FR Doc 03-11966

[Federal Register: May 19, 2003 (Volume 68, Number 96)]
[Proposed Rules]
[Page 27153-27422]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my03-17]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 412 and 413

Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates; Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412 and 413

[CMS-1470-P]
RIN 0938-AL89

Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates

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

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient
prospective payment systems (IPPS) for operating and capital costs to
implement changes arising from our continuing experience with these
systems. In addition, in the Addendum to this proposed rule, we are
describing proposed 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 would be
applicable to discharges occurring on or after October 1, 2003. We also
are setting forth proposed rate-of-increase limits as well as proposed
policy changes for hospitals and hospital units excluded from the IPPS.
Among other changes that we are proposing are changes to the
policies governing postacute care transfers, payments to hospitals for
the direct and indirect costs of graduate medical education,
determination of hospital beds and patient days for payment adjustment
purposes, and payments to critical access hospitals (CAHs).

DATES: Comments will be considered if received at the appropriate
address, as provided below, no later than 5 p.m. on July 18, 2003.

ADDRESSES: Mail written comments (an original and three copies) to the
following address only: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-1470-P, P.O.
Box 8010, Baltimore, MD 21244-1850.
If you prefer, you may deliver, by hand or courier, your written
comments (an original and three copies) to one of the following
addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or
Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, MD
21244-1850.

(Because access to the interior of the Humphrey Building is not readily
available to persons without Federal Government identification,
commenters are encouraged to leave their comments in the CMS drop slots
located in the main lobby of the building. A stamp-in clock is
available for commenters who wish to retain proof of filing by stamping
in and keeping an extra copy of the comments being filed.)

Comments mailed to those addresses specified as appropriate for
courier delivery may be delayed and could be considered late.
Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code CMS-1470-P.
For information on viewing public comments see the beginning of the
SUPPLEMENTARY INFORMATION section.
For comments that relate to information collection requirements,
mail a copy of comments to the following addresses:

Centers for Medicare & Medicaid Services, Office of Strategic
Operations and Regulatory Affairs, Security and Standards Group, Office
of Regulations Development and Issuances, Room N2-14-26, 7500 Security
Boulevard, Baltimore, Maryland 21244-1850. Attn: Julie Brown, CMS-1470-
P; and
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 3001, New Executive Office Building, Washington, DC 20503,
Attn: Brenda Aguilar, CMS Desk Officer.

FOR FURTHER INFORMATION CONTACT:
Stephen Phillips, (410) 786-4548, Operating Prospective Payment,
Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and
Technology, Patient Transfers, Counting Beds and Patient Days, and
Hospital Geographic Reclassifications Issues;
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, Nursing and Allied Health Education, Graduate Medical
Education, and Critical Access Hospital Issues.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments

Comments received timely will be available for public inspection as
they are received, generally beginning approximately 3 weeks after
publication of a document, in Room C5-12-08 of the Centers for Medicare
& Medicaid Services, 7500 Security Blvd., Baltimore, MD, on Monday
through Friday of each week from 8:30 a.m. to 5 p.m. Please call (410)
786-7197 to schedule an appointment to view public comments.

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Table of Contents

I. Background
A. Summary
B. Major Contents of This Proposed Rule

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background
B. DRG Reclassification
1. General
2. Review of DRGs for CC Split
3. MDC 1 (Diseases and Disorders of the Nervous System)
a. Revisions of DRGs 1 and 2
b. DRG 23 (Nontraumatic Stupor and Coma)
4. MDC 5 (Diseases and Disorders of the Circulatory System)
a. DRG 478 (Other Vascular Procedures With CC) and DRG 479
(Other Vascular Procedures Without CC)
b. DRGs 514 (Cardiac Defibrillator Implant With Cardiac
Catheterization) and 515

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(Cardiac Defibrillator Implant Without Cardiac Catheterization)
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System
and Connective Tissue)
6. MDC 15 (Newborns and Other Neonates with Conditions
Originating in the Perinatal Period)
a. Nonneonate Diagnoses
b. Heart Failure Codes for Newborns and Neonates
7. MDC 17 (Myeloproliferative Diseases and Disorders and Poorly
Differentiated Neoplasms)
8. MDC 23 (Factors Influencing Health Status and Other Contracts
with Health Services)
a. Implantable Devices
b. Malignancy Codes
9. Medicare Code Editor (MCE) Change
10. Surgical Hierarchies
11. Refinement of Complications and Comorbidities (CC)
12. Review of Procedure Codes in DRGs 468, 476, and 477
a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs
b. Reassignment of Procedures among DRGs 468, 476, and 477
c. Adding Diagnosis Codes to MDCs
13. Changes to the ICD-9-CM Coding System
14. Other Issues
a. Cochlear Implants
b. Burn Patients on Mechanical Ventilation
c. Multiple Level Spinal Fusion
d. Heart Assist System Implant
e. Drug-Eluting Stents
f. Artificial Anal Spincter
C. Recalibration of DRG Weights
D. Proposed LTC-DRG Reclassifications and Relative Weights for
LTCHs for FY 2004
1. Background
2. Proposed Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications into DRGs
3. Development of the Proposed FY 2004 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative
Weights
b. Data
c. Hospital-Specific Relative Value Methodology
d. Low Volume LTC-DRGs
4. Steps for Determining the Proposed FY 2004 LTC-DRG Relative
Weights
E. Add-On Payments for New Services and Technologies
1. Background
2. FY 2004 Status of Technology Approved for FY 2003 Add-On
Payments: Drotrecogin Alfa (Activated)--Xigris[reg]
3. FY 2004 Applicants for New Technology Add-On Payments
a. Bone Morphogenetic Proteins (BMPs) for Spinal Fusions
b. GLIADEL[reg] Wafer
4. Review of the High-Cost Threshold
5. Technical Changes
III. Proposed Changes to the Hospital Wage Index
A. Background
B. Proposed FY 2004 Wage Index Update
C. FY 2004 Wage Index Proposals
1. Elimination of Wage Costs Associated with Rural Health
Clinics and Federally Qualified Health Centers
2. Paid Hours
D. Verification of Wage Data from the Medicare Cost Reports
E. Computation of the Proposed FY 2004 Wage Index
F. Proposed Revisions to the Wage Index Based on Hospital
Redesignation
1. General
2. Effects of Reclassification
G. Requests for Wage Data Corrections
H. Modification of the Process and Timetable for Updating the
Wage Index
IV. Other Decisions and Proposed Changes to the IPPS for Operating
Costs and GME Costs
A. Transfer Payment Policy
1. Transfers to Another Acute Care Hospital
2. Technical Correction
3. Expanding the Postacute Care Transfer Policy to Additional
DRGs
B. Rural Referral Centers
1. Case-Mix Index
2. Discharges
C. Indirect Medical Education (IME) Adjustment and
Disproportionate Share Hospital (DSH) Adjustment
1. Available Beds and Patient Days: Background
2. Unoccupied Beds
3. Nonacute Care Beds and Days
4. Observation Beds and Swing-Beds
5. Labor, Delivery, Recovery, and Postpartum Beds and Days
6. Days Associated with Demonstration Projects under Section
1115 of the Act
7. Dual-Eligible Patient Days
8. Medicare+Choice (M+C) Days
D. Medicare Geographic Classification Review Board (MGCRB)
Reclassification Process
E. Costs of Approved Nursing and Allied Health Education
Activities
1. Background
2. Continuing Education Issue for Nursing and Allied Health
Education Activities
3. Programs Operated by Wholly Owned Subsidiary Educational
Institutions of Hospitals
F. Payment for Direct Costs of Graduate Medical Education
1. Background
2. Prohibition Against Counting Residents Where Other Entities
First Incur the Training Costs
3. Rural Track FTE Limitation for Purposes of Direct GME and IME
for Urban Hospitals that Establish Separately Accredited Approved
Medical Programs in a Rural Area
a. Change in the Amount of Rural Training Time Required for an
Urban Hospital to Qualify for an Increase in the Rural Track FTE
Limitation
b. Inclusion of Rural Track FTE Residents in the Rolling Average
Calculation
4. Technical Changes Related to Affiliated Groups and Affiliated
Agreements
G. Notification of Updates to the Reasonable Compensation
Equivalent (RCE) Limits
1. Background
2. Publication of the Updated RCE Limits
V. PPS for Capital-Related Costs
VI. Proposed Changes for Hospitals and Hospital Units Excluded from
the IPPS
A. Payments to Excluded Hospitals and Hospital Units
1. Payments to Existing Excluded Hospitals and Hospital Units
2. Updated Caps for New Excluded Hospitals and Units
3. Implementation of a PPS for IRFs
4. Implementation of a PPS for LTCHs
B. Payment for Services Furnished at Hospitals-Within-Hospitals
and Satellite Facilities
C. Clarification of Classification Requirements for LTCHs
D. Criteria for Payment on a Reasonable Cost Basis for Clinical
Diagnostic Laboratory Services Performed by CAHs
E. Technical Changes
VII. MedPAC Recommendations
VIII. Other Required Information
A. Requests for Data from the Public
B. Collection of Information Requirements

Regulation Text

Addendum--Proposed Schedule of Standardized Amounts Effective
with Discharges Occurring On or After October 1, 2003 and Update
Factors and Rate-of-Increase Percentages Effective With Cost
Reporting Periods Beginning On or After October 1, 2003

Tables

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 2--Hospital Average Hourly Wage for Federal Fiscal Years 2002
(1998 Wage Data), 2003 (1999 Wage Data), and 2004 (2000 Wage Data)
Wage Indexes and 3-Year Average of Hospital Average Hourly Wages
Table 3A--3-Year Average Hourly Wage for Urban Areas
Table 3B--3-Year Average Hourly Wage for Rural Areas
Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF)
for Urban Areas
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF)
for Rural Areas
Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF)
for Hospitals That Are Reclassified
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment
Factor (GAF)
Table 4G--Pre-Reclassified Wage Index for Urban Areas
Table 4H--Pre-Reclassified Wage Index for Rural Areas
Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting
Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes

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Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 2002 MedPAR Update December 2002 GROUPER V20.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 2002 MedPAR Update December 2002 GROUPER V21.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for
Urban and Rural Hospitals (Case Weighted) March 2003
Table 8B--Statewide Average Capital Cost-to-Charge Ratios (Case
Weighted) March 2003
Table 9--Hospital Reclassifications and Redesignations by Individual
Hospital--FY 2004
Table 10--Mean and Standard Deviations by Diagnosis-Related Groups
(DRGs)--FY 2004
Table 11--Proposed LTC-DRGs Relative Weights and Geometric and Five-
Sixths of the Average Length of Stay--FY 2004
Appendix A--Regulatory Impact Analysis
Appendix B--Recommendation of Update Factors for Operating Cost
Rates of Payment for Inpatient Hospital Services

Acronyms

AHIMA American Health Information Management Association
AHA American Hospital Association
CAH Critical access hospital
CBSAs Core Based Statistical Areas
CC Complication or comorbidity
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Areas
COBRA Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99-
272
CPI Consumer Price Index
CRNA Certified registered nurse anesthetist
DRG Diagnosis-related group
DSH Disproportionate share hospital
FDA Food and Drug Administration
FQHC Federally qualified health center
FTE Full-time eguivalent
FY Federal fiscal year
GME Graduate medical education
HIPC Health Information Policy Council
HIPAA Health Insurance Portability and Accountability Act, Pub. L.
104-191
HHA Home health agency
ICD-9-CM International Classification of Diseases, Ninth Revision,
and Clinical Modification
ICD-10-PCS International Classification of Diseases Tenth Edition,
and Procedure Coding System
IME Indirect medical education
IPPS Acute care hospital inpatient prospective payment system
IRF Inpatient Rehabilitation Facility
LDRP Labor, delivery room, and postpartum
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare Code Editor
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
MPFS Medicare Physician Fee Schedule
MSA Metropolitan Statistical Area
NECMA New England County Metropolitan Areas
NCHS National Center for Health Statistics
NCHVS National Committee on Health and Vital Statistics
O.R. Operating room
PPS Prospective payment system
PRA Per resident amount
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
RCE Reasonable compensation equivalent
RHC Rural health center
RRC Rural referral center
SCH Sole community hospital
SNF Skilled nursing facility
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248
UHDDS Uniform Hospital Discharge Data Set

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
labor-related share is adjusted by the wage index applicable to the
area where the hospital is located; and 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 that have been approved for special add-on payments. To
qualify, a new technology must demonstrate that it is a substantial
clinical improvement over technologies 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 any DSH, IME, and new technology 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 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. For example, sole community hospitals
(SCHs) are the sole source of care in their areas, and Medicare-
dependent, small rural hospitals (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 (although MDHs receive
only 50 percent of the difference between the IPPS rate and their
hospital-specific rates if the hospital-specific rate is higher than
the IPPS rate).
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

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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 PPS,
payments are adjusted by the same DRG for the case as they are under
the operating IPPS. Similar adjustments are also made for IME and DSH
as under the operating IPPS. In addition, hospitals may receive an
outlier payment 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: Psychiatric hospitals and units,
rehabilitation hospitals and units; long-term care hospitals (LTCHs);
children's hospitals; and cancer hospitals. 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)), psychiatric hospitals and units, and LTCHs, as discussed
below. Children's hospitals and cancer hospitals continue to be paid
under reasonable cost-based reimbursement.
The existing regulations governing payments to excluded hospitals
and hospital units are located in 42 CFR parts 412 and 413.
a. Inpatient Rehabilitation Facilities. 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 prospective payments for cost reporting periods
beginning January 1, 2002 through September 30, 2002, to payment on a
full prospective payment system basis effective for cost reporting
periods beginning on or after October 1, 2002 (66 FR 41316, August 7,
2001 and 67 FR 49982, August 1, 2002). The existing regulations
governing payments under the IRF PPS are located in 42 CFR part 412,
subpart P.
b. LTCHs. Under the authority of sections 123(a) and (c) of Pub. L.
106-113 and section 307(b)(1) of Pub. L. 106-554, LTCHs are being
transitioned from being paid for inpatient hospital services based on a
blend of reasonable cost-based reimbursement under section 1886(b) of
the Act to fully Federal prospective rates during a 5-year period,
beginning with cost reporting periods that start on or after October 1,
2002. For cost reporting periods beginning on or after October 1, 2006,
LTCHs will be paid under the fully Federal prospective payment rate
(the August 30, 2002 LTCH PPS final rule (67 FR 55954)). LTCHs may
elect to be paid based on full PPS payments instead of a blended
payment in any year during the 5-year transition period. The existing
regulations governing payment under the LTCH PPS are located in 42 CFR
part 412, subpart O.
c. Psychiatric Hospitals and Units. Sections 124(a) and (c) of Pub.
L. 106-113 provide for the development of a per diem PPS for payment
for inpatient hospital services furnished in psychiatric hospitals and
units under the Medicare program, effective for cost reporting periods
beginning on or after October 1, 2002. This system must include an
adequate patient classification system that reflects the differences in
patient resource use and costs among these hospitals and maintain
budget neutrality. We are in the process of developing a proposed rule,
to be followed by a final rule, to implement the PPS for psychiatric
hospitals and units.
3. Critical Access Hospitals
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 on a reasonable cost basis. 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
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
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. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the
Medicare IPPS for operating costs and for capital-related costs in FY
2004. We also are proposing changes relating to payments for GME costs,
payments to CAHs, and payments to providers classified as psychiatric
hospitals and units that continue to be excluded from the IPPS and paid
on a reasonable cost basis. The proposed changes would be effective for
discharges occurring on or after October 1, 2003.
The following is a summary of the major changes that we are
proposing to make:
1. Proposed Changes to the DRG Reclassifications and Recalibrations of
Relative Weights
As required by section 1886(d)(4)(C) of the Act, we adjust the DRG
classifications and relative weights annually. Based on analyses of
Medicare claims data, we are proposing to establish a number of new
DRGs and make changes to the designation of diagnosis and procedure
codes under other existing DRGs. Our proposed changes for FY 2004 are
set forth in section II. of this preamble.
Among the proposed changes discussed are:
[sbull] Expanding the number of DRGs that are split on the basis of
the presence or absence of complications or comorbidities (CCs). The
DRGs we are proposing to split are: DRG 4 (Spinal Procedures), DRG 5
(Extracranial Vascular Procedures), DRG 231 (Local Excision and Removal
of Internal Fixation Devices Except Hip and Femur) and DRG 400
(Lymphoma and Leukemia With Major O.R. Procedure).
[sbull] Creating two new DRGs to differentiate current DRG 514
(Cardiac Defibrillator Implant With Cardiac Catheterization) on the
basis of whether the patient does or does not experience any of the
following symptoms: acute myocardial infarction, heart failure, or
shock.
[sbull] Changing the DRG assignments of certain congenital
anomalies that currently result in patients being assigned to newborn
DRGs even when the patient is actually an adult. We also are adding to
the list of major problems in newborns that affect DRG assignment.
[sbull] Modifying DRG 492 (Chemotherapy With Acute Leukemia as
Secondary Diagnosis) to include in this DRG cases receiving high-dose
Interleukin-2 (IL-2)

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chemotherapy for patients with advanced renal cell cancer and advanced
melanoma.
We also are presenting our analysis of applicants for add-on
payments for high-cost new medical technologies.
2. Proposed Changes to the Hospital Wage Index
In section III. of this preamble, we discuss proposed revisions to
the wage index and the annual update of the wage data. Specific issues
addressed in this section include the following:
[sbull] The proposed FY 2004 wage index update, using wage data
from cost reporting periods that began during FY 2000.
[sbull] Proposed exclusion of the wage data for rural health
centers (RHCs) and Federally qualified health centers (FQHCs) from the
calculation of the FY 2004 wage index.
[sbull] Proposed exclusion of paid hours associated with military
and jury duty leave from the wage index calculation, and request for
comments on possible exclusion of paid lunch or meal break hours.
[sbull] Proposed revisions to the wage index based on hospital
redesignations and reclassifications.
[sbull] Proposed amendments to the timetable for reviewing and
verifying the wage data that will be in effect for the FY 2005 wage
index.
3. Other Decisions and Proposed Changes to the PPS for Inpatient
Operating and GME Costs
In section IV. of this preamble, we discuss several provisions of
the regulations in 42 CFR parts 412 and 413 and set forth certain
proposed changes concerning the following:
[sbull] Proposed expansion of the current postacute transfer policy
to 19 additional DRGs.
[sbull] Proposed clarification of our policies that would be
applied to counting hospital beds and patient days, in particular with
regard to the treatment of swing-beds and observation beds, for
purposes of the IME and DSH adjustments.
[sbull] Proposed changes in our policy relating to nursing and
allied health education payments to wholly owned subsidiary educational
institutions of hospitals.
[sbull] Proposed clarification of policy relating to application of
redistribution of costs and community support funds in determining a
hospital's resident training costs.
[sbull] Proposed change in the amount of rural training time
required for an urban hospital to qualify for an increase in the rural
track FTE limitation.
[sbull] Proposed inclusion of FTE residents training in rural
tracks in a hospital's rolling average calculation.
4. PPS for Capital-Related Costs
In section V., of this preamble, we discuss the payment
requirements for capital-related costs. We are not proposing any
changes to the policies on payments to hospitals for capital-related
costs.
5. Proposed Changes for Hospitals and Hospital Units Excluded from
the IPPS
In section VI., of this preamble, we discuss the following
proposals concerning excluded hospitals and hospital units and CAHs:
[sbull] Revisions relating to the operation of excluded
``grandfathered'' hospitals-within-hospitals in effect on September 30,
1999.
[sbull] Clarification of the classification criteria for LTCHs.
[sbull] Clarification of the policy on payments for laboratory
services provided by a CAH to patients outside a CAH.
6. Determining Prospective Payment Operating and Capital Rates and
Rate-of-Increase Limits
In the Addendum to this proposed rule, we set forth proposed
changes to the amounts and factors for determining the FY 2004
prospective payment rates for operating costs and capital-related
costs. We also establish the proposed threshold amounts for outlier
cases. In addition, we address update factors for determining the rate-
of-increase limits for cost reporting periods beginning in FY 2004 for
hospitals and hospital units excluded from the PPS.
7. Impact Analysis
In Appendix A, we set forth an analysis of the impact that the
proposed changes described in this proposed rule would have on affected
hospitals.
8. Proposed Recommendation of Update Factor for Hospital Inpatient
Operating Costs
As required by sections 1886(e)(4) and (e)(5) of the Act, Appendix
B provides our recommendation of the appropriate percentage change for
FY 2004 for the following:
[sbull] Large urban area and other area average standardized
amounts (and hospital-specific rates applicable to SCHs and MDHs) for
hospital inpatient services paid under the IPPS for operating costs.
[sbull] Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals and
hospital units excluded from the IPPS.
9. Discussion of Medicare Payment Advisory Commission Recommendations
Under section 1805(b) of the Act, the Medicare Payment Advisory
Commission (MedPAC) is required to submit a report to Congress, no
later than March 1 of each year, that reviews and makes recommendations
on Medicare payment policies. This annual report makes recommendations
concerning hospital inpatient payment policies. In section VII., of
this preamble, we discuss the MedPAC recommendations and any actions we
are proposing to take with regard to them (when an action is
recommended). For further information relating specifically to the
MedPAC March 1 report or to obtain a copy of the report, contact MedPAC
at (202) 653-7220 or visit MedPAC's Web site at: http://www.medpac.gov.

II. Proposed Changes to 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. The proposed changes to the DRG
classification system and the proposed recalibration of the DRG weights
for discharges occurring on or after October 1, 2003 are discussed
below.

[[Page 27159]]

B. DRG Reclassification

1. General
Cases are classified into DRGs for payment under the IPPS based on
the principal diagnosis, up to eight additional diagnoses, and up to
six procedures performed during the stay. In a small number of 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).
For FY 2003, cases are assigned to one of 510 DRGs in 25 major
diagnostic categories (MDCs). Most MDCs are based on a particular organ
system of the body. For example, MDC 6 is Diseases and Disorders of the
Digestive System. This approach is used because the 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)). The table
below lists the 25 MDCs.

------------------------------------------------------------------------
Major Diagnostic Categories
------------------------------------------------------------------------
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 a DRG. However, for FY 2003,
there are eight DRGs to which cases are directly assigned on the basis
of ICD-9-CM procedure codes. These are the DRGs for heart, liver, bone
marrow, lung transplants, simultaneous pancreas/kidney, and pancreas
transplants (DRGs 103, 480, 481, 495, 512, and 513, respectively) and
the two DRGs for tracheostomies (DRGs 482 and 483). Cases are assigned
to these DRGs before classification to an MDC.
Within most MDCs, cases are then divided into surgical DRGs 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 (less than 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 a comorbidity (CC).
Generally, nonsurgical procedures and minor surgical procedures 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
DRG assignment for certain principal diagnoses, such as extracorporeal
shock wave lithotripsy for patients with a principal diagnosis of
urinary stones.
Patients' diagnosis, procedure, discharge status, and demographic
information is fed into the Medicare claims processing systems and
subjected to a series of automated screens called the Medicare Code
Editor (MCE). These screens are designed to identify cases that require
further review before classification into a DRG.
After screening through the MCE and any further development of the
claims, cases are classified into the appropriate DRG by the Medicare
GROUPER software program. The GROUPER program was developed as a means
of classifying each case into a DRG on the basis of the diagnosis and
procedure codes and, for a limited number of DRGs, demographic
information (that is, sex, age, and discharge status).
After cases are screened through the MCE and assigned to a DRG by
the GROUPER, a payment is calculated by the PRICER software. The PRICER
calculates the payments for each case covered by the IPPS based on the
DRG relative weight and factors associated with each hospital, such as
IME and DSH adjustments.
The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights. However, in the July 30,
1999 IPPS final rule (64 FR 41500), we discussed a process for
considering non-MedPAR data in the recalibration process. In order for
the use of particular data to be feasible, 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 data submitted. Generally, however, a
significant sample of the data should be submitted by mid-October for
consideration in conjunction with the next year's proposed rule, so
that we can 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.
Many of the changes to the DRG classifications are the result of
specific issues brought to our attention by interested parties. We
encourage individuals with concerns about the DRG classifications to
bring those concerns to our attention in a timely manner so they can be
carefully considered for possible inclusion in the next proposed rule
and so any proposed changes 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 DRG recalibration
process, concerns about DRG classification issues should be brought to
our attention no later than early December in order to be considered
and possibly included in the next annual proposed rule updating the
IPPS.
The changes we are proposing to the DRG classification system for
FY 2004 GROUPER version 21.0 and to the methodology to recalibrate the
DRG weights are set forth below. Unless otherwise noted, our DRG
analysis is based on data from the December 2002 update of the FY 2002
MedPAR file, which contains hospital bills received

[[Page 27160]]

through December 31, 2002, for discharges in FY 2002.
2. Review of DRGs for CC Split
In an effort to improve the clinical and cost cohesiveness of the
DRG classification system, we have evaluated whether additional DRGs
should be split based on the presence or absence of a CC. There are
currently 116 paired CC split DRGs. We last performed a systematic
evaluation and considered changes to the DRGs to recognize the within-
DRG cost differences based on the presence or absence of CCs in 1994
(May 27, 1994 IPPS proposed rule, 59 FR 27715). In 1994, we described a
refined DRG system based on a list of secondary diagnoses that have a
major effect on the resources used by hospitals in treating patients
across DRGs. We analyzed how the presence of the secondary diagnosis
affected resource use compared to other secondary diagnoses, and
classified these secondary diagnoses as non-CC, CC, or major CC. After
finalizing the classification of secondary diagnoses, we evaluated
which collapsed DRGs should be split on the basis of the presence 8 of
a major CC, other CC, or both.\1\ However, this refined system was not
implemented because we did not believe it would be prudent policy to
make changes for which we could not predict the effect on the case-mix
(the average DRG relative weight for all cases) and, thus, payments (60
FR 29209). We were concerned that we would be unable to fulfill the
requirement of section 1886(d)(4)(C)(iii) of the Act that aggregate
payments may not be affected by DRG reclassification and recalibration
of weighting factors. That is, our experience has been that hospitals
respond to major changes to the DRGs by changing their coding practices
in ways that increase total payments (for example, by beginning to
include ICM-9-CM codes that previously did not affect payment for a
case). Because changes in coding behavior do not represent a real
increase in the severity of the overall mix of cases, total payments
should not increase. The only way to ensure this behavioral response
does not lead to higher total payments is to make an offsetting
adjustment to the system in advance of the fiscal year when the changes
are effective.
---------------------------------------------------------------------------

\1\ The complete description of the analysis was published in
the Health Care Financing Review (Edwards, N., Honemann, D., Burley,
D., Navarro, M., ``Refinement of the Medicare Diagnosis-Related
Groups to Incorporate a Measure of Severity,'' Health Care Financing
Review, Winter 1994, Vol. 16, No. 2, p. 45).
---------------------------------------------------------------------------

Section 301(e) of the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 Public Law 106-554 authorized
the Secretary to make such a prospective adjustment to the average
standardized amounts for discharges occurring on or after October 1,
2001, to ensure the total payment impacts of changes to the DRGs do not
result in any more or less total spending than would otherwise occur
without the changes (budget neutrality).
Pending a decision whether to replace ICD-9-CM with another
classification system, we are not proposing to proceed with
implementing a refined DRG system at this time. The refined DRG system
discussed in the 1994 Federal Register involved a complete and thorough
assessment of all of the ICD-9-CM diagnosis codes in order to establish
an illness severity level associated with each code. Rather than
undertaking the time-consuming process of establishing illness severity
levels for all ICD-9-CM codes at this time, we believe the more prudent
course would be to delay this evaluation pending the potential
replacement of ICD-9-CM. For example, the National Committee on Health
and Vital Statistics (NCHVS) is considering making a recommendation to
the Secretary on whether to recommend the adoption of ICD-10-CM and the
ICD-10-Procedure Coding System (PCS) as the national uniform standard
coding system for inpatient reporting.
In the meantime, we have undertaken an effort to identify groups of
DRGs where a CC-split appears most justified. Our analysis identified
existing DRGs that meet the following criteria: a reduction in variance
in charges within the DRG of at least 4 percent; fewer than 75 percent
of all patients in the current DRG would be assigned to the with-CC
DRG; and the overall payment impact (higher payments for cases in the
with-CC DRG offset by lower payments for cases in the without-CC DRG)
is at least $40 million.
The following four DRGs meet these criteria: DRG 4 (Spinal
Procedures) and DRG 5 (Extracranial Vascular Procedures) in MDC 1
(Diseases and Disorders of the Nervous System); DRG 231 (Local Excision
and Removal of Internal Fixation Devices Except Hip and Femur) in MDC 8
(Diseases and Disorders of the Musculoskeletal and Connective Tissue);
and DRG 400 (Lymphoma and Leukemia with Major O.R. Procedure) in MDC 17
(Myeloproliferative Diseases and Disorders and Poorly Differentiated
Neoplasms).
The following data indicate that the presence or absence of a CC
was found to have a significant impact on patient charges and average
length of stays in these four DRGs.

----------------------------------------------------------------------------------------------------------------
Number of Average Average length
DRG cases charges of stay
----------------------------------------------------------------------------------------------------------------
DRG 4 (Current)................................................. 4,488 $35,074 7.3
With CC..................................................... 2,514 46,071 10.0
Without CC.................................................. 1,974 21,070 3.9
DRG 5 (Current)................................................. 64,942 18,613 2.9
With CC..................................................... 29,296 23,213 4.1
Without CC.................................................. 35,646 14,833 2.0
DRG 231 (Current)............................................... 8,971 20,147 4.9
With CC..................................................... 4,565 25,948 6.9
Without CC.................................................. 4,406 14,136 2.9
DRg 400 (Current)............................................... 4,275 39,953 9.0
With CC..................................................... 2,990 49,044 11.2
Without CC.................................................. 1,285 18,799 4.0
----------------------------------------------------------------------------------------------------------------

Therefore, we are proposing to establish the following new DRGs:
proposed DRG 531 (Spinal Procedures With CC) and proposed DRG 532
(Spinal Procedures Without CC) in MDC 1; proposed DRG 533 (Extracranial
Vascular Procedures With CC) and proposed DRG 534 (Extracranial
Vascular Procedures Without CC) in

[[Page 27161]]

MDC 1; proposed DRG 537 (Local Excision and Removal of Internal
Fixation Devices Except Hip and Femur With CC) and proposed DRG 538
(Local Excision and Removal of Internal Fixation Devices Except Hip and
Femur Without CC) in MDC 8; and proposed DRG 539 (Lymphoma and Leukemia
With Major O.R. Procedure With CC) and DRG 540 (Lymphoma and Leukemia
With Major O.R. Procedure Without CC) in MDC 17. We are proposing that
DRGs 4, 5, 231, and 400 would become invalid.
3. MDC 1 (Diseases and Disorders of the Nervous System)
a. Revisions of DRGs 1 and 2. In the FY 2003 IPPS final rule, we
split DRGs 1 and 2 (Craniotomy Age 17 With and Without CC,
respectively) based on the presence or absence of a CC (67 FR 49986).
We have received several proposals related to devices or procedures
that are used in a small subset of cases from these DRGs. These
proposals argue that the current payment for these devices or
procedures under DRGs 1 and 2 is inadequate.\2\
---------------------------------------------------------------------------

\2\ We also examined the issue of treating brain tumors through
the implantation of chemotherapy wafers. This analysis is discussed
later in this preamble under section II.E.2.b. relative to the
application for new technology add-on payments for the GLIADEL[reg]
Wafer.
---------------------------------------------------------------------------

Therefore, we undertook an analysis of the charges of various
procedures and diagnoses within DRGs 1 and 2 to assess whether further
changes to these DRGs may be warranted. Currently, the average charges
for cases assigned to DRGs 1 and 2 are approximately $55,000 and
$30,000, respectively. We are proposing to create two separate new DRGs
for: Cases with an intracranial vascular procedure and a principal
diagnosis of an intracranial hemorrhage; and craniotomy cases with a
ventricular shunt procedure (absent another procedure). The former set
of cases are much more expensive than those presently in DRGs 1 and 2;
the latter set of cases are much less expensive.
(1) Intracranial Vascular Procedures
Our analysis indicated that patients with an intracranial vascular
procedure and a principal diagnosis of an intracranial hemorrhage were
significantly more costly than other cases in DRGs 1 and 2. These
patients have an acute condition with a high severity of illness and
risk of mortality. There were 917 cases in DRGs 1 and 2 with an
intracranial vascular procedure and a principal diagnosis of hemorrhage
with average charges of approximately $113,884, which are much higher
than the average charges of DRGs 1 and 2 noted above.
We also found 890 cases that had an intracranial vascular procedure
without a principal diagnosis of hemorrhage (for example, nonruptured
aneurysms). These cases are generally less acutely ill than those
involving ruptured aneurysms, and have a lower risk of mortality. Among
these 890 cases, the average charges were approximately $52,756, which
are much more similar to the average charges for all cases in DRGs 1
and 2.
Based on this analysis, we are proposing to create new DRG 528
(Intracranial Vascular Procedure With a Principal Diagnosis of
Hemorrhage) for patients with an intracranial vascular procedure and an
intracranial hemorrhage. We are proposing that cases involving
intracranial vascular procedures without a principal diagnosis of
hemorrhage would remain in DRGs 1 and 2.
Proposed new DRG 528 would have the following principal diagnoses:

[sbull] 094.87, Syphilitic ruptured cerebral aneurysm
[sbull] 430, Subarachnoid hemorrhage
[sbull] 431, Intracerebral hemorrhage
[sbull] 432.0, Nontraumatic extradural hemorrhage
[sbull] 432.1, Subdural hemorrhage
[sbull] 432.9, Unspecified intracranial hemorrhage
And operating room procedures:
[sbull] 02.13, Ligation of meningeal vessel
[sbull] 38.01, Incision of vessel, intracranial vessels
[sbull] 38.11, Endarterectomy, intracranial vessels
[sbull] 38.31, Resection of vessel with anastomosis, intracranial
vessels
[sbull] 38.41, Resection of vessel with replacement, intracranial
vessels
[sbull] 38.51, Ligation and stripping of varicose veins, intracranial
vessels
[sbull] 38.61, Other excision of vessels, intracranial vessels
[sbull] 38.81, Other surgical occlusion of vessels, intracranial
vessels
[sbull] 39.28, Extracranial-intracranial (EC-IC) vascular bypass
[sbull] 39.51, Clipping of aneurysm
[sbull] 39.52, Other repair of aneursym
[sbull] 39.53, Repair of arteriovenous fistula
[sbull] 39.72, Endovascular repair or occlusion of head and neck
vessels
[sbull] 39.79, Other endovascular repair of aneurysm of other vessels

(2) Ventricular Shunt Procedures

We also found that craniotomy patients who had a ventricular shunt
procedure (absent another procedure) were significantly less costly
than other craniotomy patients in DRGs 1 and 2. Ventricular shunts are
normally performed for draining intracranial fluid. A ventricular shunt
is a less extensive procedure than the other intracranial procedures in
DRGs 1 and 2. As a result, if a ventricular shunt is the only
intracranial procedure performed, these cases will typically be less
costly.
There were 4,373 cases in which only ventricular shunt procedures
were performed. These cases had average charges of approximately
$27,188. However, the presence or absence of a CC had a significant
impact on patient charges and lengths of stay. There were 2,533 cases
with CC, with average charges of approximately $33,907 and an average
length of stay of 8.2 days. In contrast, there were 1,840 cases without
CC, with average charges of approximately $17,939 and an average length
of stay of 3.7 days.
Therefore, we are proposing to create two new DRGs, splitting on
CC, for patients with only a vascular shunt procedure: proposed new DRG
529 (Ventricular Shunt Procedures With CC) and proposed new DRG 530
(Ventricular Shunt Procedures Without CC).
Proposed new DRG 529 would consist of any principal diagnosis in
MDC 5, with the presence of a CC and one of the following operating
room procedures:
[sbull] 02.31, Ventricular shunt to structure in head and neck
[sbull] 02.32, Ventricular shunt to circulatory system
[sbull] 02.33, Ventricular shunt to thoracic cavity
[sbull] 02.34, Ventricular shunt to abdominal cavity and organs
[sbull] 02.35, Ventricular shunt to urinary system
[sbull] 02.39, Other operations to establish drainage of ventricle
[sbull] 02.42, Replacement of ventricular shunt

[sbull] 02.43, Removal of ventricular shunt
Proposed new DRG 530 would consist of any principal diagnosis in
MDC 5 with one of the operating room procedures listed above for the
proposed new DRG 529, but without the presence of a CC.
b. DRG 23 (Nontraumatic Stupor and Coma). In DRG 23 (Nontraumatic
Stupor and Coma), there are currently six principal diagnoses
identified by the following ICD-9-CM diagnosis codes: 348.4,
Compression of the brain; 348.5, Cerebral edema; 780.01, Coma; 780.02,
Transient alteration of awareness; 780.03, Persistent vegetative state;
and 780.09, Other alteration of consciousness. Code 780.02 is often
used to describe the diagnosis of psychiatric patients rather than the
diagnosis of patients with severe

[[Page 27162]]

neurological disorders. The treatment plan for a patient with
``transient alteration of awareness'' is clinically very different from
the treatment plan for a coma patient. Furthermore, many patients with
this diagnosis are treated in psychiatric facilities rather than in
acute care hospitals.
Although there are neurological patients who present with the
complaint of ``transient alteration of awareness,'' the cause of this
alteration of consciousness is commonly identified, and the principal
diagnosis for the hospital admission is the etiology of the alteration
of consciousness rather than the symptom itself. For the few remaining
neurological patients for whom the cause is not identified and for whom
code 780.02 is assigned as the principal diagnosis, we still believe
that the care of these patients is different than the care of patients
with coma or cerebral edema.
Because we believe the patients with a principal diagnosis of
``transient alteration of consciousness'' are more clinically related
to the patients in DRG 429 (Organic Disturbances and Mental
Retardation) in MDC 19 (Mental Diseases and Disorders), we are
proposing that patients who are assigned a principal diagnosis of code
780.02 will be assigned to DRG 429 instead of DRG 23. DRG 429 also
contains similar diagnoses, such as code 293.81, Organic delusional
syndrome and code 293.82, Organic hallucinosis syndrome. We note that
the charges for the patient cases in DRGs 23 and 429 are very similar
($11,559 and $11,713, respectively), so the proposed movement of code
780.02 from DRG 23 to DRG 429 would have minimal payment impact. Moving
this diagnosis code would also consolidate diagnoses treated frequently
in psychiatric hospitals in those DRGs that are likely to be a part of
the upcoming proposed Medicare psychiatric facility PPS.
4. MDC 5 (Diseases and Disorders of the Circulatory System)
a. DRG 478 (Other Vascular Procedures With CC) and DRG 479 (Other
Vascular Procedures Without CC)
Code 37.64 (Removal of heart assist system) in DRGs 478 and 479
describes the operative, as opposed to bedside, removal of a heart
assist system. Based on comments we received suggesting that code 37.64
was inappropriately assigned to DRGs 478 and 479, we reviewed the
MedPAR data for both DRGs 478 and 479 and DRG 110 (Major Cardiovascular
Procedures With CC) and DRG 111 (Major Cardiovascular Procedures
Without CC) to assess the appropriate assignment of code 37.64.
We found that there were only 17 cases of code 37.64 in DRGs 478
and 479, with an average length of stay of 14.1 days and average
charges of $105,153. There were a total of 90,591 cases in DRGs 478 and
479 that did not contain code 37.64. These cases had an average length
of stay of 6.6 days and average charges of $31,879. In DRGs 110 and
111, we found an average length of stay of 8.1 days, with average
charges of $54,653.
We are proposing to remove code 37.64 from DRGs 478 and 479 and
reassign it to DRGs 110 and 111. The surgical removal of a heart assist
system is a major cardiovascular procedure and, therefore, more
appropriately assigned to DRGs 110 and 111. Accordingly, we believe
this DRG assignment for this procedure is more clinically and
financially appropriate.
b. DRGs 514 (Cardiac Defibrillator Implant With Cardiac
Catheterization) and 515 (Cardiac Defibrillator Implant Without Cardiac
Catheterization)
(1) Cardiac Defibrillator Implant With Cardiac Catheterization With
Acute Myocardial Infarction
We received a recommendation that we modify DRG 514 (Cardiac
Defibrillator Implant With Cardiac Catheterization) and DRG 515
(Cardiac Defibrillator Implant Without Cardiac Catheterization) so that
these DRGs are split based on the presence or absence of acute
myocardial infarction, heart failure, or shock. We note that the
increased cost of treating cardiac patients with acute myocardial
infarction, heart failure, or shock is recognized in the payment logic
for pacemaker implants (DRG 115 (Permanent Cardiac Pacemaker Implant
With Acute Myocardial Infarction, Heart Failure or Shock, or AICD Lead
or Generator) and DRG 116 (Other Permanent Cardiac Pacemaker Implant)).
We examined FY 2002 MedPAR data regarding the number of cases and
the average charges for DRGs 514 and 515. The results of our
examination are summarized in the following table.

----------------------------------------------------------------------------------------------------------------
With AMI,
DRG Number of Average heart failure, Average
cases charges or shock count charges
----------------------------------------------------------------------------------------------------------------
514............................................. 16,743 $97,133 3,623 $120,852
515............................................. 4,674 76,537 935 84,140
----------------------------------------------------------------------------------------------------------------

A cardiac catheterization is generally performed to establish the
nature of the patient's cardiac problem and determine if implantation
of a cardiac defibrillator is appropriate. Generally, the cardiac
catheterization can be done on an outpatient basis. Patients who are
admitted with acute myocardial infarction, heart failure, or shock and
have a cardiac catheterization are generally acute patients who require
emergency implantation of the defibrillator. Thus, there are very high
costs associated with these patients.
We found that the average charges for patients with cardiac
catheterizations who also had acute myocardial infarction, heart
failure, or shock were $120,852, compared to the average charges for
all DRG 514 cases of $97,133. Therefore, we are proposing to split DRG
514 and create a new DRG for patients receiving a cardiac defibrillator
implant with cardiac catheterization and with acute myocardial
infarction, heart failure, or shock.
Patients without cardiac catheterization generally have had the
need for the defibrillator established on an outpatient basis prior to
admission. We found 935 cases with acute myocardial infarction, heart
failure, or shock, with average charges of $84,140. The average charges
for all cases in DRG 515 were $76,537. Because of the relatively small
number of patients and the less-than-10-percent charge difference for
patients in DRG 515 who have acute myocardial infarction, heart
failure, or shock, we are not proposing to create a separate DRG for
patients with a cardiac defibrillator implant without cardiac
catheterization with acute myocardial infarction, heart failure, or
shock.
Specifically, we are proposing to create two new DRGs that would
replace the current DRG 514. The two new DRGs would have the same
procedures currently listed for DRG 514, but would be split based on
the presence or absence of acute myocardial infarction, heart failure,
or shock. The proposed new DRGs would be DRG 535 (Cardiac

[[Page 27163]]

Defibrillator Implant With Cardiac Catheterization and With Acute
Myocardial Infarction, Heart Failure, or Shock) and DRG 536 (Cardiac
Defibrillator Implant With Cardiac Catheterization and Without Acute
Myocardial Infarction, Heart Failure, or Shock). Proposed new DRG 536
would exclude the following principal diagnosis codes from MDC 5
associated with acute myocardial infarction, heart failure, or shock.
[sbull] 398.91, Rheumatic heart failure
[sbull] 402.01, Malignant hypertensive heart disease with heart
failure
[sbull] 402.11, Benign hypertensive heart disease with heart
failure
[sbull] 402.91, Hypertensive heart disease not otherwise specified
with heart failure
[sbull] 404.01, Malignant hypertensive heart and renal disease with
heart failure
[sbull] 404.03, Malignant hypertensive heart and renal disease with
heart failure and renal failure
[sbull] 404.11, Benign hypertensive heart and renal disease with
heart failure
[sbull] 404.13, Benign hypertensive heart and renal disease with
heart failure and renal failure
[sbull] 404.91, Hypertensive heart and renal disease not otherwise
specified with heart failure
[sbull] 404.93, Hypertensive heart and renal disease not otherwise
specified with heart failure and renal failure
[sbull] 410.01, AMI anterolateral, initial
[sbull] 410.11, AMI anterior wall, initial
[sbull] 410.21, AMI inferolateral, initial
[sbull] 410.31, AMI inferopost, initial
[sbull] 410.41, AMI inferior wall, initial
[sbull] 410.51, AMI lateral not elsewhere classified, initial
[sbull] 410.61, True posterior infarction, initial
[sbull] 410.71, Subendocardial infarction, initial
[sbull] 410.81, AMI not elsewhere classified, initial
[sbull] 410.91, AMI not otherwise specified, initial
[sbull] 428.0, Congestive heart failure, not otherwise specified
[sbull] 428.1, Left heart failure
[sbull] 428.20, Systolic heart failure, not otherwise specified
[sbull] 428.21, Acute systolic heart failure
[sbull] 428.22, Chronic systolic heart failure
[sbull] 428.23, Acute on chronic systolic heart failure
[sbull] 428.30, Diastolic heart failure, not otherwise specified
[sbull] 428.31, Acute diastolic heart failure
[sbull] 428.32, Chronic diastolic heart failure
[sbull] 428.33, Acute on chronic diastolic heart failure
[sbull] 428.40, Combined systolic and diastolic heart failure not
otherwise specified
[sbull] 428.41, Acquired combined systolic and diastolic heart
failure
[sbull] 428.42, Chronic combined systolic and diastolic heart
failure
[sbull] 428.43, Acute on chronic combined systolic and diastolic
heart failure
[sbull] 428.9, Heart failure, not otherwise specified
[sbull] 785.50, Shock, not otherwise specified
[sbull] 785.51, Cardiogenic shock
(2) Cardiac Resynchronization Therapy (CRT)
We received a comment from a provider who pointed out that we did
not include the following combination of codes under the list of
procedure combinations that would lead to an assignment of DRG 514 or
DRG 515:
[sbull] 39.75, Implantation of automatic cardioverter/defibrillator
lead(s) only
[sbull] 00.54, Implantation or replacement of cardiac
resynchronization defibrillator, pulse generator device only [CRT-D]
The commenter pointed out that cases are assigned to DRGS 514 and
515 when a total cardiodefibrillator or CRT-D system is implanted. In
addition, cases are assigned to DRGs 514 and 515 when implantation of a
variety of combinations of defibrillator leads and device combinations
are reported. The commenter indicated that total defibrillator and CRT-
D system may be replaced with completely new systems or all new devices
and leads, and added that it is also possible to replace a generator, a
lead, or a combination of generators and up to three leads.
When the CRT-D generator (code 00.54) and one of the cardioverter/
defibrillator leads are replaced, the case currently is assigned to DRG
115 (Permanent Cardiac Pacemaker Implant with AMI, Heart Failure, or
Shock or AICD Lead or Generator Procedure). The commenter recommended
that we include the combination of codes 39.75 and 00.54 as a
combination that would result in assignment to DRG 514 or DRG 515, as
do other combinations of generators and leads. Our medical advisors
agree with this recommendation. As discussed previously, we are
proposing to delete DRG 514 and replace it with proposed new DRGs 535
and 536. Therefore, we are proposing to add codes 39.75 and 00.54 to
the list of procedure combinations that would result in assignment to
DRG 515 or new proposed DRGs 535 and 536.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and
Connective Tissue)
We received a comment that two codes for cervical fusion of the
spine are not included within DRG 519 (Cervical Spinal Fusion With CC)
and DRG 520 (Cervical Spinal Fusion Without CC). The two cervical
fusion codes are:
[sbull] 81.01, Atlas-axis spinal fusion
[sbull] 81.31, Refusion of atlas-axis
The atlas-axis includes the first two vertebrae of the cervical
spine (C1 and C2). These two cervical fusion codes are currently
assigned to DRG 497 (Spinal Fusion Except Cervical With CC) and DRG 498
(Spinal Fusion Except Cervical Without CC). Because codes 81.01 and
81.31 involve the cervical spine, we are proposing to remove these
codes from DRGs 497 and 498 and reassign them to DRGs 519 and 520.
6. MDC 15 (Newborns and Other Neonates With Conditions Originating in
the Perinatal Period)
a. Nonneonate Diagnoses. As indicated earlier, ICD-9-CM diagnosis
codes are assigned to MDCs based on 25 groupings corresponding to a
single organ system or etiology and, in general, are associated with a
particular medical specialty. MDC 15 is comprised of diagnoses that
relate to newborns and other neonates with conditions originating in
the perinatal period. Some of the codes included in MDC 15 consist of
conditions that originate in the neonatal period but can persist
throughout life. These conditions are referred to as congenital
anomalies. When an older (not neonate) population is treated for a
congenital anomaly, DRG assignment problems can arise. For instance, if
a patient is over 65 years old and is admitted with a congenital
anomaly, it is not appropriate to assign the patient to a newborn DRG.
This situation occurs when a congenital anomaly code is classified
within MDC 15.
We have received a recommendation to move the following congenital
anomaly codes from MDC 15 and reassign them to other appropriate MDCs
based on the body system being treated:
[sbull] 758.9, Chromosome anomaly, not otherwise specified
[sbull] 759.4, Conjoined twins
[sbull] 759.7, Multiple congenital anomalies, not elsewhere
classified
[sbull] 759.81, Prader-Willi syndrome
[sbull] 759.83, Fragile X syndrome
[sbull] 759.89, Specified congenital anomalies, not elsewhere
classified
[sbull] 759.9, Congenital anomaly, not otherwise specified

[[Page 27164]]

[sbull] 779.7, Periventricular leukomalacia
[sbull] 795.2, Abnormal chromosomal analysis
Each of the congenital anomaly diagnosis codes recommended for
reassignment represents a condition that is frequently addressed beyond
the neonatal period. In addition, the assignment of these congenital
anomaly codes as principal diagnosis currently results in assignment to
MDC 15.
We have evaluated the recommendation and agree that each of the
identified codes represents a condition that is frequently addressed
beyond the neonate period and should therefore be removed from the list
of principal diagnoses that result in assignment to MDC 15. Therefore,
we are proposing to change the MDC and DRG assignments of the
congenital anomaly codes as specified in the following table. The table
shows the principal diagnosis code for the congenital anomaly and the
proposed MDC and DRG to which the code would be assigned.

