FR Doc 03-5206

[Federal Register: March 7, 2003 (Volume 68, Number 45)]
[Proposed Rules]
[Page 11233-11292]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr03-27]

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Part III

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 412

Medicare Program; Prospective Payment System for Long-Term Care
Hospitals: Proposed Annual Payment Rate Updates and Policy Changes;
Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1472-P]
RIN 0938-AL92

Medicare Program; Prospective Payment System for Long-Term Care
Hospitals: Proposed Annual Payment Rate Updates and Policy Changes

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

ACTION: Proposed rule.

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SUMMARY: In this proposed annual update of the payment rates for the
Medicare prospective payment system (PPS) for inpatient hospital
services provided by long-term care hospitals (LTCHs), we are proposing
to change the annual period during which the updated payment rates for
the LTCH PPS would be effective from October 1 through September 30 to
July 1 through June 30. We also are proposing to change the publication
schedule for these updates to allow for an effective date of July 1
(instead of August 1). The proposed payment amounts and factors used to
determine the proposed updated Federal rates that are described in this
proposed rule have been determined based on this proposed revised
update rate year. In addition, we are proposing that the annual update
of the long-term care diagnosis-related groups (LTC-DRG)
classifications and relative weights will remain linked to the annual
adjustments of the acute care hospital inpatient diagnosis-related
group system, effective each October 1. The proposed outlier threshold
for July 1, 2003 through June 30, 2004 would be derived from the
proposed rate year calculations. In order to conform to a proposed
change in the acute care hospital inpatient PPS (IPPS) outlier policy,
we are proposing a change for outlier payments under the LTCH PPS.
We also are proposing a policy change eliminating bed-number
restrictions for pre-1997 LTCHs that have established satellite
facilities and that elect to be paid 100 percent of the Federal rate.

DATES: Comments will be considered if received at the appropriate
address, as provided below, no later than 5 p.m. on May 6, 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-1472-P, PO 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 limitation, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code CMS-1472-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 address:

Centers for Medicare & Medicaid Services, Office of Strategic
Operations and Regulatory Affairs, Security and Standards Group,
Regulations Development and Issuances Group Standards, PRA Reports
Clearance Office, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Attn: John Burke, CMS-1472-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:
Tzvi Hefter, (410) 786-4487 (General information)
Judy Richter, (410) 786-2590 (General information, transition payments,
payment adjustments, and onsite discharges and readmissions)
Michele Hudson, (410) 786-5490 (Calculation of the payment rates,
relative weights and case-mix index, and payment adjustments)
Tiffany Eggers, (410) 786-0400 (Market basket update, short-stay
outliers and interrupted stays)
Ann Fagan, (410) 786-5662 (Patient classification system)
Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and budget
neutrality)
Linda McKenna, (410) 786-4537 (Payment adjustments and transition
period)
Kathryn McCann, (410) 786-7623 (Medigap)
Robert Nakielny, (410) 786-4466 (Medicaid)

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments

Comments received timely will be available for public inspection as
they are processed, generally beginning approximately 4 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.

Availability of Copies and Electronic Access

Copies: To order copies of the Federal Register containing this
document, send your request to: New Orders, Superintendent of
Documents, PO Box 371954, Pittsburgh, PA 15250-7954. Specify the date
of the issue requested and enclose a check or money order payable to
the Superintendent of Documents, or enclose your Visa or Master Card
number and expiration date. Credit card orders can also be placed by
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $10. As an alternative, you can view
and photocopy the Federal Register document at most libraries
designated as Federal Depository Libraries and at many other public and
academic libraries throughout the country that receive the Federal
Register.
This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. The Web site address is: http://
www.access.gpo.gov/nara/index.html.

To assist readers in referencing sections contained in this

preamble, we are providing the following table of contents.

Table of Contents

I. Background
A. Legislative and Regulatory Authority
B. Criteria for Classification as a LTCH

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C. Transition Period for Implementation of the LTCH PPS
D. Limitation on Charges to Beneficiaries
E. System Implementation for the LTCH PPS
II. Summary of the Major Contents of This Proposed Rule
A. Proposed Change in the Annual Update
B. Proposed Update Changes
III. Proposed Changes in the Annual Update of the LTCH PPS
IV. Proposed Changes in Long-Term Care Diagnosis-Related Group (LTC-
DRG) Classifications and Relative Weights
A. Background
B. Patient Classifications into DRGs
C. Organization of DRGs
D. Update of LTC-DRGs
E. ICD-9-CM Coding System
1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
2. Maintenance of the ICD-9-CM Coding System
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
F. Proposed Changes to the Method for Updating the LTC-DRG
Relative Weights
V. Proposed Policy Change Relating to Payments to LTCHs That Are
Satellite Facilities
VI. Proposed Changes to the LTCH PPS Rates for the Proposed 2004
LTCH PPS Rate Year
A. Overview of the Development of the Proposed Payment Rates
B. Proposed Update to the Standard Federal Rate for the Proposed
2004 LTCH PPS Rate Year
1. Proposed Standard Federal Rate Update
a. Description of the Proposed Market Basket for the Proposed
2004 LTCH PPS Rate Year
b. Proposed LTCH Market Basket Increase for the Proposed 2004
LTCH PPS Rate Year
2. Proposed Standard Federal Rate for the Proposed 2004 LTCH PPS
Rate Year
C. Calculation of Proposed LTCH Prospective Payments for the
Proposed 2004 LTCH PPS Rate Year
1. Proposed Adjustment for Area Wage Levels
2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
3. Proposed Adjustment for High-Cost Outliers
4. Proposed Adjustment for Special Cases
a. General
b. Short-Stay Outlier Cases
c. Interrupted Stay
d. Onsite Discharges and Readmittances
e. Treatment of Swing Beds Under the Interrupted Stay and Onsite
Discharge and Readmittance Policies
5. Other Proposed Payment Adjustments
6. Proposed Budget Neutrality Offset to Account for the
Transition Methodology
VII. Computing the Proposed Adjusted Federal Prospective Payments
VIII. Transition Period
IX. Proposed Payments to New LTCHs
X. Method of Payment
XI. Monitoring
XII. Collection of Information Requirements
XIII. Regulatory Impact Analysis
A. Introduction
1. Executive Order 12866
2. Regulatory Flexibility Act (RFA)
3. Impact on Rural Hospitals
4. Unfunded Mandates
5. Federalism
B. Anticipated Effects
1. Budgetary Impact
2. Impact on Providers
3. Calculation of Prospective Payments
4. Results
5. Effect on the Medicare Program
6. Effect on Medicare Beneficiaries
C. Executive Order 12866
XIV. Response to Public Comments
Regulations Text
Addendum-Tables

Acronyms

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

BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-
554
CMS Centers for Medicare & Medicaid Services
DRGs Diagnosis-related groups
FY Federal fiscal year
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act, Pub. L. 104-
191
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
OSCAR Online Survey Certification and Reporting (System)
PPS Prospective Payment System
QIO Quality Improvement Organization (formerly Peer Review Organization
(PRO))
SNF Skilled nursing facility
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248

I. Background

A. Legislative and Regulatory Authority

The Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) (Pub.
L. 106-113) and the Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provide for payment
for both the operating and capital-related costs of hospital inpatient
stays in long-term care hospitals (LTCHs) under Medicare Part A based
on prospectively set rates. The Medicare prospective payment system for
LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) of
the Social Security Act (the Act), effective for cost reporting periods
beginning on or after October 1, 2002. Section 1886(d)(1)(B)(iv)(I) of
the Act defines a LTCH as ``a hospital which has an average inpatient
length of stay (as determined by the Secretary) of greater than 25
days.'' Section 1886(d)(1)(B)(iv)(II) of the Act also provides another
definition of LTCHs: Specifically, a hospital that first received
payment under section 1886(d) of the Act in 1986 and has an average
inpatient length of stay (as determined by the Secretary) of greater
than 20 days and has 80 percent or more of its annual Medicare
inpatient discharges with a principal diagnosis that reflects a finding
of neoplastic disease in the 12-month cost reporting period ending in
FY 1997.
Section 123 of Pub. L. 106-113 requires the prospective payment
system for LTCHs to be a per discharge system with a diagnosis-related
group (DRG) based patient classification system that reflects the
differences in patient resources and costs in LTCHs while maintaining
budget neutrality. Section 123 also requires that the system be
implemented for cost reporting periods beginning on or after October 1,
2002.
Section 307(b)(1) of Pub. L. 106-554 mandates the examination of
the feasibility and the impact of basing payment under the LTCH
prospective payment system (LTCH PPS) on the use of existing (or
refined) hospital DRGs that have been modified to account for different
resource use of LTCH patients as well as the use of the most recently
available hospital discharge data. Further, section 307(b)(1) provides
that the Secretary shall examine and may provide for adjustments to
payments under the LTCH PPS, including adjustments to DRG weights, area
wage adjustments, geographic reclassification, outliers, updates, and a
disproportionate share adjustment.
In a Federal Register document issued on August 30, 2002 (67 FR
55954), we implemented the LTCH PPS authorized under Pub. L. 106-113
and Pub. L. 106-554. This system uses

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information from LTCH patient records to classify patients into
distinct long-term care diagnosis-related groups (LTC-DRGs) based on
clinical characteristics and expected resource needs. Payments are
calculated for each LTC-DRG and provisions are made for appropriate
payment adjustments. Payment rates under the LTCH PPS are updated
annually and published in the Federal Register.
The LTCH PPS replaced the reasonable cost-based payment system
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, for payments for inpatient services provided by a LTCH
with a cost reporting period beginning on or after October 1, 2002.
(The regulations implementing the TEFRA hospital payment provisions are
located at 42 CFR part 413.) With the implementation of the prospective
payment system for inpatient acute care hospitals authorized by the
Social Security Amendments of 1983 (Pub. L. 98-21), which added section
1886(d) to the Act, certain hospitals, including LTCHs, were excluded
from the PPS for acute care hospitals and paid their reasonable costs
for inpatient services subject to a per discharge limitation or target
amount under the TEFRA system. For each cost reporting period, a
ceiling on payments to each hospital excluded from the acute care
hospital inpatient prospective payment system (IPPS) was determined by
multiplying the hospital's updated target amount by the number of total
current year Medicare discharges. The August 30, 2002 final rule
further details payment policy under the TEFRA system (67 FR 55954).
In the August 30, 2002 final rule, we presented an in-depth
discussion of the LTCH PPS, including the patient classification
system, relative weights, payment rates, additional payments, and the
budget neutrality requirements mandated by section 123 of Pub. L. 106-
113. That same final rule, which established regulations for the LTCH
PPS under 42 CFR part 412, Subpart O, also contained provisions related
to covered inpatient services, limitation on charges to beneficiaries,
medical review requirements, furnishing of inpatient hospital services
directly or under arrangement, and reporting and recordkeeping
requirements.
We refer readers to the August 30, 2002 final rule for a
comprehensive discussion of the research and data that supported the
establishment of the LTCH PPS.

