FR Doc 06-3629

[Federal Register: April 25, 2006 (Volume 71, Number 79)]
[Proposed Rules]
[Page 23995-24472]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ap06-18]

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Part II

Book 2 of 2 Books

Pages 23995-24550

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 409, 410 et al.

Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2007 Rates; Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 410, 412, 413, 424, 485, and 489

[CMS-1488-P]
RIN 0938-AO12

Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2007 Rates

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

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient
prospective payment systems (IPPS) for operating and capital-related
costs to implement changes arising from our continuing experience with
these systems, and to implement a number of changes made by the Deficit
Reduction Act of 2005 (Pub. L. 109-171). In addition, in the Addendum
to this proposed rule, we describe the proposed changes to the amounts
and factors used to determine the rates for Medicare hospital inpatient
services for operating costs and capital-related costs. We also are
setting forth proposed rate-of-increase limits as well as proposed
policy changes for hospitals and hospital units excluded from the IPPS
that are paid in full or in part on a reasonable cost basis subject to
these limits. These proposed changes would be applicable to discharges
occurring on or after October 1, 2006.
In this proposed rule, we discuss our proposals to refine the
diagnosis-related group (DRG) system under the IPPS to better recognize
severity of illness among patients--for FY 2007, we are proposing to
use a hospital-specific relative value cost center weighting
methodology to adjust DRG relative weights and in FY 2008 (if not
earlier), to implement consolidated severity-adjusted DRGs or
alternative severity adjustment methods.
Among the other policy changes that we are proposing to make are
changes related to: limited revisions of the reclassification of cases
to DRGs; the long-term care (LTC)-DRGs and relative weights; the wage
data, including the occupational mix data, used to compute the wage
index; applications for new technologies and medical services add-on
payments; payments to hospitals for the direct and indirect costs of
graduate medical education; submission of hospital quality data;
payments to sole community hospitals and Medicare-dependent, small
rural hospitals; and provisions governing emergency services under the
Emergency Medical Treatment and Labor Act of 1986 (EMTALA).
We are also inviting comments on a number of issues including
performance-based hospital payments for services and health information
technology, as well as how to improve data transparency for consumers.

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. on June 12, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1488-P. Because
of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
You may submit comments in one of three ways (no duplicates,
please):
1. Electronically. You may submit electronic comments on specific
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click

on the link ``Submit electronic comments on CMS regulations with an
open comment period''. (Attachments should be in Microsoft Word,
WordPerfect, or Excel; however, we prefer Microsoft Word.)
2. By regular mail. You may mail written comments (one original and
two copies) to the following address ONLY: Centers for Medicare &
Medicaid Services, Department of Health and Human Services, Attention:
CMS-1488-P, P.O. Box 8011, Baltimore, MD 21244-1850.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments (one
original and two copies) to the following address ONLY: Centers for
Medicare & Medicaid Services, Department of Health and Human Services,
Attention: CMS-1488-P, Mail Stop C4-26-05, 7500 Security Boulevard,
Baltimore, MD 21244-1850.
4. By hand or courier. If you prefer, you may deliver (by hand or
courier) your written comments (one original and two copies) before the
close of the comment period to one of the following addresses. If you
intend to deliver your comments to the Baltimore address, please call
telephone number (410) 786-7195 in advance to schedule your arrival
with one of our staff members. Room 445-G, Hubert H. Humphrey Building,
200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security
Boulevard, Baltimore, MD 21244-1850.

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

Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
Submission of comments on paperwork requirements. You may submit
comments on this document's paperwork requirements by mailing your
comments to the addresses provided at the end of the ``Collection of
Information Requirements'' section in this document.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Marc Hartstein, (410) 786-4548, Operating Prospective Payment,
Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and
Technology Add-On Payments, Hospital Geographic Reclassifications, Sole
Community Hospital, Disproportionate Share Hospital, and Medicare-
Dependent, Small Rural Hospital Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, Graduate Medical Education, Critical Access Hospitals, and
Long-Term Care (LTC)-DRG Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital
Demonstration Issues.
Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment
Update Issues.
Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues.
Frederick Grabau, (410) 786-0206, Services in Foreign Hospitals Issues.
Brian Reitz, (410) 786-5001, Obsolete Paper Claims Forms Issues.

SUPPLEMENTARY INFORMATION: Submitting Comments: We welcome comments
from the public on all issues set forth in this rule to assist us in
fully considering issues and developing policies. You can assist us by
referencing the file code CMS-1488-P and the specific ``issue
identifier'' that precedes the section on which you choose to comment.
Inspection of Public Comments: All comments received before the
close of

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the comment period are available for viewing by the public, including
any personally identifiable or confidential business information that
is included in a comment. We post all comments received before the
close of the comment period on the following Web site as soon as
possible after they have been received: http://www.cms.hhs.gov/eRulemaking.
Click on the link ``Electronic Comments on CMS

Regulations'' on that Web site to view public comments.
Comments received timely will also be available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, at the headquarters of the
Centers for Medicare & Medicaid Services, 7500 Security Boulevard,
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30
a.m. to 4 p.m. To schedule an appointment to view public comments,
phone 1-800-743-3951.

Electronic Access

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. Free public access is available on a Wide
Area Information Server (WAIS) through the Internet and via
asynchronous dial-in. Internet users can access the database by using
the World Wide Web; the Superintendent of Documents' home page address
is http://www.gpoaccess.gov/, by using local WAIS client software, or

by telnet to swais.access.gpo.gov, then login as guest (no password
required). Dial-in users should use communications software and modem
to call (202) 512-1661; type swais, then login as guest (no password
required).

Acronyms

AHA American Hospital Association
AHIMA American Health Information Management Association
AHRO Agency for Health Care Research and Quality
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ASC Ambulatory surgical center
ASP Average sales price
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999, Public Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Benefits Improvement and Protection Act of 2000, Public Law
106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CDAC Clinical Data Abstraction Center
CIPI Capital input price index
CPI Consumer price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-
272
CPI Consumer price index
CRNA Certified registered nurse anesthetist
CY Calendar year
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law
99-272
FDA Food and Drug Administration
FFY Federal fiscal year
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems
HCFA Health Care Financing Administration
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIC Health insurance card
HIPAA Health Insurance Portability and Accountability Act of 1996,
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HSA Health savings account
HSCRC Maryland Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HwH Hospital-within-a-hospital
ICD-9-CM International Classification of Diseases, Ninth Revision,
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition,
Procedure Coding System
ICU Intensive care unit
IHS Indian Health Service
IME Indirect medical education
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS Acute care hospital inpatient prospective payment system
IRF Inpatient rehabilitation facility
JCAHO Joint Commission on Accreditation of Healthcare Organizations
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MMA Medicare Prescription Drug, Improvement, and Modernization Act of
2003, Public Law 108-173
MRHFP Medicare Rural Hospital Flexibility Program
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NICU Neonatal intensive care unit
NQF National Quality Forum
NTIS National Technical Information Service
NVHRI National Voluntary Hospital Reporting Initiative
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
O.R. Operating room

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OSCAR Online Survey Certification and Reporting (System)
PRM Provider Reimbursement Manual
PPI Producer price index
PMSAs Primary metropolitan statistical areas
PPS Prospective payment system
PRA Per resident amount
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious Nonmedical Health care Institution
RRC Rural referral center
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSA Social Security Administration
SSI Supplemental Security Income
TAG Technical Advisory Group
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
UHDDS Uniform hospital discharge data set

Table of Contents

I. Background
A. Summary
1. Acute Care Hospital Inpatient Prospective Payment System
(IPPS)
2. Hospitals and Hospital Units Excluded From the IPPS
a. Inpatient Rehabilitation Facilities (IRFs)
b. Long-Term Care Hospitals (LTCHs)
c. Inpatient Psychiatric Facilities (IPFs)
3. Critical Access Hospitals (CAHs)
4. Payments for Graduate Medical Education (GME)
B. Provisions of the Deficit Reduction Act of 2005 (DRA)
C. Major Contents of this Proposed Rule
1. Proposed DRG Reclassifications and Recalibrations of Relative
Weights
2. Proposed Changes to the Hospital Wage Index
3. Other Decisions and Proposed Changes to the IPPS for
Operating Costs and GME Costs
4. Proposed Changes to the PPS for Capital-Related Costs
5. Proposed Changes for Hospitals and Hospital Units Excluded
From the IPPS
6. Payment for Services Furnished Outside the United States
7. Payment for Blood Clotting Factor Administered to Inpatients
With Hemophilia
8. Limitation on Payments to Skilled Nursing Facilities for Bad
Debt
9. Determining Proposed Prospective Payment Operating and
Capital Rates and Rate-of-Increase Limits
10. Impact Analysis
11. Recommendation of Update Factors for Operating Cost Rates of
Payment for Inpatient Hospital Services
12. Discussion of Medicare Payment Advisory Commission
Recommendations
13. Appendix C--Combinations of Consolidated Severity-Adjusted
DRGs and Appendix D--Crosswalk of Consolidated Severity-Adjusted
DRGs to Respective APR DRGs
II. Proposed Changes to DRG Classifications and Relative Weights
A. Background
B. DRG Reclassifications
1. General
2. Yearly Review for Making DRG Changes
3. Refinement of DRGs Based on Severity of Illness
C. Proposals for Revisions to the DRG System Used Under the IPPS
1. MedPAC Recommendations
2. Refinement of the Relative Weight Calculation
3. Refinement of DRGs Based on Severity of Illness
a. Comparison of the CMS DRG System and the APR DRG System
b. Consolidated Severity-Adjusted DRGs for Use in the IPPS
c. Changes to Case-Mix Index (CMI) From a New DRG System
4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier
Threshold
5. Impact of Refinement of DRG System on Payments
6. Conclusions
D. Proposed Changes to Specific DRG Classifications
1. Pre-MDCs: Pancreas Transplants
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantation of Intracranial Neurostimulator System for Deep
Brain Stimulation (DBS)
b. Carotid Artery Stents
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Insertion of Epicardial Leads for Defibrillator Devices
b. Application of Major Cardiovascular Diagnoses (MCVs) List to
Defibrillator DRGs
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System
and Connective Tissue)
a. Hip and Knee Replacements
b. Spinal Fusion
c. Charite^TM Spinal Disc Replacement Device
5. MDC 18 (Infectious and Parasitic Diseases (Systemic or
Unspecified Sites)): Severe Sepsis
6. Medicare Code Editor (MCE) Changes
a. Newborn Diagnoses Edit
b. Diagnoses Allowed for Females Only Edit
c. Diagnoses Allowed for Males Only Edit
d. Manifestations Not Allowed as Principal Diagnosis Edit
e. Nonspecific Principal Diagnosis Edit
f. Unacceptable Principal Diagnosis Edit
g. Nonspecific O.R. Procedures Edit
h. Noncovered Procedures Edit
i. Bilateral Procedure Edit
7. Surgical Hierarchies
8. Refinement of Complications and Comorbidities (CC) List
a. Background
b. Comprehensive Review of the CC List
c. CC Exclusions List Proposed for FY 2007
9. Review of Procedure Codes in DRGs 468, 476, and 477
a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs
b. Reassignment of Procedures Among DRGs 468, 476, and 477
c. Adding Diagnosis or Procedure Codes to MDCs
10. Changes to the ICD-9-CM Coding System
E. Proposed Recalibration of DRG Weights
F. Proposed LTC-DRG Reclassifications and Relative Weights for
LTCHs for FY 2007
1. Background
2. Proposed Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications into DRGs
3. Development of the Proposed FY 2007 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative
Weights
b. Data
c. Hospital-Specific Relative Value Methodology
d. Proposed Low-Volume LTC-DRGs
4. Steps for Determining the Proposed FY 2007 LTC-DRG Relative
Weights
G. Proposed Add-On Payments for New Services and Technologies
1. Background
2. Public Input Before Publication of This Notice of Proposed
Rulemaking on Add-On Payments
3. FY 2007 Status of Technologies Approved for FY 2006 Add-On
Payments
a. Kinetra[supreg] Implantable Neurostimulator for Deep Brain
Stimulation
b. Endovascular Graft Repair of the Thoracic Aorta
c. Restore[supreg] Rechargeable Implantable Neurostimulator
4. FY 2007 Applicants for New Technology Add-On Payments
a. C-Port[supreg] Distal Anastomosis System
b. NovoSeven[supreg] for Intracerebral Hemorrhage
c. X STOP Interspinous Process Decompression System
III. Proposed Changes to the Hospital Wage Index
A. Background
B. Core-Based Statistical Areas for the Proposed Hospital Wage
Index
C. Proposed Occupational Mix Adjustment to the Proposed FY 2007
Index
1. Development of Data for the Proposed Occupational Mix
Adjustment
2. Calculation of the Proposed FY 2007 Occupational Mix
Adjustment Factor and the Proposed FY 2007 Occupational Mix Adjusted
Wage Index

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D. Worksheet S-3 Wage Data for the Proposed FY 2007 Wage Index
Update
E. Verification of Worksheet S-3 Wage Data
F. Computation of the Proposed FY 2007 Unadjusted Wage Index
G. Computation of the Proposed FY 2007 Blended Wage Index
H. Proposed Revisions to the Wage Index Based on Hospital
Redesignations
1. General
2. Effects of Reclassification
3. FY 2007 MGCRB Reclassifications
4. Proposed FY 2007 Redesignations Under Section 1886(d)(8)(B)
of the Act
5. Reclassifications Under Section 508 of Pub. L. 108-173
6. Proposed Wage Indices for Reclassified Hospitals and Proposed
Reclassification Budget Neutrality Factor
I. Proposed FY 2007 Wage Index Adjustment Based on Commuting
Patterns of Hospital Employees
J. Process for Requests for Wage Index Data Corrections
K. Labor-Related Share for the Wage Index for FY 2007
L. Proxy for the Hospital Market Basket
IV. Other Decisions and Proposed Changes to the IPPS for Operating
Costs and GME Costs
A. Reporting of Hospital Quality Data for Annual Hospital
Payment Update
1. Background
2. New Procedures for Hospital Reporting of Quality Data
3. Electronic Medical Records
B. Value-Based Purchasing
1. Introduction
2. Premier Hospital Quality Incentive Demonstration
3. RHQDAPU Program
a. Section 501(b) of Pub. L. 108-173 (MMA)
b. Section 5001(a) of Pub. L. 109-171 (DRA)
4. Plan for Implementing Hospital Value-Based Purchasing
Beginning With FY 2009
a. Measure Development and Refinement
b. Data Infrastructure
c. Incentive Methodology
d. Public Reporting
5. Considerations Related to Certain Conditions, Including
Hospital-Acquired Infections
6. Promoting Effective Use of Health Information Technology
C. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small
Rural Hospitals (MDHs)
1. Background
2. Volume Decrease Adjustment for SCHs and MDHs
a. HAS/Monitrend Data
b. HAS/Monitrend Data Book Replacement Alternative
3. Mandatory Reporting Requirements for Any Changes in the
Circumstances Under Which a Hospital Was Designated as an SCH or MDH
4. Proposed Payment Changes for MDHs Under the DRA of 2005
a. Background
b. Proposed Regulation Changes
5. Proposed Technical Change
D. Rural Referral Centers
1. Case-Mix Index
2. Discharges
E. Indirect Medical Education (IME) Adjustment
1. Background
2. IME Adjustment Factor for FY 2007
3. Technical Change to Revise Cross-Reference
F. Payment Adjustment for Disproportionate Share Hospitals
(DSHs)
1. Background
2. Technical Corrections
3. Proposed Reinstatement of Inadvertently Deleted Provisions on
DSH Payment Adjustment Factors
4. Enhanced DSH Adjustment for MDHs
G. Geographic Reclassifications
1. Background
2. Reclassifications under Section 508 of Pub. L. 108-173
3. Multicampus Hospitals
4. Urban Group Hospital Reclassifications
5. Effect of Change of Ownership on Urban County Group
Reclassifications
6. Requested Reclassification for Hospitals Located in a Single
Hospital MSA Surrounded by Rural Counties
H. Payment for Direct Graduate Medical Education
1. Background
2. Determination of Weighted Average Per Resident Amounts (PRAs)
for Merged Teaching Hospitals
3. Determination of Per Resident Amounts (PRAs) for New Teaching
Hospitals
4. Requirements for Counting and Appropriate Documentation of
FTE Residents: Clarification
5. Resident Time Spent in Nonpatient Care Activities as Part of
Approved Residency Programs
6. Medicare GME Affiliated Groups: Technical Changes to
Regulations
I. Payment for the Costs of Nursing and Allied Health Education
Activities: Clarification
J. Hospital Emergency Services Under EMTALA
1. Background
2. Role of the EMTALA Technical Advisory Group (TAG)
3. Definition of ``Labor''
4. Application of EMTALA Requirements to Hospitals Without
Dedicated Emergency Departments
5. Clarification of Reference to ``Referral Centers''
K. Other Proposed Technical Changes
1. Proposed Cross-Reference Correction in Regulations on
Limitations on Beneficiary Charges
2. Proposed Cross-Reference Corrections in Regulations on
Payment Denials Based on Admissions and Quality Reviews
3. Proposed Cross-Reference Correction in Regulations on Outlier
Payments
4. Removing References to Two Paper Claims Forms
L. Rural Community Hospital Demonstration Program
M. Health Care Information Transparency Initiative
V. Proposed Changes to the PPS for Capital-Related Costs
A. Background
B. Treatment of Certain Urban Hospitals Reclassified as Rural
Hospitals Under Sec. 412.103
C. Other Technical Corrections Relating to the Capital PPS
Geographic Adjustment Factors
VI. Proposed Changes for Hospitals and Hospital Units Excluded From
the IPPS
A. Payments to Existing Hospitals and Hospital Units
1. Payments to Existing Excluded Hospitals and Hospital Units
2. Separate PPS for IRFs
3. Separate PPS for LTCHs
4. Separate PPS for IPFs
5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and
Satellite Facilities
6. Proposed Changes to the Methodology for Determining LTCH
Cost-to-Charge Ratios (CCRs) and the Reconciliation of High-Cost and
Short-Stay Outlier Payments Under the LTCH PPS
a. Background
b. High-Cost Outliers
c. Short-Stay Outliers
7. Technical Corrections Relating to LTCHs
8. Proposed Cross-Reference Correction in Authority Citations
for 42 CFR 412 and 413
B. Critical Access Hospitals (CAHs)
1. Background
2. Sunset of Designation of CAHs as Necessary Providers:
Technical Correction
VII. Payment for Services Furnished Outside the United States
A. Background
B. Proposed Clarification of Regulations
VIII. Payment for Blood Clotting Factor Administered to Inpatients
With Hemophilia
IX. Limitation on Payments to Skilled Nursing Facilities for Bad
Debt
A. Background
B. Changes Made by Section 5004 of the DRA
C. Proposed Regulation Changes
X. MedPAC Recommendations
XI. Other Required Information
A. Requests for Data From the Public
B. Collection of Information Requirements
C. Public Comments
XII. Regulation Text
Addendum--Proposed Schedule of Standardized Amounts Effective With
Discharges Occurring On or After October 1, 2006 and Update Factors
and Rate-of-Increase Percentages Effective With Cost Reporting
Periods Beginning on or After October 1, 2006
I. Summary and Background
II. Proposed Changes to Prospective Payment Rates for Hospital
Inpatient Operating Costs for FY 2007
A. Calculation of the Adjusted Standardized Amount
1. Standardization of Base-Year Costs or Target Amounts
2. Computing the Average Standardized Amount
3. Updating the Average Standardized Amount
4. Other Adjustments to the Average Standardized Amount
a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment

[[Page 24000]]

b. Reclassified Hospitals--Budget Neutrality Adjustment
c. Outliers
d. Rural Community Hospital Demonstration Program Adjustment
(Section 410A of Pub. L. 108-173)
5. Proposed FY 2007 Standardized Amount
B. Adjustments for Area Wage Levels and Cost-of-Living
1. Adjustment for Area Wage Levels
2. Adjustment for Cost-of-Living in Alaska and Hawaii
C. DRG Relative Weights
D. Calculation of the Proposed Prospective Payment Rates for FY
2007
1. Federal Rate
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2007
3. General Formula for Calculation of Proposed Prospective
Payment Rates for Hospitals Located in Puerto Rico Beginning On or
After October 1, 2006 and Before October 1, 2007
a. Puerto Rico Rate
b. National Rate
III. Proposed Changes to Payment Rates for Acute Care Hospital
Inpatient Capital-Related Costs for FY 2007
A. Determination of Proposed Federal Hospital Inpatient Capital-
Related Prospective Payment Rate Update
1. Projected Capital Standard Federal Rate Update
a. Description of the Update Framework
b. Comparison of CMS and MedPAC Update Recommendation
2. Proposed Outlier Payment Adjustment Factor
3. Proposed Budget Neutrality Adjustment Factor for Changes in
DRG Classifications and Weights and the GAF
4. Proposed Exceptions Payment Adjustment Factor
5. Proposed Capital Standard Federal Rate for FY 2007
6. Proposed Special Capital Rate for Puerto Rico Hospitals
B. Calculation of the Proposed Inpatient Capital-Related
Prospective Payments for FY 2007
C. Capital Input Price Index
1. Background
2. Forecast of the CIPI for FY 2007
IV. Payment Rates for Excluded Hospitals and Hospital Units:
Proposed Rate-of-Increase Percentages
A. Payments to Existing Excluded Hospitals and Units
B. New Excluded Hospitals and Units
V. Proposed Payment for Blood Clotting Factor Administered to
Inpatients With Hemophilia
Tables
Table 1A--National Adjusted Operating Standardized Amounts,
Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share
If Wage Index Is Greater Than 1)
Table 1B--National Adjusted Operating Standardized Amounts,
Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If
Wage Index Is Less Than or Equal to 1)
Table 1C--Adjusted Operating Standardized Amounts for Puerto
Rico, Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 2--Hospital Case-Mix Indexes for Discharges Occurring in
Federal Fiscal Year 2005; Hospital Wage Indexes for Federal Fiscal
Year 2007; Hospital Average Hourly Wage for Federal Fiscal Years
2005 (2001 Wage Data), 2006 (2002 Wage Data), and 2007 (2003 Wage
Data); Wage Indexes and 3-Year Average of Hospital Average Hourly
Wages
Table 3A--FY 2007 and 3-Year Average Hourly Wage for Urban Areas
by CBSA
Table 3B--FY 2007 and 3-Year Average Hourly Wage for Rural Areas
by CBSA
Table 4A-1--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Urban Areas by CBSA--FY2007
Table 4A-2--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Certain Urban Areas by CBSA for the Period April 1 through
September 30, 2007
Table 4B--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Rural Areas by CBSA--FY 2007
Table 4C-1--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Hospitals That Are Reclassified by CBSA--FY 2007
Table 4C-2--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Certain Hospitals That Are Reclassified by CBSA for the
Period April 1 Through September 30, 2007
Table 4F--Puerto Rico Wage Index and Capital Geographic
Adjustment Factor (GAF) by CBSA--FY 2007
Table 4J--Out-Migration Wage Adjustment--FY 2007
Table 5--List of Diagnosis-Related Groups (DRGs), Relative
Weighting Factors, and Geometric and Arithmetic Mean Length of Stay
(LOS)
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected
Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005
GROUPER V23.0
Table 7B--Medicare Prospective Payment System Selected
Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005
GROUPER V24.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios--
March 2006
Table 8B--Statewide Average Capital Cost-to-Charge Ratios--March
2006
Table 8C--Proposed Statewide Average Total Cost-to-Charge Ratios
for LTCHs--March 2006
Table 9A--Hospital Reclassifications and Redesignations by
Individual Hospital and CBSA--FY 2007
Table 9B--Hospital Reclassifications and Redesignation by
Individual Hospital Under Section 508 of Pub. L. 108-173--FY 2007
Table 9C--Hospitals Redesignated as Rural Under Section
1886(d)(8)(E) of the Act--FY 2007
Table 10--Geometric Mean Plus the Lesser of .75 of the National
Adjusted Operating Standardized Payment Amount (Increased to Reflect
the Difference Between Costs and Charges) or .75 of One Standard
Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)--March
2006
Table 11--Proposed FY 2007 LTC-DRGs, Relative Weights, Geometric
Average Length of Stay, and \5/6\ths of the Geometric Average Length
of Stay
Appendix A--Regulatory Impact Analysis
I. Overall Impact
II. Objectives
III. Limitations on Our Analysis
IV. Hospitals Included In and Excluded From the IPPS
V. Effects on Excluded Hospitals and Hospital Units
VI. Quantitative Effects of the Proposed Policy Changes Under the
IPPS for Operating Costs
A. Basis and Methodology of Estimates
B. Analysis of Table I
C. Effects on the Hospitals that Failed the Quality Data
Submission Process (Column 2)
D. Effects of the DRA Provision Related to MDHs (Column 3)
E. Effects of the Changes to the DRG Reclassifications and
Relative Cost-Based Weights (Column 4)
F. Effects of Proposed Wage Index Changes (Column 5)
G. Combined Effects of Proposed DRG and Wage Index Changes,
Including Budget Neutrality Adjustment (Column 6)
H. Effects of the 3-Year Provision Allowing Urban Hospitals that
Were Converted to Rural as a Result of the FY 2005 Labor Market Area
Changes to Maintain the Wage Index of the Urban Labor Market Area in
Which They Were Formerly Located (Column 7)
I. Effects of MGCRB Reclassifications (Column 8)
J. Effects of the Proposed Wage Index Adjustment for Out-
Migration (Column 9)
K. Effects of All Changes (Column 10)
L. Effects of Policy on Payment Adjustments for Low-Volume
Hospitals
M. Impact Analysis of Table II
VII. Effects of Other Proposed Policy Changes
A. Effects of LTC-DRG Reclassifications and Relative Weights for
LTCHs
B. Effects of Proposed New Technology Add-On Payments
C. Effects of Requirements for Hospital Reporting of Quality
Data for Annual Hospital Payment Update
D. Effects of Other Proposed Policy Changes Affecting Sole
Community Hospitals (SCHs) and Medicare-Dependent, Small Rural
Hospitals (MDHs)
E. Effects of Proposed Policy on Payment for Direct Costs of
Graduate Medical Education

[[Page 24001]]

1. Determination of Weighted Average GME PRAs for Merged
Teaching Hospitals
2. Determination of PRAs for New Teaching Hospitals
3. Requirements for Counting and Appropriate Documentation of
FTE Residents
4. Resident Time Spent in Nonpatient Care Activities as Part of
an Approved Residency Program
F. Effects of Proposed Policy Changes Relating to Emergency
Services Under EMTALA
G. Effects of Policy on Rural Community Hospital Demonstration
Program
H. Effects of Proposed Policy on Hospitals-Within-Hospitals and
Satellite Facilities
I. Effects of Proposed Policy Changes to the Methodology for
Determining LTCH CCRs and the Reconciliation LTCH PPS Outlier
Payments
J. Effects of Proposed Policy on Payment for Services Furnished
Outside the United States
K. Effects of Proposed Policy on Limitation on Payments to SNFs
VIII. Effects of Proposed Changes in the Capital PPS
A. General Considerations
B. Results
IX. Alternatives Considered
X. Overall Conclusion
XI. Accounting Statement
XII. Executive Order 12866
Appendix B--Recommendation of Update Factors for Operating Cost
Rates of Payment for Inpatient Hospital Services
I. Background
II. Inpatient Hospital Update for FY 2007
III. Secretary's Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and
Updating Payments in Traditional Medicare
Appendix C--Combinations of Proposed Consolidated Severity-Adjusted
DRGs
Appendix D--Crosswalk of Proposed Consolidated Severity-Adjusted
DRGs to Respective APR DRGs

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. Section 1886(g) of the Act requires the
Secretary to pay for the capital-related costs of hospital inpatient
stays under a prospective payment system (PPS). Under these PPSs,
Medicare payment for hospital inpatient operating and capital-related
costs is made at predetermined, specific rates for each hospital
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
The base payment rate is comprised of a standardized amount that is
divided into a labor-related share and a nonlabor-related share. The
labor-related share is adjusted by the wage index applicable to the
area where the hospital is located; and if the hospital is located in
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the
DRG relative weight.
If the hospital treats a high percentage of low-income patients, it
receives a percentage add-on payment applied to the DRG-adjusted base
payment rate. This add-on payment, known as the disproportionate share
hospital (DSH) adjustment, provides for a percentage increase in
Medicare payments to hospitals that qualify under either of two
statutory formulas designed to identify hospitals that serve a
disproportionate share of low-income patients. For qualifying
hospitals, the amount of this adjustment may vary based on the outcome
of the statutory calculations.
If the hospital is an approved teaching hospital, it receives a
percentage add-on payment for each case paid under the IPPS, known as
the indirect medical education (IME) adjustment. This percentage
varies, depending on the ratio of residents to beds.
Additional payments may be made for cases that involve new
technologies or medical services that have been approved for special
add-on payments. To qualify, a new technology or medical service must
demonstrate that it is a substantial clinical improvement over
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG
payment.
The costs incurred by the hospital for a case are evaluated to
determine whether the hospital is eligible for an additional payment as
an outlier case. This additional payment is designed to protect the
hospital from large financial losses due to unusually expensive cases.
Any outlier payment due is added to the DRG-adjusted base payment rate,
plus any DSH, IME, and new technology or medical service add-on
adjustments.
Although payments to most hospitals under the IPPS are made on the
basis of the standardized amounts, some categories of hospitals are
paid the higher of a hospital-specific rate based on their costs in a
base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the
IPPS rate based on the standardized amount. For example, sole community
hospitals (SCHs) are the sole source of care in their areas, and
Medicare-dependent, small rural hospitals (MDHs) are a major source of
care for Medicare beneficiaries in their areas. Both of these
categories of hospitals are afforded this special payment protection in
order to maintain access to services for beneficiaries. (Until FY 2007,
an MDH has received the IPPS rate plus 50 percent of the difference
between the IPPS rate and its hospital-specific rate if the hospital-
specific rate is higher than the IPPS rate. In addition, an MDH does
not have the option of using FY 1996 as the base year for its hospital-
specific rate. As discussed below, for discharges occurring on or after
October 1, 2007, but before October 1, 2011, an MDH will receive the
IPPS rate plus 75 percent of the difference between the IPPS rate and
its hospital-specific rate, if the hospital-specific rate is higher
than the IPPS rate.)
Section 1886(g) of the Act requires the Secretary to pay for the
capital-related costs of inpatient hospital services ``in accordance
with a prospective payment system established by the Secretary.'' The
basic methodology for determining capital prospective payments is set
forth in our regulations at 42 CFR 412.308 and 412.312. Under the
capital PPS, payments are adjusted by the same DRG for the case as they
are under the operating IPPS. Capital PPS payments are also adjusted
for IME and DSH, similar to the adjustments made under the operating
IPPS. In addition, hospitals may receive outlier payments for those
cases that have unusually high costs.
The existing regulations governing payments to hospitals under the
IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
Under section 1886(d)(1)(B) of the Act, as amended, certain
specialty hospitals and hospital units are excluded from the IPPS.
These hospitals and units are: rehabilitation hospitals and units;
long-term care hospitals (LTCHs); psychiatric hospitals and units;
children's hospitals; and cancer hospitals. Religious nonmedical health
care institutions (RNHCIs) are also excluded from the IPPS. Various
sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the
Medicare, Medicaid and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs
for rehabilitation hospitals and units (referred to as inpatient
rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and
units (referred to as

[[Page 24002]]

inpatient psychiatric facilities (IPFs)), as discussed below.
Children's hospitals, cancer hospitals, and RNHCIs continue to be paid
solely under a reasonable cost-based system.
The existing regulations governing payments to excluded hospitals
and hospital units are located in 42 CFR Parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
Under section 1886(j) of the Act, as amended, rehabilitation
hospitals and units (IRFs) have been transitioned from payment based on
a blend of reasonable cost reimbursement subject to a hospital-specific
annual limit under section 1886(b) of the Act and the adjusted facility
Federal prospective payment rate for cost reporting periods beginning
on or after January 1, 2002 through September 30, 2002, to payment at
100 percent of the Federal rate effective for cost reporting periods
beginning on or after October 1, 2002. IRFs subject to the blend were
also permitted to elect payment based on 100 percent of the Federal
rate. The existing regulations governing payments under the IRF PPS are
located in 42 CFR Part 412, Subpart P.
b. Long-Term Care Hospitals (LTCHs)
Under the authority of sections 123(a) and (c) of Pub. L. 106-113
and section 307(b)(1) of Pub. L. 106-554, LTCHs that do not meet the
definition of ``new'' under Sec. 412.23(e)(4) are being transitioned
from being paid for inpatient hospital services based on a blend of
reasonable cost-based reimbursement under section 1886(b) of the Act to
100 percent of the Federal rate during a 5-year period, beginning with
cost reporting periods that start on or after October 1, 2002. These
LTCHs that do not meet the definition of ``new'' may elect to be paid
based on 100 percent of the Federal prospective payment rate instead of
a blended payment in any year during the 5-year transition. For cost
reporting periods beginning on or after October 1, 2006, LTCHs will be
paid 100 percent of the Federal rate. The existing regulations
governing payment under the LTCH PPS are located in 42 CFR Part 412,
Subpart O.
c. Inpatient Psychiatric Facilities (IPFs)
Under the authority of sections 124(a) and (c) of Pub. L. 106-113,
inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals
and psychiatric units of acute care hospitals) are paid under the IPF
PPS. Under the IPF PPS, some IPFs are transitioning from being paid for
inpatient hospital services based on a blend of reasonable cost-based
payment and a Federal per diem payment rate, effective for cost
reporting periods beginning on or after January 1, 2005 (November 15,
2004 IPF PPS final rule (69 FR 66922) and January 23, 2006 IPF PPS
proposed rule (71 FR 3616)). For cost reporting periods beginning on or
after January 1, 2008, all IPFs will be paid 100 percent of the Federal
per diem payment amount. The existing regulations governing payment
under the IPF PPS are located in 42 CFR 412, Subpart N.
3. Critical Access Hospitals (CAHs)
Under sections 1814, 1820, and 1834(g) of the Act, payments are
made to critical access hospitals (CAHs) (that is, rural hospitals or
facilities that meet certain statutory requirements) for inpatient and
outpatient services based on 101 percent of reasonable cost. Reasonable
cost is determined under the provisions of section 1861(v)(1)(A) of the
Act and existing regulations under 42 CFR Parts 413 and 415.
4. Payments for Graduate Medical Education (GME)
Under section 1886(a)(4) of the Act, costs of approved educational
activities are excluded from the operating costs of inpatient hospital
services. Hospitals with approved graduate medical education (GME)
programs are paid for the direct costs of GME in accordance with
section 1886(h) of the Act; the amount of payment for direct GME costs
for a cost reporting period is based on the hospital's number of
residents in that period and the hospital's costs per resident in a
base year. The existing regulations governing payments to the various
types of hospitals are located in 42 CFR Part 413.