----------------------------------------------------------------------------------------------------------------
Proposed MDC
Principal diagnosis code in MDC 15 Code title assignment Proposed DRG assignment
----------------------------------------------------------------------------------------------------------------
758.9................................... Chromosome anomaly, not 23 467 (Other Factors
otherwise specified. Influencing Health
Status).
759.4................................... Conjoined twins........... 6 188, 189, and 190 (Other
Digestive System
Diagnoses, Age 17 with CC, Age 17 without CC, and
Age 0-17, respectively).
759.7................................... Multiple congenital 8 256 (Other Musculoskeletal
anomalies, not elsewhere System and Connective
classified. Tissue Diagnoses).
759.81.................................. Prader-Willi syndrome..... 8 256 (Other Musculoskeletal
System and Connective
Tissue Diagnoses).
759.83.................................. Fragile X syndrome........ 19 429 (Organic Disturbances
and Mental Retardation).
759.89.................................. Specified congenital 8 256 (Other Musculoskeletal
anomalies, not elsewhere System and Connective
classified. Tissue Diagnoses).
759.9................................... Congenital anomaly, not 23 467 (Other Factors
otherwise specified. Influencing Health
Status).
779.7................................... Periventricular 1 34 and 35 (Other Disorders
leukomalacia. of Nervous System with
CC, and without CC,
respectively).
795.2................................... Abnormal chromosomal 23 467 (Other Factors
analysis. Influencing Health
Status).
----------------------------------------------------------------------------------------------------------------

b. Heart Failure Codes for Newborns and Neonates. Under MDC 15,
cases of newborns and neonates with major problems may be assigned to
DRG 387 (Prematurity With Major Problems) or DRG 389 (Full-Term Neonate
With Major Problems). Existing DRG 387 has three components: (1)
Principal or secondary diagnosis of prematurity; (2) principal or
secondary diagnosis of major problem (these are the diagnoses that
define MDC 15); or (3) secondary diagnosis of major problem (these are
diagnoses that do not define MDC 15, so they will only be secondary
diagnosis codes for patients assigned to MDC 15). To be assigned to DRG
389, the neonate must have one of the principal or secondary diagnoses
listed under the DRG.
We have received correspondence suggesting that the following
diagnosis codes for heart failure, which are currently in MDC 5, be
added to the list of major problems for neonates under MDC 15.

------------------------------------------------------------------------
Diagnosis code Title
------------------------------------------------------------------------
428.20............................. Systolic heart failure, not
otherwise specified.
428.21............................. Acute systolic heart failure.
428.22............................. Chronic systolic heart failure.
428.23............................. Acute on chronic systolic heart
failure.
428.30............................. Diastolic heart failure, not
otherwise specified.
428.31............................. Acute diastolic heart failure.
428.32............................. Chronic diastolic heart failure.
428.33............................. Acute on chronic diastolic heart
failure.
428.40............................. Systolic/diastolic heart failure,
not otherwise specified.
428.41............................. Acute systolic/diastolic heart
failure.
428.42............................. Chronic systolic/diastolic heart
failure.
428.43............................. Acute on chronic systolic/diastolic
heart failure.
------------------------------------------------------------------------

These heart failure-related diagnosis codes were new codes as of
October 1, 2002. They were an expansion of the previous 4-digit codes
for heart failure and provided additional detail about the specific
type of heart failure. The other codes for heart failure that existed
prior to October 1, 2002, are classified as major problems within MDC
15 and are currently assigned to DRGs 387 and DRG 389.
We agree that diagnosis codes 428.20 through 428.43 listed in the
chart above should be included as principal diagnosis of major problem
codes within MDC 15 and, therefore, are proposing to add them to DRG
387 and 389.
7. MDC 17 (Myeloproliferative Diseases and Disorders and Poorly
Differentiated Neoplasms)
High-dose Interleukin-2 (IL-2) Chemotherapy is a hospital
inpatient-based regimen requiring administration by experienced
oncology professionals. It is used for the treatment of patients with
advanced renal cell cancer and advanced melanoma. Unlike traditional
cytotoxic chemotherapies that attack cancer cells themselves,
Interleukin-2 is designed to enhance the body's defenses by mimicking
the way natural IL-2 activates the immune system and stimulates the
growth and activity of cancer-killing cells. The IL-2 product on the
market was approved for use by the Food and Drug Administration (FDA)
in 1992.
High-dose IL-2 therapy is performed only in very specialized
treatment settings, such as an intensive care unit or a bone marrow
transplant unit. This therapy requires oversight by oncology health
care professionals experienced in the administration and management of
patients undergoing this intensive treatment because of the severity of
the side effects. Unlike most cancer

[[Page 27165]]

therapies, high-dose IL-2 therapy is associated with predictable
toxicities that require extensive monitoring. Often patients require
one-on-one nursing or physician care for extended portions of their
stay.
High-dose IL-2 therapy is significantly different from conventional
chemotherapy in terms of the resources required to administer it.
Conventional chemotherapy may be given to patients either on an
outpatient basis or through a series of short (that is, 1 to 3 day)
inpatient stays.
High-dose IL-2 therapy is given during two separate hospital
admissions. For the first cycle, the IL-2 is administered every 8 hours
over 5 days. Patients are then discharged to rest at home for several
days and then are admitted for the second cycle of therapy, in which
the same regimen and dosing is repeated. The two cycles complete the
first course of high-dose IL-2 therapy. This regimen may be repeated at
8 to 12 weeks if the patient is responding. The maximum number of
courses for any one patient is predicted to be five courses.
Not all patients with end-stage renal cell carcinoma or end-stage
melanoma are appropriate candidates for high-dose IL-2 chemotherapy. It
is estimated that there are between 15,000 and 20,000 patients in the
United States who have one of these two types of cancer. However, only
20 percent of those patients will be appropriate candidates for the
rigors of the treatment regimen. It is further estimated that,
annually, approximately 1,300 of these patients will be Medicare
beneficiaries. However, allegedly due to the level of payment for the
DRGs to which these cases are currently assigned, we have been informed
by industry sources that only between 100 and 200 Medicare patients
receive the treatment each year. According to these industry sources,
several treatment centers have had to discontinue their high-dose IL-2
therapy programs for end-stage renal cell carcinoma or end-stage
melanoma because of the low Medicare payment.
According to industry sources, the wholesale cost of IL-2 is
approximately $700 per vial. Dosages range between 15 and 20 vials per
treatment, or between $10,500 and $14,000 per patient, per cycle, for
the cost of the IL-2 drug alone. There is no ICD-9-CM procedure code
that currently identifies patients receiving this therapy. Therefore,
it is not possible to identify directly these cases in the MedPAR data.
Currently, this therapy is coded using the more general ICD-9-CM code
99.28 (Injection or infusion of biologic response modifier). When we
addressed this issue previously in the August 1, 2000 IPPS final rule
(65 FR 47067) by examining cases for which procedure code 99.28 was
present, our analysis was inconclusive due to the wide range of cases
identified (1,179 cases across in 136 DRGs). However, recent data
collected by the industry on 30 Medicare beneficiaries who received
high-dose IL-2 therapy during FY 2002 show average charges for these
cases of approximately $54,000.
Depending on the principal diagnosis reported, patients receiving
high-dose IL-2 therapy may be assigned to one of the following five
DRGs: DRG 272 (Major Skin Disorder With CC) and DRG 273 (Major Skin
Disorder Without CC) in MDC 9; DRG 318 (Kidney and Urinary Tract
Neoplasms With CC) and DRG 319 (Kidney and Urinary Tract Neoplasms
Without CC) in MDC 11; and DRG 410 (Chemotherapy Without Leukemia as
Secondary Diagnosis) in MDC 17. The following table illustrates the
average charges for patients in these DRGs.

------------------------------------------------------------------------
Average
DRG charges
------------------------------------------------------------------------
272........................................................ $14,997
273........................................................ 9,128
318........................................................ 16,892
319........................................................ 9,583
410........................................................ 16,103
------------------------------------------------------------------------

Because of the need to identify the subset of patients receiving
this type of treatment, the ICD-9-CM Coordination and Maintenance
Committee determined, based on its consideration at the December 6,
2002 public meeting, that a new code for high-dose IL-2 therapy was
warranted. Therefore, a new code has been created in the 00 Chapter of
ICD-9-CM (Procedures and Interventions, Not Elsewhere Classified), in
category 00.1 (Pharmaceuticals) at 00.15 (High-dose infusion
Interleukin-2 (IL-2)), effective October 1, 2003.
We believe patients receiving high-dose IL-2 therapy are clinically
similar to other cases currently assigned to DRG 492 (Chemotherapy With
Acute Leukemia as Secondary Diagnosis) in MDC 17. The average charge
for patients currently assigned to DRG 492 is $55,581. Currently, DRG
492 requires one of the following two principal diagnoses:
[sbull] V58.1, Encounter for chemotherapy
[sbull] V67.2, Followup examination following chemotherapy

[sbull] And one of the following secondary diagnoses:

[sbull] 204.00, Acute lymphoid leukemia without mention of
remission
[sbull] 204.01, Acute lymphoid leukemia with remission
[sbull] 205.00, Acute myeloid leukemia without mention of remission
[sbull] 205.01, Acute myeloid leukemia with remission
[sbull] 206.00, Acute monocytic leukemia without mention of
remission
[sbull] 206.01, Acute monocytic leukemia with remission
[sbull] 207.00, Acute erythremia and erythroleukemia without
mention of remission
[sbull] 207.01, Acute erythremia and erythroleukemia with remission
[sbull] 208.00, Acute leukemia of unspecified cell type without
mention of remission
[sbull] 208.01, Acute leukemia of unspecified cell type without
mention of remission
We are proposing to modify DRG 492 by adding new procedure code
00.15 to the logic. Assignment to this DRG would require the same two
V-code principal diagnosis codes as listed above (V58.1 and V67.2), but
would require either one of the leukemia codes listed as a secondary
diagnosis, or would require the procedure code 00.15. In addition, we
are proposing to change the title of DRG 492 to ``Chemotherapy With
Acute Leukemia or With Use of High Dose Chemotherapy Agent''.
We will monitor cases with procedure code 00.15 as these data
become available, and consider potential further refinements to DRG 492
as necessary.
8. MDC 23 (Factors Influencing Health Status and Other Contacts With
Health Services)
a. Implantable Devices. We received a comment regarding three ICD-
9-CM diagnosis codes that are currently assigned to MDC 23: V53.01
(Fitting and adjustment of cerebral ventricular (communicating) shunt);
V53.02 (Neuropacemaker (brain) (peripheral nerve) (spinal cord)); and
V53.09 (Fitting and adjustment of other devices related to nervous
system and special senses). The commenter suggested that we move these
three codes from MDC 23 to MDC 1 (Diseases and Disorders of the Nervous
System) because these codes are used as the principal diagnosis for
admissions involving removal, replacement, and reprogramming of devices
such as cerebral ventricular shunts, neurostimulators, intrathecal
infusion pumps and thalamic stimulators.
Currently, if these diagnosis codes are reported alone without an
O.R. procedure, the case would be assigned to DRG 467 (Other Factors
Influencing Health Status). However, if an O.R. procedure is reported
with the principal

[[Page 27166]]

diagnosis of V53.01, V53.02, or V53.09, the case would be assigned to
DRG 461 (O.R. Procedure with Diagnoses of Other Contact with Health
Services).
In our analysis of the MedPAR data, we found 30 cases assigned to
DRG 467 and 179 cases assigned to DRG 461 with one of these codes as
principal diagnosis. We found that the procedures reported with one of
these diagnosis codes were procedures in MDC 1. The most frequent
procedure was 86.06 (Insertion of totally implantable infusion pump).
Because the procedures that are routinely used with these codes are
in MDC 1, it would be appropriate to assign these diagnosis codes to
MDC 1. As the commenter also stated, this assignment would be
consistent with how fitting and adjustments of devices are handled
within other MDCs, such as in MDC 5 (Disease and Disorders of the
Circulatory System) and MDC 11 (Diseases and Disorders of the Kidney
and Urinary Tract). Diagnosis codes V53.31 (Cardiac pacemaker), V53.32
(Automatic implantable cardiac defibrillator), and V53.39 (Other
cardiac device) are used for fitting and adjustment of cardiac devices
and are assigned to MDC 5. Diagnosis code V53.6 (Urinary devices) is
used for fitting and adjustment of urinary devices and is assigned to
MDC 11.
Therefore, we are proposing to move V53.01, V53.02, and V53.09 from
MDC 23 to MDC 1 when an O.R. procedure is performed. If no O.R.
procedure is performed, these diagnosis codes would be assigned to DRG
34 (Other Disorders of Nervous System With CC) or DRG 35 (Other
Disorders of Nervous System Without CC). If an O.R. procedure is
performed on a patient assigned with one of these codes as the
principal diagnosis, the case would be assigned to the DRG in MDC 1 to
which the O.R. procedure is assigned.
b. Malignancy Codes. We received correspondence that indicated that
when we recognized code V10.48 (History of malignancy, epididymis) as a
new code for FY 2002, we did not include the code as a history of
malignancy code in DRG 465 (Aftercare with History of Malignancy as
Secondary Diagnosis). All other history of malignancy codes were
included in DRG 465.
We agree that code V10.48 should have been included in the list of
history of malignancy codes within DRG 465 and, therefore, are
proposing to add it to the list of secondary diagnoses in DRG 465.
9. Medicare Code Editor (MCE) Change
As explained under section II.B.1. of this preamble, the MCE is a
software program that detects and reports errors in the coding of
Medicare claims data.
We received a request to examine the MCE edit ``Adult Diagnosis--
Age Greater than 14'' because currently the edit rejects claims for
patients under age 15 who are being treated for gall bladder disease.
We reviewed this issue with our pediatric consultants and determined
that, although incidence is rare, gallbladder disease does occur in
patients under age 15. Therefore, we are proposing to modify the MCE by
removing the following codes from the edit ``Adult Diagnosis--Age
Greater Than 14'':
[sbull] 574.00, Calculus of gallbladder with acute cholecystitis
without mention of obstruction
[sbull] 574.01, Calculus of gallbladder with acute cholecystitis
with obstruction
[sbull] 574.10, Calculus of gallbladder with other cholecystitis
without mention of obstruction
[sbull] 574.11, Calculus of gallbladder with other cholecystitis
with obstruction
[sbull] 574.20, Calculus of gallbladder without mention of
cholecystitis without mention of obstruction
[sbull] 574.21, Calculus of gallbladder without mention of
cholecystitis with obstruction
[sbull] 574.30, Calculus of bile duct with acute cholecystitis
without mention of obstruction
[sbull] 574.31, Calculus of bile duct with acute cholecystitis with
obstruction
[sbull] 574.40, Calculus of bile duct with other cholecystitis
without mention of obstruction
[sbull] 574.41, Calculus of bile duct with other cholecystitis with
obstruction
[sbull] 574.50, Calculus of bile duct without mention of
cholecystitis without mention of obstruction
[sbull] 574.51, Calculus of bile duct without mention of
cholecystitis with obstruction
[sbull] 574.60, Calculus of gallbladder and bile duct with acute
cholecystitis without mention of obstruction
[sbull] 574.61, Calculus of gallbladder and bile duct with acute
cholecystitis with obstruction)
[sbull] 574.70, Calculus of gallbladder and bile duct with other
cholecystitis without mention of obstruction
[sbull] 574.71, Calculus of gallbladder and bile duct with other
cholecystitis with obstruction
[sbull] 574.80, Calculus of gallbladder and bile duct with acute
and chronic cholecystitis without mention of obstruction
[sbull] 574.81, Calculus of gallbladder and bile duct with acute
and chronic cholecystitis with obstruction
[sbull] 574.90, Calculus of gallbladder and bile duct without
cholecystitis without mention of obstruction
[sbull] 574.90, Calculus of gallbladder and bile duct without
cholecystitis with obstruction
[sbull] 575.0, Acute cholecystitis
[sbull] 575.10, Cholecystitis, not otherwise specified
[sbull] 575.11, Chronic cholecystitis
[sbull] 575.12, Acute and chronic cholecystitis
[sbull] 575.2, Obstruction of gallbladder
[sbull] 575.3, Hydrops of gallbladder
[sbull] 576.0, Postcholecystectomy syndrome
[sbull] 577.1, Chronic pancreatitis
10. Surgical Hierarchies
Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. Therefore, it is necessary to have a decision rule within the
GROUPER by which these cases are assigned to a single 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 DRG associated with the most resource-
intensive surgical class.
Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and 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 DRGs. For example,
in MDC 11, the surgical class ``kidney transplant'' consists of a
single DRG (DRG 302) and the class ``kidney, ureter and major bladder
procedures'' consists of three DRGs (DRGs 303, 304, and 305).
Consequently, in many cases, the surgical hierarchy has an impact on
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting the average resources for
each DRG by frequency to determine the weighted average resources for
each surgical class. For example, assume surgical class A includes DRGs
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also
that the average charge of DRG 1 is higher than that of

[[Page 27167]]

DRG 3, but the average charges of DRGs 4 and 5 are higher than the
average charge of DRG 2. To determine whether surgical class A should
be higher or lower than surgical class B in the surgical hierarchy, we
would weight the average charge of each DRG in the class by frequency
(that is, by the number of cases in the DRG) to determine average
resource consumption for the surgical class. The surgical classes would
then be ordered from the class with the highest average resource
utilization to that with the lowest, with the exception of ``other O.R.
procedures'' as discussed below.
This methodology may occasionally result in assignment of a case
involving multiple procedures to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER search for the procedure in the
most resource-intensive surgical class, this result is unavoidable.
We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average 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 DRG or 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. 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 higher-
ordered surgical class has a lower average charge than the class
ordered below it.
Based on the preliminary recalibration of the DRGs, we are
proposing modifications of the surgical hierarchy as set forth below.
At this time, we are proposing to revise the surgical hierarchy for
the pre-MDC DRGs, MDC 1 (Diseases and Disorders of the Nervous System),
MDC 5 (Diseases and Disorders of the Circulatory System), MDC 8
(Diseases and Disorders of the Musculoskeletal System and Connective
Tissue), and MDC 17 (Myeloproliferative Disease and Disorders, Poorly
Differentiated Neoplasms for Lymphoma and Leukemia) as follows:
[sbull] In the pre-MDC DRGs, we are proposing to reorder DRG 513
(Pancreas Transplant) above DRG 512 (Simultaneous Pancreas/Kidney
Transplant).
[sbull] In MDC 1, we are proposing to reorder DRG 3 (Craniotomy Age
0-17) above DRG 528 (Intracranial Vascular Procedures with Principal
Diagnosis Hemorrhage); DRG 528 above DRGs 1 and 2 (Craniotomy Age
17 With and Without CC, respectively); DRGs 1 and 2 above
DRGs 529 and 530 (Ventricular Shunt Procedures With and Without CC,
respectively); DRGs 529 and 530 above DRGs 531 and 532 (Spinal
Procedures With and Without CC, respectively); DRGs 531 and 532 above
DRGs 533 and 534 (Extracranial Procedures With and Without CC,
respectively); and DRGs 533 and 534 above DRG 6 (Carpal Tunnel
Release).
[sbull] In MDC 5, we are proposing to reorder DRG 535 (Cardiac
Defibrillator Implant With Cardiac Catheterization With AMI, Heart
Failure, or Shock) above DRG 536 (Cardiac Defibrillator Implant With
Cardiac Catheterization Without AMI, Heart Failure, or Shock), and DRG
536 above DRG 515 (Cardiac Defibrillator Implant Without Cardiac
Catheterization).
[sbull] In MDC 8, we are proposing to reorder DRGs 537 and 538
(Local Excision and Removal of Internal Fixation Devices Except Hip and
Femur With and Without CC, respectively) above DRG 230 (Local Excision
and Removal of Internal Fixation Devices of Hip and Femur).
[sbull] In MDC 17, we are proposing to reorder DRGs 539 and 540
(Lymphoma and Leukemia With Major O.R. Procedure With and Without CC,
respectively) above DRGs 401 and 402 (Lymphoma and Non-Acute Leukemia
With Other O.R. Procedures With and Without CC, respectively).
11. Refinement of Complications and Comorbidities (CC) List
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. Thus, we created the CC Exclusions List. We made these
changes for the following reasons: (1) To preclude coding of CCs for
closely related conditions; (2) to preclude duplicative coding 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. We developed this standard 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 standard list of CCs, either by adding new CCs or
deleting CCs already on the list. At this time, we are not proposing to
delete any of the diagnosis codes on the CC list.
In the May 19, 1987 proposed notice (52 FR 18877) concerning
changes to the DRG classification system, we explained that the
excluded secondary diagnoses were established using the following five
principles:
[sbull] Chronic and acute manifestations of the same condition
should not be considered CCs for one another (as subsequently corrected
in the September 1, 1987 final notice (52 FR 33154)).
[sbull] Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for the same condition should not be considered
CCs for one another.
[sbull] 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.
[sbull] Codes for the same condition in anatomically proximal sites
should not be considered CCs for one another.
[sbull] Closely related conditions should not be considered CCs for
one another.
The creation of the CC Exclusions List was a major project
involving hundreds of codes. The FY 1988 revisions were intended only
as a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered CCs of another diagnosis. For that reason, and in light of
comments and questions on the CC list, we have continued to review the
remaining CCs to identify additional exclusions and to remove diagnoses
from the master list that have been shown not to meet the definition of
a CC. (See the September 30, 1988 final rule (53 FR 38485) for the
revision made for the discharges occurring in FY 1989; the September 1,
1989 final rule (54 FR

[[Page 27168]]

36552) for the FY 1990 revision; the September 4, 1990 final rule (55
FR 36126) for the FY 1991 revision; the August 30, 1991 final rule (56
FR 43209) for the FY 1992 revision; the September 1, 1992 final rule
(57 FR 39753) for the FY 1993 revision; the September 1, 1993 final
rule (58 FR 46278) for the FY 1994 revisions; the September 1, 1994
final rule (59 FR 45334) for the FY 1995 revisions; the September 1,
1995 final rule (60 FR 45782) for the FY 1996 revisions; the August 30,
1996 final rule (61 FR 46171) for the FY 1997 revisions; the August 29,
1997 final rule (62 FR 45966) for the FY 1998 revisions; the July 31,
1998 final rule (63 FR 40954) for the FY 1999 revisions, the August 1,
2000 final rule (65 FR 47064) for the FY 2001 revisions; the August 1,
2001 final rule (66 FR 39851) for the FY 2002 revisions; and the August
1, 2002 final rule (67 FR 49998) for the FY 2003 revisions.) In the
July 30, 1999 final rule (64 FR 41490), we did not modify the CC
Exclusions List for FY 2000 because we did not make any changes to the
ICD-9-CM codes for FY 2000.
We are proposing a limited revision of the CC Exclusions List to
take into account the proposed changes that will be made in the ICD-9-
CM diagnosis coding system effective October 1, 2003. (See section
II.B.13. of this preamble for a discussion of ICD-9-CM changes.) These
proposed changes are being made in accordance with the principles
established when we created the CC Exclusions List in 1987.
Tables 6G and 6H in the Addendum to this proposed rule contain the
revisions to the CC Exclusions List that would be effective for
discharges occurring on or after October 1, 2003. Each table shows the
principal diagnoses with changes to the excluded CCs. Each of these
principal diagnoses is shown with an asterisk, and the additions or
deletions to the CC Exclusions List are provided in an indented column
immediately following the affected principal diagnosis.
CCs that are added to the list are in Table 6G--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 2003,
the indented diagnoses would not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
CCs that are deleted from the list are in Table 6H--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 2003, the indented diagnoses would be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $133.00
plus shipping and handling. A request for the FY 1988 CC Exclusions
List (which should include the identification accession number (PB) 88-
133970) should be made to the following address: National Technical
Information Service, United States Department of Commerce, 5285 Port
Royal Road, Springfield, VA 2216l; or by calling (800) 553-6847.
Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, 1998, 1999, 2000, 2002, and 2003) and those in Tables 6G and 6H
of the final rule for FY 2004 must be incorporated into the list
purchased from NTIS in order to obtain the CC Exclusions List
applicable for discharges occurring on or after October 1, 2003. (Note:
There was no CC Exclusions List in FY 2001 because we did not make
changes to the ICD-9-CM codes for FY 2001.)
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 20.0, is available for $225.00,
which includes $15.00 for shipping and handling. Version 21.0 of this
manual, which includes the final FY 2003 DRG changes, is available for
$225.00. 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.
12. Review of Procedure Codes in DRGs 468, 476, and 477
Each year, we review cases assigned to DRG 468 (Extensive O.R.
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R.
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
O.R. Procedure Unrelated to Principal Diagnosis) to determine whether
it would be appropriate to change the procedures assigned among these
DRGs.
DRGs 468, 476, and 477 are reserved for those cases in which none
of the 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. DRG 476 is assigned to those
discharges in which one or more of the following prostatic procedures
are performed and are unrelated to the principal diagnosis:
[sbull] 60.0, Incision of prostate
[sbull] 60.12, Open biopsy of prostate
[sbull] 60.15, Biopsy of periprostatic tissue
[sbull] 60.18, Other diagnostic procedures on prostate and
periprostatic tissue
[sbull] 60.21, Transurethral prostatectomy
[sbull] 60.29, Other transurethral prostatectomy
[sbull] 60.61, Local excision of lesion of prostate
[sbull] 60.69, Prostatectomy, not elsewhere classified
[sbull] 60.81, Incision of periprostatic tissue
[sbull] 60.82, Excision of periprostatic tissue
[sbull] 60.93, Repair of prostate
[sbull] 60.94, Control of (postoperative) hemorrhage of prostate
[sbull] 60.95, Transurethral balloon dilation of the prostatic
urethra
[sbull] 60.99, Other operations on prostate
All remaining O.R. procedures are assigned to DRGs 468 and 477,
with DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. The original list of the ICD-9-CM procedure codes
for the procedures we consider nonextensive procedures, if performed
with an unrelated principal diagnosis, was published in Table 6C in
section IV. of the Addendum to the September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990 (55
FR 36135), August 30, 1991 (56 FR 43212), September 1, 1992 (57 FR
23625), September 1, 1993 (58 FR 46279), September 1, 1994 (59 FR
45336), September 1, 1995 (60 FR 45783), August 30, 1996 (61 FR 46173),
and August 29, 1997 (62 FR 45981), we moved several other procedures
from DRG 468 to 477, and some procedures from DRG 477 to 468. No
procedures were moved in FY 1999, as noted in the July 31, 1998 final
rule (63 FR 40962); in FY 2000, as noted in the July 30, 1999 final
rule (64 FR 41496); in FY 2001, as noted in the August 1, 2000 final
rule (65 FR 47064); or in FY 2002, as noted in the August 1, 2001 final
rule (66 FR 39852).
In the August 1, 2002 final rule (67 FR 49999), we did not move any
procedures from DRG 477. However, we did move procedures codes from DRG
468 and placed them in more clinically coherent DRGs.
a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs. We
annually conduct a review of procedures

[[Page 27169]]

producing assignment to DRG 468 or 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 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.
Based on this year's review, we did not identify any necessary changes
in procedures under DRG 477. Therefore, we are not proposing to move
any procedures from DRG 477 to one of the surgical DRGs.
However, we have identified a necessary proposed change under DRG
468 relating to code 50.29 (Other destruction of lesion of liver). We
were contacted by a hospital about the fact that code 50.29 is not
currently included in MDC 6 (Diseases and Disorders of the Digestive
System). The hospital pointed out that it is not uncommon for patients
to have procedures performed on the liver when they are admitted for a
condition that is classified in MDC 6. For example, DRGs 170 and 171
(Other Digestive System O.R. Procedures With and Without CC,
respectively) in MDC 6 currently include liver procedures such as
biopsy of the liver. The hospital disagreed with the assignment of code
50.29 to DRG 468 when performed on a patient with a principal diagnosis
in MDC 6. We believe that the commenter is correct and are proposing to
assign code 50.29 to DRGs 170 and 171 in MDC 6.
b. Reassignment of Procedures among DRGs 468, 476, and 477. We also
annually review the list of ICD-9-CM procedures that, when in
combination with their principal diagnosis code, result in assignment
to DRGs 468, 476, and 477, to ascertain if any of those procedures
should be reassigned from one of these DRGs to another of these DRGs
based on average charges and 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 moving 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. Based on our review this
year, we are not proposing to move any procedures from DRG 468 to DRGs
476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to DRGs
468 or 476.
c. Adding Diagnosis or Procedure Codes to MDCs. Based on our review
this year, we are not proposing to add any diagnosis codes to MDCs.
However, we have identified several procedures that we propose to
move from DRG 468 and add to DRGs 476 and 477 because the procedures
are nonextensive:
[sbull] 38.21, Biopsy of blood vessel
[sbull] 77.42, Biopsy of scapula, clavicle and thorax [ribs and
sternum]
[sbull] 77.43, Biopsy of radius and ulna
[sbull] 77.44, Biopsy of carpals and metacarpals
[sbull] 77.45, Biopsy of femur
[sbull] 77.46, Biopsy of patella
[sbull] 77.47, Biopsy of tibia and fibula
[sbull] 77.48, Biopsy of tarsals and metatarsals
[sbull] 77.49, Biopsy of other bones
[sbull] 92.27, Implantation or insertion of radioactive elements
13. Changes to the ICD-9-CM Coding System
As described in section II.B.1. of this preamble, the ICD-9-CM is a
coding system that is used for the reporting of diagnoses and
procedures performed on a patient. In September 1985, the ICD-9-CM
Coordination and Maintenance Committee was formed. This is a Federal
interdepartmental committee, co-chaired by the National Center for
Health Statistics (NCHS) 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 ICD-9-CM Manual contains the list of valid diagnosis and
procedure codes. (The ICD-9-CM Manual is available from the Government
Printing Office on CD-ROM for $23.00 by calling (202) 512-1800.) 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 physicians, medical record administrators, health
information management professionals, and other members of the public,
to contribute ideas on coding matters. After considering the opinions
expressed at the public meetings and in writing, the Committee
formulates recommendations, which then must be approved by the
agencies.
The Committee presented proposals for coding changes for
implementation in FY 2004 at a public meeting held on December 6, 2002,
and finalized the coding changes after consideration of comments
received at the meetings and in writing by January 10, 2003. Those
coding changes are announced later in this section of the preamble.
Copies of the Committee procedure minutes of the 2002 meetings can be
obtained from the CMS home page at: http://www.cms.gov/paymentsystems/icd9/.
The diagnosis minutes 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.
The first of the 2003 public meetings was held on April 3, 2003. 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
all proposals discussed and approved at the April meeting as part of
the code revisions effective the following October. Because this
proposed rule is being published after the April meeting, we are able
to include all new codes that were approved subsequent to that meeting
in Table 6F of the Addendum to this proposed rule, including the DRG
assignments.
For a report of procedure topics discussed at the April 2003
meeting, see the Summary Report at: http://www.cms.hhs.gov/paymentsystems/icd9/.
For a report of the diagnosis topics discussed at
the April 2003 meeting, see the Summary Report at: http:/www.cdc.gov/nchs/icd9.htm
.

[[Page 27170]]

We encourage commenters to address suggestions on coding issues
involving diagnosis codes to: Donna Pickett, Co-Chairperson; ICD-9-CM
Coordination and Maintenance Committee; NCHS; Room 2404, 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, Co-Chairperson; ICD-9-CM Coordination
and Maintenance Committee; CMS, Center for Medicare Mangement, 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: pbrooks@cms.hhs.gov. The ICD-9-CM code changes that have been approved will become
effective October 1, 2003. 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
proposed 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 this proposed rule, we
are only soliciting comments on the proposed DRG classification of
these new codes.
For codes that have been replaced by new or expanded codes, 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, 2003. Table 6D contains invalid
procedure codes. Revisions to diagnosis code titles are in Table 6E
(Revised Diagnosis Code Titles), which also includes the DRG
assignments for these revised codes. Table 6F includes a revised
procedure code title for FY 2003.
The Department of Health and Human Services has been actively
working on the development of new coding systems to replace the ICD-9-
CM. For example, the ICD-10-CM (for diagnoses) and the ICD-10-PCS (for
procedures) were developed to replace ICD-9-CM. These efforts have
become increasingly important because of the many problems with the
ICD-9-CM, which was implemented 24 years ago.
Implementing ICD-10-PCS as a national standard was discussed at the
December 6, 2002, ICD-9-CM Coordination and Maintenance Committee
meeting. A complete report of the meeting, including examples of
letters supporting and opposing ICD-10-PCS, can be found at the CMS web
site: www.cms.hhs.gov/paymentsystems/icd9/. Also, the Secretary has
asked the NCVHS to recommend whether or not the country should replace
ICD-9-CM as a national coding standard with ICD-10-CM and ICD-10-PCS. A
complete report on the activities of this committee can be found at:
http://www.ncvhs.hhs.gov.
14. Other Issues
In addition to the specific topics discussed in section II.B.1.
through 13. of this proposed rule, we considered a number of other DRG-
related issues. Below is a summary of the issues that were addressed.
a. Cochlear Implants. Cochlear implants were first covered by
Medicare in 1986 and were assigned to DRG 49 (Major Head and Neck
Procedures) in MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth,
and Throat). This is the highest weighted surgical DRG in MDC 3.
However, commenters have contended that this DRG is clinically and
economically inappropriate and have requested a specific DRG for
cochlear implants. The commenters contend that, like heart assist
systems (we created a new DRG last year, DRG 525 (Heart Assist System
Implant) in MDC 5), cochlear implants are low incidence procedures with
disproportionately high costs compared to other procedures within DRG
49.
As we stated in the FY 2003 final rule in our discussion regarding
the creation of DRG 525 (67 FR 49989), we found 185 heart assist system
cases in DRG 104 (Cardiac Valve and Other Major Cardiothoracic
Procedures with Cardiac Catheterization) and 90 cases in DRG 105
(Cardiac Valve and Other Major Cardiothoracic Procedures without
Cardiac Catheterization). The average charges for these cases were
approximately $36,000 and $85,000, higher than the average charges for
cases in DRGS 104 and 105, respectively, but they represented only a
small fraction of all cases in these DRGs (1.3 percent and 0.5 percent,
respectively). Therefore, despite the drastically higher average
charges for heart assist systems, the relative volume was insufficient
to affect the DRG weight to any great degree.
In our analysis of the FY 2002 MedPAR file, we found 134 cochlear
implant cases out of 1,637 cases assigned to DRG 49, which represent
more than 8 percent of the total cases in DRG 49. Compared to the
situation with the heart assist system implant cases in DRGs 104 and
105, cochlear implants do have a greater effect on the relative weight
for DRG 49. Also, while average charges for cochlear implant cases are
significantly more than other cases in DRG 49 (average charges for
cochlear implant cases were $51,549 compared to $25,052 for noncochlear
implant cases), this difference is much less than the $36,000 and
$85,000 differences for heart assist systems cited above.
Although we are concerned about the disparity between the average
costs and payments for cochlear implant patients, we also have concerns
about establishing a separate DRG for these cases. Doing so could
create an incentive for some of these procedures to be shifted from
outpatient settings, where most are currently performed. Even among
current cochlear implant cases, our analysis found the average length
of stay for Medicare patients receiving this procedure in the inpatient
setting was just over 1 day, indicating minimal inpatient care is
necessary for these cases. It is unclear whether a shift toward more
inpatient stays would be appropriate.
We also are concerned whether the volume of cochlear implant cases
across all hospitals performing this procedure warrants establishing a
new DRG. The DRG relative weights reflect an average cost per case,
with the costs of some procedures above the DRG mean costs and some
below the mean. It is expected that hospitals will offset losses for
certain procedures with payment gains for other procedures, while
responding to incentives to maintain efficient operations. An excessive
proliferation of new DRGs for specific technologies would fundamentally
alter this averaging concept.
Accordingly, for the reasons cited above, we are not proposing to
change the DRG assignment of cochlear implants at this time. However,
we encourage public comments as to whether a new DRG for cochlear
implants (or some other solution) is warranted.
b. Burn Patients on Mechanical Ventilation. Concerns have been
raised by hospitals treating burn patients that the current DRG payment
for burn patients on mechanical ventilation is not adequate. The DRG
assignment for these cases depends on whether the hospital performed
the tracheostomy, or the tracheostomy was performed prior to transfer
to the hospital. If the hospital does not actually perform the
tracheostomy, the case is assigned to

[[Page 27171]]

one of the burn DRGs in MDC 22 (Burns). If the hospital performs a
tracheostomy, the case is assigned to DRG 482 (Tracheostomy for Face,
Mouth, and Neck Diagnoses) or DRG 483 (Tracheostomy with Mechanical
Ventilation 96 + Hours, Except Face, Mouth and Neck Diagnoses).
In the August 1, 2002 final rule, we modified DRGs 482 and 483 to
recognize code 96.72 (Continuous mechanical ventilation for 96
consecutive hours or more) for the first time in the DRG assignment (67
FR 49996). We noted that many patients assigned to DRG 483 did not have
code 96.72 recorded. We believed this was due, in part, to the limited
number of procedure codes (six) that can be submitted on the current
billing form, and the fact that code 96.72 did not affect the DRG
assignment (prior to FY 2003). We stated that we would give future
consideration to further modifying DRGs 482 and 483 based on the
presence of code 96.72. We anticipate that cases of patients receiving
96 or more hours of continuous mechanical ventilation are more
expensive than other tracheostomy patients. Once code 96.72 is reported
more frequently, we will be better able to assess the need for future
revisions to DRGs 482 and 483.
To assess the payment for burn patients on mechanical ventilation
when the hospital did not perform the tracheostomy, we analyzed data on
cases reporting both code 96.72 and diagnosis code V44.0 (Tracheostomy
status). We had hoped that these cases would show patients on long-term
ventilation who were admitted to the hospital with a tracheostomy in
place. Our data did not include any cases reported in any of the burn
DRGs with codes 96.72 and V44.0. We then analyzed data on the frequency
of cases reporting code 96.72 along with diagnosis code V46.1
(Respirator dependence). We found only 5 of these cases in the burn
DRGs. With so few cases reporting code 96.72, it is difficult for us to
determine the effect of long-term ventilation on reimbursement for burn
cases.
All hospitals, including those that treat burn patients, are
encouraged to increase the reporting of code 96.72 for patients who are
on continuous mechanical ventilation for 96 or more hours. With better
data, we would be able to determine how best to make any future DRG
modification for all patients on long-term mechanical ventilation.
c. Multiple Level Spinal Fusion. We received a comment recommending
the establishment of new DRGs that would differentiate between the
number of levels of vertebrae involved in a spinal fusion procedure.
The commenter noted that the ICD-9-CM Coordination and Maintenance
Committee discussed adding a new series of codes to identify multiple
levels of spinal fusions at its December 6, 2002 meeting.
The following codes were approved by the Committee, effective for
October 1, 2003, and are listed in Table 6B in the Addendum to this
proposed rule:
[sbull] 81.62, Fusion or refusion of 2-3 vertebrae
[sbull] 81.63, Fusion or refusion of 4-8 vertebrae
[sbull] 81.64, Fusion or refusion of 9 or more vertebrae
The commenter conducted an analysis to support redefining the
spinal fusion DRGs using these new ICD-9-CM codes. Using the CMS FY
2001 Standard Analytical File data for physicians and hospitals as the
basis for its analysis, the commenter linked a 5-percent sample of
hospital spinal fusion cases with the corresponding physician claims.
Because there were no ICD-9-CM codes to identify multiple level fusions
in 2001, multiple level fusions were identified using Current
Procedural Terminology (CPT) codes on the physician claims.
The analysis found that increasing the levels fused from 1 to 2
levels to 3 or more levels increased the mean standardized charges by
38 percent for lumbar/thoracic fusions, and by 47 percent for cervical
fusions. The commenter then recommended redefining the spinal fusion
DRGs to differentiate between 1 to 2 level spinal fusions and
multilevel spinal fusions.
The following current spinal fusion DRGs separate cases based on
whether or not a CC is present: DRG 497 (Spinal Fusion Except Cervical
With CC) and DRG 498 (Spinal Fusion Except Cervical Without CC); and
DRG 519 (Cervical Spinal Fusion With CC) and DRG 520 (Cervical Spinal
Fusion Without CC). The difference in charges associated with the
current CC-split is only slightly greater than the difference
attributable to the number of levels fused as found by the commenter's
analysis. Therefore, at this time, we are not proposing to redefine
these DRGs to differentiate on the basis of the number of levels fused.
We note that adopting the commenter's recommendation would
necessitate adjusting the DRG relative weights using non-MedPAR data,
because Medicare claims data with the new ICD-9-CM codes will not be
available until the FY 2003 MedPAR file. Although we considered this
possibility, we believe the more prudent course, given that the current
DRG structure actually appears to differentiate appropriately among
these cases, is to wait until sufficient data with the new multilevel
spinal fusion codes are available before making a final determination
on whether multilevel spinal fusions should be incorporated into the
DRG structure.
d. Heart Assist System Implant. During the comment period for the
FY 2003 IPPS proposed rule on which the FY 2003 IPPS final rule was
based, we received a suggestion that we develop a new heart transplant
DRG entitled ``Heart Transplant with Left Ventricular Assist Device
(LVAD).'' The commenter stated that, because a great number of LVAD
cases remain inpatients until heart transplant occurs, there is a
disparity in costs between heart transplant patients who receive LVADs
during the stay and those who do not. Cases in which heart
transplantation occurs during the hospitalization are assigned to DRG
103 (Heart Transplant). Therefore, the costs of LVAD cases are included
in the DRG relative weight for DRG 103. However, we noted that we would
continue to monitor these types of cases.
When we reviewed the FY 2002 MedPAR data, we identified only 21
cases in DRG 103 that listed a procedure code that would indicate the
use of an LVAD. We do not believe this is a sufficient number of cases
to support creation of an additional DRG. Therefore, we are not
proposing a change to the structure of either DRG 103 or DRG 525 at
this time.
e. Drug-Eluting Stents. In the August 1, 2002 final rule, we
created two new temporary DRGs to reflect cases involving the insertion
of a drug-eluting coronary artery stent as signified by the presence of
code 36.07 (Insertion of drug-eluting coronary artery stent): DRG 526
(Percutaneous Cardiovascular Procedure With Drug-Eluting Stent With
AMI); and DRG 527 (Percutaneous Cardiovascular Procedure With Drug-
Eluting Stent Without AMI). We expect that when claims data are
available that reflect the use of these stents, we will combine drug-
eluting stent cases with other cases in DRGs 516 and 517.
In the absence of MedPAR data reflecting the use of drug-eluting
stents, it was necessary to undertake several calculations to establish
the FY 2003 DRG relative weights for these two new DRGs. First, based
on prices where drug-eluting stents are currently being used and the
average price of currently available stents, we calculated a price
differential of approximately $1,200. Assuming average hospital charge
markups for this technology (based on weighted average cost-to-charge
ratios), the anticipated charge differential

[[Page 27172]]

between nondrug-eluting and drug-eluting stents would be approximately
$2,664 per stent. However, we recognize that some cases involve more
than one stent. Using an average of 1.5 stents per procedure, we
estimate that the net incremental charge for cases that would receive
drug-eluting stents is $3,996.
In order to determine accurately the DRG relative weights for these
two new DRGs relative to all other DRGs, we also must estimate the
volume of cases likely to occur. We used the manufacturer's estimate
that as many as 43 percent of current stent patients will receive drug-
eluting stents during FY 2003 to calculate the FY 2003 DRG relative
weights, although we prorated this percentage since the new DRGs did
not become active until April 1, 2003. Even though the DRG will become
active on April 1, 2003, we expect that hospitals did not use this
technology before FDA approval. (We intend to identify and review any
cases with the code 36.07 that occurred prior to FDA approval.)
Therefore, no payments are expected to have been made under these DRGs
for cases occurring before FDA approval.
In determining the FY 2004 proposed DRG relative weights for DRGs
526 and 527, we assumed that 43 percent of coronary stent cases (those
with code 36.06 (Insertion of nondrug-eluting coronary artery stent))
from DRGs 516 and 517 would be reassigned to new DRGs 526 and 527 (with
code 36.07), and the charges of these cases would be increased $3,996
per case, to approximate the higher charges associated with the drug-
eluting stents in DRGs 526 and 527. The relative weights for DRGs 516
and 517 are calculated based on the charges of the cases estimated to
remain in these two DRGs.
We are proposing to maintain DRGs 526 and 527 for FY 2004, and to
adopt the same methodology to establish the relative weights as we used
for FY 2003. The FDA issued a decision on April 24, 2003 approving
drug-eluting stents. For the final rule, we will use the best available
data at that time to establish the FY 2004 relative weights for DRGs
526 and 527.
f. Artificial Anal Sphincter. The ICD-9-CM Coordination and
Maintenance Committee created two new codes to describe procedures
involving an artificial anal sphincter for use for discharges occurring
on or after October 1, 2002. One code (49.75, Implantation or revision
of artificial anal sphincter) is used to identify cases involving
implantation or revision of an artificial anal sphincter. The second
code (49.76, Removal of artificial anal sphincter) is used to identify
cases involving the removal of the device. In Table 6B of the August 1,
2002 IPPS final rule (67 FR 50242), we assigned both codes to one of
four MDCs based on principal diagnosis, and to one of six DRGs within
those MDCs as follows: MDC 6, DRG 157 (Anal and Stomal Procedures With
CC) and DRG 158 (Anal and Stomal Procedures Without CC); MDC 9
(Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast),
DRG 267 (Perianal and Pilonidal Procedures); MDC 21 (Injuries,
Poisonings, and Toxic Effect of Drugs), DRG 442 (Other O.R. Procedures
for Injuries With CC) and DRG 443 (Other O.R. Procedures for Injuries
Without CC); and MDC 24 (Multiple Significant Trauma), DRG 486 (Other
O.R. Procedures for Multiple Significant Trauma).
We have received a request that we review these DRG assignments.
According to the requester, the artificial anal sphincter procedures
are expensive and the payment does not adequately cover a hospital's
costs in the most likely occurring DRGs 157 and 158. The requester
submitted data showing cases involving artificial anal sphincters with
average charges of $44,000, and suggested that we assign codes 49.75
and 49.76 in MDC 6 to DRG 170 (Other Digestive System O.R. Procedures
With CC) and DRG 171) (Other Digestive System O.R. Procedures Without
CC) because DRG 170 and DRG 171 are higher weighted than DRGs 157 and
158.
At this time, we are not proposing to assign these cases to DRGs
170 and 171. Although we recognize the data submitted by the commenter
appear to show this procedure is associated with above average costs in
the DRGs to which these cases are assigned, we believe the current
assignment is the most clinically appropriate at this time. As noted
above, the procedure codes to identify the implantation, revision, or
removal of these devices were effective beginning on October 1, 2002.
Therefore, we propose to monitor the costs of these cases using actual
Medicare cases with these codes included from the FY 2003 MedPAR that
will be used for the FY 2004 DRG relative weights.