B. Criteria for Classification as a LTCH

LTCHs must have a provider agreement with Medicare and must have an
average Medicare inpatient length of stay of greater than 25 days, or,
for cost reporting periods beginning on or after August 5, 1997, for a
hospital that was first excluded from the PPS in 1986, must have an
average inpatient length of stay for all patients, including both
Medicare and non-Medicare inpatients, of greater than 20 days and
demonstrate that at least 80 percent of its annual Medicare inpatient
discharges in the 12-month cost reporting period ending in FY 1997 have
a principle diagnosis that reflects a finding of neoplastic disease.
Subject to the provisions of Sec. 412.23(e)(3), the average Medicare
inpatient length of stay is determined based on all covered and
noncovered days of stay of Medicare patients as calculated by dividing
the total number of covered and noncovered days of stay of Medicare
inpatients (less leave or pass days) by the number of total Medicare
discharges for the hospital's most recent complete cost reporting
period. Fiscal intermediaries verify that LTCHs meet the average length
of stay requirements.
The fiscal intermediary's determination of whether or not a
hospital qualifies as an LTCH is based on the hospital's discharge data
from its most recent cost reporting period and is effective at the
start of the hospital's next cost reporting period, under Sec.
412.22(d). If a hospital does not meet the length of stay requirement,
the hospital may provide the intermediary with data indicating a change
in the hospital's average length of stay by the same method for the
immediately preceding 6-month period (Sec. 412.23(e)(3)(ii)). (For
procedural efficiency and in order to comply with the timing
requirement of Sec. 412.22(d), we have a longstanding policy of
allowing hospitals to submit data for a period greater than 5 months
for this purpose.) Requirements for hospitals seeking classification as
LTCHs that have undergone a change in ownership, as described in Sec.
489.18, are set forth in Sec. 412.23(e)(3)(iii).
LTCHs that exist as hospitals-within-hospitals or satellite
facilities must also meet the criteria set forth in Sec. 412.22(e) or
Sec. 412.22(h), respectively, to be excluded from the IPPS and paid
under the LTCH PPS.
The following hospitals are paid under special payment provisions,
as described in Sec. 412.22(c) and, therefore, are not subject to the
LTCH PPS rules:
[sbull] Veterans Administration hospitals.
[sbull] Hospitals that are reimbursed under State cost control
systems approved under 42 CFR part 403.
[sbull] Hospitals that are reimbursed in accordance with
demonstration projects authorized under section 402(a) of Pub. L. 90-
248 (42 U.S.C. 1395b-1) or section 222(a) of Pub. L. 92-603 (42 U.S.C.
1395b-1 (note)) (statewide all-payer systems, subject to the rate-of-
increase test at section 1814(b) of the Act).
[sbull] Nonparticipating hospitals furnishing emergency services to
Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

In the August 30, 2002 final rule (67 FR 56038), we provided for a
5-year transition period from cost-based reimbursement to fully Federal
prospective payment for LTCHs. During the 5-year period, two payment
percentages are to be used to determine a LTCH's total payment under
the PPS. The blend percentages are as follows:

------------------------------------------------------------------------
Prospective
payment Cost-based
Cost reporting periods beginning on or after federal reimbursement
rate rate
percentage percentage
------------------------------------------------------------------------
Oct. 1, 2002................................ 20 80
Oct. 1, 2003................................ 40 60
Oct. 1, 2004................................ 60 40
Oct. 1, 2005................................ 80 20
Oct. 1, 2006................................ 100 0
------------------------------------------------------------------------

The phase-in for payments to the full prospective payment Federal
rate will apply according to each LTCH's cost reporting period.

D. Limitation on Charges to Beneficiaries

In the August 30, 2002 final rule, we presented an in-depth
discussion of beneficiary liability under the LTCH prospective payment
system (67 FR 55974-55975). Under Sec. 412.507, as consistent with
other established hospital prospective payment systems, a LTCH may not
bill a Medicare beneficiary for more than the deductible and
coinsurance amounts as specified under Sec. Sec. 409.82, 409.83, and
409.87 and for items and services as specified under Sec. 489.30(a),
if the Medicare payment to the LTCH is the full LTC-DRG payment amount.
However, if the Medicare payment was for a short-stay outlier case
(Sec. 412.529) that was less than the full LTC-DRG payment amount, the
LTCH could also charge the beneficiary for services for which the costs
of those services or the days those services were provided were not a
basis for calculating the Medicare short-stay outlier payment (Sec.
412.507).
Since the origin of the Medicare system, the intent of our
regulations has been to set limits on beneficiary liability and to
clearly establish the circumstances under which the

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beneficiary would be required to assume responsibility for payment;
that is, upon exhausting benefits described in 42 CFR part 409, subpart
F. The discussion in the August 30, 2002 final rule was not meant to
establish rates or payments for, or define, Medicare-eligible expenses.
While CMS regulates beneficiary liability for coinsurance and
deductibles for hospital stays that are covered by Medicare, payments
from Medigap insurers to providers for inpatient hospital coverage
after Medicare benefits are exhausted are not regulated by CMS.
Furthermore, regulations beginning at Sec. 403.200 and the 1991
National Association of Insurance Commissioners (NAIC) Model Regulation
for Medicare Supplemental Insurance, which was incorporated by
reference into section 1882 of the Act, govern the relationship between
Medigap insurers and beneficiaries.

E. System Implementation for the LTCH PPS

When we established the regulations to implement the LTCH PPS on
August 30, 2002 (67 FR 55954), effective for cost reporting periods
that began on or after October 1, 2002, we did not have computer system
changes in place that were necessary to accommodate claims processing
and payment under the system. However, after January 1, 2003, we made
the necessary system changes. Accordingly, after January 1, 2003, the
fiscal intermediary will reconcile the payment amounts that had been
made to LTCHs for all covered inpatient hospital services furnished to
Medicare beneficiaries from cost reporting periods that began on or
after October 1, 2002, through January 1, 2003, with the amounts that
were payable under the LTCH PPS methodology. Because the LTCH PPS was
effective at the start of the LTCH's first cost reporting period that
began on or after October 1, 2002, only those LTCHs with cost reporting
periods that started October 1, 2002, through January 1, 2003, will
experience the payment reconciliation necessitated by this 3-month
period prior to systems implementation. The claims submission procedure
of using ICD-9-CM codes has not changed following the systems
implementation of the LTCH PPS.
We also want to note that as of October 16, 2002, a LTCH that was
required to comply with the Administrative Simplification Standards
under the Health Insurance Portability and Accountability Act (HIPAA)
(Pub. L. 104-191) 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 for submitting claim forms to the LTCH's
Medicare fiscal intermediary (45 CFR 162.1002 and 45 CFR 162.1102).
Beginning October 16, 2003, LTCHs that obtained an extension and that
are required to comply with the HIPPA Administrative Simplification
Standards must start submitting electronic claims in compliance with
the HIPPA regulations cited above, among others.

II. Summary of the Major Contents of This Proposed Rule

In this proposed rule, we are setting forth the proposed annual
update to the payment rates for the Medicare LTCH PPS and proposing
other policy changes. The following is a summary of the major areas
that we are addressing in this proposed rule:

A. Proposed Change in the Annual Update

We are proposing to change the annual update to the Federal payment
rate under the LTCH PPS from the Federal fiscal year (October 1 through
September 30) to a ``LTCH rate year'' of July 1 through June 30,
beginning July 1, 2003, as discussed in section III. of this preamble.
(In this proposed rule, we would define the LTCH rate year as the
period of July 1 to June 30 for updates to the LTCH PPS.) We are
proposing to publish information on the annual update in the Federal
Register by June 1 of each year. We recognize that it may be necessary
to address issues affecting LTCHs at a time that does not conform to
this schedule and in those circumstances, we could utilize the IPPS
proposed and final rule for this purpose.

B. Proposed Update Changes

[sbull] In section IV. of this preamble, we are proposing that the
annual update of the LTC-DRG classifications and relative weights would
remain linked to the annual adjustments of the acute care hospital
inpatient DRG system, which are based on the annual revisions to the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM) codes, effective each October 1.
[sbull] In section V. of this preamble, we discuss a proposed
policy change in how Medicare payment under the LTCH PPS would be made
to certain LTCHs that have satellite facilities.
[sbull] In sections VI. through X. of this preamble, we discuss our
proposed determination of the LTCH PPS rates that would be applicable
to the proposed LTCH rate year of July 1, 2003 through June 30, 2004,
including proposed revisions to the wage index, the proposed excluded
hospital with capital market basket that would be applied to the
current standard Federal rate to determine the prospective payment
rates, the applicable adjustments to payments, the proposed outlier
threshold, the transition period, and the proposed budget neutrality
factor.
[sbull] We are also proposing to revise Sec. 412.525(a) and Sec.
412.529(c)(4) regarding adjustments to outlier payments under the LTCH
PPS in order to conform the regulation to a proposed policy change
under the IPPS that is published in the Federal Register on March 4,
2003.
[sbull] In section XI. of this preamble, we discuss our continuing
monitoring efforts to evaluate the LTCH PPS.
[sbull] In section XIII. of this preamble, we set forth an analysis
of the impact of the proposed changes in this proposed rule on Medicare
expenditures and on Medicare-participating LTCHs and Medicare
beneficiaries.

III. Proposed Changes in the Annual Update of the LTCH PPS

In existing regulations at Sec. 412.535 that were issued in the
August 30, 2002 final rule, we specify a schedule for publishing
information on the LTCH PPS on or before August 1, which coincided with
the statutorily mandated publication schedule for the IPPS. We are
proposing to revise Sec. 412.535 to provide generally for a change in
the annual rate update for the LTCH PPS, starting on July 1.
Section 1886(e)(5)(A) of the Act requires that, for the IPPS, the
proposed rule be published in the Federal Register ``not later than the
April 1 before each fiscal year; and the final rule, not later than the
August 1 before such fiscal year.'' The statute imposes no such
publication schedule for the LTCH PPS. In the August 30, 2002 final
rule (67 FR 55977), we stated that we were considering changing the
publication schedule of the LTCH PPS annual rulemaking cycle in order
to avoid concurrent publication of annual rules for these two systems
for purposes of administrative feasibility and efficiency. In
considering a change in the publication schedule of the LTCH PPS final
rule, we contemplated a change in the effective date for updating the
Federal rates for the LTCH PPS. Therefore, in this proposed rule, we
are proposing to change the effective date of the annual update for the
LTCH PPS from October 1 to July 1 of each year in order to facilitate a
timely publication of these two significant payment updates (acute care
hospital inpatient and LTCH). Thus, the annual update of the

[[Page 11238]]

