with other 

payment changes in this final rule, will result 

in an approximate $4.7 billion increase in FY 

2009 operating and capital payments. Our 

impact estimate includes the ¥0.9 percent 

adjustment for documentation and coding 

changes to the IPPS standardized amounts 

and capital Federal rates for FY 2009 in 

accordance with section 7 of Public Law 

110–90. For purposes of the impact analysis, 

we also assume an additional 1.8 percent 

increase in case-mix between FY 2008 and 

FY 2009 because we believe the adoption of 

the MS–DRGs will result in case-mix growth 

due to documentation and coding changes 

that do not reflect real changes in patient 

severity of illness. The estimates of IPPS 

operating payments do not reflect any 

changes in hospital admissions or real casemix intensity, which would also affect 

overall payment changes. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, small 

entities include small businesses, nonprofit 

organizations, and small government 

jurisdictions. Most hospitals and most other 

providers and suppliers are considered to be 

small entities, either by being nonprofit 

organizations or by meeting the Small 

Business Administration definition of a small 

business (having revenues of $31.5 million or 

less in any 1 year). (For details on the latest 

standards for heath care providers, we refer 

readers to page 33 of the Table of Small 

Business Size Standards at the Small 

Business Administration Web site at: http:// 

www.sba.gov/services/ 


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contractingopportunities/ 

sizestandardstopics/tableofsize/index.html.) 

For purposes of the RFA, all hospitals and 

other providers and suppliers are considered 

to be small entities. Individuals and States 

are not included in the definition of a small 

entity. We believe that this final rule will 

have a significant impact on small entities as 

explained in this Appendix. Because we 

acknowledge that many of the affected 

entities are small entities, the analysis 

discussed throughout the preamble of this 

final rule constitutes our final regulatory 

flexibility analysis. In the FY 2009 IPPS 

proposed rule, we solicited comments on our 

estimates and analysis of the impact of the 

proposed rule on those small entities. We 

address any public comments that we 

received on the impact of these changes we 

are finalizing in the applicable sections of 

this Appendix. 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 (SBREFA), 

Public Law 104–121, as amended by section 

8302 of Public Law 110–28 (enacted May 25, 

2007), requires an agency to provide 

compliance guides for each rule or group of 

related rules for which an agency is required 

to prepare a final regulatory flexibility 

analysis. The compliance guides associated 

with this final rule are available on the 

inpatient prospective payment system web 

page at http://www.cms.hhs.gov/ 

AcuteInpatientPPS/01_overview.asp. We also 

note that the Hospital Center Web page 

http://www.cms.hhs.gov/center/hospital.asp 

was developed to assist hospitals in 

understanding and adapting to changes in 

Medicare regulations and in billing and 

payment procedures. This Web page provides 

hospitals with substantial downloadable 

explanatory materials. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory impact 

analysis for any proposed or final rule that 

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. 

With the exception of hospitals located in 

certain New England counties, for purposes 

of section 1102(b) of the Act, we now define 

a small rural hospital as a hospital that is 

located outside of an urban area and has 

fewer than 100 beds. Section 601(g) of the 

Social Security Amendments of 1983 (Pub. L. 

98–21) designated hospitals in certain New 

England counties as belonging to the adjacent 

urban area. Thus, for purposes of the IPPS, 

we continue to classify these hospitals as 

urban hospitals. 

Section 202 of the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4) also 

requires that agencies assess anticipated costs 

and benefits before issuing any rule whose 

mandates require spending in any 1 year of 

$100 million in 1995 dollars, updated 

annually for inflation. That threshold level is 

currently approximately $130 million. This 

final rule will not mandate any requirements 

for State, local, or tribal governments, nor 

will it affect private sector costs. 

Executive Order 13132 establishes certain 

requirements that an agency must meet when 

it promulgates a proposed rule (and 

subsequent final rule) that imposes 

substantial direct requirement costs on State 

and local governments, preempts State law, 

or otherwise has Federalism implications. As 

stated above, this final rule will not have a 

substantial effect on State and local 

governments. 

The following analysis, in conjunction 

with the remainder of this document, 

demonstrates that this final rule is consistent 

with the regulatory philosophy and 

principles identified in Executive Order 

12866, the RFA, and section 1102(b) of the 

Act. The final rule will affect payments to a 

substantial number of small rural hospitals, 

as well as other classes of hospitals, and the 

effects on some hospitals may be significant. 

II. Objectives 

The primary objective of the IPPS is to 

create incentives for hospitals to operate 

efficiently and minimize unnecessary costs 

while at the same time ensuring that 

payments are sufficient to adequately 

compensate hospitals for their legitimate 

costs. In addition, we share national goals of 

preserving the Medicare Hospital Insurance 

Trust Fund. 

We believe the changes in this final rule 

will further each of these goals while 

maintaining the financial viability of the 

hospital industry and ensuring access to high 

quality health care for Medicare 

beneficiaries. We expect that these changes 

will ensure that the outcomes of this 

payment system are reasonable and equitable 

while avoiding or minimizing unintended 

adverse consequences. 

III. Limitations of Our Analysis 

The following quantitative analysis 

presents the projected effects of our policy 

changes, as well as statutory changes 

effective for FY 2009, on various hospital 

groups. We estimate the effects of individual 

policy changes by estimating payments per 

case while holding all other payment policies 

constant. We use the best data available, but, 

generally, we do not attempt to make 

adjustments for future changes in such 

variables as admissions, lengths of stay, or 

case-mix. However, in the FY 2008 IPPS final 

rule with comment period, we indicated that 

we believe that implementation of the MS–

DRGs would lead to increases in case-mix 

that do not reflect actual increases in 

patients’ severity of illness as a result of more 

comprehensive documentation and coding. 

As explained in section II.D. of the preamble 

of this final rule, the FY 2008 IPPS final rule 

with comment period established a 

documentation and coding adjustment of 

¥1.2 percent for FY 2008, ¥1.8 percent for 

FY 2009, and ¥1.8 percent for FY 2010 to 

maintain budget neutrality for the transition 

to the MS–DRGs. Subsequently, Congress 

enacted Public Law 110–90. Section 7 of 

Public Law 110–90 reduced the IPPS 

documentation and coding adjustment from 

¥1.2 percent to ¥0.6 percent for FY 2008 

and from ¥1.8 percent to ¥0.9 percent for 

FY 2009. Following the enactment of Public 

Law 110–90, we revised the FY 2008 

standardized amounts (as well as other 

affected payment factors and thresholds) to 

reflect the ¥0.6 percent FY 2008 

documentation and coding adjustment. The 

tentative FY 2009 IPPS national standardized 

amount included in this final rule reflects the 

documentation and coding adjustment of 

¥0.9 percent for FY 2009. While we have 

adopted the statutorily mandated 

documentation and coding adjustments for 

payment purposes, we continue to believe 

that an increase in case-mix of 1.8 percent 

between FY 2008 and FY 2009 is likely as a 

result of the adoption of the MS–DRGs. The 

impacts shown below illustrate the impact of 

the FY 2009 IPPS changes on hospital 

operating payments, including the ¥0.9 

percent FY 2009 documentation and coding 

adjustment to the IPPS national standardized 

amounts, both prior to and following the 

expected 1.8 percent growth in case-mix 

between FY 2008 and FY 2009. As we have 

done in the previous rules, we solicited 

comments and information about the 

anticipated effects of the proposed changes 

on hospitals and our methodology for 

estimating them. We did not receive any 

public comments on the methodology for 

estimating the impacts. 

IV. Hospitals Included in and Excluded From 

the IPPS 

The prospective payment systems for 

hospital inpatient operating and capitalrelated costs encompass most general shortterm, acute care hospitals that participate in 

the Medicare program. There were 35 Indian 

Health Service hospitals in our database, 

which we excluded from the analysis due to 

the special characteristics of the prospective 

payment methodology for these hospitals. 

Among other short-term, acute care hospitals, 

only the 46 such hospitals in Maryland 

remain excluded from the IPPS under the 

waiver at section 1814(b)(3) of the Act. 

As of July 2008, there are 3,538 IPPS 

hospitals to be included in our analysis. This 

represents about 58 percent of all Medicareparticipating hospitals. The majority of this 

impact analysis focuses on this set of 

hospitals. There are also approximately 1,313 

CAHs. These small, limited service hospitals 

are paid on the basis of reasonable costs 

rather than under the IPPS. There are also 

1,226 specialty hospitals and 2,226 specialty 

units that are excluded from the IPPS. These 

specialty hospitals include IPFs, IRFs, 

LTCHs, RNHCIs, children’s hospitals, and 

cancer hospitals, which are paid under 

separate payment systems. Changes in the 

prospective payment systems for IPFs and 

IRFs are made through separate rulemaking. 

Payment impacts for these specialty hospitals 

and units are not included in this final rule. 

There is also a separate rule to update and 

make changes to the LTCH PPS for its rate 

year (RY). However, we have traditionally 

used the IPPS rule to update the LTCH 

patient classifications and relative weights 

because the LTCH PPS uses the same DRGs 

as the IPPS, resulting in the LTCH relative 

weights being reclassified and recalibrated 

according to the same schedule as the IPPS 

(that is, for each Federal fiscal year). The 

impacts of our policy changes on LTCHs, 

where applicable, are discussed below. (We 

note that, as discussed in section II.I. of the 

preamble of this final rule, in the RY 2009 

LTCH PPS final rule 73 FR 26797 through 

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update (currently effective July 1) to be 

effective October 1 through September 30 

(the Federal fiscal year) each year beginning 

October 1, 2009. Under this change, RY 2009 

is extended 3 months, such that RY 2009 will 

be the 15-month period of July 1, 2008 

through September 30, 2009.) 

V. Effects on Excluded Hospitals and 

Hospital Units 

As of July 2008, there were 1,226 hospitals 

excluded from the IPPS. Of these 1,226 

hospitals, 56 IPFs, 78 children’s hospitals, 11 

cancer hospitals, and 19 RNHCIs are either 

being paid on a reasonable cost basis or have 

a portion of the PPS payment based on 

reasonable cost principles subject to the rateof-increase ceiling under § 413.40. The 

remaining providers, 226 IRFs, 396 LTCHs, 

and 440 IPFs, are paid 100 percent of the 

Federal prospective rate under the IRF PPS 

and the LTCH PPS, respectively, or 100 

percent of the Federal per diem amount 

under the IPF PPS. As stated above, IRFs and 

IPFs are not affected by this final rule. The 

impacts of the changes to LTCHs are 

discussed separately below. In addition, 

there are 1,320 IPFs co-located in hospitals 

otherwise subject to the IPPS, 312 of which 

are paid on a blend of the IPF PPS per diem 

payment and the reasonable cost-based 

payment. The remaining 1,008 IPF units are 

paid 100 percent of the Federal amount 

under the IPF PPS. There are 970 IRFs (paid 

under the IRF PPS) co-located in hospitals 

otherwise subject to the IPPS. 

In the past, certain hospitals and units 

excluded from the IPPS have been paid based 

on their reasonable costs subject to limits as 

established by the Tax Equity and Fiscal 

Responsibility Act of 1982 (TEFRA). 

Hospitals that continue to be paid fully on a 

reasonable cost basis are subject to TEFRA 

limits for FY 2009. For these hospitals 

(cancer and children’s hospitals), consistent 

with section 1886(b)(3)(B)(ii) of the Act, the 

update is the percentage increase in the FY 

2009 IPPS operating market basket, which is 

estimated to be 3.6 percent, based on Global 

Insight, Inc.’s 2008 second quarter forecast of 

the IPPS operating market basket increase. In 

addition, in accordance with § 403.752(a) of 

the regulations, RNHCIs are paid under 

§ 413.40, which also uses section 

1886(b)(3)(B)(ii) of the Act to update target 

amounts by the rate-of-increase percentage. 

For RNHCIs, the update is the percentage 

increase in the FY 2009 IPPS operating 

market basket increase, which is estimated to 

be 3.6 percent, based on Global Insight, Inc.’s 

2008 second quarter forecast of the IPPS 

operating market basket increase. 

The final rule implementing the IPF PPS 

(69 FR 66922) established a 3-year transition 

to the IPF PPS during which some providers 

received a blend of the IPF PPS per diem 

payment and the TEFRA reasonable costbased payment. This transitional period for a 

blended payment amount for IPFs ended for 

cost reporting periods that began on or after 

January 1, 2008. Because the reasonable costbased amount is zero percent for cost 

reporting periods beginning during CY 2008, 

no IPF will have a portion of its PPS payment 

that is based in part on reasonable cost 

subject to the rate-of-increase ceiling during 

FY 2009. Thus, there is no longer a need for 

an update factor for IPFs’ TEFRA target 

amount for FY 2009 and thereafter. 

The impact on those excluded hospitals 

and hospital units of the update in the rateof-increase limit depends on the cumulative 

cost increases experienced by each excluded 

hospital or unit since its applicable base 

period. For excluded hospitals and units that 

have maintained their cost increases at a 

level below the rate-of-increase limits since 

their base period, the major effect is on the 

level of incentive payments these hospitals 

and hospital units receive. Conversely, for 

excluded hospitals and hospital units with 

per-case cost increases above the cumulative 

update in their rate-of-increase limits, the 

major effect is the amount of excess costs that 

will not be reimbursed. 

We note that, under § 413.40(d)(3), an 

excluded hospital or unit, that continue to be 

paid under the TEFRA system, whose costs 

exceed 110 percent of its rate-of-increase 

limit receives its rate-of-increase limit plus 

50 percent of the difference between its 

reasonable costs and 110 percent of the limit, 

not to exceed 110 percent of its limit. In 

addition, under the various provisions set 

forth in § 413.40, certain excluded hospitals 

and hospital units can obtain payment 

adjustments for justifiable increases in 

operating costs that exceed the limit. 