C. Recalibration of DRG Weights

We are proposing to use the same basic methodology for the FY 2004
recalibration as we did for FY 2003 (August 1, 2002 IPPS final rule (67
FR 50008). That is, we are proposing to recalibrate the DRG weights
based on charge data for Medicare discharges using the most current
charge information available (the FY 2002 MedPAR file).
The MedPAR file is based on fully coded diagnostic and procedure
data for all Medicare inpatient hospital bills. FY 2002 MedPAR data
include discharges occurring between October 1, 2001 and September 30,
2002, based on bills received by CMS through December 31, 2002, from
all hospitals subject to the IPPS and short-term acute care hospitals
in Maryland (which is under a waiver from the IPPS under section
1814(b)(3) of the Act). The FY 2002 MedPAR file includes data for
approximately 11,404,829 Medicare discharges. Discharges for Medicare
beneficiaries enrolled in a Medicare+Choice managed care plan are
excluded from this analysis. The data include hospitals that
subsequently became CAHs, although no data are included for hospitals
after the point they are certified as CAHs.
The proposed methodology used to calculate the DRG relative weights
from the FY 2002 MedPAR file is as follows:
[sbull] To the extent possible, all the claims were regrouped using
the DRG classification revisions discussed in section II.B. of this
preamble.
[sbull] Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education and
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
[sbull] The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG. A transfer
case is counted as a fraction of a case based on the ratio of its
transfer payment under the per diem payment methodology to the full DRG
payment for nontransfer cases. That is, transfer cases paid under the
transfer methodology equal to half of what the case would receive as a
nontransfer would be counted as 0.5 of a total case.
[sbull] Statistical outliers were eliminated by removing all cases
that are beyond 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG.
[sbull] The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
[sbull] The transplant cases that were used to establish the
relative weight for heart and heart-lung, liver, and lung transplants
(DRGs 103, 480, and 495) were limited to those Medicare-approved
transplant centers that have cases in the FY 2000 MedPAR file.
(Medicare coverage for heart, heart-lung, liver, and lung transplants
is limited to

[[Page 27173]]

those facilities that have received approval from CMS as transplant
centers.)
[sbull] 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
charges before computing the average charge for the DRG and before
eliminating statistical outliers.
When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We used that same case threshold in
recalibrating the proposed DRG weights for FY 2004. Using the FY 2002
MedPAR data set, there are 42 DRGs that contain fewer than 10 cases. We
computed the weights for these low-volume DRGs by adjusting the
proposed FY 2003 weights of these DRGs by the percentage change in the
average weight of the cases in the other DRGs.
The proposed new weights are normalized by an adjustment factor
(1.45510) so that the average case weight after recalibration is equal
to the average case weight before recalibration. This adjustment is
intended to ensure that recalibration by itself neither increases nor
decreases total payments under the IPPS.
As noted below in section IV.A.2., we are proposing to expand the
transfer policy applicable to postacute care transfers from 10 DRGs
currently to an additional 19 DRGs, beginning in FY 2004. Because we
count a transfer case as a fraction of a case as described above in the
recalibration process, any expansion of the postacute care transfer
policy to 19 additional DRGs would affect the proposed relative weights
for those DRGs. Therefore, we calculated the proposed FY 2004
normalization factor comparing the case-mix using the proposed FY 2004
DRG relative weights in which we treated postacute care transfer cases
in the 19 DRGs proposed to be added to the postacute transfer policy
for FY 2004 as a fraction of a case with the case-mix using the FY 2003
DRG relative weights without treating cases in these 19 additional DRGs
as transfer cases.
Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payments to hospitals are affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.a. of the Addendum to this proposed rule, we are
proposing to make a budget neutrality adjustment to ensure that the
requirement of section 1886(d)(4)(C)(iii) of the Act is met.

D. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs
for FY 2004

1. Background
In the March 7, 2003 LTCH PPS proposed rule (68 FR 11234), we
proposed to change 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, since the patient classification system utilized under
the LTCH PPS is based directly on the DRGs used under the IPPS for
acute care hospitals, in that same proposed rule, we proposed that the
annual update of the long-term care diagnosis-related group (LTC-DRG)
classifications and relative weights would continue to remain linked to
the annual reclassification and recalibration of the CMS-DRGs under the
IPPS.
The annual update to the IPPS DRGs is based on the annual revisions
to the ICD-9-CM codes and is effective each October 1. In the health
care industry, annual changes to the ICD-9-CM codes are effective for
discharges occurring on or after October 1 each year. The use of the
ICD-9-CM coding system is also compliant with the requirements of the
Health Insurance Portability and Accountability Act (HIPAA), Pub. L.
104-191, under 45 CFR Parts 160 and 162. Therefore, the manual and
electronic versions of the GROUPER software, which are based on the
ICD-9-CM codes, are also revised annually and effective for discharges
occurring on or after October 1 each year. Because the LTC-DRGs are
based on the patient classification system used under the IPPS (CMS-
DRGs), which is updated annually and effective for discharges occurring
on or after October 1 through September 30 each year, in the March 7,
2003 LTCH PPS proposed rule (68 FR 11234), we proposed to 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.
As we explained in the March 7, 2003 LTCH PPS proposed rule (68 FR
11234), the FY 2004 DRGs and relative weights used under the IPPS had
not yet been proposed, and we were unable to propose updated LTC-DRGs
and relative weights at that time. Therefore, since the LTC-DRG
classifications and relative weights would continue to be based on the
annual updates to the IPPS DRGs, we proposed that proposed revisions to
the LTC-DRG classifications and relative weights would be presented for
public comment in the IPPS proposed rule and finalized in the IPPS
final rule, to be effective October 1, 2003 through September 30, 2004.
For FY 2003, version 20.0 of the DRG GROUPER is being utilized
under both the IPPS and the LTCH PPS. The LTC-DRG classifications and
relative weights are shown in Table 3 of the Addendum to the August 30,
2002 for FY 2003 final rule (67 FR 56076-56084) and in Table 3 of the
Addendum to the March 7, 2003 LTCH PPS proposed rule (68 FR 11285
through 11292). Below we discuss the proposed LTC-DRGs and relative
weights for FY 2004 based on the proposed changes to the hospital IPPS
DRGs (GROUPER version 21.0) discussed in section II. of this preamble.
2. Proposed Changes in the LTC-DRG Classifications
a. Background. Section 123 of Pub. L. 106-113 specifically requires
that the PPS for LTCHs be a per discharge system with a DRG-based
patient classification system reflecting the differences in patient
resources and costs in LTCHs while maintaining budget neutrality.
Section 307(b)(1) of Pub. Law 106-554 modified the requirements of
section 123 of Pub. L. 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.''
In accordance with section 307(b)(1) of Pub. L. 106-554 and Sec.
412.515 of our existing regulations, the LTCH PPS uses information from
LTCH patient records to classify patient cases into distinct LTC-DRGs
based on clinical characteristics and expected resource needs. The LTC-
DRGs used as the patient classification component of the LTCH PPS
correspond to the DRGs

[[Page 27174]]

under the IPPS for acute care hospitals. Thus, in this proposed rule,
we are proposing to use the proposed IPPS version 21.0 GROUPER for FY
2004 to process LTCH PPS claims. The proposed changes to the IPPS DRG
classification system for FY 2004 (Grouper 21.0) are discussed in
section II.B. of this preamble.
Under the LTCH PPS, we determine relative weights for each of the
IPPS DRGs to account for the difference in resource use by patients
exhibiting the case complexity and multiple medical problems
characteristic of LTCHs. In a departure from the IPPS, as we discussed
in the August 30, 2002 final rule (67 FR 55985), we use low volume LTC-
DRGs (less than 25 LTCH cases) in determining the LTC-DRG weights,
since LTCHs do not typically treat the full range of diagnoses as do
acute care hospitals. In order to deal with the large number of low
volume LTC-DRGs (DRGs with fewer than 25 cases), we group those low
volume LTC-DRGs into 5 quintiles based on average charge per discharge.
(A listing of the composition of low volume quintiles for the FY 2003
LTC-DRGs (based on FY 2001 MedPAR data) appears in the August 30, 2002
final rule at 67 FR 55986-55988). We also adjusted for cases in which
the stay at the LTCH is five-sixths of the geometric average length of
stay; that is, short-stay outlier cases (Sec. 412.529). (A detailed
discussion of the application of the Lewin Group model that was used to
develop the LTC-DRGs appears in the August 30, 2002 final rule at 67 FR
55978).
b. Patient Classifications into DRGs. Generally, under the LTCH
PPS, Medicare payment is made at a predetermined specific rate for each
discharge; that is, payment varies by the LTC-DRG to which a
beneficiary's stay is assigned. Similar to case classification for
acute care hospitals under the IPPS (see section II.B. of this
preamble), cases are classified into 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 age, sex, and discharge status of the patient. The diagnosis and
procedure information is reported by the hospital using codes from the
ICD-9-CM.
As discussed above in section II.B. of this preamble, the DRGs are
organized into 25 Major Diagnostic Categories (MDCs), most of which are
based on a particular organ system of the body; the remainder involve
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. Some surgical and
medical DRGs are further differentiated based on the presence or
absence of CCs. (See section II.B. of this preamble for further
discussion of surgical DRGs and medical DRGs.)
Because the assignment of a case to a particular LTC-DRG will help
determine the amount that will be paid for the case, it is important
that the coding is accurate. As is the case under the IPPS,
classifications and terminology used in the LTCH PPS are consistent
with the ICD-9-CM and the Uniform Hospital Discharge Data Set (UHDDS),
as recommended to the Secretary by the National Committee on Vital and
Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set,
National Center for Health Statistics, April 1980'') and as revised in
1984 by the Health Information Policy Council (HIPC) of the U.S.
Department of Health and Human Services. We wish to point out again
that the ICD-9-CM coding terminology and the definitions of principal
and other diagnoses of the UHDDS are consistent with the requirements
of the Administrative Simplification Act of 1996 of the HIPAA (45 CFR
Parts 160 and 162).
As we stated in the August 30, 2002 LTCH PPS final rule (67 FR
55981), the emphasis on the need for proper coding cannot be
overstated. Inappropriate coding of cases can adversely affect the
uniformity of cases in each LTC-DRG and produce inappropriate weighting
factors at recalibration and result in inappropriate payments under the
LTCH PPS. LTCHs are to follow the same coding guidelines used by the
acute care hospitals to ensure accuracy and consistency in coding
practices. There will be only one LTC-DRG assigned per long-term care
hospitalization; it will be assigned at the discharge. Therefore, it is
mandatory that the coders continue to report the same principal
diagnosis on all claims and include all diagnostic codes that coexist
at the time of admission, that are subsequently developed, or that
affect the treatment received. Similarly, all procedures performed
during that stay are to be reported on each claim. (For further
information on the use of ICD-9-CM codes under the LTCH PPS, see the
August 30, 2002 LTCH PPS final rule (67 FR 55979-55983).)
Upon the discharge of the patient from a LTCH, the LTCH must assign
appropriate diagnosis and procedure codes from the ICD-9-CM. As of
October 16, 2002, a LTCH that was required to comply with the HIPAA
Administrative Simplification Standards and that had not obtained an
extension in compliance with the Administrative Compliance Act (Pub. L.
107-105) is obligated to comply with the standards at 45 CFR 162.1002
and 45 CFR 162.1102. Completed claim forms are to be submitted to the
LTCH's Medicare fiscal intermediary.
Medicare fiscal intermediaries 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 DRG can be
made. (For more information on types of cases selected for further
development, see the August 30, 2002 LTCH PPS final rule (67 FR
55979).)
After screening through the MCE, each LTCH claim will be classified
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH
GROUPER is specialized computer software based on the same GROUPER used
under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal
intermediary determines the prospective payment by using the Medicare
PRICER program, which accounts for LTCH hospital-specific adjustments.
As provided for under the IPPS, we provide an opportunity for the LTCH
to review the LTC-DRG assignments made by the fiscal intermediary and
to submit additional information within a specified timeframe (Sec.
412.513(c)).
The GROUPER is used both to classify past cases in order to measure
relative hospital resource consumption to establish the DRG weights and
to classify current cases for purposes of determining payment. The
records for all Medicare hospital inpatient discharges are maintained
in the MedPAR file. The data in this file are used to evaluate possible
DRG classification changes and to recalibrate the DRG weights during
our annual update (as discussed in section II. of this preamble). The
LTC-DRG weights are based on data for the population of LTCH
discharges, reflecting the fact that LTCH patients represent a
different patient mix than patients in short-term acute care hospitals.
3. Development of the Proposed FY 2004 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative Weights.
As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55984),
one of the primary goals for the implementation of the LTCH IPPS is to
pay each LTCH an appropriate amount for the efficient delivery of care
to Medicare patients.

[[Page 27175]]

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 adjust the LTCH PPS standard
Federal prospective payment system rate by the LTC-DRG relative weights
in determining payment to LTCHs for each case.
Under the LTCH PPS, relative weights for each LTC-DRG are a primary
element used to account for the variations in cost per discharge and
resource utilization among the payment groups (Sec. 412.515). To
ensure that Medicare patients classified to each LTC-DRG have access to
an appropriate level of services and to encourage efficiency, we
calculate a relative weight for each LTC-DRG that represents the
resources needed by an average inpatient LTCH case in that LTC-DRG. For
example, cases in a LTC-DRG with a relative weight of 2 will, on
average, cost twice as much as cases in a LTC-DRG with a weight of 1.
b. Data. To calculate the proposed LTC-DRG relative weights for FY
2004 in this proposed rule, we obtained total Medicare allowable
charges from FY 2002 Medicare hospital bill data from the December 2002
update of the MedPAR file, and we used the proposed Version 21.0 of the
CMS GROUPER used under the acute care hospital inpatient IPPS as
discussed above in section II.B. of this preamble. Consistent with the
methodology under the hospital IPPS, we are proposing to recalculate
the FY 2004 LTC-DRG relative weights based on the best available data
for the final rule.
As we discussed in further detail in the August 30, 2002 LTCH PPS
final rule (67 FR 55984), based on comments regarding the data used in
the development of the LTCH prospective payment system, 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 (42 U.S.C. 1395b-
1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1).
Therefore, in the development of the proposed FY 2004 LTC-DRG relative
weights we have excluded the data of the 22 all-inclusive rate
providers and the 3 LTCHs that are paid in accordance with
demonstration projects.
In addition, as we discussed in the August 30, 2002 LTCH PPS final
rule (67 FR 55989), a data problem regarding the proposed FY 2003 LTC-
DRG relative weight values that were determined using MedPAR (claims)
data for FYs 2000 and 2001 was brought to our attention. Following
notification of this problem, we researched the commenter's claims and
determined that, given the long stays at LTCHs, some providers had
submitted multiple bills for payment under the TEFRA reimbursement
system for the same stay. Based upon our research, we became aware of
the following situation: In certain LTCHs, hospital personnel
apparently reported a different principal diagnosis on each bill since,
under the TEFRA system, payment was not dependent upon principal
diagnosis as it is under a DRG-based system. These claims from the
MedPAR file were run through the LTCH GROUPER and used in determining
the proposed FY 2003 relative weights for each LTC-DRG.
Since this issue was brought to our attention and we discovered
that only data from the final bills were being extracted for the MedPAR
file, it was possible that the original MedPAR file was not receiving
the correct principal diagnosis. Therefore, in the August 30, 2002
final rule (67 FR 55989), we addressed the problem by identifying all
LTCH cases in the FY 2001 MedPAR file for which multiple bills were
submitted. For each of these cases, beginning with the first bill and
moving forward consecutively through subsequent bills for that stay, we
recorded the first unique diagnosis codes up to 10 and the first unique
procedure codes up to 10. We then used these codes to appropriately
group each LTCH case to a LTC-DRG for FY 2003.
As we noted above, we are proposing to use LTCH claims data from
the FY 2002 MedPAR file for the determination of the proposed FY 2004
LTC-DRG relative weights. Since at the time (FY 2002) LTCHs were still
reimbursed under the TEFRA reasonable cost-based system, some LTCHs
also had submitted multiple bills for Medicare payment for the same
stay. Thus, in certain LTCHs, hospital personnel were apparently still
reporting a different principal diagnosis on each bill since, under the
TEFRA system in FY 2002, payment was not dependent upon principal
diagnosis as it is under a DRG-based system. Therefore, we are
proposing to follow the same methodology outlined above to determine
the appropriate diagnosis and procedure codes for those multiple bill
LTCH cases in the FY 2002 MedPAR files, and we are proposing to use
these codes to group each LTCH case to a proposed LTC-DRG for FY 2004.
Since the LTCH PPS was implemented for cost reporting periods beginning
on or after October 1, 2002 (FY 2003), we believe that this problem
will be self-correcting as LTCHs submit more completely coded data in
the future.
c. Hospital-Specific Relative Value Methodology. As we discussed in
the August 30, 2002 LTCH PPS final rule (67 FR 55985), by nature LTCHs
often specialize in certain areas, such as ventilator-dependent
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. Such
nonarbitrary distribution of cases with relatively high (or low)
charges in specific 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 explained in
that same final rule (67 FR 55985), we use a hospital-specific relative
value method to calculate the proposed LTC-DRG relative weights instead
of the methodology used to determine the proposed DRG relative weights
under the hospital IPPS described above in section II.C. of this
preamble. We believe this method will remove this hospital-specific
source of bias in measuring LTCH average charges. Specifically, we
reduce the impact of the variation in charges across providers on any
particular 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 hospital-specific relative value method, as we explained
in the August 30, 2002 LTCH PPS final rule (67 FR 55985), 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, averages 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 55985), we standardize charges for each
case by first dividing the adjusted charge for the case (adjusted for
short-stay outliers under Sec. 412.529 as described in section II.D.4.
(step 3) of this preamble) by the average adjusted charge for all cases
at the LTCH in which the case was treated.

[[Page 27176]]

Short-stay outliers under Sec. 412.529 are cases with a length of stay
that is less than or equal to five-sixths the average length of stay of
the LTC-DRG. 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 in 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 in 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 in 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. Low Volume LTC-DRGs. In order to account for LTC-DRGs with low
volume (that is, with fewer than 25 LTCH cases), in accordance with the
methodology we established in the August 30, 2002 LTCH PPS final rule
(67 FR 55985), we group those low volume LTC-DRGs into one of five
categories (quintiles) based on average charges, for the purposes of
determining relative weights. For this proposed rule, using LTCH cases
from the December 2002 update of the FY 2002 MedPAR file, we identified
163 proposed LTC-DRGs that contained between 1 and 24 cases. This list
of proposed LTC-DRGs was then divided into one of the five proposed low
volume quintiles, each containing a minimum of 32 proposed LTC-DRGs
(163/5 = 32 with 3 proposed LTC-DRGs as the remainder). For FY 2004, we
are proposing to make an assignment to a specific low volume quintile
by sorting the 163 low volume proposed LTC-DRGs in ascending order by
average charge. Since the number of proposed LTC-DRGs with less than 25
LTCH cases is not evenly divisible by five, the average charge of the
low volume proposed LTC-DRG was used to determine which proposed low
volume quintile received the additional proposed LTC-DRG. After sorting
the 163 low volume proposed LTC-DRGs in ascending order, we are
proposing that the first fifth (32) of low volume proposed LTC-DRGs
with the lowest average charge would be grouped into Quintile 1. Since
the average charge of the 33rd proposed LTC-DRG in the sorted list is
closer to the previous proposed LTC-DRG's average charge (assigned to
proposed Quintile 1) than to the average charge of the 34th proposed
LTC-DRG on the sorted list (to be assigned to proposed Quintile 2), we
are proposing to place it into proposed Quintile 1. The highest average
charge cases would then be grouped into proposed Quintile 5. This
process would be repeated through the remaining low volume proposed
LTC-DRGs so that 3 proposed low volume quintiles would contain 33
proposed LTC-DRGs and 2 proposed low volume quintiles would contain 32
proposed LTC-DRGs.
In order to determine the proposed relative weights for the
proposed LTC-DRGs with low volume for FY 2004, in accordance with the
methodology established in the August 30, 2002 LTCH PPS final rule (67
FR 55985), we would use the five proposed low volume quintiles
described above. The proposed composition of each of the five low
volume quintiles shown below in Table 1 would be used in determining
the proposed LTC-DRG relative weights for FY 2004. We would determine a
proposed relative weight and (geometric) average length of stay for
each of the five proposed low volume quintiles using the formula that
we are proposing to apply to the regular proposed LTC-DRGs (25 or more
cases), as described below in section II.D.4. of this preamble. We are
proposing to assign the same proposed relative weight and average
length of stay to each of the proposed LTC-DRGs that make up that
proposed low volume quintile. We note that as this system is dynamic,
it is possible that the number and specific type of 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 LTC-DRGs and to
calculate the relative weights based on our methodology.

Table 1.--Proposed Composition of Low Volume Quintiles
------------------------------------------------------------------------
Proposed LTC-DRG Description
------------------------------------------------------------------------
Proposed Quintile 1
------------------------------------------------------------------------
044............................... ACUTE MAJOR EYE INFECTIONS
047............................... OTHER DISORDERS OF THE EYE AGE 17 W/O CC
065............................... DYSEQUILIBRIUM
066............................... EPISTAXIS
069............................... OTITIS MEDIA & URI AGE 17
W/O CC
072............................... NASAL TRAUMA & DEFORMITY
128............................... DEEP VEIN THROMBOPHLEBITIS
149............................... MAJOR SMALL & LARGE BOWEL PROCEDURES
W/O CC
178............................... UNCOMPLICATED PEPTIC ULCER W/O CC
192............................... PANCREAS, LIVER & SHUNT PROCEDURES W/
O CC
262............................... BREAST BIOPSY & LOCAL EXCISION FOR
NON-MALIGNANCY
273............................... MAJOR SKIN DISORDERS W/O CC
276............................... NON-MALIGNANT BREAST DISORDERS
305............................... KIDNEY,URETER & MAJOR BLADDER PROC
FOR NON-NEOPL W/O CC
311............................... TRANSURETHRAL PROCEDURES W/O CC
319............................... KIDNEY & URINARY TRACT NEOPLASMS W/O
CC
328............................... URETHRAL STRICTURE AGE 17
W CC
339............................... TESTES PROCEDURES, NON-MALIGNANCY
AGE 17
342............................... CIRCUMCISION AGE 17
348............................... BENIGN PROSTATIC HYPERTROPHY W CC
349............................... BENIGN PROSTATIC HYPERTROPHY W/O CC

[[Page 27177]]

376............................... POSTPARTUM & POST ABORTION DIAGNOSES
W/O O.R. PROCEDURE
385............................... NEONATES, DIED OR TRANSFERRED TO
ANOTHER ACUTE CARE FACILITY
399............................... RETICULOENDOTHELIAL & IMMUNITY
DISORDERS W/O CC
420............................... FEVER OF UNKNOWN ORIGIN AGE 17 W/O CC
428............................... DISORDERS OF PERSONALITY & IMPULSE
CONTROL
431............................... CHILDHOOD MENTAL DISORDERS
432............................... OTHER MENTAL DISORDER DIAGNOSES
455............................... OTHER INJURY, POISONING & TOXIC
EFFECT DIAG W/O CC
465............................... AFTERCARE W HISTORY OF MALIGNANCY AS
SECONDARY DIAGNOSIS
509............................... FULL THICKNESS BURN W/O SKIN GRFT OR
INH INJ W/O CC OR SIG TRAUMA
511............................... NON-EXTENSIVE BURNS W/O CC OR
SIGNIFICANT TRAUMA
540............................... LYMPHOMA AND LEUKEMIA WITH MAJOR
O.R. PROCEDURE WITHOUT CC
-----------------------------------
Proposed Quintile 2
------------------------------------------------------------------------
021............................... VIRAL MENINGITIS
022............................... HYPERTENSIVE ENCEPHALOPATHY
031**............................. CONCUSSION AGE 17 W CC
046............................... OTHER DISORDERS OF THE EYE AGE 17 W CC
053............................... SINUS & MASTOID PROCEDURES AGE 17
084............................... MAJOR CHEST TRAUMA W/O CC
177............................... UNCOMPLICATED PEPTIC ULCER W CC
193............................... BILIARY TRACT PROC EXCEPT ONLY
CHOLECYST W OR W/O C.D.E. W CC
194*.............................. BILIARY TRACT PROC EXCEPT ONLY
CHOLECYST W OR W/O C.D.E. W/O CC
200............................... HEPATOBILIARY DIAGNOSTIC PROCEDURE
FOR NON-MALIGNANCY
206............................... DISORDERS OF LIVER EXCEPT MALIG,
CIRR, ALC HEPA W/O CC
208............................... DISORDERS OF THE BILIARY TRACT W/O
CC
211............................... HIP & FEMUR PROCEDURES EXCEPT MAJOR
JOINT AGE 17 W/O CC
232............................... ARTHROSCOPY
234............................... OTHER MUSCULOSKELET SYS & CONN TISS
O.R. PROC W/O CC
237............................... SPRAINS, STRAINS, & DISLOCATIONS OF
HIP, PELVIS & THIGH
275............................... MALIGNANT BREAST DISORDERS W/O CC
299............................... INBORN ERRORS OF METABOLISM
309............................... MINOR BLADDER PROCEDURES W/O CC
323............................... URINARY STONES W CC, &/OR ESW
LITHOTRIPSY
324............................... URINARY STONES W/O CC
341............................... PENIS PROCEDURES
344............................... OTHER MALE REPRODUCTIVE SYSTEM O.R.
PROCEDURES FOR MALIGNANCY
367............................... MALIGNANCY, FEMALE REPRODUCTIVE
SYSTEM W/O CC
414............................... OTHER MYELOPROLIF DIS OR POORLY DIFF
NEOPL DIAG W/O CC
421............................... VIRAL ILLNESS AGE 17
454............................... OTHER INJURY, POISONING & TOXIC
EFFECT DIAG W CC
473............................... ACUTE LEUKEMIA W/O MAJOR O.R.
PROCEDURE AGE 17
497**............................. SPINAL FUSION W CC
502............................... KNEE PROCEDURES W PDX OF INFECTION W/
O CC
506............................... FULL THICKNESS BURN W SKIN GRAFT OR
INHAL INJ W CC OR SIG TRAUMA
507*.............................. FULL THICKNESS BURN W SKIN GRFT OR
INHAL INJ W/O CC OR SIG TRAUMA
508............................... FULL THICKNESS BURN W/O SKIN GRFT OR
INHAL INJ W CC OR SIG TRAUMA
510............................... NON-EXTENSIVE BURNS W CC OR
SIGNIFICANT TRAUMA
529............................... VENTRICULAR SHUNT PROCEDURES WITH CC
-----------------------------------
Proposed Quintile 3
------------------------------------------------------------------------
031*.............................. CONCUSSION AGE 17 W CC
032............................... CONCUSSION AGE 17 W/O CC
063............................... OTHER EAR, NOSE, MOUTH & THROAT O.R.
PROCEDURES
083............................... MAJOR CHEST TRAUMA W CC
117............................... CARDIAC PACEMAKER REVISION EXCEPT
DEVICE REPLACEMENT
119............................... VEIN LIGATION & STRIPPING
158............................... ANAL & STOMAL PROCEDURES W/O CC
194**............................. BILIARY TRACT PROC EXCEPT ONLY
CHOLECYST W OR W/O C.D.E. W/O CC
197............................... CHOLECYSTECTOMY EXCEPT BY
LAPAROSCOPE W/O C.D.E. W CC
218............................... LOWER EXTREM & HUMER PROC EXCEPT
HIP, FOOT, FEMUR AGE 17
W CC
223............................... MAJOR SHOULDER/ELBOW PROC, OR OTHER
UPPER EXTREMITY PROC W CC
228............................... MAJOR THUMB OR JOINT PROC, OR OTH
HAND OR WRIST PROC W CC
257............................... TOTAL MASTECTOMY FOR MALIGNANCY W CC
293............................... OTHER ENDOCRINE, NUTRIT & METAB O.R.
PROC W/O CC
295............................... DIABETES AGE 0-35
317............................... ADMIT FOR RENAL DIALYSIS
345............................... OTHER MALE REPRODUCTIVE SYSTEM O.R.
PROC EXCEPT FOR MALIGNANCY
347***............................ MALIGNANCY, MALE REPRODUCTIVE
SYSTEM, W/O CC
352............................... OTHER MALE REPRODUCTIVE SYSTEM
DIAGNOSES

[[Page 27178]]

369............................... MENSTRUAL & OTHER FEMALE
REPRODUCTIVE SYSTEM DISORDERS
402............................... LYMPHOMA & NON- ACUTE LEUKEMIA W
OTHER O.R. PROC W/O CC
408............................... MYELOPROLIF DISORD OR POORLY DIFF
NEOPL W OTHER O.R.PROC
410............................... CHEMOTHERAPY W/O ACUTE LEUKEMIA AS
SECONDARY DIAGNOSIS
411............................... HISTORY OF MALIGNANCY W/O ENDOSCOPY
419............................... FEVER OF UNKNOWN ORIGIN AGE 17 W CC
443............................... OTHER O.R. PROCEDURES FOR INJURIES W/
O CC
447............................... ALLERGIC REACTIONS AGE 17
449............................... POISONING & TOXIC EFFECTS OF DRUGS
AGE 17 W CC
450............................... POISONING & TOXIC EFFECTS OF DRUGS
AGE 17 W/O CC
497*.............................. SPINAL FUSION W CC
498*.............................. SPINAL FUSION W/O CC
503............................... KNEE PROCEDURES W/O PDX OF INFECTION
505............................... EXTENSIVE 3RD DEGREE BURNS W/O SKIN
GRAFT
507**............................. FULL THICKNESS BURN W SKIN GRFT OR
INHAL INJ W/O CC OR SIG TRAUMA
518............................... PERCUTANEOUS CARDIVASCULAR PROC W/O
CORONARY ARTERY STENT OR AMI
-----------------------------------
Proposed Quintile 4
------------------------------------------------------------------------
008............................... PERIPH & CRANIAL NERVE & OTHER NERV
SYST PROC W/O CC
061............................... MYRINGOTOMY W TUBE INSERTION AGE 17
095***............................ PNEUMOTHORAX W/O CC
124............................... CIRCULATORY DISORDERS EXCEPT AMI, W
CARD CATH & COMPLEX DIAG
125............................... CIRCULATORY DISORDERS EXCEPT AMI, W
CARD CATH W/O COMPLEX DIAG
150............................... PERITONEAL ADHESIOLYSIS W CC
152............................... MINOR SMALL & LARGE BOWEL PROCEDURES
W CC
157............................... ANAL & STOMAL PROCEDURES W CC
161............................... INGUINAL & FEMORAL HERNIA PROCEDURES
AGE 17 W CC
191............................... PANCREAS, LIVER & SHUNT PROCEDURES W
CC
195............................... CHOLECYSTECTOMY W C.D.E. W CC
210............................... HIP & FEMUR PROCEDURES EXCEPT MAJOR
JOINT AGE 17 W CC
226............................... SOFT TISSUE PROCEDURES W CC
227............................... SOFT TISSUE PROCEDURES W/O CC
230............................... LOCAL EXCISION & REMOVAL OF INT FIX
DEVICES OF HIP & FEMUR
268............................... SKIN, SUBCUTANEOUS TISSUE & BREAST
PLASTIC PROCEDURES
306............................... PROSTATECTOMY W CC
308............................... MINOR BLADDER PROCEDURES W CC
310............................... TRANSURETHRAL PROCEDURES W CC
312............................... URETHRAL PROCEDURES, AGE 17 W CC
360............................... VAGINA, CERVIX & VULVA PROCEDURES
394............................... OTHER O.R. PROCEDURES OF THE BLOOD
AND BLOOD FORMING ORGANS
427............................... NEUROSES EXCEPT DEPRESSIVE
479***............................ OTHER VASCULAR PROCEDURES W/O CC
486............................... OTHER O.R. PROCEDURES FOR MULTIPLE
SIGNIFICANT TRAUMA
493............................... LAPAROSCOPIC CHOLECYSTECTOMY W/O
C.D.E. W CC
494*.............................. LAPAROSCOPIC CHOLECYSTECTOMY W/O
C.D.E. W/O CC
498**............................. SPINAL FUSION W/O CC
500............................... BACK & NECK PROCEDURES EXCEPT SPINAL
FUSION W/O CC
517............................... PERCUTANEOUS CARDIVASCULAR PROC W
NON-DRUG ELUTING STENT W/O AMI
519............................... CERVICAL SPINAL FUSION W CC
532............................... SPINAL PROCEDURES WITHOUT CC
538............................... LOCAL EXCISION AND REMOVAL OF
INTERNAL FIXATION DEVICES EXCEPT
HIP AND FEMUR WITHOUT CC
-----------------------------------
Proposed Quintile 5
------------------------------------------------------------------------
001............................... CRANIOTOMY AGE 17 W CC
055............................... MISCELLANEOUS EAR, NOSE, MOUTH &
THROAT PROCEDURES
075............................... MAJOR CHEST PROCEDURES
077............................... OTHER RESP SYSTEM O.R. PROCEDURES W/
O CC
108............................... OTHER CARDIOTHORACIC PROCEDURES
110............................... MAJOR CARDIOVASCULAR PROCEDURES W CC
115............................... PRM CARD PACEM IMPL W AMI,HRT FAIL
OR SHK,OR AICD LEAD OR GNRTR P
116............................... OTH PERM CARD PACEMAK IMPL OR PTCA W
CORONARY ARTERY STENT IMPLNT
118............................... CARDIAC PACEMAKER DEVICE REPLACEMENT
154............................... STOMACH, ESOPHAGEAL & DUODENAL
PROCEDURES AGE 17 W CC
168............................... MOUTH PROCEDURES W CC
171***............................ OTHER DIGESTIVE SYSTEM O.R.
PROCEDURES W/O CC
201............................... OTHER HEPATOBILIARY OR PANCREAS O.R.
PROCEDURES
209............................... MAJOR JOINT & LIMB REATTACHMENT
PROCEDURES OF LOWER EXTREMITY
216............................... BIOPSIES OF MUSCULOSKELETAL SYSTEM &
CONNECTIVE TISSUE
261............................... BREAST PROC FOR NON-MALIGNANCY
EXCEPT BIOPSY & LOCAL EXCISION

[[Page 27179]]

266***............................ SKIN GRAFT &/OR DEBRID EXCEPT FOR
SKIN ULCER OR CELLULITIS W/O CC
288............................... O.R. PROCEDURES FOR OBESITY
304............................... KIDNEY,URETER & MAJOR BLADDER PROC
FOR NON-NEOPL W CC
365............................... OTHER FEMALE REPRODUCTIVE SYSTEM
O.R. PROCEDURES
401............................... LYMPHOMA & NON-ACUTE LEUKEMIA W
OTHER O.R. PROC W CC
406............................... MYELOPROLIF DISORD OR POORLY DIFF
NEOPL W MAJ O.R.PROC W CC
412............................... HISTORY OF MALIGNANCY W ENDOSCOPY
441............................... HAND PROCEDURES FOR INJURIES
471............................... BILATERAL OR MULTIPLE MAJOR JOINT
PROCS OF LOWER EXTREMITY
482............................... TRACHEOSTOMY FOR FACE,MOUTH & NECK
DIAGNOSES
488............................... HIV W EXTENSIVE O.R. PROCEDURE
494**............................. LAPAROSCOPIC CHOLECYSTECTOMY W/O
C.D.E. W/O CC
499............................... BACK & NECK PROCEDURES EXCEPT SPINAL
FUSION W CC
501............................... KNEE PROCEDURES W PDX OF INFECTION W
CC
515............................... CARDIAC DEFIBRILATOR IMPLANT W/O
CARDIAC CATH
534............................... EXTRACRANIAL VASCULAR PROCEDURES
WITHOUT CC
536............................... CARDIAC DEFIB IMPLANT WITH CARDIAC
CATH WITHOUT AMI/HF/SHOCK
------------------------------------------------------------------------
* One of the original 163 low volume proposed LTC-DRGs initially
assigned to a different proposed low volume quintile; reassigned to
this proposed low volume quintile in addressing nonmonotonicity (see
step 5 below).
** One of the original 163 low volume proposed LTC-DRGs initially
assigned to this proposed low volume quintile; reassigned to a
different proposed low volume quintile in addressing nonmonotonicity
(see step 5 below).
*** One of the original 163 low volume proposed LTC-DRGs initially
assigned to this proposed low volume quintile; removed from the
proposed low volume quintiles in addressing nonmonotonicity (see step
5 below).

4. Steps for Determining the Proposed FY 2004 LTC-DRG Relative Weights
As we noted previously, the proposed FY 2004 LTC-DRG relative
weights are determined in accordance with the methodology established
in the August 30, 2002 LTCH PPS final rule (67 FR 55989-55991). In
summary, LTCH cases must be grouped in the appropriate proposed LTC-
DRG, while taking into account the low volume proposed LTC-DRGs as
described above, before the proposed FY 2004 LTC-DRG relative weights
can be determined. After grouping the cases in the appropriate proposed
LTC-DRG, we are proposing to calculate the proposed relative weights
for FY 2004 in this proposed rule by first removing statistical
outliers and cases with a length of stay of 7 days or less. Next, we
are proposing to adjust the number of cases in each proposed LTC-DRG
for the effect of short-stay outlier cases under Sec. 412.529. The
short-stay adjusted discharges and corresponding charges would be used
to calculate ``relative adjusted weights'' in each proposed LTC-DRG
using the hospital-specific relative value method described above.
Below we discuss in detail the steps for calculating the proposed
FY 2004 LTC-DRG relative weights, in accordance with the methodology
established in the August 30, 2002 LTCH PPS final rule (67 FR 55989-
55991).
Step 1--Remove statistical outliers. The first step in the
calculation of the proposed FY 2004 LTC-DRG relative weights is to
remove statistical outlier cases. We 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 proposed LTC-DRG. These statistical outliers would be removed
prior to calculating the proposed relative weights. 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 proposed relative weights could result in an inaccurate proposed
relative weight that does not truly reflect relative resource use among
the proposed LTC-DRGs.
Step 2--Remove cases with a length of stay of 7 days or less. The
proposed FY 2004 LTC-DRG relative weights should reflect the average of
resources used on representative cases of a specific type. Generally,
cases with a length of stay 7 days or less do not belong in a LTCH,
since such 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 proposed FY 2004 LTC-DRG
relative weights, the value of many proposed 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,
in order to include data from these very short-stays. Thus, in
determining the proposed FY 2004 LTC-DRG relative weights, we remove
LTCH cases with a length of stay of 7 days or less.
Step 3--Adjust charges for the effects of short-stay outliers. The
third step in the calculation of the proposed FY 2004 LTC-DRG relative
weights is to adjust each LTCH's charges per discharge for short-stay
outlier cases (that is, a patient with a length of stay that is less
than or equal to five-sixths the average length of stay of the LTC-DRG
as described in the August 30, 2002 LTCH PPS final rule (67 FR 55977).
We make this adjustment by counting a short-stay outlier 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 proposed LTC-DRG for
nonshort-stay outlier cases. This has the effect of proportionately
reducing the impact of the lower charges for the short-stay outlier
cases in calculating the average charge for the proposed LTC-DRG. This
process produces the same result as if the actual charges per discharge
of a short-stay outlier 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 proposed LTC-DRG.
As we explained in the August 30, 2002 LTCH PPS final rule (67 FR
55990), counting short-stay outlier cases as full discharges with no
adjustment in determining the proposed LTC-DRG relative weights would
lower the proposed LTC-DRG relative weight for affected proposed LTC-
DRGs because the relatively lower charges of the short-

[[Page 27180]]

stay outlier cases would bring down the average charge for all cases
within a proposed LTC-DRG. This would result in an ``underpayment'' to
nonshort-stay outlier cases and an ``overpayment'' to short-stay
outlier cases. Therefore, in this proposed rule, in accordance with the
methodology established in the August 30, 2002 LTCH PPS final rule (67
FR 55990), we adjust for short-stay outlier cases under Sec. 412.529
in this manner since it would result in more appropriate payments for
all LTCH cases.
Step 4--Calculate the proposed FY 2004 LTC-DRG relative weights on
an iterative basis. The process of calculating the LTC-DRG relative
weights using the hospital specific relative value methodology is
iterative. First, for each LTCH case, we calculate a hospital-specific
relative charge value by dividing the short-stay outlier 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 is 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 proposed LTC-DRG, the proposed FY 2004 LTC-DRG relative
weight is calculated by dividing the average of the adjusted hospital-
specific relative charge values (from above) for the proposed LTC-DRG
by the overall average hospital-specific relative charge value across
all cases for all LTCHs. Using these recalculated proposed LTC-DRG
relative weights, each LTCH's average proposed relative weight for all
of its cases (case-mix) is calculated by dividing the sum of all the
LTCH's proposed LTC-DRG relative weights by its total number of cases.
The LTCHs' hospital-specific relative charge values above are
multiplied by these hospital specific case-mix indexes. These hospital-
specific case-mix adjusted relative charge values are then used to
calculate a new set of proposed LTC-DRG relative weights across all
LTCHs. In this proposed rule, this iterative process is continued until
there is convergence between the weights produced at adjacent steps,
for example, when the maximum difference is less than 0.0001.
Step 5--Adjust the proposed FY 2004 LTC-DRG relative weights to
account for nonmonotonically increasing relative weights. As explained
in section II.B. of this preamble, the proposed FY 2004 CMS DRGs, upon
which the proposed FY 2004 LTC-DRGs are based, contain ``pairs'' that
are differentiated based on the presence or absence of CCs. The
proposed LTC-DRGs with CCs are defined by certain secondary diagnoses
not related to or inherently a part of the disease process identified
by the principal diagnosis, but the presence of additional diagnoses
does not automatically generate a CC. As we discussed in the August 30,
2002 LTCH PPS final rule (67 FR 55990), the value of monotonically
increasing relative weights rises as the resource use increases (for
example, from uncomplicated to more complicated). The presence of CCs
in a proposed LTC-DRG means that cases classified into a ``without CC''
proposed LTC-DRG are expected to have lower resource use (and lower
costs). In other words, resource use (and costs) are expected to
decrease across ``with CC''/``without CC'' pairs of proposed LTC-DRGs.
For a case to be assigned to a proposed LTC-DRG with CCs, as we
explained in the August 30, 2002 LTCH PPS final rule (67 FR 55990),
more coded information is called for (that is, at least one relevant
secondary diagnosis), than for a case to be assigned to a proposed LTC-
DRG ``without CCs'' (which is based on only one principal diagnosis and
no relevant secondary diagnoses). Currently, the LTCH claims data
include both accurately coded cases without complications and cases
that have complications (and cost more) but were not coded completely.
Both types of cases are grouped to a proposed LTC-DRG ``without CCs''
since only one principal diagnosis was coded. Since LTCHs were
previously paid under cost-based reimbursement, which is not based on
patient diagnoses, LTCHs' coding for these cases may not have been as
detailed as possible.
Thus, in developing the FY 2003 LTC-DRG relative weights for the
LTCH PPS based on FY 2001 claims data, as we explained in the August
30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that
the data suggested that cases classified to the LTC-DRG ``with CCs'' of
a ``with CC''/``without CC'' pair had a lower average charge than the
corresponding LTC-DRG ``without CCs.'' Similarly, based on FY 2002
claims data, we also found on occasion that the data suggested that
cases classified to the proposed LTC-DRG ``with CCs'' of a ``with CC''/
``without CC'' pair would have a lower average charge than the
corresponding proposed LTC-DRG ``without CCs'' for FY 2004.
We believe this anomaly may be due to coding that may not have
fully reflected all comorbidities that were present. Specifically,
LTCHs may have failed to code relevant secondary diagnoses, which
resulted in cases that actually had CCs being classified into a
``without CC'' LTC-DRG. It would not be appropriate to pay a lower
amount for the ``with CC'' LTC-DRG. Therefore, in this proposed rule,
in accordance with the methodology established in that same final rule
(67 FR 55990-55991), we grouped both the cases ``with CCs'' and
``without CCs'' together for the purpose of calculating the proposed FY
2004 LTC-DRG relative weights. We continue to employ this methodology
to account for nonmonotonically increasing relative weights until we
have adequate data to calculate appropriate separate weights for these
anomalous LTC-DRG pairs. We expect that, as was the case when we first
implemented the IPPS, this problem will be self-correcting, as LTCHs
submit more completely coded data in the future.
As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR
55990), there are three types of ``with CC'' and ``without CC'' pairs
that were nonmonotonic, that is, where the ``without CC'' proposed LTC-
DRG would have a higher average charge than the ``with CC'' proposed
LTC-DRG. For this proposed rule, using the LTCH cases in the December
2002 update of the FY 2002 MedPAR file, we identified two of the types
of nonmonotonic LTC-DRG pairs.
The first category of nonmonotonically increasing relative weights
for proposed FY 2004 LTC-DRG pairs ``with and without CCs'' contains no
pairs of proposed LTC-DRGs in which both the proposed LTC-DRG ``with
CCs'' and the proposed LTC-DRG ``without CCs'' had 25 or more LTCH
cases and, therefore, would not fall into one of the 5 proposed low
volume quintiles. For that type of nonmonotonic LTC-DRG pair, in
accordance with the methodology established in the August 30, 2002 LTCH
PPS final rule (67 FR 55990-55991), we would combine the LTCH cases and
compute a new proposed relative weight based on the case-weighted
average of the combined LTCH cases of the proposed LTC-DRGs. The case-
weighted average charge is determined by dividing the total charges for
all LTCH cases by the total number of LTCH cases for the combined
proposed LTC-DRG. This new proposed relative weight would then be
assigned to both of the proposed LTC-DRGs in the pair. However, as
there are no pairs that fall into this category, in this proposed rule,
we are proposing that, for FY 2004, there would be zero proposed LTC-
DRGs in this category.