LTCH PPS Federal rates would no longer be linked to the start of the
Federal fiscal year, as is the update of the IPPS. This proposed change
would necessitate publication of the final rule for the LTCH PPS by no
later than June 1 of each year (proposed revised Sec. 412.535).
We also are proposing to amend Sec. 412.503 to include a
definition of ``long-term care hospital rate year''. A ``long-term care
hospital rate year'' would mean the 12-month period of July 1 through
June 30. We would use this period for those calculations related to
updating the Federal rate for payments under the LTCH PPS. The
determination of the proposed fixed-loss threshold for outlier payment
calculations, under Sec. 412.525(a), would also be calculated based on
the proposed LTCH rate year. (Section VI.C. of this proposed rule
includes a more detailed discussion of our proposed outlier policy.)
Proposing a change for the annual Federal rate update period for
the LTCH PPS has also necessitated a proposed recalculation of the
excluded hospital market basket with capital estimate for the proposed
forthcoming payment year, July 1, 2003 through June 30, 2004. In the
August 30, 2002 final rule, we adopted a Federal rate of $34,956 that
was computed based on the excluded hospital with capital market basket
calculated for the 12-month Federal fiscal year of October 1, 2002
through September 30, 2003. As already noted, we are proposing to
change the Federal rate update for the LTCH PPS from the Federal fiscal
year to a 12-month year of July 1 through June 30, and the proposed
rates in this proposed rule are based on this period. Because the
Federal rate of $34,956 was originally computed based on a 12-month
year, but in actuality will only be utilized for 9 months, if the
proposed change in the LTCH PPS rate update year is finalized, we are
proposing a budget neutral adjustment to the market basket update
taking this 3-month differential into account in setting the Federal
rate for July 1, 2003 through June 30, 2004. In addition, we are
proposing that the change in the proposed 2004 LTCH PPS rate year be
budget neutral. In section VI.B.1 of this proposed rule, we describe
this proposed adjustment in greater detail.
We are proposing to update the LTCH PPS wage index that adjusts for
differences in area wages under Sec. 412.525(c) using the FY 1999 IPPS
wage data because these are the best available data (as discussed in
section VI.C. of this preamble).
We also are proposing to recalculate the budget neutrality offset
to account for the effect of the transition period and the policy
allowing LTCHs to elect 100 percent Federal rate payments rather than
the transition blend. In addition, we are proposing an updated fixed-
loss amount for determining outlier payments based on the updated
proposed Federal rate (as discussed in section VII. of this preamble).
As discussed in section IV.C. of this proposed rule, we are not
proposing an update to the LTC-DRG classifications or relative weights
at this time. Currently, the LTC-DRG patient classifications utilized
by the LTCH PPS for FY 2003 are based directly on the same version of
DRGs used by the IPPS, that is, GROUPER 20.0. Therefore, we are not
proposing any change to the timing of the annual update of the LTC-DRG
classifications and relative weights. They would remain linked to the
annual adjustments of the acute care hospital inpatient DRG system,
which are based on the annual revisions to the ICD-9-CM codes,
effective each October 1. Table 3 of the Addendum to the August 30,
2002 final rule (67 FR 56076-56084), which we are reprinting as Table 3
of the Addendum to this proposed rule, contains the LTC-DRG
classifications and relative weights that we propose to continue to
apply to discharges occurring during the period of July 1, 2003 through
September 30, 2003. As an aid in calculating payment under the short-
stay outlier policy, under Sec. 412.529, we also are including, in
column 3 of Table 3, the proposed five-sixths average length of stay
that would be applied to each LTC-DRG in determining whether the LTCH
stay is a short-stay outlier. The average length of stay for each DRG
based on the FY 2001 MedPAR data, which were used for the FY 2003 LTCH
PPS final rule, are still the best available complete LTCH discharge
data available at this time.
The revised LTC-DRG classifications and relative weights for
discharges occurring from October 1, 2003 through September 30, 2004,
for payments under the LTCH PPS during that period would continue to be
based on the annual updates to the acute care hospital inpatient DRG
system. The FY 2004 DRGs and relative weights for the IPPS have not yet
been proposed and we are unable to propose updated LTC-DRGs and
relative weights (which would be based on the proposed updated acute
care hospital inpatient DRGs and relative weights) at this time. Thus,
we are proposing that the LTC-DRG classifications and relative weights
would be presented for public comment in the proposed rule for the IPPS
and finalized in the IPPS final rule, for an effective date of October
1, 2003.
The proposed change in the rate year for the LTCH PPS from October
1 through September 30 to July 1 through June 30 means that, although
the Federal rate calculations in the August 30, 2002 final rule were
based on a 12-month year, only 9 months will elapse before the proposed
July 1, 2003 update. We are proposing a prospective adjustment to the
market basket update to take into account this 3-month differential in
setting the proposed rates for July 1, 2003 through June 30, 2004.
Specifically, the proposed updates for the proposed 2004 LTCH PPS
rate year would be affected as follows:
[sbull] The proposed update to the standard Federal rate calculated
in accordance with Sec. 412.523(c)(3) would be adjusted to account for
updating the standard Federal rate on July 1, 2003, instead of October
1, 2003.
[sbull] The fixed-loss amount for determining high-cost outlier
payments under Sec. 412.525(a) would also be updated based on the
proposed Federal rate effective for July 1, 2003 through June 30, 2004.
In section VI.B.1 of this proposed rule, we discuss the proposed
computational adjustments resulting from our proposed establishment of
a LTCH PPS rate year beginning July 1, 2003 through June 30, 2004.
Several provisions of the LTCH PPS would not be affected by the
proposed change in the annual rate update year for the LTCH PPS from
October 1 to July 1 because these policies are not based on any of the
Federal rate calculations for the LTCH PPS. Specifically, the following
provisions would not be affected:
[sbull] The transition blends provided for under Sec. 412.533(a)
would not be affected because they are linked to the start of each
LTCH's cost reporting period, rather than to the start of the Federal
fiscal year. (LTCHs being paid under the transition blend methodology
would receive those blends for the entire 5-year transition period,
unless they elect payments based on 100 percent of the Federal rate.)
For instance, for cost reporting periods that began on or after October
1, 2002, and before October 1, 2003, the total payment for a LTCH is 80
percent of the amount that would have been calculated under the TEFRA
payment system for that specific LTCH and 20 percent of the Federal
prospective payment amount. For cost reporting periods beginning on or
after October 1, 2003 and before October 1, 2004, the total payment for
a LTCH is 60 percent of the amount that would have been calculated
under the

[[Page 11239]]

TEFRA payment system for that specific LTCH and 40 percent of the
Federal prospective payment amount.
[sbull] The 5-year phase-in of the adjustment for differences in
area wage levels under Sec. 412.525(c) would not be affected because
they are linked to the start of each LTCH's cost reporting period,
rather than to the start of the Federal fiscal year. For cost reporting
periods that began on or after October 1, 2002 and before September 30,
2003, the applicable LTCH PPS wage index is one-fifth of the full LTCH
wage index value, and for cost reporting periods beginning on or after
October 1, 2003 and before September 30, 2004, the applicable LTCH PPS
wage index is two-fifths of the full LTCH wage index value.
[sbull] The LTC-DRGs and their relative weights and the GROUPER
would not be affected since they would continue to be updated effective
October 1 through September 30 each year based on the changes to the
DRGs published in the IPPS final rule.
Section XII. of this proposed rule contains an impact analysis that
reflects the impact of these proposed changes.
In summary, we are proposing to amend Sec. 412.535 to indicate
that information on the unadjusted Federal payment rates and a
description of the methodology and data used to calculate the payment
rates under the LTCH PPS would be published in the Federal Register on
or before June 1 prior to the beginning of each proposed LTCH PPS rate
year beginning July 1. We are proposing that information on the DRG
classification system and associated weighting factors, with the DRGs
from which the LTC-DRGs are derived, would be published in the proposed
IPPS rule and, ultimately, the final rule for the IPPS (the final IPPS
rule is published on or before August 1 of each Federal fiscal year).

IV. Proposed Changes in Long-Term Care Diagnosis-Related Group (LTC-
DRG) Classifications and Relative Weights

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. L. 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 long-term
care diagnosis-related groups (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
in the IPPS. We apply weights to the existing hospital inpatient 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, 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 DRGs (all DRGs
with fewer than 25 cases), we group low volume DRGs into 5 quintiles
based on average charge per discharge. (A listing of the composition of
low volume quintiles appears in the August 30, 2002 final rule at 67 FR
55986.) We also take into account adjustments to payments for cases in
which the stay at the LTCH is five-sixths of the geometric average
length of stay and classify these cases as short-stay outlier cases. (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 payment varies by
the LTC-DRG to which a beneficiary's stay is assigned. Cases are
classified into LTC-DRGs for payment based on the following six data
elements:
(1) Principal diagnosis.
(2) Up to eight additional diagnoses.
(3) Up to six procedures performed.
(4) Age.
(5) Sex.
(6) Discharge status of the patient.
Upon the discharge of the patient from a LTCH, the LTCH must assign
appropriate diagnosis and procedure codes from the 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. During this process, the following type of cases are selected for
further development:
[sbull] Cases that are improperly coded. (For example, diagnoses
are shown that are inappropriate, given the sex of the patient. Code
68.6, Radical abdominal hysterectomy, would be an inappropriate code
for a male.)
[sbull] Cases including surgical procedures not covered under
Medicare (for example, organ transplant in a nonapproved transplant
center).
[sbull] Cases requiring more information. (For example, ICD-9-CM
codes are required to be entered at their highest level of specificity.
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code
136.3, Pneumocystosis, contains all appropriate digits, but if it is
reported with either fewer or more than 4 digits, the claim will be
rejected by the MCE as invalid.)
[sbull] Cases with principal diagnoses that do not usually justify
admission to the hospital. (For example, code 437.9, Unspecified
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the
principal diagnosis.)
After screening through the MCE, each 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 by the
IPPS. The GROUPER software was developed as a means of classifying each
case into a DRG on the basis of diagnosis and procedure codes and other
demographic information (age, sex, and discharge status). Following the
LTC-DRG assignment, the Medicare fiscal intermediary will determine the
prospective payment by using the Medicare PRICER program, which
accounts for hospital-specific adjustments. As provided for under the
IPPS, we provide an opportunity for the

[[Page 11240]]

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. 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.

C. Organization of DRGs

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.
Surgical DRGs are assigned based on a surgical hierarchy that orders
operating room (O.R.) procedures or groups of O.R. procedures by
resource intensity. The GROUPER does not recognize all ICD-9-CM
procedure codes as procedures that affect DRG assignment, that is,
procedures which are not surgical (for example, EKG), or minor surgical
procedures (for example, 86.11, Biopsy of skin and subcutaneous
tissue).
The medical DRGs are generally differentiated on the basis of
diagnosis. Both medical and surgical DRGs may be further differentiated
based on age, sex, discharge status, and presence or absence of
complications or comorbidities (CC). We note that CCs are defined by
certain secondary diagnoses not related to, or not inherently a part
of, the disease process identified by the principal diagnosis. (For
example, the GROUPER would not recognize a code from the 800.0x series,
Skull fracture, as a CC when combined with principal diagnosis 850.4,
Concussion with prolonged loss of consciousness, without return to
preexisting conscious level.) In addition, we note that the presence of
additional diagnoses does not automatically generate a CC, as not all
DRGs recognize a comorbid or complicating condition in their
definition. (For example, DRG 466, Aftercare without History of
Malignancy as Secondary Diagnosis, is based solely on the principal
diagnosis, without consideration of additional diagnoses for DRG
determination.)
In its June 2000 Report to Congress, MedPAC recommended that the
Secretary ``* * * improve the hospital inpatient prospective payment
system by adopting, as soon as practicable, diagnosis-related group
refinements that more fully capture differences in severity of illness
among patients.'' (Recommendation 3A, p. 63) We have determined it is
not practical at this time to develop a refinement to inpatient
hospital DRGs based on severity due to time and resource requirements.
However, this does not preclude us from development of a severity-
adjusted DRG refinement in the future. That is, a refinement to the
list of comorbidities and complications could be incorporated into the
existing DRG structure. It is also possible a more comprehensive
severity adjusted structure may be created if a new code set is
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic
coding) and ICD-10-CS (for procedure coding) or by other code sets, a
severity concept may be built into the resulting DRG assignments. Of
course any change to the code set would be adopted through the process
established in the HIPAA Administrative Simplification provisions.