B. Provisions of the Deficit Reduction Act of 2005 (DRA)

On February 8, 2006, the Deficit Reduction Act of 2005 (DRA), Pub.
L. 109-171, was enacted. Pub. L. 109-171 made a number of changes to
the Act relating to prospective payments to hospitals and other
providers for inpatient services. This proposed rule would implement
amendments made by the following sections of Pub. L. 109-171:
Section 5001(a), which, effective for FY 2007 and
subsequent years, expands the requirements for hospital quality data
reporting.
Section 5003, which makes various improvements to the MDH
program. It extends special payment provisions, requires MDHs to use FY
2002 as their base year for determining whether use of their hospital-
specific rate enhances payment (but permits them to continue to use
either their 1982 or 1987 hospital-specific rate if using either of
those rates results in higher payments), and removes the application of
the 12-percent cap on the DSH payment adjustment factor for MDHs.
Section 5004, which reduces certain allowable SNF bad debt
payments by 30 percent. Payments for the bad debts of full-benefit,
dual eligible individuals are not reduced.
In this proposed rule, we also discuss and invite comments on the
requirements of section 5001(b) of Pub. L. 109-171, which require us to
develop a plan to implement, beginning with FY 2009, a value-based
purchasing plan for section 1886(d) hospitals. This discussion also
includes the provisions of section 5001(c) of Pub. L. 109-171, which
requires a quality adjustment in DRG payments for certain hospital-
acquired conditions, effective for FY 2008.

C. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the
Medicare IPPS for operating costs and for capital-related costs in FY
2007. We also are setting forth proposed changes relating to payments
for GME costs, payments to certain hospitals and units that continue to
be excluded from the IPPS and paid on a reasonable cost basis, and
payments for SCHs and MDHs. The changes being proposed would be
effective for discharges occurring on or after October 1, 2006, unless
otherwise noted.
The following is a summary of the major changes that we are
proposing to make:
1. Proposed DRG Reclassifications and Recalibrations of Relative
Weights
In section II. of the preamble to this proposed rule, as required
by section 1886(d)(4)(C) of the Act, we are proposing limited revisions
to the DRG classifications structure. In this section, we respond to
several recommendations made by MedPAC intended to improve the DRG
system. We are also proposing to use, for FY 2007, hospital-specific
relative values for 10 cost centers to compute DRG relative weights. In
addition, we are proposing to use consolidated severity-adjusted DRGs
or alternative severity adjustment methods in FY 2008 (if not earlier).
We also are presenting our reevaluation of certain FY 2006
applicants for add-on payments for high-cost new medical services and
technologies, and our analysis of FY 2007 applicants (including public
input,

[[Page 24003]]

as directed by Pub. L. 108-173, obtained in a town hall meeting).
We are proposing the annual update of the long-term care diagnosis-
related group (LTC-DRG) classifications and relative weights for use
under the LTCH PPS for FY 2007.
2. Proposed Changes to the Hospital Wage Index
In section III. of the preamble to this proposed rule, we are
proposing revisions to the wage index and the annual update of the wage
data. Specific issues addressed include the following:
The FY 2007 wage index update, using wage data from cost
reporting periods that began during FY 2003.
The proposed FY 2007 occupational mix adjustment to the
wage index.
The proposed revisions to the wage index based on hospital
redesignations and reclassifications.
The proposed adjustment to the wage index for FY 2007
based on commuting patterns of hospital employees who reside in a
county and work in a different area with a higher wage index.
The timetable for reviewing and verifying the wage data
that will be in effect for the proposed FY 2007 wage index.
The labor-related share for the FY 2007 wage index,
including the labor-related share for Puerto Rico.
3. Other Decisions and Proposed Changes to the IPPS for Operating
Costs, GME Costs, and Promoting Hospitals' Effective Use of Health
Information Technology
In section IV. of the preamble to this proposed rule, we discuss a
number of provisions of the regulations in 42 CFR Parts 412 and 413
including the following:
The reporting of hospital quality data as a condition for
receiving the full annual payment update increase.
Proposed changes in payments to SCHs and MDHs.
Proposed updated national and regional case-mix values and
discharges for purposes of determining rural referral center status.
The statutorily-required IME adjustment factor for FY
2007.
Proposed changes relating to hospitals' geographic
classifications, including reclassifications under section 508 of Pub.
L. 108-173, multicampus hospitals, urban group hospital
reclassification and the effect of change in ownership on urban county
group reclassifications.
Proposed changes and clarifications relating to GME that
address determining the per resident amounts (PRAs) for merged
hospitals and new teaching hospitals, counting and appropriate
documentation of FTE residents, and counting of resident time spent in
nonpatient care activities as part of approved residency programs.
Proposed changes relating to payment for costs of nursing
and allied health education programs.
Proposed changes relating to requirements for emergency
services for hospitals under EMTALA.
Discussion of the third year of implementation of the
Rural Community Hospital Demonstration Program.
We also are inviting comments on promoting hospitals' effective use
of health information technology.
4. Proposed Changes to the PPS for Capital-Related Costs
In section V. of the preamble to this proposed rule, we discuss the
payment policy requirements for capital-related costs and capital
payments to hospitals and propose several technical corrections to the
regulations.
5. Proposed Changes for Hospitals and Hospital Units Excluded From the
IPPS
In section VI. of the preamble to this proposed rule, we discuss
payments to excluded hospitals and hospital units, proposed policy
changes regarding increases or decreases in square footage or decreases
in the number of beds of the ``grandfathering'' HwHs and satellite
facilities, proposed changes to the methodology for determining LTCH
CCRs and the reconciliation of high-cost and short-stay outlier
payments under the LTCH PPS, and a proposed technical change relating
to the designation of CAHs as necessary providers.
6. Payments for Services Furnished Outside the United States
In section VII. of the preamble to this proposed rule, we set forth
proposed changes to clarify what is considered ``outside the United
States'' for Medicare payment purposes.
7. Payment for Blood Clotting Factor Administered to Inpatients With
Hemophilia
In section VIII. of the preamble to this proposed rule, we discuss
the proposed changes in payment for blood clotting factor administered
to Medicare beneficiaries with hemophilia for FY 2007.
8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt
In section IX. of the preamble to this proposed rule, we propose to
implement section 5004 of Pub. L. 109-171 relating to reduction in
payments to SNFs for bad debt.
9. Determining Proposed Prospective Payment Operating and Capital Rates
and Rate-of-Increase Limits
In the Addendum to this proposed rule, we set forth proposed
changes to the amounts and factors for determining the FY 2007
prospective payment rates for operating costs and capital-related
costs. We also establish the proposed threshold amounts for outlier
cases. In addition, we address the proposed update factors for
determining the rate-of-increase limits for cost reporting periods
beginning in FY 2007 for hospitals and hospital units excluded from the
PPS.
10. Impact Analysis
In Appendix A of this proposed rule, we set forth an analysis of
the impact that the proposed changes would have on affected hospitals.
11. Recommendation of Update Factors for Operating Cost Rates of
Payment for Inpatient Hospital Services
In Appendix B of this proposed rule, as required by sections
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of
the appropriate percentage changes for FY 2007 for the following:
A single average standardized amount for all areas for
hospital inpatient services paid under the IPPS for operating costs
(and hospital-specific rates applicable to SCHs and MDHs).
Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals and
hospital units excluded from the IPPS.
12. Discussion of Medicare Payment Advisory Commission Recommendations
Under section 1805(b) of the Act, MedPAC is required to submit a
report to Congress, no later than March 1 of each year, in which MedPAC
reviews and makes recommendations on Medicare payment policies.
MedPAC's March 2006 recommendation concerning hospital inpatient
payment policies addressed the update factor for inpatient hospital
operating costs and capital-related costs under the IPPS and for
hospitals and distinct part hospital units excluded from the IPPS. This
recommendation is addressed in Appendix B of this proposed rule. For
further information relating specifically to the MedPAC March 2006
reports or to obtain a copy of the reports, contact MedPAC at (202)
220-3700 or visit

[[Page 24004]]

MedPAC's Web site at: http://www.medpac.gov.

13. Appendix C and Appendix D
In Appendix C of this proposed rule, we list the combinations of
the consolidated severity-adjusted DRGs that we are proposing to
implement on FY 2008 (if not earlier), as discussed in section II.C. of
the preamble of this proposed rule. In Appendix D of this proposed
rule, we provide a crosswalk of the proposed consolidated severity-
adjusted DRG system to the respective All Patient Related Diagnosis-
Related Group (APR DRG) system.

II. Proposed Changes to DRG Classifications and Relative Weights

(If you choose to comment on issues in this section, please include
the caption ``DRG Reclassifications'' at the beginning of your
comment.)

A. Background

Section 1886(d) of the Act specifies that the Secretary shall
establish a classification system (referred to as DRGs) for inpatient
discharges and adjust payments under the IPPS based on appropriate
weighting factors assigned to each DRG. Therefore, under the IPPS, we
pay for inpatient hospital services on a rate per discharge basis that
varies according to the DRG to which a beneficiary's stay is assigned.
The formula used to calculate payment for a specific case multiplies an
individual hospital's payment rate per case by the weight of the DRG to
which the case is assigned. Each DRG weight represents the average
resources required to care for cases in that particular DRG, relative
to the average resources used to treat cases in all DRGs.
Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
at least annually. These adjustments are made to reflect changes in
treatment patterns, technology, and any other factors that may change
the relative use of hospital resources.

B. DRG Reclassifications

1. General
For FY 2007, we are proposing only limited changes to the current
DRG classifications, as discussed in section II.D. of the preamble to
this proposed rule, that would be applicable to discharges occurring on
or after October 1, 2006. We are limiting our proposed changes because,
as discussed in detail in section II.C. of the preamble to this
proposed rule, we are focusing our efforts on addressing the
recommendations made last year by MedPAC to refine the entire CMS DRG
system by taking into account severity of illness (if not earlier) and
applying hospital-specific relative value (HSRV) weights to DRGs.
Currently, cases are classified into CMS DRGs for payment under the
IPPS based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay. In a
small number of DRGs, classification is also based on the age, sex, and
discharge status of the patient. The diagnosis and procedure
information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM).
The process of forming the DRGs was begun by dividing all possible
principal diagnoses into mutually exclusive principal diagnosis areas,
referred to as Major Diagnostic Categories (MDCs). The MDCs were formed
by physician panels as the first step toward ensuring that the DRGs
would be clinically coherent. The diagnoses in each MDC correspond to a
single organ system or etiology and, in general, are associated with a
particular medical specialty. Thus, in order to maintain the
requirement of clinical coherence, no final DRG could contain patients
in different MDCs. Most MDCs are based on a particular organ system of
the body. For example, MDC 6 is Diseases and Disorders of the Digestive
System. This approach is used because clinical care is generally
organized in accordance with the organ system affected. However, some
MDCs are not constructed on this basis because they involve multiple
organ systems (for example, MDC 22 (Burns)). For FY 2006, cases are
assigned to one of 526 DRGs in 25 MDCs. The table below lists the 25
MDCs.

Major Diagnostic Categories (MDCs)
------------------------------------------------------------------------

------------------------------------------------------------------------
1................................. Diseases and Disorders of the
Nervous System.
2................................. Diseases and Disorders of the Eye.
3................................. Diseases and Disorders of the Ear,
Nose, Mouth, and Throat.
4................................. Diseases and Disorders of the
Respiratory System.
5................................. Diseases and Disorders of the
Circulatory System.
6................................. Diseases and Disorders of the
Digestive System.
7................................. Diseases and Disorders of the
Hepatobiliary System and Pancreas.
8................................. Diseases and Disorders of the
Musculoskeletal System and
Connective Tissue.
9................................. Diseases and Disorders of the Skin,
Subcutaneous Tissue and Breast.
10................................ Endocrine, Nutritional and Metabolic
Diseases and Disorders.
11................................ Diseases and Disorders of the Kidney
and Urinary Tract.
12................................ Diseases and Disorders of the Male
Reproductive System.
13................................ Diseases and Disorders of the Female
Reproductive System.
14................................ Pregnancy, Childbirth, and the
Puerperium.
15................................ Newborns and Other Neonates with
Conditions Originating in the
Perinatal Period.
16................................ Diseases and Disorders of the Blood
and Blood Forming Organs and
Immunological Disorders.
17................................ Myeloproliferative Diseases and
Disorders and Poorly Differentiated
Neoplasms.
18................................ Infectious and Parasitic Diseases
(Systemic or Unspecified Sites).
19................................ Mental Diseases and Disorders.
20................................ Alcohol/Drug Use and Alcohol/Drug
Induced Organic Mental Disorders.
21................................ Injuries, Poisonings, and Toxic
Effects of Drugs.
22................................ Burns.
23................................ Factors Influencing Health Status
and Other Contacts with Health
Services.
24................................ Multiple Significant Trauma.
25................................ Human Immunodeficiency Virus
Infections.
------------------------------------------------------------------------

[[Page 24005]]

In general, cases are assigned to an MDC based on the patient's
principal diagnosis before assignment to a DRG. However, for FY 2006,
there are nine DRGs to which cases are directly assigned on the basis
of ICD-9-CM procedure codes. These DRGs are for heart transplant or
implant of heart assist systems, liver and/or intestinal transplants,
bone marrow transplants, lung transplants, simultaneous pancreas/kidney
transplants, and pancreas transplants, and for tracheostomies. Cases
are assigned to these DRGs before they are classified to an MDC. The
table below lists the nine current pre-MDCs.

Pre-Major Diagnostic Categories (Pre-MDCs)
------------------------------------------------------------------------

------------------------------------------------------------------------
DRG 103........................... Heart Transplant or Implant of Heart
Assist System.
DRG 480........................... Liver Transplant and/or Intestinal
Transplant.
DRG 481........................... Bone Marrow Transplant.
DRG 482........................... Tracheostomy for Face, Mouth, and
Neck Diagnoses.
DRG 495........................... Lung Transplant.
DRG 512........................... Simultaneous Pancreas/Kidney
Transplant.
DRG 513........................... Pancreas Transplant.
DRG 541........................... ECMO or Tracheostomy with Mechanical
Ventilation 96+ Hours or Principal
Diagnosis Except for Face, Mouth,
and Neck Diagnosis with Major O.R.
DRG 542........................... Tracheostomy with Mechanical
Ventilation 96+ Hours or Principal
Diagnosis Except for Face, Mouth,
and Neck Diagnosis without Major
O.R.
------------------------------------------------------------------------

Once the MDCs were defined, each MDC was evaluated to identify
those additional patient characteristics that would have a consistent
effect on the consumption of hospital resources. Because the presence
of a surgical procedure that required the use of the operating room
would have a significant effect on the type of hospital resources used
by a patient, most MDCs were initially divided into surgical DRGs and
medical DRGs. Surgical DRGs are based on a hierarchy that orders
operating room (O.R.) procedures or groups of O.R. procedures by
resource intensity. Medical DRGs generally are differentiated on the
basis of diagnosis and age (0 to 17 years of age or greater than 17
years of age). Some surgical and medical DRGs are further
differentiated based on the presence or absence of a complication or a
comorbidity (CC).
Generally, nonsurgical procedures and minor surgical procedures
that are not usually performed in an operating room are not treated as
O.R. procedures. However, there are a few non-O.R. procedures that do
affect DRG assignment for certain principal diagnoses, for example,
extracorporeal shock wave lithotripsy for patients with a principal
diagnosis of urinary stones.
Once the medical and surgical classes for an MDC were formed, each
class of diagnoses was evaluated to determine if complications,
comorbidities, or the patient's age would consistently affect the
consumption of hospital resources. Physician panels classified each
diagnosis code based on whether the diagnosis, when present as a
secondary condition, would be considered a substantial CC. A
substantial CC was defined as a condition which, because of its
presence with a specific principal diagnosis, would cause an increase
in the length of stay by at least one day in at least 75 percent of the
patients. Each medical and surgical class within an MDC was tested to
determine if the presence of any substantial CC would consistently
affect the consumption of hospital resources.
A patient's diagnosis, procedure, discharge status, and demographic
information is fed into the Medicare claims processing systems and
subjected to a series of automated screens called the Medicare Code
Editor (MCE). The MCE screens are designed to identify cases that
require further review before classification into a DRG.
After patient information is screened through the MCE and any
further development of the claim is conducted, the cases are classified
into the appropriate DRG by the Medicare GROUPER software program. The
GROUPER program was developed as a means of classifying each case into
a DRG on the basis of the diagnosis and procedure codes and, for a
limited number of DRGs, demographic information (that is, sex, age, and
discharge status).
After cases are screened through the MCE and assigned to a DRG by
the GROUPER, the PRICER software calculates a base DRG payment. The
PRICER calculates the payment for each case covered by the IPPS based
on the DRG relative weight and additional factors associated with each
hospital, such as IME and DSH adjustments. These additional factors
increase the payment amount to hospitals above the base DRG payment.
The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights. However, in the July 30,
1999 IPPS final rule (64 FR 41500), we discussed a process for
considering non-MedPAR data in the recalibration process. In order for
us to consider using particular non-MedPAR data, we must have
sufficient time to evaluate and test the data. The time necessary to do
so depends upon the nature and quality of the non-MedPAR data
submitted. Generally, however, a significant sample of the non-MedPAR
data should be submitted by mid-October for consideration in
conjunction with the next year's proposed rule. This allows us time to
test the data and make a preliminary assessment as to the feasibility
of using the data. Subsequently, a complete database should be
submitted by early December for consideration in conjunction with the
next year's proposed rule.
The limited changes that we are proposing to the DRG classification
system for FY 2007 for the FY 2007 GROUPER, version 24.0 and to the
methodology used to recalibrate the DRG weights are set forth under
section II.E. of this proposed rule. Unless otherwise noted in this
proposed rule, our DRG analysis is based on data from the December 2005
update of the FY 2005 MedPAR file, which contains hospital bills
received through December 31, 2005, for discharges occurring in FY
2005.
2. Yearly Review for Making DRG Changes
Many of the changes to the DRG classifications are the result of
specific issues brought to our attention by interested parties. We
encourage individuals with concerns about DRG classifications to bring
those concerns to our attention in a timely manner so they can be
carefully considered for possible

[[Page 24006]]

inclusion in the annual proposed rule and, if included, may be
subjected to public review and comment. Therefore, similar to the
timetable for interested parties to submit non-MedPAR data for
consideration in the DRG recalibration process, concerns about DRG
classification issues should be brought to our attention no later than
early December in order to be considered and possibly included in the
next annual proposed rule updating the IPPS.
The actual process of forming the DRGs was, and continues to be,
highly iterative, involving a combination of statistical results from
test data combined with clinical judgment. For purposes of this
proposed rule, in deciding whether to create a separate DRG, we
consider whether the resource consumption and clinical characteristics
of the patients with a given set of conditions are significantly
different than the remaining patients in the existing DRG. We evaluate
patient care costs using average charges and lengths of stay as proxies
for costs and rely on the judgment of our medical officers to decide
whether patients are clinically distinct or similar to other patients
in the DRG. In evaluating resource costs, we consider both the absolute
and percentage differences in average charges between the cases we are
selecting for review and the remainder of cases in the DRG. We also
consider variation in charges within these groups; that is, whether
observed average differences are consistent across patients or
attributable to cases that are extreme in terms of charges or length of
stay, or both. Further, we also consider the number of patients who
will have a given set of characteristics and generally prefer not to
create a new DRG unless it will include a substantial number of cases.

C. Proposals for Revisions to the DRG System Used Under the IPPS

1. MedPAC Recommendations
In the FY 2006 IPPS final rule, we discussed a number of
recommendations made by MedPAC regarding revisions to the DRG system
used under the IPPS (70 FR 47473 through 47482).
In Recommendation 1-3 in the 2005 Report to Congress on Physician-
Owned Specialty Hospitals, MedPAC recommended that CMS:
Refine the current DRGs to more fully capture differences
in severity of illness among patients, including--
Base the DRG relative weights on the estimated cost of
providing care.
Base the weights on the national average of the hospital-
specific relative values (HSRVs) for each DRG (using hospital-specific
costs to derive the HSRVs).
Adjust the DRG relative weights to account for differences
in the prevalence of high-cost outlier cases.
Implement the case-mix measurement and outlier policies
over a transitional period.
As we noted in the FY 2006 IPPS final rule, we had insufficient
time to complete a thorough evaluation of these recommendations for
full implementation in FY 2006. However, we did adopt severity-weighted
cardiac DRGs in FY 2006 to address public comments on this issue and
the specific concerns of MedPAC regarding cardiac surgery DRGs. We also
indicated that we planned to further consider all of MedPAC's
recommendations and thoroughly analyze options and their impacts on the
various types of hospitals in the FY 2007 IPPS proposed rule. Following
the publication of the FY 2006 IPPS final rule, we contracted with 3M
Health Information Systems to assist us in performing this analysis.
Beginning with MedPAC's relative weight recommendations, we
analyzed MedPAC's recommendations to move to a cost-based HSRV
weighting methodology. In performing this portion of the analysis, we
studied hospital cost report data, departmental cost-to-charge ratios
(CCRs), MedPAR claims data, and HSRV weighting methodology. Our
intention in undertaking this portion of the analysis was to find an
administratively feasible approach to improving the accuracy of the DRG
weights. As we describe in detail below, we believe some changes can be
made to MedPAC's methodology for determining the relative weights that
will make it more feasible to replicate on an annual basis but will
result in similar impacts.
In conjunction with analyzing MedPAC's relative weight
recommendations, we looked at refining the current DRG system to better
recognize severity of illness. Starting with the APR DRG GROUPER used
by MedPAC in its analysis, we studied Medicare claims data. Based on
this analysis, we developed a consolidated severity-adjusted DRG
GROUPER that we believe could be a better alternative for recognizing
severity of illness among the Medicare population. We note that
MedPAC's recommendations with regard to revising the DRGs to better
recognize severity of illness may have implications for the outlier
threshold, the measurement of real case-mix versus apparent case-mix,
and the IME and the DSH adjustments. We will discuss these implications
in more detail in the following sections.
As we present below, we believe that the recommendations made by
MedPAC, or some variants of them, have significant promise to improve
the accuracy of the payment rates in the IPPS. For instance, the
percent of DRGs with payment-to-cost ratios between 0.95 and 1.05 will
increase substantially from adoption of these recommendations.\1\ We
agree with MedPAC about exploring possible refinements to our payment
methodology even in the absence of concerns about the proliferation of
specialty hospitals. In the FY 2006 final rule, we indicated that until
we had completed further analysis of the options and their effects, we
could not predict the extent to which changing to APR DRGs would
provide payment equity between specialty and general hospitals. In
fact, we cautioned that any system that groups cases will always
present some opportunities for providers to specialize in cases they
believe to have higher margins. We believe that improving payment
accuracy should reduce these opportunities, and potentially reduce the
incentives that Medicare payments may provide for the further
development of specialty hospitals.
---------------------------------------------------------------------------

\1\ Medicare Payment Advisory Commission: Report to the
Congress; Physician-Owned Specialty Hospitals, March 2005, p. 37.
---------------------------------------------------------------------------

We considered MedPAC's recommendation to adjust the relative
weights to account for differences in the prevalence of outlier cases.
However, we placed most of our attention and resources on the
recommendations related to refinement of the current DRGs to more fully
capture differences in severity of illness among patients as we do not
have the statutory authority to make the specific changes to our
outlier policy that MedPAC recommended. While we have not made MedPAC's
recommendation regarding outliers a central focus of our analysis, we
do intend to examine this issue in more detail in the future. In the
following sections II.C.2. through C.6. of this proposed rule, we
present our analysis and discuss a number of issues related to the
MedPAC recommendations. We also present the estimated impacts of
implementing the recommendations and conclude with a specific proposal
for FY 2007 and some proposed intended actions for implementation for
FY 2008. We also are soliciting comments on other possible proposals or
actions in FY 2007, FY 2008, or a combination of both.

[[Page 24007]]

2. Refinement of the Relative Weight Calculation
(If you choose to comment on issues in this section, please include
the caption ``HSRV Weights'' at the beginning of your comment.)
MedPAC made two recommendations with respect to the DRG relative
weight calculation. First, MedPAC recommended that CMS base the DRG
relative weights on the estimated cost of providing care. Second,
MedPAC recommended that CMS base the weights on the national average of
the HSRVs in each DRG (using hospital-specific costs to derive the
HSRVs). Because both of these recommendations address the relative
weight calculation, we are addressing them together. The work we have
done to address these recommendations is discussed below.
MedPAC recommended that CMS replace its charge-based relative
weight methodology with cost-based HSRV weights as it believed that the
charge-based relative weight methodology that CMS has utilized since
1983 has introduced bias into the weights due to differential markups
for ancillary services among the DRGs. In analyzing claims data, it is
evident to us that some hospital types (for example, teaching
hospitals) are systematically more expensive overall than the average
hospital and certain case types are more commonly treated at these more
expensive facilities. This fact results in an upward bias in the
weights for these types of cases. The HSRV methodology recommended by
MedPAC would help reduce the bias that may be present in the national
relative weights due to differences in case-mix adjusted costs.
Under the HSRV method recommended by MedPAC, charges are
standardized for each provider by converting its charges for each case
to hospital-specific relative charge values and then adjusting those
values for the hospital's case-mix. The first step in this process
involves dividing the charge for each case at the hospital by the
average charge for all cases at the hospital in which the case was
treated. The hospital-specific relative charge value, by definition,
averages 1.0 for each hospital. The resulting ratio is then multiplied
by the hospital's case-mix index (CMI). In this way, each hospital's
relative charge value is adjusted by its case-mix to an average that
reflects the complexity of the cases it treats relative to the
complexity of the cases treated by all other hospitals.
Our analysis of departmental-level CCRs from the Medicare cost
report data has shown that charges for routine days, intensive care
days, and various ancillary services are not marked up by a consistent
amount. For example, the markup amounts for cardiology services are
higher than average. Because charges are the current basis for the DRG
relative weights, the practice of differential markups can lead to bias
in the DRG weights because various DRGs use, on average, more or less
of particular ancillary services. MedPAC believes that the bias in the
national DRG relative weights that may arise as a result of
differential markups across various cost centers can be removed by
moving from charge-based to cost-based weights.
Based on the analysis we have conducted, we agree that it may be
appropriate to adjust the DRG relative weights to account for the
differences in charge markups across cost centers and to adopt an HSRV
methodology. However, we have several concerns about the methodology
used by MedPAC. MedPAC's methodology to reduce hospital charges to cost
is administratively burdensome, not only to develop, but also to
maintain.
First, MedPAC developed CCRs for individual hospitals at the most
detailed department level. Specifically, in calculating costs as the
basis for the relative weights, MedPAC applied hospital-specific CCRs
from each provider's cost report to the line item charges on the claims
that the hospital submitted during the same time period. This
methodology required matching cost report data to claims data, and
because cost report data take longer to compile and file, the method
necessitates using older claims data to set relative weights. The most
recent complete set of Medicare cost reports available to us is from FY
2003. Thus, if we were to model the exact approach used by MedPAC and
use claims data for a matching year, we would be using claims data from
FY 2003. If we set DRG weights for FY 2007 using our current charge-
based method, we would use FY 2005 hospital claims to set the proposed
relative weights. In addition, MedPAC's hospital-specific approach
required detailed cost center distinctions for each hospital that are
difficult to define, map, and apply. This approach also required the
use of the Standard Analytic File (SAF) because MedPAR data that we
currently use to set DRG weights did not have the necessary level of
detail. Using the SAF increases processing time and adds further
complexity to the process of setting the relative weights.
Second, because MedPAC applied these CCRs at the individual claim
level, missing or invalid data resulted in MedPAC deleting a large
number of claims (approximately 10 percent) from the relative weight
calculation. Lastly, MedPAC acknowledged that its method was too
difficult to replicate on an annual basis and suggested that the
weights be recalculated once every 5 years with other adjustments based
on charges during the intervening years.
We have developed an alternative to MedPAC's approach that we
believe would achieve similar results in a more administratively
feasible manner. This method involves developing hospital-specific
charge relative weights at the cost center level to remove the bias
introduced by hospital characteristics (that is, teaching,
disproportionate share, location, and size, among others) and then
scaling the weights to costs using the national cost center charge
ratios developed from the cost report data. After studying Medicare
cost report data, we established 10 cost center categories based upon
broad hospital accounting definitions. In our cost center categories,
there are 8 ancillary cost groups in addition to routine day costs and
intensive care day costs, and each category represents at least 5
percent of the charges in the claims data. The specific cost report
lines that contribute to each category and the corresponding charge
lines from the MedPAR claims data are itemized in Table A below.
We believe this alternative approach, which we are labeling as the
HSRV cost center (HSRVcc) methodology, has several advantages. First,
the use of national average rather than hospital-specific CCRs avoids
the complexity encountered with cost center CCRs at the hospital level
and allows us to retain more data for use in the relative weight
calculation. In addition, the methodology eliminates the need to match
claims to the time period of the CCRs, resulting in the ability to use
more timely claims data. Furthermore, the alternative approach makes it
more feasible to update the relative weights annually using a single
methodology. We do not have to replicate the methodology once every 5
years and make adjustments based on changes in charges in the
intervening years.
In developing an alternative method of calculating DRG weights, we
utilized two data sources: claims data and cost report data. The claims
data are taken from the FY 2004 MedPAR file. This file is based on
fully coded diagnostic and procedure data for all Medicare inpatient
hospital bills. The FY 2004 MedPAR data include discharges occurring
between October 1, 2003, and September 30, 2004, based on bills
received by CMS through March 30, 2005, from all hospitals subject to
the IPPS. The full FY 2004 MedPAR file

[[Page 24008]]

includes data for approximately 13,673,607 Medicare discharges. We
excluded discharges for Medicare beneficiaries enrolled in a
Medicare+Choice managed care plan from the analysis. In addition, we
excluded data for any hospital that was paid under the IPPS during FY
2004 but became a CAH at any time before February 28, 2005; data from
IPFs, IRFs, and LTCHs; data from Maryland hospitals; data from Indian
Health Service hospitals; and data from all-inclusive rate providers.
The Medicare cost report data used in the analysis were from FY 2003,
the most recent full set of data available. Under our alternative
methodology, we calculated DRG weights from MedPAR and cost report data
as follows:
a. Step One: Clean the Data
(1) All of the claims were grouped using Version 23.0 of the CMS
DRGs.
The transplant cases that were used to establish the
alternative relative weights for heart and heart-lung, liver and/or
intestinal, and lung transplants (DRGs 103, 480, and 495 under the
current Version 23.0 GROUPER) were limited to those Medicare-approved
transplant centers that have cases in the FY 2004 MedPAR file.
(Medicare coverage for heart, heart and lung, liver and/or intestinal,
and lung transplants is limited to those facilities that have received
approval from CMS as transplant centers.)
Organ acquisition for kidney, heart, heart-lung, liver,
lung, pancreas, and intestinal (or multivisceral organs) transplants
continue to be paid on a reasonable cost basis. Because these
acquisition costs are paid separately from the prospective payment
rate, it is necessary to subtract the acquisition charges from the
total charges on each transplant bill that showed acquisition charges
before adjusting the charges under the HSRVcc methodology and before
eliminating statistical outliers.
(2) The FY 2004 MedPAR data were edited to exclude claims for
hospitals with no cost report data. Claims with total charges or total
length of stay less than or equal to zero were eliminated. Claims that
had an amount in the total charge field that differed by more or less
than $10 from the sum of charges for routine days, intensive care,
pharmacy, special equipment, therapy, operating room, cardiology,
laboratory, radiology, and other services were deleted. In addition, we
deleted claims for providers that had charges only in the routine days
and intensive care days cost centers and had no charges in any of the
eight ancillary cost centers. These claims were deleted because we
believe the charges for the eight ancillary cost centers were included
in the routine days and intensive care days cost centers. Had we
included these claims, the charges for the routine days and intensive
care days would have been inflated. After applying these edits, we
identified 11,142,651 claims that we used in this analysis.
(3) Statistical outliers were eliminated by removing all cases that
were beyond 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG.
b. Step Two: Compute HSRVs for Each Cost Center for Each DRG
Once the MedPAR data were edited, we sorted the data by provider so
that charges could be standardized under the HSRVcc methodology. To do
this, an average charge was computed for each provider for each of 10
proposed cost centers (see Table A). The average charge was computed by
summing the charges for each cost center and dividing by the transfer-
adjusted case count for each provider. A transfer case, identified by
discharge code, DRG, and length of stay, was counted as a fraction of a
case based on the ratio of its length of stay plus 1 day relative to
the geometric mean length of stay for that DRG. That is, a transfer
case with a length of stay of 2 days in a DRG with a geometric mean
length of stay of 6 days would be counted as 3 (2 days plus 1 extra
day) divided by 6 or 0.5 of a total case. This treatment of transfer
cases is consistent with payment rules.
After computing the average charge for each provider for each cost
center, the cost center charges on each claim were divided by the
provider's average charge for the matching cost center across all
services. For example, the routine day charges on each individual claim
were divided by the average routine day charge for the provider across
all services, the intensive care unit charges on the same claim were
divided by the average intensive care unit charge for the provider
across all services, and so on.
By using a hospital's relative charge structure, we found that the
resulting weights did not reflect differences in charges among
providers for factors such as location, size, wages, relative
efficiency, average markup, IME adjustment, DSH adjustment, and the
variety of cases treated. Therefore, once charge weights were computed
at the hospital cost center level, they were multiplied by the
provider's CMI. We made this adjustment for the CMI to rescale the
hospital-specific relative charge values which, by definition, averaged
to 1.0 for each cost center. We believed that the CMI was a reasonable
scale factor to use to further adjust the relative charges to reflect
the complexity of cases treated by the provider. We assigned a starting
CMI of 1 to the cost center for each provider. However, an alternative
starting CMI could have been assigned because the algorithm is not
sensitive to starting values of CMI.
After the relative charges (cost center claim charge divided by the
average cost center charge for the provider) were multiplied by the
hospital's matching cost center CMI, they were summed by DRG. The
transfer adjusted case count for each DRG was also summed. Average
charges by DRG were calculated for each cost center by taking the sum
of the relative CMI-adjusted charges for that DRG and dividing by the
transfer-adjusted case count for that DRG. A national average charge
for each cost center was calculated summing all relative CMI-adjusted
charges in the trimmed MedPAR data set and dividing by the total
transfer-adjusted case count. We then created a set of cost center DRG
weights by dividing the national average charge for each DRG for each
cost center by the national average charge for that cost center. The
result was a set of 10 weights for each DRG. These 10 weights are then
assigned to each claim, and a new CMI is created for each provider.
Then the relative charges for each cost center on the claim (total
charge for cost center is divided by the provider's average charge for
that cost center) are multiplied by this new CMI and the weights are
iterated until the national average CMI for each cost center stops
changing between iterations. In preparing the proposed weights for
their simulation, we used a transfer-adjusted CMI that was computed by
taking the sum of the transfer-adjusted weights and dividing by a full
case count, where the transfer-adjusted weight is computed by
multiplying the transfer-adjusted case count (length of stay for the
claim plus 1 day divided by geometric mean length of stay for the DRG)
by the DRG weight.
Table A below illustrates the charge line items from MedPAR that
were included in each cost center charge group. In addition, it shows
the corresponding line items from Worksheet C, Part 1, columns 5, 6,
and 7 of the Medicare cost reports. The name of each cost report line
item appears as it is listed in the Hospital Cost Report Information
System (HCRIS) cost report database record layout which is available
for download via the Web site: http://www.cms.hhs.gov.