VI. Quantitative Effects of the Policy Changes 

Under the IPPS for Operating Costs 

A. Basis and Methodology of Estimates 

In this final rule, we are announcing policy 

changes and payment rate updates for the 

IPPS for operating costs. Changes to the 

capital payments are discussed in section 

VIII. of this Appendix. We note that, due to 

recently passed legislation (section 124 of 

Pub. L. 110–275) that extended certain 

special exceptions and reinstated the 

provisions of section 508 of Public Law 108–

173 relating to the wage index 

reclassifications of hospitals for an additional 

year, through FY 2009, as discussed in 

section III.I. of the preamble of this final rule, 

we are unable to finalize the FY 2009 wage 

index at this time. Therefore, we are also 

unable to finalize budget neutrality 

calculations, the outlier threshold, the outlier 

offsets, and the standardized payment 

amounts. We have calculated tentative 

amounts for all of these factors and have 

based the impacts shown in the following 

pages on these tentative amounts. When we 

revise the wage index to account for the 

recently enacted legislation that extends 

certain exceptions as well as the section 508 

reclassifications for an additional year 

through FY 2009, we will recalculate impacts 

and publish them in a separate Federal 

Register notice prior to October 1, 2008. 

Based on the overall percentage change in 

payments per case estimated using our 

payment simulation model, we estimate that 

total FY 2009 operating payments will 

increase 4.7 percent compared to FY 2008, 

largely due to the statutorily mandated 

update to the IPPS rates. This amount also 

reflects the ¥0.9 percent FY 2009 

documentation and coding adjustment to the 

IPPS national standardized amounts and our 

assumption of an additional 1.8 percent 

increase in case-mix between FY 2008 and 

FY 2009 as a result of improvements in 

documentation and coding that do not 

represent real increases in underlying 

resource demands and patient acuity due to 

the adoption of the MS–DRGs. The impacts 

do not illustrate changes in hospital 

admissions or real case-mix intensity, which 

will also affect overall payment changes. 

We have prepared separate impact analyses 

of the changes to each system. This section 

deals with changes to the operating 

prospective payment system. Our payment 

simulation model relies on the most recent 

available data to enable us to estimate the 

impacts on payments per case of certain 

changes in this final rule. However, there are 

other changes for which we do not have data 

available that would allow us to estimate the 

payment impacts using this model. For those 

changes, we have attempted to predict the 

payment impacts based upon our experience 

and other more limited data. 

The data used in developing the 

quantitative analyses of changes in payments 

per case presented below are taken from the 

FY 2007 MedPAR file and the most current 

Provider-Specific File that is used for 

payment purposes. Although the analyses of 

the changes to the operating PPS do not 

incorporate cost data, data from the most 

recently available hospital cost report were 

used to categorize hospitals. Our analysis has 

several qualifications. First, in this analysis, 

we do not make adjustments for future 

changes in such variables as admissions, 

lengths of stay, or underlying growth in real 

case-mix. Second, due to the interdependent 

nature of the IPPS payment components, it is 

very difficult to precisely quantify the impact 

associated with each change. Third, we use 

various sources for the data used to 

categorize hospitals in the tables. In some 

cases, particularly the number of beds, there 

is a fair degree of variation in the data from 

different sources. We have attempted to 

construct these variables with the best 

available source overall. However, for 

individual hospitals, some 

miscategorizations are possible. 

Using cases from the FY 2007 MedPAR 

file, we simulated payments under the 

operating IPPS given various combinations of 

payment parameters. Any short-term, acute 

care hospitals not paid under the IPPS 

(Indian Health Service hospitals and 

hospitals in Maryland) were excluded from 

the simulations. The impact of payments 

under the capital IPPS, or the impact of 

payments for costs other than inpatient 

operating costs, are not analyzed in this 

section. Estimated payment impacts of FY 

2009 changes to the capital IPPS are 

discussed in section VIII. of this Appendix. 

The changes discussed separately below 

are the following: 

• The effects of the annual reclassification 

of diagnoses and procedures, full 

implementation of the MS–DRG system and 

100 percent cost-based DRG relative weights, 

• The effects of the changes in hospitals’

wage index values reflecting wage data from 

hospitals’ cost reporting periods beginning 

during FY 2005, compared to the FY 2004 

wage data. 

• The effects of the recalibration of the 

DRG relative weights as required by section 


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1886(d)(4)(C) of the Act, including the wage 

and recalibration budget neutrality factors. 

• The effects of geographic 

reclassifications by the MGCRB that will be 

effective in FY 2009. 

• The effects of the first year of the 3-year 

transition to apply rural floor budget 

neutrality adjustment at the State level. In FY 

2009, hospitals will receive a blended wage 

index that is 20 percent of a wage index with 

the State level rural and imputed floor budget 

neutrality adjustment and 80 percent of a 

wage index with the national budget 

neutrality adjustment. 

• The effects of section 505 of Public Law 

108–173, which provides for an increase in 

a hospital’s wage index if the hospital 

qualifies by meeting a threshold percentage 

of residents of the county where the hospital 

is located who commute to work at hospitals 

in counties with higher wage indexes. 

• The effect of the budget neutrality 

adjustment being made for the adoption of 

the MS–DRGs under section 1886(d)(3)(A)(iv) 

of the Act for the change in aggregate 

payments that is a result of changes in the 

coding or classification of discharges that do 

not reflect real changes in case-mix. 

• The total estimated change in payments 

based on the FY 2009 policies relative to 

payments based on FY 2008 policies. 

To illustrate the impacts of the FY 2009 

changes, our analysis begins with an FY 2008 

baseline simulation model using: The FY 

2009 update of 3.6 percent; the FY 2008 DRG 

GROUPER (Version 25.0); the most current 

CBSA designations for hospitals based on 

OMB’s MSA definitions; the FY 2008 wage 

index; and no MGCRB reclassifications. 

Outlier payments are set at 5.1 percent of 

total operating DRG and outlier payments. 

Section 1886(b)(3)(B)(viii) of the Act, as 

added by section 5001(a) of Public Law 109–

171, provides that for FY 2007 and 

subsequent years, the update factor will be 

reduced by 2.0 percentage points for any 

hospital that does not submit quality data in 

a form and manner and at a time specified 

by the Secretary. At the time this impact was 

prepared, 186 hospitals did not receive the 

full market basket rate-of-increase for FY 

2008 because they failed the quality data 

submission process. For purposes of the 

simulations shown below, we modeled the 

payment changes for FY 2009 using a 

reduced update for these 186 hospitals. 

However, we do not have enough 

information at this time to determine which 

hospitals will not receive the full market 

basket rate-of-increase for FY 2009. 

Each policy change, statutorily or 

otherwise, is then added incrementally to 

this baseline, finally arriving at an FY 2009 

model incorporating all of the changes. This 

simulation allows us to isolate the effects of 

each change. 

Our final comparison illustrates the 

percent change in payments per case from FY 

2008 to FY 2009. Three factors not discussed 

separately have significant impacts here. The 

first is the update to the standardized 

amount. In accordance with section 

1886(b)(3)(B)(i) of the Act, we are updating 

the standardized amounts for FY 2009 using 

the most recently forecasted hospital market 

basket increase for FY 2009 of 3.6 percent. 

(Hospitals that fail to comply with the quality 

data submission requirements to receive the 

full update will receive an update reduced by 

2.0 percentage points to 1.6 percent.) Under 

section 1886(b)(3)(B)(iv) of the Act, the 

updates to the hospital-specific amounts for 

SCHs and for MDHs are also equal to the 

market basket increase, or 3.6 percent. 

A second significant factor that affects the 

changes in hospitals’ payments per case from 

FY 2008 to FY 2009 is the change in a 

hospital’s geographic reclassification status 

from one year to the next. That is, payments 

may be reduced for hospitals reclassified in 

FY 2008 that are no longer reclassified in FY 

2009. Conversely, payments may increase for 

hospitals not reclassified in FY 2008 that are 

reclassified in FY 2009. This impact analysis 

was prepared under the assumption that 

certain special exceptions, as well as section 

508 of Public Law 108–173, the 

reclassification provision, were to expire in 

FY 2009. However, legislation (section 124 of 

Pub. L. 110–275) enacted after preparation of 

this impact analysis has extended the certain 

special exceptions, as well as the section 508 

reclassification provision for an additional 

year through FY 2009, and the impact of the 

provision will be addressed in a separate 

Federal Register notice to be published 

subsequent to this final rule. In the impact 

analysis for this final rule, the expiration of 

certain special exceptions as well as section 

508 of Public Law 108–173 resulted in 

substantial impacts for a relatively small 

number of hospitals in a particular category 

because those providers would have lost 

their reclassification status resulting in a 

percentage change in payments for the 

category to be below the national mean. 

A third significant factor is that we 

currently estimate that actual outlier 

payments during FY 2008 will be 4.7 percent 

of total DRG payments. When the FY 2008 

final rule with comment period was 

published, we projected FY 2008 outlier 

payments would be 5.1 percent of total DRG 

plus outlier payments; the average 

standardized amounts were offset 

correspondingly. The effects of the lower 

than expected outlier payments during FY 

2009 (as discussed in the Addendum to this 

final rule) are reflected in the analyses below 

comparing our current estimates of FY 2008 

payments per case to estimated FY 2009 

payments per case (with outlier payments 

projected to equal 5.1 percent of total DRG 

payments). 

B. Analysis of Table I 

Table I displays the results of our analysis 

of the changes for FY 2009. The table 

categorizes hospitals by various geographic 

and special payment consideration groups to 

illustrate the varying impacts on different 

types of hospitals. The top row of the table 

shows the overall impact on the 3,538 

hospitals included in the analysis. 

The next four rows of Table I contain 

hospitals categorized according to their 

geographic location: All urban, which is 

further divided into large urban and other 

urban; and rural. There are 2,553 hospitals 

located in urban areas included in our 

analysis. Among these, there are 1,408 

hospitals located in large urban areas 

(populations over 1 million), and 1,145 

hospitals in other urban areas (populations of 

1 million or fewer). In addition, there are 985 

hospitals in rural areas. The next two 

groupings are by bed-size categories, shown 

separately for urban and rural hospitals. The 

final groupings by geographic location are by 

census divisions, also shown separately for 

urban and rural hospitals. 

The second part of Table I shows hospital 

groups based on hospitals’ FY 2009 payment 

classifications, including any 

reclassifications under section 1886(d)(10) of 

the Act. For example, the rows labeled urban, 

large urban, other urban, and rural show that 

the numbers of hospitals paid based on these 

categorizations after consideration of 

geographic reclassifications (including 

reclassifications under section 1886(d)(8)(B) 

and section 1886(d)(8)(E) of the Act that have 

implications for capital payments) are 2,594, 

1,430, 1,164 and 944, respectively. 

The next three groupings examine the 

impacts of the changes on hospitals grouped 

by whether or not they have GME residency 

programs (teaching hospitals that receive an 

IME adjustment) or receive DSH payments, or 

some combination of these two adjustments. 

There are 2,495 nonteaching hospitals in our 

analysis, 808 teaching hospitals with fewer 

than 100 residents, and 235 teaching 

hospitals with 100 or more residents. 

In the DSH categories, hospitals are 

grouped according to their DSH payment 

status, and whether they are considered 

urban or rural for DSH purposes. The next 

category groups together hospitals considered 

urban after geographic reclassification, in 

terms of whether they receive the IME 

adjustment, the DSH adjustment, both, or 

neither. 

The next five rows examine the impacts of 

the changes on rural hospitals by special 

payment groups (SCHs, RRCs, and MDHs). 

There were 196 RRCs, 356 SCHs, 157 MDHs, 

104 hospitals that are both SCHs and RRCs, 

and 12 hospitals that are both an MDH and 

an RRC. 

The next series of groupings are based on 

the type of ownership and the hospital’s 

Medicare utilization expressed as a percent 

of total patient days. These data were taken 

from the FY 2005 Medicare cost reports. 

The next two groupings concern the 

geographic reclassification status of 

hospitals. The first grouping displays all 

urban hospitals that were reclassified by the 

MGCRB for FY 2009. The second grouping 

shows the MGCRB rural reclassifications. 

The final category shows the impact of the 

policy changes on the 20 cardiac specialty 

hospitals in our analysis. 

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BILLING CODE 4120–01–C 

C. Effects of the Changes to the MS–DRG 

Reclassifications and Relative Cost-Based 

Weights (Column 2) 

In Column 2 of Table I, we present the 

effects of the DRG reclassifications, as 

discussed in section II. of the preamble to 

this final rule. Section 1886(d)(4)(C)(i) of the 

Act requires us annually to make appropriate 

classification changes in order to reflect 

changes in treatment patterns, technology, 

and any other factors that may change the 

relative use of hospital resources. 

As discussed in the preamble of this final 

rule, the FY 2009 DRG relative weights will 

be 100 percent cost-based and 100 percent 

MS–DRGs, thus completing our 3-year 

transition to cost-based relative weights and 

our 2-year transition to MS–DRGs. For FY 

2009, the MS–DRGs are calculated using the 

FY 2007 MedPAR data grouped to the 

Version 26.0 (FY 2009) DRGs. The methods 

of calculating the relative weights and the 

reclassification changes to the GROUPER are 

described in more detail in section II.H. of 

the preamble to this final rule. In previous 

years, this column also reflected the effects 

of the recalibration budget neutrality factor 

that is applied to the hospital-specific rates 

and the Puerto Rico-specific standardized 

amount. However, for this final rule, we 

show the effects of the recalibration budget 

neutrality factor of 0.998795 in column 4. We 

note that, consistent with section 

1886(d)(4)(C)(iii) of the Act, we are applying 

a budget neutrality factor to the national 

standardized amounts to ensure that the 

overall payment impact of the DRG changes 

(combined with the wage index changes) is 

budget neutral. This wage and recalibration 

budget neutrality factor of 0.999580 is 

applied to payments in Column 4 and not 

Column 2. 

The changes to the relative weights and 

DRGs shown in column 2 are prior to any 

offset for budget neutrality. The ‘‘All 

Hospitals’’ line indicates that changes in this 

column will increase payments by 0.1 

percent. However, as stated earlier, the 

changes shown in this column are combined 

with revisions to the wage index, and the 

budget neutrality adjustments made for these 

changes are shown in column 4. Thus, the 

impact after accounting only for budget 

neutrality for changes to the DRG relative 

weights and classification is somewhat lower 

than the figures shown in this column 

(approximately 0.1 percent). 