D. Update of LTC-DRGs

For FY 2003, the LTC-DRG patient classification system was based on
LTCH data from the FY 2001 MedPAR file, which contained hospital bills
received through March 31, 2001, for hospital discharges occurring in
FY 2001. The patient classification system consisted of 510 DRGs that
formed the basis of the FY 2003 LTCH PPS GROUPER. The 510 LTC-DRGs
included two ``error DRGs''. As in the IPPS, we included two error DRGs
in which cases that cannot be assigned to valid DRGs will be grouped.
These two error DRGs are DRG 469 (Principal Diagnosis Invalid as a
Discharge Diagnosis) and DRG 470 (Ungroupable). (See the August 1,
2001, Medicare Program final rule, Changes to the Hospital Inpatient
Prospective Payment Systems and Rates and Costs of Graduate Medical
Education; Fiscal Year 2002 Rates, 66 FR 40062.) The other 508 LTC-DRGs
are the same DRGs used in the IPPS GROUPER for FY 2003 (Version 20.0).
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.
Thus, 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. As
discussed earlier, the patient classification system for the LTCH PPS
(LTC-DRGs) is based on the IPPS patient classification system (CMS-
DRGs), which is updated annually and effective for discharges occurring
on or after October 1 through September 30 each year. The updated DRGs
and GROUPER software are based on the latest revision to the ICD-9-CM
codes, which are published annually in the IPPS proposed rule and final
rule. The new or revised ICD-9-CM codes are not used by the industry
for either the IPPS or the LTCH PPS until the beginning of the next
Federal fiscal year (effective for discharges occurring on or after
October 1 through September 30). (The use of the ICD-9-CM codes in this
manner is consistent with current usage and the HIPAA regulations.)
October 1 is also when the changes to the CMS-DRGs and the next version
of the GROUPER software becomes effective.
As discussed in section III. of this proposed rule, we are
proposing to make the annual update to the LTCH PPS effective from July
1 through June 30 each year. As a result of this change the LTCH PPS
would use two GROUPERS during the course of a 12-month period: one
GROUPER for 3 months (from July 1 through September 30); and an updated
GROUPER for 9 months (from October 1 through June 30). The need to use
two GROUPERs is based upon the October 1 effective date of the updated
ICD-9-CM coding system. As previously discussed, new ICD-9-CM codes may
result in changes to the structure of the DRGs. In order for the
industry to be on the same schedule (for both the IPPS and the LTCH
PPS) for the use of the most current ICD-9-CM codes, it is necessary
for us to propose to apply two GROUPER programs to the LTCH PPS.
Although we do not believe that this will have any adverse effect on
LTCHs, we are interested in receiving comments on this issue. LTCHs
would continue to code diagnosis and procedures using the most current
version of the ICD-9-CM coding system.
Currently, for Federal FY 2003, we are using Version 20.0 of the
GROUPER software for both the IPPS and the LTCH PPS. For discharges
beginning on October 1, 2003 (Federal FY 2004), we are proposing our
intent to use Version 21.0 of the GROUPER software for both the IPPS
and the LTCH PPS. Thus, proposed changes to the CMS-DRGs

[[Page 11241]]

(the DRGs on which the LTC-DRGs are based), and their relative weights,
as well as the LTC-DRGs and their relative weights that would be
effective for October 1, 2003 through September 30, 2004, would be
presented in the IPPS FY 2004 proposed rule that will be published in
the spring of 2003 in the Federal Register. Accordingly, we would then
notify LTCHs of any revised LTC-DRG relative weights based on the final
DRGs and Version 21.0 GROUPER for the IPPS that would be effective
October 1, 2003.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
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. Classifications and terminology used in
the LTCH PPS are consistent with the ICD-9-CM and the 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 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 HIPPA Administrative
Simplification Act of 1996 (45 CFR Part 162). Furthermore, the UHDDS
has been used as a standard for the development of policies and
programs related to hospital discharge statistics by both governmental
and nongovernmental sectors for over 30 years. In addition, the
following definitions (as described in the 1984 Revision of the UHDDS,
approved by the Secretary of Health and Human Services for use starting
January 1986) are requirements of the ICD-9-CM coding system, and have
been used as a standard for the development of the CMS-DRGs:
[sbull] Diagnoses include all diagnoses that affect the current
hospital stay.
[sbull] Principal diagnosis is defined as the condition established
after study to be chiefly responsible for occasioning the admission of
the patient to the hospital for care.
[sbull] Other diagnoses (also called secondary diagnoses or
additional diagnoses) are defined as all conditions that coexist at the
time of admission, that develop subsequently, or that affect the
treatment received or the length of stay or both. Diagnoses that relate
to an earlier episode of care that have no bearing on the current
hospital stay are excluded.
[sbull] All procedures performed will be reported. This includes
those that are surgical in nature, carry a procedural risk, carry an
anesthetic risk, or require specialized training.
We provide LTCHs with a 60-day window after the date of the notice
of the initial LTC-DRG assignment to request review of that assignment.
Additional information may be provided by the LTCH to the fiscal
intermediary as part of that review.
2. Maintenance of the ICD-9-CM Coding System
The ICD-9-CM Coordination and Maintenance (C&M) Committee is a
Federal interdepartmental committee, co-chaired by the National Center
for Health Statistics (NCHS) and CMS, that is charged with maintaining
and updating the ICD-9-CM system. The C&M 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 C&M 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 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 C&M Committee encourages participation by health-related
organizations in the above process and holds public meetings for
discussion of educational issues and proposed coding changes twice a
year at the CMS Central Office located in Baltimore, Maryland. The
agenda and dates of the meetings can be accessed on the CMS Web site
at: http://www.cms.gov/paymentsystems/icd9.

All changes to the ICD-9-CM coding system affecting DRG assignment

are addressed annually in the IPPS proposed and final rules. Because
the DRG-based patient classification system for the LTCH PPS is based
on the IPPS DRGs, these changes will also affect the LTCH PPS LTC-DRG
patient classification system.
As discussed above, the ICD-9-CM coding changes that have been
adopted by the C&M Committee become effective at the beginning of each
Federal fiscal year, October 1. Regardless of the proposed change to
the annual update of the LTCH PPS year to July 1, we are proposing that
coders would use the most current updated ICD-9-CM coding book from
October 1 through September 30 of each year. This would mean that
coders and LTCHs that use the updated ICD-9-CM coding system would be
on the same schedule (effective October 1) as the rest of the health
care industry. The newest version of ICD-9-CM is not available for use
until October 1, which would be 4 months after the date that we are
proposing to publish the LTCH annual payment rate update final rule.
The new codes on which the LTC-DRGs are based would go into effect and
be available for use for discharges occurring on or after October 1
through September 30 of each year. This annual schedule of the revision
to the ICD-9-CM coding system and the change of the ICD-9-CM coding
books or electronic coding programs has been in effect since the
adoption of Revision 9 of the ICD in 1979.
Of particular note to LTCHs will be the invalid diagnosis codes
(Table 6C) and the invalid procedure codes (Table 6D) located in the
annual proposed and final rules for the IPPS. Claims with invalid codes
will not be processed by the Medicare claims processing system.
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
We emphasize the need for proper coding by LTCHs. Inappropriate
coding of cases can adversely affect the uniformity of cases in each
LTC-DRG and produce inappropriate weighting factors at recalibration.
We continue to urge LTCHs to focus on improved coding practices.
Because of concerns raised by LTCHs concerning correct coding, we have
asked the American Hospital Association (AHA) to provide additional
clarification or instruction on proper coding in the LTCH setting. The
AHA will provide this instruction via their established process of
addressing questions through their publication ``Coding Clinic for ICD-
9-CM''. Written questions or requests for clarification may be
addressed to the Central Office on ICD-9-CM, American Hospital
Association, One North Franklin, Chicago, IL 60606. A form for the
question(s) is available to be downloaded and mailed on AHA's Web site
at: http://www.ahacentraloffice.org. In addition, current coding

at: http://www.ahacentraloffice.org. In addition, current coding

guidelines are available at the National Center for Health Statistics
(NCHS) Web site:

[[Page 11242]]

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

In conjunction with the cooperating parties of the C&M Committee

(AHA, AHIMA, and NCHS), we have reviewed actual medical records and are
concerned about the quality of the documentation under the LTCH PPS, as
was the case at the beginning of the IPPS. We fully believe that, with
experience, the quality of the documentation and coding will improve,
just as it did for the IPPS. As noted above, the cooperating parties
have plans to assist their members with improvement in documentation
and coding issues for the LTCHs through specific questions and coding
guidelines. The importance of good documentation is emphasized in the
revised ICD-9-CM Official Guidelines for Coding and Reporting (October
1, 2002): ``A joint effort between the attending physician and coder is
essential to achieve complete and accurate documentation, code
assignment, and reporting of diagnoses and procedures. The importance
of consistent, complete documentation in the medical record cannot be
overemphasized. Without such documentation, the application of all
coding guidelines is a difficult, if not impossible, task. (Coding
Clinic for ICD-9-CM, Fourth Quarter 2002, page 115)
To improve medical record documentation, LTCHs should be aware that
if the patient is being admitted for continuation of treatment of an
acute or chronic condition, guidelines at Section I.B.10 of the Coding
Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable
concerning selection of principal diagnosis. To clarify coding advice
issued in the August 30, 2002 final rule (67 FR 55979-55981), we would
like to point out that, at Guideline I.B.12, Late Effects, a late
effect is considered to be the residual effect (condition produced)
after the acute phase of an illness or injury has terminated (Coding
Clinic for ICD-9-CM, Fourth Quarter 2002, page 129). We have received
question regarding whether a LTCH should report the ICD-9-CM code(s)
for an unresolved acute condition instead of the code(s) for late
effect or rehabilitation. Depending on the documentation in the medical
record, either code could be appropriate in a LTCH. Since
implementation of the LTCH PPS, our Medicare fiscal intermediaries have
been conducting training and providing assistance to LTCHs in correct
coding. We have also issued manuals containing procedures as well as
coding instructions to LTCHs and fiscal intermediaries. We will
continue to conduct such training and provide guidance on an as-needed
basis. We also refer readers to the detailed discussion on correct
coding practices in the August 30, 2002 final rule (67 FR 55979-55981).

F. Proposed Changes to the Method for Updating the LTC-DRG Relative
Weights

As previously discussed, under the LTCH PPS, each LTCH will receive
a payment that represents an appropriate amount for the efficient
delivery of care to Medicare patients. The system must be able to
account adequately for each LTCH's case-mix in order to ensure both
fair distribution of Medicare payments and access to adequate care for
those Medicare patients whose care is more costly. Therefore, in
accordance with Sec. 412.523(c), we adjust the standard Federal PPS
rate by the LTC-DRG relative weights in determining payment to LTCHs
for each case.
Under this payment system, 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 who are 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.
As we discussed in the August 30, 2002 final rule (67 FR 55984-
55995), the LTC-DRG relative weights effective under the LTCH PPS for
Federal FY 2003 were calculated using the March 2002 update of FY 2001
MedPAR data and Version 20.0 of the CMS GROUPER software. We use total
days and total charges in the calculation of the LTC-DRG relative
weights.
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 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, we use a hospital-specific
relative value method to calculate relative weights. We believe this
method removes this hospital-specific source of bias in measuring
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. (See the August 30, 2002 final rule (67 FR
55985) for further information of the hospital-specific relative value
methodology.)
In order to account for LTC-DRGs with low volume (that is, with
fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into
one of five categories (quintiles) based on average charges, for the
purposes of determining relative weights. For FY 2003 based on the FY
2001 MedPAR data, we identified 161 LTC-DRGs that contained between 1
and 24 cases. This list of low volume LTC-DRGs was then divided into
one of the five low volume quintiles, each containing a minimum of 32
LTC-DRGs (161/5 = 32 with 1 LTC-DRG as a remainder). Each of the low
volume LTC-DRGs grouped to a specific quintile received the same
relative weight and average length of stay using the formula applied to
the regular LTC-DRGs (25 or more cases), as described below. (See the
August 30, 2002 final rule (67 FR 55985-55988) for further explanation
of the development and composition of each of the five low volume
quintiles for FY 2003.)
After grouping the cases in the appropriate LTC-DRG, we calculate
the relative weights by first removing statistical outliers and cases
with a length of stay of 7 days or less. Next, we adjust the number of
cases in each LTC-DRG for the effect of short-stay outlier cases under
Sec. 412.529. The short-stay adjusted discharges and corresponding
charges were used to calculate ``relative adjusted weights'' in each
LTC-DRG using the hospital-specific relative value method described
above. (See the August 30, 2002 final rule (67 FR 55989-55995) for
further details on the steps for calculating the LTC-DRG relative
weights.)
We also adjust the LTC-DRG relative weights to account for
nonmonotonically increasing relative weights. That is, we make an
adjustment if cases classified to the LTC-DRG ``with comorbidities
(CCs)'' of a ``with CC''/``without CC'' pair had a lower average charge
than the corresponding LTC-DRG ``without CCs'' by assigning the same
weight to both LTC-DRGs in the ``with CC''/``without CC'' pair. (See
August 30, 2002, 67 FR 55990-55991). In addition, of the 510 LTC-DRGs
in the LTCH PPS for FY 2003, based on the FY 2001 MedPAR data, we
identified 159 LTC-DRGs for which there were no LTCH cases in the
database. That is, no