BILLING CODE 4120-01-P

[[Page 24009]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.000

[[Page 24010]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.001

c. Step Three: Compute CCRs From the Cost Reports for Each of the 10
Cost Center Groups Identified in Table A
After the iteration process was completed, we removed the effects
of differential markups within cost centers. The first step in this
process was to develop national cost center CCRs. Taking FY 2003 cost
report data, we edited the data to remove data for CAHs, IPFs, IRFs,
LTCHs, Maryland hospitals, Indian Health Service hospitals, and all
inclusive rate hospitals, and cost reports that represented time
periods of less than 1 year (365 days). We then created CCRs for each
provider for each group of cost centers (see Table A for line items
used in the calculations) while removing any cost center CCRs that were
greater than 10 or less than .01, as we believe that these CCRs are
outside of a reasonable range. We then took the logs of all of the cost
center CCRs and removed any cost center CCRs where the log of the cost
center CCR was greater or less than the mean log plus/minus 1.96
standard deviations of the log of that cost center CCR. We used 1.96
standard deviations as a trim factor because the logs of the cost
center CCRs are normally distributed and 1.96 standard deviations
represent the 95th percentile of the T-Distribution for large sample
size, for which 2,000 to 3,000 hospitals qualify. Once the cost report
data were trimmed, we calculated the geometric mean CCR for each cost
center.

[[Page 24011]]

d. Step Four: Sum the Average Charge for Each Cost Center From the
MedPAR Data and Apply the National CCRs From the MedPAR File
Once the national average CCRs from Step Three were computed, they
were multiplied by the total unadjusted charges for the matching cost
centers in the MedPAR file. The estimated costs were then summed to
derive a total cost for all cases across the Nation. The percentage
that each cost center was contributing to the overall total costs is
calculated by dividing the individual cost center cost by the total.
For example, the total cost for routine days was divided by the total
cost for all cases to arrive at 0.29, which indicated that routine
costs were responsible for approximately 29 percent of total costs. The
10 scaling factors sum to 1.0.
e. Step Five: Adjust Relative Weights From Step Two to Cost by Applying
Scaling Factors From Step Four
For each DRG, the cost center weights are multiplied by these
scaling factors (that is, the routine day weight is multiplied by the
routine day scaling factor, the intensive care unit weight is
multiplied by the intensive care unit scaling factor, and so on). After
the weights are adjusted by the scaling factor, they are summed by DRG
to create one final weight for each DRG.
f. Step Six: Normalize the Weights
In order to compare the weights calculated in Step Five to the
charge-based weights that are in effect in FY 2006, the weights were
normalized by the FY 2006 normalization factor of 1.47462 (70 FR
47332). This factor was applied to the charge-based weights from FY
2006 to ensure that recalibration by itself neither increases nor
decreases total payments under the IPPS. We used the same normalization
factor that we applied for purposes of calculating the DRG relative
weights in the FY 2006 IPPS final rule because we used the same FY 2004
MedPAR data and FY 2003 cost report data that we used to set the FY
2006 DRG relative weights. We note that we likely will have more recent
data available when we determine the DRG relative weights for the FY
2007 IPPS final rule.
3. Refinement of DRGs Based on Severity of Illness
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Severity of Illness'' at the beginning of your
comment.)
For purposes of the following discussions, the term ``CMS DRGs''
means the DRG system we currently use under the IPPS; the term ``APR
DRGs'' means the severity DRG system designed by 3M Health Information
Systems that currently is used by the State of Maryland; and the term
``consolidated severity-adjusted DRGs'' means the DRG system based on a
consolidated version of the APR DRGs (as described in detail below).
Although we discuss the consolidated severity-adjusted DRGs in this
proposed rule, we are interested in public comments on whether there
are alternative DRG systems that could result in better recognition of
severity than the consolidated severity-adjusted DRGs we are proposing.
We refer to adopting consolidated severity-adjusted DRGs numerous times
in this proposed rule. As we make clear in the detailed discussion
below, there are still further changes that we believe may be important
to make to this proposed system before it is ready for adoption. In the
remainder of this proposed rule, ``consolidated severity-adjusted
DRGs'' refers to the DRG system we have analyzed. However, it is
possible that the public comment process will present compelling
evidence that there are potential alternatives to the consolidated
severity-adjusted DRG system for us to consider that could more
effectively recognize severity of illness.
In the FY 2006 IPPS final rule (70 FR 47474), we stated that we
would consider making changes to the CMS DRGs to better reflect
severity of illness among patients. We indicated that we would conduct
a comprehensive review of the CC list as well as consider the
possibility of using the APR DRGs for FY 2007. We did not adopt APR
DRGs for FY 2006 because such an adoption would represent a significant
undertaking that could have a substantial effect on all hospitals.
There was insufficient time between the release of the MedPAC reports
in March 2005 and the publication of the FY 2006 IPPS final rule for us
to analyze fully a change of this magnitude. Instead, we adopted a more
limited policy by implementing severity-adjusted cardiac DRGs.
After publication of the FY 2006 IPPS final rule, CMS contracted
with 3M Health Information Systems to further analyze the MedPAC
recommendations in support of our consideration of possible changes to
the IPPS for FY 2007. Under one task of this contract, 3M Health
Information Systems analyzed the feasibility of using a revised DRG
system under the IPPS that is modeled on the APR DRGs Version 23 to
better recognize severity of illness. The APR DRGs have been used
successfully as the basis of Belgium's hospital prospective global
budgeting system since 2002. The State of Maryland began using APR DRGs
as the basis of its all-payer hospital payment system in July 2005.
More than a third of the hospitals in the United States are already
using APR DRG software to analyze comparative hospital performance.
Many major health information system vendors have integrated this
system into their products. Several State agencies utilize the APR DRGs
for the public dissemination of comparative hospital performance
reports. APR DRGs have been widely applied in policy and health
services research. In addition to being used in research by MedPAC, the
APR DRGs also contain a separate measure of risk of mortality that is
used in the Quality Indicators of the Agency for Healthcare Research
and Quality, the Premier Hospital Quality Incentive Demonstration
discussed in section IV.B. of this preamble, and the Joint Commission
on Accreditation of Healthcare Organizations (JCAHO) hospital
accreditation survey process (Shared Visions-New Pathways).
Below we present a comparison of the CMS DRG system and the APR DRG
system.
a. Comparison of the CMS DRG System and the APR DRG System
The CMS DRG and APR DRG systems have a similar basic structure.
There are 25 MDCs in both systems. The DRG assignments for both systems
are based on the reporting of ICD-9-CM diagnosis and procedure codes.
Both DRG systems are composed of a base DRG that describes the reason
for hospital admission and a subdivision of the base DRG based on other
patient attributes that affect the care of the patient. For surgical
patients, the base DRG is defined based on the type of procedure
performed. For medical patients, the base DRG is defined based on the
principal diagnosis. In Version 23.0 of the CMS DRG system, there are
367 base DRGs and 526 total DRGs. In Version 23 of the APR DRG system,
there are 314 base DRGs and 1,258 total APR DRGs. Some of the base DRGs
in the two systems are virtually identical. For example, there is no
significant difference between the base DRG under both systems for
medical treatment of congestive heart failure. For other base DRGs,
there are substantial differences. For example, in the CMS DRG system,
there are two base DRGs for appendectomy (simple and complex); in the
APR DRG system, there is only one base DRG for appendectomy (the
relative complexity of the patient is addressed in the subsequent
subdivision

[[Page 24012]]

of the base DRG into severity of illness subclasses).
The focus of the CMS DRGs is on complexity. Complexity is defined
as the relative volume and types of diagnostic, therapeutic, and bed
services required for the treatment of a particular illness. Thus, the
focus of payment in the CMS DRG system reflects the relative resource
use needed by the patient in one DRG group compared to another.
Resource use is generally correlated with severity of illness but an
intensive resource use does not necessarily indicate a high level of
severity in every case. It is possible that some patients will be
resource-intensive and require high-cost services even though they are
less severely ill than other patients. The CMS DRG system subdivides
the base DRGs using age and the presence of a secondary diagnosis that
represents a CC. The age subdivisions primarily relate to pediatric
patients (those who are less than 18 years of age). Patients are
assigned to the CC subgroup if they have at least one secondary
diagnosis that is considered a CC. The diagnoses that are designated as
CCs are the same across all base DRGs. The subdivisions of the base CMS
DRGs are not uniform: some base DRGs have no subdivision; some base
DRGs have a two-way subdivision based on the presence of a CC; and
other base DRGs have a three-way subdivision based on a pediatric
subdivision followed by a CC subdivision of the adult patients. In
addition, some base DRGs in MDC 5 (Diseases and Disorders of the
Circulatory System) have a subdivision based on the presence of a major
cardiovascular condition or complex diagnosis.
The APR DRG system subdivides the base DRGs by adding four severity
of illness subclasses to each DRG. Under the APR DRG system, severity
of illness is defined as the extent of physiologic decompensation or
organ system loss of function. The underlying clinical principle of APR
DRGs is that the severity of illness of a patient is highly dependent
on the patient's underlying problem and that patients with high
severity of illness are usually characterized by multiple serious
diseases or illnesses. The assessment of the severity of illness of a
patient is specific to the base APR DRG to which a patient is assigned.
In other words, the determination of the severity of illness is
disease-specific. High severity of illness is primarily determined by
the interaction of multiple diseases. Patients with multiple comorbid
conditions involving multiple organ systems are assigned to the higher
severity of illness subclasses. The four severity of illness subclasses
under the APR DRG system are numbered sequentially from 1 to 4,
indicating minor (1), moderate (2), major (3), and extreme (4) severity
of illness.
The APR DRG system does not subdivide base DRGs based on the age of
the patient. Instead, patient age is used in the determination of the
severity of illness subclass. In the CMS DRG system, the CC list is
generally the same across all base DRGs. However, there are CC list
exclusions for secondary diagnoses that are related to the principal
diagnosis. In the APR DRG system, the significance of a secondary
diagnosis is dependent on the base DRG. For example, an infection is
considered more significant for an immune-suppressed patient than for a
patient with a broken arm. The logic of the CC subdivision in the CMS
DRG system is a simple binary split for the presence or absence of a
CC. In the APR DRG system, the determination of the severity subclass
is based on an 18-step process that takes into account secondary
diagnoses, principal diagnosis, age, and procedures. The 18 steps are
divided into three phases. There are six steps in Phase I, three steps
in Phase II, and nine steps in Phase III.
The diagram below illustrates the three-phase process for
determining patient severity of illness subclass.
BILLING CODE 4120-01-P

[[Page 24013]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.002

BILLING CODE 4120-01-C

[[Page 24014]]

Under the CMS DRG system, a patient is assigned to the DRG with CC
if there is at least one secondary diagnosis present that is a CC.
There is no recognition of the impact of multiple CCs. Under the APR
DRG system, high severity of illness is primarily determined by the
interaction of multiple diseases. Under the CMS DRG system, patients
are assigned to an MDC based on their principal diagnosis. While the
principal diagnosis is generally used to assign the patient to an MDC
in the APR DRG system, there is a rerouting step that assigns some
patients to another MDC. For example, lower leg amputations can be
performed for circulatory, endocrine, or musculoskeletal principal
diagnoses. Instead of having three separate amputation base DRGs in
different MDCs as is done in the CMS DRG system, the APR DRG system
reroutes all of these amputation patients into a single base APR DRG in
the musculoskeletal MDC. The CMS DRG system uses death as a variable in
the DRG definitions but the APR DRG system does not. Both DRG systems
are based on the information contained in the Medicare Uniform Bill.
The APR DRG system requires the same information used by the current
CMS DRG system. No changes to the claims form or the data reported
would be necessary if CMS were to adopt APR DRGs or a variant of them.
The CMS DRG structure makes some DRG modifications difficult to
accommodate. For example, high severity diseases that occur in low
volume are difficult to accommodate because the only choice is to form
a separate base DRG with relatively few patients. Such an approach
would lead to a proliferation of low-volume DRGs. Alternatively, these
cases may be included in DRGs with other patients that are dissimilar
clinically or in costs. Requests for new base DRGs formed on the use of
a specific technology may also be difficult to accommodate. Base DRGs
formed based on the use of a specific technology would result in the
payment weight for the DRG being dominated by the price set by the
manufacturer for the technology.
The structure of the APR DRGs provides a means of addressing high
severity cases that occur in low volume through assignment of the case
to a severity of illness subclass. However, the APR DRG structure does
not currently accommodate distinctions based on complexity.
Technologies that represent increased complexity, but not necessarily
greater severity of illness, are not explicitly recognized in the APR
DRG system. For example, in the CMS DRGs, there are separate DRGs for
coronary angioplasty with or without insertion of stents. The APR DRGs
do not make such a differentiation. The insertion of the stent makes
the patient's case more complex but does not mean the patient is more
severely ill. However, the inability to insert a stent may be
indicative of a patient's more advanced coronary artery disease.
Although such conflicts are relatively few in number, they do represent
an underlying difference between the two systems. If Medicare were to
adopt a severity DRG system based on the APR DRG logic but assign cases
based on complexity as well as severity as we do under the current
Medicare DRG system, such a distinction would represent a departure
from the exclusive focus on severity of illness that currently forms
the basis of assigning cases in the APR DRG system.
Section 1886(d)(4) of the Act specifies that the Secretary must
adjust the classifications and weighting factors at least annually to
reflect changes in treatment patterns, technology, and other factors
that may change the relative use of hospital resources. Therefore, we
believe a method of recognizing technologies that represent increased
complexity, but not necessarily greater severity of illness, should be
included in the system. We plan to develop criteria for determining
when it is appropriate to recognize increased complexity in the
structure of the DRG system and how these criteria interact with the
existing statutory provisions for new technology add-on payments. We
invite public comments on this particular issue.
Another difference between the CMS DRG system and the APR DRG
system is the assignment of diagnosis codes in category 996
(Complications peculiar to certain specified procedures). The CMS DRG
system treats virtually all of these codes as CCs. With the exceptions
of complications of organ transplant and limb reattachments, these
complication codes do not contribute to the severity of illness
subclass in the APR DRG system. While these codes could be added to the
severity logic, the appropriateness of recognizing codes such as code
998.4 (Foreign body accidentally left during a procedure) as a factor
in payment calculation could create the appearance of incentives for
less than optimal quality. Although there is no direct recognition of
the codes under the 996 category, the precise complication, in general,
can be coded separately and could contribute to the severity of illness
subclass assignment.
Table B below summarizes the differences between the two DRG
systems:

Table B.--Comparison of the CMS DRG System and the APR DRG System
------------------------------------------------------------------------
Element CMS DRG system APR DRG system
------------------------------------------------------------------------
Number of base DRGs............. 367............... 314.
Total number of DRGs............ 526............... 1,258.
Number of CC (severity) 2................. 4.
subclasses.
Multiple CCs recognized......... No................ Yes.
CC assignment specific to base No................ Yes.
DRG.
Logic of CC subdivision......... Presence or 18-step process.
absence.
Logic of MDC assignment......... Principal Principal
diagnosis. diagnosis with
rerouting.
Death used in DRG definitions... Yes............... No.
Data requirements............... Hospital claims... Hospital claims.
------------------------------------------------------------------------

To illustrate the differences between the two DRG systems, we
compare in Table C below four cases that have been assigned to CMS DRGs
and APR DRGs. In all four cases, the patient is a 67-year-old who is
admitted for diverticulitis of the colon and who has a multiple
segmental resection of the large intestine performed. ICD-9-CM
diagnosis code 562.11 (Diverticulitis of colon (without mention of
hemorrhage)) and ICD-9-CM procedure code 45.71 (Multiple segmental
resection of large intestine) would be reported to capture this case.
In both DRG systems, the patient would be assigned to the base DRG for
major small and large bowel procedures. These four cases would fall

[[Page 24015]]

into two different CMS DRGs and four different APR DRGs. We include
Medicare average charges in the table to illustrate the differences in
hospital resource use.
Case 1: The patient receives only a secondary diagnosis of an ulcer
of anus and rectum (ICD-9-CM diagnosis code 569.41). Under the CMS DRG
system, the patient is assigned to base DRG 149 (Major Small and Large
Bowel Procedures Without CC). Under the APR DRG system, the patient is
assigned to base DRG 221 (Major Small and Large Bowel Procedures) with
a severity of illness subclass of 1 (minor).
Case 2: The patient receives a secondary diagnosis of an ulcer of
anus and rectum and an additional secondary diagnosis of unspecified
intestinal obstruction (ICD-9-CM diagnosis code 560.9). Under the CMS
DRG system, the patient is assigned to DRG 148 (Major Small and Large
Bowel Procedures With CC). Under the APR DRG system, the patient is
assigned to base DRG 221 and the severity of illness subclass increases
to 2 (moderate).
Case 3: The patient receives multiple secondary diagnoses of an
ulcer of anus and rectum, unspecified intestinal obstruction, acute
myocarditis (ICD-9-CM diagnosis code 422.99), and atrioventricular
block, complete (ICD-9-CM diagnosis code 426.0). Under the CMS DRG
system, the patient is assigned to DRG 148. Under the APR DRG system,
the patient is assigned to base DRG 221 and the severity of illness
subclass increases to 3 (major).
Case 4: The patient receives multiple secondary diagnoses of an
ulcer of anus and rectum, unspecified intestinal obstruction, acute
myocarditis, atrioventricular block, complete, and the additional
diagnosis of acute renal failure, unspecified (ICD-9-CM diagnosis code
584.9). Under the CMS DRG system, the patient is assigned to DRG 148.
Under the APR DRG system, the patient is assigned to base DRG 221 and
the severity of illness subclass increases to 4 (extreme).

Table C.--Example of Sample Cases Assigned Under the CMS DRG System and Under the APR DRG System
----------------------------------------------------------------------------------------------------------------
CMS DRG system APR DRG system
Principal diagnosis code: 562.11 --------------------------------------------------------------------------
Procedure code: 45.71 Average Average
DRG assigned charge DRG assigned charge
----------------------------------------------------------------------------------------------------------------
Case 1--Secondary Diagnosis: 569.41.. 149 without CC.......... $25,147 221 with severity of $25,988
illness subclass 1.
Case 2--Secondary Diagnoses: 569.41, 148 with CC............. 59,519 221 with severity of 38,209
560.9. illness subclass 2.
Case 3--Secondary Diagnoses: 569.41, 148 with CC............. 59,519 221 with severity of 66,597
560.9, 422.99, 426.0. illness subclass 3.
Case 4--Secondary Diagnoses: 569.41, 148 with CC............. 59,519 221 with severity of 130,750
560.9, 422.99, 426.0, 584.9. illness subclass 4.
----------------------------------------------------------------------------------------------------------------

The largest significant difference in average charges is seen in
case 4 where the average charge under the APR DRG assigned to the
patient ($130,750) is more than double the average charge under the CMS
DRG assigned to the patient ($59,519).
b. Consolidated Severity-Adjusted DRGs for Use in the IPPS
APR DRGs were developed to encompass all-payer patient populations.
As a result, we found that, for the Medicare population, some of the
APR DRGs have very low volume. MedPAC noted that the larger number of
DRGs under a severity-weighted system might mean that CMS would be
faced with establishing weights in many categories that have few cases
and, thus, potentially creating unstable estimates. While volume is an
important consideration in evaluating any potential consolidation of
APR DRGs for use under the IPPS, we believe that hospital resource use
and clinical interpretability also need to be taken into consideration.
For example, any consolidation of severity of illness subclasses within
a base DRG should be restricted to contiguous severity of illness
subclasses. Thus, it would not be reasonable clinically to combine
severity of illness subclasses 1 and 4 solely because both consist of
low-volume cases. We analyzed consolidating APR DRGs by either
combining the base DRGs or the severity of illness subclasses within a
base DRG. For consolidation across base APR DRGs, we considered patient
volume, similarity of hospital charges across all four severity of
illness subclasses and clinical similarity of the base APR DRGs. For
consolidations of severity of illness subclasses within a base DRG, we
considered patient volume and the similarity of hospital charges
between severity of illness subclasses. In considering how to
consolidate severity of illness subclasses, we believed it was
important to use uniform criteria across all DRGs to avoid creating
confusing and difficult to interpret results. That is, we were
concerned about inconsistencies in the number of severity levels across
different DRGs.
The objective to simultaneously take into consideration patient
volume and average charges often produced conflict. Table D below
contains the overall patient volume and average charge by APR DRG
severity of illness subclass. While severity of illness subclass 4
(extreme) has had the lowest patient volume of 5.80 percent, we found
that the dramatically different average charges between severity of
illness subclass 3 (major) and subclass 4 (extreme) patients of
approximately $32,426 and $81,952, respectively, would make it
difficult to consolidate severity of illness subclass 3 and 4 patients.
Conversely, we found that, while the average charge difference between
severity of illness subclass 1 (minor) and 2 (moderate) patients was
much smaller, of approximately $17,649 and $20,021, respectively, the
majority of patient volume (68.08 percent) is in these two subclasses.
Thus, low patient volume and small average charge differences rarely
coincided.

[[Page 24016]]

Table D.--Overall Average Charges and Patient Volume by APR DRG Severity of Illness Subclass
----------------------------------------------------------------------------------------------------------------
APR DRG APR DRG APR DRG APR DRG
severity of severity of severity of severity of
All cases illness illness illness illness
subclass 1 subclass 2 subclass 3 subclass 4
----------------------------------------------------------------------------------------------------------------
Count........................... 11,142,651 21.47% 46.61% 26.12% 5.80%
Average Charges................. $26,342 $17,649 $20,021 $32,426 $81,952
----------------------------------------------------------------------------------------------------------------

There were also few opportunities to consolidate base DRGs. For
base DRGs for which there was a clinical basis for considering a
consolidation, there were usually significant differences in average
charges for one or more of the severity of illness subclasses. APR DRGs
already represented a considerable consolidation of base DRGs (314)
compared to CMS DRGs (367). Thus, we expected that further base DRG
consolidation would be difficult.
We reviewed the patient volume and average charges across APR DRGs
and found that medical cases assigned severity of illness subclass 4
within an MDC have similar average charges. We observed the same
pattern in average charges across severity of illness subclass 4
surgical patients within an MDC. The data suggest that, in cases with a
severity of illness of subclass 4, the severity of the cases had more
impact on hospital resource use than the reason for admission (that is,
the base APR DRG within an MDC). Thus, we believe that, within each
MDC, the severity of illness subclass 4 medical and surgical patients,
respectively, could be consolidated into a single group.
In some MDCs, it was not possible to consolidate into a single
medical and a single surgical severity of illness subclass 4 group. In
these MDCs, more than one group was necessary. For instance, Table E
below contains the patient volume and average charges for severity of
illness subclass 4 cases in MDC 11 (Diseases and Disorders of the
Kidney and Urinary Tract). Taking into consideration volume and average
charges, except for APR DRG 440 (Kidney Transplant), surgical cases
assigned severity of illness subclass 4 in MDC 11 could be consolidated
into a single group having 5,492 patients and an average charge of
$107,258. However, we decided not to include kidney transplant patients
in this severity of illness 4 subclass due to their very high average
charges (approximately $203,732 or more than $100,000 greater than
other patients in MDC 11 having a severity of illness 4 subclass).
Average charges within the consolidated severity of illness 4 surgical
DRG in MDC 11 show some variation but are much higher than the
corresponding average charges for the severity of illness subgroup 3
patients of $48,863. Thus, our analysis suggests that the data support
maintaining three severity of illness levels for each base DRG in MDC
11; a separate severity of illness 4 subclass for all patients other
than those having kidney transplant; and a separate DRG for kidney
transplants.

Table E.--Summary Statistics for Surgical Cases With Severity of Illness Subclass 4 in MDC 11
----------------------------------------------------------------------------------------------------------------
Number of Average length Average total
APR DRG cases of stay charges
----------------------------------------------------------------------------------------------------------------
440 (Kidney Transplant)......................................... 378 18.0 $203,732
441 (Major Bladder Procedures).................................. 528 21.5 128,729
442 (Kidney & Urinary Tract Procedure for Malignancy)........... 833 16.6 101,501
443 (Kidney & Urinary Tract Procedure for Non-Malignancy)....... 966 18.4 103,905
444 (Renal Dialysis Access Device Procedure Only Severity of 935 18.3 104,249
Illness Subclass 4)............................................
445 (Other Bladder Procedures).................................. 186 15.2 80,197
446 (Urethral & Transurethral Procedure--Severity of Illness 492 13.4 73,110
Subclass 4)....................................................
447 (Other Kidney, Urinary Tract & Related Procedures).......... 1,552 19.3 121,011
----------------------------------------------------------------------------------------------------------------

The consolidation of severity of illness 4 subclass APR DRG into
fewer groups was done for all MDCs except MDC 15 (Newborn and Other
Neonates With Conditions Originating in the Perinatal Period), MDC 19
(Mental Diseases and Disorders), and MDC 20 (Alcohol/Drug Use and
Alcohol/Drug Induced Organic Mental Disorders). In the 22 MDCs in which
the severity of illness subclass 4 consolidation was applied, the
number of separate severity of illness subclass 4 groups was reduced
from 262 to 69.
For MDC 14 (Pregnancy, Childbirth, and Puerperium), the base APR
DRGs were consolidated from 12 to 6. Severity of illness subclass 1
through 3 were retained, and severity of illness subclass 4 was
consolidated into a single APR DRG, except for cesarean section and
vaginal deliveries, which were maintained as separate APR DRGs. This
consolidation reduced the total number of obstetric APR DRGs from 48 to
22.
The Medicare patient volume in MDC 15 was very low, allowing for a
more aggressive consolidation. For MDC 15, we consolidated 28 base APR
DRGs into 7 base consolidated severity-adjusted DRGs. For each of the 7
consolidated base MDC 15 DRGs, we combined severity of illness
subclasses 1 and 2 into one DRG and severity of illness subclass 3 and
4 into another one. This consolidation reduced the total number of MDC
15 DRGs from 112 in the APR DRG system to 14 consolidated severity-
adjusted DRGs.
In MDC 19, we consolidated 12 base DRGs into 4 base DRGs. We
retained the 4 severity of illness subclasses in MDC 19 for each of the
4 base DRGs. In MDC 20, the base APR DRG for patients who left against
medical advice has severity of illness subclass 1 and 2 consolidated
and severity of illness subclass 3 and 4 consolidated. The remaining 4
base DRGs were consolidated into 1 base DRG and retained in 4 severity
of illness subclasses.
We did not consolidate any of the pre-MDC subclass 4 APR DRGs such
as Heart Transplant. As explained earlier, pre-MDC DRGs are DRGs to
which cases are directly assigned on the basis of ICD-9-CM procedure
codes. These DRGs are for liver and/or intestinal transplants, heart
and/or lung

[[Page 24017]]

transplants, bone marrow transplants, pancreas transplants, and
tracheotomies. For the pre-MDC DRGs, except for Bone Marrow Transplant,
we consolidated severity of illness subclasses 1 and 2 into one DRG. In
addition, the three base APR DRGs for Human Immunodeficiency Virus
(HIV) with multiple or major HIV-related conditions had severity of
illness subclasses 1 and 2 consolidated.
In total, we reduced 1,258 APR DRGs to 861 consolidated severity-
adjusted DRGs. In Appendix C of this proposed rule, we present the 861
unique combinations of consolidated severity-adjusted DRGs.
Table F below includes a description of the consolidations that we
did within each individual MDC and includes information about the total
number of DRGs that were eliminated from the APR DRGs to develop the
consolidated severity-adjusted DRGs.
BILLING CODE 4120-01-P

[[Page 24018]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.003

BILLING CODE 4120-01-C

[[Page 24019]]

Appendix D of this proposed rule shows the crosswalk of each
consolidated severity-adjusted DRG to its respective APR DRG. We
numbered the DRGs sequentially and incorporated the severity of illness
subclass into the DRG description. However, within the range of
sequential numbers used for an MDC, we retained some unused numbers to
allow for future DRG expansion. By using a three-digit number for the
consolidated severity-adjusted DRGs, we also avoid the need for
reprogramming of computer systems that would be necessary to
accommodate a change from the current three-digit DRG number to
separate fields for the base consolidated severity-adjusted DRG number
and the severity of illness subclass.
Severity DRGs represent a significant change from our current DRG
system. In addition to changing the way claims are grouped, severity
DRGs introduce other issues requiring additional analysis, including
possible increases in reported case-mix and changes to the outlier
threshold. Our analysis of these issues is outlined below.
c. Changes to CMI From a New DRG System
After the 1983 implementation of the IPPS DRG classification
system, CMS observed unanticipated growth in inpatient hospital case-
mix (the average relative weight of all inpatient hospital cases) that
is used as proxy measurement for severity of illness. There are three
factors that determine changes in a hospital's CMI:
(1) Admitting and treating a more resource intensive patient-mix
(due, for example, to technical changes that allow treatment of
previously untreatable conditions and/or an aging population);
(2) Providing services (such as higher cost surgical treatments,
medical devices, and imaging services) on an inpatient basis that
previously were more commonly furnished in an outpatient setting; and
(3) Changes in documentation (more complete medical records) and
coding practice (more accurate and complete coding of the information
contained in the medical record).
Changes in CMI as a result of improved documentation and coding do
not represent real increases in underlying resource demands. For the
implementation of the IPPS in 1983, improved documentation and coding
were found to be the primary cause in the underprojection of CMI
increases, accounting for as much as 2 percent in the annual rate of
CMI growth observed post-PPS.\2\
---------------------------------------------------------------------------

\2\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix
Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand,
1985.
---------------------------------------------------------------------------

We believe that adoption of consolidated severity-adjusted DRGs
would create a risk of increased aggregate levels of payment as a
result of increased documentation and coding. MedPAC notes that
``refinements in DRG definitions have sometimes led to substantial
unwarranted increase in payments to hospitals, reflecting more complete
reporting of patients' diagnoses and procedures.'' MedPAC further notes
that ``refinements to the DRG definitions and weights would
substantially strengthen providers' incentives to accurately report
patients' comorbidities and complications.'' To address this issue,
MedPAC recommended that the Secretary ``project the likely effect of
reporting improvements on total payments and make an offsetting
adjustment to the national average base payment amounts.'' \3\
---------------------------------------------------------------------------

\3\ Medicare Payment Advisory Commission: Report to Congress on
Physician-Owned Specialty Hospitals, March 2005, p. 42.
---------------------------------------------------------------------------

The Secretary has broad discretion under section 1886(d)(3)(A)(vi)
of the Act to adjust the standardized amount so as to eliminate the
effect of changes in coding or classification of discharges that do not
reflect real changes in case-mix. While we modeled the changes to the
DRG system and relative weights to ensure budget neutrality, we are
concerned that the large increase in the number of DRGs will provide
opportunities for hospitals to do more accurate documentation and
coding of information contained in the medical record. Coding that has
no effect on payment under the current DRG system may result in a case
being assigned to a higher paid DRG under the consolidated severity-
adjusted system. Thus, more accurate and complete documentation and
coding may occur under the consolidated severity-adjusted system
because it will result in higher payments under the more sophisticated
DRG system. We are soliciting comments on this issue.
4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier
Threshold
(If you choose to comment on issues in this section, please include
the caption ``Cost-Based Weights: Outlier Threshold'' at the beginning
of your comment.)
In its March 2005 Report to Congress on Physician-Owned Specialty
Hospitals, MedPAC recommended that Congress amend the law to give the
Secretary authority to adjust the DRG relative weights to account for
the differences in the prevalence of high-cost outlier cases. MedPAC
recommended DRG-specific outlier thresholds that are financed by each
DRG rather than through an across-the-board adjustment to the
standardized amounts. Furthermore, in comments that MedPAC submitted
during the comment period for the FY 2006 IPPS proposed rule, MedPAC
stated its belief that the current policy makes DRGs with a high
prevalence of outliers profitable for two reasons: (1) These DRGs
receive more in outlier payments than the 5.1 percent that is removed
from the national standardized amount; and (2) the relative weight
calculation results in these DRGs being overvalued because of the high
standardized charges of outlier cases. MedPAC also noted that, under
its recommendations, outlier thresholds in each DRG would reduce the
distortion in the relative weights that comes from including the
outlier cases in the calculation of the weight and would correct the
differences in profitability that stem from using a uniform outlier
offset for all cases. MedPAC added that its recommendation would help
make relative profitability more uniform across all DRGs.
In the FY 2006 IPPS final rule (70 FR 47481), we responded to
MedPAC's recommendation on outliers by noting that a change in policy
to replace the 5.1 percent offset to the standardized amount would
require a change in law. However, because the Secretary has broad
discretion to consider all factors that change the relative use of
hospital resources in the calculation of the DRG relative weights, we
stated we would consider changes that would reduce or eliminate the
effect of high-cost outliers on the DRG relative weights. At this time,
we have not completed a detailed analysis of MedPAC's outlier
recommendation because we do not have the authority to adopt such a
change under current law. Instead, we have focused our resources on
analyzing MedPAC's recommendations with respect to adopting severity
DRGs and calculating cost-based HSRV weights that can be adopted
without a change in law. While we intend to study MedPAC's
recommendation in more detail at a future date, we note that the
changes described above with respect to adopting a consolidated
severity-adjusted DRG system would have important implications for the
outlier threshold.
As noted above, we have completed a detailed analysis that would
increase

[[Page 24020]]

the number of DRGs from 526 under the current CMS DRG system to 861
under a consolidated severity-adjusted DRG system. Using FY 2004
Medicare charge data, 3M Health Information Systems simulated the
effect of adopting consolidated severity-adjusted DRGs in conjunction
with cost-based HSRV weights (described below) on the FY 2006 outlier
threshold using the same estimation parameters used by CMS in the FY
2006 final rule (that is, the charge inflation factor of 14.94 percent)
(70 FR 47494). Under these assumptions, 3M Health Information Systems
estimated that the outlier threshold would be reduced from $23,600
under the current system to $18,758 under a consolidated severity-
adjusted DRG system. By increasing the number of DRGs to better
recognize severity, the DRG system itself would provide better
recognition for cases that are currently paid as outliers. That is,
many cases that are high-cost outlier cases under the current DRG
system would be paid using a severity of illness subclass 3 or 4 under
the consolidated severity-adjusted DRGs and could potentially be paid
as nonoutlier cases.
5. Impact of Refinement of DRG System on Payments
Using the FY 2004 MedPAR claims data, we simulated the payment
impacts of moving to the consolidated severity-adjusted DRG GROUPER and
the alternative HSRVcc method for developing HSRV weights. These
payment simulations do not make any adjustments for changes in coding
or case-mix. For purposes of this analysis, estimated payments were
held budget neutral to the estimated FY 2006 payments because we have a
statutory requirement to make any changes to the weights or GROUPER
budget neutral. Based on the results of this impact analysis, we are
proposing to adopt both the HSRVcc weighting methodology and the
consolidated severity-adjusted DRGs. However, for reasons described in
more detail below, we are proposing to implement the HSRVcc weighting
methodology we described above for FY 2007 and future fiscal years and
the consolidated severity-adjusted DRG GROUPER for implementation in FY
2008 (if not earlier). Although we are proposing to adopt each of these
changes to the IPPS sequentially, the changes should be viewed as part
of a unified effort to improve Medicare's inpatient hospital payment
system. Our findings in support of these proposals are discussed below.
In examining the effects of moving to consolidated severity-
adjusted DRGs with HSRVcc relative weights, the primary impact of the
changes generally results from a redistribution of the relative weights
from the surgical DRGs to the medical DRGs. In Table G below, we show
an analysis of the total case-mix change for the medical and surgical
DRGs. We are comparing the percent change in case-mix between the FY
2006 DRGs with HSRVcc relative weights and the FY 2006 GROUPER with the
FY 2006 charge-based relative weights. We also show the percent change
in case-mix between the consolidated severity-adjusted DRGs with HSRVcc
relative weights and the FY 2006 GROUPER with the FY 2006 charge-based
relative weights and the percent change between the consolidated
severity-adjusted DRGs with HSRVcc relative weights and the FY 2006
DRGs with HSRVcc relative weights.