D. Effects of Wage Index Changes (Column 3) 

Section 1886(d)(3)(E) of the Act requires 

that, beginning October 1, 1993, we annually 

update the wage data used to calculate the 

wage index. In accordance with this 

requirement, the wage index for FY 2009 is 

based on data submitted for hospital cost 

reporting periods beginning on or after 

October 1, 2004 and before October 1, 2005. 

The estimated impact of the wage data on 

hospital payments is isolated in Column 3 by 

holding the other payment parameters 

constant in this simulation. That is, Column 

3 shows the percentage changes in payments 

when going from a model using the FY 2008 

wage index, based on FY 2004 wage data and 

having a 100-percent occupational mix 

adjustment applied, to a model using the FY 

2009 pre-reclassification wage index, also 

having a 100-percent occupational mix 

adjustment applied, based on FY 2005 wage 

data (while holding other payment 

parameters such as use of the Version 26.0 

DRG GROUPER constant). The wage data 

collected on the FY 2005 cost report include 

overhead costs for contract labor that were 

not collected on FY 2004 and earlier cost 

reports. The impacts below incorporate the 

effects of the FY 2005 wage data collected on 

hospital cost reports, including additional 

overhead costs for contract labor compared to 

the wage data from FY 2004 cost reports that 

were used to calculate the FY 2008 wage 

index. 

Column 3 shows the impacts of updating 

the wage data using FY 2004 cost reports. 

Overall, the new wage data will lead to a 0.0 

percent change for all hospitals before 

application of the wage and DRG 

recalibration budget neutrality adjustment 

shown in column 4. Thus, the figures in this 

column are estimated to be the same as what 

they otherwise would be if they also 

illustrated a budget neutrality adjustment 

solely for changes to the wage index. Among 

the regions, the largest increase is in the 

urban Pacific region, which experiences a 1.1 

percent increase before applying an 

adjustment for budget neutrality. The largest 

decline from updating the wage data is seen 

in Puerto Rico (0.7 percent decrease). 

In looking at the wage data itself, the 

national average hourly wage increased 4.3 

percent compared to FY 2008. Therefore, the 

only manner in which to maintain or exceed 

the previous year’s wage index was to match 

or exceed the national 4.3 percent increase in 

average hourly wage. Of the 3,458 hospitals 

with wage data for both FYs 2008 and 2009, 

1,703, or 49.2 percent, experienced an 

average hourly wage increase of 4.3 percent 

or more. 

The following chart compares the shifts in 

wage index values for hospitals for FY 2009 

relative to FY 2008. Among urban hospitals, 

32 will experience an increase of more than 

5 percent and less than 10 percent and 3 will 

experience an increase of more than 10 

percent. Among rural hospitals, none will 

experience an increase of more than 5 

percent and less than 10 percent, and none 

will experience an increase of more than 10 

percent. However, 970 rural hospitals will 

experience increases or decreases of less than 

5 percent, while 2,426 urban hospitals will 

experience increases or decreases of less than 

5 percent. Seventeen urban hospitals will 

experience decreases in their wage index 

values of more than 5 percent and less than 

10 percent. Ten urban hospitals will 

experience decreases in their wage index 

values of greater than 10 percent. No rural 

hospitals will experience decreases of more 

than 5 percent. These figures reflect changes 

in the wage index which is an adjustment to 

either 69.7 percent or 62 percent of a 

hospital’s standardized amount, depending 

upon whether its wage index is greater than 

1.0 or less than or equal to 1.0. Therefore, 

these figures are illustrating a somewhat 

larger change in the wage index than would 

occur to the hospital’s total payment. 

The following chart shows the projected 

impact for urban and rural hospitals. 


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Percentage change in 

area wage index values 

Number of 

hospitals 

Urban Rural 

Increase more than 10 

percent .......................... 3 0 

Increase more than 5 percent and less than 10 

percent .......................... 32 0 

Increase or decrease less 

than 5 percent ............... 2,426 970 

Decrease more than 5 

percent and less than 

10 percent ..................... 17 0 

Decrease more than 10 

percent .......................... 10 0 

E. Combined Effects of MS–DRG and Wage 

Index Changes (Column 4) 

Section 1886(d)(4)(C)(iii) of the Act 

requires that changes to MS–DRG 

reclassifications and the relative weights 

cannot increase or decrease aggregate 

payments. In addition, section 1886(d)(3)(E) 

of the Act specifies that any updates or 

adjustments to the wage index are to be 

budget neutral. As noted in the Addendum 

to this final rule, in determining the budget 

neutrality factor, we equated simulated 

aggregate payments for FY 2008 and FY 2009 

using the FY 2007 Medicare utilization data 

after applying the changes to the DRG 

relative weights and the wage index. 

We computed a wage and MS–DRG 

recalibration budget neutrality factor of 

0.999580 (which is applied to the national 

standardized amounts) and a recalibration 

budget neutrality factor 0.998795 (which is 

applied to the hospital-specific rates and the 

Puerto Rico-specific standardized amount). 

The 0.0 percent impact for all hospitals 

demonstrates that the MS–DRG and wage 

changes, in combination with the budget 

neutrality factor, are budget neutral. In Table 

I, the combined overall impacts of the effects 

of both the MS–DRG reclassifications and the 

updated wage index are shown in Column 4. 

The estimated changes shown in this column 

reflect the combined effects of the changes in 

Columns 2 and 3 and the budget neutrality 

factors discussed previously. 

We estimate that the combined impact of 

the changes to the relative weights and DRGs 

and the updated wage data with budget 

neutrality applied will increase payments to 

hospitals located in large urban areas 

(populations over 1 million) by 

approximately 0.3 percent. These changes 

will generally increase payments to hospitals 

in all urban areas (0.1 percent) and teaching 

hospitals (0.1 percent). Rural hospitals will 

generally experience a decrease in payments 

(¥1.0 percent). Among the rural hospital 

categories, rural hospitals with less than 50 

beds will experience the greatest decline in 

payment (¥2.3 percent) primarily due to the 

changes to MS–DRGs and the relative cost 

weights. 

F. Effects of MGCRB Reclassifications 

(Column 5) 

Our impact analysis to this point has 

assumed hospitals are paid on the basis of 

their actual geographic location (with the 

exception of ongoing policies that provide 

that certain hospitals receive payments on 

other bases than where they are 

geographically located). The changes in 

Column 5 reflect the per case payment 

impact of moving from this baseline to a 

simulation incorporating the MGCRB 

decisions for FY 2009 which affect hospitals’

wage index area assignments. 

By Spring of each year, the MGCRB makes 

reclassification determinations that will be 

effective for the next fiscal year, which 

begins on October 1. The MGCRB may 

approve a hospital’s reclassification request 

for the purpose of using another area’s wage 

index value. Hospitals may appeal denials of 

MGCRB decisions to the CMS Administrator. 

Further, hospitals have 45 days from 

publication of the IPPS rule in the Federal 

Register to decide whether to withdraw or 

terminate an approved geographic 

reclassification for the following year. This 

column reflects all MGCRB decisions, 

Administrator appeals and decisions of 

hospitals for FY 2009 geographic 

reclassifications. 

The overall effect of geographic 

reclassification is required by section 

1886(d)(8)(D) of the Act to be budget neutral. 

Therefore, for the purposes of this impact 

analysis, we are applying an adjustment of 

0.991339 to ensure that the effects of the 

section 1886(d)(10) reclassifications are 

budget neutral. (See section II.A. of the 

Addendum to this final rule.) Geographic 

reclassification generally benefits hospitals in 

rural areas. We estimate that geographic 

reclassification will increase payments to 

rural hospitals by an average of 2.1 percent. 

However, we note that this budget 

neutrality factor and this impact are both 

calculated using wage adjustments applied 

prior to legislation that extends certain 

special exceptions and section 508 

reclassifications for an additional year 

through FY 2009. As noted earlier in section 

III.I.7. of the preamble of this final rule, for 

affected areas, CMS will use best efforts to 

apply a reclassification decision for FY 2009 

on behalf of hospitals to give them the 

highest wage index. Hospitals will have 15 

days from the date of publication to revise 

the decision that CMS made on their behalf. 

We are unable to state with certainty that all 

of the reclassified providers shown in 

tentative Table 9A of the Addendum to this 

final rule will retain their approved 

reclassifications for FY 2009 once the wage 

indices that account for the new legislation 

are known. We will include the FY 2009 

wage related impacts and our reclassification 

decisions made on behalf of hospitals in a 

separate Federal Register notice document to 

be published prior to October 1, 2008. 

G. Effects of the Rural Floor and Imputed 

Floor, Including the Transition to Apply 

Budget Neutrality at the State Level (Column 

6) 

As discussed in section III.B. of the 

preamble of this FY 2009 final rule, section 

4410 of Public Law 105–33 established the 

rural floor by requiring that the wage index 

for a hospital in any urban area cannot be 

less than the wage index received by rural 

hospitals in the same State. In FY 2008, we 

changed how we applied budget neutrality to 

the rural floor. Rather than applying a budget 

neutrality adjustment to the standardized 

amount, a uniform budget neutrality 

adjustment is applied to the wage index. In 

the FY 2009 proposed rule, we had proposed 

to apply the rural floor budget neutrality 

adjustment at the State level, which will 

redistribute payments within the State rather 

than across all other providers within the 

Nation. In this final rule, we are finalizing 

the policy to apply the rural floor budget 

neutrality at the State level with a 3-year 

transition. In FY 2009, hospitals will receive 

a blended wage index that is 20 percent of 

a wage index with the State level rural and 

imputed floor budget neutrality adjustment 

and 80 percent of a wage index with the 

national budget neutrality adjustment. The 

national rural floor budget neutrality applied 

to the wage index is 0.996355. The withinState rural floor budget neutrality factors 

applied to the wage index will be available 

in Table 4D that will be published in a 

separate Federal Register notice before 

October 1, 2008. After the wage index is 

blended, an additional adjustment of 

0.999923 is applied to the wage index to 

ensure that payments before the application 

of the rural floor are equivalent to the 

payments under the blended budget neutral 

rural floor wage index. 

Furthermore, the FY 2005 IPPS final rule 

(69 FR 49109) established a temporary 

imputed floor for all urban States from FY 

2005 to FY 2007. The rural floor requires that 

an urban wage index cannot be lower than 

the wage index for any rural hospital in that 

State. Therefore, an imputed floor was 

established for States that do not have rural 

areas or rural IPPS hospitals. In the FY 2008 

IPPS final rule with comment period (72 FR 

47321), we finalized our rule to extend the 

imputed floor for 1 additional year. In this 

final rule, we are extending the imputed floor 

for an additional 3 years through FY 2011. 

Furthermore, in the proposed rule, we 

wanted the application of the imputed floor 

budget neutrality to be consistent with our 

application of the rural floor budget 

neutrality adjustment at the State level, so we 

proposed to apply the imputed floor budget 

neutrality adjustment to the wage index at 

the State level. In this final rule, we will have 

a 3-year transition to the rural floor budget 

neutrality adjustment at the State level. 

Therefore, we will also apply the imputed 

floor budget neutrality adjustment at the 

State level through a 3-year transition, so that 

wage indices adjusted for the imputed floor 

will be blended where 80 percent of the wage 

index will have the national rural and 

imputed floor budget neutrality factor 

applied and 20 percent of the wage index 

will have the within-State rural and imputed 

budget neutrality factor applied. The national 

rural floor budget neutrality factor listed also 

incorporates the imputed floor in its 

adjustment to the wage index. Column 6 

shows the projected impact of the rural floor 

and the imputed floor, including the 

application of the transition to within-State 

rural and imputed floor budget neutrality. 

The column compares the postreclassification FY 2009 wage index of 

providers before the rural floor adjustment 

and the post-reclassification FY 2009 wage 

index of providers with the rural floor and 


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imputed floor adjustment. Only urban 

hospitals can benefit from the rural floor 

provision. Because the provision is budget 

neutral, in prior years, all other hospitals 

(that is, all rural hospitals and those urban 

hospitals to which the adjustment is not 

made) had experienced a decrease in 

payments due to the budget neutrality 

adjustment applied nationally. However, 

under this final rule, because the rural floor 

adjusted wage index is based on a blend 

where 20 percent of the wage index has a 

within state budget neutrality factor applied 

and 80 percent of the wage index has a 

national rural floor budget neutrality factor 

applied, rural hospitals and urban hospitals 

that do not benefit from the rural floor will 

continue to see decreases in payments, to a 

lesser extent. Conversely, all hospitals in 

States with hospitals receiving a rural floor 

will have their wage indices only partly 

downwardly adjusted to achieve budget 

neutrality within the State. 

We project that, in aggregate, rural 

hospitals will experience a 0.1 percent 

decrease in payments as a result of the 

transition to within-State rural floor budget 

neutrality. We project hospitals located in 

other urban areas (populations of 1 million 

or fewer) will experience a 0.1 percent 

increase in payments because those providers 

benefit from the rural floor. Rural New 

England hospitals can expect the greatest 

decrease in payment, 0.3 percent, because 

under the blended rural floor budget 

neutrality adjustment, hospitals in Vermont 

will receive a rural floor budget neutrality 

adjustment of 0.97721 or a reduction of 

approximately 2 percent, and hospitals in 

Connecticut will receive a rural floor budget 

neutrality adjustment of 0.98968 or a 

reduction of approximately 1 percent. New 

Jersey, which is the only State that benefits 

from the imputed floor, is expected to receive 

a rural floor budget neutrality adjustment of 

0.99441, or a reduction of less than 1 percent. 

We note that these wage indices and rural 

floor budget neutrality factors are subject to 

change when we revise these factors to 

account for the recent enacted legislation that 

extended certain special exceptions and 

section 508 reclassifications through FY 

2009. In the notice that we will publish in 

the Federal Register prior to October 1, 2008, 

we will present the revised wage indices and 

rural floor budget neutrality factors and the 

impacts. 