[[Page 27181]]

The second category of nonmonotonically increasing relative weights
for proposed LTC-DRG pairs with and without CCs consists of 5 pairs of
proposed LTC-DRGs that has fewer than 25 cases, and each proposed LTC-
DRG would be grouped to different proposed low volume quintiles in
which the ``without CC'' proposed LTC-DRG would be in a higher-weighted
proposed low volume quintile than the ``with CC'' proposed LTC-DRG. For
those pairs, in accordance with the methodology established in the
August 30, 2002 LTCH PPS final rule (67 FR 55990-55991), we combine the
LTCH cases and determine the case-weighted average charge for all LTCH
cases. The case-weighted average charge is determined by dividing the
total charges for all LTCH cases by the total number of LTCH cases for
the combined proposed LTC-DRG. Based on the case-weighted average LTCH
charge, we determine which proposed low volume quintile the ``combined
proposed LTC-DRG'' would be grouped. Both proposed LTC-DRGs in the pair
are then grouped into the same proposed low volume quintile, and thus
would have the same proposed relative weight. For the FY 2004, in this
proposed rule, we are proposing that the following proposed LTC-DRGs
would be in this category: Proposed LTC-DRGs 31 and 32 (proposed low
volume quintile 3); proposed LTC-DRGs 193 and 194 (proposed low volume
quintile 2); proposed LTC-DRGs 493 and 494 (proposed low volume
quintile 4); proposed LTC-DRGs 497 and 498 (proposed low volume
quintile 3); and proposed LTC-DRGs 506 and 507 (proposed low volume
quintile 2).
The third category of nonmonotonically increasing relative weights
for proposed LTC-DRG pairs with and without CCs consists of 5 pairs of
proposed LTC-DRGs where one of the proposed LTC-DRGs has fewer than 25
LTCH cases and is grouped to a proposed low volume quintile and the
other proposed LTC-DRG has 25 or more LTCH cases and has its own
proposed LTC-DRG relative weight, and the proposed LTC-DRG ``without
CCs'' has the higher proposed relative weight. In accordance with the
methodology established in the August 30, 2002 LTCH PPS final rule (67
FR 55990 and 55991), we remove the proposed low volume LTC-DRG from the
proposed low volume quintile and combine it with the other proposed
LTC-DRG for the computation of a new proposed relative weight for each
of these proposed LTC-DRGs. This new proposed relative weight is
assigned to both proposed LTC-DRGs, so they each have the same proposed
relative weight. For FY 2004, in this proposed rule, we are proposing
the following proposed LTC-DRGs would be in this category: Proposed
LTC-DRGs 94 and 95; proposed LTC-DRGs 170 and 171; proposed LTC-DRGs
265 and 266; proposed LTC-DRGs 346 and 347; and proposed LTC-DRGs 478
and 479.
Step 6--Determine a proposed FY 2004 LTC-DRG relative weight for
LTC-DRGs with no LTCH cases. As we stated above, we determine the
proposed relative weight for each proposed LTC-DRG using charges
reported in the December 2002 update of the FY 2002 MedPAR file. Of the
518 proposed LTC-DRGs for FY 2004, we identified 164 proposed LTC-DRGs
for which there were no LTCH cases in the database. That is, based on
data from the FY 2002 MedPAR file used in this proposed rule, no
patients who would have been classified to those proposed LTC-DRGs were
treated in LTCHs during FY 2002 and, therefore, no charge data were
reported for those proposed LTC-DRGs. Thus, in the process of
determining the proposed LTC-DRG relative weights, we are unable to
determine proposed weights for these 164 proposed LTC-DRGs using the
methodology described in steps 1 through 5 above. However, since
patients with a number of the diagnoses under these proposed LTC-DRGs
may be treated at LTCHs beginning in FY 2004, in accordance with the
methodology established in the August 30, 2002 LTCH PPS final rule (67
FR 55991), we assign proposed relative weights to each of the 164 ``no
volume'' proposed LTC-DRGs based on clinical similarity and relative
costliness to one of the remaining 354 (518-164 = 354) proposed LTC-
DRGs for which we are able to determine proposed relative weights,
based on FY 2002 claims data.
As there are currently no LTCH cases in these ``no volume''
proposed LTC-DRGs, in accordance with the methodology established in
the August 30, 2002 LTCH PPS final rule (67 FR 55991), we determine
proposed relative weights for the 164 proposed LTC-DRGs with no LTCH
cases in the FY 2002 MedPAR file used in this proposed rule by grouping
them to the appropriate proposed low volume quintile. This methodology
is consistent with our methodology used in determining proposed
relative weights to account for the proposed low volume LTC-DRGs
described above.
As we described in the August 30, 2002 LTCH PPS final rule (67 FR
55991), our methodology for determining proposed relative weights for
the ``no volume'' proposed LTC-DRGs is as follows: First, we crosswalk
the no volume proposed LTC-DRGs by matching them to other similar
proposed LTC-DRGs for which there were LTCH cases in the FY 2002 MedPAR
file based on clinical similarity and intensity of use of resources as
determined by care provided during the period of time surrounding
surgery, surgical approach (if applicable), length of time of surgical
procedure, post-operative care, and length of stay. We assign the
proposed relative weight for the applicable proposed low volume
quintile to the no volume proposed LTC-DRG if the proposed LTC-DRG to
which it is crosswalked is grouped to one of the proposed low volume
quintiles. If the proposed LTC-DRG to which the no volume proposed LTC-
DRG is crosswalked is not one of the proposed LTC-DRGs to be grouped to
one of the proposed low volume quintiles, we compare the proposed
relative weight of the proposed LTC-DRG to which the no volume proposed
LTC-DRG is crosswalked to the proposed relative weights of each of the
five proposed quintiles and we assign the no volume proposed LTC-DRG
the proposed relative weight of the proposed low volume quintile with
the closest weight. For this proposed rule, a list of the no volume
proposed FY 2004 LTC-DRGs and the proposed FY 2004 LTC-DRG to which it
is crosswalked in order to determine the appropriate proposed low
volume quintile for the assignment of a proposed relative weight for FY
2004 is shown below in Table 2.

Table 2.--Proposed No Volume LTC-DRG Crosswalk and Proposed Quintile
Assignment for FY 2004
------------------------------------------------------------------------
Cross walked Low volume
LTC-DRG Description LTC-DRG quintile assigned
------------------------------------------------------------------------
2............. CRANIOTOMY AGE 17 W/O CC.
3............. CRANIOTOMY AGE 0-17. 1 Quintile 5.

[[Page 27182]]

6............. CARPAL TUNNEL 251 Quintile 1.
RELEASE.
26............ SEIZURE & HEADACHE 25 Quintile 2.
AGE 0-17.
30............ TRAUMATIC STUPOR & 29 Quintile 3.
COMA, COMA <1 HR
AGE 0-17.
33............ CONCUSSION AGE 0-17. 25 Quintile 2.
36............ RETINAL PROCEDURES.. 47 Quintile 1.
37............ ORBITAL PROCEDURES.. 47 Quintile 1.
38............ PRIMARY IRIS 47 Quintile 1.
PROCEDURES.
39............ LENS PROCEDURES WITH 47 Quintile 1.
OR WITHOUT
VITRECTOMY.
40............ EXTRAOCULAR 47 Quintile 1.
PROCEDURES EXCEPT
ORBIT AGE 17.
41............ EXTRAOCULAR 47 Quintile 1.
PROCEDURES EXCEPT
ORBIT AGE 0-17.
42............ INTRAOCULAR 47 Quintile 1.
PROCEDURES EXCEPT
RETINA, IRIS & LENS.
43............ HYPHEMA............. 47 Quintile 1.
45............ NEUROLOGICAL EYE 46 Quintile 2.
DISORDERS.
48............ OTHER DISORDERS OF 47 Quintile 1.
THE EYE AGE 0-17.
49............ MAJOR HEAD & NECK 64 Quintile 4.
PROCEDURES.
50............ SIALOADENECTOMY..... 63 Quintile 3.
51............ SALIVARY GLAND 63 Quintile 3.
PROCEDURES EXCEPT
SIALOADENECTOMY.
52............ CLEFT LIP & PALATE 63 Quintile 3.
REPAIR.
54............ SINUS & MASTOID 63 Quintile 3.
PROCEDURES AGE 0-17.
56............ RHINOPLASTY......... 72 Quintile 1.
57............ T&A PROC, EXCEPT 63 Quintile 3.
TONSILLECTOMY &/OR
ADENOIDECTOMY ONLY,
AGE 17.
58............ T&A PROC, EXCEPT 63 Quintile 3.
TONSILLECTOMY &/OR
ADENOIDECTOMY ONLY,
AGE 0-17.
59............ TONSILLECTOMY &/OR 63 Quintile 3.
ADENOIDECTOMY ONLY,
AGE 17.
60............ TONSILLECTOMY &/OR 63 Quintile 3.
ADENOIDECTOMY ONLY,
AGE 0-17.
62............ MYRINGOTOMY W TUBE 63 Quintile 3.
INSERTION AGE 0-17.
67............ EPIGLOTTITIS........ 63 Quintile 3.
70............ OTITIS MEDIA & URI 69 Quintile 1.
AGE 0-17.
71............ LARYNGOTRACHEITIS... 97 Quintile 2.
74............ OTHER EAR, NOSE, 69 Quintile 1.
MOUTH & THROAT
DIAGNOSES AGE 0-17.
81............ RESPIRATORY 69 Quintile 1.
INFECTIONS &
INFLAMMATIONS AGE 0-
17.
91............ SIMPLE PNEUMONIA & 90 Quintile 2.
PLEURISY AGE 0-17.
98............ BRONCHITIS & ASTHMA 97 Quintile 2.
AGE 0-17.
104........... CARDIAC VALVE & 110 Quintile 5.
OTHER MAJOR
CARDIOTHORACIC PROC
W CARDIAC CATH.
105........... CARDIAC VALVE & 110 Quintile 5.
OTHER MAJOR
CARDIOTHORACIC PROC
W/O CARDIAC CATH.
106........... CORONARY BYPASS W 110 Quintile 5.
PTCA.
107........... CORONARY BYPASS W 110 Quintile 5.
CARDIAC CATH.
109........... CORONARY BYPASS W/O 110 Quintile 5.
PTCA OR CARDIAC
CATH.
111........... MAJOR CARDIOVASCULAR 110 Quintile 5.
PROCEDURES W/O CC.
137........... CARDIAC CONGENITAL & 136 Quintile 2.
VALVULAR DISORDERS
AGE 0-17.
146........... RECTAL RESECTION W 148 Quintile 5.
CC.
147........... RECTAL RESECTION W/O 148 Quintile 5.
CC.
151........... PERITONEAL 150 Quintile 4.
ADHESIOLYSIS W/O CC.
153........... MINOR SMALL & LARGE 152 Quintile 4.
BOWEL PROCEDURES W/
O CC.
155........... STOMACH, ESOPHAGEAL 171 Quintile 5.
& DUODENAL
PROCEDURES AGE 17 W/O CC.
156........... STOMACH, ESOPHAGEAL 171 Quintile 5.
& DUODENAL
PROCEDURES AGE 0-17.
159........... HERNIA PROCEDURES 161 Quintile 4.
EXCEPT INGUINAL &
FEMORAL AGE 17 W CC.
160........... HERNIA PROCEDURES 161 Quintile 4.
EXCEPT INGUINAL &
FEMORAL AGE 17 W/O CC.
162........... INGUINAL & FEMORAL 178 Quintile 1.
HERNIA PROCEDURES
AGE 17 W/
O CC.
163........... HERNIA PROCEDURES 178 Quintile 1.
AGE 0-17.
164........... APPENDECTOMY W 148 Quintile 5.
COMPLICATED
PRINCIPAL DIAG W CC.
165........... APPENDECTOMY W 149 Quintile 1.
COMPLICATED
PRINCIPAL DIAG W/O
CC.
166........... APPENDECTOMY W/O 148 Quintile 5.
COMPLICATED
PRINCIPAL DIAG W CC.
167........... APPENDECTOMY W/O 149 Quintile 1.
COMPLICATED
PRINCIPAL DIAG W/O
CC.
169........... MOUTH PROCEDURES W/O 72 Quintile 1.
CC.
184........... ESOPHAGITIS, 183 Quintile 2.
GASTROENT & MISC
DIGEST DISORDERS
AGE 0-17.
186........... DENTAL ORAL DIS 185 Quintile 2.
EXCEPT EXTRACTIONS
& RESTORATIONS, AGE
0-17.
187........... DENTAL EXTRACTIONS & 185 Quintile 2.
RESTORATIONS.
190........... OTHER DIGESTIVE 189 Quintile 2.
SYSTEM DIAGNOSES
AGE 0-17.
196........... CHOLECYSTECTOMY W 197 Quintile 3.
C.D.E. W/O CC.
198........... CHOLECYSTECTOMY 197 Quintile 3.
EXCEPT BY
LAPAROSCOPE W/O
C.D.E. W/O CC.
199........... HEPATOBILIARY 200 Quintile 2.
DIAGNOSTIC
PROCEDURE FOR
MALIGNANCY.
212........... HIP & FEMUR 211 Quintile 2.
PROCEDURES EXCEPT
MAJOR JOINT AGE 0-
17.
219........... LOWER EXTREM & HUMER 218 Quintile 3.
PROC EXCEPT HIP,
FOOT, FEMUR AGE 17 W/O CC.
220........... LOWER EXTREM & HUMER 218 Quintile 3.
PROC EXCEPT HIP,
FOOT, FEMUR AGE 0-
17.
224........... SHOULDER, ELBOW OR 234 Quintile 2.
FOREARM PROC, EXC
MAJOR JOINT PROC, W/
O CC.
229........... HAND OR WRIST PROC, 234 Quintile 2.
EXCEPT MAJOR JOINT
PROC, W/O CC.
252........... FX, SPRN, STRN & 234 Quintile 2.
DISL OF FOREARM,
HAND, FOOT AGE 0-17.
255........... FX, SPRN, STRN & 234 Quintile 2.
DISL OF UPARM,
LOWLEG EX FOOT AGE
0-17.
258........... TOTAL MASTECTOMY FOR 257 Quintile 3.
MALIGNANCY W/O CC.

[[Page 27183]]

259........... SUBTOTAL MASTECTOMY 257 Quintile 3.
FOR MALIGNANCY W CC.
260........... SUBTOTAL MASTECTOMY 257 Quintile 3.
FOR MALIGNANCY W/O
CC.
267........... PERIANAL & PILONIDAL 158 Quintile 1.
PROCEDURES.
279........... CELLULITIS AGE 0-17. 78 Quintile 1.
282........... TRAUMA TO THE SKIN, 281 Quintile 2.
SUBCUT TISS &
BREAST AGE 0-17.
286........... ADRENAL & PITUITARY 292 Quintile 4.
PROCEDURES.
289........... PARATHYROID 293 Quintile 3.
PROCEDURES.
290........... THYROID PROCEDURES.. 293 Quintile 3.
291........... THYROGLOSSAL 293 Quintile 3.
PROCEDURES.
298........... NUTRITIONAL & MISC 297 Quintile 2.
METABOLIC DISORDERS
AGE 0-17.
303........... KIDNEY,URETER & 304 Quintile 5.
MAJOR BLADDER
PROCEDURES FOR
NEOPLASM.
307........... PROSTATECTOMY W/O CC 306 Quintile 4.
313........... URETHRAL PROCEDURES, 311 Quintile 1.
AGE 17 W/
O CC.
314........... URETHRAL PROCEDURES, 311 Quintile 1.
AGE 0-17.
322........... KIDNEY & URINARY 326 Quintile 2.
TRACT INFECTIONS
AGE 0-17.
327........... KIDNEY & URINARY 326 Quintile 2.
TRACT SIGNS &
SYMPTOMS AGE 0-17.
329........... URETHRAL STRICTURE 328 Quintile 1.
AGE 17 W/
O CC.
330........... URETHRAL STRICTURE 328 Quintile 1.
AGE 0-17.
333........... OTHER KIDNEY & 332 Quintile 1.
URINARY TRACT
DIAGNOSES AGE 0-17.
334........... MAJOR MALE PELVIC 345 Quintile 3.
PROCEDURES W CC.
335........... MAJOR MALE PELVIC 345 Quintile 3.
PROCEDURES W/O CC.
336........... TRANSURETHRAL 341 Quintile 2.
PROSTATECTOMY W CC.
337........... TRANSURETHRAL 341 Quintile 2.
PROSTATECTOMY W/O
CC.
338........... TESTES PROCEDURES, 339 Quintile 1.
FOR MALIGNANCY.
340........... TESTES PROCEDURES, 339 Quintile 1.
NON-MALIGNANCY AGE
0-17.
343........... CIRCUMCISION AGE 0- 339 Quintile 1.
17.
351........... STERILIZATION, MALE. 339 Quintile 1.
353........... PELVIC EVISCERATION, 365 Quintile 5.
RADICAL
HYSTERECTOMY &
RADICAL VULVECTOMY.
354........... UTERINE,ADNEXA PROC 365 Quintile 5.
FOR NON-OVARIAN/
ADNEXAL MALIG W CC.
355........... UTERINE,ADNEXA PROC 365 Quintile 5.
FOR NON-OVARIAN/
ADNEXAL MALIG W/O
CC.
356........... FEMALE REPRODUCTIVE 360 Quintile 4.
SYSTEM
RECONSTRUCTIVE
PROCEDURES.
357........... UTERINE & ADNEXA 360 Quintile 4.
PROC FOR OVARIAN OR
ADNEXAL MALIGNANCY.
358........... UTERINE & ADNEXA 360 Quintile 4.
PROC FOR NON-
MALIGNANCY W CC.
359........... UTERINE & ADNEXA 360 Quintile 4.
PROC FOR NON-
MALIGNANCY W/O CC.
361........... LAPAROSCOPY & 149 Quintile 1.
INCISIONAL TUBAL
INTERRUPTION.
362........... ENDOSCOPIC TUBAL 149 Quintile 1.
INTERRUPTION.
363........... D&C, CONIZATION & 367 Quintile 2.
RADIO-IMPLANT, FOR
MALIGNANCY.
364........... D&C, CONIZATION 367 Quintile 2.
EXCEPT FOR
MALIGNANCY.
370........... CESAREAN SECTION W 369 Quintile 3.
CC.
371........... CESAREAN SECTION W/O 367 Quintile 2.
CC.
372........... VAGINAL DELIVERY W 367 Quintile 2.
COMPLICATING
DIAGNOSES.
373........... VAGINAL DELIVERY W/O 367 Quintile 2.
COMPLICATING
DIAGNOSES.
374........... VAGINAL DELIVERY W 367 Quintile 2.
STERILIZATION &/OR
D&C.
375........... VAGINAL DELIVERY W 367 Quintile 2.
O.R. PROC EXCEPT
STERIL &/OR D&C.
377........... POSTPARTUM & POST 367 Quintile 2.
ABORTION DIAGNOSES
W O.R. PROCEDURE.
378........... ECTOPIC PREGNANCY... 369 Quintile 3.
379........... THREATENED ABORTION. 376 Quintile 1.
380........... ABORTION W/O D&C.... 376 Quintile 1.
381........... ABORTION W D&C, 376 Quintile 1.
ASPIRATION
CURETTAGE OR
HYSTEROTOMY.
382........... FALSE LABOR......... 376 Quintile 1.
383........... OTHER ANTEPARTUM 376 Quintile 1.
DIAGNOSES W MEDICAL
COMPLICATIONS.
384........... OTHER ANTEPARTUM 376 Quintile 1.
DIAGNOSES W/O
MEDICAL
COMPLICATIONS.
386........... EXTREME IMMATURITY.. 367 Quintile 2.
387........... PREMATURITY W MAJOR 367 Quintile 2.
PROBLEMS.
388........... PREMATURITY W/O 367 Quintile 2.
MAJOR PROBLEMS.
389........... FULL TERM NEONATE W 367 Quintile 2.
MAJOR PROBLEMS.
390........... NEONATE W OTHER 367 Quintile 2.
SIGNIFICANT
PROBLEMS.
391........... NORMAL NEWBORN...... 376 Quintile 1.
392........... SPLENECTOMY AGE 17.
393........... SPLENECTOMY AGE 0-17 194 Quintile 2.
396........... RED BLOOD CELL 399 Quintile 1.
DISORDERS AGE 0-17.
405........... ACUTE LEUKEMIA W/O 404 Quintile 2.
MAJOR O.R.
PROCEDURE AGE 0-17.
407........... MYELOPROLIF DISORD 408 Quintile 3.
OR POORLY DIFF
NEOPL W MAJ O.R.
PROC W/O CC.
417........... SEPTICEMIA AGE 0-17. 416 Quintile 3.
422........... VIRAL ILLNESS & 420 Quintile 1.
FEVER OF UNKNOWN
ORIGIN AGE 0-17.
446........... TRAUMATIC INJURY AGE 445 Quintile 2.
0-17.
448........... ALLERGIC REACTIONS 455 Quintile 1.
AGE 0-17.
451........... POISONING & TOXIC 455 Quintile 1.
EFFECTS OF DRUGS
AGE 0-17.
481........... BONE MARROW 394 Quintile 1.
TRANSPLANT.

[[Page 27184]]

484........... CRANIOTOMY FOR 1 Quintile 5.
MULTIPLE
SIGNIFICANT TRAUMA.
485........... LIMB REATTACHMENT, 209 Quintile 5.
HIP AND FEMUR PROC
FOR MULTIPLE
SIGNIFICANT TR.
491........... MAJOR JOINT & LIMB 209 Quintile 5.
REATTACHMENT
PROCEDURES OF UPPER
EXTREMITY.
492........... CHEMOTHERAPY W ACUTE 410 Quintile 3.
LEUKEMIA AS
SECONDARY DIAGNOSIS.
496........... COMBINED ANTERIOR/ 210 Quintile 4.
POSTERIOR SPINAL
FUSION.
504........... EXTENSIVE 3RD DEGREE 468 Quintile 5.
BURNS W SKIN GRAFT.
516........... PERCUTANEOUS 578 Quintile 3.
CARDIVASCULAR
PROCEDURE W AMI.
520........... CERVICAL SPINAL 498 Quintile 3.
FUSION W/O CC.
525........... HEART ASSIST SYSTEM 468 Quintile 5.
IMPLANT.
526........... PERCUTANEOUS 517 Quintile 4.
CARVIOVASCULAR PROC
W DRUG-ELUTING
STENT W AMI.
527........... PERCUTANEOUS 517 Quintile 4.
CARVIOVASCULAR PROC
W DRUG-ELUTING
STENT W/O AMI.
528........... INTRACRANIAL 1 Quintile 5.
VASCLUAR PROCEDURES
WITH PDX HEMORRHAGE.
530........... VENTRICULAR SHUNT 529 Quintile 2.
PROCEDURES WITHOUT
CC.
531........... SPINAL PROCEDURES 519 Quintile 4.
WITH CC.
533........... EXTRACRANIAL 534 Quintile 5.
VASCULAR PROCEDURES
WITH CC.
535........... CARDIAC DEFIB 515 Quintile 5.
IMPLANT WITH
CARDIAC CATH WITH
AMI/HF/SHOCK.
537........... LOCAL EXCISION AND 253 Quintile 2.
REMOVAL OF INTERNAL
FIXATION DEVICES
EXCEPT HIP AND
FEMUR WITH CC.
539........... LYMPHOMA AND 401 Quintile 5.
LEUKEMIA WITH MAJOR
O.R. PROCEDURE WITH
CC.
------------------------------------------------------------------------

To illustrate this methodology, which was established in the August
30, 2002 LTCH PPS final rule (67 FR 55991), for determining the
proposed relative weights for the 164 proposed LTC-DRGs with no LTCH
cases, we are providing the following examples, which refer to the no
volume proposed LTC-DRGs crosswalk information for FY 2004 provided
above in Table 2:

Example 1: There were no cases in the FY 2002 MedPAR file used
for this proposed rule for proposed LTC-DRG 163 (Hernia Procedures
Age 0-17). Since the procedure is similar in resource use and the
length and complexity of the procedures and the length of stay are
similar, we determined that proposed LTC-DRG 178 (Uncomplicated
Peptic Ulcer Without CC), which is assigned to proposed low volume
quintile 1 for the purpose of determining the proposed FY 2004
relative weights, would display similar clinical and resource use.
Therefore, we are proposing to assign the same proposed relative
weight of LTC-DRG 178 of 0.5711 (proposed Quintile 1) for FY 2004
(Table 11 in the Addendum to this proposed rule) to proposed LTC-DRG
163.
Example 2: There were no LTCH cases in the FY 2002 MedPAR file
used in this proposed rule for proposed LTC-DRG 91 (Simple Pneumonia
and Pleurisy Age 0-17). Since the severity of illness in patients
with bronchitis and asthma is similar in patients regardless of age,
we determined that proposed LTC-DRG 90 (Simple Pneumonia and
Pleurisy Age 17 Without CC) would display similar
clinical and resource use characteristics and have a similar length
of stay to proposed LTC-DRG 91. There were over 25 cases in proposed
LTC-DRG 90. Therefore, it would not be assigned to a proposed low
volume quintile for the purpose of determining the proposed LTC-DRG
relative weights. However, under our established methodology,
proposed LTC-DRG 91, with no LTCH cases, would need to be grouped to
a proposed low volume quintile. We identified that the proposed low
volume quintile with the closest weight to proposed LTC-DRG 90
(0.7429; see Table 11 in the Addendum to this proposed rule) would
be proposed low volume quintile 2 (0.7347; see Table 11 in the
Addendum to this proposed rule). Therefore, we are proposing to
assign proposed LTC-DRG 91 a proposed relative weight of 0.7347 for
FY 2004.

Furthermore, in accordance with the methodology established in the
August 30, 2002 final rule (67 FR 55991), we are proposing LTC-DRG
relative weights of 0.0000 for heart, kidney, liver, lung, pancreas,
and simultaneous pancreas/kidney transplants (proposed LTC-DRGs 103,
302, 480, 495, 512, and 513, respectively) for FY 2004 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, as we discussed in that same final rule (67
FR 55995), 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 would become certified as a transplant center.
In fact, in the nearly 20 years since the implementation of the IPPS,
there has never been a LTCH that even expressed an interest in becoming
a transplant center.
However, 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 propose
appropriate weights for the LTC-DRGs affected. At the present time, we
would only include these six transplant proposed LTC-DRGs in the
GROUPER program for administrative purposes. Since we use the same
GROUPER program for LTCHs as is used under the acute care hospital
IPPS, removing these LTC-DRGs would be administratively burdensome.
Again, we note that as this system is dynamic, it is entirely
possible that the number of proposed LTC-DRGs with a zero volume of
LTCH cases based on the system will vary in the future. We used the
best most recent available claims data in the MedPAR file to identify
zero volume proposed LTC-DRGs and to determine the relative weights in
this final rule.
Table 11 in the Addendum to this proposed rule lists the proposed
LTC-DRGs and their respective proposed relative weights, geometric mean
length of stay, and five-sixths of the geometric mean length of stay
(to assist in the determination of short-stay outlier payments under
Sec. 412.529) for FY 2004.

E. 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 under the IPPS. Section 1886(d)(5)(K)(ii)(I) of

[[Page 27185]]

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.'' 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 412.87(b)(1) of our existing regulations provides that a
new technology will be an appropriate candidate for an additional
payment when it represents an advance in medical technology that
substantially improves, relative to technologies previously available,
the diagnosis or treatment of Medicare beneficiaries (see the September
7, 2001 final rule (66 FR 46902)). Section 412.87(b)(3) provides that,
to receive special payment treatment, new technologies meeting this
clinical definition must be demonstrated to be inadequately paid
otherwise under the DRG system. To assess whether technologies would be
inadequately paid under the DRGs, we established this threshold at one
standard deviation beyond the geometric mean standardized charge for
all cases in the DRGs to which the new technology is assigned (or the
case-weighted average of all relevant DRGs, if the new technology
occurs in many different DRGs). Table 10 in the Addendum to this
proposed rule lists the proposed qualifying criteria by DRG, based on
the discharge data that we are using to calculate the proposed FY 2004
DRG weights. The thresholds that will be published in the final rule
for FY 2004 will be used to evaluate applicants for new technology add-
on payments during FY 2005.
In addition to the clinical and cost criteria, we established that,
in order to qualify for the new technology add-on payments, a specific
technology must be ``new'' under the requirements of Sec. 412.87(b)(2)
of our regulations. The statutory provision contemplated the special
payment treatment for new technologies until such time as data are
available to reflect the cost of the technology in the DRG weights
through recalibration (no less than 2 years and no more than 3 years).
There is a lag of 2 to 3 years from the point a new technology is first
introduced on the market and when data reflecting the use of the
technology are used to calculate the DRG weights. For example, data
from discharges occurring during FY 2002 are used to calculate the
proposed FY 2004 DRG weights in this proposed rule.
Technology may be considered ``new'' for purposes of this provision
within 2 or 3 years after the point at which data begin to become
available reflecting the costs of the technology. After we have
recalibrated the DRGs to reflect the costs of an otherwise new
technology, the special add-on payment for new technology will cease
(Sec. 412.87(b)(2)). For example, an approved new technology that
received FDA approval in October 2002 would be eligible to receive add-
on payments as a new technology at least until FY 2005 (discharges
occurring before October 1, 2004), when data reflecting the costs of
the technology would be used to recalibrate the DRG weights. Because
the FY 2005 DRG weights will be calculated using FY 2003 MedPAR data,
the costs of such a new technology would likely be reflected in the FY
2005 DRG weights.
Similar to the timetable for applying for new technology add-on
payments during FY 2004, we are proposing that applicants for FY 2005
must submit a formal request, including a full description of the
clinical applications of the technology and the results of any clinical
evaluations demonstrating that the new technology represents a
substantial clinical improvement, along with a significant sample of
data to demonstrate the technology meets the high-cost threshold, no
later than early October 2003. We are proposing that a complete
database must be submitted no later than mid-December 2003. Complete
application information is available at our Web site at: http://www.cms.hhs.gov/providers
/hipps/default.asp. To allow interested
parties to identify the technologies under review before the
publication of the annual proposed rule, the Web site also lists the
tracking forms completed by each applicant.
The new technology add-on payment policy provides additional
payments for cases with high costs involving eligible new technologies
while preserving some of the incentives under the average-based payment
system. The payment mechanism is based on the cost to hospitals for the
new technology. Under Sec. 412.88, Medicare pays a marginal cost
factor of 50 percent for the costs of the new technology in excess of
the full DRG payment. If the actual costs of a new technology case
exceed the DRG payment by more than the estimated costs of the new
technology, Medicare payment is limited to the DRG payment plus 50
percent of the estimated costs of the new technology.
The report language accompanying section 533 of Public Law 106-554
indicated Congressional intent that the Secretary implement the new
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033,
106th Cong., 2nd Sess. at 897 (2000)). 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, we account for
projected payments under the new technology provision during the
upcoming fiscal year at the same time we estimate the payment effect of
changes to the DRG classifications and recalibration. The impact of
additional payments under this provision would then be included in the
budget neutrality factor, which is applied to the standardized amounts
and the hospital-specific amounts.
Because any additional payments directed toward new technology
under this provision must be offset to ensure budget neutrality, it is
important to consider carefully the extent of this provision and ensure
that only technologies representing substantial advances are recognized
for additional payments. In that regard, we indicated that we would
discuss in the annual proposed and final rules those technologies that
were considered under this provision; our determination as to whether a
particular technology meets our criteria to be considered new; whether
it is determined further that cases involving the new technology would
be inadequately paid under the existing DRG payment; and any
assumptions that went into the budget neutrality calculations related
to additional payments for that new technology, including the expected
number, distribution, and costs of these cases.
To balance appropriately the Congress' intent to increase
Medicare's payments for eligible new technologies with concern that the
total size of those payments not result in significantly reduced
payments for other cases, we set a target limit for estimated add-on
payments for new technology under the provisions of sections
1886(d)(5)(K) and (L) of the Act at 1.0 percent of estimated total
operating prospective payments.
If the target limit is exceeded, we would reduce the level of
payments for approved technologies across the board, to ensure
estimated payments do not exceed the limit. Using this approach, all
cases involving approved new technologies that would otherwise receive
additional payments would still receive special payments, albeit at a

[[Page 27186]]

reduced amount. Although the marginal payment rate for individual
technologies would be reduced, this reduction would be offset by large
overall payments to hospitals for new technologies under this
provision.
2. FY 2004 Status of Technology Approved for FY 2003 Add-On Payments:
Drotrecogin Alfa (Activated)--Xigris[reg]
In the August 1, 2002 IPPS final rule, we stated that cases
involving the administration of Xigris[reg] (a biotechnology product
that is a recombinant version of naturally occurring Activated Protein
C (APC)) as identified by the presence of code 00.11 (Infusion of
drotrecogin alfa (activated)) are eligible for additional payments of
up to $3,400 (50 percent of the average cost of the drug)'' (67 FR
50013). (The August 1, 2002 final rule contains a detailed discussion
of this technology.) Although Xigris[reg] was approved by the FDA in
November 2001, it did not qualify for add-on payments until discharges
on or after October 1, 2002. Consequently, FY 2002 discharges (between
October 1, 2001 and September 30, 2002) may not reflect full
utilization of the technology due to the absence of the add-on payment.
Therefore, for FY 2004, we are proposing to continue to make add-on
payments for cases involving the administration of Xigris[reg] as
identified by the presence of code 00.11. Based on preliminary analysis
of the incidence of Xigris[reg] in the first quarter FY 2003 MedPAR
file, we are proposing to revise downward our estimate of total add-on
payments for Xigris[reg]. For FY 2003, we estimated that total add-on
payments would be approximately $74.8 million (22,000 Medicare patients
who would be eligible for a $3,400 add-on payment). For FY 2004, we are
estimating the total add-on payments would be approximately $50 million
(based on 14,000 Medicare patients who would be eligible for a $3,400
add-on payment). We are proposing that this additional payment would be
included in the DRG reclassification and recalibration budget
neutrality factor, which is applied to the standardized amounts and the
hospital-specific amounts. However, we will reevaluate our assumptions
regarding this estimate based on preliminary claims data from the FY
2003 MedPAR file before the publication of the FY 2004 IPPS final rule.
3. FY 2004 Applicants for New Technology Add-On Payments
We received two applications for new technologies to be designated
eligible for inpatient add-on payments for new technology for FY 2004.
A discussion of these applications and our determinations on these
applications appears below.
a. Bone Morphogenetic Proteins (BMPs) for Spinal Fusions. An
application was submitted by Medtronic Sofamor Danek for the
InFUSE^TM Bone Graft/LT-CAGE[reg]'' Lumbar Tapered Fusion
Device for approval as a new technology eligible for add-on payments. A
similar application was submitted last year but was denied because,
based on the available data, the technology did not exceed the one
standard deviation threshold above the average charges for the DRGs to
which the technology is assigned.
The product is applied through use of an absorbable collagen sponge
and an interbody fusion device, which is then implanted at the fusion
site. The patient undergoes a spinal fusion, and the product is placed
at the fusion site to promote bone growth. This procedure is done in
place of the more traditional use of autogenous iliac crest bone graft.
For a more detailed discussion about InFUSE^TM Bone Graft/LT-
CAGE[reg] Lumbar Tapered Fusion, see the August 1, 2002 IPPS final rule
(67 FR 50016).
On July 2, 2002, the FDA approved InFUSE^TM Bone Graft/
LT-CAGE[reg] for spinal fusion procedures in skeletally mature patients
at one level. Therefore, based on the FDA's approval, multilevel use of
this technology would be off-label. In the August 1, 2002 IPPS final
rule (67 FR 50017), we stated this technology would meet the cost
threshold only if the added costs of multilevel fusions were taken into
account. Because the FDA had not approved this technology for
multilevel fusions, and the applicant had not submitted data to
demonstrate this technology is a substantial clinical improvement for
multilevel fusions (the clinical trial upon which the application was
based was a single-level fusion trial), we could not issue a
substantial clinical improvement determination for multilevel fusions
and, consequently, did not consider the costs associated with
multilevel fusions in our analysis of whether this technology met the
cost threshold. Therefore, because the average charges for this new
technology, when used for single-level spinal fusions, did not exceed
the threshold to qualify for new technology add-on payment of $37,815,
we denied this application for add-on payments for FY 2003. For similar
reasons, we did not consider data on the charges for multilevel fusions
in our analysis of whether this technology meets the cost threshold for
FY 2004.
In its application for add-on payments for FY 2004, Medtronic used
data from CMS' FY 2001 Standard Analytical File for physicians and
hospitals. The analysis linked a 5-percent sample of hospital spinal
fusions cases with the corresponding physician claims. Because there
were no ICD-9-M codes to identify multilevel fusions in 2001,
multilevel fusions were identified using CPT codes on the physician
claims. Average charges were taken from actual cases used in clinical
trials.
After grouping these cases into one, two, and three or more levels
fused in DRGs 497 and 498 (Spinal Fusion Except Cervical With and
Without CC, respectively), the applicant then calculated average
charges assuming the use of the InFUSE^TM Bone Graft/LT-
CAGE[reg] for these cases. For DRG 497, the estimated single-level
fusion average charge was $41,321; for DRG 498, the estimated single-
level fusion average charge was $37,200. Because these DRGs are not
currently split for different numbers of fusion levels involved,
Medtronic has calculated its own standard deviation of average charges
to determine the threshold for these DRGs using the 5-percent sample
data. For DRG 497, the threshold (calculated by Medtronic) was $45,646,
which is greater than the estimated average charge of $41,321 for
single-level fusions noted above. For DRG 498, the threshold
(calculated by Medtronic) was $36,935, which is less than the average
charges for single-level fusions in this DRG as noted above.
However, we note the thresholds to qualify for the new technology
add-on payments for FY 2003 published in Table 10 of the August 1, 2002
IPPS final rule for DRGs 497 and 498 were $58,040 and $41,923,
respectively. These thresholds were computed based on all cases
assigned to these DRGs, and do not differentiate between the number of
spinal levels fused. Because we are not proposing to redefine these
DRGs to differentiate cases on the basis of the number of levels of the
spine fused in the manner suggested by the applicant's analysis, the
thresholds published in last year's final rule are applicable for a new
technology to qualify for add-on payments in these DRGs for FY 2004.
Therefore, because the averages calculated by the applicant for single-
level fusions do not exceed the published thresholds, we are proposing
not to approve this technology on the basis of this analysis.
The applicant also submitted data from actual cases involving the
InFUSE^TM Bone Graft/LT-CAGE[reg] with single level fusions
only. The data submitted included 31 claims from 4

[[Page 27187]]

hospitals (only one Medicare patient was included in the sample). All
31 cases were from DRG 498. The average standardized charge for these
cases was $47,172. Based on these data, the average standardized charge
exceeds the threshold for DRG 498. However, we note that this limited
sample excludes any cases from DRG 497.
We note that, effective for discharges occurring on or after
October 1, 2002, ICD-9-CM codes 84.51 (Insertion of interbody spinal
fusion device) and 84.52 (Insertion of recombinant bone morphogenetic
protein) are effective to identify cases involving this technology.
Therefore, in an effort to resolve the difficulties in obtaining
sufficient data upon which to determine whether this technology exceeds
the applicable threshold, we intend to review available MedPAR data for
the first several months of FY 2003 to identify these cases and
calculate their average standardized charges to compare with the
thresholds. We anticipate some of these cases will involve multilevel
spinal fusions, and it will be necessary to identify those cases in
order to remove them from the calculation of the average charges.
If the technology meets the cost threshold based on the MedPAR
data, we will evaluate whether it qualifies as a substantial clinical
improvement. According to the applicant:
``InFUSE^TM Bone Graft is more appropriate to use and has
been proven more effective in its use than autogenous iliac crest bone
graft, when either is placed in the LT-Cage^TM Lumbar Tapered
Fusion Device for anterior lumbar interbody fusion. Use of
InFUSE^TM Bone Graft instead of autogenous iliac crest bone
graft:
[sbull] Obviates iliac crest bone graft donor site morbidity.
[sbull] Reduces operative time, blood loss and hospitalization.
[sbull] Results in greater fusion success.
[sbull] We found that the Oswestry Low Back Pain Disability score
and SF-36 Physical Component and Pain Index score were consistently 10
percent better in the InFUSE^TM Bone Graft group than the
autogenous iliac bone graft group.
[sbull] Enables earlier return to work.''
Among the issues we will consider are: Does avoiding the
complications associated with the iliac crest bone harvesting procedure
constitute a substantial clinical improvement; and, with the increased
rate of osteoarthritis and osteoporosis in the Medicare population, is
there evidence that the technology represents a substantial clinical
improvement in spinal fusions among this population? We are
particularly interested in data on the results of aged Medicare
patients who have been treated with BMP, and any basic biology bench
data on the results of using BMP in osteoporotic bones.
b. GLIADEL[reg] Wafer. Glioblastoma Multiforme (GBM) is the most
common and most aggressive of the primary brain tumors. Standard care
for patients diagnosed with GBM is surgical resection and radiation.
According to the manufacturer (Guilford Pharmaceuticals), the
GLIADEL[reg] Wafer is indicated for use as an adjunct to surgery to
prolong survival in patients with recurrent GBM. Implanted directly
into the cavity that is created when a brain tumor is surgically
removed, GLIADEL[reg] delivers chemotherapy directly to the site where
tumors are most likely to recur.
The FDA approved GLIADEL[reg] Wafer on September 23, 1996, for use
as an adjunct to surgery to prolong survival in patients with recurrent
GBM for whom surgical resection is indicated. In announcing its
approval, the FDA indicated that GLIADEL[reg] was approved:
`` * * * based on the results of a multi-center placebo controlled
study in 222 patients who had recurrent malignant glioma after initial
treatment with surgery and radiation therapy. Following surgery to
remove the tumor, half of the patients were treated with GLIADEL[reg]
implants and half with placebo. In patients with glioblastoma
multiforme, the 6-month survival rate increased from 36 percent with
placebo to 56 percent with GLIADEL[reg]. Median survival increased from
20 weeks with placebo to 28 weeks with GLIADEL[reg]. In patients with
pathologic diagnoses other than glioblastoma multiforme, GLIADEL[reg]
had no effect on survival.''
Guilford Pharmaceuticals has requested that GLIADEL[reg] still be
considered new because, until a new ICD-9-CM code (00.10 Implementation
of Chemotherapeutic Agent) was established on October 1, 2002, it was
not possible to identify specifically these cases in the MedPAR data.
However, as noted previously, technology will no longer be considered
new after the costs of the technology are reflected in the DRG weights.
Because the costs of GLIADEL[reg] are currently reflected in the DRG
weights (despite the absence of a specific code), GLIADEL[reg] does not
meet our criterion that a medical service or technology be ``new''.
That is, FY 2002 MedPAR data used to calculate the proposed DRG weights
for FY 2004 include cases where GLIADEL[reg] was administered (and the
corresponding charges of these cases, include charges associated with
GLIADEL[reg]). On February 26, 2003, the FDA approved GLIADEL[reg] for
use in newly diagnosed patients with high-grade malignant glioma as an
adjunct to surgery and radiation. However, our understanding is that
many newly diagnosed patients were already receiving this therapy. To
the extent this is true, the charges associated with this use of
GLIADEL[reg] are also reflected in the DRG relative weights.
According to Guilford's application, the current average wholesale
price of GLIADEL[reg] is $10,985. Guilford submitted charge data for 23
Medicare patients at 7 hospitals from FY 2000. The charges were then
standardized and adjusted for inflation using the hospital market
basket inflation factor (from 2000 to 2003) in order to determine an
inflated average standardized charge of $33,002. Guilford points out
that this charge narrowly misses the DRG 2 threshold published in Table
10 of the August 1, 2002 IPPS final rule of $34,673. However, we note
that, according to the manufacturer, as many as 60 percent of current
GLIADEL[reg] cases may be assigned to DRG 1 based on the presence of
CCs. Based on this assumption, the qualifying threshold for
GLIADEL[reg] would be $54,312 (60 percent of the DRG 1 threshold of
$67,404, and 40 percent of the DRG 2 threshold of $34,673).
As mentioned above in section II.B.3.a. of this proposed rule, we
examined the definitions of DRGs 1 and 2 to determine whether they
could be improved, and we are proposing to create a new DRG for
patients with an intracranial vascular procedure and an intracranial
hemorrhage and two new DRGs for patients with only a vascular shunt
procedure (splitting on the presence or absence of a CC). We also
compared the data submitted in the application on the charges for
GLIADEL[reg] cases with the charges of other procedures in DRGs 1 and
2. We found that, although the $33,002 average standardized charge
reported is just below the qualifying threshold in DRG 2, it is
actually well below the mean average standardized charge for DRG 1
($42,092). As noted previously, as many as 60 percent of current
GLIADEL[reg] cases may be assigned to DRG 1 based on the presence of
CCs. Therefore, we do not believe that any change to the DRG assignment
of cases receiving GLIADEL[reg] is warranted at this time. However, we
will continue to monitor our data to determine whether a change is
warranted in the future.
4. Review of the High-Cost Threshold
The current cost threshold for a new technology to qualify for add-
on

[[Page 27188]]

payments is that the average standardized charges of cases involving
the new technology must be demonstrated to exceed one standard
deviation beyond the mean standardized charges of the DRG to which the
new technology will be assigned. When we established this threshold in
the September 7, 2001 final rule, we expressed our belief that it is
important to establish a threshold that recognizes the variability in
costs per case within DRGs and maintains the fundamental financial
incentives of the IPPS (66 FR 46917).
In its comments on this approach, MedPAC supported the one standard
deviation threshold. However, others, particularly representatives of
the manufacturers of new technology, have argued this threshold is too
high, and that virtually no new technology would qualify for the
special payment provision.
We are concerned that establishing higher payments for a great
number of new technologies may be inflationary because the add-on
payments reduce the efficiency incentives hospitals face when new
technologies must otherwise be financed out of current payments for
similar cases. Traditionally, new technologies were required to compete
with existing treatment methods on clinical and cost criteria. Add-on
payments are intended to give new technologies a competitive boost
relative to existing treatment methods with the goal of encouraging
faster and more widespread adoption of new technologies.
Much of the current variation around the mean within any particular
DRG is due to the range of procedures contained within each DRG.
Generally, some of these procedures will be more expensive than the
mean and some will be less expensive. The threshold should be set high
enough to ensure that it identifies truly high-cost technologies. If
the threshold were set too low (for example, at $2,500, as some have
suggested), additional technologies may qualify merely by association
with a procedure only slightly more costly than the mean for the DRG.
For example, consider a DRG with five different procedures and mean
charges of $15,000. The mean charges for each procedure are distributed
around $15,000, as illustrated in the following table. A qualifying
threshold of $2,500 would result in any new technology that is only
used for the fifth procedure automatically qualifying for new
technology add-on payments (unless the new technology had the unlikely
effect of lowering the mean cost for cases with this procedure by at
least $2,500). This is because the average charge of $20,000 for cases
in this procedure already exceeds the mean charges for the DRG plus
$2,500.