Table G.--Percent Change in Case-Mix Among Medical and Surgical DRGs by MDC
----------------------------------------------------------------------------------------------------------------
Percent change
in case-mix
Percent change due to Total impact
MDC description Cases in case-mix consolidated all changes
due to HSRVcc severity- (percent)
adjusted DRGs
----------------------------------------------------------------------------------------------------------------
Medical......................................... 7,832,185 6.0 1.3 7.3
Surgical........................................ 3,301,570 -5.7 -1.3 -6.9
----------------------------------------------------------------------------------------------------------------

Surgical DRGs experience a decline of 5.7 percent in weights, while
medical DRGs overall increase by approximately 6 percent when we apply
the HSRVcc method to the FY6 DRGs. Adoption of the consolidated
severity-adjusted DRGs also shows a redistribution of payment from the
surgical to the medical DRGs, but to a much lesser extent. The
redistribution of payments from adopting the HSRVcc weighting
methodology can be explained by the much lower CCRs for ancillary cost
centers that account for a higher proportion of total charges in the
surgical DRGs than the medical DRGs. Table H below shows department
charges as a percent of total charges and the CCRs for the two routine
cost centers (routine days and intensive care unit) and eight ancillary
cost centers that we used to develop the cost-based weights.

Table H.--Departmental Charges as Percent of Total Charges for Medical and Surgical DRGs and Departmental Cost-to-Charge Ratios (CCRs)
[In percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Routine Intensive Supplies &
days care unit equipment Therapy Lab Radiology Other O.R. Pharmacy Cardiac
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cost-to-Charge Ratio................... 85 72 34 35 25 24 51 37 26 20
Medical................................ 24 12 5 7 14 10 7 1 16 5
Surgical............................... 10 10 23 4 8 5 4 17 13 6
--------------------------------------------------------------------------------------------------------------------------------------------------------

As the above Table H shows, the routine cost centers account for 36
percent (24 percent for routine days and 12 percent for intensive care
unit) and 20 percent (10 percent for routine days and 10 percent for
intensive care unit) of total charges in the medical and surgical DRGs,
respectively. These departments have CCRs that range from

[[Page 24021]]

85 (routine days) to 72 percent (intensive care unit). However, the
markup over costs is much higher in the ancillary than in the routine
cost centers. The CCRs in the ancillary departments range from 20
percent (cardiac) to 51 percent (other). Ancillary cost centers account
for 64 percent of total charges in the medical and 80 percent of total
charges in the surgical DRGs. Thus, because ancillary departments have
higher markups and account for a larger proportion of total charges in
the medical than the surgical DRGs, adopting HSRVcc redistributes
payments to the more routine-intensive medical DRGs. Table H supports
the hypothesis that the charge-based relative weight methodology
results in high payments to surgical DRGs that use more ancillary
services relative to medical DRGs that use more routine services. By
changing the relative weight methodology from the charge-based to the
HSRVcc method, the weights will more closely reflect actual relative
costs.
In addition to examining the change in weights by MDC for the
medical and surgical DRGs, we also looked at the percent change to the
relative weights for several DRGs that account for the high Medicare
spending. Again, the payment impacts illustrate that a change from the
charge-based relative weights to the HSRVcc weighting methodology will
result in significant payment redistribution for selected DRGs. Table I
below also shows payment reductions from adopting HSRVcc for several
DRGs where ancillary charges represent a high proportion of total
charges and the ancillary department has a low CCR. For instance, Table
I shows a 30-percent reduction in payment for DRG 558 from adopting
HSRVcc weights. For this DRG, charges for the medical supplies and the
cardiac care represent over 60 percent of average total hospital
charges. These cost centers have low CCRs (34 and 20 percent for
medical supplies and cardiology respectively). For this DRG, routine
cost center charges account for only 7 percent of total hospital
charges. Thus, similar to the MDC analysis presented above, payment for
this DRG can be expected to decline because ancillary departments with
higher markups account for a larger proportion of total charges.
The data are similar for many of the other DRGs presented in Table
I that are showing large reductions in the relative weights from
adopting the HSRVcc weighting methodology. Conversely, Table I shows
payment increases from adopting HSRVcc for DRGs where routine charges
represent a high proportion of total charges. These departments have
high CCRs. Below we illustrate the charges by cost center as a percent
of total charges for DRGs 558 and 089.

Illustration
--------------------------------------------------------------------------------------------------------------------------------------------------------
Supplies
Routine and Radiology
days ICU equipment Therapy Laboratory Other O.R. Pharmacy Cardiac
(percent) (percent) (percent) (percent) (percent) (percent) (percent) (percent) (percent)
(percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
CCRs..................................... 85 72 34 35 25 24 51 37 26 20
DRG 558.................................. 2 5 39 0 3 2 1 2 8 29
DRG 089.................................. 25 9 7 9 14 8 6 1 19 3
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table I below shows a 30-percent reduction in payment for DRG 558
from adopting HSRVcc weights. For this DRG, charges for the medical
supplies and the cardiac care represent nearly 80 percent of average
total hospital charges. These cost centers have low CCRs (34 percent
and 20 percent for medical supplies and cardiology, respectively). For
this DRG, routine cost center charges account for only 7 percent of
total hospital charges. Thus, similar to the MDC analysis presented
above, payment for this DRG can be expected to decline because
ancillary departments with higher markups account for a larger
proportion of total charges. The data are similar for many of the other
DRGs presented in Table I that are showing large reductions in the
relative weights from adopting HSRVcc. Conversely, routine charges
account for a higher proportion of total charges for the DRGs that are
showing large increases in payments. For instance, payment for DRG 089
is increasing nearly 10 percent from adoption of HSRVcc weights.
Routine day charges account for 34 percent of total charges for DRG
089. Thus, because routine charges represent a high proportion of total
charges and these cost centers have relatively low markups, the HSRVcc
methodology will lead to higher payments for this DRG.

BILLING CODE 4120-01-P

[[Page 24022]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.004

[[Page 24023]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.005

BILLING CODE 4120-01-C

[[Page 24024]]

Our payment impacts were similar to MedPAC's in both magnitude and
direction. Table J below compares our impact estimates to those
simulated by MedPAC \4\ using our alternative HSRVcc weighting
methodology and the consolidated severity-adjusted DRG GROUPER.
---------------------------------------------------------------------------

\4\ Medicare Payment Advisory Commission: Report to Congress on
Physician-Owned Specialty Hospitals, March 2005, p. 39.

Table J.--Comparison of MedPAC's Table of Combined Payment Impact of Severity-Adjusted DRGs and Cost-Based,
Hospital-Specific Relative Values (HSRVs) to the CMS/3M Analysis
[The percent changes estimated by CMS/3M are shown in parenthesis.]
----------------------------------------------------------------------------------------------------------------
Decrease/
Decrease Decrease increase Increase Increase
Type of hospital greater than - between -5% between -1% between +1% greater than
5% and -1% and 1% and +5% +5%
----------------------------------------------------------------------------------------------------------------
Specialty:
Heart....................... 87% (95%) 13% (5%) 0% (0%) 0% (0%) 0% (0%)
Orthopedic.................. 76% (91%) 24% (2%) 0% (2%) 0% (2%) 0% (2%)
Surgical.................... N/A (67%) N/A (17%) N/A (0%) N/A (17%) N/A (0%)
All Other IPPS:
Urban....................... 7% (8%) 22% (25%) 16% (19%) 33% (31%) 22% (17%)
Rural....................... 8% (11%) 25% (35%) 17% (20%) 33% (26%) 16% (9%)
High IME/DSH................ 8% (10%) 28% (25%) 14% (15%) 25% (28%) 24% (23%)
----------------------------------------------------------------------------------------------------------------
**Numbers may not add to 100 percent due to rounding.

As shown in Table J above, the shifts in payment from MedPAC's
method compared to the alternative approach that we developed are
fairly similar. Both methods introduce refinements to the DRG GROUPER
and relative weight methods that expand the DRG groups and create
greater homogeneity among the cases within each DRG. These changes will
significantly reduce payments to hospitals that specialize in certain
DRGs experiencing a reduction in payment. There are also payment
impacts across all other hospitals. Although some urban (17 percent)
and rural (9 percent) providers are estimated to receive increases of
greater than 5 percent from these combined changes, 8 percent of urban
hospitals and 11 percent of rural hospitals are expected to experience
decreases of greater than 5 percent in payment and an additional 25
percent of urban providers and 35 percent of rural providers are
expected to experience a decrease of between 1 and 5 percent.
Table K below shows the impact on specific categories of hospitals
of adopting HSRVcc weights and the consolidated severity-adjusted DRGs.
As illustrated in Table K, cardiac specialty hospitals and orthopedic
specialty hospitals may experience an 11.2 and 4.4 percent decline in
payments, respectively, from the move to the HSRVcc weighting method
alone. Urban hospitals experience a small decline of 0.3 but rural
hospitals experience a gain of 2.7 percent. While urban hospitals as a
group are not expected to experience a change in overall payments with
the combined introduction of the consolidated severity-adjusted DRGs
and the HSRVcc weighting methodology, rural hospitals would likely
experience a 0.4 percent decline in payments.

Table K.--Payment Impact of Hospital-Specific Cost Weights and Consolidated Severity-Adjusted DRGs by Hospital
Type
----------------------------------------------------------------------------------------------------------------
Percent change
in case-mix
Number of Percent change due to Total impact
hospitals Cases in case-mix consolidated all changes
due to HSRVcc severity-
adjusted DRGs
----------------------------------------------------------------------------------------------------------------
Specialty Hospital Type:
Cardiac..................... 19 44,203 -11.2 -0.5 -11.7
Orthopedic.................. 43 11,097 -4.4 -5.2 -9.4
Surgery..................... 12 1,840 0.3 -7.4 -7.2
All Other IPPS:
Urban....................... 1,959 7,148,362 -0.3 0.3 0
Rural....................... 880 1,444,664 2.7 -3.1 -0.4
High IME/DSH................ 734 2,492,485 0 0.4 0.4
----------------------------------------------------------------------------------------------------------------

In Table L, we provide a more detailed impact analysis by hospital
type. Column 1 shows the estimated impact of moving from the current
charge-based relative weight methodology to the HSRVcc method.
Hospitals with more than 60 percent of Medicare patients are projected
to receive the greatest benefit in payments with a 7.6 percent
increase. Hospitals with less than 50 beds are estimated to experience
an additional 4.1 percent increase, and hospitals with 50 to 100 beds
are also projected to benefit with a 2.54 percent increase.
Payments to major and other teaching hospitals are estimated to
decrease by 1.1 percent and 1 percent, respectively,

[[Page 24025]]

while payments to nonteaching hospitals are estimated to increase by
1.3 percent. Hospitals with less than 20 percent DSH payments will
experience declines in payment from 0.48 to 1.45 percent, while
hospitals with DSH payments greater than 50 percent will experience a
2.3 percent increase. Because we are proposing to implement the HSRVcc
weighting methodology for FY 2007, we are also showing the impact of
this proposal on FY 2007 payments in the impact section in the Addendum
to this proposed rule. We note that the impact section models adopting
the HSRVcc in isolation using FY 2005 Medicare charge data. The impacts
shown here were simulated with FY 2004 Medicare charge data. Thus, the
payment changes shown in this section from adopting HSRVcc may differ
from those shown in the impact section in the Addendum to this proposed
rule.
Column 2 shows the estimated incremental impacts of transitioning
from the FY 2006 GROUPER with HSRVcc relative weights to the
consolidated severity-adjusted DRG GROUPER with HSRVcc relative
weights. Hospitals with high Medicare patient percentages experience
the largest payment increases of 1.1 percent, followed by hospitals in
the East North Central Region where increases are estimated at 0.9
percent. Hospitals with less than 50 beds, rural hospitals, and
hospitals with 50 to 100 beds experience the greatest estimated
decreases in payment of 5.2, 3.1, and 2.8 percent, respectively.
Column 3 shows the estimated total impact of moving from the FY
2006 GROUPER with the current charge-based relative weights to the
consolidated severity-adjusted DRG GROUPER with HSRVcc relative
weights. While large urban hospitals are expected to gain 0.7 percent
from the combined changes, other urban hospitals and rural hospitals
are projected to experience declines of 0.7 percent and 0.4 percent,
respectively. Hospitals with high percentages of Medicare patients
would see the greatest increase in payments, while hospitals with low
DSH percentages, hospitals with under 50 beds, and hospitals in the
West North Central Region are projected to experience the greatest
decreases.

Table L.--Payment Impact of Hospital-Specific Cost Weights and Consolidated Severity-Adjusted DRGs by Hospital
Category
----------------------------------------------------------------------------------------------------------------
Percent change
in case-mix
Percent change due to Total impact
Number of Cases in case mix consolidated all changes
hospitals due to HSRVcc severity- (3)
(1) adjusted DRGs
(2)
----------------------------------------------------------------------------------------------------------------
Geographic Location:
Large Urban................. 1,454 5,159,405 -0.1 0.7 0.7
Other Urban................. 1,158 4,313,598 -0.7 0.0 -0.7
Rural....................... 1,035 1,669,648 2.8 -3.1 -0.4
Census:
New England................. 150 550,391 0.3 -0.5 -0.2
Middle Atlantic............. 473 1,750,452 0.1 -0.5 -0.4
South Atlantic.............. 556 2,191,787 -0.2 0.4 0.2
East North Central.......... 541 1,973,092 -0.1 0.9 0.8
East South Central.......... 368 973,664 0.3 -1.3 -1.0
West North Central.......... 314 846,046 -0.5 -0.8 -1.3
West South Central.......... 572 1,332,819 -0.1 -0.1 -0.2
Mountain.................... 234 502,128 -0.6 0.6 -0.1
Pacific..................... 439 1,022,272 0.6 0.3 0.9
Bed Size:
Less than 50 beds........... 761 423,096 4.1 -5.2 -1.3
50-100 beds................. 717 1,028,840 2.5 -2.8 -0.3
100-200 beds................ 1,096 2,895,808 1.8 -0.6 1.2
200-300 beds................ 509 2,396,739 0.0 0.5 0.5
300-400 beds................ 269 1,666,872 -0.9 0.7 -0.2
400-500 beds................ 138 1,017,724 -1.5 0.7 -0.8
Greater than 500 beds....... 157 1,713,572 -1.8 0.8 -1.0
Teaching Status:
Major Teaching.............. 268 1,552,985 -1.1 0.5 -0.5
Other Teaching.............. 760 3,856,302 -0.9 0.6 -0.3
Non Teaching................ 2,619 5,733,364 1.3 -0.8 0.5
Disproportionate Share:
%DSH Less than 5%........... 202 339,171 -1.4 -0.8 -2.2
%DSH 5-10%.................. 335 1,048,420 -0.6 -0.1 -0.7
%DSH 10-15%................. 460 1,429,319 -0.6 0.1 -0.4
%DSH 15-20%................. 582 2,061,387 -0.5 -0.1 -0.6
%DSH 20-25%................. 528 1,812,743 0.1 -0.1 0.0
%DSH 25-30%................. 455 1,497,940 0.0 0.2 0.2
%DSH 30-40%................. 516 1,586,376 0.0 0.0 -0.1
%DSH 40-50%................. 262 693,815 0.6 -0.1 0.4
%DSH Greater than 50%....... 307 673,480 2.3 0.5 2.9
Percent Medicare Discharges:
Less than 10% Medicare Cases 1,194 3,210,704 -0.7 -0.1 -0.8
10%-20% Medicare Cases...... 1,471 5,109,042 0.1 0.0 0.0
20%-30% Medicare Cases...... 617 1,934,947 -0.1 0.1 -0.1
30%-40% Medicare Cases...... 226 617,518 0.9 0.1 1.0
40%-50% Medicare Cases...... 86 197,882 2.0 0.8 2.8

[[Page 24026]]

50%-60% Medicare Cases...... 39 55,346 5.2 1.1 6.4
Greater than 60% Medicare 14 17,212 7.6 -0.2 7.4
Cases......................
----------------------------------------------------------------------------------------------------------------

6. Conclusions
As we describe in more detail below, we believe that adopting
HSRVcc weights and the consolidated severity-adjusted DRGs as
recommended by MedPAC has the potential to result in significant
improvements to Medicare's IPPS payments. This rule proposes the HSRVcc
methodology effective for FY 2007.
Because we believe that accounting more appropriately for severity
of illness may significantly improve the effectiveness of the IPPS, we
are also proposing implementation of the consolidated severity-adjusted
DRGs or alternative severity adjustment methods in FY 2008 (if not
earlier). In developing this proposal, we considered a range of
alternatives outlined below, and we are soliciting comments on both the
proposal and the alternatives. We ask commenters to consider both the
consolidated severity-adjusted DRGs and alternative severity adjustment
methods for accounting for severity more comprehensively in the DRG
payment system. For example, under one alternative, we would implement
the consolidated severity-adjusted DRGs in FY 2007 along with the
HSRVcc weighting methodology. In this event, as discussed above, to
maintain budget neutrality, we would also implement in FY 2007 an
adjustment to the standardized amounts to eliminate the effect of
changes in coding or classification of discharges that do not reflect
real changes in case-mix. Under another alternative, as proposed, we
would adopt and implement consolidated severity-adjusted DRGs in FY
2008. Under yet another alternative, we would consider partially
implementing the consolidated severity-adjusted DRGs in FY 2007 and
complete implementation in FY 2008. However, there are practical
difficulties associated with partial implementation of consolidated
severity-adjusted DRGs because cases in a single DRG under the current
CMS DRG system may group to multiple DRGs and MDCs under a consolidated
severity-adjusted DRG system. Conversely, cases that group to multiple
MDCs and DRGs under the current system may group to a single MDC and
DRG under the current system. We welcome public comments on this issue.
One potential alternative to partially adopting consolidated
severity-adjusted DRGs would involve applying a clinical severity
concept to an expanded set of DRGs in FY 2007. For example, we have
received correspondence that raised the concern that hospitals may have
incentives under the current DRG system to avoid severely ill,
resource-intensive back and spine surgical cases (as discussed in
section II.D.3.b. of this proposed rule; the correspondence
specifically requested that we apply a clinical severity concept to DRG
546). Other surgical DRGs may not accurately recognize case severity.
Because of the frequency of DRG use and the potential for risk
selection, certain DRGs may be particularly important in creating a
financial incentive for hospitals to select a less severely ill patient
whose case would be assigned to the same DRG as a more severely ill
patient.
Therefore, while we are proposing to adopt the consolidated
severity-adjusted DRGs in FY 2008, we are considering whether to make
more limited changes to the current DRG system to better recognize
severity of illness in FY 2007. In the FY 2006 IPPS final rule (70 FR
47474 through 47478), we took steps to better recognize severity of
illness among cardiovascular patients. For all DRGs except cardiac
DRGs, we currently distinguish between more complex and less complex
cases based on the presence or absence of a CC. However, the diagnoses
that we designate as CCs are the same across all base DRGs. Because the
CC list is not dependent on the patient's underlying condition, CCs may
not accurately recognize severity in a given case. The changes we made
in FY 2006 to the cardiac DRGs significantly improved recognition of
severity between patients by distinguishing between more and less
severe cases based on the presence or absence of a major cardiovascular
condition (MCV). We are considering whether a similar approach applied
to other DRGs would improve payment.
Much like the approach we took last year to identify MCV conditions
that represented higher severity in cardiovascular patients, we plan to
examine which conditions identify more severely ill cases in selected
MDCs and DRGs. We are soliciting comments as to whether it would be
appropriate to adopt these types of limited changes in FY 2007 as an
intermediate step to adopting consolidated severity-adjusted DRGs in FY
2008. We also encourage commenters to send suggestions regarding this
method for modifying the DRGs. Under the final alternative, we would
implement the consolidated severity-adjusted DRGs in FY 2007 and the
HSRVcc methodology in FY 2008. As the impacts presented in this
proposed rule are based on the latest and best available data, we
believe the estimated yearly impacts due to implementing the HSRVcc
methodology in FY 2007 described in the regulatory impact section of
Appendix A of this proposed rule would be similar to the annual impact
of adopting the HSRVcc methodology in FY 2008.
With respect to the relative weight calculations, we believe that
adopting HSRVcc weights has the potential to significantly improve
payment equity between DRGs. As MedPAC notes, ``a survey of hospitals'
charging practices suggest that hospitals use diverse strategies for
setting service charges and raising them over time.'' MedPAC found that
data from the Medicare cost reports indicate that hospital markups for
ancillary services (for example, operating room, radiology, and
laboratory) are generally higher than for routine services (for
example, intensive care unit and room and board).\5\ Thus, MedPAC has
concluded that the relative weights for DRGs that use more ancillary
services may be too high compared to other DRGs where the routine costs
account for a higher proportion of hospital costs. We agree.

[[Page 24027]]

The CCRs that we are using to develop the HSRVccs support MedPAC's
conclusion. As indicated above, we summarized hospital-level cost and
charge information to 2 routine and 8 ancillary departmental cost
centers and found that national average routine cost center CCRs ranged
from 72 percent (intensive care unit days) to 85 percent (routine
days), while ancillary cost center CCRs ranged from 20 percent
(cardiology) to 37 percent (operating room).
---------------------------------------------------------------------------

\5\ Ibid., p. 26.
---------------------------------------------------------------------------

MedPAC also found that relative profitability ratios were higher
among cardiovascular surgical DRGs than the medical DRGs.\6\ We believe
the relative profitability of the surgical cardiovascular DRGs has been
an important factor in the development of specialty heart hospitals.
Our payment impact analysis indicates that this issue will be addressed
by adopting HSRVccs. Moving from the current system of charge-based
weights to HSRVcc weights increases payment in the medical DRGs
relative to the surgical DRGs. We expected this result, given that
routine costs will generally account for a higher proportion of total
costs in the medical DRGs than in the surgical DRGs. Adopting HSRVcc
weights would result in the most significant improvement in hospital
payment-to-cost ratios among the changes to the IPPS recommended by
MedPAC.\7\ For these reasons described above, we are proposing to adopt
HSRVccs for FY 2007.
---------------------------------------------------------------------------

\6\ Ibid., p. 29.
\7\ Ibid., p. 37.
---------------------------------------------------------------------------

Based on our analysis, we concur with MedPAC that the modified
version of the APR DRGs would account more completely for differences
in severity of illness and associated costs among hospitals. MedPAC
observed some modest improvements in hospitals' payment-to-cost ratios
from adopting APR DRGs.\8\ We modeled the consolidated severity-
adjusted DRGs discussed above and observed a 12-percent increase in the
explanatory power (or R-square statistic) of the DRG system to explain
total hospital charges. That is, we found more uniformity among
hospital total charges within the consolidated severity-adjusted DRG
system than we did with Medicare's current DRG system. While we believe
the consolidated severity-adjusted DRG system that we described above
has the potential to improve the IPPS, we have the following concerns
about adopting these changes for FY 2007, which is why we have proposed
not adopting the changes in FY 2007. However, we recognize that there
may be countervailing views, and we specifically seek comment on the
wisdom of adopting consolidated severity-adjusted DRGs in FY 2007.
Below are our concerns with immediate implementation of consolidated
severity-adjusted DRGs:
---------------------------------------------------------------------------

\8\ Ibid., p. 37.
---------------------------------------------------------------------------

These changes would represent a major change to how
hospitals are paid for Medicare inpatient services. Given the number of
new DRGs and logic for assigning cases in a consolidated severity-
adjusted DRG system, we believe it may be appropriate to provide
hospitals with additional time to plan for these changes. We also are
considering whether hospitals should have more than the 60-day public
comment period and the additional 60-day delay between the publication
of the final rule and implementation on October 1, 2006, to fully
understand and plan for the changes that we are proposing. Further, we
welcome public comment on the changes we are proposing;
If, based on analysis of data and public comments
received, we were to make significant revisions in the final rule to
the consolidated severity-adjusted DRGs we describe above, hospitals
would have only 60 total days between the publication of the final rule
and the October 1, 2006 effective date of the IPPS rule to understand
and plan for the new DRG system.
While we modeled the changes to the DRG system and
relative weights to reflect budget neutrality, we believe the large
increase in the number of DRGs would provide opportunities for
hospitals to more accurately and completely code the information
contained in the medical record. Coding that has no effect on payment
under the current DRG system may result in a case being assigned to a
higher paid DRG under the consolidated severity-adjusted DRG system.
Thus, more accurate and complete coding may occur under the new system
because the more sophisticated DRG system would mean that more
comprehensive coding could result in higher payments. Section
1886(d)(3)(A)(vi) of the Act provides the Secretary with the authority
to adjust the standardized amounts to account for the effect of coding
or classification changes that do not reflect real changes in case-mix.
We are interested in public comments on this issue.
As described above, adoption of a consolidated severity-
adjusted DRG system could have implications for the outlier threshold.
As we indicated in the introduction to this section,
adoption of a consolidated severity-adjusted DRG system also raises
issues regarding the IME and DSH adjustments. It is possible that a
consolidated severity-adjusted DRG system would have important
implications for these payment adjustments. We believe further study of
this issue is warranted.
To this point, we have only considered one alternative DRG
system to better recognize severity of illness. It is possible that the
public comment process will present compelling evidence that there are
potential alternatives to the consolidated severity-adjusted DRG system
that could also better recognize severity of illness.
Therefore, for the reasons indicated above, we are seeking comment
on the most effective approach to address severity of illness in the
IPPS. However, we reserve the option to adopt consolidated severity-
adjusted DRGs in FY 2007, based upon the comments that we receive.
Between now and the eventual implementation, we will carefully study
the additional impact of these DRGs on payment accuracy after our
proposed refinements in relative weights are implemented, as well as
their impact on hospitals before reaching a final decision.
Given the changes we are proposing, we believe that hospitals would
be interested in understanding how a given case would be assigned to a
consolidated severity-adjusted DRG under the new system. In order to
facilitate understanding of the underlying severity DRG concepts and
logic, we are providing a link below to 3M's Web site for the duration
of the comment period where users can access information related to the
proposed consolidated severity-adjusted DRGs. Users will have access to
a tool that allows them to build case examples using this proposed DRG
classification system. The report produced by the tool will provide a
detailed explanation of how the severity of illness was assigned and
the diagnostic and demographic factors affecting that assignment. In
addition, users will be able to view the APR DRG Definitions Manual, a
report showing the mapping from the standard APR DRGs to the
consolidated severity-adjusted DRGs, a report showing basic APR DRG
statistics, and other APR DRG background and educational materials.
This site can be accessed at http://www.aprdrgassign.com.

In addition to the above information, CMS makes available for
purchase the Expanded Modified MedPAR data that were used in simulating
the policies proposed in the IPPS rule. If readers have already ordered
the proposed rule data, we are in the process of filling the orders and
will be providing the FY

[[Page 24028]]

2005 MedPAR data that were used to model the proposed changes to the
DRGs and relative weights for FY 2007 as well as the FY 2004 MedPAR
data that we used to model the consolidated severity-adjusted DRGs that
we are proposing to implement in FY 2008 (if not earlier). If readers
have not ordered the proposed rule MedPAR data but are interested in
receiving them, we encourage them to order the data as soon as possible
by following the directions provided below. We will process orders in
the order they are received. For information on how to order the
Expanded Modified MedPAR, go to the following Web site: http://www.cms.hhs.gov/LimitedDataSets/
and click on MedPAR Limited Data Set

(LDS)--Hospital (National). This Web page will describe the file and
provide directions to further detailed instructions for how to order.
Persons placing orders must send the following: Letter of Request, LDS
Data Use Agreement and Research Protocol (see Web site for further
instructions), LDS Form, and a check for $3,655 to: Centers for
Medicare & Medicaid Services, Public Use Files, Accounting Division,
P.O. Box 7520, Baltimore, MD 21207-0520.
We are seeking public comments on both of these proposals and
whether we should provide a transition to the HSRVcc weights. The
proposed changes to the relative weights, in some cases, could result
in significant changes to hospital payments. Using FY 2005 MedPAR data,
we computed an estimated FY 2006 CMI (based on FY 2006 relative
weights) and an estimated FY 2007 CMI (based on the FY 2007 weights
that we are proposing in this proposed rule) and looked at the percent
change from FY 2006 to FY 2007. Table M shows the number of hospitals
in each category that can expect to experience increases or decreases
in CMI of more than 5 percent and also shows the number of providers
expected to experience smaller changes in case-mix.
Overall, we estimate that 134 providers may experience decreases in
payment of greater than 5 percent, while 1,003 providers may expect
increases of greater than 5 percent. Approximately 54 percent of rural
hospitals may receive increases in their CMI of greater than 5 percent.
However, as discussed in the previous section, the eventual
implementation of a consolidated severity-adjusted DRG system in FY
2008 (if not earlier) would offset these increases for some types of
cases or categories of hospitals. For this reason, we are considering
whether to provide a transition to the HSRVcc weights. Under such a
transition, we would blend the HSRVcc weights with the charge-based
weights over a period of 2, 3, or 4 years. For instance, if we were to
implement the HSRVcc methodology over 2 years, we would blend 1/2 of
the HSRVcc weights with 1/2 of the charge-based weights. Such a
transition would result in an impact of 50 percent of moving directly
to the HSRVcc weights. If we were to establish a longer transition to
the HSRVcc weights, we would blend charge-based with hospital-specific
cost weights calculated under the consolidated severity-adjusted DRGs.
As discussed in the previous sentences, we are presenting an example of
a 2-year transition because the payment impact of consolidated
severity-adjusted DRGs and the HSRVcc weights go in different
directions for some types of cases or categories of hospitals. Thus, a
2-year transition provides the shortest time period for achieving the
improvements to the IPPS we have analyzed. However, we welcome public
comments on this issue.

TABLE M.--Percent Change in Case-Mix Index Between FY 2006 and FY 2007 Based on FY 2005 MedPAR Data
----------------------------------------------------------------------------------------------------------------
Number of
Number of Number of Number of Number of providers
Number of providers providers providers providers with
hospitals with more with loss with 1% with gain greater
than 5% between 1 loss to 1% between 1 than 5%
loss and 5% gain and 5% gain
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
All Hospitals..................... 3,522 134 581 394 1,410 1,003
By Geographic Location:
Urban hospitals............... 2,517 127 540 356 1,030 464
Large urban areas (populations 1,391 63 238 191 639 260
over 1 million)..............
Other urban areas (populations 1,126 64 302 165 391 204
of 1 million or fewer).......
Rural hospitals............... 1,005 7 41 38 380 539
Bed Size (Urban):
0-99 beds..................... 590 46 58 26 191 269
100-199 beds.................. 865 22 103 87 490 163
200-299 beds.................. 482 20 133 102 205 22
300-499 beds.................. 414 28 164 93 120 9
500 or more beds.............. 166 11 82 48 24 1
Bed Size (Rural):
0-49 beds..................... 349 2 5 3 67 272
50-99 beds.................... 366 1 4 5 155 201
100-149 beds.................. 179 1 14 10 92 62
150-199 beds.................. 64 2 6 14 40 2
200 or more beds.............. 47 1 12 6 26 2
Urban by Region:
New England................... 127 2 22 6 75 22
Middle Atlantic............... 353 15 50 39 194 55
South Atlantic................ 381 19 86 39 179 58
East North Central............ 388 14 100 68 145 61
East South Central............ 163 8 36 19 51 49
West North Central............ 156 15 49 28 39 25
West South Central............ 350 27 85 68 99 71
Mountain...................... 143 12 42 36 42 11

[[Page 24029]]

Pacific....................... 404 13 69 51 188 83
Puerto Rico................... 52 2 1 2 18 29
Rural by Region:
New England................... 19 0 1 0 15 3
Middle Atlantic............... 72 1 2 2 34 33
South Atlantic................ 175 0 2 4 67 102
East North Central............ 125 3 5 3 69 45
East South Central............ 181 1 5 9 37 129
West North Central............ 118 0 15 5 57 41
West South Central............ 191 1 6 9 40 135
Mountain...................... 80 1 5 4 35 35
Pacific....................... 44 0 0 2 26 16
By Payment Classification:
Urban hospitals............... 2,539 128 538 353 1,042 478
Large urban areas (populations 1,400 63 238 191 644 264
over 1 million)..............
Other urban areas (populations 1,139 65 300 162 398 214
of 1 million or fewer).......
Rural areas................... 983 6 43 41 368 525
Teaching Status:
Nonteaching................... 2,449 80 262 194 1,008 905
Fewer than 100 residents...... 836 42 237 147 318 92
100 or more residents......... 237 12 82 53 84 6
Urban DSH:
Non-DSH....................... 854 71 165 95 364 159
100 or more beds.............. 1,513 52 374 256 645 186
Less than 100 beds............ 333 8 12 12 98 203
Rural DSH:
SCH........................... 383 0 6 5 106 266
RRC........................... 196 3 23 24 124 22
Other Rural:
100 or more beds.............. 55 0 0 2 26 27
Less than 100 beds............ 188 0 1 0 47 140
Urban teaching and DSH:
Both teaching and DSH......... 809 38 248 156 290 77
Teaching and no DSH........... 198 13 57 37 81 10
No teaching and DSH........... 1,037 22 138 112 453 312
No teaching and no DSH........ 495 55 95 48 218 79
Rural Hospital Types:
Non special status hospitals.. 288 1 6 5 88 188
RRC........................... 140 3 20 18 86 13
SCH........................... 341 0 6 7 113 215
MDH........................... 126 0 0 1 29 96
SCH and RRC................... 80 2 10 10 47 11
MDH and RRC................... 8 0 1 0 5 2
Type of Ownership:
Voluntary..................... 2,087 65 406 248 895 473
Proprietary................... 831 61 139 96 292 243
Government.................... 604 8 36 50 223 287
Medicare Utilization as a Percent
of Inpatient Days:
0-25.......................... 252 8 26 23 130 65
25-50......................... 1,302 54 312 200 475 261
50-65......................... 1,490 45 210 147 669 419
Over 65....................... 459 25 33 24 129 248
Unknown....................... 19 2 0 0 7 10
Urban Hospitals Reclassified by
the Medicare Geographic
Classification Review Board:
First Half FY 2007 319 17 72 37 146 47
Reclassifications............
Urban Nonreclassified, First 2,119 109 444 312 846 408
Half FY 2007.................
All Urban Hospitals 339 17 75 37 160 50
Reclassified Second Half FY
2007.........................
Urban Nonreclassified 2,099 109 441 312 832 405
Hospitals Second Half FY 2007
All Rural Hospitals 385 5 30 34 210 106
Reclassified Full Year FY
2007.........................
Rural Nonreclassified 604 2 11 4 163 424
Hospitals Full Year FY 2007..
All Section 401 Reclassified 38 0 2 3 11 22
Hospitals....................