The table that appears in section III B.2.b. 

of the preamble of this final rule compares 

payments under our former policy of 

applying rural floor budget neutrality at the 

national level to payments under our new 

policy to undergo a 3-year transition to apply 

the rural floor budget neutrality within the 

State so that, for FY 2009, hospitals receive 

a blended wage index where 20 percent of 

their wage index has the within-State rural 

floor budget neutrality applied and 80 

percent of their wage index has the national 

rural floor budget neutrality applied. The last 

column of the table shows the net effect on 

State payments resulting from this policy 

change. The table shows that, under our 

former policy of applying budget neutrality at 

the national level, States that do not have any 

hospitals receiving the rural floor wage index 

will expect a decrease in payments because, 

in order to maintain budget neutrality 

nationally, these hospitals have to pay for the 

hospitals in other States that do receive a 

rural floor. For example, States such as 

Arizona, New York, and Rhode Island, which 

do not have hospitals receiving a rural floor, 

will expect to lose 0.2 percent in payments 

under a national rural floor budget neutrality 

adjustment. However, under our new policy 

to transition to within-State rural floor 

budget neutrality and to have a blended 

budget neutral wage index for FY 2009, 

States with providers that receive the rural 

floor will expect minor decreases in their 

payments under blended budget neutral wage 

indices relative to a wage index with national 

rural floor budget neutrality applied. 

Therefore, States such as California and 

Connecticut, which have several hospitals 

that benefit from the rural floor, can expect 

decreases in payments by 0.2 and 0.4, 

respectively. States that do not have hospitals 

receiving a floor will see a negligible change 

in payments (compared with our previous 

policy of applying budget neutrality at the 

national level) because a majority of their 

wage index (80 percent) has a national rural 

floor budget neutrality applied, resulting in 

a zero percent change in payments relative to 

national rural floor budget neutrality. For 

States that do not have hospitals receiving a 

floor, their wage indices is a blend of a wage 

index with within-State budget neutrality 

applied (which is 1.0 because they do not 

have a rural floor) and a wage index with a 

national rural floor budget neutrality applied 

(which is 0.996355), so the blended wage 

index would be reduced by 0.19 percent. 

H. Effects of the Wage Index Adjustment for 

Out-Migration (Column 7) 

Section 1886(d)(13) of the Act, as added by 

section 505 of Public Law 108–173, provides 

for an increase in the wage index for 

hospitals located in certain counties that 

have a relatively high percentage of hospital 

employees who reside in the county, but 

work in a different area with a higher wage 

index. Hospitals located in counties that 

qualify for the payment adjustment are to 

receive an increase in the wage index that is 

equal to a weighted average of the difference 

between the wage index of the resident 

county, post-reclassification and the higher 

wage index work area(s), weighted by the 

overall percentage of workers who are 

employed in an area with a higher wage 

index. With the out-migration adjustment, 

rural providers will experience a 0.1 percent 

increase in payments in FY 2009 relative to 

no adjustment at all. We included these 

additional payments to providers in the 

impact table shown above, and we estimate 

the impact of these providers receiving the 

out-migration increase to be approximately 

$34 million. 

As section 505 reclassification adjustments 

must be calculated using wage data after 

accounting for the extension of certain 

special exceptions and section 508 

reclassifications through FY 2009, we are 

unable to assess whether any new counties 

would qualify for section 505 reclassification 

adjustments for FY 2009. In the notice that 

we will publish in the Federal Register prior 

to October 1, 2008, we will show any new 

counties that qualify for the section 505 

reclassification adjustment for FY 2009 and 

any related impacts that result from 

application of the out-migration adjustment 

to the revised adjusted wage indices. 

I. Effects of All Changes With CMI 

Adjustment Prior to Estimated Growth 

(Column 8) 

Column 8 compares our estimate of 

payments per case between FY 2008 and FY 

2009 with all changes reflected in this final 

rule for FY 2009, including a ¥0.9 percent 

documentation and coding adjustment to the 

FY 2009 national standardized amounts to 

account for anticipated improvements in 

documentation and coding that are expected 

to increase case-mix. We generally apply an 

adjustment to the DRGs to ensure budget 

neutrality assuming constant utilization. 

However, in the FY 2008 IPPS final rule with 

comment period, we indicated that we 

believe that the adoption of MS–DRGs would 

lead to increases in case-mix as a result of 

improved documentation and coding. In the 

FY 2008 IPPS final rule with comment 

period, we had finalized a policy to apply a 

documentation and coding adjustment to the 

standardized amount of ¥1.2 percent for FY 

2008, ¥1.8 percent for FY 2009, and ¥1.8 

percent for FY 2010 to offset the expected 

increase in case-mix and achieve budget 

neutrality. However, in compliance with 

section 7 of Public Law 110–90, we reduced 

the documentation and coding adjustment to 

¥0.6 percent for FY 2008. In accordance 

with section 7 of Public Law 110–90, for FY 

2009, we are applying a documentation and 

coding adjustment of ¥0.9 percent to the FY 

2009 national standardized amounts (in 

addition to the ¥0.6 percent adjustment 

made for FY 2008). We are not applying the 

documentation and coding adjustment to the 

FY 2009 hospital-specific rates and the FY 

2009 Puerto Rico-specific standardized 

amount. However, we continue to believe 

that case-mix growth of an additional 1.8 

percent compared to FY 2008 is likely to 

occur across all hospitals as a result of 

improvements in documentation and coding. 

Column 8 illustrates the total payment 

change for FY 2009 compared to FY 2008, 

taking into account the ¥0.9 percent FY 

2009 documentation and coding adjustment 

but not the projected 1.8 percent case-mix 

increase itself. Therefore, this column 

illustrates a total payment change that is less 

than what is anticipated to occur. 

J. Effects of All Changes With CMI 

Adjustment and Estimated Growth (Column 

9) 

Column 9 compares our estimate of 

payments per case between FY 2008 and FY 

2009, incorporating all changes reflected in 

this final rule for FY 2009 (including 

statutory changes). This column includes the 

FY 2009 documentation and coding 

adjustment of ¥0.9 percent and the projected 

1.8 percent increase in case-mix from 

improved documentation and coding (with 

the 1.8 percent case-mix increase assumed to 

occur equally across all hospitals). We note 

that this impact is calculated using 

standardized amounts, outlier estimates, and 

budget neutrality factors that do not account 

for wage index changes due to the recently 


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enacted legislation that extends certain 

special exceptions and section 508 

reclassifications for FY 2009. 

Column 9 reflects the impact of all FY 2009 

changes relative to FY 2008, including those 

shown in Columns 2 through 7. The average 

increase for all hospitals is approximately 4.7 

percent. This increase includes the effects of 

the 3.6 percent market basket update. It also 

reflects the 0.4 percentage point difference 

between the projected outlier payments in FY 

2008 (5.1 percent of total DRG payments) and 

the current estimate of the percentage of 

actual outlier payments in FY 2008 (4.7 

percent), as described in the introduction to 

this Appendix and the Addendum to this 

final rule. As a result, payments are projected 

to be 0.4 percentage points lower in FY 2008 

than originally estimated, resulting in a 0.4 

percentage point greater increase for FY 2009 

than would otherwise occur. This analysis 

accounts for the impact of expiration of 

certain special exceptions and section 508 

reclassification, a nonbudget neutral 

provision, which results in a decrease in 

estimated payments by 0.1 percent. However, 

recently enacted legislation has extended 

certain special exceptions and section 508 

reclassifications for FY 2009, and a revised 

impacts analysis to account for this change 

will be published in a Federal Register 

notice prior to October 1, 2008. There might 

also be interactive effects among the various 

factors comprising the payment system that 

we are not able to isolate. For these reasons, 

the values in Column 9 may not equal the 

product of the percentage changes described 

above. 

The overall change in payments per case 

for hospitals in FY 2009 is estimated to 

increase by 4.7 percent. Hospitals in urban 

areas will experience an estimated 4.8 

percent increase in payments per case 

compared to FY 2008. Hospitals in large 

urban areas will experience an estimated 5.0 

percent increase and hospitals in other urban 

areas will experience an estimated 4.5 

percent increase in payments per case in FY 

2008. Hospital payments per case in rural 

areas are estimated to increase 3.9 percent. 

The increases that are larger than the national 

average for larger urban areas and smaller 

than the national average for other urban and 

rural areas are largely attributed to the 

differential impact of adopting MS–DRGs. 

Among urban census divisions, the largest 

estimated payment increases will be 6.4 

percent in the Pacific region (generally 

attributed to MS–DRGs and wage data) and 

5.4 percent in the Mountain region (mostly 

due to MS–DRGs). The smallest urban 

increase is estimated at 3.6 percent in the 

Middle Atlantic region. 

Among the rural regions in Column 9, the 

providers in the New England region 

experience the smallest increase in payments 

(3.3 percent) primarily due to the transition 

to the within-State rural floor budget 

neutrality adjustment. The Pacific and South 

Atlantic regions will have the highest 

increases among rural regions, with 4.6 

percent and 4.3 percent estimated increases, 

respectively. Again, increases in rural areas 

are generally less than the national average 

due to the adoption of MS–DRGs. 

Among special categories of rural hospitals 

in Column 9, the MDH and the RRC 

providers will receive an estimated increase 

in payments of 4.7 percent, and the MDHs 

and RRCs will experience an estimated 

increase in payments by 3.6 percent. 

Urban hospitals reclassified for FY 2009 

are anticipated to receive an increase of 4.9 

percent, while urban hospitals that are not 

reclassified for FY 2009 are expected to 

receive an increase of 4.8 percent. Rural 

hospitals reclassifying for FY 2009 are 

anticipated to receive a 4.2 percent payment 

increase and rural hospitals that are not 

reclassifying are estimated to receive a 

payment increase of 3.4 percent. 

K. Effects of Policy on Payment Adjustments 

for Low-Volume Hospitals 

For FY 2009, we are continuing to apply 

the volume adjustment criteria we specified 

in the FY 2005 IPPS final rule (69 FR 49099). 

We expect that three providers will receive 

the low-volume adjustment for FY 2009. We 

estimate the impact of these providers 

receiving the additional 25-percent payment 

increase to be approximately $22,000. 

L. Impact Analysis of Table II 

Table II presents the projected impact of 

the changes for FY 2009 for urban and rural 

hospitals and for the different categories of 

hospitals shown in Table I. It compares the 

estimated payments per case for FY 2008 

with the average estimated payments per case 

for FY 2009, as calculated under our models. 

Thus, this table presents, in terms of the 

average dollar amounts paid per discharge, 

the combined effects of the changes 

presented in Table I. The percentage changes 

shown in the last column of Table II equal 

the percentage changes in average payments 

from Column 9 of Table I. 

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BILLING CODE 4120–01–C 

VII. Effects of Other Policy Changes 

In addition to those policy changes 

discussed above that we are able to model 

using our IPPS payment simulation model, 

we are making various other changes in this 

final rule. Generally, we have limited or no 

specific data available with which to estimate 

the impacts of these changes. Our estimates 

of the likely impacts associated with these 

other changes are discussed below. 

A. Effects of Policy on HACs, Including 

Infections 

In section II.F. of the preamble of this final 

rule, we discuss our implementation of 

section 1886(d)(4)(D) of the Act, which 

requires the Secretary to identify conditions 

that are: (1) High cost, high volume, or both; 

(2) result in the assignment of a case to an 

MS–DRG that has a higher payment when 

present as a secondary diagnosis; and (3) 

could reasonably have been prevented 

through application of evidence-based 

guidelines. For discharges occurring on or 

after October 1, 2008, hospitals will not 

receive additional payment for cases in 

which one of the selected conditions was not 

present on admission, unless based on data 

and clinical judgment, it cannot be 

determined at the time of admission whether 

a condition is present. That is, the case will 

be paid as though the secondary diagnosis 

were not present. However, the statute also 

requires the Secretary to continue counting 

the condition as a secondary diagnosis that 

results in a higher IPPS payment when doing 

the budget neutrality calculations for MS–

DRG reclassifications and recalibration. 

Therefore, we will perform our budget 

neutrality calculations as though the 

payment provision did not apply, but 

Medicare will make a lower payment to the 

hospital for the specific case that includes 

the secondary diagnosis. Thus, the provision 

will result in cost savings to the Medicare 

program. 

We note that the provision will only apply 

when one or more of the selected conditions 

are the only secondary diagnosis or diagnoses 

present on the claim that will lead to higher 

payment. Medicare beneficiaries will 

generally have multiple secondary diagnoses 

during a hospital stay, such that beneficiaries 

having one MCC or CC will frequently have 

additional conditions that also will generate 

higher payment. Only a small percentage of 

the cases will have only one secondary 

diagnosis that would lead to a higher 

payment. Therefore, if at least one 

nonselected secondary diagnosis that leads to 

higher payment is on the claim, the case will 

continue to be assigned to the higher paying 

MS–DRG and there will be no Medicare 

savings from that case. 