------------------------------------------------------------------------
Procedure Mean charge
------------------------------------------------------------------------
1....................................................... $10,000
2....................................................... 12,000
3....................................................... 15,000
4....................................................... 17,000
5....................................................... 20,000
------------------------------------------------------------------------

At the same time, we recognize that the very limited number of
applications that have been submitted the past 2 years (five for FY
2003; two for FY 2004) may indicate that only a very small number of
the new technologies that come onto the market every year are costly
enough even to apply for new technology add-on payments. Therefore, for
FY 2005 and subsequent Fiscal Years, we are proposing to reduce the
threshold to 75 percent of one standard deviation beyond the geometric
mean standardized charge for all cases in the DRG to which the new
medical service or technology is assigned (proposed Sec.
412.87(b)(3)).
Based on our analysis of the thresholds for FY 2004, this proposed
change would reduce the average threshold across all DRGs to qualify
for the add-on payments from approximately $9,900 above the mean
standardized charges for each DRG to approximately $7,400. This
reduction would maintain the averaging principles of the IPPS while
easing the requirement somewhat to allow more technologies to qualify.
Furthermore, the situation illustrated above, where a technology
qualifies on the basis of its association with a high cost procedure,
is much less likely to occur as a result of this reduction than if the
threshold were reduced dramatically.
5. Technical Changes
Subpart H of part 412 describes payments to hospitals under IPPS.
We have become aware of references to the calculation of IPPS payments
in this subpart that inadvertently omit references to new technology
add-on payments. For example, Sec. 412.112(c) describes the basis for
per case payments. This section refers to outlier payments under
subpart F, but was not revised to reflect the implementation of the new
technology add-on payments. Therefore, we are proposing to amend Sec.
412.112(c) to add a new paragraph (d) to include a reference to
additional payments for new medical services or technologies under
subpart F.
Section 412.116(e) currently states that payments for outlier cases
are not made on an interim basis. That is, for hospitals receiving
payments under a biweekly, lump-sum payment methodology, outlier
payments are not included in the calculation of the lump-sum payment
amounts. Rather, outlier payments are calculated on a case-by-case
basis. Similarly, due to the unique nature of the new technology add-on
payments, we are proposing that they would also be calculated on a
case-by-case basis rather than included in the calculation of interim
payment amounts. Therefore, we are proposing to revise Sec. 412.116(e)
to include this policy.

III. Proposed Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts ``for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level.'' In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New
England County Metropolitan Areas (NECMAs) issued by the Office of
Management and Budget (OMB). OMB also designates Consolidated MSAs
(CMSAs). A CMSA is a metropolitan area with a population of one million
or more, comprising two or more PMSAs (identified by their separate
economic and social character). For purposes of the hospital wage
index, we use the PMSAs rather than CMSAs since they allow a more
precise breakdown of labor costs. If a metropolitan area is not
designated as part of a PMSA, we use the applicable MSA. Rural areas
are areas outside a designated MSA, PMSA, or NECMA. For purposes of the
wage index, we combine all of the rural counties in a State to
calculate a rural wage index for that State.
We note that, effective April 1, 1990, the term Metropolitan Area
(MA) replaced the term MSA (which had been used since June 30, 1983) to
describe the set of metropolitan areas consisting of MSAs, PMSAs, and
CMSAs. The terminology was changed by OMB in the March 30, 1990 Federal
Register to distinguish between the individual metropolitan areas known
as MSAs and the set of all metropolitan areas (MSAs, PMSAs, and CMSAs)
(55 FR 12154). For

[[Page 27189]]

purposes of the IPPS, we will continue to refer to these areas as MSAs.
Under section 1886(d)(8)(B) of the Act, hospitals in certain rural
counties adjacent to one or more MSAs are considered to be located in
one of the adjacent MSAs if certain standards are met. Under section
1886(d)(10) of the Act, the Medicare Geographic Classification Review
Board (MGCRB) considers applications by hospitals for geographic
reclassification from a rural area to a MSA, one rural area to another
rural area, or from one MSA to another MSA, for purposes of payment
under the IPPS.
In a December 27, 2000 notice published in the Federal Register (65
FR 82228), the Office of Management and Budget (OMB) issued its revised
standards for defining MSAs. In that notice, OMB indicated that it
plans to announce in calendar year 2003 new definitions of ``Core Based
Statistical Areas'' (CBSAs) based on the new standards and the Census
2000 data. The new standards establish two categories of CBSAs: (1)
Metropolitan Statistical Areas (50,000 or more), and (2) Micropolitan
Statistical Areas (10,000 to 49,999). After these new CBSAs are
announced, we will evaluate the new area designations and their
possible effects on the Medicare hospital wage index. Therefore, the
earliest these new CBSA definitions would be used is the FY 2005 wage
index.
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 should measure, to the extent feasible, the earnings and paid
hours of employment by occupational category, and must exclude the
wages and wage-related costs incurred in furnishing skilled nursing
services. As discussed below in section III.F. 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 the wage index.
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 each
short-term, acute care hospital participating in the Medicare program,
in order to construct an occupational mix adjustment to the wage index.
The initial collection of these data must be completed by September 30,
2003, for application beginning October 1, 2004 (the FY 2005 wage
index). In the April 4, 2003 Federal Register (68 FR 16516), we
published a notice of intent to collect calendar year 2002 data from
hospitals. There is a 60-day public comment period on that notice.
After considering and responding to the comments we receive, we plan to
send the surveys to all IPPS hospitals (and hospitals in Maryland that
are under a waiver from the IPPS) through the fiscal intermediaries. We
intend to collect these data to be incorporated in the FY 2005 wage
index after notice and opportunity for public comment.

B. Proposed FY 2004 Wage Index Update

The proposed FY 2004 wage index values (effective for hospital
discharges occurring on or after October 1, 2003 and before October 1,
2004) in section V. of the Addendum to this proposed rule are based on
the data collected from the Medicare cost reports submitted by
hospitals for cost reporting periods beginning in FY 2000 (the FY 2003
wage index was based on FY 1999 wage data).
The proposed FY 2004 wage index includes the following categories
of data associated with costs paid under the IPPS (as well as
outpatient costs), which were also included in the FY 2003 wage index:
[sbull] Salaries and hours from short-term, acute care hospitals.
[sbull] Home office costs and hours.
[sbull] Certain contract labor costs and hours.
[sbull] Wage-related costs.
Consistent with the wage index methodology for FY 2003, the
proposed wage index for FY 2004 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.

C. FY 2004 Wage Index Proposals

1. Elimination of Wage Costs Associated With Rural Health Clinics and
Federally Qualified Health Centers
In the FY 2001 IPPS final rule, we discussed removing from the wage
index 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 (65
FR 47074). We noted that because RHC and FQHC costs were not separately
reported on Worksheet S-3 of the Medicare cost report, we could not
exclude these costs from the prior wage indexes. We further noted that
we would evaluate the exclusion of RHC and FQHC wage data in developing
the FY 2004 wage index. We now have revised Worksheet S-3 so that it
allows for the separate reporting of RHC and FQHC wage costs and hours
beginning with FY 2000. Therefore, as we now have the ability to
exclude these costs from the wage index, beginning with the FY 2004
wage index, we are proposing to exclude the wage costs and hours data
for RHCs and FQHCs from the hospital wage index calculation. An
analysis of the effects of this change is included in the Appendix A of
this proposed rule.
2. Paid Hours
It has been the longstanding policy of CMS to calculate the wage
index using paid hours rather than hours worked (58 FR 46299). This
policy reflects our belief that paid hours more appropriately reflect a
hospital's total wage costs, which include amounts paid for actual time
worked and for covered leave periods (for example, annual, sick, and
holiday leave). Therefore, the inclusion of paid lunch hours in the
wage index is consistent with our inclusion of other paid nonworking
hours.
Several hospitals have requested that we exclude paid lunch or meal
break hours from the wage index calculation. At these hospitals, the
typical workday is 7\1/2\ working hours, plus a \1/2\ hour paid meal
break, for a total of 8 paid hours. These hospitals, some of which are
municipal-owned and required by their overarching union contracts to
provide paid lunch hours, believe they are disadvantaged by wage index
policy that requires paid lunch hours to be included in calculating the
wage index.
The hospitals argue that their practice of paying employees for
meal breaks is not substantially different, in practice, from other
hospitals whose employees do not receive paid lunch hours but who are
on call during their lunch periods. These hospitals further argue that
this policy causes them, in some cases due to union contracts beyond
the hospital's control, to be the only hospitals with this category of
nonproductive hours included in the wage index.
We are soliciting comments on our policy that paid lunch hours
should be excluded from the wage index. Specifically, we would like a
broader understanding of the issue of whether some hospitals may, in
fact, be truly disadvantaged by this policy through no fault of their
own. Any change in our policy would not be implemented until, at the
earliest, the FY 2005 wage index.

[[Page 27190]]

Some hospitals and associations have also recommended that we
exclude the paid hours associated with military and jury duty leave
from the wage index calculation. They state that, unlike other paid
leave categories for which workers are usually paid at their full
hourly rates (for example, annual, sick, and holiday), hospitals
typically pay employees on military or jury duty only a fraction of
their normal pay. The amount that the hospital pays is intended to only
supplement the earnings that the employee receives from the government,
so that, while performing military or civic duties, the employee can
continue to be paid the same salary level as if he or she were still
working at the hospital.
The hospitals and associations believe that including the lower pay
rates associated with employees' military and jury duty leave unfairly
decreases a hospital's average hourly wage and, therefore, its wage
index value. Therefore, we are proposing to exclude from the wage index
the paid hours associated with military and jury duty leave, beginning
with the FY 2005 wage index. The associated salaries would continue to
be reported on Worksheet S-3, Part II, Line 1 of the Medicare cost
report.

D. Verification of Wage Data From the Medicare Cost Reports

The data for the proposed FY 2004 wage index were obtained from
Worksheet S-3, Parts II and III of the FY 2000 Medicare cost reports.
The data file used to construct the proposed wage index includes FY
2000 data submitted to us as of February 18, 2003. 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 to revise or verify data
elements that resulted in specific edit failures. Some unresolved data
elements are included in the calculation of the proposed FY 2004 wage
index, pending their resolution before calculation of the final FY 2004
wage index. We instructed the intermediaries to complete their
verification of questionable data elements and to transmit any changes
to the wage data no later than April 4, 2003. We believe all unresolved
data elements will be resolved by the date the final rule is issued.
The revised data will be reflected in the final rule.
Also, as part of our editing process, we removed data for 110
hospitals that failed edits. We identified 72 hospitals with incomplete
or inaccurate data resulting in zero or negative, or otherwise
aberrant, average hourly wages. Therefore, wage data from these
hospitals were removed from the calculation. We have notified the
fiscal intermediaries of these hospitals and will continue to work with
the fiscal intermediaries to correct these data whenever possible. As a
result, the proposed FY 2004 wage index is calculated based on FY 2000
wage data for 4,593 hospitals.
In constructing the proposed FY 2004 wage index, we include the
wage data for facilities that were IPPS hospitals in FY 2000, even for
those facilities that have terminated their participation in the
program as hospitals or have since been designated as a critical access
hospital (CAH), as long as those data do not fail any of our edits for
reasonableness. 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.
However, we received correspondence suggesting that the wage data
for hospitals that have subsequently been redesignated as CAHs should
be removed from the wage index calculation because CAHs are unique
compared to other short-term, acute care hospitals. CAHs are limited to
only 15 acute care beds. An additional 10 beds may be designated as
swing-beds, but only 15 beds can be used at one time to serve acute
care patients. CAHs tend to be located in isolated, rural areas. We
solicit comment on whether we should exclude wage data from such
hospitals from the wage index calculation. However, we have included
the data for CAHs in the proposed FY 2004 wage index if the CAH was
paid under the IPPS during FY 2000.

E. Computation of the Proposed FY 2004 Wage Index

The method used to compute the proposed FY 2004 wage index follows:
Step 1--As noted above, we based the proposed FY 2004 wage index on
wage data reported on the FY 2000 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, 1999 and before October 1, 2000. In addition, we
included data from some hospitals that had cost reporting periods
beginning before October 1999 and reported a cost reporting period
covering all of FY 2000. These data were 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 2000 data. We note that, if a hospital
had more than one cost reporting period beginning during FY 2000 (for
example, a hospital had two short cost reporting periods beginning on
or after October 1, 1999 and before October 1, 2000), 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. We have removed
the wage data of CAHs, after the effective date of the CAH designation,
from the calculation of the proposed wage index.
Step 2--Salaries--Beginning with the FY 2003 wage index, the method
used to compute a hospital's average hourly wage excludes all GME and
CRNA costs.
In calculating a hospital's average salaries plus wage-related
costs, we subtracted from Line 1 (total salaries) the GME and CRNA
costs reported on lines 2, 4.01, and 6, the Part B salaries reported on
Lines 3, 5 and 5.01, home office salaries reported on Line 7, and
excluded 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 subtracted
from Line 1 the salaries for which no hours were reported on Line 4. To
determine total salaries plus wage-related costs, we added 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, 9.01, 9.02, 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 were 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 computed 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 allocated overhead
costs to areas of the hospital excluded from the wage

[[Page 27191]]

index calculation. First, we determined 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, 6,
7, and Part III, Line 13 of Worksheet S-3). We then computed the
amounts of overhead salaries and hours to be allocated to excluded
areas by multiplying the above ratio by the total overhead salaries and
hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed
the amounts of overhead wage-related costs to be allocated to excluded
areas using three steps: (1) We determined the ratio of overhead hours
(Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2,
3, 4.01, 5, 6, and 7); (2) we computed 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 multiplied the computed
overhead wage-related costs by the above excluded area hours ratio.
Finally, we subtracted the computed overhead salaries, wage-related
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 adjusted the total salaries plus
wage-related costs to a common period to determine total adjusted
salaries plus wage-related costs. To make the wage adjustment, we
estimated the percentage change in the employment cost index (ECI) for
compensation for each 30-day increment from October 14, 1999 through
April 15, 2001 for private industry hospital workers from the Bureau of
Labor Statistics' 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. 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
------------------------------------------------------------------------
Adjustment
After Before factor
------------------------------------------------------------------------
10/14/1999.............................. 11/15/1999 1.06794
11/14/1999.............................. 12/15/1999 1.06447
12/14/1999.............................. 01/15/2000 1.06083
01/14/2000.............................. 02/15/2000 1.05713
02/14/2000.............................. 03/15/2000 1.05335
03/14/2000.............................. 04/15/2000 1.04954
04/14/2000.............................. 05/15/2000 1.04571
05/14/2000.............................. 06/15/2000 1.04186
06/14/2000.............................. 07/15/2000 1.03786
07/14/2000.............................. 08/15/2000 1.03356
08/14/2000.............................. 09/15/2000 1.02898
09/14/2000.............................. 10/15/2000 1.02425
10/14/2000.............................. 11/15/2000 1.01953
11/14/2000.............................. 12/15/2000 1.01482
12/14/2000.............................. 01/15/2001 1.01004
01/14/2001.............................. 02/15/2001 1.00509
02/14/2001.............................. 03/15/2001 1.00000
03/14/2001.............................. 04/15/2001 0.99491
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning
January 1, 2000 and ending December 31, 2000 is June 30, 2000. An
adjustment factor of 1.03786 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 2000 and covered a
period of less than 360 days or more than 370 days, we annualized the
data to reflect a 1-year cost report. Annualization is accomplished by
dividing the data by the number of days in the cost report and then
multiplying the results by 365.
Step 6--Each hospital was assigned to its appropriate urban or
rural labor market area before any reclassifications under section
1886(d)(8)(B) or section 1886(d)(10) of the Act. Within each urban or
rural labor market area, we added the total adjusted salaries plus
wage-related costs obtained in Step 5 for all hospitals in that area to
determine the total adjusted salaries plus wage-related costs for the
labor market area.
Step 7--We divided the total adjusted salaries plus wage-related
costs obtained 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 added the total adjusted salaries plus wage-related
costs obtained in Step 5 for all hospitals in the nation and then
divided the sum by the national sum of total hours from Step 4 to
arrive at a national average hourly wage. Using the data as described
above, the national average hourly wage is $24.5439.
Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8.
Step 10--Following the process set forth above, we developed a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. (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 added the total adjusted salaries plus
wage-related costs (as calculated in Step 5) for all hospitals in
Puerto Rico and divided the sum by the total hours for Puerto Rico (as
calculated in Step 4) to arrive at an overall average hourly wage of
$11.5431 for Puerto Rico. For each labor market area in Puerto Rico, we
calculated 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.

[[Page 27192]]

Step 11--Section 4410 of Pub. L. 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. Furthermore, this wage index floor is to be
implemented in such a manner as to ensure that aggregate prospective
payment system payments are not greater or less than those that would
have been made in the year if this section did not apply. For FY 2004,
this change affects 141 hospitals in 44 MSAs. The MSAs affected by this
provision are identified by a footnote in Table 4A in the Addendum of
this proposed rule.

F. Proposed Revisions to the Wage Index Based on Hospital Redesignation

1. General
Under section 1886(d)(10) of the Act, the Medicare Geographic
Classification Review Board (MGCRB) considers applications by hospitals
for geographic reclassification for purposes of payment under the IPPS.
Hospitals can elect to reclassify for the wage index or the
standardized amount, or both, and as individual hospitals or as rural
groups. 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. Hospitals
must apply for reclassification to the MGCRB, which issues its
decisions by the end of February for reclassification to become
effective for the following fiscal year (beginning October 1). The
regulations applicable to reclassifications by the MGCRB are in
Sec. Sec. 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 the 3 most recent years'
average hourly wage data in evaluating a hospital's reclassification
application for FY 2003 and any succeeding fiscal year.
Section 304(b) of Pub. L. 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 at Sec. 412.235.
Section 1886(d)(8)(B) of the Act permits a hospital located in a
rural county adjacent to one or more urban areas to be designated as
being located in the MSA to which the greatest number of workers in the
county commute (1) If the rural county would otherwise be considered
part of an urban area under the standards published in the Federal
Register for designating MSAs (and for designating NECMAs), and (2) if
the commuting rates used in determining outlying counties (or, for New
England, similar recognized area) 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 (or NECMAs). Hospitals that meet these criteria are
deemed urban for purposes of the standardized amounts and for purposes
of assigning the wage index.
Revised MSA standards were published in the December 27, 2000
Federal Register (65 FR 82228). We are working with the Census Bureau
to compile a list of hospitals that meet the new standards based on the
2000 census data; however, that work is not yet complete. Therefore,
for purposes of calculating the proposed wage indexes in this proposed
rule, we used the list of qualifying hospitals based on the 1990 MSA
standards.
However, if the updated list of hospitals meeting the new standards
based on the 2000 census data is available in time, we will incorporate
it in the final rule to be published by August 1, 2003. To the extent
hospitals otherwise reclassified by the MGCRB for FY 2004 are adversely
affected by their inclusion on or exclusion from the new list, we will
address this in the final rule. Among the options we may consider in
the final rule to address situations where hospitals may be adversely
affected are: Assigning adversely affected hospitals the highest
applicable wage index; or extending the opportunity for adversely
affected hospitals to withdraw from a reclassification by the MGCRB for
FY 2004.
2. Effects of Reclassification
The methodology for determining the wage index values for
redesignated hospitals is applied jointly to the hospitals located in
those rural counties that were deemed urban under section 1886(d)(8)(B)
of the Act and those hospitals that were reclassified as a result of
the MGCRB decisions under section 1886(d)(10) of the Act. Section
1886(d)(8)(C) of the Act provides that the application of the wage
index to redesignated hospitals is dependent on the hypothetical impact
that the wage data from these hospitals would have on the wage index
value for the area to which they have been redesignated. Therefore, as
provided in section 1886(d)(8)(C) of the Act,\3\ the wage index values
were determined by considering the following:
---------------------------------------------------------------------------

\3\ Although section 1886(d)(8)(C)(iv)(I) of the Act also
provides that the wage index for an urban area may not decrease as a
result of redesignated hospitals if the urban area wage index is
below the wage index for rural areas in the State in which the urban
area is located, this was effectively made moot by section 4410 of
Public Law 105-33, which provides that 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.
Also, section 1886(d)(8)(C)(iv)(II) of the Act provides that an
urban area's wage index may not decrease as a result of redesignated
hospitals if the urban area is located in a State that is composed
of a single urban area.
---------------------------------------------------------------------------

[sbull] 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.
[sbull] 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.
[sbull] 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).
[sbull] 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.
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.
The wage data for a reclassified urban hospital is included in both
the wage index calculation of the area to which

[[Page 27193]]

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.
The proposed wage index values for FY 2004 are shown in Tables 4A,
4B, 4C, and 4F in the Addendum to this proposed rule. Hospitals that
are redesignated should use the wage index values shown in Table 4C.
Areas in Table 4C may have more than one wage index value because the
wage index value for a redesignated urban or rural hospital cannot be
reduced below the wage index value for the rural areas of the State in
which the hospital is located, and those areas have hospitals from more
than one State reclassified into them.
Tables 3A and 3B in the Addendum of this proposed rule list the 3-
year average hourly wage for each labor market area before the
redesignation of hospitals, based on FYs 1998, 1999, and 2000 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 proposed rule includes the adjusted average hourly
wage for each hospital from the FY 1998 and FY 1999 cost reporting
periods, as well as the FY 2000 period used to calculate the proposed
FY 2004 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.
At the time this proposed wage index was constructed, the MGCRB had
completed its review of FY 2004 reclassification requests. We have
included in this proposed rule Table 9, which shows hospitals that have
been reclassified under either section 1886(d)(8) or section
1886(d)(10)(D) of the Act. This table includes hospitals reclassified
for FY 2004 by the MGCRB (73 for wage index, 66 for the standardized
amount, and 33 for both the wage index and the standardized amount), as
well as hospitals that were reclassified for the wage index in either
FY 2002 (476) or FY 2003 (56) and are, therefore, in either the second
or third year of their 3-year reclassification. This table also
includes hospitals located in urban areas that have been designated
rural in accordance with section 1886(d)(8)(E) of the Act (14). In
addition, it includes rural hospitals redesignated to an urban area
under section 1886(d)(8)(B) of the Act for purposes of the standardized
amount and the wage index (42).
Under Sec. 412.273, hospitals that have been reclassified by the
MGCRB are permitted to withdraw their applications within 45 days of
the publication of this proposed rule in the Federal Register.
Similarly, hospitals may terminate an existing 3-year reclassification
within 45 days of the publication of this proposed rule. The request
for withdrawal of an application for reclassification or termination of
an existing 3-year reclassification that would be effective in FY 2003
must be received by the MGCRB within 45 days of the publication of this
proposed rule. If a hospital elects to withdraw its wage index
application after the MGCRB has issued its decision but prior to the
above date, it may later cancel its withdrawal in a subsequent year and
request the MGCRB to reinstate its wage index reclassification for the
remaining fiscal year(s) of the 3-year period (Sec. 412.273(b)(2)(i)).
The request to cancel a prior withdrawal must be made in writing to the
MGCRB no later than the deadline for submitting reclassification
applications for the following fiscal year (Sec. 412.273(d)). 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 Sec. 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).
Any 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 the final rule following this proposed rule.
Therefore, the final wage indexes will likely be different from those
published in this proposed rule, and, in some cases, they may be quite
different. Although, as described above, the statute provides that a
reclassified rural hospital may not have a lower wage index after
reclassification than before, there is no similar protection for urban
hospitals. Therefore, hospitals should carefully evaluate the impacts
of their reclassifications prior to the deadline for withdrawing from
an approved reclassification.
Applications and other information about MGCRB reclassifications
may be obtained 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.
As noted previously, OMB plans to announce new definitions of CBSAs
by the middle of this year, and the earliest these new CBSA definitions
would be used for the wage index is FY 2005. Applications for
reclassification by the MGCRB for FY 2005 will be due by September 2,
2003. However, by that time, we will not have completed our analysis of
the new CBSAs. Therefore, hospitals submitting applications for
reclassification by the MGCRB for FY 2005 should base those
applications on the current MSAs. We will assess the implications of
the new CBSAs on hospitals' reclassification requests in the FY 2005
proposed rule.

G. Requests for Wage Data Corrections

The preliminary wage data file was made available on January 10,
2003 (and subsequently on February 4, 2003), through the Internet on
CMS's Web site at http://www.cms.hhs.gov/providers/hipps/default.asp.
In a memorandum dated December 31, 2002, we instructed all Medicare
fiscal intermediaries to inform the IPPS hospitals they service of the
availability of the wage data file and the process and timeframe for
requesting revisions (including the specific deadlines listed below).
We also instructed the fiscal intermediaries to advise hospitals that
these data are made available directly through their representative
hospital organizations.
If a hospital wished to request a change to its data as shown in
that wage data file, the hospital was to submit corrections along with
complete, detailed supporting documentation to its intermediary by
February 17, 2003 (this deadline was initially announced as February
10, 2003, but was changed due to the need to repost some of the data).
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 data file on the
Internet, through the December 31, 2002 memorandum referenced above.
After reviewing requested changes submitted by hospitals, fiscal
intermediaries transmitted any revised cost reports to CMS and
forwarded a copy of the revised Worksheet S-3, Parts II and III to the
hospitals by April 4, 2003. In addition, fiscal intermediaries were to
notify hospitals of the changes or the reasons that changes were not
accepted. These deadlines are necessary to allow sufficient time to
review and process the data so that the final wage index

[[Page 27194]]

calculation can be completed for the development of the final FY 2004
prospective payment rates to be published by August 1, 2003.
If a hospital disagreed with the fiscal intermediary's resolution
of a policy issue (for example, whether a general category of cost is
allowable in the wage data), the hospital could have contacted CMS in
an effort to resolve the issue. We note that the April 4, 2003 deadline
also applied to these requests. Requests were required to be sent to
CMS at the address below (with a copy to the hospital's fiscal
intermediary). The request must have fully documented all attempts by
the hospital to resolve the dispute through the process described
above, including copies of relevant correspondence between the hospital
and the fiscal intermediary. During review, we do not consider issues
such as the adequacy of a hospital's supporting documentation, as we
believe that fiscal intermediaries are generally in the best position
to make evaluations regarding the appropriateness of these types of
issues (which should have been resolved earlier in the process).
Hospitals should also examine Table 2 in the Addendum to this
proposed rule to verify their data. Table 2 contains each hospital's
adjusted average hourly wage used to construct the wage index values
for the past 3 years, including the FY 2000 data used to construct the
proposed FY 2004 wage index. We note that the hospital average hourly
wages shown in Table 2 only reflect changes made to a hospital's data
and transmitted to CMS prior to February 18, 2003.
We will release a final wage data file in May 2003 to hospital
associations and the public on the Internet at http://www.cms.hhs.gov/providers/hipps/default.asp.
The May 2003 public use file will be made
available solely for the limited purpose of identifying any potential
errors made by CMS or the fiscal intermediary in the entry of the final
wage data that result from the correction process described above
(revisions submitted to CMS by the fiscal intermediaries by April 4,
2003). If, after reviewing the May 2003 final file, a hospital believes
that its wage data are incorrect due to a fiscal intermediary or CMS
error in the entry or tabulation of the final wage data, it should send
a letter to both its fiscal intermediary and CMS that outlines why the
hospital believes an error exists and provide all supporting
information, including relevant dates (for example, when it first
became aware of the error).
CMS and the fiscal intermediaries must receive these requests no
later than June 6, 2003. Requests mailed to CMS should be sent to:
Centers for Medicare & Medicaid Services, Center for Medicare
Management, Attention: Wage Index Team, Division of Acute Care, C4-07-
05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Each request also must be sent to the hospital's fiscal
intermediary. The intermediary will review requests upon receipt and
contact CMS immediately to discuss its findings.
At this point in the process, that is, after the release of the May
2003 wage index file, changes to the hospital wage data will only be
made in those very limited situations involving an error by the
intermediary or CMS that the hospital could not have known about before
its review of the final wage data file. Specifically, neither the
intermediary nor CMS will approve the following types of requests:
[sbull] Requests for wage data corrections that were submitted too
late to be included in the data transmitted to CMS by fiscal
intermediaries on or before April 4, 2003.
[sbull] Requests for correction of errors that were not, but could
have been, identified during the hospital's review of the January 2003
wage data file.
[sbull] Requests to revisit factual determinations or policy
interpretations made by the intermediary or CMS during the wage data
correction process.
Verified corrections to the wage index received timely (that is, by
June 6, 2003) will be incorporated into the final wage index in the
final rule to be published by August 1, 2003, and to be effective
October 1, 2003.
We have created the process described above to resolve all
substantive wage data correction disputes before we finalize the wage
data for the FY 2004 payment rates. Accordingly, hospitals that did not
meet the procedural deadlines set forth above will not be afforded a
later opportunity to submit wage data corrections or to dispute the
intermediary'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)).
Again, we believe the wage data correction process described above
provides hospitals with sufficient opportunity to bring errors in their
wage data to the fiscal intermediaries' attention. Moreover, because
hospitals will have access to the final wage data by early May 2003,
they will have the opportunity to detect any data entry or tabulation
errors made by the fiscal intermediary or CMS before the development
and publication of the FY 2004 wage index by August 1, 2003, and the
implementation of the FY 2004 wage index on October 1, 2003. If
hospitals avail themselves of this opportunity, the wage index
implemented on October 1 should be accurate. Nevertheless, in the event
that errors are identified after that date, we retain the right to make
midyear changes to the wage index under very limited circumstances.
Specifically, in accordance with Sec. 412.63(x)(2) of our existing
regulations, we make midyear corrections to the wage index for an area
only if a hospital can show that the intermediary or CMS made an error
in tabulating its data. 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. As described earlier, the requesting
hospital must show that it could not have known about the error, or
that it did not have the opportunity to correct the error, before the
publication of the FY 2004 wage index. As indicated earlier, since a
hospital will have the opportunity to verify its data, and the fiscal
intermediary will notify the hospital of any changes, we do not expect
that midyear corrections will be necessary. However, 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 approved.

H. Modification of the Process and Timetable for Updating the Wage
Index

Although the wage data correction process described in section
III.G. of this preamble has proven successful in the past for ensuring
that the wage data used each year to calculate the wage indexes are
generally reliable and accurate, we continue to be concerned about the
growing volume of wage data revisions initiated by hospitals after the
release of the first public use file in February. This issue has been
discussed previously in the FY 1998 IPPS proposed rule (62 FR 29918)
and in the FY 2002 IPPS proposed rule (66 FR 22682). In each
discussion, we describe the increasing number of revisions to wage data
between the proposed rule and the final rule.
Currently, the fiscal intermediaries are required to conduct
initial desk reviews on or before November 15 in advance of the
preparation of the preliminary wage data public use file in early
January (see Program

[[Page 27195]]

Memorandum A-02-94, October 4, 2002). Furthermore, they are required to
address items that fall outside the established thresholds. This may
involve further review of the supplementary documentation or contacting
the hospital for additional documentation. In addition, fiscal
intermediaries are required to notify State hospital associations
regarding hospitals that fail to respond to issues raised during the
desk review. These actions are to be completed in advance of sending
the data to CMS to prepare the preliminary wage data public use file in
early January. However, as we have indicated in prior Federal
Registers, as much as 30 percent of hospitals subsequently request
revisions to their data after the preliminary wage data file is made
available.
This high volume of revisions results in an additional workload for
the fiscal intermediaries. In particular, much of a fiscal
intermediary's efforts prior to submitting the data to prepare the
preliminary public use file may be in vain if the hospital subsequently
revises all of its data prior to the early February deadline (which is
the hospital's right at that point). Therefore, we are proposing to
modify the process to release the preliminary wage data file prior to
requiring the fiscal intermediaries to conduct their initial desk
reviews on the data. This unaudited data would be available on the
Internet by early October rather than early January. Hospitals would
review this file to ensure it contains their correct data as submitted
on their cost reports and request any changes by early November. At
that time, the fiscal intermediaries would review the revision requests
and conduct desk reviews of the data including all approved changes.
Under this proposed revised timetable, the fiscal intermediaries
would notify the hospitals in early February of any changes to the wage
data as a result of the desk reviews and the resolution of the
hospitals' early November change requests. The fiscal intermediaries
would also submit the revisions to CMS in early February. Hospitals
would then have until early March to submit requests to the fiscal
intermediaries for reconsideration of adjustments made by the fiscal
intermediaries as a result of the desk review. Other than requesting
reconsideration of desk review adjustments, hospitals would not be able
to submit new requests for additional changes that were not submitted
by early November. By early April, the fiscal intermediaries would
notify all hospitals of their decisions regarding the hospitals'
requests to reconsider desk review adjustments and submit all of the
revised wage data to CMS. From this point (early April) until the
publication of the final rule, the process would be identical to the
current timetable. Similar to the current timetable, hospitals would
also have the opportunity in early April to request CMS consideration
of policy disputes.
We believe that the proposed revision of the schedule would improve
the quality of the wage index by initiating hospitals' review of their
data sooner and allowing the fiscal intermediaries to focus their
reviews on the final data submitted by hospitals to be included in the
wage index. In addition, we would receive the revised data in time to
incorporate them into the wage indexes published in the proposed rule,
resulting in fewer changes from the proposed rule to the final rule.
This will improve the ability of hospitals to assess whether they
should request a withdrawal from a MGCRB reclassification. Because the
decision of whether to withdraw a wage index reclassification must be
made prior to publication of the final rule, this proposed schedule
should decrease the likelihood that the final wage index will be
dramatically different from the proposed wage index.
The following table illustrates the proposed timetable that would
be applicable for the development of the FY 2005 wage index:

------------------------------------------------------------------------
Steps in wage index development
Timeframe process
------------------------------------------------------------------------
Early October..................... Preliminary and unaudited wage data
file published as a public use file
(PUF) on CMS Web site.
Early November.................... Deadline for hospitals to send
requests for revisions to the
fiscal intermediaries.
Early February.................... Fiscal intermediaries review
revisions and desk review wage
data; notify hospitals of changes
and resolution of revision
requests; and submit preliminary
revised data to CMS.
Early March....................... Deadline for hospitals to request
wage data reconsideration of desk
review adjustments and provide
adequate documentation to support
the request.
Early April....................... Deadline for the fiscal
intermediaries to submit additional
revisions resulting from the
hospitals' reconsideration
requests. This is also the deadline
for hospitals to request CMS
intervention in cases where the
hospital disagrees with the fiscal
intermediary's policy
interpretations.
Early May *....................... Release of final wage data PUF on
CMS Web site.
Early June *...................... Deadline for hospitals to submit
correction requests, to both CMS
and their fiscal intermediary, for
errors due to the mishandling of
the final wage data by CMS or the
fiscal intermediary.
August 1 *........................ Publication of the final rule.
October 1 *....................... Effective date of updated wage
index.
------------------------------------------------------------------------
* Indicates no change from prior years.

IV. Other Decisions and Proposed Changes to the IPPS for Operating
Costs and GME Costs

A. Transfer Payment Policy (Sec. 412.4)

Existing regulations at Sec. 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, and Sec. 412.4(c)
defines transfers to certain postacute care providers. Our policy
provides that, in transfer situations, full payment is made to the
final discharging hospital and each transferring hospital is paid a per
diem rate for each day of the stay, not to exceed the full DRG payment
that would have been made if the patient had been discharged without
being transferred.
The per diem rate paid to a transferring hospital is calculated by
dividing the full DRG payment by the geometric mean length of stay for
the DRG. Based on an analysis that showed that the first day of
hospitalization is the most expensive (60 FR 45804), our policy
provides for payment that is double the per diem amount for the first
day (Sec. 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, divided by the
geometric mean length of stay for the DRG, multiplied by the length of
stay for the case, plus one day.

[[Page 27196]]

1. Transfers to Another Acute Care Hospital (Sec. 412.4(b))
Medicare adopted its IPPS transfer policy because, if we were to
pay the full DRG payment regardless of whether a patient is transferred
or discharged, there would be a strong incentive for hospitals to
transfer patients to another IPPS hospital early in their stay in order
to minimize costs while still receiving the full DRG payment. The
transfer policy adjusts the payments to approximate the reduced costs
of transfer cases.
Currently, when a patient chooses to depart from a hospital against
the medical opinion of treating physicians, the case is treated as a
left against medical advice (LAMA) discharge and coded as discharge
status ``07-Left Against Medical Advice (LAMA)'' on the inpatient
billing claim form. Because, by definition, LAMA discharges are assumed
not to involve the active participation of the hospital administration,
our policy has been to treat LAMA cases as discharges. This policy
applies even if the patient is admitted to another hospital on the date
of the LAMA discharge. Consequently, we currently make a full DRG
payment for any discharge coded as a LAMA case.
However, we are concerned that some hospitals may be incorrectly
coding transfers as LAMA cases. The Office of Inspector General (OIG)
issued a report in March 2002 (A-06-99-00045), asserting that of the
approximately 60,000 LAMA discharges annually, 1,500 patients were
subsequently admitted to another IPPS hospital the same day. The OIG
performed a detailed review of the medical records at selected
hospitals and found evidence that the hospitals actively participated
in transferring the patients to a different IPPS hospital, yet the
hospital coded the claim as a LAMA. OIG cited several examples of these
cases:
``In the first example, the transferring hospital did not have an
inpatient room available for the patient, who had been in the emergency
room for 24 hours. The medical record showed that the treating
physician contacted another PPS hospital to determine whether the
hospital could accept the patient. Specifically, the medical record
stated: `Upon request of the patient, [hospital name] was contacted
since there is a good possibility of transferring patient to [name of
hospital]. At present, he has been in emergency room for 24 hours
waiting for a bed.' ''
In this example, despite the overt participation of the physician
in securing the admission to the other IPPS hospital and the fact that
the transferring hospital did not have an inpatient room available for
the patient, the claim was submitted as a LAMA discharge, rather than
as a transfer to another IPPS hospital.
``In the second example, the patient was brought to the first
hospital by ambulance. Subsequently, the patient's family indicated
that they wanted a neurologist at another hospital to render the
treatment needed by the patient. The attending physician contacted the
neurologist in order to determine if the neurologist would accept,
admit, and treat the patient. The medical record contained ample
evidence of knowledge and participation of the transferring hospital,
and the discharge should have been reported as a PPS transfer.
Specifically, the medical record stated: `Patient's family wanted to
sign the patient out against medical advice and take her to [name of
hospital]. The physician spoke with the neurologist at [name of
hospital], who agreed to accept the patient. The patient's family
signed the patient discharged against medical advice. All the risks of
self-discharge were explained.' ''
In this case, although the medical record indicated the patient
wanted to leave against medical advice, there is also evidence that the
patient's attending physician at the hospital participated in the
transfer to another IPPS hospital. While we do not wish to discourage
such participation and cooperation in cases where a transfer occurs,
this situation would seem almost indistinguishable from other transfer
situations. For instance, we have long recognized situations where
patients are transferred from a rural hospital to an urban hospital for
a surgical procedure, then back to the rural hospital to complete the
recuperative care, as appropriate transfer situations as long as the
transfers are medically appropriate. In such a case, the rural hospital
would receive a payment under the transfer policy for the first portion
of the stay, the urban hospital would also receive payment under the
transfer policy for the care it provided, and the rural hospital would
receive a full DRG payment as the discharging hospital for the
recuperative care it provided upon the patient's return from the urban
hospital. In such situations, each portion of the stay may be assigned
a different DRG.
Therefore, we are proposing to expand our definition of a transfer
under Sec. 412.4(b) to include all patients who are admitted to
another IPPS hospital on the same day that the patient is discharged
from an IPPS hospital, unless the first (transferring) hospital can
demonstrate that the patient's treatment was completed at the time of
discharge from that hospital. In other words, unless the same-day
readmission is to treat a condition that is unrelated to the condition
treated during the original admission (for example, the beneficiary is
in a car accident later that day), any situation where the beneficiary
is admitted to another IPPS hospital on the same date that he or she is
discharged from an IPPS hospital would be considered a transfer, even
if the patient left against medical advice from the first hospital.
Although we considered proposing a policy that would be based on
whether the hospital actively participated in the transfer, and
exempting from the transfer definition cases where the hospital had
absolutely no knowledge that the patient intended to go to another
hospital, we are not proposing such a policy for two reasons. First, it
would be difficult to administer equitably a policy that required a
determination as to whether the hospital or the physician had knowledge
of the patient's intentions. Such a policy would require fiscal
intermediaries to make a difficult judgment call in many cases. Second,
if we were to base the determination of whether a case is a transfer on
the level of involvement of the hospital and the physician caring for
the patient, we would be creating a financial disincentive to hospitals
for ensuring an efficient and cooperative transfer once a decision has
been made by the patient or the patient's family to leave the hospital.
We recognize that, in some cases, a hospital cannot know the
patient will go to another hospital. However, we note the claims
processing system can identify cases coded as discharges where the date
of discharge matches the admission date at another hospital. In these
cases, the fiscal intermediary will notify the hospital of the need to
submit an adjustment claim. However, if the hospital can present
documentation showing that the patient's care associated with the
admission to the hospital was completed before discharge, consistent
with our current policy, the transfer policy will not be applied.
2. Technical Correction
Section 412.4(b)(2) defines a discharge from one inpatient area of
the hospital to another area of the hospital as a transfer. Although
this situation may be viewed as an intrahospital transfer, it does not
implicate the transfer policy under the IPPS. Therefore, to avoid
confusion and to be

[[Page 27197]]

consistent with the proposed changes to Sec. 412.4(b) described at
section IV.A.3. of this preamble, we are proposing to delete existing
Sec. 412.4(b)(2) from the definition of a transfer.
3. Expanding the Postacute Care Transfer Policy to Additional DRGs
(Sec. Sec. 412.4(c) and (d))
Under section 1886(d)(5)(J) of the Act, a ``qualified discharge''
from one of 10 DRGs selected by the Secretary, to a postacute care
provider is treated as a transfer case beginning with discharges on or
after October 1, 1998. This section requires the Secretary to define
and pay as transfers all cases assigned to one of 10 DRGs selected by
the Secretary, if the individuals are discharged to one of the
following postacute care settings:
[sbull] 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.)
[sbull] A SNF (as defined at section 1819(a) of the Act).
[sbull] 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 July 31, 1998 IPPS final rule (63 FR 40975 through 40976),
we specified the appropriate time period during which we would consider
a discharge to postacute home health services to constitute a transfer
as within 3 days after the date of discharge. Also, in the July 31,
1998 final rule, we did not include in the definition of postacute care
transfer cases patients transferred to a swing-bed for skilled nursing
care (63 FR 40977).
Section 1886(d)(5)(J) of the Act directed the Secretary to select
10 DRGs based upon a high volume of discharges to postacute care and a
disproportionate use of postacute care services. As discussed in the
July 31, 1998 final rule, these 10 DRGs were selected in 1998 based on
the MedPAR data from FY 1996. Using that information, we identified and
selected the first 20 DRGs that had the largest proportion of
discharges to postacute care (and at least 14,000 such transfer cases).
In order to select 10 DRGs from the 20 DRGs on our list, we considered
the volume and percentage of discharges to postacute care that occurred
before the mean length of stay and whether the discharges occurring
early in the stay were more likely to receive postacute care. We
identified the following DRGs to be subject to the special 10 DRG
transfer rule:
[sbull] DRG 14 (Intracranial Hemorrhage and Stroke with Infarction
(formerly ``Specific Cerebrovascular Disorders Except Transient
Ischemic Attack''));
[sbull] DRG 113 (Amputation for Circulatory System Disorders Except
Upper Limb and Toe);
[sbull] DRG 209 (Major Joint Limb Reattachment Procedures of Lower
Extremity);
[sbull] DRG 210 (Hip and Femur Procedures Except Major Joint
Procedures Age 17 With CC);
[sbull] DRG 211 (Hip and Femur Procedures Except Major Joint
Procedures Age 17 Without CC);
[sbull] DRG 236 (Fractures of Hip and Pelvis);
[sbull] DRG 263 (Skin Graft and/or Debridement for Skin Ulcer or
Cellulitis With CC);
[sbull] DRG 264 (Skin Graft and/or Debridement for Skin Ulcer or
Cellulitis Without CC);
[sbull] DRG 429 (Organic Disturbances and Mental Retardation); and
[sbull] DRG 483 (Tracheostomy With Mechanical Ventiliation 96+
Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses
(formerly ``Tracheostomy Except for Face, Mouth, and Neck
Diagnoses'')).
Similar to the policy for transfers between two acute care
hospitals, the transferring hospital in a postacute care transfer for 7
of the 10 DRGs receives twice the per diem rate the first day and the
per diem rate for each following day of the stay before the transfer,
up to the full DRG payment. However, 3 of the 10 DRGs exhibit a
disproportionate share of costs very early in the hospital stay in
postacute care transfer situations. For these 3 DRGs, hospitals receive
50 percent of the full DRG payment plus the single per diem (rather
than double the per diem) for the first day of the stay and 50 percent
of the per diem for the remaining days of the stay, up to the full DRG
payment. This is consistent with section 1886(d)(5)(J)(i) of the Act,
which recognizes that in some cases ``a substantial portion of the
costs of care are incurred in the early days of the inpatient stay.''
Section 1886(d)(5)(J)(iv) of the Act authorizes the Secretary to
expand the postacute transfer policy beyond 10 DRGs. In the May 9, 2002
IPPS proposed rule, we discussed the possibility of expanding this
policy to either all DRGs or a subset of additional DRGs (we identified
13 additional DRGs in that proposed rule) (67 FR 31455). However, as
discussed further in the August 1, 2002 final rule (65 FR 50048), we
did not expand the postacute transfer provision to additional DRGs for
FY 2003. The commenters on the options in the May 9, 2002 proposed rule
raised many issues regarding the impact of expanding this policy that
we needed to consider further before proceeding. In particular, due to
the limited time between the close of the comment period and the
required publication date of August 1, we were unable to completely
analyze and respond to all of the points that were raised. We indicated
that we would continue to conduct research to assess whether further
expansion of this policy may be warranted and, if so, how to design any
such refinements.
Many commenters on the May 9, 2002 proposed rule argued that, in a
system based on averages, expansion of the postacute care transfer
policy negatively influences, and in fact penalizes, hospitals for
efficient care. They claimed that this policy indiscriminately
penalizes hospitals for efficient treatment and for ensuring that
patients receive the right care at the right time in the right place.
They believed that the postacute care transfer provision creates an
inappropriate incentive for hospitals to keep patients longer.
Commenters also expressed concern that the expansion of the
transfer provision violates the fundamental principle of the IPPS. The
DRG system is based on payments that will, on average, be adequate.
These commenters argued that expansion of the postacute care transfer
policy would give the IPPS a per-diem focus and would mean that
hospitals would be paid less for shorter than average lengths of stay,
although they would not be paid more for the cases that are longer than
average (except for outlier cases).
We agree that the transfer policy should not hamper the provision
of effective patient care, and any future expansion must consider both
the need to reduce payments to reflect cost-shifting due to reductions
in length of stay attributable to early transfers to postacute care and
the need to ensure that payments, on average, remain adequate to ensure
effective patient care. Therefore, we have assessed the extent to which
the current postacute transfer policy balances these objectives.
The table below displays the results of our analysis. We first
examined whether the 10 DRGs included in the policy continue to exhibit
a relatively high percentage of cases transferred to postacute care
settings, particularly

[[Page 27198]]

among cases with lengths of stay shorter than the geometric mean for
the DRG (these cases would be affected by the reduced payments for
transfers). The table shows that these DRGs continue to contain high
percentages of cases transferred to postacute care settings similar to
those we reported in the FY 1999 final rule (63 FR 40975). These
results would appear to demonstrate that the postacute transfer policy
has not greatly altered hospitals' treatment patterns for these cases.
This similarity in treatment patterns is further evidenced by the
fact that, for 6 of the 10 DRGs, the geometric mean length of stay has
continued to decline in the 5 years since the policy was implemented.
Accordingly, hospitals have continued to transfer many patients in
these DRGs before the mean length of stay, despite the transfer policy.
As we stated in the July 31, 1998 final rule, the transfer provision
adjusts payments to hospitals to reflect the reduced lengths of stay
arising from the shift of patient care from the acute care setting to
the postacute setting (63 FR 40977). This policy does not require a
change in physician clinical decisionmaking nor in the manner in which
physicians and hospitals practice medicine: it simply addresses the
appropriate level of payments once those decisions have been made.
With respect to whether this policy alters the fundamental
averaging principles of the IPPS, we believe the current policy, which
targets specific DRGs where evidence shows hospitals have aggressively
moved care to postacute care settings, does not alter the averaging
principles of the system. In fact, it could be said to enhance those
principles because a transfer case is counted as only a fraction of a
case toward DRG recalibration based on the ratio of its transfer
payment to the full DRG payment for nontransfer cases. This methodology
ensures the DRG weight calculation is consistent with the payment
policy for transfer cases. The last column of the table below indicates
that all but three of these DRGs have experienced increases in DRG
weights since the policy was implemented. By reducing the contribution
of transfer cases to the calculation of the DRG average charge, the
relative weights (the result of dividing the DRG average charge by the
national average charge per case) are higher than they would otherwise
be. This is because transfers, particularly short-stay transfers, have
lower total charges, on average.