[[Page 24030]]

Other Reclassified Hospitals 54 1 0 0 24 29
(Section 1886(d)(8)(B))......
Section 508 Hospitals......... 95 1 24 7 45 18
----------------------------------------------------------------------------------------------------------------

We also recognize the change from the current Medicare DRGs to a
consolidated severity-adjusted DRG system would represent significant
changes for hospitals. While we have considered the possibility of
blending the two DRG systems, we do not believe there is a practical
and simple mechanism to transition from the CMS DRGs to a consolidated
severity-adjusted DRG system. Our payments would be a blend of two
different relative weights that would have to be determined using two
different DRG systems. The systems and legal implications of such a
transition could be significant. First, we believe that the use of two
DRG systems would involve significant administrative complexity and
expense for the Nation's hospitals, fiscal intermediaries, and CMS.
Second, we would likely have to establish two sets of Medicare rates
with one set specific to each DRG system. In addition to complicating
the ratesetting process and making it unclear to hospitals how
Medicare's IPPS rates for a year were determined, we are uncertain how
we would:
Apply the budget neutrality requirement under section
1886(d)(4)(C)(iii) of the Act for changes to DRG classifications and
weighting factors.
Determine the outlier threshold under section
1886(d)(5)(A)(iv) and the amounts removed for outliers from the IPPS
standardized amounts under section 1886(d)(3)(B) of the Act.
While we believe there are significant administrative, technical,
and legal difficulties associated with making a blended transition from
one DRG system to another, we welcome public comments on this issue as
well.

D. Proposed Changes to Specific DRG Classifications

1. Pre-MDCs: Pancreas Transplants
(If you choose to comment on issues in this section, please include
the caption ``Pancreas Transplants'' at the beginning of your comment.)
On July 1, 1999, we issued coverage policy which specified that
pancreas transplants were only covered when performed simultaneously
with or after a Medicare covered kidney transplant. A noncoverage
policy for pancreas transplant remained in effect for patients who had
not experienced end stage renal failure secondary to diabetes. On July
29, 2005, we opened a national coverage determination (NCD) to
determine whether pancreas transplant alone, that is, without a kidney
transplant, is a reasonable and necessary service for Medicare
beneficiaries. On January 26, 2006, we published the proposed decision
memorandum for pancreas transplants on our Web site at http://www.cms.hhs.gov.mcd/viewdraftdecisionmemo.asp?id=166
, stating that the

evidence is adequate to conclude that pancreas transplant alone is
reasonable and necessary for Medicare beneficiaries under limited
circumstances.
Medicare coverage of pancreas transplants alone is proposed to be
limited to transplants in those facilities that are Medicare-approved
for kidney transplantation. A listing of approved transplant centers
can be found at http://www.cms.hhs.gov/AprovedTransplantCenters/. In

addition to other criteria listed in the draft decision memorandum,
patients must have a diagnosis of Type I diabetes.
Because we have issued a proposed NCD and a final NCD is not
expected to be completed until late April 2006, which is after the
publication date of this proposed rule, we are using this proposed rule
to indicate the coding changes that we would make to DRG 513 (Pancreas
Transplant) in FY 2007 if limited coverage of pancreas transplants
alone is established. If the final NCD indicates that a pancreas
transplant alone is not a reasonable and necessary service, in the IPPS
final rule, we will not adopt the changes we are currently proposing to
make to DRG 513 to implement the NCD. In addition, we are also
indicating the conforming changes that we would make to the MCE
``NonCovered Procedure'' edit if Medicare coverage is established for
pancreas transplants alone. That discussion can be found in the section
II.D.6. of this preamble, which describes proposed changes to the MCE.
Because of the potential decision to cover pancreas transplants
alone, the logic for the determination of patient case assignment to
DRG 513 would have to be modified to remove the requirement that
patients also have kidney disease. Therefore, if the NDC is finalized,
DRG 513 would consist of the following logic: List A (the diabetes
codes) of the required principal or secondary diagnosis codes would
remain the same, as would the required operating room procedures (codes
52.80 (Pancreatic transplant NOS), and 52.82, (Homotransplant of
pancreas)). List B would be removed from the logic; the following codes
would no longer be required as a principal or secondary diagnosis:
403.01, Hypertensive kidney disease, malignant, with
chronic kidney disease.
403.11, Hypertensive kidney disease, benign, with chronic
kidney disease.
403.91, Hypertensive kidney disease, unspecified, with
chronic kidney disease.
404.02, Hypertensive heart and kidney disease, malignant,
with chronic kidney disease.
404.03, Hypertensive heart and kidney disease, malignant,
with heart failure and chronic kidney disease.
404.12, Hypertensive heart and kidney disease, benign,
with chronic kidney disease.
404.13, Hypertensive heart and kidney disease, benign,
with heart failure and chronic kidney disease.
404.92, Hypertensive heart and kidney disease,
unspecified, with chronic kidney disease.
404.93, Hypertensive heart and kidney disease,
unspecified, with heart failure and chronic kidney disease.

[[Page 24031]]

585.1, Chronic kidney disease, Stage I.
585.2, Chronic kidney disease, Stage II (mild).
585.3, Chronic kidney disease, Stage III (moderate).
585.4, Chronic kidney disease, Stage IV (severe).
585.5, Chronic kidney disease, Stage V.
585.6, End stage renal disease.
585.9, Chronic kidney disease, unspecified.
V42.0, Organ or tissue replaced by transplant, kidney.
V43.89, Organ or tissue replaced by other means, other
organ or tissue, other.
We note that DRG 513 would remain in the Pre-MDC hierarchy.
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantation of Intracranial Neurostimulator System for Deep Brain
Stimulation (DBS)
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Neurostimulators'' at the beginning of your
comment.)
Deep-brain stimulation (DBS) is designed to deliver electrical
stimulation to the subthalamic nucleus or internal globus pallidus to
ameliorate symptoms caused by abnormal neurotransmitter levels that
lead to abnormal cell-to-cell electrical impulses in Parkinson's
disease and essential tremor. DBS implants for essential tremor are
unilateral, with neurostimulation leads on one side of the brain. DBS
implants for Parkinson's disease are bilateral, requiring implantation
of neurostimulation leads in both the left and right sides of the
brain.
The implantation of a full DBS system requires two types of
procedures. First, surgeons implant leads containing electrodes into
the targeted sections of the brain where neurostimulation therapy is to
be delivered. Second, a neurostimulator pulse generator is implanted in
the pectoral region and extensions from the neurostimulator pulse
generator are then tunneled under the skin along the neck and connected
with the proximal ends of the leads implanted in the brain. Hospitals
stage the two procedures required for a full-system DBS implant.
In FY 2005, to better account for these two types of procedures, we
revised procedure code 02.93 (Implantation or replacement of
intracranial neurostimulator lead(s)) for the lead placement and
created three new procedures codes for the pulse generator: 86.94
(Insertion or replacement of single array neurostimulator pulse
generator); 86.95 (Insertion or replacement of dual array
neurostimulator pulse generator); and 86.96 (Insertion or replacement
of other neurostimulator pulse generator). We published the new
procedure codes and revised procedure code titles in Tables 6B and 6F
of the FY 2005 IPPS final rule (69 FR 49627 and 49641).
In FY 2006, we made further refinements to the pulse generator
codes to identify rechargeable pulse generators. We published the new
procedure codes and revised procedure code titles in Tables 6B and 6F
of the FY 2006 IPPS final rule (70 FR 47637 and 47639). The current
list of pulse generators codes are:
86.94 (Insertion or replacement of single array
neurostimulator pulse generator, not specified as rechargeable);
86.95 (Insertion or replacement of dual array
neurostimulator pulse generator, not specified as rechargeable);
86.96 (Insertion or replacement of other neurostimulator
pulse generator);
86.97 (Insertion or replacement of single array
neurostimulator rechargeable generator); and
86.98 (Insertion or replacement of dual array
neurostimulator rechargeable generator).
Kinetra[supreg] is an implantable dual array neurostimulator pulse
generator that is approved for a new technology add-on payment through
FY 2006. For more information about the new technology add-on payment,
please refer to section II.G.3.a. of this preamble.
Medtronic, the manufacturer of Kinetra[supreg], argues that the new
technology add-on payment provision is designed to recognize the higher
costs of new medical innovations for the initial period the technology
is available on the market, and until the associated costs and charges
related to the technology are available in the MedPAR database and can
be used to recalibrate the DRG weights. Medtronic also argues that,
once a technology is no longer eligible for new technology add-on
payments, the new technology add-on payment provision is designed to
support the reclassification of the technology to other clinically
coherent DRGs with comparable resource costs.
With the conclusion of the new technology add-on payment, Medtronic
is concerned that Kinetra[supreg] will be inadequately paid in DRG 1
(Craniotomy Age >17 With CC) or DRG 2 (Craniotomy Age >17 Without CC)
under MDC 1. Medtronic recommended that CMS reassign the full-system
Kinetra[supreg] implants to DRG 543 (Craniotomy with Implant of Chemo
Agent or Acute Complex CNS Principal Diagnosis) under MDC 1. To
accommodate this recommendation, procedure codes 02.93 and 86.95 would
have to be reassigned to DRG 543 and the title for DRG 543 would have
to be revised to ``Craniotomy with Implantation of Major Device or
Acute Complex CNS Principal Diagnosis.'' Medtronic argued that DRG 543
would be a ``clinically-consistent DRG that more appropriately reflects
the resource utilization associated with full-system [deep brain
stimulation] procedures.'' Medtronic also emphasized that its proposal
would only apply to full-system Kinetra[supreg] implants when both the
leads and generators are implanted during a single inpatient stay or
procedure codes 02.93 and 86.95 both appear on the claim. Medtronic
believes the current DRG assignment is appropriate for partial system
implants.
Medtronic provided an analysis of FY 2004 MedPAR data. Procedure
code 86.95 was not created until FY 2005 so Medtronic used procedure
codes 02.93 and 86.09 (Other incision of skin and subcutaneous tissue)
to identify the full system. It identified 193 cases assigned to DRG 1
with average charges of approximately $69,155, and 532 cases assigned
to DRG 2 with average charges of approximately $56,113.
We have reviewed the latest data for the full-system DBS implants
assigned to DRG 1 or DRG 2 in the FY 2005 MedPAR file. We identified
cases with procedure codes 02.93 and 86.95 for full-system dual array
cases. We also identified cases with reported codes 02.93 and 86.96 for
those full-system cases where the type of pulse generator was not
specified. The following table displays our results:

----------------------------------------------------------------------------------------------------------------
Average length
DRG Number of cases of stay Average charges
----------------------------------------------------------------------------------------------------------------
DRG 1--All Cases............................................. 23,037 9.61 $55,494
DRG 1--Cases with 02.93 and 86.95 (Kinetra[supreg]).......... 51 5.18 73,020
DRG 1--Cases with 02.93 and 86.96 (Unspecified).............. 101 4.86 53,356
DRG 2--All Cases............................................. 9,707 4.41 32,791

[[Page 24032]]

DRG 2--Cases with 02.93 and 86.95 (Kinetra[supreg]).......... 146 2.40 59,414
DRG 2--Cases with 02.93 and 86.96 (Unspecified).............. 249 2.12 47,047
DRG 543--All cases........................................... 5,192 11.71 71,138
----------------------------------------------------------------------------------------------------------------

The data show that approximately one-quarter of the full-system
dual array neurostimulator pulse generator cases are assigned to DRG 1
and approximately three-quarters of these cases are assigned to DRG 2.
In both DRGs, the average length of stay was shorter for the full-
system array neurostimulator pulse generator cases than for all other
cases. However, the average charges for the full-system dual array
neurostimulator pulse generator cases are approximately $18,000 and
$27,000 higher than the average charges for DRGs 1 and 2, respectively.
The average charges for these cases in DRG 1 are comparable to those
for DRG 543. However, the more commonly occurring cases in DRG 2 have
average charges that are less than those in DRG 543 by nearly $12,000.
We reviewed all of the procedures that will result in a case being
assigned to DRGs 1 and 2. Unlike the full-system DBS implants, we
believe for most of the cases assigned to these DRGs, there will be no
device cost to the hospital. For this reason, we believe the higher
average charges and lower length of stay for cases involving full-
system dual array neurostimulator pulse generators are likely accounted
for by the cost of the device. While it is possible that the cost of
the device itself will make the full-system DBS implants more expensive
than other cases in the DRG, the hospital's charge markup may also
explain the higher charges but lower average length of stay. As
indicated in section II.G.3.a.of this proposed rule, the national
average CCR for medical equipment and supplies is approximately 34
percent. Thus, the actual cost to the hospital of the case including
the full-system dual array neurostimulator pulse generator may be much
lower than the charges would suggest.
With respect to whether the cost of the technology itself, absent a
charge markup, makes the case more expensive, we intend to address this
issue as we make further refinements to the severity DRG system we are
proposing to implement in FY 2008 (if not earlier), as discussed in
section II.C. of this preamble. As we indicate in section II.C. of this
proposed rule, the consolidated severity-adjusted DRG system that we
are proposing does not currently assign a case to a higher weighted DRG
based on use of a technology that represents increased complexity but
not necessarily greater severity of illness. The data above indicate
that approximately three-quarters of the patients who receive a full-
system dual array neurostimulator pulse generator do not have a CC.
Thus, it appears that these patients would be more likely to be
assigned to a lower severity of illness class based solely on
diagnosis. However, the implant of a full-system dual array
neurostimulator pulse generator may increase complexity and resource
use even though the patient is not more severely ill. As we also
explain in section II.C. of this proposed rule, we believe that the
consolidated severity-adjusted DRG system we are proposing would need
to be further refined to assign cases based on complexity as well as
severity to account for technologies like the full-system dual array
neurostimulator pulse generator implants that increase costs. We plan
to further develop the consolidated severity-adjusted DRGs between now
and its implementation to address this issue.
b. Carotid Artery Stents
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Carotid Artery Stents'' at the beginning of your
comment.)
Stroke is the third leading cause of death in the United States and
the leading cause of serious, long-term disability. Approximately 70
percent of all strokes occur in people age 65 and older. The carotid
artery, located in the neck, is the principal artery supplying the head
and neck with blood. Accumulation of plaque in the carotid artery can
lead to stroke either by decreasing the blood flow to the brain or by
having plaque break free and lodge in the brain or in other arteries to
the head. The percutaneous transluminal angioplasty (PTA) procedure
involves inflating a balloon-like device in the narrowed section of the
carotid artery to reopen the vessel. A carotid stent is then deployed
in the artery to prevent the vessel from closing or restenosing. A
distal filter device (embolic protection device) may also be present,
which is intended to prevent pieces of plaque from entering the
bloodstream.
Effective July 1, 2001, Medicare covers PTA of the carotid artery
concurrent with carotid stent placement when furnished in accordance
with the FDA-approved protocols governing Category B Investigational
Device Exemption (IDE) clinical trials. PTA of the carotid artery, when
provided solely for the purpose of carotid artery dilation concurrent
with carotid stent placement, is considered to be a reasonable and
necessary service only when provided in the context of such clinical
trials and, therefore, is considered a covered service for the purposes
of these trials. Performance of PTA in the carotid artery when used to
treat obstructive lesions outside of approved protocols governing
Category B IDE clinical trials remained noncovered until the release of
the October 12, 2004 NCD for PTA of the carotid artery in post-approval
studies. This decision extended coverage of PTA in the carotid artery
concurrent with placement of an FDA-approved carotid stent for an FDA-
approved indication when furnished in accordance with the FDA-approved
protocols governing post-approval studies. On March 17, 2005, CMS
released the NCD extending coverage to patients at high risk for
carotid endarterectomy (CEA) who also have symptomatic carotid artery
stenosis >= 70 percent. Procedures must be performed in CMS-approved
facilities and with FDA-approved carotid artery stenting with distal
embolic protection. (Section 20.7 of the NCD manual, which may be
viewed at the Web site: http://www.cms.hhs.gov/manuals/downloads/ncd103c1_Part1.pdf.
)

We established codes for carotid artery stenting procedures for use
with discharges occurring on or after October 1, 2004, for inpatients
who are enrolled in an FDA-approved clinical trial and are using on-
label FDA-approved stents and embolic protection devices. These codes
are as follows:
00.61 (Percutaneous angioplasty or atherectomy of
precerebral (extracranial vessel(s)); and
00.63 (Percutaneous insertion of carotid artery stent(s)).
We assigned procedure code 00.61 to four MDCs and seven DRGs. The
most likely scenario is that in which cases are assigned to MDC 1
(Diseases and Disorders of the Nervous System) in DRGs 533
(Extracranial Procedures with CC) and 534 (Extracranial Procedures
without CC). Other DRG assignments

[[Page 24033]]

can be found in Table 6B of the Addendum to the FY 2005 IPPS final rule
(69 FR 49624).
As part of our annual DRG review, for the FY 2006 final rule (70 FR
47300), we used proxy codes to evaluate the costs and DRG assignments
for carotid artery stenting because codes 00.61 and 00.63 were only
approved for use beginning October 1, 2004, and MedPAR data for this
period were not yet available. We used procedure code 39.50
(Angioplasty or atherectomy of other noncoronary vessel(s)) in
combination with procedure code 39.90 (Insertion of nondrug-eluting
peripheral vessel stent(s)) in DRGs 533 and 534 as the proxy codes for
carotid artery stenting. For this evaluation, we used principal
diagnosis code 433.10 (Occlusion and stenosis of carotid artery,
without mention of cerebral infarction) to reflect the clinical trial
criteria. Based on the results of our review, for FY 2006, we did not
find sufficient evidence to warrant a DRG change at that time.
Manufacturer representatives have suggested that we assign all
carotid stenting cases to DRG 533 only, bypassing DRG 534. We have
reviewed the FY 2005 MedPAR data on all cases in DRGs 533 and 534 and
on those cases containing code 00.61 in combination with 00.63. The
following table displays our results:

----------------------------------------------------------------------------------------------------------------
Average length
DRG Number of cases of stay (days) Average charges
----------------------------------------------------------------------------------------------------------------
DRG 533--All cases........................................... 44,031 3.65 $26,376
DRG 533 with codes 00.61 and 00.63 reported.................. 2,400 2.94 33,344
DRG 533 with code 00.61 and without 00.63.................... 99 5.95 46,591
DRG 534--All cases........................................... 40,381 1.72 17,196
DRG 534 with codes 00.61 and 00.63 reported.................. 2,056 1.52 25,000
DRG 534 with code 00.61 and without 00.63.................... 55 2.31 27,895
----------------------------------------------------------------------------------------------------------------

We found that 5.5 and 5.1 percent of the cases in DRGs 533 and 534,
respectively, involved placement of a carotid artery stent. In both
DRGs, the average length of stay was shorter for the carotid stenting
cases than for all other cases. However, the average charges for the
carotid stent cases were higher by $6,968 in DRG 533 and $7,804 in DRG
534. We reviewed all of the procedures that would result in a case
being assigned to DRGs 533 and 534. Unlike the carotid artery stent
placements, we believe that, for most of the cases assigned to these
DRGs, there will be no device cost to the hospital. For this reason, we
believe the higher average charges and lower length of stay for the
cases involving carotid artery stents are likely accounted for by the
cost of the device. While it is possible that the cost of the device
itself will make the stent cases more expensive than other cases in the
DRG, the hospital's charge markup may also explain the higher charges
but lower average length of stay. As indicated elsewhere in this
proposed rule, the national average CCR for medical equipment and
supplies is approximately 34 percent. Thus, the actual cost to the
hospital of the case including the carotid stent may be much lower than
the charges would suggest.
With respect to whether the cost of the technology itself, absent a
charge markup, makes the case more expensive, we intend to address this
issue as we make further refinements to the severity-adjusted DRG
system we describe above. As we indicate in section II.C. of the
preamble of this proposed rule, the consolidated severity-adjusted DRG
system that we are proposing does not currently assign a case to a
higher weighted DRG based on use of a technology that represents
increased complexity but not necessarily greater severity of illness.
The use of a carotid stent or stents may increase complexity and
resource use even though the patient is not more severely ill. We
believe that the consolidated severity-adjusted DRG system we are
proposing would need to be further refined to assign cases based on
complexity as well as severity to account for technologies such as
carotid stents that increase costs. For this reason, we believe that
this issue of assignment of carotid stent cases may be better addressed
in the consolidated severity-adjusted DRG system that we are proposing
in FY 2008 (if not earlier) than through a change to the current DRG
assignment for these cases.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Insertion of Epicardial Leads for Defibrillator Devices
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Epicardial Leads'' at the beginning of your
comment.)
We received a comment indicating that a change in coding advice for
the insertion of epicardial leads for CRT-D defibrillator devices
affects DRG assignment. The commenter noted that the Third Quarter 2005
issue of the American Hospital Association's publication Coding Clinic
for ICD-9-CM instructs coders to assign code 37.74 (Insertion or
replacement of epicardial lead [electrode] into atrium) for pacemaker
or defibrillator leads inserted through use of a thoracotomy into the
epicardium. While the use of code 37.74 is standard coding practice for
pacemakers, the advice is new for defibrillators. This coding advice
was discussed at the ICD-9-CM Coordination and Maintenance Committee
meeting held on September 29 and 30, 2005. Participants at the
Committee meeting proposed modifications for the code category 37.7
(insertion, revision, replacement, and removal of pacemaker leads;
insertion of temporary pacemaker system; and revision of cardiac device
pocket). These modifications involved expanding the category so that
the codes for leads would no longer be restricted to pacemakers. This
change would guide coders to use code 37.74 for the insertion of
epicardial leads for both defibrillators and pacemakers. This change
was adopted for the ICD-9-CM and will become effective on October 1,
2006.
The commenter pointed out that this coding advice would restrict
some defibrillator cases from being assigned to the defibrillator DRGs.
Specifically, the commenter expressed concerns about the DRG logic for
the following DRGs:
DRG 515 (Cardiac Defibrillator Implant without Cardiac
Catheter.
DRG 535 (Cardiac Defibrillator Implant with Cardiac
Catheter with AMI/Heart Failure/Shock).
DRG 536 (Cardiac Defibrillator Implant with Cardiac
Catheter without AMI/Heart Failure/Shock).
Cases are assigned to one of these three DRGs when a total
defibrillator system, including both the device and one or more leads,
is implanted. The implant could be represented by the ICD-9-CM codes
for the total system, that is, code 00.51 (Implantation of cardiac
resynchronization defibrillator,

[[Page 24034]]

total system [CRT-D]) or code 37.94 (Implantation or replacement of
automatic cardioverter/defibrillator, total system [AICD]). Cases can
also be assigned to DRGs 515, 535, and 536 when a combination of a
device and a lead code is reported. The following combinations of
defibrillator device and lead codes are present in the current DRG
logic:
00.52 (Implantation or replacement of transvenous lead
[electrode] into left ventricular coronary venous system) and 00.54
(Implantation or replacement of cardiac resynchronization
defibrillator, pulse generator device only [CRT-D]).
37.95 (Implantation of automatic cardioverter/
defibrillator lead(s) only) and 00.54 (Implantation or replacement of
cardiac resynchronization defibrillator, pulse generator device only
[CRT-D]).
37.95 (Implantation of automatic cardioverter/
defibrillator lead(s) only) and 37.96 (Implantation of automatic
cardioverter/defibrillator pulse generator only).
37.97 (Replacement of automatic cardioverter/defibrillator
lead(s) only) and 00.54 (Implantation or replacement of cardiac
resynchronization defibrillator, pulse generator device only [CRT-D]).
37.97 (Replacement of automatic cardioverter/defibrillator
lead(s) only) and 37.98 (Replacement of automatic cardioverter/
defibrillator pulse generator only).
A DRG logic issue has arisen concerning the instruction to use code
37.74 to capture epicardial leads inserted with CRT-D defibrillators.
The new combination of a defibrillator device with an epicardial lead
(code 37.74) is not included in DRGs 515, 535, and 536. The commenter
recommended that the following combinations be added to DRGs 515, 535,
and 536 so that all types of defibrillator device and lead combinations
would be included: code 37.74 and code 00.54; code 37.74 and code
37.96; and code 37.74 and code 37.98.
We agree that these three combinations should be added to the list
of combination codes included in DRGs 515, 535, and 536. This would
result in all combinations of defibrillator devices and leads being
assigned to one of the defibrillator DRGs. Therefore, we are proposing
to add these three combinations to the list of procedure combinations
under DRGs 515, 535, and 536.
b. Application of Major Cardiovascular Diagnoses (MCVs) List to
Defibrillator DRGs
(If you choose to comment on issues in this section, please include
the caption ``DRGs: MCVs and Defibrillators'' at the beginning of your
comment.)
In the FY 2006 IPPS final rule (70 FR 47289 and 47474 through
47479), we addressed a comment we had received in response to the FY
2006 proposed rule which noted that section 507(c) of Pub. L. 108-173
required MedPAC to conduct a study to determine how the DRG system
should be updated to better reflect the cost of delivering care in a
hospital setting. The commenter noted that MedPAC reported that the
``cardiac surgery DRGs have high relative profitability ratios.'' While
the commenter acknowledged that it may take time to conduct and
complete a thorough evaluation of the MedPAC payment recommendations
for all DRGs, the commenter strongly encouraged CMS to revise the
cardiac DRGs through patient severity refinement as part of the IPPS
final rule effective for FY 2006.
In response to this comment, we performed an extensive review of
the cardiovascular DRGs in MDC 5, particularly those DRGs that were
commonly billed by specialty hospitals. We observed that there was some
overlap between the lists of cardiovascular complications and complex
diagnoses and that these lists were already used to segregate patients
into DRGs that use greater resources. Because the hospital industry
already was familiar with the major complication and complex diagnosis
lists used within the cardiovascular DRGs, we began our analysis with
these two overlapping lists.
The two lists were originally developed for the current DRG system
because they contained conditions that could have an impact on the
resources needed to treat a patient with cardiovascular complications.
Many of the conditions were cardiovascular diagnoses and, therefore,
would be classified to MDC 5. However, we determined that some of the
diagnoses were not cardiovascular, but would still have an impact on a
patient with cardiovascular complications. The conditions that were not
cardiovascular diagnoses were not assigned to MDC 5 if they were the
principal diagnosis.
We reviewed the conditions on the two overlapping lists and
identified conditions that we believed would lead to a more complicated
patient stay requiring greater resource use. We referred to these
conditions as ``major cardiovascular conditions (MCVs).'' The MCVs
could be present as either a principal diagnosis or a secondary
diagnosis and lead to greater resource consumption. The complete list
of MCVs was published in the FY 2006 IPPS final rule (70 FR 47477 and
47478).
In the FY 2006 IPPS final rule, we also adopted new DRGs 547
through 558, effective October 1, 2006 (70 FR 47475 and 47476).
However, we emphasized that the refinements to the DRGs were being
taken as an interim step to better recognize severity in the DRG system
for FY 2006 until we could complete a more comprehensive analysis of
the APR DRG system and the CC list as part of a complete analysis of
the MedPAC recommendations that we planned to perform for FY 2007 (and
which is addressed in section II.C. of the preamble of this proposed
rule).
Since publication of the FY 2006 IPPS final rule, we have received
a question from a commenter as to why we did not apply the MCV list to
the following defibrillator DRGs: 515, 535, and 536. The commenter
noted that the pacemaker DRGs were revised using the MCV list, but the
defibrillator DRGs were not.
As noted above, for FY 2006, we created new DRGs 546 through 558 to
identify cases with more costly and severely ill patients as an interim
step to evaluating severity DRGs. We analyzed for the first time past
year data on cases within MDC 5 and presented data that showed
significant difference for patients in certain DRGs based on the
presence of absence of an MCV. This split did not work for the
defibrillator DRGs, as we could not identify groups with significantly
different resource use. For instance, splitting DRG 515 based on the
presence of an MCV would lead to two groups with differences in charges
of only $3,430 ($89,341 for those with an MCV and $85,911 for those
without an MCV). In the data we displayed in the FY 2006 IPPS final
rule, the differences for DRGs selected for an MCV split ranged from
$10,319 to $21,035. Splitting DRG 515 based on an MCV would produce a
difference in charges of only 10.1 percent as compared to differences
of 28.7 to 47.7 percent for DRGs 547 through 558. Therefore, the data
did not support including DRG 515 among those split based on the
presence or absence of an MCV. Similar results were found when DRG 536
was split by an MCV. There was only an 8.1 percent difference in
charges between the two groups. We also identified other problems with
splitting DRG 535 based on the presence or absence of an MCV. Some of
the codes a claim must include for the case

[[Page 24035]]

to be grouped to DRG 535 under our current system are also codes on the
MCV list. Therefore, applying the MCV list to DRG 535 would result in
all cases being assigned to the DRG with an MCV and none to the DRG
without an MCV. For these reasons, we did not subdivide DRGs 515, 535,
and 536 based on the presence or absence of an MCV.
We have decided not to propose additional refinements of the DRGs
based on MCVs for FY 2007 because of our efforts to propose a broader
refinement of the DRG system that would focus on consolidated severity-
adjusted DRGs, as discussed in detail in section II.C. of this proposed
rule. However, as discussed further in section II.C. of this preamble,
we are soliciting comments on whether it would be appropriate in FY
2007 to apply a clinical severity concept to an expanded set of DRGs,
similar to the approach we used in FY 2006 to refine cardiac DRGs based
on the presence or absence of an MCV.
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and
Connective Tissue)
a. Hip and Knee Replacements
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Hip and Knee Replacements'' at the beginning of
your comment.)
In the FY 2006 final rule (70 FR 47303), we deleted DRG 209 (Major
Joint and Limb Reattachment Procedures of Lower Extremity) and created
new DRGs 544 (Major Joint Replacement or Reattachment of Lower
Extremity) and 545 (Revision of Hip or Knee Replacement) to help
resolve payment issues for hospitals that perform revisions of joint
replacements because we found revisions of joint replacements to be
significantly more resource intensive than original hip and knee
replacements. DRG 544 includes the following code assignments:
81.51, Total hip replacement.
81.52, Partial hip replacement.
81.54, Total knee replacement.
81.56, Total ankle replacement.
84.26, Foot reattachment.
84.27, Lower leg or ankle reattachment.
84.28, Thigh reattachment.
DRG 545 includes the following procedure code assignments:
00.70, Revision of hip replacement, both acetabular and
femoral components.
00.71, Revision of hip replacement, acetabular component.
00.72, Revision of hip replacement, femoral component.
00.73, Revision of hip replacement, acetabular liner and/
or femoral head only.
00.80, Revision of knee replacement, total (all
components).
00.81, Revision of knee replacement, tibial component.
00.82, Revision of knee replacement, femoral component.
00.83, Revision of knee replacement, patellar component.
00.84, Revision of knee replacement, tibial insert
(liner).
81.53, Revision of hip replacement, not otherwise
specified.
81.55, Revision of knee replacement, not otherwise
specified.
In the FY 2006 IPPS final rule (70 FR 47305), we indicated that the
American Association of Orthopaedic Surgeons had requested that, once
we receive claims data using the two DRG procedure code assignments, we
closely examine data from the use of the codes under the two DRGs to
determine if future additional DRG modifications are needed.
After publication of the FY 2006 IPPS final rule, a number of
hospitals and coding personnel advised us that the DRG logic for DRG
471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity),
which utilizes the new and revised hip and knee procedure codes under
DRGs 544 and 545, also includes codes that describe procedures that are
not bilateral or that do not involve multiple major joints. DRG 471 was
developed to include cases where major joint procedures such as
revisions or replacements were performed either bilaterally or on two
joints of one lower extremity. We changed the logic for DRG 471 last
year for the first time when we added the new and revised codes. The
commenters indicated that, by adding the more detailed codes that do
not include total revisions or replacements to the list of major joint
procedures to DRG 471, we are assigning cases to DRG 471 that do not
have bilateral or multiple joint procedures. For example, when a
hospital reports a code for revision of the tibial component (code
00.81) and patellar component of the right knee (code 00.83), the
current DRG logic assigns the case to DRG 471. The commenters indicated
that this code assignment is incorrect because only one joint has
undergone surgery, but two components were used. One commenter
indicated that ICD-9-CM does not identify left/right laterality.
Therefore, it is difficult to use the current coding structure to
determine if procedures are performed on the same leg or on both legs.
The commenters raised concern about whether CMS intended to pay
hospitals using DRG 471 for procedures performed on one joint. The
commenters indicated that the DRG assignments for these codes would
also make future data analysis misleading. The commenters recommended
removing codes from DRG 471 that do not specifically identify bilateral
or multiple joint procedures so that DRG 471 will only include cases
involving the more resource intensive cases of bilateral or multiple
total joint replacements and revisions.
We agree that the new and revised joint procedure codes should not
be assigned to DRG 471 unless they include bilateral and multiple
joints. Therefore, we are proposing to remove the following codes from
DRG 471 that do not capture bilateral and multiple joint revisions or
replacements:
00.71, Revision of hip replacement, acetabular component.
00.72, Revision of hip replacement, femoral component.
00.73, Revision of hip replacement, acetabular liner and/
or femoral head only.
00.81, Revision of knee replacement, tibial component.
00.82, Revision of knee replacement, femoral component.
00.83, Revision of knee replacement, patellar component.
00.84, Revision of total knee replacement, tibial insert
(liner).
81.53, Revision of hip replacement, not otherwise
specified.
81.55, Revision of knee replacement, not otherwise
specified.
The proposed revised DRG 471 would then contain only the following
codes:
00.70, Revision of hip replacement, both acetabular and
femoral components.
00.80, Revision of knee replacement, total (all
components).
81.51, Total hip replacement.
81.52, Partial hip replacement.
81.54, Total knee replacement.
81.56, Total ankle replacement.
As a result of the proposed removal of the identified codes from
DRG 471, we are proposing that one or more of the following hip or knee
revision codes would be assigned to DRG 545: 00.71, 00.72, 00.73,
00.81, 00.82, 00.83, 00.84, 81.53, and 81.55. This list includes
partial revisions of the knee and hip as well as unspecified joint
procedures such as code 81.55 where it is not clear if the revision is
total or partial.
We plan to perform extensive data analysis on the new and revised
joint procedure codes as we receive billing data to determine if future
refinements of these DRGs are needed. In addition, as indicated in
section II.C. of this