The HAC payment provision will go into 

effect on October 1, 2008. Our savings 

estimates for the next 5 fiscal years are 

shown below: 

Year Savings 

(in millions) 

FY 2009 .................................... $21 

FY 2010 .................................... 21 

FY 2011 .................................... 21 

Year Savings 

(in millions) 

FY 2012 .................................... 22 

FY 2013 .................................... 22 

B. Effects of MS–LTC–DRG Reclassifications 

and Relative Weights for LTCHs 

In section II.I. of the preamble to this final 

rule, we discuss the MS–LTC–DRGs (Version 

26.0 of the GROUPER) and development of 

the relative weights for use under the LTCH 

PPS for FY 2009. We also discuss that when 

we adopted the new severity adjusted MS–

LTC–DRG patient classification system under 

the LTCH PPS in the FY 2008 IPPS final rule 

with comment, we implemented a 2-year 

transition, in which the MS–LTC–DRG 

relative weights for FY 2009 will be based 

completely on the MS–LTC–DRG patient 

classification system (and no longer based in 

part on the former LTC–DRG patient 

classification system). Consistent with the 

requirement at § 412.517 established in the 

RY 2008 LTCH PPS final rule (72 FR 26880 

through 26884), the annual update to the 

classification and relative weights under the 

LTCH PPS for RY 2009 was done in a budget 

neutral manner, such that estimated 

aggregate LTCH PPS payments would be 

unaffected; that is, they would be neither 

greater than nor less than the estimated 

aggregate LTCH PPS payments that would 

have been made without the MS–LTC–DRG 

classification and relative weight changes. To 

achieve budget neutrality under § 412.517, in 

determining the FY 2009 MS–LTC–DRG 

relative weights, we applied a factor of 

1.03887 in the first step of the budget 

neutrality process (normalization), and we 

applied a budget neutrality factor of 1.04186 

after normalization (see section II.I.4. (step 7) 

of the preamble of this final rule). These 

factors that were applied to maintain budget 

neutrality were based on the most recent 

available LTCH claims data (FY 2007 

MedPAR files) for the 388 LTCHs in our 

database. Consistent with the budget 

neutrality requirement under § 412.517, we 

estimate that with the changes to the MS–

LTC–DRG classifications and relative weights 

for FY 2009, there will be no change in 

aggregate LTCH PPS payments. In applying 

the budget neutrality adjustment described 

above, we assumed constant utilization. 

C. Effects of Policy Change Relating to New 

Medical Service and Technology Add-On 

Payments 

In section II.J. of the preamble to this final 

rule, we discuss add-on payments for new 

medical services and technologies. As 

explained in that section, add-on payments 

for new technology under section 

1886(d)(5)(K) of the Act are not required to 

be budget neutral. As discussed in section 

II.J.4. of this final rule, one applicant, the 

CardioWest(tm) temporary Total Artificial 

Heart system (TAH-t) met the criteria for new 

technology add-on payments for FY 2009. 

There were no technologies receiving new 

technology add-on payment in FY 2008. In 

the proposed rule, we estimated that 

Medicare’s new technology add-on payments 

would remain unchanged in FY 2009 

compared to FY 2008 because we believed it 

was premature to predict which, if any, new 

technology add-on payment applications 

would be approved in the FY 2009 final rule. 

In the proposed rule, we stated that if any of 

the four applicants were found to be eligible 

for new technology add-on payments for FY 

2009, in the final rule, we would discuss the 

estimated payment impact for FY 2009 in 

that final rule. As stated above, the TAH-t 

was approved for FY 2009 new technology 

add-on payments. The maximum add-on 

payment for the TAH-t is $53,000 per case 

and the applicant estimates that there will be 

approximately 180 cases in FY 2009. 

Therefore, we estimate that total new 

technology add-on payments will be $9.54 

million in FY 2009. 

D. Effects of Requirements for Hospital 

Reporting of Quality Data for Annual 

Hospital Payment Update 

In section IV.B. of the preamble of this 

final rule, we discuss the requirements for 

hospitals to report quality data in order for 

hospitals to receive the full annual hospital 

payment update for FY 2009 and FY 2010. 

We also note that, for the FY 2009 payment 

update, hospitals must pass our validation 

requirement of a minimum of 80 percent 

reliability, based upon our chart-audit 

validation process, for the fourth quarter of 

data from CY 2006 and first three quarters of 

data from CY 2007. These data were due to 

the QIO Clinical Warehouse by May 15, 2007 

(fourth quarter CY 2006 discharges), August 

15, 2007 (first quarter CY 2007 discharges), 

November 15, 2007 (second quarter CY 2007 

discharges), and February 15, 2008 (third 

quarter CY 2006 discharges). We have 

continued our efforts to ensure that QIOs 

provide assistance to all hospitals that wish 

to submit data. In the preamble of this final 

rule, we are providing additional validation 

criteria to ensure that the quality data being 

sent to CMS are accurate. The requirement of 

5 charts per hospital will result in 

approximately 21,500 charts per quarter total 

submitted to the agency. We reimburse 

hospitals for the cost of sending charts to the 

Clinical Data Abstraction Center (CDAC) at 

the rate of 12 cents per page for copying and 

approximately $4.00 per chart for postage. 

Our experience shows that the average chart 

received at the CDAC is approximately 150 

pages. Thus, the agency will have 

expenditures of approximately $597,600 per 

quarter to collect the charts. Given that we 

reimburse for the data collection effort, we 

believe that a requirement for five charts per 

hospital per quarter represents a minimal 

burden to the participating hospital. 

E. Effects of Policy Change to Methodology 

for Computing Core Staffing Factors for 

Volume Decrease Adjustment for SCHs and 

MDHs 

In section IV.D. of the preamble of this 

final rule, we discuss a change to the 

methodology we will use to compute the 

average nursing staff factors (nursing hours 

per patient days) for the volume decrease 

adjustment for SCHs and MDHs. If certain 

requirements are met, this adjustment may be 

made if the hospital’s total discharges 

decrease by more than 5 percent from one 

cost reporting period to the next. We do not 

believe this change will have any significant 


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impact on Medicare payments to these 

hospitals. 

F. Impact of the Policy Revisions Related to 

Payment to Hospitals for Direct Graduate 

Medical Education (GME) 

As we discussed in detail in section IV.G. 

of the preamble of this final rule, we are 

finalizing the current GME regulations that 

were included in interim final rules with 

comment periods issued on April 12, 2006 

(71 FR 18654) and November 27, 2007 (72 FR 

66580), as they apply to emergency Medicare 

GME affiliated groups, with two 

modifications. They provide for greater 

flexibility in training residents in approved 

residency programs during times of disaster. 

Specifically, this final rule modifies the 

provision for ‘‘emergency Medicare GME 

affiliated groups’’ to extend the submission 

deadline for emergency Medicare GME 

affiliation agreements and also provides for 

home and host hospitals with valid 

emergency Medicare GME affiliation 

agreements an exemption to the application 

of the IRB ratio cap. That is, IME payments 

for home and host hospitals with valid 

emergency Medicare GME affiliation 

agreements are calculated based on the 3-year 

rolling average FTE resident count, subject to 

the hospital’s FTE resident cap for IME; and 

the calculation is not subject to the IRB ratio 

cap. 

We believe that there is limited, if any, 

impact associated with modifying the 

existing emergency Medicare GME affiliation 

regulations to extend the deadline for 

hospitals to submit emergency Medicare 

GME affiliation agreements. In estimating the 

impact resulting from the exemption from 

application of the IRB ratio cap for home and 

host hospitals with valid emergency 

Medicare GME affiliation agreements, CMS’

Office of the Actuary notes that it is nearly 

impossible to predict the occurrence of future 

emergencies, the magnitude of those 

emergencies, or how they would affect 

graduate medical education programs at 

teaching hospitals in a declared emergency 

area under section 1135 of the Act. However, 

for purposes of estimating the impact of the 

change to hospitals affected by Hurricanes 

Katrina and Rita, the Office of the Actuary 

estimates that the IRB ratio cap exemption for 

home and host hospitals will result in an 

additional cost of no more than $1 million 

per year for the remaining 2 years for which 

emergency Medicare GME affiliation 

agreements due to Hurricanes Katrina and 

Rita are permitted. 

G. Effects of Clarification of Policy for 

Collection of Risk Adjustment Data From MA 

Organizations 

In section IV.H. of the preamble of this 

final rule, we discuss our revision of our 

regulations to clarify that CMS has the 

authority to require MA organizations to 

submit encounter data for each item and 

service provided to an MA plan enrollee. The 

revision also clarifies that CMS will 

determine the formats for submitting 

encounter data, which may be more 

abbreviated than those used for the Medicare 

fee-for-service claims data submission 

process. At this time, we have not yet 

determined an approach for submission of 

the encounter data. Therefore, we are not in 

a position to determine the extent to which 

the cost impact of submitting encounter data 

would differ from the current costs to MA 

organizations of submitting risk adjustment 

data. 

H. Effects of Policy Changes Relating to 

Hospital Emergency Services Under 

EMTALA 

In section IV.I. of the preamble of this final 

rule, we are clarifying our policy regarding 

the applicability of EMTALA to hospital 

inpatients. We are stating that when an 

individual covered by EMTALA is admitted 

as an inpatient and remains unstabilized 

with an emergency medical condition, a 

receiving hospital with specialized 

capabilities does not have an EMTALA 

obligation to accept that individual. In 

addition, we are making two changes related 

to the requirements for on-call physicians in 

hospital emergency departments. We are 

deleting the provision related to maintaining 

a list of on-call physicians from the EMTALA 

regulations at § 489.24(j)(1) and merging it 

with § 489.20(r)(2) because the requirement 

to maintain an on-call list is not found in the 

EMTALA statutory provision at section 1867 

of the Act, but rather in section 1866 of the 

Act which outlines the requirements for 

provider agreements. We are incorporating 

the language of § 489.24(j)(1) as replacement 

language for the existing § 489.20(r)(2) and 

amending the regulatory language to make it 

more consistent with the statutory language 

found at section 1866(a)(1)(I)(iii) of the Act, 

which refers to provider agreements and the 

requirement to maintain an on-call list. These 

changes will make the regulations consistent 

with the statutory basis for maintaining an 

on-call list. In addition, we are amending our 

regulations to provide that hospitals may 

comply with the on-call list requirement by 

participating in a formal community call plan 

so long as the plan includes a number of 

elements that are specified in the final rule. 

Lastly, we are making a technical change to 

the regulations to conform them to the 

statutory language found in the Pandemic 

and All-Hazards Preparedness Act. These 

changes do not include any substantive new 

requirements. Although hospitals choosing to 

participate in a community call arrangement 

will be required to devise a formal 

community call plan, such a plan will 

increase a hospital’s flexibility in meeting its 

on-call requirements. We are estimating no 

impact on Medicare expenditures and no 

significant impact on hospitals with 

emergency departments. 

I. Effects of Implementation of Rural 

Community Hospital Demonstration Program 

In section IV.K. of the preamble to this 

final rule, we discuss our implementation of 

section 410A of Public Law 108–173 that 

required the Secretary to establish a 

demonstration that will modify 

reimbursement for inpatient services for up 

to 15 small rural hospitals. Section 

410A(c)(2) requires that ‘‘in conducting the 

demonstration program under this section, 

the Secretary shall ensure that the aggregate 

payments made by the Secretary do not 

exceed the amount which the Secretary 

would have paid if the demonstration 

program under this section was not 

implemented.’’ There are currently 13 

hospitals participating in the demonstration; 

4 of these hospitals were selected to 

participate in the demonstration as of July 1, 

2008, as a result of our February 6, 2008 

solicitation (73 FR 6971). 

As discussed in section IV.K. of the 

preamble to this final rule, we are satisfying 

this requirement by adjusting national IPPS 

rates by a factor that is sufficient to account 

for the added costs of this demonstration. We 

estimate that the average additional annual 

payment for FY 2009 that will be made to 

each participating hospital under the 

demonstration will be approximately 

$1,753,106. We based this estimate on the 

recent historical experience of the difference 

between inpatient cost and payment for 

hospitals that are participating in the 

demonstration. We estimate that the total 

annual impact of the demonstration program 

for FY 2009 for the 13 participating hospitals 

will be $22,790,388. The adjustment factor to 

the Federal rate used in calculating Medicare 

inpatient prospective payments as a result of 

the demonstration is 0.999764. 

J. Effects of Policy Changes Relating to 

Payments to Hospitals-Within-Hospitals 

In section VI.F. of the preamble of this final 

rule, we discuss our policy change to allow 

a HwH that, because of state law, cannot 

meet the criteria in regulations for a separate 

governing body solely because it is a State 

hospital occupying space with another State 

hospital or located on the same campus as 

another State hospital and both hospitals are 

under the same governing authority, or the 

governing authority of a third entity that 

controls both State hospitals, to nevertheless 

qualify for an exclusion from the IPPS if the 

hospital meets other applicable criteria for 

HwHs in the regulations and the specified 

criteria in this final rule. We are only aware 

of one hospital that would qualify for 

exclusion from the IPPS under the criteria 

and to expand its bed size under the 

provisions. Because any expansion would 

occur at some point in the future, we are 

unable to quantify the impact of this change. 

K. Effects of Policy Changes Relating to 

Requirements for Disclosure of Physician 

Ownership in Hospitals 

In section VII. of the preamble of this final 

rule, we discuss revisions to the definition of 

a physician-owned hospital at § 489.3 to 

include hospitals that have ownership or 

investment interests by a physician and/or by 

an immediate family member of a physician. 

We are excepting from the definition of 

physician-owned hospital those hospitals 

that do not have at least one owner/investor 

who is either a physician who refers patients 

to the hospital or an immediate family 

member of a referring physician. We believe 

that the changes to the definition of 

physician-owned hospital will result in no 

more than a de minimis increase in the 

number of hospitals that are subject to the 

disclosure requirements applicable to 

physician-owned hospitals. We believe that 

there will be very few hospitals that will 

meet the revised definition of physicianowned hospital that did not already meet the 

definition as set forth in the existing 


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regulations. That is, we believe there are very 

few hospitals that have no referring 

physician owners/investors but which have 

one or more owners/investors who are 

immediate family members of a referring 

physician. We note that such hospitals that 

have no physician owners/investors (and, 

thus, that are not subject to the former 

disclosure requirement) but do have at least 

one owner/investor that is the immediate 

family member of a referring physician will 

be subject to the revised disclosure 

requirement. 

We expect that under the final policy for 

an exception to the definition of physicianowned hospital, the number of hospitals that 

now are subject to the disclosure requirement 

may be reduced slightly as we understand 

that there are some hospitals that have no 

referring physician owner/investors but 

rather have physician owner/investors who 

have retired from the practice of medicine. 

Thus, for both of our final changes to the 

definition of physician-owned hospital, the 

net result may be no change, or a minimal 

increase or decrease in the number of 

hospitals that are subject to the disclosure 

requirement. Finally, by changing the 

definition of physician-owned hospital to 

encompass immediate family members, we 

believe that some hospitals that already meet 

the definition based on the investment of 

referring physicians may have to amend their 

list of physician owner/investors to add 

immediate family members, which we 

believe will be a minimal burden. 