[[Page 11243]]

patients who would have been classified to those DRGs were treated in
LTCHs during FY 2001 and, therefore, no charge data were reported for
those DRGs. Thus, in the process of determining the relative weights of
LTC-DRGs, we were unable to determine weights for these 159 LTC-DRGs
using the method described above. However, since patients with a number
of the diagnoses under these LTC-DRGs may be treated at LTCHs beginning
in FY 2003, we assigned relative weights to each of the 159 ``no
volume'' LTC-DRGs based on clinical similarity and relative costliness
to one of the remaining 351 (510 - 159 = 351) LTC-DRGs for which we
were able to determine relative weights, based on the FY 2001 claims
data. (A list of the no volume LTC-DRGs and further explanation of
their relative weight assignment can be found in the August 30, 2002
final rule (67 FR 55991-55994).)
Furthermore, we establish LTC-DRG relative weights of 0.0000 for
heart, kidney, liver, lung, pancreas, and simultaneous pancreas/kidney
transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively)
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. If in the future,
however, 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 effected. At the present time, though, we only
include these six transplant LTC-DRGs in the GROUPER program for
administrative purposes because since the LTCH PPS uses the same
GROUPER program for LTCHs as is used under the IPPS, removing these
DRGs would be administratively burdensome.
As we stated previously, we are proposing that we would continue to
use the same LTC-DRGs and relative weights until October 1, 2003.
Accordingly, Table 3 in the Addendum to this proposed rule lists the
LTC-DRGs and their respective relative weights and arithmetic mean
length of stay that we are proposing would continue to be used for the
period of July 1, 2003 through September 30, 2003. (This table is the
same as Table 3 of the Addendum to the August 30, 2002 final rule (67
FR 56076-56084), except that it includes the proposed five-sixth of the
average length of stay for short-stay outliers under Sec. 412.529. As
we noted in section IV.D. of this preamble, we are proposing that the
final DRGs and GROUPER for FY 2004 that would be used for the IPPS and
the LTCH PPS, effective October 1, 2003, would be presented in the IPPS
FY 2004 final rule published no later than August 1, 2003 in the
Federal Register.
Accordingly, we would notify LTCHs of the revised LTC-DRG relative
weights for use in determining payments for discharges occurring
between October 1, 2003 and September 30, 2004, based on the final DRGs
and Version 21.0 GROUPER published in the IPPS rule on or before August
1, 2003.

V. Proposed Policy Change Related to Payments to LTCHs That Are
Satellite Facilities

In the March 22, 2002 proposed rule related to the establishment of
the LTCH PPS (67 FR 13416), we stated that we were considering
proposing the elimination of the bed limit in Sec. 412.22(h)(2)(i) for
pre-1997 excluded hospitals once the applicable prospective payment
system was fully phased in and all payments were based on 100 percent
of the Federal prospective payment rates. This statement generated a
number of comments and in the August 30, 2002 final rule (67 FR 56012),
we stated our agreement with commenters who urged us to adopt a policy
eliminating the bed-number restrictions for pre-1997 LTCHs with
satellite facilities, as soon as a LTCH elected to be paid based on 100
percent of the Federal prospective rate. However, we also noted that we
would address a change in the policy concerning bed limits in the next
update of the LTCH PPS. Therefore, we are now proposing to eliminate
the application of the bed-number restrictions set forth in Sec.
412.22(h)(i) for LTCHs established prior to 1997 with satellite
facilities, effective at the start of the first cost reporting year
that the LTCH is paid under the 100 percent fully Federal prospective
payment system. This would be either when the LTCH elects to be paid
based on 100 percent of the Federal prospective rate or when the LTCH
is transitioned to 100 percent of the Federal prospective rate,
whichever comes first.
Presently, section 1886(b)(3) of the Act, as amended by section
4414 of Pub. L. 105-33, requires existing LTCHs to be subject to caps
on their target amounts for cost reporting periods beginning on or
after October 1, 1997 through September 30, 2002. For purposes of
calculating these caps, the statute required the Secretary to
``estimate the 75th percentile of the target amounts for such hospitals
within [each] class for cost reporting periods ending during fiscal
year 1996.'' Section 1886(b)(3)(H) of the Act, as amended by section
121 of Pub. L. 106-113, directed the Secretary to provide for an
appropriate wage adjustment to the caps on the target amounts for
psychiatric and rehabilitation hospitals and units and LTCHs effective
for cost reporting periods beginning on or after October 1, 1999
through September 30, 2002. In addition, payment limits were
established for new excluded hospitals or units (excluding children's
hospitals) effective October 1, 1997. For new excluded hospitals (that
is, post-1997 LTCHs), section 1886(b)(7) of the Act, as added by
section 4416 of Pub. L. 105-33, specified that the payment amount for
the facility's first two 12-month cost reporting periods, for which the
hospital has a settled cost report, must not exceed 110 percent of the
national median of target amounts of similarly classified hospitals for
cost reporting periods ending during FY 1996, updated by the hospital
market basket increase percentage to the first cost reporting period in
which the hospital receives payment, as adjusted by section
1886(b)(7)(C) of the Act. The result of section 4414 and 4416 of Pub.
L. 105-33 was a distinction between the LTCHs established prior to and
those established after 1997 with lower payment caps for the post-1997
LTCHs.
In the July 30, 1999 final rule for the IPPS (64 FR 41532-41533),
we promulgated regulations at Sec. 412.22(h)(2)(i) to discourage pre-
1997 excluded hospitals, which had the higher caps on target amounts as
discussed above (under Sec. 413.40(c)(4)(iii), which implemented
section 4414 of Pub. L. 105-33), from creating satellite arrangements
rather than establishing new hospitals, in order to avoid the payment
impact of the lower caps that apply to new hospitals (under Sec.
413.40(f)(2)(ii) which implemented section 4416 of Pub. L. 105-33).
Under the July 30, 1999 acute care hospital inpatient final rule (64 FR
41490), in order to address this possibility of gaming if a pre-1997
excluded hospital, such as a LTCH, established a satellite facility
and, in doing so, its total beds, in both the parent hospital (or unit)
and the satellite facility, exceeded the number of State-licensed and
Medicare-certified beds in the parent hospital on the last day of its
last cost reporting period beginning before October 1, 1997, the
excluded hospital would be paid under the inpatient DRG system instead
of receiving payment as an excluded hospital under the TEFRA payment
system. Although the excluded hospital

[[Page 11244]]

could ``transfer'' bed capacity from the parent facility to the
satellite, it could not increase its total bed capacity beyond the
level it had in the most recent cost reporting period beginning before
October 1, 1997, and still be paid as a hospital excluded from the
IPPS. However, no such limitation was imposed on a LTCH (or other
excluded facility) established after October 1, 1997 because it would
have already been subject to the lower payment limits under Sec.
413.40(f)(2)(ii) of 110 percent of the national median of target
amounts for similarly classified hospitals. Therefore, it would not
benefit from the higher 75 percent cap on target amounts under Sec.
413.40(c)(4) by establishing a satellite facility, as would a pre-1997
LTCH.
The rationale for the bed-limit provision based on the distinction
between these groups of hospitals was the potential for gaming, by
creating a satellite facility with a higher TEFRA target cap where, in
reality, the satellite facility should have been a separately certified
excluded facility, which would have been subject to the lower cap on
payments to new (post-1997) facilities paid under the TEFRA system.
Once the LTCH is paid based on 100 percent of the Federal prospective
rate, however, the LTCH will no longer be subject to TEFRA caps and
LTCH prospective payments will be the same regardless of when the LTCH
was established. Therefore, we are proposing to eliminate the bed-limit
provision once the LTCH is paid based on 100 percent of the LTCH
Federal PPS rate. Finally, under this proposed policy, the bed
limitation on ``existing'' LTCHs would, however, continue to apply to
those LTCHs while they are paid based on the transition blend, and,
therefore, continue to receive a percentage of their payments based on
the TEFRA payment rules, until they transition to a rate based on 100
percent of the Federal prospective payment rate.

VI. Proposed Changes to the LTCH PPS Rates for the Proposed 2004 LTCH
PPS Rate Year

A. Overview of the Development of the Proposed Payment Rates

The PPS for LTCHs was effective for cost reporting periods
beginning on or after October 1, 2002. Effective with that cost
reporting period, LTCHs are paid, during a 5-year transition period, on
the basis of an increasing proportion of the LTCH PPS Federal rate and
a decreasing proportion of a hospital's payment under TEFRA, unless the
hospital makes a one-time election to receive payment based on 100
percent of the Federal rate (see Sec. 412.533). New LTCHs (as defined
at Sec. 412.23(e)(4)) are paid based on 100 percent of the Federal
rate, with no phase-in transition payments.
The basic methodology for determining LTCH PPS Federal prospective
payment rates is set forth in our regulations at Sec. Sec. 412.521
through 412.529. Below we discuss the factors that we are proposing to
use to update the LTCH PPS standard Federal rate for the proposed 2004
LTCH PPS rate year, which would be effective for LTCHs paid under the
PPS for discharges occurring on or after July 1, 2003 through June 30,
2004.
In the August 30, 2002 final rule (67 FR 56029-56031), for cost
reporting periods beginning on or after October 1, 2002 (FY 2003), we
computed the LTCH PPS standard Federal payment rate by updating the
best available (FY 1998 or FY 1999) Medicare inpatient operating and
capital costs per case data, using the excluded hospital market basket.
Section 123(a)(1) of Pub. L. 106-113 requires that the PPS
developed for LTCHs be budget neutral. Therefore, in calculating the
standard Federal rate for FY 2003 under Sec. 412.523(d)(2), we set
total estimated PPS payments equal to estimated payments that would
have been made under the TEFRA methodology if the PPS for LTCHs were
not implemented. Section 307(a) of Pub. L. 106-554 specified that the
increases to the hospital-specific target amounts and cap on the target
amounts for LTCHs for FY 2002 provided for by section 307(a)(1) of Pub.
L. 106-554 shall not be taken into account in the development and
implementation of the LTCH PPS. In addition, the statute provides for
enhanced bonus payments for LTCHs for FY 2001 and FY 2002 provided for
by section 122 of Pub. L. 106-113. Furthermore, as specified at Sec.
412.523(d)(1), the standard Federal rate is reduced by an adjustment
factor to account for the estimated proportion of outlier payments
under the LTCH PPS to total LTCH PPS payments (8 percent). For further
details on the development of the FY 2003 standard Federal rate, see
the August 30, 2002 final rule (67 FR 56027-56037). Under the existing
regulations at Sec. 412.523(c)(3)(ii) for fiscal years after FY 2003,
we update the standard Federal rate annually to adjust for the most
recent estimate of the projected increases in prices for LTCH inpatient
hospital services.