----------------------------------------------------------------------------------------------------------------
Percent of
all cases Percent of Percent Percent Percent
All transferred all cases change in change in change in
DRG DRG title transfer to transferred mean length mean length DRG
cases postacute prior to of stay FYs of stay FYs relative
care mean length 92-98 98-03 weight FYs
setting of stay 98-03
----------------------------------------------------------------------------------------------------------------
14............ Intracranial 143,649 48.88 11.74 -29.17 -5.88 8.53
Hemorrhage and
Stroke with
Infarction.
113........... Amputation for 24,470 66.57 30.12 -32.17 7.22 9.21
Circulatory
System Disorders
Except Upper Limb
and Toe.
209........... Major Joint and 244,969 66.66 19.76 -47.52 -15.09 -8.09
Limb Reattachment
Procedures of
Lower Extremity.
210........... Hip and Femur 87,253 76.26 35.67 -42.98 -6.15 0.1
Procedures Except
Major Joint Age
17
With CC.
211........... Hip and Femur 20,239 72.38 15.89 -44.44 -8.00 1.39
Procedures Except
Major Joint Age
17
Without CC.
236........... Fractures of Hip 26,583 69.86 11.20 -34.85 -6.98 -1.43
and Pelvis.
263........... Skin Graft and/or 13,158 62.00 31.35 -41.45 4.49 9.36
Debridement for
Skin Ulcer or
Cellulitis with
CC.
264........... Skin Graft and/or 1,759 49.97 18.81 -37.21 1.85 5.36
Debridement for
Skin Ulcer or
Cellulitis
Without CC.
429........... Organic 30,349 53.25 15.22 -28.95 -12.96 -5.27
Disturbances and
Mental
Retardation.
483........... Tracheostomy With 21,818 52.93 27.34 -15.29 2.37 1.38
Mechanical
Ventilation 96 +
Hours or
Principal
Diagnosis Except
Face, Mouth, and
Neck Diagnoses.
----------------------------------------------------------------------------------------------------------------

After determining the current 10 DRG postacute care transfer policy
appears to be appropriately balancing the objectives to reduce payments
to reflect cost-shifting due to reductions in length of stay
attributable to early postacute care transfers and to ensure that
payments, on average, remain adequate to ensure effective patient care,
we once again undertook the analysis to identify additional DRGs to
which the policy may be expanded. However, it should be noted that, at
this time, we have decided not to expand the policy to all DRGs.
Although we still believe expanding the postacute care transfer policy
to all DRGs might be the most equitable approach because a policy that
is limited to certain DRGs may result in disparate payment treatment
across hospitals, at this time, we believe an incremental expansion is
appropriate. That is, we believe further analysis is necessary to
assess whether it would be appropriate to apply a reduced payment for
postacute care transfers across all DRGs. In particular, it is
important to attempt to distinguish between DRGs where the care is
increasingly being shifted to postacute care sites versus DRGs where
some patients have always been discharged to postacute care early in
the stay. For the latter DRGs, it may not be appropriate to reduce
payment for these DRGs if the base payment already reflects a similar
postacute care utilization rate (for example, in these cases there
would be no cost shifting).
As described below, we have identified an additional 19 DRGs, based
on declining mean lengths of stay and high percentages of postacute
transfers, for which an expansion of the current policy appears
warranted.
MedPAC has also conducted analysis on the current postacute care
transfer policy. Most recently, in its March 2003 Report to Congress,
MedPAC recommended adding 13 additional DRGs to the 10 DRGs covered
under the current policy (page 46). The 13 DRGs were the same DRGs
included in one of our proposals to expand the postacute care transfer
policy in last year's IPPS proposed rule. MedPAC did not recommend
expanding the policy to include all DRGs at this time, noting

[[Page 27199]]

that this expansion might reduce payments to some hospitals by as much
as 4 percent. Rather, it suggested evaluating the impact of a limited
expansion before extending the policy to more DRGs.
MedPAC's report cites several reasons for expanding the postacute
care transfer policy beyond the current 10 DRGs. First, it notes the
continuing shifts in services from the acute care setting to the
postacute care setting. Second, the report points to different
postacute care utilization for different hospitals, particularly based
on geographic location. Third, the report states: ``the expanded
transfer policy provides a better set of incentives to protect
beneficiaries from potential premature discharge to postacute care.''
Fourth, MedPAC notes that the policy improves payment equity across
hospitals by: Reducing payments to hospitals that transfer patients to
postacute care while making full payments to hospitals that provide all
of the acute inpatient services in an acute care setting; and
maintaining more accurate DRG weights that reflect the true resource
utilization required to provide the full course of acute inpatient
care, as distinguished from the partial services provided to patients
who are transferred to postacute care.
Since the publication of last year's rule, we have conducted an
extensive analysis to identify the best method by which to expand the
postacute care transfer policy. Similar to the analysis used to
identify the current 10 DRGs, we are proposing to identify DRGs with
high postacute care transfer rates and at least 14,000 transfer cases.
However, rather than ranking DRGs on the basis of the percentage of all
postacute care transfers, we are proposing to rank DRGs on the basis of
the percentage of postacute care transfers occurring before the DRG
geometric mean length of stay. This is because only transfers that
occur before the geometric mean length of stay, minus one day due to
the policy that hospitals receive double the per diem for the first
day, are impacted by the transfer policy. In order to focus on those
DRGs where this policy would have the most impact, we are proposing to
include only DRGs where at least 10 percent of all cases that were
transferred to postacute care before the geometric mean length of stay.
The next proposed criterion is to identify DRGs with at least a 7-
percent decline in length of stay over the past 5 years (from FY 1998
to FY 2003). This criterion would focus on those DRGs for which
hospitals have been most aggressively discharging patients sooner into
postacute care settings. Finally, we are proposing to include only DRGs
with a geometric mean length of stay of at least 3 days because the
full payment is reached on the second day for a DRG with a 3-day length
of stay.
Using these criteria, we have identified 19 additional DRGs to
include in the postacute care transfer policy. However, some of the 13
DRGs proposed last year (and included in MedPAC's proposed expansion)
are not included in this proposed rule. For example, DRGs 79 and 80
(Respiratory Infections and Inflammations Age 17 With and
Without CC, respectively) were included in last year's proposed
expansion but are not included in this proposed rule for FY 2004. DRGs
79 and 80 are excluded from this proposed rule because they did not
exhibit a decline in length of stay of at least 7 percent over the past
5 years.
We note that 7 of these 19 DRGs are paired DRGs (that is, they
contain a CC and no-CC split). Because these DRGs are paired DRGs (that
is, the only difference in the cases assigned to DRG 130, for example,
as opposed to DRG 131 is that the patient has a complicating or
comorbid condition), we are proposing to include both DRGs under this
expanded policy. If we were to include only DRG 130 in the transfer
policy, there would be an incentive for hospitals not to include any
code that would identify a complicating or comorbid condition, so that
a transfer case would be assigned to DRG 131 instead of DRG 130.
Using the selection criteria described above, we identified the
following 19 DRGs that we are proposing to include under the postacute
care transfer policy (in addition to the 10 DRGs already subject to the
policy).

----------------------------------------------------------------------------------------------------------------
Percent of
all cases Percent of Percent Percent
All transferred cases change in change in
DRG DRG title transfer to transferred mean length mean length
cases postacute prior to of stay FYs of stay FYs
care mean length 1992-1998 1998-2003
setting of stay
----------------------------------------------------------------------------------------------------------------
12.................. Degenerative Nervous 39,034 54.13 13.10 -21.74 -12.00
System Disorders.
24.................. Seizure and Headache Age 19,239 35.67 11.63 -20.75 -7.69
17 With CC.
25.................. Seizure and Headache Age 4,738 19.15 2.15 -14.29 -10.71
17 Without CC.
89.................. Simple Pneumonia and 175,441 34.86 11.37 -18.31 -11.11
Pleurisy Age
17 With CC.
90.................. Simple Pneumonia and 9,544 20.86 2.82 -20.37 -15.00
Pleurisy Age 17 Without CC.
121................. Circulatory Disorders 79,242 52.52 20.46 -21.95 -11.67
With AMI and Major
Complication, Discharged
Alive.
122................. Circulatory Disorders 33,028 48.91 24.09 -26.67 -23.08
With AMI Without Major
Complications Discharged
Alive.
130................. Peripheral Vascular 31,106 37.78 14.27 -13.11 -11.76
Disorders With CC.
131................. Peripheral Vascular 5,723 23.08 5.42 -4.44 -19.51
Disorders Without CC.
239................. Pathological Fractures 23,188 53.54 21.96 -22.67 -7.55
and Musculoskeletal and
Connective Tissue
Malignancy.
243................. Medical Back Problems.... 36,772 41.49 13.61 -14.00 -7.50
277................. Cellulitis Age 17 With CC.
278................. Cellulitis Age 17 Without CC.
296................. Nutritional and 104,216 40.05 11.88 -21.67 -9.30
Miscellaneous Metabolic
Disorders Age 17 With CC.
297................. Nutritional and 12,649 28.03 2.17 -17.50 -10.00
Miscellaneous Metabolic
Disorders Age 17 Without CC.
320................. Kidney and Urinary Tract 77,669 44.64 12.40 -23.88 -8.51
Infectious Age 17 With CC.
321................. Kidney and Urinary Tract 8,610 29.90 5.67 -20.41 -13.89
Infections Age 17 Without CC.
462................. Rehabilitation........... 147,211 56.59 22.69 -22.54 -11.43
468................. Extensive O.R. Procedure 24,783 44.51 18.53 -20.30 -7.07
Unrelated to Principal
Diagnosis.
----------------------------------------------------------------------------------------------------------------

[[Page 27200]]

We are proposing to revise Sec. 412.4(d) to incorporate these
additional 19 DRGs as qualifying DRGs for transfer payments and to make
a conforming change to Sec. 412.4(c).
We also examined whether any of these DRGs would qualify for the
alternative payment methodology of 50 percent of the full DRG payment
plus the per diem for the first day of the stay, and 50 percent of the
per diem for the remaining days of the stay, up to the full DRG payment
specified in existing regulations under Sec. 412.4(f). To identify the
DRGs that might qualify, the average charges for all cases with a
length of stay of 1 day were compared to the average charges of all
cases in a particular DRG. To qualify for the alternative methodology,
the average charges of 1-day discharge cases must be at least 50
percent of the average charges for all cases in the DRG.
Based on this analysis, we determined that 5 out of the 19 DRGs
would qualify for this payment method (DRGs 25, 122, 131, 297, and
321). However, the fact that the average charges of 1-day stays equal
at least 50 percent of the average charges for all cases in these DRGs
is due to the very short lengths of stay for these DRGs. Therefore, we
do not believe that it is necessary to include them in the alternative
payment methodology. For example, for a DRG with a 3-day geometric mean
length of stay, full DRG payment will be met on the second day of the
stay, regardless of which payment methodology is used. Therefore, we
are proposing that none of the 19 additional DRGs that we are proposing
to add to the postacute care transfer policy would be paid under the
alternative payment methodology.
We also have analyzed the 10 DRGs that are currently subject to the
postacute care transfer policy. Of the three DRGs that are receiving
payments under the special payment (transfers after 1 day incur charges
equal to at least 50 percent of the average charges for all cases).
Unlike the five DRGs that would otherwise meet this criterion, the
geometric mean lengths of stay of both DRG 209 and 211 are over 4 days.
In addition, DRG 210 is currently paid under the special payment
methodology, but our current analysis indicates average charges for one
day stays are less than 50 percent of the average charges for all cases
in the DRG. Nonetheless, DRG 210 is a paired with DRG 211, which meets
the criteria. Therefore, we are proposing DRG 210 will continue to be
paid under the special payment methodology. Similar to our rationale
for including both paired DRGs when one qualifies for inclusion in the
postacute care transfer policy, we are including both DRGs in this pair
under the special payment methodology. Accordingly, we are proposing
that only DRGs 209, 210, and 211 that are currently paid under the
alternative transfer payment methodology would continue to be paid
under this methodology.
Finally, we note that the OIG has prepared several reports that
examined hospitals' compliance with proper coding of patients'
discharge status as transferred under our guidelines, and has found
substantial noncompliance leading to excessive payments.\4\
Specifically, the OIG found hospitals submitting claims indicating the
patient had been discharged when, in fact, the patient was transferred
to a postacute care setting. As we indicated in the May 8, 1998 Federal
Register (63 FR 25593), hospitals found to be intentionally engaging in
such practices may be investigated for fraudulent or abusive billing
practices. We intend to work with the OIG to develop the most
appropriate response to ensure all hospitals become compliant with our
guidelines.
---------------------------------------------------------------------------

\4\ The OIG report identification numbers are: A-04-00-02162, A-
04-00-01220 and A-04-01210. A fourth report is expected out soon.
---------------------------------------------------------------------------

B. Rural Referral Centers (Sec. 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the
regulations at Sec. 412.96 set forth the criteria that a hospital must
meet in order to qualify under the IPPS as a rural referral center. For
discharges occurring before October 1, 1994, rural referral centers
received the benefit of payment based on the other urban amount rather
than the rural standardized amount. Although the other urban and rural
standardized amounts are the same for discharges beginning with that
date, rural referral centers continue to receive special treatment
under both the DSH payment adjustment and the criteria for geographic
reclassification.
Rural referral centers with a disproportionate share percentage of
at least 30 percent are not subject to the 5.25 percent cap on DSH
payments that is applicable to other rural hospitals (with the
exception of rural hospitals with 500 or more beds). Rural referral
centers 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 106
percent of the average hourly wage of the labor market area where the
hospital is located.
As discussed in Federal Register documents at 62 FR 45999 and 63 FR
26325, under section 4202 of Public Law 105-33, a hospital that was
classified as a rural referral center for FY 1991 is to be considered
as a rural referral center for FY 1998 and later years so long as that
hospital continues to be located in a rural area and does not
voluntarily terminate its rural referral center status. Effective
October 1, 2000, if a hospital located in what is now an urban area was
ever a rural referral center, it is reinstated to rural referral center
status (65 FR 47089). Otherwise, a hospital seeking rural referral
center status must satisfy the applicable criteria.
One of the criteria under which a hospital may qualify as a rural
referral center is to have 275 or more beds available for use (Sec.
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size
requirement can qualify as a rural referral center if the hospital
meets two mandatory prerequisites (a minimum case-mix index 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) (Sec. 412.96(c)(1) through (c)(5)).
(See also the September 30, 1988 Federal Register (53 FR 38513).) With
respect to the two mandatory prerequisites, a hospital may be
classified as a rural referral center if--
[sbull] The hospital's case-mix index is at least equal to the
lower of the median case-mix index for urban hospitals in its census
region, excluding hospitals with approved teaching programs, or the
median case-mix index for all urban hospitals nationally; and
[sbull] 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 will establish updated
national and regional case-mix index values in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. The methodology we use to determine the
proposed national and regional case-mix index values is set forth in
regulations at Sec. 412.96(c)(1)(ii). The proposed national mean case-
mix index value for FY 2004 includes all urban hospitals nationwide,
and the proposed regional values for FY 2004 are the

[[Page 27201]]

median values of urban hospitals within each census region, excluding
those hospitals with approved teaching programs (that is, those
hospitals receiving indirect medical education payments as provided in
Sec. 412.105). These proposed values are based on discharges occurring
during FY 2002 (October 1, 2001 through September 30, 2002) and include
bills posted to CMS' records through December 2002.
We are proposing that, in addition to meeting other criteria, if
they are to qualify for initial rural referral center status for cost
reporting periods beginning on or after October 1, 2003, rural
hospitals with fewer than 275 beds must have a case-mix index value for
FY 2002 that is at least--
[sbull] 1.3374; or
[sbull] The median case-mix index value (not transfer-adjusted) for
urban hospitals (excluding hospitals with approved teaching programs as
identified in Sec. 412.105) calculated by CMS for the census region in
which the hospital is located.
The proposed median case-mix index values by region are set forth
in the following table:

------------------------------------------------------------------------
Case-mix index
Region value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)................. 1.2252
2. Middle Atlantic (PA, NJ, NY)......................... 1.2270
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).. 1.3157
4. East North Central (IL, IN, MI, OH, WI).............. 1.2485
5. East South Central (AL, KY, MS, TN).................. 1.2511
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...... 1.1841
7. West South Central (AR, LA, OK, TX).................. 1.2733
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............ 1.3511
9. Pacific (AK, CA, HI, OR, WA)......................... 1.2834
------------------------------------------------------------------------

The preceding numbers will be revised in the final rule to the
extent required to reflect the updated FY 2002 MedPAR file, which will
contain data from additional bills received through March 31, 2002.
Hospitals seeking to qualify as rural referral centers or those
wishing to know how their case-mix index value compares to the criteria
should obtain hospital-specific case-mix index values (not transfer-
adjusted) from their fiscal intermediaries. Data are available on the
Provider Statistical and Reimbursement (PS&R) System. In keeping with
our policy on discharges, these case-mix index values are computed
based on all Medicare patient discharges subject to DRG-based payment.
2. Discharges
Section 412.96(c)(2)(i) provides that CMS will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. We are
proposing to update the regional standards based on discharges for
urban hospitals' cost reporting periods that began during FY 2002 (that
is, October 1, 2001 through September 30, 2002).
Therefore, we are proposing that, in addition to meeting other
criteria, a hospital, if it is to qualify for initial rural referral
center status for cost reporting periods beginning on or after October
1, 2003, must have as the number of discharges for its cost reporting
period that began during FY 2002 a figure that is at least--
[sbull] 5,000 (3,000 for an osteopathic hospital); or
[sbull] The median number of discharges for urban hospitals in the
census region in which the hospital is located, as indicated in the
following table:

------------------------------------------------------------------------
Number of
Region discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)................. 7,476
2. Middle Atlantic (PA, NJ, NY)......................... 8,906
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).. 9,497
4. East North Central (IL, IN, MI, OH, WI).............. 8,439
5. East South Central (AL, KY, MS, TN).................. 6,894
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...... 3,991
7. West South Central (AR, LA, OK, TX).................. 7,629
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............ 8,908
9. Pacific (AK, CA, HI, OR, WA)......................... 7,021
------------------------------------------------------------------------

These numbers will be revised in the final rule based on the latest
available cost report data.

C. Indirect Medical Education (IME) Adjustment (Sec. 412.105) and
Disproportionate Share Hospital (DSH) Adjustment (Sec. 412.105)

1. Available Beds and Patient Days: Background (Sec. 412.105(b) and
Sec. 412.106(a)(1)(ii))
Section 1886(d)(5)(B) of the Act provides that subsection (d)
hospitals that have residents in approved graduate medical education
(GME) programs receive an additional payment for each discharge of
Medicare beneficiaries to reflect the higher indirect patient care
costs of teaching hospitals relative to nonteaching hospitals. The
existing regulations regarding the calculation of this additional
payment, known as the indirect medical education (IME) adjustment, are
located at Sec. 412.105. The additional payment is based on the IME
adjustment factor, calculated using

[[Page 27202]]

hospitals' ratios of residents to beds. The determination of the number
of beds, based on available bed days, is specified at Sec. 412.105(b).
This determination of the number of available beds is also applicable
for other purposes, including the level of the disproportionate share
hospital (DSH) adjustment payments under Sec. 412.106(a)(l)(i).
Section 1886(d)(5)(F) of the Act specifies two methods for a
hospital to qualify for the Medicare DSH adjustment. The primary
method, which is the subject of a provision in this proposed rule, is
for a hospital to qualify based on a complex statutory formula under
which payment adjustments are based on the level of the DSH patient
percentage. The first computation includes the number of patient days
that are furnished to patients who were entitled to both Medicare Part
A and Supplemental Security Income (SSI) benefits. This number is
divided by the total number of patient days that are associated with
patients entitled to benefits under Medicare Part A. The second
computation includes hospital patient days that are furnished to
patients who, for those days, were eligible for Medicaid but were not
entitled to benefits under Medicare Part A. This number is divided by
the number of total hospital inpatient days in the same period.
Hospitals whose DSH patient percentage exceeds 15 percent are
eligible for a DSH payment adjustment (prior to April 1, 2001, the
qualifying DSH patient percentage varied, in part, by the number of
beds (66 FR 39882)). The DSH payment adjustment may vary based on the
DSH patient percentage and the type of hospital: the statute provides
for different adjustments for urban hospitals with 100 or more beds and
rural hospitals with 500 or more beds, hospitals that qualify as rural
referral centers or SCHs, and other hospitals.
We are combining our discussion of proposed changes to the policies
for counting beds and patient days, in relation to the calculations at
Sec. Sec. 412.105(b) and 412.106(a)(1)(ii) because the underlying
concepts are similar, and we believe they should generally be
interpreted in a consistent manner for both purposes. Specifically, we
are proposing to clarify that beds and patient days that are counted
for these purposes should be limited to beds or patient days in
hospital units or wards that would be directly included in determining
the allowable costs of inpatient hospital care payable under the IPPS
on the Medicare cost reports. As a preliminary matter, beds and patient
days associated with these beds that are located in units or wards that
are excluded from the IPPS (for example, psychiatric or rehabilitation
units), and thus from the determination of allowable costs of inpatient
hospital care under the IPPS on the Medicare cost report, are not to be
counted for purposes of Sec. Sec. 412.105(b) and 412.106(a)(1)(ii).
The remainder of this discussion pertains to beds and patient days
associated with these beds that are located in units or wards that are
not excluded from the IPPS and for which costs are included in
determining the allowable costs of inpatient hospital care under the
IPPS on the Medicare cost report. For example, neonatal intensive care
unit beds are included in the determination of available beds because
the costs and patient days associated with these beds are directly
included in the determination of the allowable costs of inpatient
hospital care under the IPPS. In contrast, beds and patient days
associated with these beds that are located in excluded distinct-part
psychiatric or rehabilitation units would not be counted for purposes
of Sec. Sec. 412.105(b) and 412.106(a)(1)(ii) under any circumstances,
because the costs associated with those units or wards are excluded
from the determination of the costs of allowable inpatient care under
IPPS.
This policy has been upheld in the past by various courts. (See,
for example, Little Co. of Mary Hospital and Health Care Centers v.
Shalala, 165 F.3d 1162 (7th Cir. 1999; Grant Medical Center v. Shalala,
905 F. Supp. 460 (S.D. Ohio 1995); Sioux Valley Hospital v. Shalala,
No. 93-3741SD, 1994 U.S. App. LEXIS 17759 (8th Cir. July 20, 1996)
(unpublished table decision); Amisub v. Shalala, No. 94-1883 (TFH)
(D.D.C. December 4, 1995) (mem.).) In these cases, the courts agreed
with the Secretary's position distinguishing between the treatment of
neonatal intensive care unit beds and well-baby nursery beds based on
the longstanding policy of CMS that neonatal intensive care unit days
are considered intensive care days (part of inpatient routine care)
rather than nursery days.
Our policies on counting beds are applied consistently for both IME
and DSH although the incentives for hospitals can be different for IME
and DSH. For purposes of IME, teaching hospitals have an incentive to
minimize their number of available beds in order to increase the
resident-to-bed ratio and maximize the IME adjustment. On the other
hand, for DSH purposes, urban hospitals with under 100 beds and rural
hospitals with under 500 beds may have an incentive to increase their
bed count in order to qualify for the higher DSH payments for urban
hospitals with over 100 beds (or rural hospitals with over 500 beds).
However, some courts have applied our current rules in a manner
that is inconsistent with our current policy and that would result in
inconsistent treatment of beds, patient days, and costs. For example,
in Clark Regional Medical Center v. United States Department of Health
& Human Services, 314 F.3d 241 (6th Cir. 2002), the court upheld the
district court's ruling that all bed types not specifically excluded
from the definition of available bed days in the regulations must be
included in the count of available bed days. Similarly, in a recent
decision in the Ninth Circuit Court of Appeals Alhambra v. Thompson,
259 F.3d 1071 (Ninth Cir. 2001), the court ruled that days attributable
to groups of beds that are not separately certified as distinct part
beds (that is, nonacute care beds in which care provided is at a level
below the level of routine inpatient acute care) but are adjacent to or
in an acute care ``area'' are included in the ``areas of the hospital
that are subject to the prospective payment system'' and should be
counted in calculating the Medicare DSH patient percentage.
These courts considered subregulatory guidance (program
instructions) in formulating their decisions. Although this proposed
rule would clarify the underlying principles for our bed and patient
days counting policies and would amend the relevant regulations to be
consistent with these clarifications, we recognize the need to revise
some of our program instructions to make them fully consistent with
these clarifications and will act to do so as soon as possible.
While some of the topics discussed below pertain only to counting
available beds (unoccupied beds) and some only to counting patient days
(section 1115 waiver days, dual-eligible days, and Medicare+Choice
days), several important topics are applicable to both bed-counting and
day-counting policies (nonacute care beds and days, observation beds
and days, and swing-beds and days). Therefore, for ease of discussion,
we have combined all topics pertaining to counting available beds and
patient days together in the following discussion.
2. Unoccupied Beds
The current policy for counting hospital beds for IME and DSH is
specified at Sec. 412.105(b). That count is based on total available
bed days during

[[Continued on page 27203]]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]

[[pp. 27203-27252]] Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates

[[Continued from page 27202]]

[[Page 27203]]

the hospital's cost reporting period, divided by the number of days in
the cost reporting period. The regulations specify certain types of
beds to be excluded from this count (for example, beds or bassinets in
the healthy newborn nursery, custodial care beds, and beds in excluded
distinct part hospital units).
Further instructions for counting beds are detailed in section
2405.3, Part I, of the Medicare Provider Reimbursement Manual (PRM).
That section states that a bed must be permanently maintained for
lodging inpatients and it must be available for use and housed in
patient rooms or wards. Thus, beds in a completely or partially closed
wing of the facility are considered available only if the hospital can
put the beds into use when they are needed.
Currently, if a bed can be staffed for inpatient care either by
nurses on staff or from a nurse registry within 24 to 48 hours, the
unoccupied bed is determined available.\5\ In most cases, it is a
straightforward matter to determine whether unoccupied beds can be
staffed within this timeframe because they are located in a unit that
is otherwise staffed and occupied (an unoccupied bed is available for
patient care but it is not occupied by a patient on a particular day).
The determination is not as simple in situations where a room in an
otherwise occupied unit has been altered for other purposes, such as
for a staff lounge or for storage.
---------------------------------------------------------------------------

\5\ This policy was first articulated in correspondence to the
Blue Cross and Blue Shield Association (BCBSA) on November 2, 1988,
and published in BCBSA's Administrative Bulletin 1841,
88.01, on November 18, 1988.
---------------------------------------------------------------------------

Section 2405.3 of the PRM states that beds in unoccupied rooms or
wards are to be excluded from the bed count if the associated costs are
excluded from depreciable plant assets because the area is not
available for patient use. However, issues continue to arise with
regard to how to treat entire units or even entire floors that are
unoccupied over a period of time. For example, in one recent Provider
Reimbursement Review Board (PRRB) decision, the hospital acknowledged
that an entire floor was temporarily unoccupied for approximately 2
years. Rooms on the floor were used for office space, storage and
outpatient services. The PRRB ruled that current rules allowed these
beds to be counted. Specifically, the PRRB found the beds could
reasonably be made ready for inpatient use within 24 to 48 hours, the
rooms were counted on the hospital's cost report as depreciable plant
assets available for patient care, and the hospital could adequately
provide patient care in the beds using staff nurses or nurses from a
nurse registry. Upon review, the Administrator also ultimately upheld
this decision based on existing policies and instructions.
We do not believe that an accurate bed count should include beds
that are essentially hypothetical in nature; for example, when the beds
are on a floor that is not used for inpatient care throughout the
entire cost reporting period (and, indeed, may have been used for other
purposes). Followed to the extreme, a hospital could count every bed in
its facility, even if it had no intention of ever using a bed for
inpatient care, as long as it would be theoretically possible to place
an inpatient in the bed. We do not believe such a result would
accurately reflect a hospital's inpatient bed capacity. Even though
some teaching hospitals have an incentive to minimize the bed count for
payment purposes, some DSH hospitals have an incentive to maximize the
bed count for the same reason. Our current policy is intended to
reflect a hospital's bed count as accurately as possible, achieving a
balance between capturing short-term shifts in occupancy and long-term
changes in capacity. Therefore, we believe further clarification and
refinement of our policies relating to counting available beds is
necessary.
In the FY 2003 IPPS proposed rule published on May 9, 2002 (67 FR
31462), we proposed that, if a hospital's reported bed count results in
an occupancy rate (average daily census of patients divided by the
number of beds) below 35 percent, the applicable bed count, for
purposes of establishing the number of available beds for that hospital
would exclude beds that would result in an average annual occupancy
rate below 35 percent. However, at the time the FY 2003 IPPS final rule
was published on August 1, 2002 (67 FR 50060), we decided not to
proceed with the proposed changes as final and to reconsider the issue
as part of a future comprehensive analysis of our bed and patient day
counting policies.
In this proposed rule, rather than establish a minimum standard
occupancy rate, we are proposing to determine whether beds in a unit
are available based upon whether the unit was used to provide patient
care of a level generally payable under the IPPS (``IPPS level of
care'') at any time during the 3 preceding months. If any of the beds
in the unit were used to provide an IPPS level of care at any time
during the preceding 3 months, all of the beds in the unit are counted
for purposes of determining available bed days during the current
month. If no patient care of a type generally payable under the IPPS
was provided in that unit during the 3 preceding months, the beds in
the unit are to be excluded from the determination of available bed
days during the current month (proposed Sec. Sec. 412.105(b)(2) and
412.106(a)(1)(ii)(C)).
For example, our policy as to how to count beds during minor
renovations of units, wards, or individual rooms has been that unless
the space costs are treated as nonallowable, the beds would be counted.
Under the policy we are proposing, beds in an otherwise unoccupied unit
that are occupied (for purposes of providing IPPS-level care) at any
time during the 3 preceding months would be counted as available for
the current month. This would apply even if the rooms were undergoing
renovation during a portion of that 3-month period.
We believe a unit or ward can be defined as a group of rooms
staffed by nurses assigned to a single nursing station. In most cases,
the patients treated within a single unit or ward will receive a
similar level of care (that is, acute, intensive, rehabilitation,
psychiatric, or skilled nursing). However, we encourage comments on the
most useful definition of a unit or ward.
We believe this proposed policy would provide a clear standard for
both hospitals and fiscal intermediaries to use to determine whether
otherwise unoccupied beds should be counted. We note that if the
required time period for excluding the unoccupied beds were to be set
too low, hospitals could potentially manipulate their available bed
count by not admitting any patients to a unit during low occupancy
periods, thereby distorting the measure of hospital size. We believe 3
months, one quarter of a hospital's fiscal year, represents a
reasonable standard for determining that a unit is not being used to
provide patient care and may be excluded from the hospital's available
bed count.
It is also necessary to consider our policy with respect to
individual beds within rooms located in an otherwise occupied unit when
those beds are used for alternative purposes. For example, section
2405.3 of the PRM states that beds used for the following are excluded
from the definition (of a bed): Postanesthesia or postoperative
recovery rooms, outpatient areas, emergency rooms, ancillary
departments nurses' and other staff residences, and other such areas as
are regularly maintained and utilized for only a portion of the stay of
patients or for purposes other than inpatient lodging. In some
situations, beds used for these excluded

[[Page 27204]]

purposes may be intermingled with acute care inpatient beds.
Beds being used to provide specific categories of nonacute
services, such as outpatient services in an observation bed or skilled
nursing services in a swing-bed, are excluded from the count. As
discussed later, this flows from our policy that the bed days are
treated consistently with the assignment of the costs on the Medicare
cost report of the services provided in the bed.
In the case of individual rooms in an otherwise occupied unit that
are altered to be used for other uses besides inpatient care, we are
proposing the bed(s) should be counted if a patient could be admitted
to the room within 24 hours (proposed Sec. 412.105(b)(3)). This would
apply even if the bed(s) were not currently located in the room, as
long as a bed could be physically placed in the room and made available
within 24 hours. We are proposing that it would no longer be necessary
for the hospital to determine whether a bed could be staffed within 24
to 48 hours. For example, in the case of a room that has been altered
for use as a staff lounge, if the room could be made available to house
a patient merely by replacing the lounge furniture with a patient bed,
the bed should be counted as available.
Under this proposal, other than when an inpatient room is used to
provide observation services, labor/delivery room services, or skilled
nursing services in a swing-bed (all discussed later in this proposed
rule), the alternative purpose of the room is only relevant if it
impacts whether the room could be made available for patient occupancy
within 24 hours. If the hospital was fully occupied (no other room was
available), and the room still was not put into service when needed,
that would provide evidence that the room could not be made available
and beds in the room should be excluded from the bed count.
Therefore, we are proposing to amend Sec. 412.105(b) to indicate
that the bed days in a unit that is unoccupied by patients receiving
IPPS-level care for the 3 preceding months are to be excluded from the
available bed day count for the current month. We are further proposing
the beds in a unit that was occupied for IPPS-level care during the 3
preceding months should be counted unless they could not be made
available for patient occupancy within 24 hours, or they are used to
provide outpatient observation services or swing-bed skilled nursing
care.
3. Nonacute Care Beds and Days
As noted above, these policies are consistent with the reporting of
the days, costs, and beds that are used to calculate the costs of
hospital inpatient care in individual cost centers on the Medicare cost
report. Furthermore, since the IME and DSH adjustments are part of the
IPPS, we read the statute to apply only to inpatient beds and days.
Under the existing provisions of Sec. 412.105(b), the regulations
specifically exclude beds or bassinets in the healthy newborn nursery,
custodial care beds, or beds in excluded distinct part hospital units
as types of beds excluded from the count of available beds.
Existing regulations at Sec. 412.106(a)(1)(ii) state that the
number of patient days used in the DSH percentage calculation includes
only those days attributable to areas of the hospital that are subject
to the IPPS and excludes all others. This regulation was added after
being proposed in the March 22, 1988 Federal Register (53 FR 9339), and
made final in the September 30, 1988 Federal Register (53 FR 38479). At
that time, we indicated that, ``based on a reading of the language in
section 1886(d)(5)(F) of the Act, which implements the disproportionate
share provision, we are in fact required to consider only those
inpatient days to which the prospective payment system applies in
determining a prospective payment hospital's eligibility for a
disproportionate share adjustment.'' Using this reasoning, we stated
that the DSH patient percentage calculation should only include patient
days associated with the types of services paid under the IPPS.
As noted previously, a recent decision in the Ninth Circuit Court
of Appeals (Alhambra v. Thompson) ruled that days attributable to
groups of beds that are not separately certified as distinct part beds
(that is, nonacute care beds in which care provided is at a level below
the level of routine inpatient acute care), but are adjacent to or in
an acute care ``area,'' are included in the ``areas of the hospital
that are subject to the prospective payment system'' and should be
counted in calculating the Medicare DSH patient percentage.
In light of the Ninth Circuit decision that our rules were not
sufficiently clear to permit exclusion of bed days based on the area
where the care is provided, we are proposing to revise our regulations
to be more specific. Therefore, in this proposed rule, we are proposing
to clarify that beds and patient days are excluded from the
calculations at Sec. 412.105(b) and Sec. 412.106(a)(1)(ii) if the
nature of the care provided in the unit or ward is inconsistent with
what is typically furnished to acute care patients, regardless of
whether these units or wards are separately certified or are located in
the same general area of the hospital as a unit or ward used to provide
an acute level of care. Although the intensity of care may vary within
a particular unit, such that some patients may be acute patients while
others are nonacute, we understand that a patient-by-patient review of
whether the care received would be paid under the IPPS would be unduly
burdensome. Therefore, we believe it is more practical to permit the
application of this principle based upon the location at which the
services were furnished.
In particular, we are proposing to revise our regulations to
clarify that the beds and patient days attributable to a nonacute care
unit or ward should not be included in the calculations at Sec.
412.105(b) and Sec. 412.106(a)(1)(ii), even if the unit is not
separately certified by Medicare as a distinct-part unit and even if
the unit or ward is within the same general location of the hospital as
areas that are subject to the IPPS.
Exceptions to this policy are outpatient observation and swing-bed
days, which are excluded from the count of available bed days even if
the care is provided in an acute care unit. Our policies pertaining to
these beds are discussed further below. Another exception is healthy
newborn nursery days. The costs, days, and beds of a healthy newborn
nursery are excluded from inpatient calculations for Medicare purposes.
Meanwhile, for the purpose of computing the Medicaid patient share
computation of the DSH patient percentages, these days are included
both as Medicaid patient days and as total patient days. Nursery costs
are not directly included in calculating Medicare hospital inpatient
care costs because Medicare does not generally cover services for
infants. However, Medicaid does offer extensive coverage to infants,
and nursery costs would be directly included in calculating Medicaid
hospital inpatient care costs. Therefore, these costs, days, and beds
are excluded for Medicare purposes, but included for determining the
Medicaid DSH percentage. (This policy was previously communicated
through a memorandum to CMS Regional Offices on February 27, 1997.)
Generally, as discussed previously, if the nature of the care
provided in the unit or ward is consistent with what is typically
furnished to acute care patients, and, therefore, would be
characteristic of services paid under the IPPS, the patient days, beds,
and costs of that unit or ward would be classified as inpatient acute
care (except for observation bed days and swing bed days, as discussed
later in this

[[Page 27205]]

preamble). Conversely, if the intensity and type of care provided in
the unit or ward are not typical of a service that would be paid under
the IPPS (for example, nonacute care), we are proposing that the beds
and patient days attributable to a nonacute care unit or ward should
not be included in the calculations of beds and patient days at Sec.
412.105(b) and Sec. 412.106(a)(1)(ii).
This proposed policy is not intended to focus on the level or type
of care provided to individual patients in a unit, but rather on the
level and type of care provided in the unit as a whole. For example,
the bed days for a patient participating in an experimental procedure
that is not covered under the IPPS should be counted as long as the
patient is treated in a unit of the hospital that generally provides
acute inpatient care normally payable under the IPPS. The expectation
is that a patient located in an acute care unit or ward of the hospital
is receiving a level of care that is consistent with what would be
payable under the IPPS.
There are instances where services that are provided in units
excluded from the IPPS (such as rehabilitation and psychiatric
distinct-part units) are consistent with the level of care that would
qualify for payment under the IPPS. However, Sec. Sec. 412.105(b) and
412.106(a)(1)(ii) specifically exclude the beds and patient days
associated with these excluded units. That exclusion is because the
costs of care provided in these units are paid outside the IPPS, even
though some of the care provided is of a type that would be payable
under the IPPS if the care was provided in an IPPS unit.
We are proposing to revise Sec. 412.105(b) to clarify that beds in
units or wards established or used to provide a level of care that is
not consistent with what would be payable under the IPPS cannot be
counted (proposed paragraph (b)(1)). We also are proposing to revise
the DSH regulations at Sec. 412.106(a)(1)(ii) to clarify that the
number of patient days includes only those attributable to patients
that receive care in units or wards that furnish a level of care that
would generally be payable under the IPPS (proposed paragraph
(a)(1)(ii)(C)).
We note these proposed revisions are clarifications of our
regulations to reflect our longstanding interpretation of the statutory
intent, especially relating to the calculation of the Medicare DSH
patient percentage.
4. Observation Beds and Swing-Beds
Observation services are those services furnished by a hospital on
the hospital's premises that include use of a bed and periodic
monitoring by a hospital's nursing or other staff in order to evaluate
an outpatient's condition or to determine the need for a possible
admission to the hospital as an inpatient. When a hospital places a
patient under observation but has not formally admitted him or her as
an inpatient, the patient initially is treated as an outpatient.
Consequently, the observation bed days are not recognized under the
IPPS as part of the inpatient operating costs of the hospital.
Observation services may be provided in a distinct observation bed
area, but they may also be provided in a routine inpatient care area.
In either case, our policy is the bed days attributable to beds used
for observation services are excluded from the counts of available bed
days and patient days at Sec. Sec. 412.105(b) and 412.106(a)(1)(ii).
This policy was clarified in a memorandum that was sent to all CMS
Regional Offices (for distribution to fiscal intermediaries) dated
February 27, 1997, which stated that if a hospital provides observation
services in beds that are generally used to provide hospital inpatient
services, the equivalent days that those beds are used for observation
services should be excluded from the count of available bed day count
(even if the patient is ultimately admitted as an acute inpatient).
A swing-bed is a bed otherwise available for use to provide acute
inpatient care that is also occasionally used to provide SNF care. The
criteria to qualify as a swing-bed hospital are located under Sec.
482.66, and for a swing-bed CAH under Sec. 485.645. Under Sec.
413.114(a)(1), payment for posthospital SNF care furnished in swing-
beds is in accordance with the provisions of the prospective payment
system for SNF care (effective for services furnished in cost reporting
periods beginning on and after July 1, 2002). Similar to observation
beds and patient days, swing-beds and patient days are excluded from
the counts of available bed days and patient days at Sec. Sec.
412.105(b) and 412.106(a)(1)(ii) when the swing-bed is used to furnish
SNF care.\6\
---------------------------------------------------------------------------

\6\ Ibid.
---------------------------------------------------------------------------