As specified in section VII. of the preamble 

of this final rule, and in new § 489.20(u)(1), 

the list of the hospital’s owners or investors 

who are physicians or immediate family 

members of physicians must be provided to 

the patient at the time the request for the list 

is made by or on behalf of the patient. We 

note that hospitals are already currently 

required to furnish the list of physician 

owners or investors and, thus, we believe 

that the impact of stipulating a timeframe for 

furnishing the list is negligible. Also 

specified in section VII. of this final rule, in 

new 489.20(u)(2), all hospitals must require 

that all physician owners who also are 

members of the hospital’s medical staff to 

agree, as a condition of continued medical 

staff membership or admitting privileges, to 

disclose, in writing, to all patients they refer 

to the hospital any ownership or investment 

interest that is held by themselves or by an 

immediate family member (as defined in 

§ 411.351). Disclosure will be required at the 

time the referral is made. Both hospitals and 

physicians will participate in the disclosure 

process. We believe this requirement will 

have a minimal financial impact on 

physician-owned hospitals to the extent that 

it may require them to change their by-laws 

or make similar changes. We are collectively 

referring to the requirements of 

§§ 489.20(u)(1) and (u)(2) as ‘‘physician 

ownership disclosure requirements.’’

We do not anticipate that these policy 

changes discussed in section VII. of the 

preamble of this final rule will have a 

significant economic impact on a substantial 

number of physicians, other health care 

providers and suppliers, or the Medicare or 

Medicaid programs and their beneficiaries. 

Specifically, we believe that this final rule 

will affect mostly hospitals, physicians, and 

beneficiaries. The changes concerning both 

the definition of a physician-owned hospital 

and the disclosure of physician ownership in 

hospitals are consistent with the physician 

self-referral statute and regulations as well as 

the current practices of most hospitals. Thus, 

our requirement that the list of physician 

owners be provided to the patient at the time 

the request for the list is made by or on 

behalf of the patient will present a negligible 

economic impact on the hospital. Similarly, 

the cost borne by individual physicians to 

implement these provisions will be limited to 

a one-time cost associated with developing a 

disclosure notice that will be shared with 

patients at the time the referral is made in 

addition to the negligible time associated 

with providing the list to the patient and 

maintaining a copy of the notice in the 

patient’s medical record. 

Also specified in section VII. of the 

preamble of this final rule, new § 489.20(w) 

requires that hospitals and CAHs furnish 

written notice to all patients at the beginning 

of their hospital or outpatient visit if a 

physician is not available 24 hours per day, 

7 days per week and describe how the 

hospital will meet the medical needs of any 

patient who develops an emergency medical 

condition at a time when there is no 

physician present in the hospital. We 

referred to this requirement in section VII. of 

the preamble of this final rule as the 

‘‘physician availability disclosure 

requirement.’’ This requirement was 

finalized in the FY 2008 IPPS final rule and 

previously located at § 489.20(v). Thus, there 

is no impact associated with this 

requirement. 

In section VII. of the preamble of this final 

rule, we discuss revisions to § 489.53(c) to 

establish additional bases for terminating the 

Medicare provider agreement. In the case of 

a physician-owned hospital, as defined at 

§ 489.3, CMS may terminate the provider 

agreement if the hospital failed to comply 

with the requirements of § 489.20(u) or (w). 

In the case of a participating hospital, as 

defined at § 489.24, CMS may terminate the 

provider agreement if the participating 

hospital failed to comply with the 

requirements of § 489.20(w). We believe that 

the cost borne by hospitals to implement 

these requirements will be limited to a onetime cost associated with completing minor 

revisions to the hospital’s policies and 

procedures to comply with the requirements 

of its Medicare provider agreement. Most 

hospitals have standard procedures to satisfy 

CMS by correcting deficiencies (such as the 

failure to furnish notice of physician 

ownership in the hospital to patients) before 

action is taken by CMS to terminate the 

Medicare provider agreement. 

Overall, we believe that beneficiaries will 

be positively impacted by these provisions. 

Specifically, disclosure of physician 

ownership or investment interests equips 

patients to make informed decisions about 

where they elect to receive care. These 

policies make no significant changes that 

have the potential to impede patient access 

to health care facilities and services. In fact, 

we believe that our policies will help 

minimize anti-competitive behavior that can 

affect the decision as to where a beneficiary 

receives health care services and possibly the 

quality of the services furnished. 

L. Effects of Policy Changes Relating to 

Physician Self-Referral Provisions 

In section VIII. of the preamble of this final 

rule, we discuss changes in our policies 

pertaining to physician self-referral 

provisions, including: ‘‘Stand in the shoes,’’

period of disallowance, alternative method of 

compliance with certain exceptions, 

percentage-based compensation, unit of 

service (‘‘per-click’’) payments in lease 

arrangements, services provided ‘‘under 

arrangements,’’ exception for obstetrical 

malpractice insurance subsidies, ownership 

or investment interest in retirement plans, 

and burden of proof. We do not anticipate 

that these final policies will have a 

significant impact on physicians, other 

health care providers and suppliers, or the 

Medicare or Medicaid programs and their 

beneficiaries. 

With respect to the policies pertaining to 

the physician ‘‘stand in the shoes’’

provisions, we do not anticipate that entities 

that have financial relationships with one or 

more physician organizations will find it 

necessary to restructure those relationships. 

We believe that compliance with the ‘‘stand 

in the shoes’’ provisions will be made easier 

by simplifying the required analysis of 

arrangements in which a physician 

organization is interposed between the 

referring physician and the entity furnishing 

DHS. We are not finalizing our proposal to 

make an entity ‘‘stand in the shoes,’’ whereby 

an entity that furnishes DHS would have 

been deemed to stand in the shoes of an 

organization in which it has a 100-percent 

ownership interest and would have been 

deemed to have the same compensation 

arrangements with the same parties and on 

the same terms as does the organization that 

it owns. In not finalizing this proposal, we 

anticipate no additional impact on the 

industry. 

Our policy pertaining to the period of 

disallowance is a codification of what we 

believe is existing law and reflects what we 

believe most entities furnishing DHS are 

already following. Therefore, we do not 

anticipate a significant economic impact on 

the industry. 

The following policies set forth in section 

VIII. of the preamble of this final rule pertain 

to the expansion of physician self-referral 

exceptions; exception for obstetrical 

malpractice insurance subsidies, ownership 

or investment interest in retirement plans, 

and alternative method of compliance with 

certain exceptions. To the extent that 

expanded exceptions permit additional 

legitimate arrangements to comply with the 

law, this rule will reduce the potential costs 

of restructuring such arrangements, and the 

consequences of noncompliance may be 

avoided entirely. 

We anticipate that our remaining physician 

self-referral policies set forth in section VIII. 

of the preamble of this final rule will result 

in savings to the program by reducing 

overutilization and anti-competitive business 

arrangements. We cannot gauge with any 


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certainty the extent of these savings to the 

Medicare program. 

M. Effects of Changes Relating to Reporting 

of Financial Relationships Between Hospitals 

and Physicians 

As discussed in section IX. of the preamble 

to this final rule, 500 hospitals will be 

required to furnish information concerning 

their financial relationships with their 

physicians. The financial relationships 

include ownership and investment interests 

and compensation arrangements. This 

information will be submitted in a collection 

of information instrument that CMS has 

developed—the ‘‘DFRR.’’ We are unable to 

quantify the number of physicians who have 

ownership and investment interests and 

compensation arrangements with hospitals. 

Even if we assume that the 500 or less 

hospitals have a substantial number of 

financial relationships with physicians, we 

believe that, in general, the economic impact 

on these hospitals would not be substantial. 

Because the physician information requested 

in the DFRR will be on file at the hospital, 

we believe there should be negligible, if any, 

impact upon physicians or other health care 

providers or suppliers. Specifically, we 

believe that the cost to complete the DFRR 

for each hospital would be approximately 

$4,080, and the total cost burden for the 

industry would be approximately $2,040,000. 

We expect that this final rule may result in 

savings to the Medicare program by 

minimizing anti-competitive business 

arrangements as well as financial incentives 

that encourage overutilization. In addition, to 

the extent that we determine that any 

arrangements are noncompliant with the 

physician self-referral statute and 

regulations, there may be monies returned to 

the Medicare Trust Fund. We cannot gauge 

with any certainty the extent of these savings 

to the Medicare program at this time. Finally, 

we do not anticipate any financial burden on 

beneficiaries or impact on beneficiary access 

to medically necessary services because the 

completion of the DFRR would be conducted 

by hospitals. 

N. Effects of Policy Change Relating to 

Payments to SCHs 

Currently, an SCH is paid under the IPPS 

based on whichever of the following rates 

yields the greatest aggregate payment for the 

cost reporting period: The Federal payment 

rate applicable to IPPS hospitals or the 

hospital-specific rate based on FY 1982, FY 

1987, or FY 1996 updated costs per 

discharge. As discussed in section IV.D.2. of 

the preamble of this final rule, section 122 of 

Public Law 110–275, effective for cost 

reporting periods beginning on or after 

January 1, 2009, an SCH’s hospital-specific 

rate will be based on its costs per discharge 

in FY 2006 if greater than the hospitalspecific rates based on its costs in FY 1982, 

FY 1987, or FY 1986, or the IPPS rate based 

on the standardized amount. 

In this final rule, we are incorporating this 

self-implementing provision of section 122 of 

Public Law 110–275 in our regulations. 

At this time, many FY 2006 cost reports 

have not as yet been settled by the Medicare 

fiscal intermediary/MAC. Therefore, we are 

unable to determine with any degree of 

accuracy a hospital’s FY 2006 costs per 

discharge. Because we cannot determine 

whether the use of the SCH’s hospitalspecific rate based on its FY 2006 cost report 

would yield the greatest aggregate payment 

for the cost reporting period, we are unable 

to determine which SCHs would benefit from 

this provision. However, we note that, in 

scoring the provision of section 112 of Public 

Law 110–275, the CMS Office of the Actuary 

estimated the cost of this provision to be 

$140 million for 2009 from its effective date 

in January 2009 through the end of FY 2009 

(September 30, 2009) and the 5-year impact 

for FYs 2009 through 2013 to be $2.74 billion 

(per FY in millions: $140 in 2009, $550 in 

2010, $640 in 2011, $680 in 2012, and $730 

in 2013). 

VIII. Effects of Changes in the Capital IPPS 

A. General Considerations 

Fiscal year (FY) 2001 was the last year of 

the 10-year transition period established to 

phase in the PPS for hospital capital-related 

costs. During the transition period, hospitals 

were paid under one of two payment 

methodologies: fully prospective or hold 

harmless. Under the fully prospective 

methodology, hospitals were paid a blend of 

the capital Federal rate and their hospitalspecific rate (see § 412.340). Under the holdharmless methodology, unless a hospital 

elected payment based on 100 percent of the 

capital Federal rate, hospitals were paid 85 

percent of reasonable costs for old capital 

costs (100 percent for SCHs) plus an amount 

for new capital costs based on a proportion 

of the capital Federal rate (see § 412.344). As 

we state in section V. of the preamble of this 

final rule, with the 10-year transition period 

ending with hospital cost reporting periods 

beginning on or after October 1, 2001 (FY 

2002), beginning in FY 2002 capital 

prospective payment system payments for 

most hospitals are based solely on the capital 

Federal rate. Therefore, we no longer include 

information on obligated capital costs or 

projections of old capital costs and new 

capital costs, which were factors needed to 

calculate payments during the transition 

period, for our impact analysis. 

The basic methodology for determining a 

capital IPPS payment is set forth at § 412.312. 

The basic methodology for calculating capital 

IPPS payments in FY 2009 is as follows: 

(Standard Federal Rate) × (DRG weight) × 

(GAF) × (COLA for hospitals located in 

Alaska and Hawaii) × (1 + DSH Adjustment 

Factor + IME Adjustment Factor, if 

applicable). 

We note that, in accordance with 

§ 412.322(c), the IME adjustment factor for 

FY 2009 is equal to half of the current 

adjustment, as discussed in section V.B.2. of 

the preamble of this final rule. In addition, 

hospitals may also receive outlier payments 

for those cases that qualify under the 

threshold established for each fiscal year. 

The data used in developing the impact 

analysis presented below are taken from the 

March 2008 update of the FY 2007 MedPAR 

file and the March 2008 update of the 

Provider-Specific File that is used for 

payment purposes. Although the analyses of 

the changes to the capital prospective 

payment system do not incorporate cost data, 

we used the March 2008 update of the most 

recently available hospital cost report data 

(FYs 2005 and 2006) to categorize hospitals. 

Our analysis has several qualifications. We 

use the best data available and make 

assumptions about case-mix and beneficiary 

enrollment as described below. In addition, 

as discussed in section III. of the Addendum 

to this final rule, as we established for FY 

2008, we are adjusting the national capital 

rate to account for improvements in 

documentation and coding under the MS–

DRGs in FY 2009. (As discussed in section 

III.A.6. of the Addendum to this final rule, 

we are not adjusting the Puerto Rico specific 

capital rate to account for improvements in 

documentation and coding under the MS–

DRGs in FY 2009.) Furthermore, due to the 

interdependent nature of the IPPS, it is very 

difficult to precisely quantify the impact 

associated with each change. In addition, we 

draw upon various sources for the data used 

to categorize hospitals in the tables. In some 

cases (for instance, the number of beds), there 

is a fair degree of variation in the data from 

different sources. We have attempted to 

construct these variables with the best 

available sources overall. However, for 

individual hospitals, some 

miscategorizations are possible. 