[[Page 24036]]

preamble, we are proposing to adopt a consolidated severity-adjusted
DRG system for the IPPS. We encourage commenters to evaluate how the
new and revised joint procedures are addressed in the consolidated
severity-adjusted DRG system. If changes to these procedures are
warranted based on public comments and our continuing analysis, we will
evaluate them as we further develop our plans for adopting the
consolidated severity-adjusted DRGs.
b. Spinal Fusion
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Spinal Fusion'' at the beginning of your comment.)
In the FY 2006 IPPS final rule (70 FR 47307), we created new DRG
546 (Spinal Fusions Except Cervical with Curvature of the Spine or
Malignancy). DRG 546 is composed of all noncervical spinal fusions
previously assigned to DRGs 497 (Spinal Fusion Except Cervical with CC)
and 498 (Spinal Fusion Except Cervical without CC) that have a
principal or secondary diagnosis of curvature of the spine or a
principal diagnosis of a malignancy. The principal diagnosis codes that
lead to DRG 546 assignment are the following:
170.2, Malignant neoplasm of vertebral column, excluding
sacrum and coccyx.
198.5, Secondary malignant neoplasm of bone and bone
marrow.
213.2, Benign neoplasm of bone and articular cartilage;
vertebral column, excluding sacrum and coccyx.
238.0, Neoplasm of uncertain behavior of other and
unspecified sites and tissues; Bone and articular cartilage.
239.2, Neoplasms of unspecified nature; bone, soft tissue,
and skin.
732.0, Juvenile osteochondrosis of spine.
733.13, Pathologic fracture of vertebrae.
737.0, Adolescent postural kyphosis.
737.10, Kyphosis (acquired) (postural).
737.11, Kyphosis due to radiation.
737.12, Kyphosis, postlaminectomy.
737.19, Kyphosis (acquired), other.
737.20, Lordosis (acquired) (postural).
737.21, Lordosis, postlaminectomy.
737.22, Other postsurgical lordosis.
737.29, Lordosis (acquired), other.
737.30, Scoliosis [and kyphoscoliosis], idiopathic.
737.31, Resolving infantile idiopathic scoliosis.
737.32, Progressive infantile idiopathic scoliosis.
737.33, Scoliosis due to radiation.
737.34, Thoracogenic scoliosis.
737.39, Other kyphoscoliosis and scoliosis.
737.8, Other curvatures of spine.
737.9, Unspecified curvature of spine.
754.2, Congenital scoliosis.
756.51, Osteogenesis imperfecta.
The secondary diagnoses that will lead to DRG 546 assignment are:
737.40, Curvature of spine, unspecified.
737.41, Curvature of spine associated with other
conditions, kyphosis.
737.42, Curvature of spine associated with other
conditions, lordosis.
737.43, Curvature of spine associated with other
conditions, scoliosis.
After publication of the FY 2006 IPPS final rule, we received a
comment stating that creating new DRG 546 was insufficient to address
clinical severity and resource differences among spinal fusion cases
that involve fusing multiple levels of the spine. Specifically, the
commenter suggested that the spinal fusion DRGs be further modified to
incorporate Bone Morphogenic Protein (BMP), code 84.52 (Insertion of
recombinant bone morphogenetic protein). The commenter also suggested
that CMS apply a clinical severity concept to all back and spine
surgical cases similar to the approach that we used for the MCVs to
refine the cardiac DRGs in the final rule for FY 2006. The commenter
recommended recognizing additional conditions that reflect higher
resource needs, regardless of whether they are principal or secondary
diagnoses. The commenter also suggested that the spine DRGs be further
subdivided based on the use of specific spinal devices such as
artificial discs. These changes would entail the creation of 10 new
spine DRGs in addition to other changes requested.
We agree that it is important to recognize severity when
classifying patients into specific DRGs. In response to recommendations
made by MedPAC last year that are discussed in section II.C. of this
proposed rule, we are conducting a comprehensive analysis of the entire
DRG system to determine whether to undertake significant reform to
better recognize severity of illness. At this time, we believe it is
premature to develop a severity adjustment for spine surgeries while we
are considering a more systematic approach to capturing severity of
illness across all DRGs. We also believe it would be premature to
propose revisions to DRG 546 because this DRG was created on October 1,
2005, and we do not yet have data to analyze its impact. Given the
number of innovations occurring in spinal surgery over the last several
years (for example, artificial spinal disc prostheses, kyphoplasty, and
vertebroplasty), we agree that additional analysis of the spine DRGs
would be warranted if we were to continue with the current DRG system
and not adopt consolidated severity-adjusted DRGs. However, as
discussed above, we are proposing to develop a severity-adjusted DRG
system. For this reason, we are not further researching this issue for
FY 2007. However, we encourage commenters to examine the proposed
consolidated severity-adjusted DRG system described in section II.C. of
the preamble of this proposed rule to determine whether there is a
better recognition of severity of illness and resource use in that
system.
c. Charite\TM\ Spinal Disc Replacement Device
(If you choose to comment on issues in this section, please include
the caption ``DRGs: CHARITE\TM\'' at the beginning of your comment.)
CHARITE\TM\ is a prosthetic intervertebral disc. On October 26,
2004, the FDA approved the CHARITE\TM\ Artificial Disc for single level
spinal arthroplasty in skeletally mature patients with degenerative
disc disease between L4 and S1. On October 1, 2004, we created new
procedure codes for the insertion of spinal disc prostheses (codes
84.60 through 84.69). We provided the DRG assignments for these new
codes in Table 6B of the FY 2005 IPPS proposed rule (69 FR 28673). We
received a number of comments on the proposed rule recommending that we
change the assignments for these codes from DRG 499 (Back and Neck
Procedures Except Spinal Fusion With CC) and DRG 500 (Back and Neck
Procedures Except Spinal Fusion Without CC) to the DRGs for spinal
fusion, DRG 497 (Spinal Fusion Except Cervical With CC) and DRG 498
(Spinal Fusion Except Cervical Without CC) for procedures on the lumbar
spine and to DRGs 519 and 520 for procedures on the cervical spine. In
the FY 2005 IPPS final rule (69 FR 48938), we indicated that DRGs 497
and 498 are limited to spinal fusion procedures. Because the surgery
involving the CHARITE\TM\ is not a spinal fusion, we decided not to
include this procedure in these DRGs. However, we stated that we would
continue to analyze this issue and solicited further public comments on
the DRG assignment for spinal disc prostheses.
In the FY 2006 final rule (70 FR 47353), we noted that, if a
product

[[Page 24037]]

meets all of the criteria for Medicare to pay for the product as a new
technology under section 1886(d)(5)(K) of the Act, there is a clear
preference expressed in the statute for us to assign the technology to
a DRG based on similar clinical or anatomical characteristics or costs.
However, for FY 2006, we did not find that CHARITE\TM\ met the
substantial clinical improvement criterion and, thus, did not qualify
as a new technology. Consequently, we did not address the DRG
classification request made under the authority of this provision of
the Act.
However, we did evaluate whether to reassign CHARITE\TM\ to
different DRGs using the Secretary's authority under section 1886(d)(4)
of the Act (70 FR 47308). We indicated that we did not have Medicare
charge information to evaluate DRG changes for cases involving an
implant of a prosthetic intervertebral disc like CHARITE\TM\ and did
not make a change in its DRG assignments. We stated that we would
consider whether changes to the DRG assignments for CHARITE\TM\ were
warranted for FY 2007, once we had information from Medicare's data
system that would assist us in evaluating the costs of these patients.
For the FY 2007 IPPS update, we received a comment regarding the
DRG assignments for the CHARITE^TM Artificial Disc, code
84.65 (Insertion of total spinal disc prosthesis, lumbosacral). The
commenter had previously submitted an application for the
CHARITE^TM Artificial Disc for new technology add-on payments
for FY 2006 and had requested a reassignment of cases involving
CHARITE^TM implantation to DRGs 497 and 498. The commenter
asked that we examine claims data for FY 2005 and reassign procedure
code 84.65 from DRGs 499 and 500 into DRGs 497 and 498. The commenter
again stated the view that cases with the CHARITE^TM
Artificial Disc reflect comparable resource use and similar clinical
indications as do those in DRGs 497 and 498. If CMS were to reject
reassignment of the CHARITE^TM Artificial Disc to DRGs 497
and 498, the commenter suggested creating two separate DRGs for lumbar
disc replacements.
On February 16, 2006, we posted a proposed NCD memorandum regarding
lumber artificial disc replacement with a focus of the
CHARITE^TM Lumber Artificial Disc for public comment on the
CMS Web site. This is part of the process for issuing an NCD. In this
memorandum, we proposed to issue an NCD. We are seeking public comment
on our proposed determination that the evidence is not adequate to
conclude that lumbar artificial disc replacement with the
CHARITE^TM Lumber Artificial Disc is reasonable and
necessary. This proposed decision memorandum can be found at: http://www.cms.hhs.gov/mcd/
viewnca.asp?where=index& nca--id=170&

basket=nca:00292N:170: Lumbar+Artificial+Disc+Replacement: Open:New:5.
After considering the public comments and any additional evidence, we
will make a final determination and issue a final NCD.
The proposed NCD states that lumber artificial disc replacement
with the CHARITE^TM Lumber Artificial Disc is generally not
indicated in patients over 65 years old. Further, it states that there
is insufficient evidence among either the aged or disabled Medicare
population to make a reasonable and necessary determination for
coverage. With an NCD pending to make spinal arthroplasty with
CHARITE^TM noncovered, we do not believe it is appropriate at
this time to reassign procedure code 84.65 from DRGs 499 and 500 to
DRGs 497 and 498.
5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified
Sites)): Severe Sepsis
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Severe Sepsis'' at the beginning of your comment.)
In FYs 2005 and 2006, we considered requests for the creation of a
separate DRG for the diagnosis of severe sepsis. Severe sepsis is
described by ICD-9-CM code 995.92 (Systemic inflammatory response
syndrome due to infection with organ dysfunction). Patients admitted
with sepsis as a principal diagnosis currently are assigned to DRG 416
(Septicemia Age > 17) and DRG 417 (Septicemia Age 0-17) in MDC 18
(Infectious and Parasitic Diseases (Systemic or Unspecified Sites)).
The commenter requested that all cases in which severe sepsis is
present on admission, as well as those cases in which it develops after
admission (which are currently classified elsewhere), be included in
this new DRG. In both FY 2005 and FY 2006 (69 FR 48975 and 70 FR
47309), we did not believe the current clinical definition of severe
sepsis was specific enough to identify a meaningful cohort of patients
in terms of clinical coherence and resource utilization to warrant a
separate DRG. Sepsis is found across hundreds of medical and surgical
DRGs, and the term ``organ dysfunction'' implicates numerous currently
existing diagnosis codes. While we recognize that Medicare
beneficiaries with severe sepsis are quite ill and require extensive
hospital resources, in the past we have not found that they can be
identified adequately to justify removing them from all of the other
DRGs in which they appear. For this reason, we did not create a new DRG
for severe sepsis for FY 2005 or FY 2006. We indicated that we would
continue to work with National Center for Health Statistics (NCHS) to
improve the codes so that our data on these patients improve. We also
indicated that we would continue to examine data on these patients as
we consider future modifications.
For this FY 2007 proposed rule, we again received a request to
consider creating a separate DRG for patients diagnosed with severe
sepsis. The information and data available to us from hospital bills
with respect to identifying patients with severe sepsis have not
changed since last year. However, the NCHS discussed modifications to
the current ICD-9-CM diagnosis codes for systemic inflammatory response
syndrome (SIRS), codes 995.91 through 995.94 (which include severe
sepsis) at the September 29-30, 2005 ICD-9-CM Coordination and
Maintenance Committee meeting. During the meeting, it became clear that
there is still confusion surrounding the use of these codes. As a
result of the meeting and the comments received, the Committee made
modifications to the set of SIRS codes. These modifications are
reflected in Table 6E, Revised Diagnosis Code Titles, of the Addendum
to this proposed rule.
We believe that implementation of the modified SIRS diagnosis codes
and the updated coding guidelines over the next year could begin the
process of improving data for this group of patients. The desired
outcome is to be able to better evaluate Medicare beneficiaries with
severe sepsis with regard to their clinical coherence, resource
utilization, and charges. Therefore, at this time, we are not proposing
to create a new DRG for severe sepsis for FY 2007. We also note that we
are proposing to adopt a consolidated severity-adjusted DRG system, as
discussed in section II.C. of this preamble. The underlying clinical
principle of the proposed consolidated severity-adjusted DRG system is
that the severity of illness of a patient is highly dependent on the
patient's underlying problem and that patients with high severity of
illness are usually characterized by multiple serious diseases or
illnesses. The assessment of the severity of illness of a patient is
specific to the base DRG to which a patient is assigned. In other
words, the determination of the severity of illness is disease-
specific. High severity of

[[Page 24038]]

illness is primarily determined by the interaction of multiple
diseases. Patients with multiple comorbid conditions involving multiple
organ systems are assigned to the higher severity of illness
subclasses. Thus, patients with severe sepsis and organ dysfunction are
likely to be classified as severity of illness subclass 3 or 4 under
the proposed DRG system, depending on the other comorbid conditions or
underlying problems the patient may have at that time. It is possible
that the consolidated severity-adjusted DRG system that we are planning
to adopt would better recognize the extensive resources that hospitals
use to treat patients with severe sepsis. We encourage commenters to
examine the consolidated severity-adjusted DRGs described in section
II.C. of this proposed rule to determine whether there is a better
recognition of severity of illness and resource use in that proposed
system.
6. Medicare Code Editor (MCE) Changes
(If you choose to comment on issues in this section, please include
the caption ``Medicare Code Editor'' at the beginning of your comment.)
As explained under section II.B.1. of this preamble, the Medicare
Code Editor (MCE) is a software program that detects and reports errors
in the coding of Medicare claims data. Patient diagnoses, procedure(s),
discharge status, and demographic information go into the Medicare
claims processing systems and are subjected to a series of automated
screens. The MCE screens are designed to identify cases that require
further review before classification into a DRG.
For FY 2007, we are proposing to make the following changes to the
MCE edits:
a. Newborn Diagnoses Edit
We are proposing to add code 780.92 (Excessive crying of infant
(baby)) to the ``Newborn Diagnoses'' edit in the MCE. This edit is
structured for patients with an age of ``0''. In the Tabular portion of
the ICD-9-CM diagnosis codes, the ``excludes'' note at code 780.92
states that this code ``excludes excessive crying of child, adolescent
or adult'' and sends the coder to code 780.95 (Other excessive crying.
(The new title of this code, shown on Table 6E of the Addendum to this
proposed rule is ``Excessive crying of child, adolescent, or adult).)
To make a conforming change, we also are proposing that code 780.92 be
removed from the ``Pediatric Diagnoses--Age 0 Through 17'' edit.
b. Diagnoses Allowed for Females Only Edit
The following codes are now invalid codes, as shown in Table 6C of
the Addendum to this proposed rule. Therefore, we are proposing to
remove them from the ``Diagnosis Allowed for Females Only'' edit in the
MCE.
616.8, Other specified inflammatory diseases of cervix,
vagina, and vulva.
629.8, Other specified disorders of female genital organs.
Codes 616.8 and 629.8 have been expanded to the fifth-digit level.
Therefore, we are proposing to place the following expanded codes in
the ``Diagnoses Allowed for Females Only'' edit.
616.81, Mucositis (ulcerative) of cervix, vagina, and
vulva.
616.89, Other inflammatory disease of cervix, vagina, and
vulva.
629.81, Habitual aborter without current pregnancy.
629.89, Other specified disorders of female genital
organs.
The following two codes have revised descriptions (as shown in
Table 6E of the Addendum to this proposed rule) which specify gender.
Therefore, we are proposing to add them to ``Diagnoses Allowed for
Females Only'' edit.
V26.31, Testing of female for genetic disease carrier
status.
V26.32, Other genetic testing of female.
c. Diagnoses Allowed for Males Only Edit
Code 608.2 (Torsion of testis) is now an invalid code (as shown in
Table 6C of the Addendum to this proposed rule). Therefore, we are
proposing to remove it from the ``Diagnoses Allowed for Males Only''
edit. This code has been expanded to the fifth-digit level. Therefore,
we are proposing to place the following expanded codes in the
``Diagnoses Allowed for Males Only'' edit:
608.20, Torsion of testis, unspecified.
608.21, Extravaginal torsion of spermatic cord.
608.22 Intravaginal torsion of spermatic cord.
608.23, Torsion of appendix testis.
608.24, Torsion of appendix epididymis.
The following codes have been created effective for FY 2007 and are
gender specific. Therefore, we are proposing to add them to the
``Diagnosis Allowed for Males Only'' edit.
V26.34, Testing of male for genetic disease carrier
status.
V26.35, Encounter for testing of male partner of habitual
aborter.
V26.39, Other genetic testing of male.
d. Manifestations Not Allowed as Principal Diagnosis Edit
We are proposing to add the following codes to the ``Manifestations
Not Allowed as Principal Diagnosis'' edit in the MCE:
362.03, Nonproliferative diabetic retinopathy, NOS.
362.04, Mild nonproliferative diabetic retinopathy.
362.05, Moderate nonproliferative diabetic retinopathy.
362.06, Severe nonproliferative diabetic retinopathy.
362.07, Diabetic macular edema.
In addition, we are proposing to remove code 525.10 (Acquired
absence of teeth, unspecified) from this edit in the MCE.
e. Nonspecific Principal Diagnosis Edit
We are proposing to add the following codes to the ``Nonspecific
Principal Diagnosis'' edit in the MCE:
255.10, Hyperaldosteronism, unspecified.
323.9, Unspecified causes of encephalitis, myelitis, and
encephalomyelitis.
770.10, Fetal and newborn aspiration, unspecified.
780.31, Febrile convulsions (simple), unspecified.
Codes 255.10, 323.9, and 780.31 appear on Table 6E, Revised
Diagnosis Codes, and are being included in this edit because of their
revised descriptions. Code 770.10 was inadvertently left off this list
for FY 2006 when the code was created.
f. Unacceptable Principal Diagnosis Edit
Most V-codes describe an individual's health status, but these
codes are not usually a current illness or injury. Therefore, most V-
codes are included in the ``Unacceptable Principal Diagnosis'' edit.
The following codes became invalid (as shown in Table 6C of the
Addendum to this proposed rule) for FY 2007, and we are proposing to
remove them from this edit:
V18.5, Family history, digestive disorders.
V58.3, Attention to surgical dressings and sutures.
V72.1, Examination of ears and hearing.
The following V-codes represent either fifth-digit extensions of
the above codes, or new codes that were created effective October 1,
2006 (Table 6A of the Addendum to this proposed rule). Therefore, we
are proposing to add the following codes to the ``Unacceptable
Principal Diagnosis'' edit:

[[Page 24039]]

V18.51, Family history, colonic polyps.
V18.59, Family history, other digestive disorders.
V26.34, Testing of male for genetic disease carrier
status.
V26.35, Encounter for testing of male partner of habitual
aborter.
V26.39, Other genetic testing of male.
V45.86, Bariatric surgery status.
V58.30, Encounter for change or removal of nonsurgical
wound dressing.
V58.31, Encounter for change or removal of surgical wound
dressing.
V58.32, Encounter for removal of sutures.
V72.11, Encounter for hearing examination following failed
hearing screening.
V72.19, Other examination of ears and hearing.
V82.71, Screening for genetic disease carrier status.
V82.79, Other genetic screening.
V85.51, Body mass index, pediatric, less than 5th
percentile for age.
V85.52, Body mass index, pediatric, 5th percentile to less
than 85th percentile for age.
V85.53, Body mass index, pediatric, 85th percentile to
less than 95th percentile for age.
V85.54, Body mass index, pediatric, greater than or equal
to 95th percentile for age.
V86.0, Estrogen receptor positive status [ER+].
V86.1, Estrogen receptor negative status [ER-].
g. Nonspecific O.R. Procedures Edit
We are proposing to remove code 00.29 (Intravascular imaging
unspecified vessel(s)) from the ``Nonspecific O.R. Procedure'' edit in
the MCE. This code was erroneously placed in this edit; it is not
considered an O.R. procedure.
h. Noncovered Procedures Edit
Under the proposed changes to DRG 513 (Pancreas Transplant) under
the Pre-MDCs described in section II.D.1. of this preamble, a patient
must have a history of medically uncontrollable, insulin-dependent
diabetes mellitus, that is, Type I diabetes mellitus. Therefore, to
conform the ``Noncovered Procedures'' Edit in the MCE to these proposed
changes, we are proposing to revise Diagnosis List 1 in this edit to
include only the following codes:
250.01, Diabetes mellitus without mention of complication,
type I [juvenile type], not stated as uncontrolled.
250.03, Diabetes mellitus without mention of complication,
type I [juvenile type], uncontrolled.
250.11, Diabetes with ketoacidosis, type I [juvenile
type], not stated as uncontrolled.
250.13, Diabetes with ketoacidosis, type I [juvenile
type], uncontrolled.
250.21, Diabetes with hyperosmolarity, type I [juvenile
type], not stated as uncontrolled.
250.23, Diabetes with hyperosmolarity, type I [juvenile
type], uncontrolled.
250.31, Diabetes with other coma, type I [juvenile type],
not stated as uncontrolled.
250.33, Diabetes with other coma, type I [juvenile type],
uncontrolled.
250.41, Diabetes with renal manifestations, type I
[juvenile type], not stated as uncontrolled.
250.43, Diabetes with renal manifestations, type I
[juvenile type], uncontrolled.
250.51, Diabetes with ophthalmic manifestations, type I
[juvenile type], not stated as uncontrolled.
250.53, Diabetes with ophthalmic manifestations, type I
[juvenile type], uncontrolled.
250.61, Diabetes with neurological manifestations, type I
[juvenile type], not stated as uncontrolled.
250.63, Diabetes with neurological manifestations, type I
[juvenile type], uncontrolled.
250.71, Diabetes with peripheral circulatory disorders,
type I [juvenile type], not stated as uncontrolled.
250.73, Diabetes with peripheral circulatory disorders,
type I [juvenile type], uncontrolled.
250.81, Diabetes with other specified manifestations, type
I [juvenile type], not stated as uncontrolled.
250.83, Diabetes with other specified manifestations, type
I [juvenile type], uncontrolled.
250.91, Diabetes with unspecified complication, type I
[juvenile type], not stated as uncontrolled.
250.93, Diabetes with unspecified complication, type I
[juvenile type], uncontrolled.
In addition, we are proposing to remove Diagnosis List 2 from the
``Noncovered Procedures'' edit, which is comprised of the following
codes:
403.01, Hypertensive kidney disease, malignant, with
chronic kidney disease.
403.11, Hypertensive kidney disease, benign, with chronic
kidney disease.
403.91, Hypertensive kidney disease, unspecified, with
chronic kidney disease.
404.02, Hypertensive heart and kidney disease, malignant,
with chronic kidney disease.
404.03, Hypertensive heart and kidney disease, malignant,
with heart failure and chronic kidney disease.
404.12, Hypertensive heart and kidney disease, benign,
with chronic kidney disease.
404.13, Hypertensive heart and kidney disease, benign,
with heart failure and chronic kidney disease.
404.92, Hypertensive heart and kidney disease,
unspecified, with chronic kidney disease.
404.93, Hypertensive heart and kidney disease,
unspecified, with heart failure and chronic kidney disease.
585.1, Chronic kidney disease, Stage I.
585.2, Chronic kidney disease, Stage II (mild).
585.3, Chronic kidney disease, Stage III (moderate).
585.4, Chronic kidney disease, Stage IV (severe).
585.5, Chronic kidney disease, Stage V.
585.6, End stage renal disease.
585.9, Chronic kidney disease, unspecified.
V42.0, Organ or tissue replaced by transplant, kidney.
V43.89, Organ or tissue replaced by other means, other
organ or tissue, other.
i. Bilateral Procedure Edit
We are proposing to remove the following codes from the ``Bilateral
Procedure'' edit, as these are adjunct codes. They are not O.R. codes
recognized by the GROUPER as procedures, and the edit was created in
error last year.
00.74, Hip replacement bearing surface, metal on
polyethylene.
00.75, Hip replacement bearing surface, metal-on-metal.
00.76, Hip replacement bearing surface, ceramic-on-
ceramic.
7. Surgical Hierarchies
(If you choose to comment on issues in this section, please include
the caption ``DRGs: Surgical Hierarchies'' at the beginning of your
comments.)
Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. Therefore, it is necessary to have a decision rule within the
GROUPER by which these cases are assigned to a single DRG. The surgical
hierarchy, an ordering of surgical classes from most resource-intensive
to least resource-intensive, performs that function. Application of
this hierarchy ensures that cases involving multiple surgical

[[Page 24040]]

procedures are assigned to the DRG associated with the most resource-
intensive surgical class.
Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibrations, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications and recalibrations, to determine if the ordering of
classes coincides with the intensity of resource utilization.
A surgical class can be composed of one or more DRGs. For example,
in MDC 11, the surgical class ``kidney transplant'' consists of a
single DRG (DRG 302) and the class ``kidney, ureter and major bladder
procedures'' consists of three DRGs (DRGs 303, 304, and 305).
Consequently, in many cases, the surgical hierarchy has an impact on
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting the average resources for
each DRG by frequency to determine the weighted average resources for
each surgical class. For example, assume surgical class A includes DRGs
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also
that the average charge of DRG 1 is higher than that of DRG 3, but the
average charges of DRGs 4 and 5 are higher than the average charge of
DRG 2. To determine whether surgical class A should be higher or lower
than surgical class B in the surgical hierarchy, we would weight the
average charge of each DRG in the class by frequency (that is, by the
number of cases in the DRG) to determine average resource consumption
for the surgical class. The surgical classes would then be ordered from
the class with the highest average resource utilization to that with
the lowest, with the exception of ``other O.R. procedures'' as
discussed below.
This methodology may occasionally result in assignment of a case
involving multiple procedures to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER search for the procedure in the
most resource-intensive surgical class, in cases involving multiple
procedures, this result is sometimes unavoidable.
We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average charge is
ordered above a surgical class with a higher average charge. For
example, the ``other O.R. procedures'' surgical class is uniformly
ordered last in the surgical hierarchy of each MDC in which it occurs,
regardless of the fact that the average charge for the DRG or DRGs in
that surgical class may be higher than that for other surgical classes
in the MDC. The ``other O.R. procedures'' class is a group of
procedures that are only infrequently related to the diagnoses in the
MDC, but are still occasionally performed on patients in the MDC with
these diagnoses. Therefore, assignment to these surgical classes should
only occur if no other surgical class more closely related to the
diagnoses in the MDC is appropriate.
A second example occurs when the difference between the average
charges for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
because, as a result of reassigning cases on the basis of the hierarchy
change, the average charges are likely to shift such that the higher-
ordered surgical class has a lower average charge than the class
ordered below it.
Based on the changes under the HSVRcc weighting methodology that we
are proposing for FY 2007, as discussed in section II.C.2. of this
preamble, we are proposing to revise the surgical hierarchy for Pre-
MDCs, MDC 1 (Diseases and Disorders of the Nervous System), MDC 2
(Diseases and Disorders of the Eye), MDC 3 (Diseases and Disorders of
the Ear, Nose, Mouth and Throat), MDC 8 (Diseases and Disorders of the
Musculoskeletal System and Connective Tissue), MDC 10 (Endocrine,
Nutritional and Metabolic Diseases and Disorders), and MDC 13 (Diseases
and Disorders of the Female Reproductive System) as follows. In our
analysis, we looked at the number of cases and the arithmetic mean.
In Pre-MDCs, we are proposing to reorder DRG 481 (Bone Marrow
Transplant) above DRG 513 (Pancreas Transplant).
In MDC 1, we are proposing to reorder DRGs 531-532 (Spinal
Procedures, with CC and without CC, respectively) above DRGs 529-530
(Ventricular Shunt Procedures, with CC and without CC, respectively).
In MDC 2, we are proposing to reorder DRG 42 (Intraocular
Procedures Except Retina, Iris and Lens) above DRG 36 (Retinal
Procedures).
In MDC 3, we are proposing to reorder DRGs 168-169 (Mouth
Procedures, with CC and without CC, respectively) above DRG 57 (T&A
Procedures, Except Tonsillectomy and/or Adenoidectomy Only, Age > 17)
and DRG 58 (T&A Procedures, Except Tonsillectomy and/or Adenoidectomy
Only, Age 0-17).
In MDC 8, we are proposing to reorder DRG 213 (Amputation for
Musculoskeletal System and Connective Tissue Disorders) above DRG 216
(Biopsies of Musculoskeletal System and Connective Tissue).
In MDC 10, we are proposing to reorder DRG 285 (Amputation of Lower
Limb for Endocrine, Nutritional and Metabolic Diseases and Disorders)
above DRG 288 (O.R. Procedures for Obesity).
In MDC 13, we are proposing to reorder DRG 363 (D&C, Conization and
Radio-Implant, for Malignancy) and DRG 364 (D&C, Conization and Radio-
Implant, Except for Malignancy) above DRG 360 (Vagina, Cervix, and
Vulva Procedures).
8. Refinement of Complications and Comorbidities (CC) List
(If you choose to comment on issues in this section, please include
the caption ``CC List'' at the beginning of your comment.)
a. Background
As indicated earlier in this preamble, under the IPPS DRG
classification system, we have developed a standard list of diagnoses
that are considered complications or comorbidities (CCs). Historically,
we developed this list using physician panels that classified each
diagnosis code based on whether the diagnosis, when present as a
secondary condition, would be considered a substantial complication or
comorbidity. A substantial complication or comorbidity was defined as a
condition that, because of its presence with a specific principal
diagnosis, would cause an increase in the length of stay by at least 1
day in at least 75 percent of the patients.
b. Comprehensive Review of the CC List
In previous years, we have made changes to the standard list of
CCs, either by adding new CCs or deleting CCs already on the list, but
we have never conducted a comprehensive review of the list. Given the
long period of time that had elapsed since the original CC list was
developed, the incremental nature of changes to it, and changes in the
way inpatient care is delivered, and in partial response to
recommendations in MedPAC's March 2005 Report to Congress on Physician-
Owned Specialty Hospitals, for the FY 2006 IPPS final rule, we reviewed
the 121-paired DRGs that were split on the presence or absence of a CC
among the 3,285 diagnosis codes on the CC list. We presented the
results of that review and summarized public comments that we received
in the FY 2006 proposed rule on the review results in the FY 2006 IPPS
final rule (70 FR 47313 through 47315). Further analysis of the CC list

[[Page 24041]]

and refinement to recognize the effects of differences in severity of
illness among patients is discussed in section II.C. of this preamble
as part of our efforts to develop a consolidated severity-adjusted DRG
system for use in the IPPS. However, as further discussed in section
II.C. of the preamble to this proposed rule, we are soliciting comments
on whether it would be appropriate in FY 2007 to apply to an expanded
set of DRGs a clinical severity concept similar to the approach we used
in FY 2006 to refine cardiac DRGs based on the presence or absence of
an MCV.
c. CC Exclusions List Proposed for FY 2007
In the September 1, 1987 final notice (52 FR 33143) concerning
changes to the DRG classification system, we modified the GROUPER logic
so that certain diagnoses included on the standard list of CCs would
not be considered valid CCs in combination with a particular principal
diagnosis. We created the CC Exclusions List for the following reasons:
(1) To preclude coding of CCs for closely related conditions; (2) to
preclude duplicative or inconsistent coding from being treated as CCs;
and (3) to ensure that cases are appropriately classified between the
complicated and uncomplicated DRGs in a pair. As we indicated above, we
developed a list of diagnoses, using physician panels, to include those
diagnoses that, when present as a secondary condition, would be
considered a substantial complication or comorbidity. In previous
years, we have made changes to the list of CCs, either by adding new
CCs or deleting CCs already on the list. At this time, we are not
proposing to delete any of the diagnosis codes on the CC list for FY
2007.
In the May 19, 1987 proposed notice (52 FR 18877) and the September
1, 1987 final notice (52 FR 33154), we explained that the excluded
secondary diagnoses were established using the following five
principles:
Chronic and acute manifestations of the same condition
should not be considered CCs for one another.
Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for the same condition should not be considered
CCs for one another.
Codes for the same condition that cannot coexist, such as
partial/total, unilateral/bilateral, obstructed/unobstructed, and
benign/malignant, should not be considered CCs for one another.
Codes for the same condition in anatomically proximal
sites should not be considered CCs for one another.
Closely related conditions should not be considered CCs
for one another.
The creation of the CC Exclusions List was a major project
involving hundreds of codes. We have continued to review the remaining
CCs to identify additional exclusions and to remove diagnoses from the
master list that have been shown not to meet the definition of a CC.\9\
---------------------------------------------------------------------------

\9\ See the FY 1989 final rule (53 FR 38485, September 30,
1988), for the revision made for the discharges occurring in FY
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final
rule (57 FR 39753),September 1, 1992), for the FY 1993 revision; the
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994
revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994),
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782,
September 1, 1995), for the FY 1996 revisions; the FY 1997 final
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004),
for the FY 2005 revisions; and the FY 2006 final rule (70 FR 47640,
August 12, 2005), for the FY 2006 revisions. In the FY 2000 final
rule (64 FR 41490, July 30, 1999, we did not modify the CC
Exclusions List because we did not make any changes to the ICD-9-CM
codes for FY 2000.
---------------------------------------------------------------------------