Observation beds and swing-beds are both special, frequently
temporary, alternative uses of acute inpatient care beds. That is, only
the days an acute inpatient care unit bed is used to provide outpatient
observation services are to be deducted from the available bed count
under Sec. 412.105(b). Otherwise, the bed is considered available for
acute care services (as long as it otherwise meets the criteria to be
considered available). This same policy applies for swing-beds. The
policies to exclude observation bed days and swing-bed days stem from
the fact that these bed days are not payable under the IPPS (unless the
patient is ultimately admitted, in the case of observation bed days).
Some hospitals have contested our policy excluding swing-beds and
patient days and observation beds and patient days under existing
Sec. Sec. 412.105(b) and 412.106(a)(1)(ii). For example, in Clark
Regional Medical Center v. United States Department of Health & Human
Services, 314 F.3d 241 (6th Cir. 2002), the court upheld the district
court's ruling that all bed types not specifically excluded from the
definition of available bed days in the regulations must be included in
the count of available bed days. The hospitals involved in this
decision wanted to include observation and swing-bed days in their bed
count calculation in order to qualify for higher DSH payments as 100
bed hospitals. The Court found that ``the listing of beds to be
excluded from the count restricts the class of excluded beds only to
those specifically listed.'' Because observation beds and swing-beds
are not currently specifically mentioned in Sec. 412.105(b) as being
excluded from the bed count, the Court ruled that these beds must be
included in the count.
The list of the types of beds excluded from the count under
existing Sec. 412.105(b) was never intended to be an exhaustive list
of all of the types of beds to be excluded from the bed count under
this provision. In fact, over the years, specific bed types have been
added to the list as clarifications of the types of beds to be
excluded, not as new exclusions (see the September 1, 1994 Federal
Register (59 FR 45373) and September 1, 1995 Federal Register (60 FR
45810), where we clarified exclusions under our policy that were not
previously separately identified in the regulation text).
Courts also have recently found that observation and swing-bed days
are included under the `plain meaning' of Sec. 412.106(a)(1)(ii),
which reads: ``The number of patient days includes only those days
attributable to areas of the hospital that are subject to the
prospective payment system and excludes all others.'' However, the
preamble language when this provision was promulgated clarified its
meaning (53 FR 38480):
[sbull] ``Although previously the Medicare regulations did not
specifically define the inpatient days for use in the computation of a
hospital's disproportionate share patient percentage, we believe that,
based on a

[[Page 27206]]

reading of the language in section 1886(d)(5)(F) of the Act, which
implements the disproportionate share provision, we are in fact
required to consider only those inpatient days to which the prospective
payment system applies in determining a prospective payment hospital's
eligibility for a disproportionate share adjustment.''
Our policy excluding outpatient observation and swing-bed days is
consistent with this regulatory interpretation of days to be counted
under Sec. 412.106(a)(1)(ii). That is, the services provided in these
beds are not payable under the IPPS (unless the patient is admitted, in
the case of observation bed days).
As outlined previously, our consistent and longstanding policy,
which has been reviewed and upheld previously by several courts,
including the United States District Court for the District of
Columbia, is based on the principle of counting beds in the same manner
as the patient days and costs are treated. Our policy to exclude
observation and swing-bed days under the regulations at Sec.
412.105(b) and Sec. 412.106(a)(1)(ii) stems from this policy.
However, we are proposing to amend our policy with respect to
observation bed days of patients who ultimately are admitted. As noted
previously, our current policy is that these bed days are excluded from
the available bed day and the patient day counts. This policy was
communicated in a memorandum to all CMS Regional Offices on February
27, 1997. Specifically, we are proposing that, if a patient is admitted
as an acute inpatient subsequent to receiving outpatient observation
services, because the charges of the observation ancillary services the
patient receives are currently treated as inpatient charges on the cost
report, in order to be consistent with our policy to treat the costs
and patient days consistently, we will begin to include the patient bed
days associated with the observation services in the inpatient bed day
count.
In order to avoid any potential future misunderstandings about our
policies regarding the exclusion of observation and swing-bed days
under the regulations at Sec. 412.105(b) and Sec. 412.106(a)(1)(ii),
we are proposing to revise our regulations to specify our policy that
observation and swing-bed bed days are to be excluded from the counts
of both available beds and patient days, unless a patient treated in an
observation bed is ultimately admitted, in which case the beds and days
would be included in those counts.
5. Labor, Delivery, Recovery, and Postpartum Beds and Days
Prior to December 1991, Medicare's policy on counting days for
maternity patients required an inpatient day to be counted for an
admitted maternity patient in the labor/delivery room at the census
taking hour. This is consistent with Medicare policy for counting days
for admitted patients in any other ancillary department at the census-
taking hour. However, based on decisions adverse to the government
regarding this policy in a number of Federal courts of appeal,
including the United States Court of Appeals for the District of
Columbia Circuit, the policy regarding the counting of inpatient days
for maternity patients was revised.
Therefore, our current policy regarding the treatment of labor and
delivery bed days was initially described in Section 2205.2 of the PRM.
Section 2205.2. of the PRM states that a maternity inpatient in the
labor/delivery room at midnight is not included in the census of
inpatient routine care if the patient has not occupied an inpatient
routine bed at some time since admission. For example, if a Medicaid
patient is in the labor room at the census and has not yet occupied a
routine bed, the bed day is not counted as a routine bed day of care in
Medicaid or total days and, therefore, is not included in the counts
under existing Sec. Sec. 412.105(b) and 412.106(a)(1)(ii). If the
patient is in the labor room at the census but had first occupied a
routine bed, a routine bed day is counted, in Medicaid and total days,
for DSH purposes and for apportioning the cost of routine care on the
cost report (consistent with our longstanding policy to treat days,
costs, and beds similarly).
Increasingly, hospitals are redesigning their maternity areas from
separate labor and delivery rooms apart from the postpartum rooms, to
single labor, delivery room, and postpartum (LDRP) rooms. In order to
appropriately track the days and costs of LDRP rooms, it is necessary
to apportion them between the labor and delivery ancillary cost center
and the routine adults and pediatrics cost center. This is done by
determining the proportion of the patient's stay in the LDRP room that
the patient was receiving ancillary services (labor and delivery) as
opposed to routine adult and pediatric services (recovery and
postpartum).
An example of this would be if 25 percent of the patient's time in
the LDRP room was for labor/delivery services and 75 percent for
routine care, over the course of a 4-day stay in the LDRP room. In that
case, 75 percent of the time the patient spent in the LDRP room is
applied to the total bed days and costs (resulting in 3 routine adults
and pediatrics bed days for this patient, 75 percent of 4 total days).
The resulting days (or portion of days) are included in total days and
in Medicaid days for all purposes. For purposes of determining hospital
bed count, the time when the beds are unoccupied should be counted as
available bed days using an average percentage (for example, 75 percent
adults and pediatrics and 25 percent ancillary) based on all patients.
In other words, 75 percent of the days the bed is unoccupied would be
counted in the available bed count.
We realize that it may be burdensome for a hospital to determine
for each patient in this type of room the amount of time spent in
labor/delivery and the amount of time spent receiving routine care.
Alternatively, the hospital could calculate an average percentage of
time patients receive ancillary services, as opposed to routine
inpatient care during a typical month, to apply the rest of the year.
6. Days Associated with Demonstration Projects Under Section 1115 of
the Act
Some States extend medical benefits to a given population that
could not have been made eligible for Medicaid under a State plan
amendment under section 1902(r)(2) or section 1931(b) of the Act, under
a demonstration under a section 1115(a)(2) demonstration project (also
referred to as a section 1115 waiver). These populations are specific,
finite populations identifiable in the award letters and special terms
and conditions for the demonstrations.
On January 20, 2000, we issued an interim final rule with comment
period (65 FR 3136), followed by a final rule issued on August 1, 2000
(65 FR 47086 through 47087), to allow hospitals to include the patient
days of all populations that receive benefits under a section 1115
demonstration project in calculating the Medicare DSH adjustment.
Previously, hospitals were to include only those days for populations
under the section 1115 demonstration project who were, or could have
been made, eligible under a State plan. Patient days of those expansion
waiver groups who could not be made eligible for medical assistance
under the State plan were not to be included for determining Medicaid
patient days in calculating the Medicare DSH patient percentage. Under
the January 20, 2000 interim final rule with comment period (65 FR
3137), hospitals could include in the numerator of the Medicaid
fraction those patient days for individuals who receive benefits under

[[Page 27207]]

a section 1115 expansion waiver demonstration project (effective with
discharges occurring on or after January 20, 2000).
In the January 20, 2000 interim final rule with comment period, we
explained that including the section 1115 expansion populations ``in
the Medicare DSH calculation is fully consistent with the Congressional
goals of the Medicare DSH adjustment to recognize the higher costs to
hospitals of treating low-income individuals covered under Medicaid.''
Since that revision, we have become aware that there are certain
section 1115 demonstration projects that serve expansion populations
with benefit packages so limited that the benefits are not similar to
the medical assistance available under a Medicaid State plan. These
section 1115 demonstration projects extend coverage only for specific
services and do not include inpatient care in the hospital. Because of
the limited nature of the coverage offered, the population involved may
have a significantly higher income than traditional Medicaid
beneficiaries.
In allowing hospitals to include patient days related to section
1115 expansion waiver populations, our intention was to include patient
days of section 1115 expansion waiver populations who receive benefits
under the demonstration project that are similar to those available to
traditional Medicaid beneficiaries, including inpatient benefits.
Because of the differences between expansion populations in these
limited benefit demonstrations and traditional Medicaid beneficiaries,
we are proposing that the Medicare DSH calculation should exclude from
treatment as Medicaid patient days those patient days attributable to
limited benefit section 1115 expansion waiver populations (proposed
Sec. 412.106(b)(4)(i)).
For example, a State may extend a family planning benefit to an
individual for 2 years after she has received the 60-day postpartum
benefit under Medicaid, or a State may choose to provide a family
planning benefit to all individuals below a certain income level,
regardless of having previously received the Medicaid postpartum
benefit. This is a limited, temporary benefit that is generally
administered in a clinic setting (see section 1905(a)(4)(C) of the
Act). Also, a number of States are developing demonstrations that are
limited to providing beneficiaries an outpatient prescription drug
benefit. Generally, these limited benefits under a demonstration
project do not include inpatient benefits. If a hospital were to
include the days attributable to patients receiving benefits under such
a limited benefit, the hospital would be able to receive higher DSH
payments, perhaps substantially, for patients who may otherwise be
insured for inpatient care. For example, these limited demonstrations
provide benefits that may be needed to supplement private insurance
coverage for individuals who do not have incomes low enough to qualify
for Medicaid under the State plan. We do not believe such patients
should be counted in the DSH patient percentage as eligible for title
XIX.
As we have noted previously, at the time the Congress enacted the
Medicare DSH adjustment provision, there were no approved section 1115
demonstration projects involving expansion populations and the statute
does not address the treatment of these days. Although we did not
initially include patient days for individuals who receive extended
benefits only under a section 1115 demonstration project, we
nevertheless expanded our policy in the January 20, 2000 revision to
these rules to include such patient days. We now believe that this
reading is warranted only to the extent that those individuals receive
inpatient benefits under the section 1115 demonstration project.
Therefore, we are proposing to revise Sec. 412.106(b)(4)(i) to
clarify that patients must be eligible for medical assistance inpatient
hospital benefits under an approved State Medicaid plan (or similar
benefits, including inpatient hospital benefits, under a section 1115
demonstration project) in order for their hospital inpatient days to be
counted as Medicaid days in the calculation of a hospital's DSH patient
percentage. Under this proposed clarification, hospital inpatient days
attributed to patients who do not receive coverage for inpatient
hospital benefits either under the approved State plan or through a
section 1115 demonstration would not be counted in the calculation of
Medicaid days for purposes of determining a hospital's DSH patient
percentage.
Under this reading, in the examples given above, the days
associated with a hospital inpatient who receives coverage of
prescription drugs or family planning services on an outpatient basis,
but no inpatient hospital coverage, through either a Medicaid State
plan or a section 1115 demonstration, would not be counted as Medicaid
days for purposes of determining the DSH patient percentage.
This proposed revision would address an unintended potential
consequence of our interpretation that hospitals may include in the DSH
calculation patient days associated with section 1115 demonstration
populations (65 FR 3136). As discussed above, that interpretation was
based on our finding that individuals receiving a comprehensive benefit
package under a section 1115 demonstration project could appropriately
be included in the numerator of the Medicaid fraction even though the
statute does not require such an inclusion, but did not address
individuals who were receiving limited benefit packages under a section
1115 demonstration project.
7. Dual-Eligible Patient Days
As described above, the DSH patient percentage is equal to the sum
of the percentage of Medicare inpatient days attributable to patients
entitled to both Medicare Part A and SSI benefits, and the percentage
of total inpatient days attributable to patients eligible for Medicaid
but not entitled to Medicare Part A benefits. If a patient is a
Medicare beneficiary who is also eligible for Medicaid, the patient is
considered dual-eligible and the patient days are included in the
Medicare fraction of the DSH patient percentage but not the Medicaid
fraction. This is consistent with the language of section
1886(d)(5)(F)(vi)(II) of the Act, which specifies that patients
entitled to benefits under Part A are excluded from the Medicaid
fraction.
This policy currently applies even after the patient's Medicare
coverage is exhausted. In other words, if a dual-eligible patient is
admitted without any Medicare Part A coverage remaining, or the patient
exhausts Medicare Part A coverage while an inpatient, his or her
patient days are counted in the Medicare fraction before and after
Medicare coverage is exhausted. This is consistent with our inclusion
of Medicaid patient days even after the patient's Medicaid coverage is
exhausted.
We are proposing to change our policy, to begin to count in the
Medicaid fraction of the DSH patient percentage the patient days of
dual-eligible Medicare beneficiaries whose Medicare coverage has
expired. We note the statute referenced above stipulates that patient
days attributable to patients entitled to benefits under Medicare Part
A are to be excluded from the Medicaid fraction, while the statute
specifies the Medicaid fraction is to include patients who are eligible
for Medicaid.
As noted above, our current policy regarding dual-eligible patient
days is that they are counted in the Medicare fraction and excluded
from the

[[Page 27208]]

Medicaid fraction, even if the patient's Medicare Part A coverage has
been exhausted. We believe this interpretation is consistent with the
statutory intent of section 1886(d)(5)(F)(vi)(II) of the Act. However,
we recognize there are other plausible interpretations. In addition, on
a more practical level, we recognize it is often difficult for fiscal
intermediaries to differentiate the days for dual-eligible patients
whose Part A coverage has been exhausted. The degree of difficulty
depends on the data provided by the States, which may vary from one
State to the next. Some States identify all dual-eligible beneficiaries
in their lists of Medicaid patient days provided to the hospitals,
while in other States the fiscal intermediary must identify patient
days attributable to dual-eligible beneficiaries by matching Medicare
Part A bills with the list of Medicaid patients provided by the State.
The latter case is problematic when Medicare Part A coverage is
exhausted because no Medicare Part A bill may be submitted for these
patients. Thus, the fiscal intermediary has no data by which to readily
verify any adjustment for these cases in the Medicaid data provided by
the hospital. Currently, the fiscal intermediaries are reliant on the
hospitals to identify the days attributable to dual-eligible
beneficiaries so these days can be excluded from the Medicaid patient
days count.
Therefore, in order to facilitate consistent handling of these days
across all hospitals, we are proposing that the days of patients who
have exhausted their Medicare Part A coverage will no longer be
included in the Medicare fraction. Instead, we are proposing these days
should be included in the Medicaid fraction of the DSH calculation. (We
note that not all SSI recipients are Medicaid eligible. Therefore, it
will not be automatic that the patient days of SSI recipients will be
counted in the Medicaid fraction when their Part a coverage expires.)
Under this proposed change, before a hospital could count patient
days attributable to dual-eligible beneficiaries in the Medicaid
fraction, the hospital must submit documentation to the fiscal
intermediary that justifies including the days in the Medicaid fraction
after the Medicare Part A benefits have been exhausted. That is, if the
State provides data on all the days associated with all dual-eligible
patients treated at a hospital, regardless of whether the beneficiary
had Medicare Part A coverage, the hospital is responsible for providing
documentation showing which days should be included in the Medicaid
fraction because Medicare Part A coverage was exhausted.
8. Medicare+Choice (M+C) Days
Under Sec. 422.1, an M+C plan ``means health benefits coverage
offered under a policy or contract by an M+C organization that includes
a specific set of health benefits offered at a uniform premium and
uniform level of cost-sharing to all Medicare beneficiaries residing in
the service area of the M+C plan.'' Generally, each M+C plan must
provide coverage of all services that are covered by Medicare Part A
and Part B (or just Part B if the M+C plan enrollee is only entitled to
Part B).
We have received questions whether patients enrolled in an M+C Plan
should be counted in the Medicare fraction or the Medicaid fraction of
the DSH patient percentage calculation. The question stems from whether
M+C plan enrollees are entitled to benefits under Medicare Part A since
M+C plans are administered through Medicare Part C.
We note that, under Sec. 422.50, an individual is eligible to
elect an M+C plan if he or she is entitled to Medicare Part A and
enrolled in Part B. However, once a beneficiary has elected to join an
M+C plan, that beneficiary's benefits are no longer administered under
Part A.
Therefore, we are proposing to clarify that once a beneficiary
elects Medicare Part C, those patient days attributable to the
beneficiary should not be included in the Medicare fraction of the DSH
patient percentage. These patient days should be included in the count
of total patient days in the Medicaid fraction (the denominator), and
the patient's days for the M+C beneficiary who is also eligible for
Medicaid would be included in the numerator of the Medicaid fraction.

D. Medicare Geographic Classification Review Board (MGCRB)
Reclassification Process (Sec. 412.230)

With the creation of the MGCRB, beginning in FY 1991, under section
1886(d)(10) of the Act, hospitals could request reclassification from
one geographic location to another for the purpose of using the other
area's standardized amount for inpatient operating costs or the wage
index value, or both (September 6, 1990 interim final rule with comment
period (55 FR 36754), June 4, 1991 final rule with comment period (56
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing
regulations in subpart L of part 412 (Sec. Sec. 412.230 et seq.) set
forth criteria and conditions for redesignations for purposes of the
wage index or the average standardized amount, or both, from rural to
urban, rural to rural, or from an urban area to another urban area,
with special rules for SCHs and rural referral centers.
Effective with reclassifications for FY 2003, section
1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the
average of the 3 years of hourly wage data from the most recently
published data for the hospital when evaluating a hospital's request
for reclassification. The regulations at Sec. 412.230(e)(2)(ii)
stipulate that the wage data are taken from the CMS hospital wage
survey used to construct the wage index in effect for prospective
payment purposes. To evaluate applications for wage index
reclassifications for FY 2004, the MGCRB used the 3-year average hourly
wages published in Table 2 of the August 1, 2002 IPPS final rule (67 FR
50135). These average hourly wages are taken from data used to
calculate the wage indexes for FY 2001, FY 2002, and FY 2003, based on
cost reporting periods beginning during FY 1997, FY 1998, and FY 1999,
respectively.
Last year, we received a comment suggesting that we allow for the
correction of inaccurate data from prior years as part of a hospital's
bid for geographic reclassification (67 FR 50027). The commenter
suggested that not to allow corrections to the data results in
inequities in the calculation in the average hourly wage for purposes
of reclassification. In the August 1, 2002 IPPS final rule, we
responded:
``Hospitals have ample opportunity to verify the accuracy of the
wage data used to calculate their wage index and to request revisions,
but must do so within the prescribed timelines. We consistently
instruct hospitals that they are responsible for reviewing their data
and availing themselves to the opportunity to correct their wage data
within the prescribed timeframes. Once the data are finalized and the
wage indexes published in the final rule, they may not be revised,
except through the mid-year correction process set forth in the
regulations at Sec. 412.63(x)(2). Accordingly, it has been our
consistent policy that if a hospital does not request corrections
within the prescribed timeframes for the development of the wage index,
the hospital may not later seek to revise its data in an attempt to
qualify for MGCRB reclassification.
``Allowing hospitals the opportunity to revise their data beyond
the timelines required to finalize the data used to calculate the wage
index each year would lessen the importance of complying with those
deadlines. The likely result would be that the data used to compute the
wage index would not be as carefully scrutinized because

[[Page 27209]]

hospitals would know they may change it later, leading to inaccuracy in
the data and less stability in the wage indexes from year to year.''
Since responding to this comment in the FY 2003 IPPS final rule, we
have become aware of a situation in which a hospital does not meet the
criteria to reclassify because its wage data were erroneous in prior
years, and these data are now being used to evaluate its
reclassification application. In addition, in this situation, the
hospital's wage index was subject to the rural floor because the
hospital was located in an urban area with an actual wage index below
the statewide rural wage index for the State, and it was for a time
period preceding the requirement for using 3 years of data. Therefore,
the hospital contends, it had no incentive to ensure its wage data were
completely accurate. (However, we would point out that hospitals are
required to certify that their cost reports submitted to CMS are
complete and accurate. Furthermore, inaccurate or incomplete reporting
may have other payment implications beyond the wage index.)
While we continue to have all of the concerns we expressed in last
year's final rule, we now more fully understand this particular
hospital's situation. Although we do have administrative authority to
establish a policy allowing corrections for this particular set of
circumstances, we are concerned about establishing a precedent that
could reduce the importance of ensuring that the final wage data
published in the annual IPPS final rule are complete and accurate. As
we indicated in our response last year, we are concerned this could
lead to less accuracy and stability in the wage indexes from year to
year.
However, we are soliciting comments on whether it may be
appropriate to establish a policy whereby, for the limited purpose of
qualifying for reclassification based on data from years preceding the
establishment of the 3-year requirement (that is, cost reporting years
beginning before FY 2000), a hospital in an urban area that was subject
to the rural floor for the period during which the wage data the
hospital wishes to revise were used to calculate the wage index, a
hospital may request that its wage data be revised.

E. Costs of Approved Nursing and Allied Health Education Activities
(Sec. 413.85)

1. Background
Medicare has historically paid providers for the share of the costs
that providers incur in connection with approved educational
activities. The activities may be divided into the following three
general categories to which different payment policies apply:
[sbull] Approved graduate medical education (GME) programs in
medicine, osteopathy, dentistry, and podiatry. Medicare makes direct
and indirect medical education payments to hospitals for residents
training in these programs. Existing policy on direct GME payment is
found at 42 CFR 413.86, and for indirect GME payment at 42 CFR 412.105.
[sbull] Approved nursing and allied health education programs
operated by the provider. The costs of these programs are excluded from
the definition of inpatient hospital operating costs and are not
included in the calculation of payment rates for hospitals paid under
the IPPS or in the calculation of payments to hospitals and hospital
units excluded from the IPPS that are subject to the rate-of-increase
ceiling. These costs are separately identified and ``passed through''
(that is, paid separately on a reasonable cost basis). Existing
regulations on nursing and allied health education program costs are
located at 42 CFR 413.85.
[sbull] All other costs that can be categorized as educational
programs and activities are considered to be part of normal operating
costs and are included in the per discharge amount for hospitals
subject to the IPPS, or are included as reasonable costs that are
subject to the rate-of-increase limits for hospitals and hospital units
excluded from the IPPS.
In this section, we are proposing to clarify our policy governing
payments to hospitals for provider-operated nursing and allied health
education programs. Under the regulations at Sec. 413.85 (``Cost of
approved nursing and allied health educational activities''), Medicare
makes reasonable cost payment to hospitals for provider-operated
nursing and allied health education programs. A program is considered
to be provider-operated if the hospital meets the criteria specified in
Sec. 413.85(f), which means the hospital directly incurs the training
costs, controls the curriculum and the administration of the program,
employs the teaching staff, and provides and controls both clinical
training and classroom instruction (where applicable) of a nursing or
allied health education program.
In the January 12, 2001 Federal Register (66 FR 3358), we published
a final rule that clarified the policy for payments for approved
nursing and allied health education activities in response to section
6205(b)(2) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L.
101-239) and sections 4004(b)(1) and (2) of the Omnibus Budget
Reconciliation Act of 1990 (Pub. L. 101-508).
Section 6205(b)(2) of Public Law 101-239 directed the Secretary to
publish regulations clarifying the rules governing allowable costs of
approved educational activities. The Secretary was directed to publish
regulations to specify the conditions under which those costs are
eligible for pass-through, including the requirement that there be a
relationship between the approved nursing or allied health education
program and the hospital. Section 4004(b)(1) of Public Law 101-508
provides an exception to the requirement that programs be provider-
operated to receive pass-through payments. The section provides that,
effective for cost reporting periods beginning on or after October 1,
1990, if certain conditions are met, the costs incurred by a hospital
(or by an educational institution related to the hospital by common
ownership or control) for clinical training (as defined by the
Secretary) conducted on the premises of the hospital under an approved
nursing or allied health education program that is not operated by the
hospital are treated as pass-through costs and paid on the basis of
reasonable cost. Section 4004(b)(2) of Public Law 101-508 sets forth
the conditions that a hospital must meet to receive payment on a
reasonable cost basis under section 4004(b)(1).
2. Continuing Education Issue for Nursing and Allied Health Education
Since publication of the January 12, 2001 final rule on nursing and
allied health education, we have encountered questions concerning the
substantive difference between provider-operated continuing education
programs for nursing and allied health education (which would not be
reimbursable under Medicare on a reasonable cost basis) and provider-
operated approved programs that are eligible to receive Medicare
reasonable cost payment. In that final rule, we stated that Medicare
would generally provide reasonable cost payment for ``programs of long
duration designed to develop trained practitioners in a nursing or
allied health discipline, such as professional nursing or occupational
therapy. This is contrasted with a continuing education program of a
month to a year in duration in which a practitioner, such as a
registered nurse, receives training in a specialized skill such as
enterostomal therapy. While such training is undoubtedly valuable in
enabling the nurse to treat patients with special needs and in
improving the level of

[[Page 27210]]

patient care in a provider, the nurse, upon completion of the program,
continues to function as a registered nurse, albeit one with special
skills. Further distinction can be drawn between this situation and one
in which a registered nurse undergoes years of training to become a
CRNA. For these reasons, the costs of continuing education training
programs are not classified as costs of approved educational activities
that are passed-through and paid on a reasonable cost basis. Rather,
they are classified as normal operating costs covered by the
prospective payment rate or, for providers excluded from the IPPS, as
costs subject to the target rate-of-increase limits'' (66 FR 3370).
Accordingly, upon publication of the final rule, we revised Sec.
413.85(h)(3) to include continuing education programs in the same
category as ``educational seminars and workshops that increase the
quality of medical care or operating efficiency of the provider.''
Costs associated with continuing education programs, as stated above,
are recognized as normal operating costs and are paid in accordance
with applicable principles.
We received an inquiry requesting further clarification on what is
meant by continuing education. It is our belief that provider-operated
programs that do not lead to any specific certification in a specialty
would be classified as continuing education. By certification, we do
not mean certification in a specific skill, such as when an individual
is certified to use a specific piece of machinery or perform a specific
procedure. Rather, we believe certification would mean the ability to
perform in the specialty as a whole.
Although, in the past, we believe we have allowed hospitals to be
paid for operating a pharmacy ``residency'' program, it has come to our
attention that those programs do not meet the criteria for approval as
a certified program. Once individuals have finished their undergraduate
degree in pharmacy, there are some individuals who go on to participate
in 1-year hospital-operated postundergraduate programs. It is our
understanding that many individuals complete the 1-year
postundergraduate program practice pharmacy inside the hospital
setting. However, we also understand that there are pharmacists who do
not complete the 1-year postundergraduate program, but have received
the undergraduate degree in pharmacy, who also practice pharmacy inside
the hospital setting. Because pharmacy students need not complete the
1-year residency program to be eligible to practice pharmacy in the
hospital setting, the 1-year programs that presently are operated by
hospitals would be considered continuing education, and therefore,
would be ineligible for pass-through reasonable cost payment.
We understand that all individuals who wish to be nurses practicing
in a hospital must either complete a 4-year degree program in a
university setting, a 2-year associate degree in a community or junior
college setting, or a diploma program traditionally offered in a
hospital setting. Since participants that complete a provider-operated
diploma nursing program could not practice as nurses without that
training, the diploma nursing programs are not continuing education
programs and, therefore, may be eligible for pass-through treatment.
Because of the apparent confusion concerning continuing education
programs in the nursing and allied health reasonable cost context, we
are proposing to revise Sec. 413.85(h)(3) to state that educational
seminars, workshops, and continuing education programs in which the
employees participate that enhance the quality of medical care or
operating efficiency of the provider and, effective October 1, 2003, do
not lead to certification required to practice or begin employment in a
nursing or allied health specialty, would be treated as educational
activities that are part of normal operating costs. We also are
proposing to add a conforming definition of ``certification'' for
purposes of nursing and allied health education under Sec. 413.85(c)
to mean ``the ability to practice or begin employment in a specialty as
a whole.''
3. Programs Operated by Wholly Owned Subsidiary Educational
Institutions of Hospitals
Another matter that has come to CMS' attention since publication of
the January 12, 2001 final rule (66 FR 3363) on nursing and allied
health education concerns the preamble language of the rule, which
states:
``Concerning those hospitals that have established their own
educational institution to meet accrediting standards, we believe that,
in some cases, these providers can be eligible to receive payment for
the classroom and clinical training of students in approved programs.
If the provider demonstrates that the educational institution it has
established is wholly within the provider's control and ownership and
that the provider continues to incur the costs of both the classroom
and clinical training portions of the program, the costs would continue
to be paid on a reasonable cost basis. An independent college would not
meet these criteria.
``An example of a program that could be considered provider-
operated would be one in which the hospital is the sole corporate
member of the college, elects the board of trustees, has board members
in common, employs the faculty and pays the salaries, controls the
administration of the program and the curriculum, and provides the site
for the clinical and classroom training on the premises of the
hospital. We believe that, in these situations, the community has not
undertaken to finance the training of health professionals; the
provider has merely restructured its provider-operated program to meet
certain State or accrediting requirements. In most cases, providers
have aligned themselves with already established educational
institutions. We note that a program operated by an educational
institution that is related to the provider through common ownership or
control would not be considered to meet the criteria for provider
operated.'' (66 FR 3363)
We have received a question from a hospital that pertains to the
cited preamble language in the narrow circumstance where the hospital
previously received Medicare reasonable cost payment for direct
operation of nursing or allied health education programs and then
established its own wholly owned subsidiary college to operate the
programs, in order to meet accreditation standards. The hospital has
continued to receive Medicare payments after the hospital moved
operation of the programs to the wholly owned subsidiary college. The
hospital believes that, based on the cited preamble language regarding
wholly owned subsidiary colleges and the lack of prior specific
guidance on this particular organizational structure (as well as its
continued receipt of pass-through payments) and because the hospital
continues to pay all of the costs of the nursing and allied health
education programs, the hospital is still the direct operator of the
programs and should continue to receive pass-through treatment.
However, we believe that once the hospital moved the direct operation
of its nursing and allied health education programs to the college, the
programs no longer met our provider-operated criteria at Sec.
413.85(f). At the very least, it appears that the hospital did not hire
the faculty for the program(s) and did not have direct control of the
curriculum of the program(s) after operation was transferred to the
wholly owned subsidiary college. As we stated in the

[[Page 27211]]

preamble language quoted above: ``a program operated by an educational
institution that is related to the provider through common ownership or
control would not be considered to meet the criteria for provider
operated'' (66 FR 3363).
However, we understand that some hospitals, including this
hospital, may have interpreted the preamble language that stated, ``if
the provider demonstrates that the educational institution it has
established is wholly within the provider's control and ownership and
that the provider continues to incur the costs of both the classroom
and clinical training portions of the program, the costs would continue
to be paid on a reasonable cost basis'' (Ibid.), to mean that hospitals
that establish wholly owned subsidiary colleges or educational
institutions would continue to receive Medicare reasonable cost payment
if the hospitals incur the costs of the classroom instruction and
clinical training. We are proposing to clarify that transferring
operation of previously provider-operated programs to educational
institutions, even if the institutions are wholly owned by the
hospital, does not necessarily mean that the programs continue to meet
our provider-operated criteria under Sec. 413.85(f). In order to
remain provider operated, the hospital must have direct control of the
program; the hospital itself must employ the teaching staff, have
direct control of the program curriculum, and meet other requirements,
as stated at Sec. 413.85(f).
While we are proposing to clarify that merely operating programs
through a wholly owned subsidiary college does not constitute direct
operation of nursing or allied health education programs unless the
hospital itself meets the requirements of the regulations at Sec.
413.85(f), we believe it would be unfair to recoup Medicare payments
that have already been made to hospitals that meet this very narrow
fact pattern. Therefore, we are proposing that Medicare would not
recoup reasonable cost payment from hospitals that have received pass-
through payments for portions of cost reporting periods occurring on or
before October 1, 2003 (the effective date of finalizing this proposed
rule) for the nursing or allied health education program(s) where the
program(s) had originally been operated by the hospital, and then
operation of the program(s) had been transferred by the hospital to a
wholly owned subsidiary educational institution in order to meet
accreditation standards prior to October 1, 2003, and where the
hospital had continuously incurred the costs of both the classroom and
clinical training portions of the programs at the educational
institution.
In addition, we are proposing that, for portions of cost reporting
periods occurring on or after October 1, 2003, such a hospital would
continue to receive reasonable cost payments for the clinical training
costs incurred by the hospital for the program(s) described above that
were previously provider operated. However, we are further proposing
that, with respect to classroom costs, only those classroom costs
incurred by the hospital for the courses that were paid by Medicare on
a reasonable cost basis and included in the hospital's provider-
operated program(s) could continue to be reimbursed on a reasonable
cost basis. That is, Medicare would pay on a reasonable cost basis for
the classroom costs associated with the courses provided as part of the
nursing and allied health education programs (for example, the courses
relating to the theory and practice of the particular nursing and
allied health discipline(s)) that were offered by the hospital when the
hospital was the direct operator of the program(s).
We believe this proposed policy is appropriate since continued
pass-through payment will allow these hospitals to maintain equal
footing with other hospitals that receive pass-through payments and
have maintained their provider-operated programs. In addition, it would
not be equitable to discontinue longstanding Medicare pass-through
payment to these hospitals (in fact, reasonable cost payment to at
least one of these hospitals for nonprovider-operated programs preceded
the publication of the January 12, 2001 final rule on nursing and
allied health education payments by many years) that restructured
operation of their nursing and allied health education program(s) as
wholly owned subsidiaries in order to meet accreditation standards
while relying on their understanding of CMS' prior expressions of
provider-operated requirements and the recent preamble language. If
these providers were now forced to restructure in order to meet the
requirements of Sec. 413.85(f), they would not be able to maintain
their accreditation.
We note that Congress has specifically expressed its intent that
providers that have restructured their programs to be operated by a
wholly owned subsidiary educational institution in order to meet
accreditation standards should continue to receive Medicare reasonable
cost payment. In the conference report accompanying the Consolidated
Appropriations Resolution for FY 2003, Congress stated:
``The conferees are particularly concerned about nursing and allied
health educational programs that cannot meet the regulations set forth
at 42 CFR 413.85(f) solely as a result of regional educational
accrediting criteria. Given the shortage of nursing and allied health
professionals, the conferees support the payment of costs on a
reasonable cost basis for a hospital that has historically been the
operator of nursing and allied health education programs(s) that
qualified for Medicare payments under 42 CFR 413.85, but, solely in
order to meet educational standards, subsequently relinquishes some
control over the program(s) to an educational institution, which meets
regional accrediting standards; is wholly owned by the provider; and is
supported by the hospital, that is, the hospital is incurring the costs
of both the classroom and clinical training of the program.'' (H.R.
Rep. No. 108-10, 108th Cong., 1st Sess., 1115 (2003).)
However, the proposed policy does not allow these hospitals to be
paid for additional classroom costs for courses that were not paid on a
reasonable cost basis to the hospitals in conjunction with their
provider-operated programs (for example, additional classes needed to
meet degree requirements). We believe that to allow pass-through
payment for those additional costs would provide these hospitals with
an unfair advantage over other hospitals with provider-operated
programs.
We note that any hospital that chooses to restructure its programs
to be operated by a wholly owned subsidiary educational institution on
or after the effective date of this proposal when finalized (October 1,
2003) would not be eligible for pass-through payments under this
proposed provision unless the hospital continues to meet the
requirements of Sec. 413.85(f). We believe it is appropriate to limit
the proposed payments to hospitals that restructured before this
proposed rule is made final because our policy with respect to programs
by a wholly owned subsidiary of a hospital will have been clarified in
that final rule.
We are proposing to revise Sec. 413.85 by adding new paragraphs
(d)(1)(iii) and (g)(3) to reflect this proposed payment policy.

F. Payment for Direct Costs of Graduate Medical Education (Sec.
413.86)

1. Background
Under section 1886(h) of the Act, Medicare pays hospitals for the
direct costs of graduate medical education

[[Page 27212]]

(GME). The payments are based in part on the number of residents
trained by the hospital. Section 1886(h)(4)(F) of the Act caps the
number of allopathic and osteopathic residents that hospitals may count
for direct GME.
Section 1886(h) of the Act, as added by section 9202 of the
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L.
99-272) and implemented in regulations at Sec. 413.86(e), establishes
a methodology for determining payments to hospitals for the costs of
approved GME programs. Section 1886(h)(2) of the Act, as added by
COBRA, sets forth a payment methodology for the determination of a
hospital-specific, base-period per resident amount (PRA) that is
calculated by dividing a hospital's allowable 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 of October 1, 1983 through September
30, 1984). The PRA is multiplied by the weighted number of full-time
equivalent (FTE) residents working in all areas of the hospital complex
(or nonhospital sites, when applicable), and the hospital's Medicare
share of total inpatient days to determine Medicare's direct GME
payments.
Existing regulations at Sec. 413.86(e)(4) specify the methodology
for calculating each hospital's weighted average PRA and the steps for
determining whether a hospital's PRA will be revised.
2. Prohibition Against Counting Residents Where Other Entities First
Incur the Training Costs
a. General Background on Methodology for Determining FTE Resident
Count. As we explain earlier in this preamble, Medicare makes both
direct and indirect GME payments to hospitals for the training of
residents. Direct GME payments are reimbursed in accordance with
section 1886(h) of the Act, based generally on hospital-specific PRAs,
the number of FTE residents a hospital trains, and the hospital's
Medicare patient share. The indirect costs of GME are reimbursed in
accordance with section 1886(d)(5)(B) of the Act, based generally on
the ratio of the hospital's FTE residents to the number of hospital
beds. It is well-established that the calculation of both direct GME
and IME payments is affected by the number of FTE residents that a
hospital is allowed to count; generally, the greater the number of FTE
residents a hospital counts, the greater the amount of Medicare direct
GME and IME payments the hospital will receive. In an attempt to end
the implicit incentive for hospitals to increase the number of FTE
residents, Congress instituted a cap on the number of allopathic and
osteopathic residents a hospital is allowed to count for direct GME and
IME purposes under the provisions of section 1886(h)(4)(F) (direct GME)
and section 1886(d)(5)(B)(v) (IME) of the Act. Dental and podiatric
residents were not included in this statutorily mandated cap.
With respect to reimbursement of direct GME costs, since July 1,
1987, hospitals have been allowed to count the time residents spend
training in sites that are not part of the hospital (referred to as
``nonprovider'' or ``nonhospital sites'') under certain conditions.
Section 1886(h)(4)(E) of the Act requires that the Secretary's rules
concerning computation of FTE residents for purposes of separate
reimbursement of direct GME costs ``provide that only time spent in
activities relating to patient care shall be counted and that all the
time so spent by a resident under an approved medical residency
training program shall be counted towards the determination of full-
time equivalency, without regard to the setting in which the activities
are performed, if the hospital incurs all, or substantially all, of the
costs for the training program in that setting.'' (Section
1886(h)(4)(E) of the Act, as added by section of 9314 of the Omnibus
Budget Reconciliation Act of 1986, Pub. L. 99-509.)
Regulations on time spent by residents training in nonhospital
sites for purposes of direct GME payment were first implemented in the
September 29, 1989 final rule (54 FR 40286). We stated in that rule
(under Sec. 413.86(f)(3)) that a hospital may count the time residents
spend in nonprovider settings for purposes of direct GME payment if the
residents spend their time in patient care activities and there is a
written agreement between the hospital and the nonprovider entity
stating that the hospital will incur all or substantially all of the
costs of the program. The regulations at that time defined ``all or
substantially all'' of the costs to include the residents' compensation
for the time spent at the nonprovider setting.
Prior to October 1, 1997, for IME payment purposes, hospitals could
only count the time residents spend training in areas subject to the
IPPS and outpatient areas of the hospital. Section 4621(b)(2) of the
Balanced Budget Act of 1997 (Pub. L. 105-33) revised section
1886(d)(5)(B) of the Act to allow providers to count time residents
spend training in nonprovider sites for IME purposes, effective for
discharges occurring on or after October 1, 1997. Specifically, section
1886(d)(5)(B)(iv) of the Act was amended to provide that ``all the time
spent by an intern or resident in patient care activities under an
approved medical residency program at an entity in a non-hospital
setting shall be counted towards the determination of full-time
equivalency if the hospital incurs all, or substantially all, of the
costs for the training program in that setting.''
In the regulations at Sec. Sec. 412.105(f)(1)(ii)(C) and
413.86(f)(4) (as issued in the July 31, 1998 Federal Register), we
specify the requirements a hospital must meet in order to include a
resident training in a nonhospital site in its FTE count for Medicare
reimbursement for portions of cost reporting periods occurring on or
after January 1, 1999 for both direct GME and for IME payments. The
regulations at Sec. 413.86(b) redefine ``all or substantially all of
the costs for the training program in the nonhospital setting'' as the
residents' salaries and fringe benefits (including travel and lodging
where applicable), and the portion of the cost of teaching physicians'
salaries and fringe benefits attributable to direct GME. A written
agreement between the hospital and the nonhospital site is required
before the hospital may begin to count residents training at the
nonhospital site; the agreement must provide that the hospital will
incur the costs of the resident's salary and fringe benefits while the
resident is training in the nonhospital site. The hospital must also
provide reasonable compensation to the nonhospital site for supervisory
teaching activities, and the written agreement must specify that
compensation amount.
b. Inappropriate Counting of FTE Residents. As we stated above,
dental residents, along with podiatric residents, are excepted from the
statutory cap on the count of FTE residents for both direct GME and IME
payment purposes. We have become aware of a practice pertaining to the
counting of FTE residents at a nonhospital site, particularly dental
residents, that we see as inappropriate under Medicare policy. Most
often, the situation involves dental schools that, for a number of
years, have been training dental residents in programs at the dental
schools of universities affiliated with teaching hospitals, and the
schools have been directly incurring the costs of the dental residents
training at the dental schools (for example, the teaching faculty
costs, the resident salary costs, the office space costs, and

[[Page 27213]]

any overhead expenses of the programs). We also understand that there
are dental clinics at these dental schools that treat patients (that
is, are involved in ``patient care activities'').
As a result of the provisions that Congress added to allow
hospitals to count FTE residents and receive IME payment, as well as
direct GME payment, if the hospital incurs ``all or substantially all''
the costs of training residents in nonhospital settings, a significant
number of dental schools are shifting the resident training costs of
the dental programs from the schools to the hospital, and thus to the
Medicare program, when the hospitals count the FTE dental residents
training in these dental schools (that is, ``nonhospital sites'') under
the regulations at Sec. 413.86(f)(4). Furthermore, in the case of
training dentists at dental school clinics, as a result of this cost-
shifting and because dental residents are excepted from the cap,
hospitals are receiving significant amounts of Medicare direct GME and
IME payments when they have incurred relatively small costs of the
residents training in a dental school.
The following actual situations are illustrative of the
inappropriate application of Medicare direct GME and IME policy that we
have found:
[sbull] An academic medical center hospital associated with a
university has been training allopathic residents for at least 20
years. Prior to 1999, the university s affiliated dental school had
always incurred the costs of dental residency programs at the dental
school. Beginning with the hospital's cost report for its fiscal year
ending in 1999, for the first time ever, the hospital has requested
direct GME and IME payment for an additional 67 FTE residents because
the hospital claims it has begun to incur ``all or substantially all''
of the costs of the dental residents training in the university's
affiliated dental school, in accordance with the regulations at Sec.
413.86(f)(4).
[sbull] A university dental school in one State has been incurring
the costs of dental residency programs at its dental school for several
years. Beginning in FY 1999, a teaching hospital in a neighboring State
decided to begin incurring ``all or substantially all'' of the costs of
the dental residents training in the dental clinics in the program
(which is located in a different State from the hospital) in order to
receive Medicare direct GME and IME payment for an additional 60 FTE
residents.
[sbull] In another situation, a teaching hospital on the East Coast
of the United States has requested direct GME and IME payment for an
additional 60 FTE dental residents, some of whom are training in dental
programs at nonhospital sites located in Hawaii, New Mexico, and the
Netherlands, because it has begun to incur ``all or substantially all''
of the costs of dental residents training in those remote ``nonhospital
sites''. Prior to 1999, the costs for these dental programs were funded
by nonhospital sources.
We note that such inappropriate cost-shifting practices are by no
means limited to the dental school context. Indeed, we understand that
there are some hospitals with resident counts below their direct GME
and IME FTE resident caps that have recently (as of October 1, 1997,
when it became possible to receive significant IME payments under the
amendment made by Pub. L. 105-33) started to incur ``all or
substantially all'' of the costs of residents who had been training at
sites outside of the hospital without any financial assistance from the
hospital, in order for the hospital to count those FTE residents and
receive Medicare direct GME and IME payments for the additional
residents. The actual costs of the programs that are being shifted from
nonhospital entities to hospitals are relatively small, compared to the
direct GME and IME payments that hospitals receive as a result of
incurring ``all or substantially all'' of the training costs.
[sbull] In another example, an academic medical center hospital in
one State asked Medicare to allow it to count an additional 10 FTEs for
both direct GME and IME payment, beginning with its fiscal year ending
1999 cost report, because the hospital claims it is incurring all or
substantially all of the costs of training osteopathic family practice
residents in a walk-in clinic. The osteopathic family practice
residency program had previously been sponsored by this clinic for
several years and the residents do not participate in any training at
the hospital.
c. Congressional Intent. Congress has delegated broad authority to
the Secretary to implement a policy on the count of FTE residents for
purposes of calculating direct GME and IME payments. For IME payment,
section 1886(d)(5)(B) of the Act simply states that ``the Secretary
shall provide for an additional payment amount'' which includes ``the
ratio of the hospital's full-time equivalent interns and residents to
beds.'' The methodology to compute the count of FTE residents for IME
is not established in the statute. Similarly, for direct GME, section
1886(h)(4)(A) of the Act states that ``the Secretary shall establish
rules consistent with this paragraph for the computation of the number
of full-time equivalent residents in an approved medical residency
training program.''
Although not in the context of the general rules for counting FTE
residents, Congress similarly acknowledged its intent to defer to the
Secretary with respect to the rules for implementing ``limits'' or caps
on the number of FTE residents hospitals may count for purposes of
direct GME and IME payment. The conference agreement that accompanied
Pub. L. 105-33, which established a cap on the number of allopathic and
osteopathic residents a hospital may count, states--
``[T]he Conferees recognize that such limits raise complex issues,
and provide for specific authority for the Secretary to promulgate
regulations to address the implementation of this provision. The
Conferees believe that rulemaking by the Secretary would allow careful
but timely consideration of this matter, and that the record of the
Secretary's rulemaking would be valuable when Congress revisits this
provision.'' (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess., 821
(1997).
The absence of statutory specificity on determining FTE counts in
these situations and the declared Congressional delegations of
authority to the Secretary on the subject are clear indications that
Congress has given the Secretary broad discretion to promulgate
reasonable regulations in order to implement the policy on the counting
of residents for direct GME and IME payments.
When Congress enacted the nonhospital site provisions for both
direct GME and IME, Congress intended to address application of the FTE
count policy to situations where the training site had been the
hospital. The intent was to create incentives for hospitals to move
resident training from the hospital to nonhospital settings. We believe
that Congress did not intend for hospitals to be able to add to their
FTE counts residents that had historically trained outside the hospital
in other settings. Training in those nonhospital settings had
historically occurred without Congress offering any financial incentive
to hospitals to move the training out of the hospital.
This Congressional intent is evident in the legislative history of
both the direct GME and the IME provisions on nonhospital settings.
First, legislative history associated with passage of the direct GME
provision (as part of Pub. L. 99-509) indicates that Congress intended
to broaden the scope of settings in which a hospital could train its
residents and still receive separate direct GME cost reimbursement, and
to