Using cases from the March 2008 update of 

the FY 2007 MedPAR file, we simulated 

payments under the capital PPS for FY 2008 

and FY 2009 for a comparison of total 

payments per case. Any short-term, acute 

care hospitals not paid under the general 

IPPS (Indian Health Service hospitals and 

hospitals in Maryland) are excluded from the 

simulations. As discussed in section III.A. of 

the Addendum to this final rule, section 124 

of Public Law 110–275 extends, through FY 

2009, wage index reclassifications under 

section 508 of Public Law 108–173 and 

special exceptions contained in the final rule 

published in the Federal Register on August 

11, 2004 (69 FR 49105 and 49107) and 

extended under section 117 of the MMSEA 

of 2007 (Pub. L. 110–173). As a result, we 

cannot finalize the FY 2009 capital rates, 

including the GAF/DRG adjustment factor, 

the outlier payment adjustment factor, and 

the outlier threshold, until we recompute the 

wage indices for FY 2009 as a result of these 

extensions. (A complete discussion on the 

extension of these provisions can be found in 

section III.I. of the preamble to this final 

rule.) Therefore, the impact analysis 

presented below is based on the tentative 

capital rates and factors discussed in section 

III.A. of the Addendum to this final rule. 

(The final capital rates and factors for FY 

2009 will be published in a forthcoming 

notice in the Federal Register.) 

As we explain in section III.A. of the 

Addendum to this final rule, payments are no 

longer made under the regular exceptions 

provision under §§ 412.348(b) through (e). 

Therefore, we no longer use the actuarial 

capital cost model (described in Appendix B 

of the August 1, 2001 proposed rule (66 FR 

40099)). We modeled payments for each 

hospital by multiplying the capital Federal 

rate by the GAF and the hospital’s case-mix. 

We then added estimated payments for 

indirect medical education (which are 

reduced by 50 percent in FY 2009 in 


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accordance with § 412.322(c), as discussed in 

section V.B.2. of the preamble of this final 

rule), disproportionate share, and outliers, if 

applicable. For purposes of this impact 

analysis, the model includes the following 

assumptions: 

• We estimate that the Medicare case-mix 

index will increase by 1.0 percent in both 

FYs 2008 and 2009. (We note that this does 

not reflect the expected growth in case-mix 

due to improvement in documentation and 

coding under the MS–DRGs, as discussed 

below.) 

• We estimate that the Medicare 

discharges will be approximately 13 million 

in both FY 2008 and FY 2009. 

• The capital Federal rate was updated 

beginning in FY 1996 by an analytical 

framework that considers changes in the 

prices associated with capital-related costs 

and adjustments to account for forecast error, 

changes in the case-mix index, allowable 

changes in intensity, and other factors. As 

discussed in section III.A.2.1. of the 

Addendum to this final rule, the FY 2009 

update is 0.9 percent. 

• In addition to the FY 2009 update factor, 

the FY 2009 capital Federal rate was 

calculated based on a GAF/DRG budget 

neutrality factor of 1.0010, an outlier 

adjustment factor of 0.9465, and an 

exceptions adjustment factor of 0.9999. 

• For FY 2009, as discussed in section 

III.A. of the Addendum to this final rule, the 

FY 2009 national capital rate was further 

adjusted by a factor to account for anticipated 

improvements in documentation and coding 

that are expected to increase case-mix under 

the MS–DRGs. In the FY 2008 IPPS final rule 

with comment period (72 FR 47186), we 

established adjustments to the IPPS rates 

based on the Office of the Actuary projected 

case-mix growth resulting from improved 

documentation and coding of 1.2 percent for 

FY 2008, 1.8 percent for FY 2009, and 1.8 

percent for FY 2010. However, we reduced 

the documentation and coding adjustment to 

¥0.6 percent for FY 2008, and for FY 2009, 

we are applying an adjustment of 0.9 percent, 

consistent with section 7 of Public Law 110–

90. As noted above and as discussed in 

section III.A.6. of the Addendum to this final 

rule, we are not adjusting the Puerto Ricospecific capital rate to account for 

improvements in documentation and coding 

under the MS–DRGs in FY 2009. 

B. Results 

We used the actuarial model described 

above to estimate the potential impact of our 

changes for FY 2009 on total capital 

payments per case, using a universe of 3,538 

hospitals. As described above, the individual 

hospital payment parameters are taken from 

the best available data, including the March 

2008 update of the FY 2007 MedPAR file, the 

March 2008 update to the PSF, and the most 

recent cost report data from the March 2008 

update of HCRIS. In Table III, we present a 

comparison of estimated total payments per 

case for FY 2008 compared to FY 2009 based 

on the FY 2009 payment policies. Column 2 

shows estimates of payments per case under 

our model for FY 2008. Column 3 shows 

estimates of payments per case under our 

model for FY 2009. Column 4 shows the total 

percentage change in payments from FY 2008 

to FY 2009. The change represented in 

Column 4 includes the 0.9 percent update to 

the capital Federal rate, other changes in the 

adjustments to the capital Federal rate (for 

example, the 50 percent reduction to the 

teaching adjustment for FY 2009), and the 

additional 0.9 percent reduction to the 

national capital rate to account for 

improvements in documentation and coding 

(or other changes in coding that do not reflect 

real changes in case-mix) for implementation 

of the MS–DRGs). Consistent with the impact 

analysis for the policy changes under the 

IPPS for operating costs in section VI. of this 

Appendix, for purposes of this impact 

analysis, we also assume a 1.8 percent 

increase in case-mix growth for FY 2009, as 

determined by the Office of the Actuary, 

because we believe the adoption of the MS–

DRGs will result in case-mix growth due to 

documentation and coding changes that do 

not reflect real changes in patient severity of 

illness. The comparisons are provided by: (1) 

Geographic location; (2) region; and (3) 

payment classification. 

The simulation results show that, on 

average, capital payments per case in FY 

2009 are expected to increase as compared to 

capital payments per case in FY 2008. The 

capital rate for FY 2009 will decrease 0.51 

percent as compared to the FY 2008 capital 

rate, and the changes to the GAFs are 

expected to result in a slight decrease (0.3 

percent) in capital payments. In addition, the 

50 percent reduction to the teaching 

adjustment in FY 2009 will also result in a 

decrease in capital payments from FY 2008 

as compared to FY 2009. Countering these 

factors is the projected case-mix growth as a 

result of improved documentation and 

coding (discussed above) as well as an 

estimated increase in outlier payments in FY 

2008 as compared to FY 2009. The net result 

of these changes is an estimated 0.4 percent 

change in capital payments per discharge 

from FY 2008 to FY 2009 for all hospitals (as 

shown below in Table III). 

The results of our comparisons by 

geographic location and by region are 

consistent with the results we expected with 

the decrease to the teaching adjustment in FY 

2009 (§ 412.522(c)). The geographic 

comparison shows that, on average, all urban 

hospitals are expected to experience a 0.4 

percent increase in capital IPPS payments 

per case in FY 2009 as compared to FY 2008, 

while hospitals in large urban areas are 

expected to experience a 0.1 percent increase 

in capital IPPS payments per case in FY 2009 

as compared to FY 2008. Capital IPPS 

payments per case for rural hospitals are 

expected to increase 1.0 percent. These 

differences in payments per case by 

geographic location are mostly due to the 

decrease in the teaching adjustment. Because 

teaching hospitals generally tend to be 

located in urban or large urban areas, we 

expect that the 50 percent decrease in the 

teaching adjustment for FY 2009 will have a 

more significant impact on hospitals in those 

areas than those hospitals located in rural 

areas. 

Most regions are estimated to experience 

an increase in total capital payments per case 

from FY 2008 to FY 2009. These increases 

vary by region and range from a 2.8 percent 

increase in the Pacific urban region to a 0.4 

percent increase in the West North Central 

urban region. Two urban regions are 

projected to experience a relatively larger 

decrease in capital payments, with the 

difference mostly due to changes in the GAFs 

and the 50 percent reduction in the teaching 

adjustment for FY 2009: ¥2.3 percent in the 

Middle Atlantic urban region and ¥2.6 

percent in the New England urban region. 

The East North Central urban region is also 

expected to experience a decrease of 0.6 

percent in capital payments in FY 2009 as 

compared to FY 2008, mostly due to changes 

in the GAFs. There are two rural regions that 

are also expected to experience a decrease in 

total capital payments per case: a ¥3.2 

percent decrease in the New England rural 

region and a ¥0.6 percent decrease in the 

Middle Atlantic rural region. Again, for these 

two rural regions, the projected decrease in 

capital payments is mostly due to changes in 

the GAF, as well as a smaller than average 

expected increase in payments due to the 

adoption of the MS–DRGs. 

By type of ownership, voluntary and 

proprietary hospitals are estimated to 

experience an increase of 0.2 percent and 2.0 

percent, respectively. The projected increase 

in capital payments per case for proprietary 

hospitals is mostly because these hospitals 

are expected to experience a smaller than 

average decrease in their payments due to the 

50 percent teaching adjustment reduction for 

FY 2009. Government hospitals are estimated 

to experience a decrease in capital payments 

per case of ¥0.3 percent. This estimated 

decrease in capital payments is mostly due 

to a larger than average decrease in payments 

resulting from the 50 percent teaching 

adjustment reduction for FY 2009. 

Section 1886(d)(10) of the Act established 

the MGCRB. Before FY 2005, hospitals could 

apply to the MGCRB for reclassification for 

purposes of the standardized amount, wage 

index, or both. Section 401(c) of Public Law 

108–173 equalized the standardized amounts 

under the operating IPPS. Therefore, 

beginning in FY 2005, there is no longer 

reclassification for the purposes of the 

standardized amounts; however, hospitals 

still may apply for reclassification for 

purposes of the wage index for FY 2009. 

Reclassification for wage index purposes also 

affects the GAFs because that factor is 

constructed from the hospital wage index. 

To present the effects of the hospitals being 

reclassified for FY 2009, we show the average 

capital payments per case for reclassified 

hospitals for FY 2008. All classifications of 

reclassified hospitals are expected to 

experience an increase in payments in FY 

2009 as compared to FY 2008. Rural 

nonreclassified hospitals are expected to 

have the smallest increase in capital 

payments of 0.3 percent, while rural 

reclassified hospitals are expected to have 

the largest increase in capital payments of 1.4 

percent. Other reclassified hospitals (that is, 

hospitals reclassified under section 

1886(d)(8)(B) of the Act) are expected to 

experience a 1.3 percent increase in capital 

payment from FY 2008 to FY 2009. The large 

than average increase in projected changes in 

capital payments for rural reclassified and 

other reclassified hospitals is mainly due to 


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a smaller than average change in payments 

from FY 2009 as compared to FY 2008 

resulting from the 50 percent reduction in the 

teaching adjustment in FY 2009. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

IX. Alternatives Considered 

This final rule contains a range of policies. 

The preamble of this final rule provides 

descriptions of the statutory provisions that 

are addressed, identifies those policies when 

discretion has been exercised, and presents 

rationale for our decisions and, where 

relevant, alternatives that were considered. 

X. Overall Conclusion 

The changes we are making in this final 

rule will affect all classes of hospitals. Some 

hospitals are expected to experience 

significant gains and others less significant 

gains, but overall hospitals are projected to 

experience positive updates in IPPS 

payments in FY 2009. Table I of section VI. 

of this Appendix demonstrates the estimated 

distributional impact of the IPPS budget 

neutrality requirements for MS–DRG and 

wage index changes, and for the wage index 

reclassifications under the MGCRB. Table I 

also shows an overall increase of 4.7 percent 

in operating payments. We estimate 

operating payments to increase by $4.709 

billion. This accounts for the projected 

savings associated with the HACs policy, 

which have an estimated savings of $21 

million. In addition, this estimate includes 

the hospital reporting of quality data program 

costs for $2.39 million, the estimated new 

technology payments of $9.54 million, and 

all operating payment policies as described 

in section VII. of this Appendix. Capital 

payments are estimated to increase by 0.4 

percent per case, as shown in Table III of 

section VIII. of this Appendix. Therefore, we 

project that the increase in capital payments 

in FY 2009 compared to FY 2008 will be 

approximately $40 million. The cumulative 

operating and capital payments should result 

in a net increase of $4.749 billion to IPPS 

providers. The discussions presented in the 

previous pages, in combination with the rest 

of this final rule, constitute a regulatory 

impact analysis. 

XI. Accounting Statement 

As required by OMB Circular A–4 

(available at http://www.whitehousegov/omb/ 

circulars/a004/a-4.pdf), in Table IV below, 

we have prepared an accounting statement 

showing the classification of the 

expenditures associated with the provisions 

of this final rule. This table provides our best 

estimate of the increase in Medicare 

payments to providers as a result of the 

changes to the IPPS presented in this final 

rule. All expenditures are classified as 

transfers to Medicare providers. 

TABLE IV—ACCOUNTING STATEMENT: 

CLASSIFICATION OF ESTIMATED EXPENDITURES FROM FY 2008 TO FY 

2009 

Category Transfers 

Annualized Monetized 

Transfers.

$4.749 Billion. 

From Whom to Whom Federal Government 

to IPPS Medicare 

Providers. 

Total .......................... $4.749 Billion. 

XII. Executive Order 12866 

In accordance with the provisions of 

Executive Order 12866, the Office of 

Management and Budget reviewed this final 

rule. 

Appendix B: Recommendation of Update 

Factors for Operating Cost Rates of Payment 

for Inpatient Hospital Services 

I. Background 

Section 1886(e)(4)(A) of the Act requires 

that the Secretary, taking into consideration 

the recommendations of the MedPAC, 

recommend update factors for inpatient 

hospital services for each fiscal year that take 

into account the amounts necessary for the 

efficient and effective delivery of medically 

appropriate and necessary high quality care. 

Under section 1886(e)(5)(B) of the Act, we are 

required to publish update factors 

recommended by the Secretary in the 

proposed and final IPPS rules, respectively. 

Accordingly, this Appendix provides the 

final recommendations for the update factors 

for the IPPS national standardized amount, 

the Puerto Rico-specific standardized 

amount, the hospital-specific rates for SCHs 

and MDHs, and the rate-of-increase limits for 

hospitals and hospital units excluded from 

the IPPS, as well as LTCHS, IPFs, and IRFs. 

We also discuss our response to MedPAC’s 

recommended update factors for inpatient 

hospital services. 