B. Proposed Update to the Standard Federal Rate for the Proposed 2004
LTCH PPS Rate Year

In the August 30, 2002 final rule (67 FR 56033), we established a
LTCH PPS standard Federal rate of $34,956.15 for FY 2003. Based on the
most recent estimate of the excluded hospital with capital market
basket, adjusted to account for the proposed change in the rate year
update cycle for the LTCH PPS rates discussed in section III. of this
proposed rule, the proposed LTCH PPS standard Federal rate, effective
from July 1, 2003 through June 30, 2004, would be $35,726.64 (as
discussed below).
In the discussion that follows, we explain how we developed the
proposed update to the standard Federal rate. The proposed Federal rate
for the proposed 2004 LTCH PPS rate year is calculated based on the
proposed update factor of 1.0250. Thus, the proposed standard Federal
rate for the proposed 2004 LTCH PPS rate year would increase 2.2
percent compared to the FY 2003 standard Federal rate.
1. Proposed Standard Federal Rate Update
In the August 30, 2002 final rule, we established in Sec. 412.523
that, for years after FY 2003, the annual update to the LTCH PPS
standard Federal rate will be equal to the percentage change in the
excluded hospital with capital market basket (described in further
detail below). As we discussed in the August 30, 2002 final rule (67 FR
56087), in the future we may propose to develop a framework to update
payments to LTCHs that would account for other appropriate factors that
affect the efficient delivery of services and care provided to Medicare
patients. Because the LTCH PPS has only been implemented for cost
reporting periods beginning on or after October 1, 2002, we have not
yet collected sufficient data to allow for the analysis and development
of an update framework under the LTCH PPS. Therefore, at this time, we
are not proposing an update framework for the LTCH PPS. However, a
conceptual basis for the proposal of developing an update framework in
the future can be found in Appendix B of the August 30, 2002 final rule
(67 FR 56086-56090).
a. Description of the Proposed Market Basket for LTCHs for the Proposed
2004 LTCH PPS Rate Year
A market basket has historically been used in the Medicare program
to account for price increases of the services furnished by providers.
The market basket used for the LTCH PPS includes both operating and
capital-related costs of LTCHs because the LTCH PPS uses a single
payment rate for both operating and capital-related costs. The
development of the LTCH

[[Page 11245]]

PPS standard Federal rate is discussed in further detail in the August
30, 2002 final rule (67 FR 56027-56037).
Under the reasonable cost-based TEFRA reimbursement system, the
excluded hospital market basket was used to update the hospital-
specific limits on payment for operating costs of LTCHs. The excluded
hospital market basket is based on operating costs from FY 1992 cost
report data and includes Medicare-participating long-term care,
rehabilitation, psychiatric, cancer, and children's hospitals. Since
LTCHs' costs are included in the excluded hospital market basket, this
market basket index, in part, also reflects the costs of LTCHs.
However, in order to capture the total costs (operating and capital-
related) of LTCHs, we added a capital component to the excluded
hospital market basket for use under the LTCH PPS. We refer to this
index as the excluded hospital with capital market basket.
Beginning with the implementation of the LTCH PPS in FY 2003, the
excluded hospital with capital market basket based on FY 1992 Medicare
cost report data has been used for updating payments to LTCHs. The FY
1992-based market basket reflected the distribution of costs in FY 1992
for Medicare-participating freestanding rehabilitation, long-term care,
psychiatric, cancer, and children's hospitals. This information was
derived from the FY 1992 Medicare cost reports. A full discussion of
the methodology and data sources used to construct the FY 1992-based
excluded hospital with capital market basket is included in Appendix A
of the August 30, 2001 final rule (67 FR 56085-56086). In this proposed
rule, we are proposing to revise and rebase the excluded hospital with
capital market basket, based on more recent data, to an FY 1997 base
year for application beginning with the proposed 2004 LTCH PPS rate
year.
We believe it is appropriate to propose to rebase the LTCH PPS
market basket based on the most recent complete data available (FY
1997) since these data would more accurately reflect LTCH current
costs. This proposed rebasing of the LTCH PPS market basket from an FY
1992 base year to a FY 1997 base year is consistent with the rebasing
of both the IPPS and the excluded hospital market basket used under the
TEFRA payment system for FY 2003, as discussed in the August 1, 2002
IPPS final rule (67 FR 50032-50047).
The operating portion of the proposed FY 1997-based excluded
hospital with capital market basket that we are proposing to use under
the LTCH PPS is derived from the FY 1997-based excluded hospital market
basket used under the TEFRA payment system. The methodology we proposed
to use to develop the proposed operating portion of the market basket
under the LTCH PPS is the same methodology used to describe the
rebasing of the excluded hospital market basket used under the TEFRA
payment system, which is described in greater detail in the August 1,
2002 IPPS final rule (67 FR 50042-50044). In brief, the operating cost
category weights in the FY 1997-based excluded market basket added to
100.0. These weights were determined from FY 1997 Medicare cost report
data, the 1997 Business Expenditure Survey, and the 1997 Annual Input-
Output data from the Bureau of the Census. In this proposed rule, in
applying the proposed FY 1997-based market basket we are proposing to
make the same two methodological revisions that we established when we
rebased the hospital inpatient market basket and the excluded hospital
market basket in the August 1, 2002 IPPS final rule: (1) Changing the
wage and benefit price proxies to use the Employment Cost Index (ECI)
wage and benefit data for hospital workers; and (2) adding a cost
category for blood and blood products.
When we add the weight for capital costs to the excluded hospital
market basket, the sum of the operating and capital weights must still
equal 100.0. Based on FY 1997 Medicare cost reports for excluded
hospitals, the capital cost weight would be 8.968 percent. Because
capital costs would account for 8.968 percent of total costs for
excluded hospitals in FY 1997, operating costs must, therefore, account
for 91.032 percent (100 percent-8.968 percent). Each operating cost
category weight in the FY 1997-based excluded hospital market basket
from the August 1, 2002 IPPS final rule (67 FR 50442-50444) was
multiplied by 0.91032 to determine its weight in the FY 1997-based
excluded hospital with capital market basket.
The aggregate capital component of the proposed FY 1997-based
excluded hospital market basket (8.968 percent) was determined from the
same set of Medicare cost reports used to derive the operating
component. The detailed capital cost categories of depreciation,
interest, and other capital expenses were also determined using the
Medicare cost reports. We needed to determine two sets of weights for
the capital portion of the proposed revised and rebased market basket.
The first set of weights identifies the proportion of capital
expenditures attributable to each capital cost category; the second set
represents relative vintage weights for depreciation and interest. The
vintage weights identify the proportion of capital expenditures that is
attributable to each year over the useful life of capital assets within
a cost category (See 67 FR 50046-50047, August 1, 2002, for a
discussion of how vintage weights are determined).
The cost categories, price proxies, and base-year FY 1992 and
proposed FY 1997 weights for the proposed excluded hospital with
capital market basket are presented below in Table I. The vintage
weights for the proposed FY 1997-based excluded hospital with capital
market basket are presented in Table II.

Table I.--Proposed Excluded Hospital With Capital Input Price Index (FY 1992-Based and Proposed FY 1997-Based)
Structure and Weights
----------------------------------------------------------------------------------------------------------------
Weights (%), base-year Proposed weights (%)
Cost category Price/wage variable FY 1992 ¹ ² base-year FY 1997 ¹ ²
----------------------------------------------------------------------------------------------------------------
Total............................ 100.000 100.000
Compensation..................... 57.935 57.579
Wages and Salaries........... ECI--Wages and Salaries, 47.417 47.335
Civilian Hospital
Workers.
Employee Benefits............ ECI--Benefits, Civilian 10.519 10.244
Hospital Workers to
Capture Total Costs.
Professional fees: Non-Medical... ECI--Compensation: 1.908 4.423
Professional & Technical.
Utilities........................ ......................... 1.524 1.180
Electricity.................. PPI--Commercial Electric 0.916 0.726
Power.
Fuel Oil, Coal, etc.......... PPI--Commercial Natural 0.365 0.248
Gas.
Water and Sewerage........... CPI-U--Water & Sewerage 0.243 0.206
Maintenance.

[[Page 11246]]

Professional Liability Insurance. CMS--Professional 0.983 0.733
Liability Insurance
Premiums Index.
All Other Products and Services.. 28.571 27.117
All Other Products........... 22.027 17.914
Pharmaceuticals.......... PPI--Ethical 2.791 6.318
(Prescription) Drugs.
Food: Direct Purchase.... PPI--Processed Foods and 2.155 1.122
Feeds.
Food: Contract Service... CPI-U--Food Away from 0.998 1.043
Home.
Chemicals................ PPI--Industrial Chemicals 3.413 2.133
Blood and Blood Products. PPI--Blood and Blood 0.748
Derivatives, Human Use.
Medical Instruments...... PPI--Medical Instruments 2.868 1.795
& Equipment.
Photographic Supplies.... PPI--Photographic 0.364 0.167
Supplies.
Rubber and Plastics...... PPI--Rubber & Plastic 4.423 1.366
Products.
Paper Products........... PPI--Converted Paper and 1.984 1.110
Paperboard Products.
Apparel.................. PPI--Apparel............. 0.809 0.478
Machinery and Equipment.. PPI--Machinery & 0.193 0.852
Equipment.
Miscellaneous Products... PPI--Finished Goods Less 2.029 0.783
Food and Energy.
All Other Services........... 6.544 9.203
Telephone................ CPI-U--Telephone Services 0.574 0.348
Postage.................. CPI-U--Postage........... 0.268 0.702
All Other: Labor ECI--Compensation for 4.945 4.453
Intensive. Private Service
Occupations.
All Other: Non-Labor CPI-U--All Items......... 0.757 3.700
Intensive.
Capital-Related Costs............ 9.080 8.968
Depreciation................. 5.611 5.586
Building & Fixed Boeckh-Institutional 3.570 3.503
Equipment. Construct. Index--
Vintage Weighted (23
years).
Movable Equipment........ PPI--Machinery & 2.041 2.083
Equipment--Vintage
Weighted (11 Years).
Interest Costs............... 3.212 2.682
Government/ Nonprofit.... Yield on Domestic 2.730 2.280
Municipal Bonds (Bond
Buyer 20 Bonds)--Vintage
Weighted (23 years).
For-profit............... Yield on Moody's Aaa 0.482 0.402
Bonds--Vintage Weighted
(23 Years).
Other Capital-Related CPI-U--Residential Rent.. 0.257 0.699
Costs.
----------------------------------------------------------------------------------------------------------------
\1\ The operating cost category weights in the excluded hospital market basket described in the August 1, 2002
final rule (67 FR 50042-50044) add to 100.0. When we add an additional set of cost category weights (total
capital weight = 8.968 percent) to this original group, the sum of the weights in the new index must still add
to 100.0. Capital costs account for 8.968 percent of the market basket; operating costs account for 91.032
percent. Each weight in the FY 1997-based excluded hospital market basket from the August 1, 2002 final rule
(67 FR 50042-50044) was multiplied by 0.91032 to determine its weight in the proposed FY 1997-based excluded
hospital with capital market basket.
\2\ Weights may not sum to 100.0 due to rounding.

Table II.--Proposed Excluded Hospital With Capital Input Price Index (FY
1997) Vintage Weights
------------------------------------------------------------------------
Building Interest:
and fixed Movable capital-
Year (from farthest to most recent) equipment equipment related
* (23-year (11-year (23-year
weights) * weights) * weights) *
------------------------------------------------------------------------
1................................... 0.018 0.063 0.007
2................................... 0.021 0.068 0.009
3................................... 0.023 0.074 0.011
4................................... 0.025 0.080 0.012
5................................... 0.026 0.085 0.014
6................................... 0.028 0.091 0.016
7................................... 0.030 0.096 0.019
8................................... 0.032 0.101 0.022
9................................... 0.035 0.108 0.026
10.................................. 0.039 0.114 0.030
11.................................. 0.042 0.119 0.035
12.................................. 0.044 .......... 0.039
13.................................. 0.047 .......... 0.045
14.................................. 0.049 .......... 0.049
15.................................. 0.051 .......... 0.053
16.................................. 0.053 .......... 0.059
17.................................. 0.057 .......... 0.065
18.................................. 0.060 .......... 0.072
19.................................. 0.062 .......... 0.077
20.................................. 0.063 .......... 0.081
21.................................. 0.065 .......... 0.085

[[Page 11247]]

22.................................. 0.064 .......... 0.087
23.................................. 0.065 .......... 0.090
-------------
Total........................... 1.0000 1.0000 1.0000
------------------------------------------------------------------------
* Weights may not sum to 1.000 due to rounding.