[[Page 27214]]

provide incentives to hospitals for training residents in primary care
programs. The Conference committee report indicates that ``[s]ince it
is difficult to find sufficient other sources of funding [than
hospitals and Medicare] for the costs of such training, [that is,
training in freestanding primary care settings such as family practice
clinics or ambulatory surgery centers] assignments to these settings
are discouraged. It is the Committee's view that training in these
settings is desirable, because of the growing trend to treat more
patients out of the inpatient hospital setting and because of the
encouragement it gives to primary care.'' (Emphasis added.) (H.R. Rep.
No. 99-727, 99th Cong., 1st Sess., 70 (1986).)
Thus, from the start of the policy allowing payment for training in
nonprovider sites, we believe Congress intended to create a monetary
incentive for hospitals to rotate residents from the hospital to the
nonhospital settings. We believe Congress did not intend for hospitals
to be paid for residents who had previously been training at
nonhospital sites without hospital funding.
Further, in the Conference committee report accompanying the
provision of Pub. L. 105-33 on IME payment for training in nonhospital
settings, Congress stated that ``[t]he conference agreement includes
new permission for hospitals to rotate residents through nonhospital
settings, without reduction in indirect medical education funds.''
(Emphasis added.) (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess.,
817 (1997).)
We note that, prior to enactment of Pub. L. 105-33, if a hospital
rotated a resident to train at a nonhospital site, the hospital could
not count the time the resident spent at the nonhospital site for
purposes of Medicare IME payments. As a result, the lack of IME
payments acted as a disincentive and discouraged hospitals from
rotating residents out of the hospital. Therefore, Congress authorized
hospitals to count residents in nonhospital sites for IME purposes as a
specific incentive to encourage hospitals to rotate their residents to
nonhospital sites (and not to encourage hospitals to incur the costs of
a program at a nonhospital site that had already been funded by other
sources). This legislative intent becomes more apparent when the nature
of the Medicare IME payment is considered. The Medicare IME payment is
inherently a payment that reflects the increased operating costs of
treating inpatients as a result of the hospital having a residency
program. For example, as explained in the September 29, 1989 final rule
(54 FR 40286), the indirect costs of medical education might include
added costs resulting from an increased number of tests ordered by
residents as compared to the number of tests normally ordered by more
experienced physicians.
The IME payment is an adjustment that is made for each Medicare
discharge from the areas subject to the IPPS in a teaching hospital.
The authorization by Congress for IME payments relating to nonhospital
services while residents are training at nonhospital sites would be
absurd if not viewed as an incentive to transfer existing residency
training from the hospital to the nonhospital setting. We do not
believe Congress intended to permit such IME payments to be allowable
to the hospital that is incurring ``all or substantially all the
costs'' of residents training in nonhospital sites except in the
situation where the hospital rotated residents from the hospital to the
nonhospital settings. The illustrative situations described above in
which nonhospital sites, such as dental schools, are shifting the costs
of existing programs to the hospitals are not consistent with the
intent of Congress to encourage hospitals to rotate residents from the
hospital setting to nonhospital sites.
Thus, we believe Congress intended both cited provisions of the Act
on counting residents in nonhospital sites for purposes of direct GME
and IME payments to be limited to situations in which hospitals rotate
residents from the hospital to the nonhospital settings, and not
situations in which nonhospital sites transfer the costs of an existing
program at a nonhospital site to the hospital.
d. Medicare Principles on Redistribution of Costs and Community
Support. It is longstanding Medicare policy that if the community has
undertaken to bear the costs of medical education, these costs are not
to be assumed by the Medicare program. In addition, medical education
costs that have been incurred by an educational institution may not be
redistributed to the Medicare program. Indeed, these concepts,
community support and redistribution of costs, have been a part of
Medicare GME payment policy since the inception of the Medicare
program. Both the House and Senate Committee reports accompanying Pub.
L. 89-97 (the authorizing Medicare statute) indicate that Congress
intended Medicare to share in the costs of medical education only in
situations in which the community has not stepped in to incur them:
``Many hospitals engage in substantial education activities,
including the training of medical students, internship and residency
programs, the training of nurses and the training of various
paramedical personnel. Educational activities enhance the quality of
care in an institution and it is intended, until the community
undertakes to bear such education costs in some other way, that a part
of the net cost of such activities * * * should be considered as an
element in the cost of patient care, to be borne to an appropriate
extent by the hospital insurance program. (Emphasis added.) (S. Rep.
No. 404, 89th Cong., 1st Sess., 36 (1965); H.R. Rep. No. 213, 89th
Cong., 1st Sess., 32 (1965).)
The principle behind the congressional committee report language
for Pub. L. 89-97 that Medicare would share in the costs of educational
activities until communities bore them in some other way has guided
Medicare policy on educational activities from the inception of the
Medicare program. The principles of community support and
redistribution of costs associated with payment for GME have been
continually reiterated in various regulations, manual provisions, and
implementing instructions to fiscal intermediaries. As recently as the
final rule published in the Federal Register on January 12, 2001, we
stated:
``We note that the proposed revisions in the proposed rule
inadvertently did not include community support as the basis for an
offset from the allowed cost of a GME or nursing and allied health
program. In this final rule, we restate our longstanding policy that
Medicare will share in the costs of educational activities of providers
where communities have not assumed responsibility for financing these
programs. Medicare's policy is to offset from otherwise allowable
education costs, community funding for these activities.'' (66 FR 3368)
We note the instructions that CMS (then HCFA) gave to its Regional
Offices in the 1990 audit instructions for purposes of calculating the
direct GME base period PRA specifically addressed redistribution of
costs and community support in the GME context:
``Where costs for services related to medical education activities
have historically been borne by the university, it is assumed the
community has undertaken to support these activities, and subsequent
allocation of these costs to a hospital constitutes a redistribution of
costs from an educational institution to a patient care institution. In
such a situation, these costs are not allowable under the Medicare
program. (See 42 CFR

[[Page 27215]]

413.85(c) and HCFA Pub. L. 15-1, Sec. 406). For example, if in the
past the hospital did not identify and claim costs attributable to the
time teaching physicians spent supervising I&Rs [interns and residents]
working at the hospital, it is assumed that these costs were borne by
the university. Therefore, the hospital may not claim these costs in
subsequent cost reports.'' (Instructions for Implementing Program
Payments for Graduate Medical Education to ARAs for Medicare, Director
of Office of Financial Operations of the Health Care Financing
Administration, BPO-F12, February 12, 1990.)
Furthermore, the regulation at Sec. 413.85(c) that was originally
issued in the Federal Register on September 30, 1986 (51 FR 34793)
(which was further refined, but conceptually left unchanged, as of
March 12, 2001) addressed the Congressional intent not to increase
program costs, as well. That paragraph (c) stated:
``Educational Activities. Many providers engage in education
activities including training programs for nurses, medical students,
interns and residents, and various paramedical specialties * * * .
Although the intent of the program is to share in the support of
educational activities customarily or traditionally carried on by
providers in conjunction with operations, it is not intended that this
program should participate in increased costs resulting from
redistribution of costs from educational institutions or units to
patient care institutions or units.''
The Secretary of Health and Human Services interpreted this
provision to deny reimbursement of educational costs that were borne in
prior years by a hospital's affiliated medical school. The U.S. Supreme
Court affirmed the Secretary's interpretation of the redistribution of
costs regulation in Thomas Jefferson University v. Shalala (``Thomas
Jefferson''), 512 U.S. 504 (1994). The Court found of Sec. 413.85(c)
that:
``The regulation provides, in unambiguous terms, that the `costs'
of these educational activities will not be reimbursed when they are
the result of a `redistribution,' or shift, of costs of an
`educational' facility to a `patient care' facility.'' (Emphasis
added.) (Thomas Jefferson, 512 U.S. at 514). Thus, the Supreme Court in
Thomas Jefferson held that it is well within the Secretary's discretion
to interpret the language at Sec. 413.85(c), which was specifically
derived from the legislative history of the original enacting Medicare
legislation quoted above, to impose a substantive limitation on medical
education payment.
The Supreme Court's opinion in Thomas Jefferson lends substantial
support and credibility to CMS' longstanding policy on community
support and redistribution of costs in the GME context.
e. Application of Redistribution of Costs and Community Support
Principles. As we have described above, we have discovered an
inappropriate application of Medicare direct GME and IME payment
policies relating to the counting of FTE residents in nonhospital
settings. As stated previously, we believe that: (1) Congress has given
the Secretary broad discretion to implement policy on FTE resident
counts; (2) Congress intended that the nonhospital site policy for both
direct GME and IME would encourage hospitals to move resident training
from the hospital to nonhospital settings, not to enable nonhospital
sites to shift the costs of already established residency programs in
the nonhospital site to the hospital; and (3) since the inception of
the Medicare program, CMS' policy has been consistent with the intent
of Congress that Medicare would only share in the costs of medical
education until the community assumes the costs. The Supreme Court has
specifically found that CMS' implementation of the redistribution of
costs and community support principles is ``reasonable.'' (Thomas
Jefferson, 512 U.S. at 514.)
Accordingly, we are proposing that residents training at
nonhospital sites may be counted in a hospital's FTE resident count
only where the principles of redistribution of costs and community
support are not violated. We are proposing this policy at this time to
address the inappropriate practice of nonhospital sites shifting costs
to hospitals solely to allow the hospitals to count residents training
in the nonhospital sites. However, we believe the concepts of
redistribution of costs and community support are equally relevant to
the counting of FTEs residents by a hospital in general.
We note again that the Medicare program has a long tradition of
applying redistribution of costs and community support principles to
medical education payments. As we have stated above, both the House and
Senate Committee reports accompanying Pub. L. 89-97 (the 1965
authorizing Medicare statute) indicate that Congress intended Medicare
to share in the costs of medical education only where the community has
not stepped in to incur them.
We believe it is appropriate to employ the principles of
redistribution of costs and community support to specifically address
the inappropriate scenarios described above whereby hospitals attempt
to inflate their FTE resident counts by assuming payment of training
costs for residents in nonhospital sites that were previously funded by
a nonhospital entity. Therefore, we are proposing to specify the
application of the redistribution of costs and community support
principles by adopting the definitions (with some modification to
reflect the methodology for counting FTE residents applicable to GME)
of ``community support'' and ``redistribution of costs'' at Sec.
413.85(c), which relate to nursing and health education program costs,
for use at Sec. 413.86(b), which relates to GME. In addition, we are
proposing a general rule at proposed Sec. 413.86(i) on the application
of community support and redistribution of costs principles to the
counting of FTE residents for GME. We are proposing to (1) make the
provisions under Sec. 413.86(f) relating to determining the number of
FTE residents subject to the provisions of the proposed Sec.
413.86(i); (2) add a proposed Sec. 413.86(f)(4) in order to clarify
that the principles of redistribution of costs and community support
are applicable to the counting of FTE residents, including when the
residents are training in nonhospital settings; and (3) making the
provisions of the proposed Sec. 413.86(i) specifically applicable to
determining the number of FTE residents under Sec. 413.86(g)(4)
through (6) and (g)(12).
The general rule at proposed Sec. 413.86(i) contains two
provisions. Proposed Sec. 413.86(i)(1) states the principles of
community support and redistribution of costs: In relation to community
support, we are proposing that if the community has undertaken to bear
the costs of medical education through community support, the training
costs of residents that are paid through community support are not
considered GME costs to the hospital for purposes of Medicare payment.
In relation to redistribution of costs, we are proposing that the costs
of training residents that constitute a redistribution of costs from an
educational institution to the hospital are not considered GME costs to
the hospital for purposes of Medicare payment.
In applying the redistribution of costs and community support
principles, we are proposing under Sec. 413.86(i)(2) to state that a
hospital must continuously incur direct GME costs of residents training
in a particular program at a training site since the date the residents
first began training in that site in order for the hospital to count
the FTE residents in accordance with the

[[Page 27216]]

provisions of paragraphs (f) and (g)(4) through (g)(6), and (g)(12) of
Sec. 413.86.
We note that our reasons for specifically referencing the
applicability of the principles of community support and redistribution
of costs at Sec. 413.86(f)(4), the paragraph concerning counting
residents training in nonhospital settings for direct GME purposes, are
twofold. First, although we are already making the proposed Sec.
413.86(i) applicable to Sec. 413.86(f), which would make the
principles applicable to each paragraph under Sec. 413.86(f), in
consideration of the inappropriate applications we have identified of
the GME FTE-counting policy with respect to counting residents in
nonhospital sites, we believe it is appropriate to also specifically
address the applicability of the redistribution of costs and community
support principles to Sec. 413.86(f)(4). In addition, we note that the
proposed reference at Sec. 413.86(f)(4) has implications for IME
payment as well, as explained below.
Under existing Sec. 412.105(f)(1)(ii)(C), the rule for the
counting of FTE residents training in nonhospital settings for IME
payment, there is a specific reference indicating that the criteria set
forth in Sec. 413.86(f)(4) must be met in order for a hospital to
count the FTE residents training in nonhospital settings for purposes
of IME payments. Thus, if under proposed Sec. 413.86(f)(4)(iv) (the
paragraph making redistribution of costs and community support
principles applicable) a hospital is not permitted to count the FTE
residents training in a nonhospital site because of redistribution of
costs or community support, the hospital would not be permitted to
count the FTE residents for purposes of IME payment as well, because
the IME regulation at Sec. 412.105(f)(1)(ii)(C) requires the criteria
under Sec. 413.86(f)(4) to be met.
As we have stated above, payment for IME is based on the concept
that, as a direct result of the hospital's resident training program,
the costs the hospital incurs for patient care are increased. When
Congress included section 1886(d)(5)(B)(iv) of the Act as part of
Public Law 105-33, the statute expanded the circumstances under which
IME payments to a hospital could be made by allowing the hospital to
count the number of residents training outside the hospital setting
under certain conditions. Even though it is clear that those residents
training outside the hospital cannot have any impact on patient care
costs to the hospital, Congress nevertheless allowed the hospital to
receive IME payments when the hospital counts FTE residents training in
a nonhospital setting in accordance with section 1886(d)(5)(B)(iv) of
the Act, where those residents would otherwise have trained in the
hospital setting. As we have stated, Congress created an incentive (or
removed a disincentive) with the provisions of Public Law 105-33 for
hospitals to rotate residents to nonhospital settings by allowing
hospitals to continue to receive IME payment as if the residents
continued to train in the hospital setting. If there is a
redistribution of costs or community support, we believe IME payment to
the hospital would be contrary to Congressional intent to encourage the
hospital to rotate residents from the hospital to the nonhospital site.
In addition, when Congress included section 1886(d)(5)(B)(iv) of
the Act as part of Public Law 105-33, the statutory authority for IME
payment was premised on the hospital incurring the direct GME costs of
the residents: ``all the time spent by an intern or resident in patient
care activities under an approved medical residency program at an
entity in a nonhospital setting shall be counted towards the
determination of full-time equivalency if the hospital incurs all, or
substantially all, of the costs for the training program in that
setting.'' (Emphasis added.) (Section 4621(b)(2) of Public Law 105-33;
section 1886(d)(5)(B)(iv) of the Act.) We believe Congress intended the
hospital to incur direct GME costs of the program in the nonhospital
site in order to count the FTE residents training in nonhospital
settings for purposes of IME payment. Thus, in the situation where a
hospital incurred direct GME costs but there was redistribution of
costs or community support, a disallowance of direct GME payments as
well as a disallowance of IME payments is appropriate.
Although we are stating generally that the principles of community
support and redistribution of cost have applied since the inception of
Medicare to graduate medical education payment, as we have stated
above, we have identified relatively recent inappropriate application
of the nonhospital site policy for counting FTE residents. Therefore,
we believe it is appropriate to propose to identify January 1, 1999, as
the date our fiscal intermediaries should use to determine whether a
hospital or another entity has been incurring the costs of training in
a particular program at a training setting for purposes of determining
whether there has been a redistribution of costs or community support.
We are proposing that January 1, 1999 be used as the date the fiscal
intermediaries should use for determinations, since it may be difficult
for our fiscal intermediaries to obtain from hospitals contemporaneous
documentation that the hospitals have appropriately been incurring the
direct GME costs in earlier fiscal years. We believe the January 1,
1999 date should simplify confirmation by our fiscal intermediaries and
hospitals of whether the hospital or another entity had been incurring
the costs of the program in particular training settings and whether
redistribution of costs or community support had occurred. We have
chosen the January 1, 1999 date because of administrative convenience
and feasibility, so that necessary data are both valid and available,
and in recognition of the fact that our fiscal intermediaries must
prioritize their limited audit resources. While we are not requiring
our fiscal intermediaries to determine whether a hospital had been
incurring the training costs of a program prior to the January 1, 1999
date, if the fiscal intermediaries determine that there is a
redistribution of costs or community support exists with respect to
certain residents prior to January 1, 1999, a disallowance of direct
GME and IME payments with respect to those FTE residents would
certainly be required.
Since calculation of a hospital's FTE resident count is dependent
upon whether the hospital incurred the training costs, we are proposing
to require each teaching hospital and its fiscal intermediary to
determine which entity had been incurring the training costs at least
since January 1, 1999. For example, if a nonhospital entity, such as a
school of medicine or dentistry, had incurred the costs of training the
residents anytime on or after January 1, 1999, and a hospital
subsequently begins to incur direct GME costs of training those FTE
residents, the hospital would not qualify to count those FTE residents
for purposes of direct GME and IME payments.
We note that the proposal states that a hospital must have been
continuously incurring the costs of the training since the date the
residents first began training in that program. Accordingly, if a
hospital had at one time incurred the costs of training residents in a
particular program, whether at the hospital or in a nonhospital
setting, but a nonhospital institution later assumed the costs of
training in that setting, even if the hospital assumed payment for the
training costs again, the hospital could not then count those residents
for purposes of direct GME and IME payments.
We note that if a hospital incurs the direct GME costs, whether
training takes

[[Page 27217]]

place inside the hospital or in a nonhospital setting, in a new
residency program, the hospital may be eligible to count the FTE
residents as specified by the regulations under Sec. 413.86(g)(6).
Consistent with the policy on redistribution of costs and community
support discussed above, if a hospital incurs the direct GME costs of
additional FTE residents training in an existing program in a hospital
setting where the costs of the existing program had been incurred by a
nonhospital entity and the hospital has continuously funded the
additional residents in the existing program in the hospital setting
since the date the residents first began training there, the
redistribution of costs or community support principles would not
prohibit the hospital from counting the additional FTE residents for
purposes of direct GME and IME payments.
We note that, under existing policy, to count residents in a
nonhospital setting, a hospital is required to incur for ``all or
substantially all of the costs of the program'' in that setting. In
other words, a hospital is required to assume financial responsibility
for the full complement of residents training in a nonhospital site in
a particular program in order to count any FTE residents training there
for purposes of IME payment. A hospital cannot count any FTE residents
if it incurs ``all or substantially all of the costs'' for only a
portion of the FTE residents in that program training setting. This
policy is derived from the language of the IME and direct GME
provisions of the statute on counting residents in nonhospital
settings; both sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act
state that the hospital must incur ``all, or substantially all, of the
costs for the training program in that setting.'' (Emphasis added.) In
contrast, as explained earlier, it is permissible under the proposed
policy on the application of the redistribution of costs and community
support principles for the hospital to count FTE residents where the
hospital incurs direct GME costs of FTE residents that are added to an
existing program, even though the hospital may not count the existing
FTE residents due to the application of the redistribution of costs or
community support rules. In the nonhospital setting, as a result of the
interaction of these two separate FTE counting requirements--(1) that
the hospital must not violate the redistribution of costs and the
community support principles in order to count the resident FTEs in the
nonhospital settings, and (2) that the hospital must incur ``all or
substantially all'' of the costs for the training program in that
setting--a hospital would be prohibited from counting FTE residents
added to an existing program at a nonhospital site unless the hospital
incurs all or substantially all of the costs of training all of the
residents in that program at that setting. That is, even if the
hospital incurs all or substantially of the costs for all of the
training program at the nonhospital site, the hospital would only be
able to count the additional FTE residents who were not excluded by
application of the redistribution of costs or community support
principles.
For example, training in a general dentistry program with 10 FTE
residents has taken place at a school of dentistry for 20 years. The
school of dentistry has been incurring the training costs of the
general dentistry residents since the inception of the program.
Beginning in 2003, the school of dentistry has decided to add an
additional 5 FTE residents to the program, and Hospital A decides to
incur ``all or substantially all'' the costs of those 5 additional FTE
residents only. Applying the policy concerning redistribution of costs
and community support in combination with the policy on incurring all
or substantially all of the costs, the hospital could not count the
additional 5 FTE residents in the dental school since it is not paying
for all or substantially all of the costs of the program. Even if the
hospital were to incur all or substantially all of the costs for the
training program for all 15 FTE residents, the hospital could not count
the 10 FTEs that were part of the existing general dentistry program
because of the redistribution of costs and community support
principles; it would be a redistribution of costs for the hospital to
begin to incur direct GME costs of the 10 FTE residents when the dental
school had previously been incurring those costs.
We note that such a result does not occur when a new program is
established in the nonhospital site. If, from the outset of the
program, the hospital incurs direct GME costs and also incurs ``all or
substantially all'' of the costs for the training program for all the
new residents training at the site, there would be no redistribution of
costs or community support, and the hospital could count all of those
residents in the new program in its FTE count (subject, of course, to
the hospital's 1996 FTE resident cap).
We also note that the interaction of the two provisions discussed
above--redistribution of costs and community support, and ``all or
substantially all''--does not occur when counting FTE residents
training inside the hospital, since a hospital is not required to incur
``all or substantially all'' of the costs for the training program
inside the hospital.
Furthermore, if one hospital had incurred the direct GME costs of
training residents in a particular program in a nonhospital site from
one point in time, for example, 1995 through 1999, and then another
hospital consecutively incurs the costs from 2000 and thereafter, the
second hospital may be eligible to receive direct GME and IME payments
for training the FTE residents from the point in time where the second
hospital incurred the direct GME costs, and the redistribution and
community support exclusions would not apply. The second hospital may
be eligible to receive Medicare direct GME and IME payments because the
costs were incurred previously by a hospital, and not either the
community or the university. Therefore, there was neither community
support nor redistribution of costs.
The following are some examples to clarify how these proposed
policies would be implemented:

Example 1

Since 1995, 10 FTE residents in an internal medicine program have
been training in the Community Clinic. In accordance with the current
provisions of Sec. 413.86(f), Hospital A has incurred all or
substantially all of the costs of training the 10 FTE residents since
1995. Assuming the current provisions of the regulations at Sec. Sec.
412.105(f)(1)(ii)(C) and 413.86(f)(3) and (f)(4) are met, Hospital A
may continue to receive IME and direct GME payments for 10 FTE
residents because Hospital A had incurred direct GME costs continuously
(as evidenced by contemporaneous documentation since January 1, 1999),
as specified in our proposed regulation.
Beginning July 1, 2004, in addition to continuing to incur all or
substantially all of the costs of the first 10 FTE internal medicine
residents training in the nonhospital site, Hospital A also incurs all
or substantially all of the costs of training an additional 3 FTE
internal medicine residents at that site. Accordingly, beginning July
1, 2004, Hospital A may count all 13 FTE residents training in the
Community Clinic for purposes of direct GME and IME payments, assuming
Hospital A does not exceed its FTE cap for IME and direct GME.

Example 2

Since 1995, 2.25 dental FTE residents in a dental school program
were training in a dental clinic at the dental school. While the 2.25
FTEs were training at the

[[Page 27218]]

clinic, the dental school paid for all of the costs of the dental
program. Prior to July 1, 2000, Hospital A signed a written agreement
with the clinic to incur all or substantially all of the costs of
training the 2.25 FTE residents, from July 1, 2000 and onward. Thus,
beginning with July 1, 2000, the dental school no longer incurred the
costs of the program at this nonhospital site. In this scenario (even
if Hospital A inappropriately received direct GME and IME payments for
the 2.25 FTEs since July 1, 2000), Hospital A may not receive direct
GME or IME payment for the 2.25 FTE residents training in the clinic
because there would have been a redistribution of costs associated with
training these 2.25 FTE residents from the dental school to the
hospital.

Example 3

Since 1995, 2.25 FTE residents in a family practice program were
training in a physicians' group practice. While the 2.25 FTEs were
training at the physicians' practice, a school of medicine paid for the
costs of the family practice residency program. Prior to July 1, 2000,
Hospital A signed a written agreement with the physicians' practice to
send 1 additional family practice FTE resident to the physicians'
practice and to incur all or substantially all of the costs of training
the original 2.25 FTE residents and the 1 additional FTE, from July 1,
2000 and onward. Thus, beginning with July 1, 2000, the school of
medicine no longer incurred the costs of the program at this
nonhospital site. Hospital A may not count the 2.25 FTE residents that
had been training since 1995 in that physicians' practice for purposes
of direct GME and IME payments because the training costs were shifted
from the school of medicine to the hospital. However, Hospital A may
count the 1 FTE resident the hospital began to rotate for training in
the physicians' practice because there was no cost-shifting for that
resident and Hospital A incurred ``all or substantially all'' of the
costs of the entire family practice program in the physicians' office
setting.

Example 4

Residents in a surgery program have been rotating from a hospital
to two nonhospital clinics, Clinic A and Clinic B, since 1996. The
training of the surgery residents in Clinic A has been supported by a
nonhospital institution since 1996, while the hospital has incurred all
or substantially all of the costs of the surgery residents in Clinic B
since 1996. The hospital cannot count the surgery FTE residents
training in Clinic A, even if it begins to pay for all of the costs of
the program at that site, since a nonhospital institution had supported
the training in Clinic A since 1996 (in other words, the redistribution
of costs and community support principles would prohibit the hospital
from counting these FTE residents). However, if the hospital continues
to incur all or substantially all of the costs of the surgery residents
in Clinic B, the hospital may count the FTE residents training in
Clinic B for purposes of direct GME and IME payments because there
would be no cost-shifting to the hospital for these residents and the
hospital would incur all or substantially all of the costs for the
training program in that setting.
3. Rural Track FTE Limitation for Purposes of Direct GME and IME
for Urban Hospitals that Establish Separately Accredited Approved
Medical Programs in a Rural Area (Sec. Sec. 412.105(f)(1)(x) and
413.86(g)(12)) a. Change in the Amount of Rural Training Time Required
for an Urban Hospital to Qualify for an Increase in the Rural Track FTE
Limitation. To encourage the training of physicians in rural areas,
section 407(c) of Pub. L. 106-113 amended sections 1886(d)(5)(B) and
1886(h)(4)(H) of the Act to add a provision that, in the case of an
urban hospital that establishes separately accredited approved medical
residency training programs (or rural tracks) in a rural area or has an
accredited training program with an integrated rural track, an
adjustment shall be made to the urban hospital's cap on the number of
residents. For direct GME, the amendment applies to payments to
hospitals for cost reporting periods beginning on or after April 1,
2000; for IME, the amendment applies to discharges occurring on or
after April l, 2000.
Section 407(c) of Pub. L. 106-113 did not define a ``rural track''
or an ``integrated rural track,'' nor are these terms defined elsewhere
in the Act or in any applicable regulations.
Currently, there are a number of accredited 3-year primary care
residency programs in which residents train for 1 year of the program
at an urban hospital and are then rotated for training for the other 2
years of the 3-year program to a rural facility(ies). These separately
accredited ``rural track'' programs are recognized by the Accreditation
Council of Graduate Medical Education (ACGME) as ``1-2'' rural track
programs. As far as CMS is able to determine, ACGME is the only
accrediting body to ``separately accredit'' rural track residency
programs, a requirement specified in Pub. L. 106-113.
We implemented the rural track program provisions of section
1886(d)(5)(B) and 1886(h)(4)(H) of the Act to address these ``1-2''
programs and to account for other programs that are not specifically
``1-2'' programs but that include rural training components. As stated
above, since there is no existing definition of ``rural track'' or
``integrated rural track,'' we define at Sec. 413.86(b) a ``rural
track'' and an ``integrated rural track'' as an approved medical
residency training program established by an urban hospital in which
residents train for a portion of the program at the urban hospital and
then rotate for a portion of the program to a rural hospital(s) or to a
rural nonhospital site(s). We have previously noted that the terms
``rural track'' and ``integrated rural track,'' for purposes of this
definition, are synonymous.
To implement these provisions, we revised Sec. 413.86 to add
paragraph (g)(11) (since redesignated as (g)(12)), and Sec. 412.105 to
add paragraph (f)(1)(x) to specify that, for direct GME, for cost
reporting periods beginning on or after April 1, 2000, or, for IME, for
discharges occurring on or after April 1, 2000, an urban hospital that
establishes a new residency program, or has an existing residency
program, with a rural track (or an integrated rural track) may, under
certain circumstances, include in its FTE count residents in those
rural tracks, in addition to the residents subject to the FTE cap at
Sec. 413.86(g)(4). (See the August 1, 2000 interim final rule with
comment period (65 FR 47033) and the August 1, 2001 IPPS final rule (66
FR 39902)). These regulations specify that an urban hospital may count
the residents in the rural track in excess of the hospital's FTE cap up
to a ``rural track FTE limitation'' for that hospital. We defined this
rural track FTE limitation at Sec. 413.86(b) as the maximum number of
residents (as specified in Sec. 413.86(g)(12)) training in a rural
track residency program that an urban hospital may include in its FTE
count, in addition to the number of FTE residents already included in
the hospital's FTE cap.
Generally, the rural track policy is divided into two categories:
rural track programs in which residents are rotated to a rural area for
at least two-thirds of the duration of the program; and rural track
programs in which residents are rotated to a rural area for less than
two-thirds of the duration of the program. Currently, family practice
is the only specialty that has separately accredited rural track
programs. As previously noted, to account for other specialties that
have program lengths greater than

[[Page 27219]]

or less than 3 years, or that are not ``1-2'' programs, but may
establish separately accredited rural track residency programs that are
longer than 3 years, our regulations specify that residents must train
in the rural area for ``two-thirds of the duration of the program,''
rather than ``2 out of 3 program years,'' in order for the urban
hospital to count FTEs in the rural track (up to the rural track FTE
limitation) in addition to the residents included in the hospital's FTE
limitation. Thus, for example, under current policy, if a surgery
program, which is a 5-year program, were to establish a separately
accredited rural track, the urban hospital must rotate the surgery
residents to the rural area for at least two-thirds of the duration of
the 5-year program in order to qualify to count those FTEs in excess of
the hospital's FTE cap, as provided in Sec. 413.86(g)(12) and Sec.
412.105(f)(1)(x).
Accordingly, our policy for determining whether an urban hospital
qualifies for an adjustment to the FTE cap for training residents in
rural areas is dependent upon the proportion of time the residents
spend training in the rural areas. If the time spent training in rural
areas (either at a rural hospital or a rural nonhospital site)
constitutes at least two-thirds of the duration of the program, then
the urban hospital may include the time the residents train at that
urban hospital in determining GME payments. However, if the urban
hospital rotates residents to rural areas for a period of time that is
less than two-thirds of the duration of the program, although the rural
hospital may count the time the residents train at the rural hospital
if the program is new, the urban hospital may not include the time the
residents train at the urban hospital for GME payment purposes (unless
it can do so within the hospital's FTE cap).
When we first implemented this policy on rural tracks, it was
consistent with our understanding of how the ACGME accredits rural
track ``1-2'' programs, in which residents train for 1 year of the
program at an urban hospital and are then rotated for training years 2
and 3 to a rural facility. We believed that the ACGME did not
separately accredit an approved program as a rural track program unless
it met this ``1-2'' condition; that is, the residents were spending
one-third of program training in the urban area and two-thirds of the
program training in the rural area. However, we have recently learned
that there are a few rural track programs that are separately
accredited by the ACGME as ``1-2'' rural track programs, but the
residents in these programs are not training in rural areas for at
least two-thirds of the duration of the program. We understand that in
certain instances in which the case-mix of the rural facilities might
not be sufficiently broad to provide the residents with an acceptable
range of training opportunities, the ACGME allows the residents in
program years 2 and 3 to return to the urban hospital for some training
in both years. However, because the training in years 2 and 3 is
predominantly occurring at the rural locations, the ACGME still
separately accredits the urban and rural portions as a ``1-2'' program.
The existing regulations at Sec. Sec. 412.105(f)(1)(x) and
413.86(g)(12) specify two main criteria for an urban hospital to count
the time spent by residents training in a rural track while at the
urban hospital in excess of the hospital's FTE limitation: (1) The
program must be separately accredited by the ACGME; and (2) the time
spent training in rural areas (either at a rural hospital or a rural
nonhospital site) must constitute at least two-thirds of the duration
of the program.
We believe that an urban hospital that operates a program that is
separately accredited by the ACGME as a ``1-2'' program, but in which
residents train in rural areas for more than half but less than two-
thirds of the duration of the program, should still be allowed to count
those FTE residents for GME payment purposes. Therefore, to be
consistent with the ACGME accreditation practices, we are proposing to
revise our regulations. Proposed Sec. 413.86(g)(12) would still
address our policy that an urban hospital qualifies for an adjustment
to the FTE cap for training in rural areas based upon the proportion of
time the residents spend training in the rural areas. However, instead
of using a ``two-thirds'' model to specify the amount of time residents
are training in the rural areas, as the framework exists under current
policy, the proposal would use, at Sec. Sec. 413.86(g)(12)(i) through
(iv), a ``one-half of the time'' model to specify the amount of time
residents are training in rural areas. This proposal would address the
limited cases where ACGME separately accredits programs as ``1-2''
rural tracks but residents in those programs train in the rural areas
less than two-thirds of the time, although greater than one-half of the
time. Specifically, we are proposing at Sec. 413.86(g)(12) to state:
[sbull] If an urban hospital rotates residents to a separately
accredited rural track program at a rural hospital(s) for two-thirds of
the duration of the program for cost reporting periods beginning on or
after April 1, 2000 and before October 1, 2003, or for more than one-
half of the duration of the program for cost reporting periods
beginning on or after October 1, 2003, the urban hospital may include
those residents in its FTE count for the time the rural track residents
spend at the urban hospital.
[sbull] If an urban hospital rotates residents to a separately
accredited rural track program at a rural nonhospital site(s) for two-
thirds of the duration of the program for cost reporting periods
beginning on or after April 1, 2000, and before October 1, 2003, or for
more than one-half of the duration of the program for cost reporting
periods beginning on or after October 1, 2003, the urban hospital may
include those residents in its FTE count, subject to the requirements
under Sec. 413.86(f)(4).
[sbull] If an urban hospital rotates residents in the rural track
program to a rural hospital(s) for less than two-thirds of the duration
of the program for cost reporting periods beginning on or after April
1, 2002, and before October 1, 2003, or for one-half or less than one-
half of the duration of the program for cost reporting periods
beginning on or after October 1, 2003, the rural hospital may not
include those residents it its FTE count (if the rural track is not a
new program under Sec. 413.86(g)(6)(iii), or if the rural hospital's
FTE count exceeds that hospital's FTE cap), nor may the urban hospital
include those residents when calculating its rural track FTE
limitation.
[sbull] If an urban hospital rotates residents in the rural track
program to a rural nonhospital site(s) for a period of time that is
less than two-thirds of the duration of the program for cost reporting
periods beginning on or after April 1, 2002, and before October 1,
2003, or for one-half or less than one-half of the duration of the
program for cost reporting periods beginning on or after October 1,
2003, the urban hospital may include those residents in its FTE count,
subject to the requirements under Sec. 413.86(f)(4).
We also are proposing to make a conforming change to Sec.
412.105(f)(1)(x) to make these proposed provisions applicable to IME
payments for discharges occurring on or after October 1, 2003.
We believe this proposal produces a more equitable result than the
existing policy; the proposal encompasses what we believe to be all
situations in which the ACGME separately accredits rural track programs
and in which residents in the programs spend a majority of the time
training in rural settings, fulfilling the intent of Congress for
Medicare to

[[Page 27220]]

provide GME payments for significant rural residency training.
b. Inclusion of Rural Track FTE Residents in the Rolling Average
Calculation. Section 1886(h)(4)(G) of the Act, as added by section 4623
of Public Law 105-33, provides that, for a hospital's first cost
reporting period beginning on or after October 1, 1997, the hospital's
FTE resident count for direct GME payment purposes equals the average
of the actual FTE resident count for that cost reporting period and the
preceding cost reporting period. Section 1886(h)(4)(G) of the Act
requires that, for cost reporting periods beginning on or after October
1, 1998, a hospital's FTE resident count for direct GME payment
purposes equals the average of the actual FTE resident count for the
cost reporting period and the preceding two cost reporting periods
(that is, a 3-year rolling average). This provision phases in over a 3-
year period any reduction in direct GME payments to hospitals that
results from a reduction in the number of FTE residents below the
number allowed by the FTE cap. We first implemented this provision in
the August 29, 1997 final rule with comment period (62 FR 46004) and
revised Sec. 413.86(g)(5) accordingly. Because hospitals may have two
PRAs, one for residents in primary care and obstetrics and gynecology
(the ``primary care PRA''), and a lower PRA for nonprimary care
residents, we revised our policy for computing the rolling average for
direct GME payment purposes (not for IME) in the August 1, 2001 final
rule (66 FR 39893) to create two separate rolling averages, one for
primary care and obstetrics and gynecology residents (the ``primary
care rolling average''), and one for nonprimary care residents.
Effective for cost reporting periods beginning on or after October 1,
2001, direct GME payments are calculated based on the sum of: (1) The
product of the primary care PRA and the primary care rolling average;
and (2) the product of the nonprimary care PRA and the nonprimary care
FTE rolling average. (This sum is then multiplied by the Medicare
patient load to determine Medicare direct GME payments).
Section 407(c) of Public Law 106-113, which amended sections
1886(d)(5)(B) and 1886(h)(4)(H) of the Act to create the rural track
provision, provided that, in the case of an urban hospital that
establishes a separately accredited rural track, ``* * * the Secretary
shall adjust the limitation under subparagraph (F) in an appropriate
manner insofar as it applies to such programs in such rural areas in
order to encourage the training of physicians in rural areas''
(emphasis added). Subparagraph (F) of the Act is the provision that
establishes a cap on the number of allopathic and osteopathic FTE
residents that may be counted at each hospital for Medicare direct GME
payment purposes. Thus, the provision authorizes the Secretary to allow
for an increase to an urban hospital's FTE cap on allopathic and
osteopathic residents in certain instances when an urban hospital
establishes a rural track program. Although the rural track provision
effectively allows an increase to the urban hospital's FTE cap by
adjusting the FTE limitation under subparagraph (F), the statute makes
no reference to subparagraph (G), the provision concerning the rolling
average count of residents. That is, the statute does not provide for
an exclusion from the rolling average for the urban hospital for those
FTE residents training in a rural track.
Since we implemented this rural track provision in the August 1,
2000 interim final rule with comment period (65 FR 47033), we have
interpreted this provision to mean that, except for new rural track
programs begun by urban teaching hospitals that are establishing an FTE
cap for the first time under Sec. 413.86(g)(6)(i), when an urban
hospital establishes a new rural track program or expands an existing
rural track program, FTE residents in the rural track that are counted
by the urban hospital are included in the hospital's rolling average
calculation immediately. Although we have not specified in the
regulations that rural track FTE residents counted by an urban hospital
are included in the hospital's rolling average FTE resident count, this
has been our policy. The Medicare cost report, Form CMS-2552-96 (line
3.05 on Worksheet E, Part A, for IME payments, and on line 3.02 on
Worksheet E-3, Part IV, for direct GME payments), reflects this policy.
Accordingly, FTE residents in a rural track program are to be included
in the urban hospital's rolling average count for IME and direct GME
for cost reporting periods beginning on or after April 1, 2000.
We are proposing to revise the regulations at Sec. 413.86(g)(5) to
add a new paragraph (vii) to clarify that, subject to regulations at
Sec. 413.86(g)(12), except for new rural track programs begun by urban
hospitals that are first establishing an FTE cap under Sec.
413.86(g)(6)(i), when an urban hospital with an existing FTE cap
establishes a new program with a rural track (or an integrated rural
track), or expands an existing rural track (or an integrated rural
track) program, the FTE residents in that program that are counted by
the urban hospital are included in the urban hospital's rolling average
FTE resident count immediately. We also are proposing to revise
Sec. Sec. 413.86(g)(12)(i)(A), (g)(12)(ii)(B), and (g)(12)(iv)(A) to
indicate that for the first 3 years of the rural track's existence, the
rural track FTE limitation for each urban hospital will be the actual
number of FTE residents, subject to the rolling average, training in
the rural track at the urban hospital.
4. Technical Change Relating to Affiliated Groups and Affiliation
Agreements
Section 1886(h)(4)(H)(ii) of the Act permits, but does not require,
the Secretary to prescribe rules that allow institutions that are
members of the same affiliated group (as defined by the Secretary) to
elect to apply the FTE resident limit on an aggregate basis. This
provision allows the Secretary to give hospitals flexibility in
structuring rotations within a combined cap when they share a
resident's time. Consistent with the broad authority conferred by the
statute, we established criteria for defining an ``affiliated group''
and an ``affiliation agreement'' in both the August 29, 1997 final rule
(62 FR 45965) and the May 12, 1998 final rule (63 FR 26317). We further
clarified our policy concerning affiliation agreements in the August 1,
2002 final rule (67 FR 50069).
We are aware that there has been some confusion at times among
members of the provider community when using the term ``affiliation
agreement,'' since the term is used in contexts other than for Medicare
GME payment purposes. For example, an ``affiliation agreement'' is a
term historically used in the academic community that generally relates
to agreements made between hospitals and medical schools or among
sponsors of medical residency education programs. To help prevent
further confusion, we are proposing to change the term in the
regulations to ``Medicare GME affiliation agreement.'' We believe this
will help to distinguish these agreements used for purposes of GME
payments from agreements used for other purposes in the provider
community. We are proposing to revise the regulations at Sec.
413.86(b) to state ``Medicare GME affiliated group,'' and ``Medicare
GME affiliation agreement,'' and we are making similar revisions to
Sec. 413.86(g)(4)(iv), (g)(7)(i) through (v), and Sec.
412.105(f)(1)(vi) for IME payment purposes.

[[Page 27221]]

G. Notification of Updates to the Reasonable Compensation Equivalent
(RCE) Limits (Sec. 415.70)

1. Background
Under the Medicare program, payment for services furnished by a
physician is made under either the Hospital Insurance Program (Part A)
or the Supplementary Medical Insurance Program (Part B), depending on
the type of services furnished. In accordance with section 1848 of the
Act, physicians' charges for medical or surgical services to individual
Medicare patients generally are covered under Part B on a fee-for-
service basis under the Medicare physician fee schedule. The
compensation that physicians receive from or through a provider for
services that benefit patients generally (for example, administrative
services, committee work, teaching, and supervision) can be covered
under Part A or Part B, depending on the provider's setting.
As required by section 1887(a)(2)(B) of the Act, allowable
compensation for services furnished by physicians to providers that are
paid by Medicare on a reasonable cost basis is subject to reasonable
compensation equivalent (RCE) limits. Under these limits, payment is
determined based on the lower of the actual cost of the services to the
provider (that is, any form of compensation to the physician) or a
reasonable compensation equivalent. For purposes of applying the RCE
limits, physician compensation costs means monetary payments, fringe
benefits, deferred compensation and any other items of value (excluding
office space or billing and collection services) that a provider or
other organization furnishes a physician in return for the physician's
services.
The RCE limits do not apply to the costs of physician compensation
that are attributable to furnishing inpatient hospital services paid
for under the IPPS or GME costs. In addition, RCE limits do not apply
to the costs CAHs incur in compensating physicians for services.
Furthermore, compensation that a physician receives for activities that
may not be paid for under either Part A or Part B are not considered in
applying the RCE limits.
The limits apply equally to all physician services to providers
that are payable on a reasonable cost basis under Medicare. If a
physician receives any compensation from a provider for his or her
physician services to the provider (that is, those services that
benefit patients generally), payment to those affected providers for
the costs of such compensation is subject to the RCE limits. The RCE
limits are not applied to payment for services that are identifiable
medical or surgical services to individual patients and paid for under
the physician fee schedule, even if the physician agrees to accept
compensation (for example, from a hospital) for those services.
(However, payments to teaching hospitals that have elected to be paid
for these services on a reasonable cost basis in accordance with
section 1861(b)(7) of the Act are subject to the limits.)
Section 415.70(b) of the regulations specifies the methodology for
determining annual RCE limits, considering average physician incomes by
specialty and type of location, to the extent possible using the best
available data. On October 31, 1997, the revised RCE limits update
methodology was published in the Federal Register (62 FR 59075). For
cost reporting periods beginning on or after January 1, 1998, updates
to the RCE limits are calculated using the Medicare Economic Index
(MEI). The inflation factor used to develop the initial RCE limits and,
subsequently, to update those limits to reflect increases in net
physician compensation was the Consumer Price Index for All Urban
Consumers (CPI-U). In 1998, we revised the RCE limits update
methodology by replacing the CPI-U with the physician fee schedule's
inflation factor (the MEI), to achieve a measure of consistency in the
methodologies employed to determine reasonable payments to physicians
for direct medical and surgical services furnished to individual
patients and reasonable compensation levels for physicians' services
that benefit provider patients generally.
2. Publication of the Updated RCE Limits
We intend to publish updated payment limits on the amount of
allowable compensation for services furnished by physicians to
providers in the FY 2004 IPPS final rule. These revised limits will be