II. Inpatient Hospital Update for FY 2009 

Section 1886(b)(3)(B)(i)(XX) of the Act, as 

amended by section 5001(a) of Public Law 

109–171, sets the FY 2009 percentage 

increase in the operating cost standardized 

amount equal to the rate-of-increase in the 

hospital market basket for IPPS hospitals in 

all areas, subject to the hospital submitting 

quality information under rules established 

by the Secretary in accordance with 

1886(b)(3)(B)(viii) of the Act. For hospitals 

that do not provide these data, the update is 

equal to the market basket percentage 


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increase less 2.0 percentage points. 

Consistent with current law, based on Global 

Insight, Inc.’s first quarter 2008 forecast of 

the FY 2009 market basket increase, we 

stated in the proposed rule that we are 

estimating that the FY 2009 update to the 

standardized amount will be 3.0 percent (that 

is, the then current estimate of the market 

basket rate-of-increase) for hospitals in all 

areas, provided the hospital submits quality 

data in accordance with our rules. For 

hospitals that do not submit quality data, we 

stated in the proposed rule that we are 

estimating that the update to the 

standardized amount will be 1.0 percent (that 

is, the then current estimate of the market 

basket rate-of-increase minus 2.0 percentage 

points).Therefore, we are adopting in this 

final rule, based on Global Insight, Inc.’s 

second quarter 2008 forecast of the FY 2009 

market basket increase, a FY 2009 update to 

the standardized amount of 3.6 percent (that 

is, the current estimate of the market basket 

rate-of-increase) for hospitals in all areas, 

provided the hospital submits quality data in 

accordance with our rules. For hospitals that 

do not submit quality data, the update to the 

standardized amount will be 1.6 percent (that 

is, the current estimate of the market basket 

rate-of-increase minus 2.0 percentage points). 

This revision to the FY 2009 market basket 

increase is primarily due to the increase in 

prices associated with energy components, 

both primary and secondary. The price 

pressures with these secondary energy 

components (chemicals, rubber and plastics, 

accounting for 4.1 percent of the hospital 

market basket) are responsible for 

approximately 50 percent of the revision. 

Most of the increased price pressure in 

energy components is a result of changing 

fundamentals; that is, supply and demand. 

There is an increase in global demand for the 

commodity from emerging market countries, 

and there is an inability or lack of desire for 

oil-producing countries to increase supply. A 

secondary effect is an overall increase in 

many goods and commodity prices due to the 

weakness of the U.S. dollar, coupled with 

increased global demand. 

Also contributing to the revision in the FY 

2009 forecast of the IPPS market basket is the 

short-term price increase in the wages for 

hospital workers as a result of continued 

tightness in the market and pressure for 

providers to increase wages to keep pace 

with inflation. The health service sector has 

continued to show growth, unlike other 

service sectors that have seen a slackening in 

wage growth due to weakness in their labor 

markets. 

Section 1886(d)(9)(C)(1) of the Act is the 

basis for determining the percentage increase 

to the Puerto Rico-specific standardized 

amount. In the proposed rule, we proposed 

to apply the full rate-of-increase in the 

hospital market basket for IPPS hospitals to 

the Puerto Rico-specific standardized 

amount. Because we did not receive any 

public comments on this proposal, for FY 

2009, we are applying the full rate-ofincrease in the hospital market basket for 

IPPS hospitals to the Puerto Rico-specific 

standardized amount. Therefore, the update 

to the Puerto Rico-specific standardized 

amount is 3.6 percent. 

Section 1886(b)(3)(B)(iv) of the Act sets the 

FY 2009 percentage increase in the hospitalspecific rates applicable to SCHs and MDHs 

equal to the rate set forth in section 

1886(b)(3)(B)(i) of the Act (that is, the same 

update factor as for all other hospitals subject 

to the IPPS, or the rate-of-increase in the 

market basket). Therefore, the update to the 

hospital-specific rates applicable to SCHs 

and MDHs is 3.6, or 1.6 percent, depending 

upon whether the hospital submits quality 

data. 

Section 1886(b)(3)(B)(ii) of the Act is used 

for purposes of determining the percentage 

increase in the rate-of-increase limits for 

children’s and cancer hospitals. Section 

1886(b)(3)(B)(ii) of the Act sets the 

percentage increase in the rate-of-increase 

limits equal to the market basket percentage 

increase. In accordance with § 403.752(a) of 

the regulations, RNHCIs are paid under 

§ 413.40, which also uses section 

1886(b)(3)(B)(ii) of the Act to update the 

percentage increase in the rate-of-increase 

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

addresses the increase factor for the Federal 

prospective payment rate of IRFs. Section 

123 of Public Law 106–113, as amended by 

section 307(b) of Public Law 106–554, 

provides the statutory authority for updating 

payment rates under the LTCH PPS. As 

discussed below, for cost reporting periods 

beginning on or after October 1, 2006, LTCHs 

that are not defined as new under 

§ 412.23(e)(4), and that had not elected to be 

paid under 100 percent of the Federal rate are 

paid 100 percent of the adjusted Federal PPS 

rate. Therefore, because no portion of LTCHs’

prospective payments will be based on 

reasonable cost concepts for cost reporting 

periods beginning on or after October 1, 

2006, we are not establishing a rate-ofincrease percentage to the reasonable cost 

portion for FY 2009 for LTCHs to be used 

under § 413.40. In addition, section 124 of 

Public Law 106–113 provides the statutory 

authority for updating all aspects of the 

payment rates for IPFs. Under this broad 

authority, IPFs that are not defined as new 

under § 412.426(c) are paid under a blended 

methodology for cost reporting periods 

beginning on or after January 1, 2005, and 

before January 1, 2008. For cost reporting 

periods beginning on or after January 1, 2008, 

existing IPFs are paid based on 100 percent 

of the Federal per diem rate. Therefore, 

because no portion of the existing IPFs 

prospective payments will be based on 

reasonable cost concepts for cost reporting 

periods beginning on or after January 1, 2008, 

we are not establishing a rate-of-increase 

percentage to the reasonable cost portion for 

FY 2009 for IPFs to be used under 

§ 412.428(b). New IPFs are paid based on 100 

percent of the Federal per diem payment 

amount. 

Currently, children’s hospitals, cancer 

hospitals, and RNHCIs are the remaining 

three types of hospitals still reimbursed 

under the reasonable cost methodology. We 

are providing our current estimate of the FY 

2009 IPPS operating market basket 

percentage increase (3.6 percent) to update 

the target limits for children’s hospitals, 

cancer hospitals, and RNHCIs. 

Effective for cost reporting periods 

beginning on or after October 1, 2002, LTCHs 

have been paid under the LTCH PPS. 

Additionally, for cost reporting periods 

beginning on or after October 1, 2006, no 

portion of a LTCH’s PPS payments can be 

based on reasonable cost concepts. 

Consequently, there is no need to update the 

target limit under § 413.40 effective October 

1, 2008, for LTCHs. 

In the RY 2009 LTCH PPS final rule (73 FR 

26812), we established an update of 2.7 

percent to the LTCH PPS Federal rate for RY 

2009, which is based on a market basket 

increase of 3.6 percent and an adjustment of 

0.9 percent to account for the increase in 

case-mix in a prior year that resulted from 

changes in coding practices rather than an 

increase in patient severity. The market 

basket of 3.6 percent used in determining this 

update factor is based on our final policy in 

the RY 2009 LTCH final rule to extend the 

LTCH RY 2009 by 3 months (a total of 15 

months instead of 12 months) through 

September 30, 2009. (A full discussion of the 

reasons for this extension of RY 2009 can be 

found in the RY 2009 LTCH PPS final rule 

(73 FR 26797 through 26798).) 

Effective for cost reporting periods 

beginning on or after January 1, 2005, IPFs 

are paid under the IPF PPS. IPF PPS 

payments are based on a Federal per diem 

rate that is derived from the sum of the 

average routine operating, ancillary, and 

capital costs for each patient day of 

psychiatric care in an IPF, adjusted for 

budget neutrality. For cost reporting periods 

beginning on or after January 1, 2005, and 

before January 1, 2008, existing IPFs (those 

not defined as ‘‘new’’ under § 412.426(c)) are 

paid based on a blend of the reasonable costbased PPS payments and the Federal per 

diem base rate. For cost reporting periods 

beginning on or after January 1, 2008, 

existing IPFs are paid based on 100 percent 

of the Federal per diem rate. Consequently, 

there is no need to update the target limit 

under § 413.40 effective October 1, 2008, for 

IPFs. 

IRFs are paid under the IRF PPS for cost 

reporting periods beginning on or after 

January 1, 2002. For cost reporting periods 

beginning on or after October 1, 2002 (FY 

2003), and thereafter, the Federal prospective 

payments to IRFs are based on 100 percent 

of the adjusted Federal IRF prospective 

payment amount, updated annually (69 FR 

45721). Section 1886(j)(3)(C) of the Act, as 

amended by section 115 of Public Law 110–

173, sets the FY 2009 IRF PPS update factor 

equal to 0 percent. Thus, we are not applying 

an update (market basket) to the IRF PPS 

rates for FY 2009. 

We did not receive any public comments 

on the market basket updates and, therefore, 

are finalizing the market basket updates for 

FY 2009. 

III. Secretary’s Final Recommendation 

MedPAC is recommending an inpatient 

hospital update equal to the market basket 

rate of increase for FY 2009. MedPAC’s 

rationale for this update recommendation is 

described in more detail below. Based on the 

FY 2009 President’s Budget, we are 

recommending an inpatient hospital update 

to the standardized amount of zero percent. 

We are recommending that this same update 

factor also apply to SCHs and MDHs. 


sroberts on PROD1PC70 with RULES
Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Rules and Regulations 49083 

Section 1886(d)(9)(C)(1) of the Act is the 

basis for determining the percentage increase 

to the Puerto Rico-specific standardized 

amount. As noted above, for FY 2009, we are 

applying the full rate-of-increase in the 

hospital market basket for IPPS hospitals to 

the Puerto Rico-specific standardized 

amount. Therefore, the update to the Puerto 

Rico-specific standardized amount is 3.6 

percent. 

In addition to making a recommendation 

for IPPS hospitals, in accordance with 

section 1886(e)(4)(A) of the Act, we are also 

recommending update factors for all other 

types of hospitals. Consistent with the 

President’s Budget, we are recommending an 

update similar to the IPPS update of zero 

percent for children’s hospitals, cancer 

hospitals, and RNHCIs. As mentioned above, 

for cost reporting periods beginning on or 

after January 1, 2008, existing IPFs are paid 

based on 100 percent of the Federal per diem 

rate (and are no longer paid a blend of the 

reasonable cost-based PPS payments and the 

Federal per diem base rate). Consequently, 

we are no longer recommending an update 

factor for the portion of the payment that is 

based on reasonable costs. Consistent with 

the President’s Budget, as we implemented in 

a Federal Register notice (73 FR 25709) for 

the RY 2009 IPF PPS, we finalized an update 

to the IPF PPS Federal rate for RY 2009 of 

3.2 percent (which is based on Global Insight, 

Inc.’s first quarter 2008 forecast of the RPL 

market basket increase) for the Federal per 

diem payment amount. 

In the RY 2009 LTCH PPS final rule (73 FR 

26812), we established an update of 2.7 

percent to the LTCH PPS Federal rate for RY 

2009, which is based on a market basket 

increase of 3.6 percent and an adjustment of 

0.9 percent to account for the increase in 

case-mix in a prior year that resulted from 

changes in coding practices rather than an 

increase in patient severity. The market 

basket of 3.6 percent used in determining this 

final update factor is based on our final 

policy in the LTCH final rule to extend the 

LTCH RY 2009 by 3 months (a total of 15 

months instead of 12 months) through 

September 30, 2009. (A full discussion on the 

reasons for this extension of RY 2009 can be 

found in the RY 2009 LTCH PPS final rule 

(73 FR 26797 through 26798).) Finally, 

consistent with the President’s FY 2009 

Budget, we are recommending a zero percent 

update to the IRF PPS Federal rate for FY 

2009. 

IV. MedPAC Recommendation for Assessing 

Payment Adequacy and Updating Payments 

in Traditional Medicare 

In its March 2008 Report to Congress, 

MedPAC assessed the adequacy of current 

payments and costs, and the relationship 

between payments and an appropriate cost 

base, utilizing an established methodology 

used by MedPAC in the past several years. 

MedPAC recommended an update to the 

hospital inpatient rates equal to the increase 

in the hospital market basket in FY 2009, 

concurrent with implementation of a quality 

incentive program. Similar to last year, 

MedPAC also recommended that CMS put 

pressure on hospitals to control their costs 

rather than accommodate the current rate of 

cost growth, which is, in part, caused by a 

lack of pressure from private payers. 

MedPAC noted that indicators of payment 

adequacy are almost uniformly positive. 

MedPAC expects Medicare margins to remain 

low in 2008. At the same time though, 

MedPAC’s analysis finds that hospitals with 

low non-Medicare profit margins have below 

average standardized costs and most of these 

facilities have positive overall Medicare 

margins. 

Response: Similar to our response last year, 

we agree with MedPAC that hospitals should 

control costs rather than accommodate the 

current rate of growth. An update equal to 

less than the market basket will motivate 

hospitals to control their costs, consistent 

with MedPAC’s recommendation. As 

MedPAC noted, the lack of financial pressure 

at certain hospitals can lead to higher costs 

and in turn bring down the overall Medicare 

margin for the industry. 

As discussed in section II. of the preamble 

of this final rule, CMS implemented the MS–

DRGs in FY 2008 to better account for 

severity of illness under the IPPS and is 

basing the DRG weights on costs rather than 

charges. We continue to believe that these 

refinements will better match Medicare 

payment of the cost of care and provide 

incentives for hospitals to be more efficient 

in controlling costs. 

We note that, because the operating and 

capital prospective payment systems remain 

separate, we are continuing to use separate 

updates for operating and capital payments. 

The final update to the capital rate is 

discussed in section III. of the Addendum to 

this final rule. 

[FR Doc. E8–17914 Filed 7–31–08; 4:30 pm] 

BILLING CODE 4120–01–P 


sroberts on PROD1PC70 with RULES