Table III. compares the FY 1992-based excluded hospital with
capital market basket to the proposed FY 1997-based excluded hospital
with capital market basket. As shown in the table, the proposed rebased
and revised market basket grows slightly faster over the FY 1999-2001
period than the FY 1992-based market basket. The major reason for this
was the switching of the wage and benefit proxy to the ECI for hospital
workers from the previous occupational blend. This revision had a
similar impact on the IPPS and excluded market baskets, as described in
the August 1, 2002 final rule (67 FR 50043-50047).

Table III.--Percent Changes in the FY 1992-Based and Proposed FY 1997-
Based Excluded Hospital with Capital Market Baskets, FYs 1999-2004
------------------------------------------------------------------------
Percentage change
-------------------------
FY 1992- Proposed
based rebased FY
Fiscal year (FY) excluded 1997-based
hospital excluded
market market
basket basket
------------------------------------------------------------------------
1999.......................................... 2.3 2.7
2000.......................................... 3.4 3.1
2001.......................................... 3.9 4.0
Average historical............................ 3.2 3.3
2002.......................................... 2.8 3.7
2003.......................................... 2.8 3.1
2004.......................................... 3.0 3.3
Average forecast.............................. 2.9 3.3
------------------------------------------------------------------------

In the August 30, 2002 LTCH PPS final rule (67 FR 56016 and 56085-
56086), we discussed why we believe the excluded hospital with capital
market basket provides a reasonable measure of the price changes facing
LTCHs. However, we have been researching the feasibility of developing
a market basket specific to LTCH services. This research has included
analyzing data sources for cost category weights, specifically the
Medicare cost reports, and investigating other data sources on cost,
expenditure, and price information specific to LTCHs. Based on this
research (as discussed below), at this time we are not proposing to
develop a market basket specific to LTCH services.
Our analysis of the Medicare cost reports indicates that the
distribution of costs among major cost report categories (wages,
pharmaceuticals, capital) for LTCHs is not substantially different from
the proposed 1997-based excluded hospital with capital market basket
presented in this proposed rule. Data on other major cost categories
(benefits, blood, contract labor) that we would like to analyze were
excluded by many LTCHs in their Medicare cost reports. An analysis
based on only the data available to us for these cost categories
presented a potential problem since no other major cost category weight
would be based on LTCH data.
We conducted a sensitivity analysis of annual percent changes in
the market basket when the weights for wages, pharmaceuticals, and
capital in LTCHs were substituted into the excluded hospital with
capital market basket. Other cost categories were recalibrated using
ratios available from the IPPS market basket. On average between FY
1995 and FY 2002, the proposed excluded hospital with capital market
basket shows increases at nearly the same average annual rate (2.9
percent) as the market basket with LTCH weights for wages,
pharmaceuticals, and capital (2.8 percent). This difference is less
than the 0.25 percentage point criterion that determines whether a
forecast error adjustment is warranted under the IPPS update framework.
We believe that an excluded hospital with capital market basket
adequately reflects the price changes facing LTCHs. We will continue to
solicit comments about issues particular to LTCHs that should be
considered in relation to the proposed FY 1997-based excluded hospital
with capital market basket and to encourage suggestions for additional
data sources that may be available.
b. Proposed LTCH Market Basket Increase for the Proposed 2004 LTCH
PPS Rate Year
As stated earlier, for LTCHs paid under the LTCH PPS, we are
proposing that the 2004 rate year update would apply to discharges
occurring from July 1, 2003 through June 30, 2004. Because we are
proposing to change the timeframe of the standard Federal rate annual
update, we needed to calculate an update factor that would reflect this
proposed change in the update cycle. Presently, the current rate cycle
is October 1, 2002 through September 30, 2003. This means that the
standard Federal rate ($34.956.15; see the August 30, 2002 final rule,
67 FR 56033) was determined based on the market basket increase through
September 30, 2003. Since we are proposing to change the rate update
cycle and, therefore, update the standard Federal rate 3 months earlier
(that is, July 1, 2003 instead of October 1, 2003), we need to propose
an adjustment to the projected full (12-month) market basket increase
to eliminate the projected increase for the 3-month overlapping period
(July 1, 2003 through September 30, 2003).
Thus, we needed to account for the fact that the FY 2003 standard
Federal rate of $34,956.15 already includes an update for the 3-month
period from July 1, 2003 through September 30, 2003. In the absence of
this proposed change, the update for FY 2004 would have been calculated
using the estimated increase between FY 2003 and FY 2004. For the
proposed update for the proposed 2004 LTCH PPS rate year, we calculated
the estimated increase between FY 2003 and the proposed 2004 LTCH PPS
rate year. Based on the fourth quarter 2002 forecast of the proposed
rebased FY 1997-based excluded hospital with capital market basket,
this calculation results in an increase that is 0.8 percentage points
less than it would have been if the proposed change in the LTCH PPS
rate cycle would not be made. The projected market basket increase for
this 3-month period (0.8

[[Page 11248]]

percent) was already included in the FY 2003 standard Federal rate and,
therefore, needs to be deducted from the projected market basket
increase for the 12-month period of July 1, 2003 through June 30, 2004
(3.3 percent) in order to account for the proposed change in the update
cycle.
Consistent with our historical practice of estimating market basket
increases, based on Global Insights' (formerly DRI-WEFA) fourth quarter
2002 forecast of the proposed rebased FY 1997-based excluded hospital
with capital market basket, we are proposing an update of 2.5 percent,
as shown in Table IV. below.

Table IV.--Calculation of Proposed Market Basket Increase for the
Proposed 2004 LTCH Prospective Payment System Rate Year
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Proposed 2004 rate year full market basket with capital 3.3
increase*....................................................
Adjustment for the proposed change in the update cycle**...... -0.8
Proposed 2004 market basket increase.......................... 2.5
------------------------------------------------------------------------
\*\ Projected market basket increase for the 12-month period of July 1,
2003 through June 30, 2004.
\**\ Projected market basket increase for the 3-month period of July 1,
2003 through September 30, 2003 already included in the FY 2003
standard Federal rate.

In addition, based on the best available data for 194 LTCHs, we
estimate that LTCH prospective payment system payments would be $1.960
billion for the proposed 2004 LTCH prospective payment system rate
year. As indicated previously, we are proposing to update the FY 2003
standard Federal rate and wage index data 3 months early (July 1, 2003
instead of October 1, 2003). We are proposing that this change be
budget neutral because, as we discussed in the August 30, 2002 final
rule (67 FR 56027), total estimated LTCH PPS payments in FY 2003 will
equal estimated payments that would have been made under the reasonable
cost-based principles if the LTCH PPS were not implemented. Based on
the most recent data, for the 3-month period from July 1, 2003 through
September 30, 2003, the proposed increase in the standard Federal rate
would result in an additional cost of $5.66 million to the FY 2003
Federal budget. Accordingly, in order to maintain budget neutrality for
the proposed change in the rate update cycle, under proposed Sec.
412.523(c)(3)(ii), we are proposing to adjust the standard Federal rate
by a factor of 0.997 (($1.960 billion--$5.66 million)/$1.960 billion)
or -0.003. Also, we propose to revise this adjustment factor in the
final rule based on the best available data.
Therefore, we are proposing to update the current standard Federal
rate ($34,956.15) established in the August 30, 2002 final rule (67 FR
56033) by 2.2 percent (2.5 percent minus 0.3 percent) for discharges
paid under the LTCH PPS that occur on or after July 1, 2003 through
June 30, 2004. This proposed update represents the most recent estimate
of the increase in the excluded hospital with capital market basket for
the proposed 2004 LTCH PPS rate year, adjusted by the above described
factor to transition to the proposed change in the rate update cycle to
July 1, and is based on the best available data for 194 LTCHs.
2. Proposed Standard Federal Rate for the Proposed 2004 LTCH PPS Rate
Year
In the August 30, 2002 LTCH PPS final rule (67 FR 56033), we
established a standard Federal rate of $34,956.15. For the proposed
2004 LTCH PPS rate year, we are proposing a standard Federal rate of
$35,726.64. Since the proposed standard Federal rate has already been
adjusted for differences in case-mix, wages, cost-of-living, and high-
cost outlier payments, we are not proposing any additional adjustments
in the proposed standard Federal rate for these factors.

C. Calculation of Proposed LTCH Prospective Payments for the Proposed
2004 LTCH PPS Rate Year

The basic methodology for determining prospective payment rates for
LTCH inpatient operating and capital-related costs is set forth in
Sec. 412.521. In accordance with Sec. 412.515, we assign appropriate
weighting factors to each LTC-DRG to reflect the estimated relative
cost of hospital resources used for discharges within that group as
compared to discharges classified within other groups. The amount of
the prospective payment is based on the standard Federal rate,
established under Sec. 412.523, and adjusted for the LTC-DRG relative
weights, differences in area wage levels, cost-of-living in Alaska and
Hawaii, high-cost outliers, and other special payment provisions
(short-stay outliers under Sec. 412.529 and interrupted stays under
Sec. 412.531). In accordance with Sec. 412.533, during the 5-year
transition period, payment is based on the applicable transition blend
percentage of the adjusted Federal rate and the TEFRA rate unless the
LTCH makes a one-time election to receive payment based on 100 percent
of the Federal rate. A LTCH defined as ``new'' under Sec. 412.23(e)(4)
is paid based on 100 percent of the Federal rate with no blended
transition payments (Sec. 412.533(d)). As discussed in the August 30,
2002 final rule and in accordance with Sec. 412.533(a), the applicable
transition blends are as follows:

------------------------------------------------------------------------
Federal
Cost reporting periods beginning on or after rate TEFRA rate
percentage percentage
------------------------------------------------------------------------
Oct. 1, 2002.................................... 20 80
Oct. 1, 2003.................................... 40 60
Oct. 1, 2004.................................... 60 40
Oct. 1, 2005.................................... 80 20
Oct. 1, 2006.................................... 100 0
------------------------------------------------------------------------

Accordingly, for cost reporting periods beginning during FY 2003
(that is, on or after October 1, 2002, and before September 30, 2003),
blended payments under the transition methodology are based on 80
percent of the LTCH's TEFRA rate and 20 percent of the adjusted Federal
rate. For cost reporting periods beginning during FY 2004 (that is, on
or after October 1, 2003 and before September 30, 2004), blended
payments under the transition methodology will be based on 60 percent
of the LTCH's TEFRA rate and 40 percent of the adjusted Federal rate.
1. Proposed Adjustment for Area Wage Levels
Under the authority of section 307(b) of Pub. L. 106-554, we
established an adjustment to account for differences in LTCH area wage
levels under Sec. 412.525(c) using the labor-related share estimated
by the excluded hospital market basket with capital and wage indices
that were computed using wage data from acute care inpatient hospitals
without regard to reclassification under section 1886(d)(8) or section
1886(d)(10) of the Act. Furthermore, as we discussed in the August 30,
2002 final rule (67 FR 56015-56019), we established a 5-year transition
to the full wage adjustment. For cost reporting periods beginning on or
after October 1, 2002 and before September 30, 2003 (FY 2003), the
applicable LTCH wage index value is one-fifth of the full FY 2002 acute
care hospital inpatient wage index data, without taking into account
geographic reclassification under section 1886(d)(8) and section
1886(d)(10) of the Act.
In that same final rule (67 FR 56018), we stated that we would
continue to reevaluate LTCH data as they become available and would
propose to adjust the phase-in if subsequent data support

[[Page 11249]]

a change. Because the LTCH PPS was only recently implemented,
sufficient new data have not been generated that would enable us to
conduct a comprehensive reevaluation of the appropriateness of
adjusting the phase-in. However, we have reviewed the most recent data
available and did not find any evidence to support a change in the 5-
year phase-in of the wage index. Therefore, we are not proposing to
adjust the phase-in at this time. In addition, as stated earlier, the
5-year phase-in of the wage index would not be affected by the proposed
establishment of a LTCH PPS rate year of July 1 to June 30. Instead,
the 5-year phase-in of the wage index established in the August 30,
2002 final rule (67 FR 56018) will continue to follow the Federal
fiscal year. That is, for cost reporting periods beginning on or after
October 1, 2003 and before September 30, 2004 (FY 2004), the applicable
proposed LTCH wage index will be two-fifths of the proposed applicable
LTCH PPS index values discussed below. However, we will reevaluate LTCH
data as they become available and would propose to adjust the phase-in
if subsequent data support a change.
Section 412.525(c) provides that the adjustment to account for
differences in area wage levels is made by multiplying the labor-
related portion of the Federal rate by the appropriate wage index value
for the area in which the LTCH is physically located. In the August 30,
2002 final rule (67 FR 56018), based on the best available data at that
time, we stated that the wage index adjustment is based on the FY 2002
inpatient acute care hospital wage index data without taking into
account geographic reclassification under section 1886(d)(8) and
section 1886(d)(10) of the Act. For the proposed 2004 LTCH PPS rate
year, we are proposing that the wage index adjustment provided for
under Sec. 412.525(c) be based on the most recent available inpatient
acute care hospital wage data, that is, the FY 2003 inpatient acute
care hospital wage index data without taking into account geographic
reclassification under section 1886(d)(8) and section 1886(d)(10) of
the Act. As we noted above, the 5-year phase-in of the wage index
adjustment would not be affected by the proposed change in the LTCH PPS
rate update cycle and will continue to be based on the Federal fiscal
year. However, we are proposing to update the data used to compute the
annual wage index values on the proposed 2004 LTCH PPS rate year cycle
(July through June). For example, for a LTCH with a cost reporting
period from January 1, 2003 through December 31, 2003, the LTCH will be
paid using the one-fifth wage index value for its entire cost reporting
period. For the first 6 months of that period (January 1, 2003 through
June 30, 2003), the one-fifth wage index value would be based on the FY
2000 inpatient acute care hospital wage index data without taking into
account geographic reclassifications under sections 1886(d)(8) and
(d)(10) of the Act as established in the August 30, 2002 final rule (67
FR 56018). Under our proposal to update the data used to compute the
LTCH PPS wage index values for July 1, 2003 through June 30 2004, for
the next 6 months (July 1, 2003 through December 31, 2003) the LTCH
would still be paid using one-fifth of the wage index value, but the
wage index value would now be computed using FY 2003 inpatient acute
care hospital wage index data without taking into account geographic
reclassifications under sections 1886(d)(8) and (d)(10) of the Act (as
shown in Tables 1 and 2 of the Addendum of this proposed rule). For the
LTCH's cost reporting period from January 1, 2004 through December 31,
2004, the LTCH would be paid using the two-fifth wage index value. For
the first 6 months of that period (January 1, 2004 through June 30,
2004), the two-fifth wage index value would be based on the FY 2000
inpatient acute care hospital wage index data without taking into
account geographic reclassifications under sections 1886(d)(8) and
(d)(10) of the Act, as shown in Tables 1 and 2 of the Addendum of this
proposed rule.
In the August 30, 2002 final rule (67 FR 56018), for FY 2003 we
used the FY 2002 inpatient acute care hospital wage index data without
taking into account geographic reclassifications under sections
1886(d)(8) and (d)(10) of the Act. The inpatient acute care hospital
wage index data, without taking into account geographic
reclassification under section 1886(d)(8) or section 1886(d)(10) of the
Act, is also used under other postacute care PPSs, such as the IRF PPS
and the SNF PPS. As we discussed in the August 30, 2002 final rule (67
FR 56019), since hospitals that are excluded from the IPPS are not
required to provide wage-related information on the Medicare cost
report and we would need to establish instructions for the collection
of such LTCH data in order to establish a geographic reclassification
adjustment under the LTCH PPS, the wage adjustment established under
the LTCH PPS is based on a LTCH's actual location without regard to the
urban or rural designation of any related or affiliated provider. In
this proposed rule, for the proposed 2004 LTCH PPS rate year, we are
proposing to use the FY 2000 inpatient acute care hospital wage index
data without taking into account geographic reclassifications under
sections 1886(d)(8) and (d)(10) of the Act, because it is the most
recent available complete data. This is the same wage data that were
used to compute the FY 2003 wage indices currently used under the IPPS.
The proposed LTCH wage index values for July 1, 2003 through June 30,
2004 is shown in Table 1 (for urban areas) and Table 2 (for rural
areas) in the Addendum of this proposed rule. As noted above, for cost
reporting periods beginning on or after October 1, 2002 and before
September 30, 2003 (FY 2003), the applicable LTCH wage index is one-
fifth of the full FY 2003 acute care hospital inpatient wage index
data, without taking into account geographic reclassifications under
sections 1886(d)(8) and (d)(10) of the Act. For cost reporting periods
beginning on or after October 1, 2003 and before September 30, 2003 (FY
2004), the applicable proposed LTCH wage index would be two-fifths of
the full FY 2003 acute care hospital inpatient wage index data, without
taking into account geographic reclassification under sections
1886(d)(8) and (d)(10) of the Act.
In conjunction with our proposal to rebase the excluded hospital
with capital market basket from an FY 1992 to an FY 1997 base year (as
discussed in section VI.B.1.a. of this preamble), we also are proposing
to use a labor-related share that is determined from our proposed FY
1997-based excluded hospital with capital market basket. In the August
30, 2002 final rule (67 FR 56016), we established a labor-related share
of 72.885 percent based on the relative importance of the labor-related
share of operating and capital costs of the excluded hospital with
capital market basket with an FY 1992 base-year. In this proposed rule,
as discussed in further detail below, we are proposing a labor-related
share of 72.612 percent based on the relative importance of the labor-
related share of operating costs (wages and salaries, employee
benefits, professional fees, postal services, and all other labor-
intensive services) and capital costs in the proposed FY 1997 rebased
excluded hospital with capital market basket.
To determine the proposed labor-related share, we use the cost
categories contained in the proposed FY 1997-based excluded hospital
with capital market basket that are influenced by local labor markets,
which reflect the different rates of price change for these cost
categories between the base year

[[Page 11250]]

(FY 1997) and this period. First, we estimate the portion related to
operating costs, which we estimate to be 69.075 percent for the
proposed LTCH PPS rate year of July 1, 2003 through June 30, 2004,
calculated based on the Medicare cost reports for excluded hospitals as
the sum of the relative importance for wages and salaries (48.967),
employee benefits (11.032), professional fees (4.518), and labor-
intensive services (4.558), as shown in Table V. The labor-related
share of capital costs in the market basket needed to be considered as
well. After an analysis of FY 1997 Medicare cost report data, we found
no evidence to revise our current estimate of the portion of capital
costs that is influenced by local labor markets of 46 percent (see 67
FR 56016, August 30, 2002). Based on the proposed change in the LTCH
PPS rate update cycle, the relative importance of capital is estimated
to be 7.692 percent. Because the relative importance of capital is
7.692 percent of the proposed FY 1997-based excluded hospital with
capital market basket for the proposed 2004 LTCH PPS rate year, we
multiplied 46 percent by 7.692 percent to determine the labor-related
share of capital costs to be 3.538 percent. We then added the 3.543
that was calculated for capital costs to the 69.075 percent that was
calculated for operating costs to determine the total labor-related
relative importance of 72.612. Therefore, we are proposing to use a
labor-related share of 72.612 percent for the proposed 2004 LTCH PPS
rate year.

Table V.--Proposed Labor-Related Share Relative Importance
------------------------------------------------------------------------
Relative Relative
importance FY importance FY
1992-based 1997-based
Cost category market basket market basket
(proposed 2004 (proposed 2004
LTCH PPS rate LTCH PPS rate
year) year)
------------------------------------------------------------------------
Wages and salaries.................. 50.572 48.967
Employee benefits................... 11.882 11.032
Professional fees................... 2.052 4.518
Postage............................. 0.254 ................
All other labor intensive services.. 5.242 4.558
Subtotal........................ 70.001 69.075
-------------------
Labor-related share of capital costs 3.412 3.538
-------------------
Total........................... 73.413 72.612*
------------------------------------------------------------------------
\*\ Although the weights of the cost categories appear to add to 76.213,
this is due to rounding; the actual labor-related share is 72.61246.

2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
Under Sec. 412.525(b), we make a cost-of-living adjustment (COLA)
for LTCHs located in Alaska and Hawaii to account for the higher costs
incurred in those States.
For the proposed 2004 LTCH PPS rate year, under Sec. 412.525(b),
we are proposing to make a COLA to payments for LTCHs located in Alaska
and Hawaii by multiplying the standard Federal payment rate by the
appropriate factor listed in Table VI. below. These factors are
obtained from the U.S. Office of Personnel Management (OPM). If OPM
releases revised COLA factors before May 1, 2003, we propose to use
them for the development of payments and will publish them in the final
rule.

Table VI.--Proposed Cost-of-Living Adjustment Factors for Alaska and
Hawaii Hospitals for the Proposed 2004 LTCH PPS Rate Year
------------------------------------------------------------------------

------------------------------------------------------------------------
Alaska:
All areas..................................................... 1.25
Hawaii:
Honolulu County............................................... 1.25
Hawaii County................................................. 1.165
Kauai County.................................................. 1.2325
Maui County................................................... 1.2375
Kalawao County................................................ 1.2375
------------------------------------------------------------------------

3. Proposed Adjustment for High-Cost Outliers
Under Sec. 412.525(a), we make an adjustment for additional
payments for outlier cases that have extraordinarily high costs
relative to the costs of most discharges. Providing additional payments
for outliers strongly improves the accuracy of the LTCH PPS in
determining resource costs at the patient and hospital level. These
additional payments reduce the financial losses that would otherwise be
caused by treating patients who require more costly care and,
therefore, reduce the incentives to underserve these patients. We
include a provision for outlier payments under the LTCH PPS and set the
outlier threshold before the beginning of the applicable proposed rate
update year so that total outlier payments are projected to equal 8
percent of total payments under the LTCH PPS.
Under Sec. 412.525(a), we make outlier payments for any discharges
if the estimated cost of a case exceeds the adjusted LTCH PPS payment
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the
amount used to limit the loss that a hospital will incur under an
outlier policy. This results in Medicare and the LTCH sharing financial
risk in the treatment of extraordinarily costly cases. The LTCH's loss
is limited to the fixed-loss amount and the percentage of costs above
the marginal cost factor. We calculate the estimated cost of a case by
multiplying the overall hospital cost-to-charge ratio by the Medicare
allowable covered charge. In accordance with Sec. 412.525(a), we pay
outlier cases 80 percent of the difference between the estimated cost
of the patient case and the outlier threshold (the sum of the adjusted
Federal prospective payment for the LTC-DRG and the fixed-loss amount).
We determine a fixed-loss amount, that is, the maximum loss that a
LTCH can incur under the PPS for a case with unusually high costs
before the hospital will receive any additional payments. We calculate
the fixed-loss amount by simulating aggregate payments with and without
an outlier policy. The fixed loss amount would result in estimated
total outlier payments being equal to 8

[[Page 11251]]

percent of projected total LTCH PPS payments.
Outlier payments under the LTCH PPS are determined consistent with
the IPPS outlier policy. Currently, under the IPPS, a floor and a
ceiling are applied to an acute care hospital's cost-to-charge ratio
and if the acute care hospital's cost-to-charge ratio is either below
the floor or above the ceiling, the applicable statewide average cost-
to-charge ratio is assigned to the acute care hospital. Similarly, if a
LTCH's cost-to-charge ratio is below the floor or above the ceiling,
currently the applicable statewide average cost-to-charge ratio is
assigned to the hospital. In addition, for LTCHs for which we are
unable to compute a cost-to-charge ratio, we also assign the applicable
statewide average. Currently, MedPAR claims data and cost-to-charge
ratios based on the latest available cost report data from HCRIS and
corresponding MedPAR claims data are used to establish a fix