We are proposing to make limited revisions to the CC Exclusions
List to take into account the changes that will be made in the ICD-9-CM
diagnosis coding system effective October 1, 2006. (See section
II.D.10. of this preamble for a discussion of ICD-9-CM changes.) We are
proposing these changes in accordance with the principles established
when we created the CC Exclusions List in 1987.
Tables 6G and 6H in the Addendum to this proposed rule contain the
revisions to the CC Exclusions List that would be effective for
discharges occurring on or after October 1, 2006. Each table shows the
principal diagnoses with changes to the excluded CCs. Each of these
principal diagnoses is shown with an asterisk, and the additions or
deletions to the CC Exclusions List are provided in an indented column
immediately following the affected principal diagnosis.
CCs that are added to the list are in Table 6G--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 2006,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
CCs that are deleted from the list are in Table 6H--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 2006, the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $152.50
plus shipping and handling. A request for the FY 1988 CC Exclusions
List (which should include the identification accession number (PB) 88-
133970) should be made to the following address: National Technical
Information Service, United States Department of Commerce, 5285 Port
Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.
Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, 1998, 1999, 2001, 2002, 2003, 2004, 2005, and 2006) and those in
Tables 6G and 6H of this proposed rule for FY 2007 must be incorporated
into the list purchased from NTIS in order to obtain the CC Exclusions
List applicable for discharges occurring on or after October 1, 2006.
(Note: There was no CC Exclusions List in FY 2000 because we did
not make changes to the ICD-9-CM codes for FY 2000.)
Alternatively, the complete documentation of the GROUPER logic,
including the current CC Exclusions List, is available from 3M/Health
Information Systems (HIS), which, under contract with CMS, is
responsible for updating and maintaining the GROUPER program. The
current DRG Definitions Manual, Version 23.0, is available for $225.00,
which includes $15.00 for shipping and handling. Version 24.0 of this
manual, which will include the final FY 2007 DRG changes, will be
available in hard copy for $250.00. Version 24.0 of the manual is also
available on a CD for $200.00; a combination hard copy and CD is
available for $400.00. These manuals may be obtained by writing 3M/HIS
at the following address: 100 Barnes Road, Wallingford, CT 06492; or by
calling (203) 949-0303. Please specify the revision or revisions
requested.
9. Review of Procedure Codes in DRGs 468, 476, and 477
Each year, we review cases assigned to DRG 468 (Extensive O.R.
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R.
Procedure Unrelated

[[Page 24042]]

to Principal Diagnosis), and DRG 477 (Nonextensive O.R. Procedure
Unrelated to Principal Diagnosis) to determine whether it would be
appropriate to change the procedures assigned among these DRGs.
DRGs 468, 476, and 477 are reserved for those cases in which none
of the O.R. procedures performed are related to the principal
diagnosis. These DRGs are intended to capture atypical cases, that is,
those cases not occurring with sufficient frequency to represent a
distinct, recognizable clinical group. DRG 476 is assigned to those
discharges in which one or more of the following prostatic procedures
are performed and are unrelated to the principal diagnosis:
60.0, Incision of prostate.
60.12, Open biopsy of prostate.
60.15, Biopsy of periprostatic tissue.
60.18, Other diagnostic procedures on prostate and
periprostatic tissue.
60.21, Transurethral prostatectomy.
60.29, Other transurethral prostatectomy.
60.61, Local excision of lesion of prostate.
60.69, Prostatectomy, not elsewhere classified.
60.81, Incision of periprostatic tissue.
60.82, Excision of periprostatic tissue.
60.93, Repair of prostate.
60.94, Control of (postoperative) hemorrhage of prostate.
60.95, Transurethral balloon dilation of the prostatic
urethra.
60.96, Transurethral destruction of prostate tissue by
microwave thermotherapy.
60.97, Other transurethral destruction of prostate tissue
by other thermotherapy.
60.99, Other operations on prostate.
All remaining O.R. procedures are assigned to DRGs 468 and 477,
with DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis.\10\
---------------------------------------------------------------------------

\10\ The original list of the ICD-9-CM procedure codes for the
procedures we consider nonextensive procedures, if performed with an
unrelated principal diagnosis, was published in Table 6C in section
IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part
of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173),
and the FY 1998 final rule (62 FR 45981), we moved several other
procedures from DRG 468 to DRG 477, and some procedures from DRG 477
to DRG 468. No procedures were moved in FY 1999, as noted in the
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule
(67 FR 49999) we did not move any procedures from DRG 477. However,
we did move procedure codes from DRG 468 and placed them in more
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365),
we moved several procedures from DRG 468 to DRGs 476 and 477 because
the procedures are nonextensive. In the FY 2005 final rule (69 FR
48950), we moved one procedure from DRG 468 to 477. In addition, we
added several existing procedures to DRGs 476 and 477. In the FY
2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned
it to DRG 477.
---------------------------------------------------------------------------

For FY 2007, we are not proposing to change the procedures assigned
among these DRGs.
a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs
We annually conduct a review of procedures producing assignment to
DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it
would be appropriate to move procedure codes out of these DRGs into one
of the surgical DRGs for the MDC into which the principal diagnosis
falls. The data are arrayed two ways for comparison purposes. We look
at a frequency count of each major operative procedure code. We also
compare procedures across MDCs by volume of procedure codes within each
MDC.
We identify those procedures occurring in conjunction with certain
principal diagnoses with sufficient frequency to justify adding them to
one of the surgical DRGs for the MDC in which the diagnosis falls.
Based on this year's review, we are not proposing to remove any
procedures in DRGs 468 or 477 to one of the surgical DRGs for FY 2007.
b. Reassignment of Procedures Among DRGs 468, 476, and 477
We also annually review the list of ICD-9-CM procedures that, when
in combination with their principal diagnosis code, result in
assignment to DRGs 468, 476, and 477, to ascertain if any of those
procedures should be reassigned from one of these three DRGs to another
of the three DRGs based on average charges and the length of stay. We
look at the data for trends such as shifts in treatment practice or
reporting practice that would make the resulting DRG assignment
illogical. If we find these shifts, we would propose to move cases to
keep the DRGs clinically similar or to provide payment for the cases in
a similar manner. Generally, we move only those procedures for which we
have an adequate number of discharges to analyze the data.
We are not proposing to move any procedure codes from DRG 476 to
DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476 for FY 2007.
c. Adding Diagnosis or Procedure Codes to MDCs
Based on our review this year, we are not proposing to add any
diagnosis codes to MDCs for FY 2007.
10. Changes to the ICD-9-CM Coding System
As described in section II.B.1. of this preamble, the ICD-9-CM is a
coding system used for the reporting of diagnoses and procedures
performed on a patient. In September 1985, the ICD-9-CM Coordination
and Maintenance Committee was formed. This is a Federal
interdepartmental committee, co-chaired by the National Center for
Health Statistics (NCHS), the Centers for Disease Control and
Prevention, and CMS, charged with maintaining and updating the ICD-9-CM
system. The Committee is jointly responsible for approving coding
changes, and developing errata, addenda, and other modifications to the
ICD-9-CM to reflect newly developed procedures and technologies and
newly identified diseases. The Committee is also responsible for
promoting the use of Federal and non-Federal educational programs and
other communication techniques with a view toward standardizing coding
applications and upgrading the quality of the classification system.
The Official Version of the ICD-9-CM contains the list of valid
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is
available from the Government Printing Office on CD-ROM for $25.00 by
calling (202) 512-1800.) The Official Version of the ICD-9-CM is no
longer available in printed manual form from the Federal Government; it
is only available on CD-ROM. Users who need a paper version are
referred to one of the many products available from publishing houses.
The NCHS has lead responsibility for the ICD-9-CM diagnosis codes
included in the Tabular List and Alphabetic Index for Diseases, while
CMS has lead responsibility for the ICD-9-CM procedure codes included
in the Tabular List and Alphabetic Index for Procedures.
The Committee encourages participation in the above process by
health-related organizations. In this regard, the Committee holds
public meetings for discussion of educational issues and proposed
coding changes. These meetings provide an opportunity for
representatives of recognized organizations in the coding field, such
as the American Health Information Management Association (AHIMA), the
American Hospital Association (AHA),

[[Page 24043]]

and various physician specialty groups, as well as individual
physicians, health information management professionals, and other
members of the public, to contribute ideas on coding matters. After
considering the opinions expressed at the public meetings and in
writing, the Committee formulates recommendations, which then must be
approved by the agencies.
The Committee presented proposals for coding changes for
implementation in FY 2007 at a public meeting held on September 29-30,
2005, and finalized the coding changes after consideration of comments
received at the meetings and in writing by December 2, 2005. Those
coding changes are announced in Tables 6A through 6F in the Addendum to
this proposed rule. The Committee held its 2006 meeting on March 23-24,
2006. Proposed new codes for which there was a consensus of public
support and for which complete tabular and indexing changes can be made
by May 2006 will be included in the October 1, 2006 update to ICD-9-CM.
Code revisions that were discussed at the March 23-24, 2006 Committee
meeting could not be finalized in time to include them in this FY 2007
IPPS proposed rule. These additional codes will be included in Tables
6A through 6F of the final rule and will be marked with an asterisk
(*).
Copies of the minutes of the procedure codes discussions at the
Committee's September 29-30, 2005 meeting can be obtained from the CMS
Web site: http://new.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp.
The minutes of the diagnosis codes discussions at the

September 29-30, 2005 meeting are found at: http://www.cdc.gov/nchs/icd9.htm.
Paper copies of these minutes are no longer available and the

mailing list has been discontinued. These Web sites also provide
detailed information about the Committee, including information on
requesting a new code, attending a Committee meeting, and timeline
requirements and meeting dates.
We encourage commenters to address suggestions on coding issues
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to:
dfp4@cdc.gov.

Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination
and Maintenance Committee, CMS, Center for Medicare Management,
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06,
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent
by E-mail to: Patricia.Brooks1@cms.hhs.gov.
The ICD-9-CM code changes that have been approved will become
effective October 1, 2006. The new ICD-9-CM codes are listed, along
with their DRG classifications, in Tables 6A and 6B (New Diagnosis
Codes and New Procedure Codes, respectively) in the Addendum to this
proposed rule. As we stated above, the code numbers and their titles
were presented for public comment at the ICD-9-CM Coordination and
Maintenance Committee meetings. Both oral and written comments were
considered before the codes were approved. In this proposed rule, we
are only soliciting comments on the proposed classification of these
new codes.
For codes that have been replaced by new or expanded codes, the
corresponding new or expanded diagnosis codes are included in Table 6A.
New procedure codes are shown in Table 6B. Diagnosis codes that have
been replaced by expanded codes or other codes or have been deleted are
in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes
will not be recognized by the GROUPER beginning with discharges
occurring on or after October 1, 2006. Table 6D contains invalid
procedure codes. These invalid procedure codes will not be recognized
by the GROUPER beginning with discharges occurring on or after October
1, 2006. Revisions to diagnosis code titles are in Table 6E (Revised
Diagnosis Code Titles), which also includes the DRG assignments for
these revised codes. Table 6F includes revised procedure code titles
for FY 2007.
In the September 7, 2001 final rule implementing the IPPS new
technology add-on payments (66 FR 46906), we indicated we would attempt
to include proposals for procedure codes that would describe new
technology discussed and approved at the April meeting as part of the
code revisions effective the following October. As stated previously,
ICD-9-CM codes discussed at the March 23-24, 2006 Committee meeting
that received consensus and that can be finalized by May 2006, will be
included in Tables 6A through 6F of the Addendum to the final rule.
Section 503(a) of Pub. L. 108-173 included a requirement for
updating ICD-9-CM codes twice a year instead of a single update on
October 1 of each year. This requirement was included as part of the
amendments to the Act relating to recognition of new technology under
the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by
adding a clause (vii) which states that the ``Secretary shall provide
for the addition of new diagnosis and procedure codes in April 1 of
each year, but the addition of such codes shall not require the
Secretary to adjust the payment (or diagnosis-related group
classification) * * * until the fiscal year that begins after such
date.'' This requirement improves the recognition of new technologies
under the IPPS system by providing information on these new
technologies at an earlier date. Data will be available 6 months
earlier than would be possible with updates occurring only once a year
on October 1.
While section 1886(d)(5)(K)(vii) of the Act states that the
addition of new diagnosis and procedure codes on April 1 of each year
shall not require the Secretary to adjust the payment, or DRG
classification under section 1886(d) of the Act until the fiscal year
that begins after such date, we have to update the DRG software and
other systems in order to recognize and accept the new codes. We also
publicize the code changes and the need for a mid-year systems update
by providers to capture the new codes. Hospitals also have to obtain
the new code books and encoder updates, and make other system changes
in order to capture and report the new codes.
The ICD-9-CM Coordination and Maintenance Committee holds its
meetings in the Spring and Fall in order to update the codes and the
applicable payment and reporting systems by October 1 of each year.
Items are placed on the agenda for the ICD-9-CM Coordination and
Maintenance Committee meeting if the request is received at least 2
months prior to the meeting. This requirement allows time for staff to
review and research the coding issues and prepare material for
discussion at the meeting. It also allows time for the topic to be
publicized in meeting announcements in the Federal Register as well as
on the CMS Web site. The public decides whether or not to attend the
meeting based on the topics listed on the agenda. Final decisions on
code title revisions are currently made by March 1 so that these titles
can be included in the IPPS proposed rule. A complete addendum
describing details of all changes to ICD-9-CM, both tabular and index,
are publicized on CMS and NCHS Web pages in May of each year.
Publishers of coding books and software use this information to modify
their products that are used by health care providers. This 5-month
time period has proved to be necessary

[[Page 24044]]

for hospitals and other providers to update their systems.
A discussion of this timeline and the need for changes are included
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance
Committee minutes. The public agreed that there was a need to hold the
fall meetings earlier, in September or October, in order to meet the
new implementation dates. The public provided comment that additional
time would be needed to update hospital systems and obtain new code
books and coding software. There was considerable concern expressed
about the impact this new April update would have on providers.
In the FY 2005 IPPS final rule, we implemented section
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law
108-173, by developing a mechanism for approving, in time for the April
update, diagnosis and procedure code revisions needed to describe new
technologies and medical services for purposes of the new technology
add-on payment process. We also established the following process for
making these determinations. Topics considered during the Fall ICD-9-CM
Coordination and Maintenance Committee meeting are considered for an
April 1 update if a strong and convincing case is made by the requester
at the Committee's public meeting. The request must identify the reason
why a new code is needed in April for purposes of the new technology
process. The participants at the meeting and those reviewing the
Committee meeting summary report are provided the opportunity to
comment on this expedited request. All other topics are considered for
the October 1 update. Participants at the Committee meeting are
encouraged to comment on all such requests. There were no requests for
an expedited April l, 2006 implementation of an ICD-9-CM code at the
September 29-30, 2005 Committee meeting. Therefore, there were no new
ICD-9-CM codes implemented on April 1, 2006.
We believe that this process captures the intent of section
1886(d)(5)(K)(vii) of the Act. This requirement was included in the
provision revising the standards and process for recognizing new
technology under the IPPS. In addition, the need for approval of new
codes outside the existing cycle (October 1) arises most frequently and
most acutely where the new codes will capture new technologies that are
(or will be) under consideration for new technology add-on payments.
Thus, we believe this provision was intended to expedite data
collection through the assignment of new ICD-9-CM codes for new
technologies seeking higher payments.
Current addendum and code title information is published on the CMS
Web page at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes.

Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-
CM Coding Guidelines, can be found on the Web page at: http://www.cdc.gov/nchs/icd9.htm.
Information on new, revised, and deleted

ICD-9-CM codes is also provided to the AHA for publication in the
Coding Clinic for ICD-9-CM. AHA also distributes information to
publishers and software vendors.
CMS also sends copies of all ICD-9-CM coding changes to its
contractors for use in updating their systems and providing education
to providers.
These same means of disseminating information on new, revised, and
deleted ICD-9-CM codes will be used to notify providers, publishers,
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as
part of the ICD-9-CM Coordination and Maintenance Committee process.
Thus, although we publish the code titles in the IPPS proposed and
final rules, they are not subject to comment in the proposed or final
rules. We will continue to publish the October code updates in this
manner within the IPPS proposed and final rules. For codes that are
implemented in April, we will assign the new procedure code to the same
DRG in which its predecessor code was assigned so there will be no DRG
impact as far as DRG assignment. This mapping was specified by section
1886(d)(5)(K)(vii) of the Act as added by section 503(a) of Pub. L.
108-173. Any midyear coding updates will be available through the
websites indicated above and through the Coding Clinic for ICD-9-CM.
Publishers and software vendors currently obtain code changes through
these sources in order to update their code books and software systems.
We will strive to have the April 1 updates available through these Web
sites 5 months prior to implementation (that is, early November of the
previous year), as is the case for the October 1 updates. Codebook
publishers are evaluating how they will provide any code updates to
their subscribers. Some publishers may decide to publish mid-year book
updates. Others may decide to sell an addendum that lists the changes
to the October 1 code book. Coding personnel should contact publishers
to determine how they will update their books. CMS and its contractors
will also consider developing provider education articles concerning
this change to the effective date of certain ICD-9-CM codes.

E. Proposed Recalibration of DRG Weights

(If you choose to comment on issues in this section, please include
the caption ``DRG Weights'' at the beginning of your comment.)
We are proposing to change the DRG recalibration process
methodology for FY 2007 to move to an HSRV weighting method as
discussed in section II.C.2. of the preamble to this proposed rule. For
FY 2006 and years prior, we have recalibrated the DRG weights based on
charge data for Medicare discharges using the most current charge
information available (for example, the FY 2005 MedPAR file would have
been used for FY 2007). Our thorough analysis of the March 2005 MedPAC
recommendations regarding refinement of the DRG system used for the
IPPS (see discussion of the MedPAC recommendations in section II.C.2.
of this preamble) has shown that using gross charges as a basis for
setting the DRG weights has introduced bias into the weighting process.
Specifically, hospitals that are systematically more expensive than
others (that is, teaching hospitals and specialty hospitals) tend to
treat certain cases more commonly than others, causing the weights for
these cases to be artificially high. In addition, hospitals may mark up
their charges for routine days, intensive care days, and various
ancillary services by different percentages. This practice of
differential markups among hospital cost centers may also introduce
bias into the weights. For instance, we have observed that ancillary
service cost centers generally have higher charge markups than routine
services. Thus, the charge-based relative weight methodology may result
in high weights for DRGs that use more ancillary services relative to
DRGs that use more routine services than would occur under a system
where the weights are based on costs.
As discussed in section II.C.2. of this preamble, based on our
study of the MedPAC recommendations, we have developed an alternative
methodology for recalibrating the DRG weights. This method involves
applying the HSRV methodology at the cost center level (HSRVcc) to
remove the bias introduced by hospital characteristics (that is,
teaching, disproportionate share, location, and size, among others) and
then scaling the weights to costs using national cost center CCRs
derived from cost report data.
In developing this proposed system of weights, we used two data
sources:

[[Continued on page 24045]]

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

[[pp. 24045-24094]] Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2007 Rates

[[Continued from page 24044]]

[[Page 24045]]

Claims data and cost report data. As in previous years, the claims data
source is the MedPAR file. This file is based on fully coded diagnostic
and procedure data for all Medicare inpatient hospital bills. The FY
2005 MedPAR data used in this proposed rule include discharges
occurring between October 1, 2004 and September 30, 2005, based on
bills received by CMS through December 31, 2005, from all hospitals
subject to the IPPS and short-term acute care hospitals in Maryland
(which are under a waiver from the IPPS under section 1814(b)(3) of the
Act). The FY 2005 MedPAR file used in calculating the relative weights
includes data for approximately 12,137,358 Medicare discharges.
Discharges for Medicare beneficiaries enrolled in a Medicare+Choice
managed care plan are excluded from this analysis. The data exclude
CAHs, including hospitals that subsequently became CAHs after the
period from which the data were taken. The second data source used in
the new HSRVcc weight methodology are the FY 2003 Medicare cost report
data files from HCRIS, which represents the most recent full set of
cost report data available. We used the December 31, 2005 update of the
HCRIS cost report files for FY 2003 in setting the proposed relative
weights.
Previously, the charge-based methodology used to calculate the DRG
relative weights from the MedPAR data was as follows:
To the extent possible, all the claims were regrouped
using the DRG classification revisions that we would have proposed.
The transplant cases that were used to establish the
proposed relative weight for heart and heart-lung, liver and/or
intestinal, and lung transplants (DRGs 103, 480, and 495) were limited
to those Medicare-approved transplant centers that have cases in the FY
2005 MedPAR file. (Medicare coverage for heart, heart-lung, liver and/
or intestinal, and lung transplants is limited to those facilities that
have received approval from CMS as transplant centers.)
Organ acquisition costs for kidney, heart, heart-lung,
liver, lung, pancreas, and intestinal (or multivisceral organs)
transplants continue to be paid on a reasonable cost basis. Because
these acquisition costs are paid separately from the prospective
payment rate, it would have been necessary to subtract the acquisition
charges from the total charges on each transplant bill that showed
acquisition charges before computing the average charge for the DRG and
before eliminating statistical outliers.
Charges would have been standardized to remove the effects
of differences in area wage levels, indirect medical education and
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG. A transfer
case would have been counted as a fraction of a case based on the ratio
of its transfer payment under the per diem payment methodology to the
full DRG payment for non-transfer cases. That is, a transfer case
receiving payment under the transfer methodology equal to half of what
the case would receive as a non-transfer would be counted as 0.5 of a
total case.
Statistical outliers were eliminated by removing all cases
that were beyond 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG.
The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
These charge-based weights were then normalized by an adjustment
factor so that the average case weight after recalibration is equal to
the average case weight before recalibration. We will continue to apply
this normalization adjustment as it is intended to ensure that
recalibration by itself neither increases nor decreases total payments
under the IPPS as required by section 1886(d)(4)(C)(iii) of the Act.
The methodology we are proposing to calculate the DRG weights from
the FY 2005 MedPAR and FY 2003 cost report data is as follows:
To the extent possible, all the claims were regrouped
using the proposed DRG classification revisions discussed in section
II.D. of this preamble.
The transplant cases that were used to establish the
proposed relative weight for heart and heart-lung, liver and/or
intestinal, and lung transplants (DRGs 103, 480, and 495) were limited
to those Medicare-approved transplant centers that have cases in the FY
2005 MedPAR file. (Medicare coverage for heart, heart-lung, liver and/
or intestinal, and lung transplants is limited to those facilities that
have received approval from CMS as transplant centers.)
Organ acquisition costs for kidney, heart, heart-lung,
liver, lung, pancreas, and intestinal (or multivisceral organs)
transplants continue to be paid on a reasonable cost basis. Because
these acquisition costs are paid separately from the prospective
payment rate, it is necessary to subtract the acquisition charges from
the total charges on each transplant bill that showed acquisition
charges before adjusting the charges under the HSRVcc methodology and
before eliminating statistical outliers.
Claims for IPPS hospitals were used in this analysis
(claims for IPFs, IRFs, LTCHs, cancer and children's hospitals, and
RNHCIs were dropped). Claims with total charges or total length of stay
less than or equal to zero were dropped. Claims that had an amount in
the total charge field that differed by more than $10.00 from the sum
of the routine day charges, intensive care charges, pharmacy charges,
special equipment charges, therapy services charges, operating room
charges, cardiology charges, laboratory charges, radiology charges, and
other service charges were also dropped. At least 96 percent of the
providers in the MedPAR file had charges for 8 of the 10 cost centers.
Claims for providers that did not have charges greater than zero for at
least 8 of the 10 cost centers were dropped.
Statistical outliers were eliminated by removing all cases
that were beyond 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG.
Once the MedPAR data were trimmed, the data were sorted by provider
so that charges could be standardized under the HSRVcc methodology
(discussed in section II.C.2. of this preamble). To do this, an average
charge was computed for each provider for each of 10 proposed cost
centers. The average charge was computed by summing the charges for
each cost center and dividing by the transfer adjusted case count for
each provider. A transfer case, identified by discharge code, DRG, and
length of stay, was counted as a fraction of a case based on the ratio
of its length of stay plus 1 day relative to the geometric mean length
of stay for that DRG. That is, a transfer case with a length of stay of
2 days in a DRG with a geometric mean length of stay of 6 days would be
counted as 3 (2 days plus 1 extra day) divided by 6 or 0.5 of a total
case as this reflects current payment policy.
The 10 cost centers that we are proposing to use in the HSRV weight
calculation are shown in the following table. In addition, the table
shows the lines on the cost report that we are proposing to use to
create the national cost center CCRs that will be discussed later in
this section:

[[Page 24046]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.006

[[Page 24047]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.007

BILLING CODE 4120-01-C

After computing the average charge for each provider for each cost
center, the cost center charges on each claim are divided by the
provider's average charge for the matching cost center. For example,
the routine day charges on the claim are divided by the average routine
day charge for the provider, the intensive care unit charges on the
claim are divided by the average intensive care unit charge for the
provider, and so on. By using a hospital's relative charge structure,
the resulting weights from this step do not reflect differences in
charges among providers for factors such as location, size, wages,
relative efficiency, average markup, IME, DSH and the variety of cases
treated. Once these charges are adjusted by the average charge for the
cost center, they are then multiplied by the provider's CMI.
This adjustment for CMI is needed to rescale the hospital-specific
relative charge values which, by definition, will average to 1.0 for
each cost center. Because the average relative weight for a provider is
that provider's CMI, we believe CMI is a reasonable scale factor to use
to further adjust the relative charges to reflect the complexity of
cases treated by the provider. A starting CMI of one was assigned to
each cost center for each provider.
After the relative charges (cost center claim charge divided by the
average cost center charge for the provider) are multiplied by the
hospital's matching cost center CMI, they are summed by DRG. The
transfer adjusted case count for each DRG is also summed. Average
charges by DRG are calculated for each cost center by taking the sum of
the relative, CMI adjusted charges for that DRG and dividing by the
transfer adjusted case count for that DRG.
A national average charge is calculated for each cost center by
summing all relative CMI adjusted charges in the trimmed MedPAR data
set and dividing by the total transfer-adjusted case count. The first
set of DRG weights is created by dividing the average charge for each
DRG for each cost center by the national average charge for that cost
center. The result is a set of 10 weights for each DRG. These 10
weights are then assigned to each claim, a new CMI is created for each
provider, the relative charges for each cost center on the claim (total
charge for cost center is divided by the provider's

[[Page 24048]]

average charge for that cost center) are multiplied by the new CMI and
the weights are iterated until the national average CMI for each cost
center stops changing between iterations. In preparing the proposed
weights for this proposed rule, we used a straight CMI calculation
where each case was given a full weight and counted as a full case
regardless of transfer status.
Alternatively, we could use the method we applied in our study of
the MedPAC recommendations (see section II.C. of this preamble) where
we used a CMI that was computed by taking the sum of the transfer-
adjusted weights and dividing by a full case count, where the transfer-
adjusted weight is computed by multiplying the transfer-adjusted case
count (length of stay for claim plus one day divided by geometric mean
length of stay for the DRG) by the DRG weight. We are soliciting public
comment on which CMI calculation would be the most appropriate to use
in this weighting methodology.
After the iteration process is completed, we remove the effects of
differential markups within cost centers. To do this, we are proposing
to use national average departmental CCRs in conjunction with the total
charges from the trimmed MedPAR file to create scaling factors for each
cost center. The first step in this process is to develop national cost
center CCRs.
Taking the FY 2003 cost report data, we removed CAHs, Maryland
hospitals, Indian Health Service hospitals, all-inclusive rate
hospitals, and cost reports that represented time periods of less than
1 year (365 days). We then created CCRs for each provider for each cost
center (see prior table for line items used in the calculations) and
removed any cost CCRs that were greater than 10 or less than .01. We
then took the logs of all of the cost center CCRs and removed any cost
center CCRs where the log of the cost center CCR was greater or less
than the mean log plus/minus 1.96 times the standard deviation for the
log of that cost center CCR. We are proposing to use 1.96 times the
standard deviation as a trim factor because the logs of the cost center
CCRs are normally distributed and 1.96 times the standard deviation
represents the 95 percentile of the T-Distribution for large sample
size, for which 2,000 to 3,000 hospitals should qualify. Once the cost
report data was trimmed, we calculated the geometric mean CCR for each
cost center.
We are proposing to use these geometric mean CCRs to create cost
scaling factors to apply to the DRG weights. Once the national average
CCRs are computed, they are multiplied by the total unadjusted charges
for the matching group of cost centers in MedPAR. The resulting costs
for each group of cost centers are then summed to derive a total cost
for all cases across the Nation. The percentage that each cost center
is contributing to the overall total costs is calculated by dividing
the individual cost center cost by the total amount. For example, the
total cost for routine days is divided by the total cost for all cases
to arrive at 0.29, which indicates that routine costs are responsible
for approximately 29 percent of total cost. We are proposing to use
these percentages as scaling factors to apply to the relative weights.
For each DRG, the cost center weights are multiplied by these scaling
factors (that is, routine day weight is multiplied by the routine day
scaling factor, intensive care unit weight is multiplied by the
intensive care unit scaling factor, and so on). After the weights are
adjusted by the scaling factor, they are summed by DRG to create one
final weight for each DRG. Following that, they are normalized by a
factor of 1.49216 so that the weights so that the average case weight
after recalibration is equal to the average case weight before
recalibration. This normalization adjustment was intended to ensure
that recalibration by itself neither increases nor decreases total
payments under the IPPS.
When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We are proposing to use that same case
threshold in recalibrating the DRG weights for FY 2007. Using the FY
2005 MedPAR data set, there are 40 DRGs that contain fewer than 10
cases. Because we believe that we do not have sufficient MedPAR data to
set accurate and stable HSRVcc weights for these low-volume DRGs, we
are proposing to assign them the weights of similar DRGs for which we
have more complete data. The crosswalk we are proposing to use is shown
below. We are soliciting comment on this crosswalk.

------------------------------------------------------------------------
Low volume DRG DRG title Crosswalk to DRG
------------------------------------------------------------------------
3......................... Craniotomy Age 0-17.. 2 (Craniotomy Age >17
Without CC).
30........................ Traumatic Stupor & 29 (Traumatic Stupor
Coma, Coma < 1 HR Age & Coma, Coma < 1 HR
0-17. Age >17 Without CC).
33........................ Concussion Age 0-17.. 32 (Concussion Age
>17 Without CC).
41........................ Extraocular 40 (Extraocular
Procedures Except Procedures Except
Orbit Age 0-17. Orbit Age >17).
48........................ Other Disorders Of 47 (Other Disorders
The Eye Age 0-17. of The Eye Age >17
Without CC).
54........................ Sinus and Mastoid 53 (Sinus and Mastoid
Procedures Age 0-17. Procedures Age >17).
58........................ T&A Proc, Except 57 (T&A Proc, Except
Tonsillectomy &/or Tonsillectomy &/or
Adenoidectomy Only, Adenoidectomy Only,
Age 0-17. Age >17).
60........................ Tonsillectomy and/or 59 (Tonsillectomy and/
Adenoidectomy Only, or Adenoidectomy
Age 0-17. Only, Age >17).
62........................ Myringotomy W Tube 61 (Myringotomy With
Insertion Age 0-17. Tube Insertion Age
>17).
74........................ Other Ear, Nose, 73 (Other Ear, Nose,
Mouth & Throat Mouth & Throat
Diagnoses Age 0-17. Diagnoses Age >17).
81........................ Respiratory 79 (Respiratory
Infections & Infections &
Inflammations Age 0- Inflammations Age
17. >17 With CC).
137....................... Cardiac Congental & 135 (Cardiac
Valvular Disorders Congental & Valvular
Age 0-17. Disorders Age >17
With CC).
156....................... Stomach, Esophageal & 155 (Stomach,
Duodenal Procedures Esophageal &
Age 0-17. Duodenal Procedures
Age >17 Without CC).
163....................... Hernia Procedures Age 162 (Inguinal &
0-17. Femoral Hernia
Procedures Age >17
Without CC).
186....................... Dental & Oral Disease 185 (Dental & Oral
Except Extractions & Disease Except
Restorations Age 0- Extractions &
17. Restorations, Age
>17).
220....................... Lower Extrem & Humer 219 (Lower Extrem &
Proc Except Hip, Humer Proc Except
Foot, Femur Age 0-17. Hip, Foot, Femur Age
>17 Without CC).
252....................... Fx, Sprn, Strn & Disl 251 (Fx, Sprn, Strn &
Of Foreman, Hand, Disl of Foreman,
Foot Age 0-17. Hand, Foot Age >17
Without CC).

[[Page 24049]]

255....................... Fx, Sprn, Strn & Disl 254 Fx, Sprn, Strn &
Of Uparm, Lowleg Ex Disl of Uparm,
Foot Age 0-17. Lowleg Ex Foot Age
>17 Without CC).
279....................... Cellulitis Age 0-17.. 278 (Cellulitis Age
>17 Without CC).
282....................... Trauma To The Skin, 281 (Trauma To The
Subcut Tiss & Breast Skin, Subcut Tiss &
Age 0-17. Breast Age >17
Without CC).
314....................... Urethral Procedures, 313 (Urethral
Age 0-17. Procedures, Age >17
Without CC).
330....................... Urethral Stricture 329 (Urethral
Age 0-17. Stricture Age >17
Without CC).
340....................... Testes Procedures, 339 (Testes
Non-Malignancy Age 0- Procedures, Non-
17. Malignancy Age >17).
343....................... Circumcism Age 0-17.. 342 (Circumcism Age
>17).
351....................... Sterilization, Male.. 352 (Other Male
Reproductive System
Diagnoses).
362....................... Endoscopic Tubal 361 (Laparoscopy &
Interruption. Incisional Tubal
Interruption).
385....................... Neonates, Died Or FY 2006 FR weight
Transferred To (adjusted by percent
Another Acute Care change in average
Facility. weight of the cases
in other DRGs).
386....................... Extreme Immaturity Or FY 2006 FR weight
Respiratory Distress (adjusted by percent
Syndrome, Neonate. change in average
weight of the cases
in other DRGs).
387....................... Prematurity With FY 2006 FR weight
Major Problems. (adjusted by percent
change in average
weight of the cases
in other DRGs).
388....................... Prematurity Without FY 2006 FR weight
Major Problems. (adjusted by percent
change in average
weight of the cases
in other DRGs).
389....................... Full Term Neonate FY 2006 FR weight
With Major Problems. (adjusted by percent
change in average
weight of the cases
in other DRGs).
390....................... Neonate With Other FY 2006 FR weight
Significant Problems. (adjusted by percent
change in average
weight of the cases
in other DRGs).
391....................... Normal Newborn....... FY 2006 FR weight
(adjusted by percent
change in average
weight of the cases
in other DRGs).
393....................... Splenectomy Age 0-17. 392 (Splenectomy Age
>17).
405....................... Acute Leukemia 473 (Acute Leukemia
Without Major O.R. Without Major O.R.
Procedure Age 0-17. Procedure Age >17).
411....................... History Of Malignancy 465 (Aftercare With
Without Endoscopy. History of
Malignancy As
Secondary
Diagnosis).
412....................... History Of Malignancy 465 (Aftercare With
With Endoscopy. History of
Malignancy As
Secondary
Diagnosis).
446....................... Traumatic Injury Age 445 (Traumatic Injury
0-17. Age >17 Without CC).
448....................... Allergic Reactions 447 (Allergic
Age 0-17. Reactions Age >17).
451....................... Poisoning and Toxic 450 (Poisoning and
Effects Of Drugs Age Toxic Effects of
0-17. Drugs Age >17
Without CC).
------------------------------------------------------------------------

Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payments to hospitals are affected by factors other than average case
weight. Therefore, as we have done in past years, and as discussed in
section II.A.4.a. of the Addendum to this proposed rule, we are making
a budget neutrality adjustment to ensure that the requirement of
section 1886(d)(4)(C)(iii) of the Act is met.

F. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs
for FY 2007

(If you choose to comment on issues in this section, please include
the caption ``LTC-DRGs'' at the beginning of your comment.)
1. Background
In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed
the LTCH PPS annual payment rate update cycle to be effective July 1
through June 30 instead of October 1 through September 30. In addition,
because the patient classification system utilized under the LTCH PPS
uses the same DRGs as those currently used under the IPPS for acute
care hospitals, in that same final rule, we explained that the annual
update of the long-term care diagnosis-related group (LTC-DRG)
classifications and relative weights will continue to remain linked to
the annual reclassification and recalibration of the DRGs used under
the IPPS. In that same final rule, we specified that we will continue
to update the LTC-DRG classifications and relative weights to be
effective for discharges occurring on or after October 1 through
September 30 each year. Furthermore, we stated that we will publish the
annual update of the LTC-DRGs in the proposed and final rules for the
IPPS.
In the past, the annual update to the IPPS DRGs has been based on
the annual revisions to the ICD-9-CM codes and was effective each
October 1. As discussed in the FY 2006 IPPS final rule (70 FR 47323
through 47341) and in the Rate Year (RY) 2007 LTCH PPS proposed rule
(71 FR 4652 through 4658), with the implementation of section 503(a) of
Pub. L. 108-173, there is the possibility that one feature of the
GROUPER software program may be updated twice during a Federal fiscal
year (October 1 and April 1) as required by the statute for the IPPS.
Specifically, ICD-9-CM diagnosis and procedure codes for new medical
technology may be created and added to existing DRGs in the middle of
the Federal fiscal year on April 1. However, this policy change will
have no effect on the LTC-DRG relative weights, which will continue to
be updated only once a year (October 1), nor will there be any impact
on Medicare payments under the LTCH PPS. The use of the ICD-9-CM code
set is also compliant with the current requirements of the Transactions
and Code Sets Standards regulations at 45 CFR Parts 160 and 162,
promulgated in accordance with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), Pub. L. 104-191.
As we explained in the RY 2007 LTCH PPS proposed rule (71 FR 4654

[[Page 24050]]

through 4658), in the health care industry, historically annual changes
to the ICD-9-CM codes were 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, were also
revised annually and effective for discharges occurring on or after
October 1 each year. As noted above, the patient classification system
used under the LTCH PPS (LTC-DRGs) is based on the patient
classification system used under the IPPS (CMS DRGs), which
historically had been updated annually and effective for discharges
occurring on or after October 1 through September 30 each year. As also
mentioned above, the ICD-9-CM coding update process was revised as a
result of implementing section 503(a) of Pub. L. 108-173, which
includes a requirement for updating ICD-9-CM codes as often as twice a
year instead of the current process of annual updates on October 1 of
each year (as discussed in greater detail in section II.D.10. of the
preamble of this proposed rule). This requirement is included as part
of the amendments to the Act relating to recognition of new medical
technology under the IPPS. Section 503(a) of Pub. L. 108-173 amended
section 1886(d)(5)(K) of the Act by adding a new clause (vii) which
states that ``the Secretary shall provide for the addition of new
diagnosis and procedure codes in [sic] April 1 of each year, but the
addition of such codes shall not require the Secretary to adjust the
payment (or diagnosis-related group classification) * * * until the
fiscal year that begins after such date.'' This requirement improves
the recognition of new technologies under the IPPS by accounting for
those ICD-9-CM codes in the MedPAR claims data at an earlier date.
Despite the fact that aspects of the GROUPER software may be
updated to recognize any new technology ICD-9-CM codes, as discussed
most recently in the RY 2007 LTCH PPS proposed rule (71 FR 4654 through
4655), there will be no impact on either LTC-DRG assignments or
payments under the LTCH PPS at that time. That is, changes to the LTC-
DRGs (such as the creation or deletion of LTC-DRGs) and the relative
weights will continue to be updated in the manner and timing (October
1) as they are now. As noted above and as described in the RY 2007 LTCH
PPS proposed rule (71 FR 4655), updates to the GROUPER for both the
IPPS and the LTCH PPS (with respect to relative weights and the
creation or deletion of DRGs) are made in the annual IPPS proposed and
final rules and are effective each October 1. We also explained that
because we do not publish a midyear IPPS rule, any April 1 code updates
will not be published in a midyear IPPS rule. Rather, we will assign
any new diagnosis or procedure codes to the same DRG in which its
predecessor code was assigned, so that there will be no impact on the
DRG assignments (as also discussed in section II.D.10. of this
preamble). Any coding updates will be available through the Web sites
provided in section II.D.10. of this preamble and through the Coding
Clinic for ICD-9-CM. Publishers and software vendors currently obtain
code changes through these sources in order to update their code books
and software system. If new codes are implemented on April 1, revised
code books and software systems, including the GROUPER software
program, will be necessary because we must use current ICD-9-CM codes.
Therefore, for purposes of the LTCH PPS, because each ICD-9-CM code
must be included in the GROUPER algorithm to classify each case into a
LTC-DRG, the GROUPER software program used under the LTCH PPS would
need to be revised to accommodate any new codes.
In implementing section 503(a) of Pub. L. 108-173, there will only
be an April 1 update if new technology codes are requested and
approved. We note that any new codes created for April 1 implementation
will be limited to those diagnosis and procedure code revisions
primarily needed to describe new technologies and medical services.
However, we reiterate that the process of discussing updates to the
ICD-9-CM has been an open process through the ICD-9-CM Coordination and
Maintenance Committee since 1995. Requestors will be given the
opportunity to present the merits for a new code and make a clear and
convincing case for the need to update ICD-9-CM codes for purposes of
the IPPS new technology add-on payment process through an April 1
update (as also discussed in section II.D.10. of this preamble).
However, as we discussed in the RY 2007 LTCH PPS proposed rule (71
FR 4655), at the September 29-30, 2005 ICD-9-CM Coordination and
Maintenance Committee meeting, there were no requests for an April 1,
2006 implementation of ICD-9-CM codes, and, therefore, the next update
to the ICD-9-CM coding system would not occur until October 1, 2006 (FY
2007). Presently, as there were no coding changes suggested for an
April 1, 2006 update, the ICD-9-CM coding set implemented on October 1,
2005, will continue through September 30, 2006 (FY 2006). The proposed
update to the ICD-9-CM coding system for FY 2007 is discussed above in
section II.D.10. of this preamble. Accordingly, in this proposed rule,
as discussed in greater detail below, we are proposing revisions to the
LTC-DRG classifications and relative weights, and to the extent that
they are finalized, we will publish them in the corresponding IPPS
final rule, to be effective October 1, 2006 through September 30, 2007
(FY 2007). Furthermore, we would notify LTCHs of any revisions to the
GROUPER software used under the IPPS and the LTCH PPS that would be
implemented April 1, 2007. The proposed LTC-DRGs and relative weights
for FY 2007 in this proposed rule are based on the proposed IPPS DRGs
(GROUPER Version 24.0) discussed in section II.B. of the preamble to
this proposed rule.
2. Proposed Changes in the LTC-DRG Classifications
a. Background
Section 123 of Pub. L. 106-113 specifically requires that the
agency implement a 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 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 under the IPPS for acute care hospitals. Thus,
in this proposed rule, we are proposing to use the IPPS GROUPER Version
24.0 for FY 2007 to process LTCH PPS claims for LTCH discharges
occurring from October 1, 2006 through September 30, 2007. The proposed
changes to the CMS-DRG classification system used under the IPPS for FY
2007

[[Page 24051]]

(GROUPER Version 24.0) are discussed in section II.D. of the preamble
to this proposed rule.
We note that, as we discuss in section II.C.6. of the preamble to
this proposed rule, MedPAC, in its 2005 Report to Congress on
Physician-Owned Specialty Hospitals, recommended that CMS, among other
things, refine the current DRGs under the IPPS to more fully capture
differences in severity of illness among patients. As we also discuss
in that same section, in evaluating the MedPAC recommendation for the
IPPS, we are evaluating the APR DRG GROUPER used by MedPAC in its
analysis. Based on this analysis, we concur with MedPAC that the
modified version of the APR DRGs would account more completely for
differences in severity of illness and associated costs among
hospitals. Therefore, as discussed in greater detail in section II.C.6.
of the preamble of this proposed rule, we are proposing to adopt the
consolidated severity adjusted DRGs for implementation in the IPPS in
FY 2008 (if not earlier). As discussed above in this section, the LTCH
PPS uses the same patient classification system (DRGs). In response to
MedPAC's recommendation that severity adjusted DRGs, such as the APR
DRGs or a modified version of the APR DRGs, be adopted under the IPPS
(as discussed in greater detail in section II.C. of this preamble), we
are proposing to adopt consolidated severity-adjusted DRGs under the
IPPS in FY 2008 (if not earlier). At that time, we would need to
consider whether to propose revisions to the patient classification
system under the LTCH PPS. Any proposed changes to the patient
classification system would be done through notice and comment
rulemaking.
Under the LTCH PPS, we determine relative weights for each of the
DRGs to account for the difference in resource use by patients
exhibiting the case complexity and multiple medical problems
characteristic of LTCH patients. In a departure from the IPPS, as we
discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55985),
which implemented the LTCH PPS, and the FY 2006 IPPS final rule (70 FR
47324), we use low-volume quintiles in determining the LTC-DRG relative
weights for LTC-DRGs with less than 25 LTCH cases, because LTCHs do not
typically treat the full range of diagnoses as do acute care hospitals.
Specifically, we group those low-volume LTC-DRGs (that is, LTC-DRGs
with fewer than 25 cases) into 5 quintiles based on average charge per
discharge. (A listing of the composition of low-volume quintiles for
the FY 2006 LTC-DRGs (based on FY 2004 MedPAR data) appears in section
II.G.3. of the FY 2006 IPPS final rule (70 FR 47325 through 47332).) We
also adjust for cases in which the stay at the LTCH is less than or
equal to five-sixths of the geometric average length of stay; that is,
short-stay outlier cases (Sec. 412.529), as discussed below in section
II.F.4. of this preamble.
b. Patient Classifications Into DRGs
Generally, under the LTCH PPS, Medicare payment is made at a
predetermined specific rate for each discharge; that is, payment varies
by the LTC-DRG to which a beneficiary's stay is assigned. Just as cases
are classified into DRGs for acute care hospitals under the IPPS (see
section II.B. of this preamble), cases are classified into LTC-DRGs for
payment under the LTCH PPS based on the principal diagnosis, up to
eight additional diagnoses, and up to six procedures performed during
the stay, as well as age, sex, and discharge status of the patient. The
diagnosis and procedure information is reported by the hospital using
the ICD-9-CM codes.
As discussed in section II.B. of this preamble, the CMS-DRGs are
organized into 25 major diagnostic categories (MDCs), most of which are
based on a particular organ system of the body; the remainder involve
multiple organ systems (such as MDC 22, Burns). Accordingly, the
principal diagnosis determines MDC assignment. Within most MDCs, cases
are then divided into surgical DRGs and medical DRGs. Some surgical and
medical DRGs are further differentiated based on the presence or
absence of CCs. (See section II.B. of this preamble for further
discussion of surgical DRGs and medical DRGs.)
Because the assignment of a case to a particular LTC-DRG will
determine the amount that is paid for the case, it is important that
the coding is accurate. As used under the IPPS, classifications and
terminology used under the LTCH PPS are consistent with the ICD-9-CM
and the Uniform Hospital Discharge Data Set (UHDDS), as recommended to
the Secretary by the National Committee on Vital and Health Statistics
(``Uniform Hospital Discharge Data: Minimum Data Set, National Center
for Health Statistics, April 1980'') and as revised in 1984 by the
Health Information Policy Council (HIPC) of the U.S. Department of
Health and Human Services. We point out again that the ICD-9-CM coding
terminology and the definitions of principal and other diagnoses of the
UHDDS are consistent with the requirements of the Transactions and Code
Sets Standards under HIPAA (45 CFR Parts 160 and 162).
The emphasis on the need for proper coding cannot be overstated.
Inappropriate coding of cases can adversely affect the uniformity of
cases in each LTC-DRG and produce inappropriate weighting factors at
recalibration and result in inappropriate payments under the LTCH PPS.
LTCHs are to follow the same coding guidelines used by acute care
hospitals to ensure accuracy and consistency in coding practices. There
will be only one LTC-DRG assigned per long-term care hospitalization;
it will be assigned at the time of discharge of the patient. Therefore,
it is mandatory that the coders continue to report the same principal
diagnosis on all claims and include all diagnosis codes for conditions
that coexist at the time of admission, for conditions that are
subsequently developed, or for conditions that affect the treatment
received. Similarly, all procedures performed in a LTCH, or paid for
under arrangements by a LTCH, during that stay are to be reported on
each claim.
Upon the discharge of the patient from a LTCH, the LTCH must assign
appropriate diagnosis and procedure codes from the ICD-9-CM. Completed
claim forms are to be submitted electronically 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 an
LTC-DRG can be made.
After screening through the MCE, each LTCH claim will be classified
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH
GROUPER is specialized computer software and is the same GROUPER used
under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal
intermediary determines the prospective payment by using the Medicare
LTCH PPS PRICER program, which accounts for LTCH hospital-specific
adjustments and payment rates. As provided for under the IPPS, we
provide an opportunity for the LTCH to review the LTC-DRG assignments
made by the fiscal intermediary and to submit additional information
within a specified timeframe (Sec. 412.513(c)).
The LTCH GROUPER is used both to classify past cases in order to
measure relative hospital resource consumption to establish the LTC-DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient

[[Page 24052]]

discharges are maintained in the MedPAR file. The data in this file are
used to evaluate possible DRG classification changes and to recalibrate
the DRG weights during our annual update (as discussed in section II.E.
of this preamble). The LTC-DRG relative weights are based on data for
the population of LTCH discharges, reflecting the fact that LTCH
patients represent a different patient-mix than patients in short-term
acute care hospitals.
3. Development of the Proposed FY 2007 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative Weights
As we stated in the August 30, 2002 LTCH PPS final rule (67 FR
55981), one of the primary goals for the implementation of the LTCH PPS
is to pay each LTCH an appropriate amount for the efficient delivery of
care to Medicare patients. The system must be able to account
adequately for each LTCH's case-mix in order to ensure both fair
distribution of Medicare payments and access to adequate care for those
Medicare patients whose care is more costly. To accomplish these goals,
we adjust the LTCH PPS standard Federal prospective payment system rate
by the applicable LTC-DRG relative weight in determining payment to
LTCHs for each case. Under the LTCH PPS, relative weights for each LTC-
DRG are a primary element used to account for the variations in cost
per discharge and resource utilization among the payment groups (Sec.
412.515). To ensure that Medicare patients classified to each LTC-DRG
have access to an appropriate level of services and to encourage
efficiency, we calculate a relative weight for each LTC-DRG that
represents the resources needed by an average inpatient LTCH case in
that LTC-DRG. For example, cases in an LTC-DRG with a relative weight
of 2 will, on average, cost twice as much as cases in an LTC-DRG with a
weight of 1.
b. Data
To calculate the proposed LTC-DRG relative weights for FY 2007 in
this proposed rule, we obtained total Medicare allowable charges from
FY 2005 Medicare LTCH bill data from the December 2005 update of the
MedPAR file, which are the best available data at this time, and we
used the proposed Version 24.0 of the CMS GROUPER used under the IPPS
(as discussed in section II.B. of this preamble) to classify cases. To
calculate the final LTC-DRG relative weights for FY 2007, we are
proposing that, if more recent data are available (that is, data from
the March 2006 update of the MedPAR file, for example), we would use
that data and use the finalized Version 24.0 of the CMS GROUPER used
under the IPPS.
As we discussed in the FY 2006 IPPS final rule (70 FR 47325), we
have excluded the data from LTCHs that are all-inclusive rate providers
and LTCHs that are reimbursed in accordance with demonstration projects
authorized under section 402(a) of 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). Therefore, in
the development of the proposed FY 2007 LTC-DRG relative weights, we
have excluded the data of the 19 all-inclusive rate providers and the 3
LTCHs that are paid in accordance with demonstration projects that had
claims in the FY 2005 MedPAR file.
c. Hospital-Specific Relative Value Methodology
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.
This nonarbitrary distribution of cases with relatively high (or low)
charges in specific LTC-DRGs has the potential to inappropriately
distort the measure of average charges. To account for the fact that
cases may not be randomly distributed across LTCHs, we use a hospital-
specific relative value method to calculate the LTC-DRG relative
weights instead of the methodology used to determine the DRG relative
weights under the IPPS described in section II.E. of this preamble. We
believe this method will remove this hospital-specific source of bias
in measuring LTCH average charges. Specifically, we reduce the impact
of the variation in charges across providers on any particular LTC-DRG
relative weight by converting each LTCH's charge for a case to a
relative value based on that LTCH's average charge.
Under the hospital-specific relative value method, we standardize
charges for each LTCH by converting its charges for each case to
hospital-specific relative charge values and then adjusting those
values for the LTCH's case-mix. The adjustment for case-mix is needed
to rescale the hospital-specific relative charge values (which, by
definition, averages 1.0 for each LTCH). The average relative weight
for a LTCH is its case-mix, so it is reasonable to scale each LTCH's
average relative charge value by its case-mix. In this way, each LTCH's
relative charge value is adjusted by its case-mix to an average that
reflects the complexity of the cases it treats relative to the
complexity of the cases treated by all other LTCHs (the average case-
mix of all LTCHs).
In accordance with the methodology established under Sec. 412.523,
as implemented in the August 30, 2002 LTCH PPS final rule (67 FR 55989
through 55991), we standardize charges for each case by first dividing
the adjusted charge for the case (adjusted for short-stay outliers
under Sec. 412.529 as described in section II.F.4. (step 3) of this
preamble) by the average adjusted charge for all cases at the LTCH in
which the case was treated. Short-stay outliers under Sec. 412.529 are
cases with a length of stay that is less than or equal to five-sixths
the average length of stay of the LTC-DRG. The average adjusted charge
reflects the average intensity of the health care services delivered by
a particular LTCH and the average cost level of that LTCH. The
resulting ratio is multiplied by that LTCH's case-mix index to
determine the standardized charge for the case.
Multiplying by the LTCH's case-mix index accounts for the fact that
the same relative charges are given greater weight at a LTCH with
higher average costs than they would at a LTCH with low average costs,
which is needed to adjust each LTCH's relative charge value to reflect
its case-mix relative to the average case-mix for all LTCHs. Because we
standardize charges in this manner, we count charges for a Medicare
patient at a LTCH with high average charges as less resource intensive
than they would be at a LTCH with low average charges. For example, a
$10,000 charge for a case at a LTCH with an average adjusted charge of
$17,500 reflects a higher level of relative resource use than a $10,000
charge for a case at a LTCH with the same case-mix, but an average
adjusted charge of $35,000. We believe that the adjusted charge of an
individual case more accurately reflects actual resource use for an
individual LTCH because the variation in charges due to systematic
differences in the markup of charges among LTCHs is taken into account.
d. Proposed Low-Volume LTC-DRGs
In order to account for LTC-DRGs with low-volume (that is, with
fewer than 25 LTCH cases), in accordance with the methodology
established in the August 30, 2002 LTCH PPS final rule (67 FR 55984),
we group those ``low-volume LTC-DRGs'' (that is, DRGs that contained
between 1 and 24 cases annually) into one of five categories
(quintiles) based on average charges, for the purposes of determining
relative weights. For this FY 2007 IPPS

[[Page 24053]]

proposed rule, we are proposing to continue to employ this treatment of
low-volume LTC-DRGs in determining the FY 2007 LTC-DRG relative weights
using the best available LTCH data. In this proposed rule, using LTCH
cases from the December 2005 update of the FY 2005 MedPAR file, we
identified 173 LTC-DRGs that contained between 1 and 24 cases. This
list of LTC-DRGs was then divided into one of the 5 low-volume
quintiles, each containing a minimum of 34 LTC-DRGs (173/5 = 34 with 3
LTC-DRGs as the remainder). In accordance with our established
methodology, we are proposing to make an assignment to a specific low-
volume quintile by sorting the low-volume LTC-DRGs in ascending order
by average charge. For this proposed rule, this results in an
assignment to a specific low-volume quintile of the sorted 173 low-
volume LTC-DRGs by ascending order by average charge. Because the
number of LTC-DRGs with less than 25 LTCH cases is not evenly divisible
by five, the average charge of the low-volume LTC-DRG was used to
determine which low-volume quintile received the additional LTC-DRG.
After sorting the 173 low-volume LTC-DRGs in ascending order, we are
proposing to group the first fifth of low-volume LTC-DRGs with the
lowest average charge into Quintile 1. The highest average charge cases
would be grouped into Quintile 5. Because the average charge of the
35th LTC-DRG in the sorted list is closer to the 34th proposed LTC-
DRG's average charge (assigned to Quintile 1) than to the average
charge of the proposed 36th LTC-DRG in the sorted list (to be assigned
to Quintile 2), we are proposing to place it into Quintile 1. This
process was repeated through the remaining proposed low-volume LTC-DRGs
so that 3 proposed low-volume quintile contain 35 proposed LTC-DRGs and
2 proposed low-volume quintiles contain 34 proposed LTC-DRGs.
In order to determine the proposed relative weights for the
proposed LTC-DRGs with low volume for FY 2007, in accordance with the
methodology established in the August 30, 2002 LTCH PPS final rule (67
FR 55984), we are proposing to use the five low-volume quintiles
described above. The composition of each of the proposed five low-
volume quintiles shown in the chart below was used in determining the
proposed LTC-DRG relative weights for FY 2007. We would determine a
proposed relative weight and (geometric) average length of stay for
each of the five proposed low-volume quintiles using the formula that
we apply to the regular proposed LTC-DRGs (25 or more cases), as
described below in section II.F.4. of this preamble. We are proposing
to assign the same relative weight and average length of stay to each
of the proposed LTC-DRGs that make up that proposed low-volume
quintile. We note that, as this system is dynamic, it is possible that
the number and specific type of LTC-DRGs with a low volume of LTCH
cases will vary in the future. We use the best available claims data in
the MedPAR file to identify low-volume LTC-DRGs and to calculate the
relative weights based on our methodology.
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We note that we will continue to monitor the volume (that is, the
number of LTCH cases) in these low-volume quintiles to ensure that our
proposed quintile assignment results in appropriate payment for such
cases and does not result in an unintended financial incentive for
LTCHs to inappropriately admit these types of cases.
4. Steps for Determining the Proposed FY 2007 LTC-DRG Relative Weights
As we noted previously, the proposed FY 2007 LTC-DRG relative
weights are determined in accordance with the methodology established
in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991).
In summary, LTCH cases must be grouped in the appropriate LTD-DRG,
while taking into account the proposed low-volume LTD-DRGs as described
above, before the proposed FY 2007 LTD-DRG relative weights can be
determined. After grouping the cases in the appropriate proposed LTD-
DRG, we are proposing to calculate the relative weights for FY 2007 in
this proposed rule by first removing statistical outliers and cases
with a length of stay of 7 days or less, as discussed in greater detail
below. Next, we are proposing to adjust the number of cases in each
proposed LTD-DRG for the effect of short-stay outlier cases under Sec.
412.529, as also discussed in greater detail below. The short-stay
adjusted discharges and corresponding charges are used to calculate
``relative adjusted weights'' in each proposed LTD-DRG using the
hospital-specific relative value method described above.
Below we discuss in detail the steps for calculating the proposed
FY 2007 LTD-DRG relative weights. We note that, as we stated above in
section II.F.3.b. of this preamble, we have excluded the data of all-
inclusive rate LTCHs and LTCHs that are paid in accordance with
demonstration projects that had claims in the FY 2005 MedPAR file.
Step 1--Remove statistical outliers.

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The first step in the calculation of the proposed FY 2007 LTD-DRG
relative weights is to remove statistical outlier cases. We define
statistical outliers as cases that are outside of 3.0 standard
deviations from the mean of the log distribution of both charges per
case and the charges per day for each proposed LTD-DRG. These
statistical outliers are removed prior to calculating the proposed
relative weights. As noted above, we believe that they may represent
aberrations in the data that distort the measure of average resource
use. Including those LTCH cases in the calculation of the proposed
relative weights could result in an inaccurate proposed relative weight
that does not truly reflect relative resource use among the proposed
LTD-DRGs.
Step 2--Remove cases with a length of stay of 7 days or less.
The proposed FY 2007 LTD-DRG relative weights reflect the average
of resources used on representative cases of a specific type.
Generally, cases with a length of stay 7 days or less do not belong in
a LTCH because these stays do not fully receive or benefit from
treatment that is typical in a LTCH stay, and full resources are often
not used in the earlier stages of admission to a LTCH. As explained
above, if we were to include stays of 7 days or less in the computation
of the proposed FY 2007 LTD-DRG relative weights, the value of many
proposed relative weights would decrease and, therefore, payments would
decrease to a level that may no longer be appropriate.
We do not believe that it would be appropriate to compromise the
integrity of the payment determination for those LTCH cases that
actually benefit from and receive a full course of treatment at a LTCH,
in order to include data from these very short-stays.
Thus, as explained above, in determining the proposed FY 2007 LTD-
DRG relative weights, we remove LTCH cases with a length of stay of 7
days or less.
Step 3--Adjust charges for the effects of short-stay outliers.
After removing cases with a length of stay of 7 days or less, we
are left with cases that have a length of stay of greater than or equal
to 8 days. The next step in the calculation of the proposed FY 2007
LTD-DRG relative weights is to adjust each LTCH's charges per discharge
for those remaining cases for the effects of short-stay outliers as
defined in Sec. 412.529(a). (However, we note that even if a case was
removed in Step 2 (that is, cases with a length of stay of 7 days or
less), it was paid as a short-stay outlier if its length of stay was
less than or equal to five-sixths of the average length of stay of the
LTD-DRG, in accordance with Sec. 412.529.)
We make this adjustment by counting a short-stay outlier as a
fraction of a discharge based on the ratio of the length of stay of the
case to the average length of stay for the proposed LTD-DRG for
nonshort-stay outlier cases. This has the effect of proportionately
reducing the impact of the lower charges for the short-stay outlier
cases in calculating the average charge for the proposed LTD-DRG. This
process produces the same result as if the actual charges per discharge
of a short-stay outlier case were adjusted to what they would have been
had the patient's length of stay been equal to the average length of
stay of the proposed LTD-DRG.
As we explained in the FY 2006 IPPS final rule (70 FR 47336),
counting short-stay outlier cases as full discharges with no adjustment
in determining the proposed LTC-DRG relative weights would lower the
proposed LTC-DRG relative weight for affected proposed LTC-DRGs because
the relatively lower charges of the short-stay outlier cases would
bring down the average charge for all cases within a proposed LTC-DRG.
This would result in an ``underpayment'' for nonshort-stay outlier
cases and an ``overpayment'' for short-stay outlier cases. Therefore,
in this proposed rule, we adjust for short-stay outlier cases under
Sec. 412.529 in this manner because it results in more appropriate
payments for all LTCH cases.
Step 4--Calculate the proposed FY 2007 LTC-DRG relative weights on
an iterative basis.
The process of calculating the proposed LTC-DRG relative weights
using the hospital-specific relative value methodology is iterative.
First, for each LTCH case, we calculate a hospital-specific relative
charge value by dividing the short-stay outlier adjusted charge per
discharge (see step 3) of the LTCH case (after removing the statistical
outliers (see step 1)) and LTCH cases with a length of stay of 7 days
or less (see step 2) by the average charge per discharge for the LTCH
in which the case occurred. The resulting ratio is then multiplied by
the LTCH's case-mix index to produce an adjusted hospital-specific
relative charge value for the case. An initial case-mix index value of
1.0 is used for each LTCH.
For each proposed LTC-DRG, the proposed FY 2007 LTC-DRG relative
weight is calculated by dividing the average of the adjusted hospital-
specific relative charge values (from above) for the proposed LTC-DRG
by the overall average hospital-specific relative charge value across
all cases for all LTCHs. Using these recalculated proposed LTC-DRG
relative weights, each LTCH's average relative weight for all of its
cases (case-mix) is calculated by dividing the sum of all the LTCH's
proposed LTC-DRG relative weights by its total number of cases. The
LTCHs' hospital-specific relative charge values above are multiplied by
these hospital-specific case-mix indexes. These hospital-specific case-
mix adjusted relative charge values are then used to calculate a new
set of proposed LTC-DRG relative weights across all LTCHs. In this
proposed rule, this iterative process is continued until there is
convergence between the weights produced at adjacent steps, for
example, when the maximum difference is less than 0.0001.
Step 5--Adjust the proposed FY 2007 LTC-DRG relative weights to
account for nonmonotonically increasing relative weights.
As explained in section II.B. of this preamble, the proposed FY
2007 CMS DRGs, on which the proposed FY 2007 LTC-DRGs are based,
contain ``pairs'' that are differentiated based on the presence or
absence of CCs. The proposed LTC-DRGs with CCs are defined by certain
secondary diagnoses not related to or inherently a part of the disease
process identified by the principal diagnosis, but the presence of
additional diagnoses does not automatically generate a CC. As we
discussed in the FY 2006 IPPS final rule (70 FR 47336), the value of
monotonically increasing relative weights rises as the resource use
increases (for example, from uncomplicated to more complicated). The
presence of CCs in a proposed LTC-DRG means that cases classified into
a ``without CC'' proposed LTC-DRG are expected to have lower resource
use (and lower costs). In other words, resource use (and costs) are
expected to decrease across ``with CC/without CC'' pairs of proposed
LTC-DRGs.
For a case to be assigned to a proposed LTC-DRG with CCs, more
coded information is called for (that is, at least one relevant
secondary diagnosis), than for a case to be assigned to a proposed LTC-
DRG ``without CCs'' (which is based on only one principal diagnosis and
no relevant secondary diagnoses). Currently, the LTCH claims data
include both accurately coded cases without complications and cases
that have complications (and cost more), but were not coded completely.
Both types of cases are grouped to a proposed LTC-DRG ``without CCs''
when only the principal diagnosis was coded. Since the LTCH PPS was
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for cost reporting periods beginning on or after October 1, 2002 (FY
2003), and LTCHs were previously paid under cost-based reimbursement,
which is not based on patient diagnoses, coding by LTCHs for these
cases may not have been as detailed as possible.
Thus, in developing the FY 2003 LTC-DRG relative weights for the
LTCH PPS based on FY 2001 claims data, as we discussed in the August
30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that
the data suggested that cases classified to the LTC-DRG ``with CCs'' of
a ``with CC''/``without CC'' pair had a lower average charge than the
corresponding LTC-DRG ``without CCs.'' Similarly, as discussed in the
FY 2006 IPPS final rule (70 FR 47336 through 47337), based on FY 2004
claims data, we also found on occasion that the data suggested that
cases classified to the LTC-DRG ``with CCs'' of a ``with CC''/``without
CC'' pair have a lower average charge than the corresponding LTC-DRG
``without CCs'' for the FY 2006 LTC-DRG relative weights.
We believe this anomaly may be due to coding that may not have
fully reflected all comorbidities that were present. Specifically,
LTCHs may have failed to code relevant secondary diagnoses, which
resulted in cases that actually had CCs being classified into a
``without CC'' LTC-DRG. It would not be appropriate to pay a lower
amount for the ``with CC'' LTC-DRG because, in general, cases
classified into a ``with CC'' LTC-DRG are expected to have higher
resource use (and higher cost) as discussed above. Therefore,
previously when we determined the LTC-DRG relative weights in
accordance with the methodology established in the August 30, 2002 LTCH
PPS final rule (67 FR 55990), we grouped both the cases ``with CCs''
and ``without CCs'' together for the purpose of calculating the LTC-DRG
relative weights since the implementation of the LTCH PPS in FY 2003.
As we stated in that same final rule, we will continue to employ this
methodology to account for nonmonotonically increasing relative weights
until we have adequate data to calculate appropriate separate weights
for these anomalous LTC-DRG pairs. We expect that, as was the case when
we first implemented the IPPS, this problem will be self-correcting, as
LTCHs submit more completely coded data in the future.
There are three types of ``with CC'' and ``without CC'' pairs that
could be nonmonotonic; that is, where the ``without CC'' LTC-DRG would
have a higher average charge than the ``with CC'' proposed LTC-DRG. For
this proposed rule, using the LTCH cases in the December 2005 update of
the FY 2005 MedPAR file (the most recent and complete data available at
this time), we identified one of the three types of nonmonotonic LTC-
DRG pairs. As we stated in the August 30, 2002 LTCH PPS final rule (67
FR 55990), we believe this anomaly may be due to coding inaccuracies
and expect that, as was the case when we first implemented the acute
care hospital IPPS, this problem will be self-correcting, as LTCHs
submit more completely coded data in the future.
The first category of nonmonotonically increasing relative weights
for LTC-DRG pairs ``with and without CCs'' contains one pair of LTC-
DRGs in which both the proposed LTC-DRG ``with CCs'' and the proposed
LTC-DRG ``without CCs'' had 25 or more LTCH cases and, therefore, did
not fall into one of the 5 low-volume quintiles. For those nonmonotonic
LTC-DRG pairs, based on our established methodology (67 FR 55983
through 55990), we would combine the LTCH cases and compute a new
relative weight based on the case-weighted average of the combined LTCH
cases of the LTC-DRGs. The case-weighted average charge is determined
by dividing the total charges for all LTCH cases by the total number of
LTCH cases for the combined LTC-DRG. This new relative weight would
then be assigned to both of the LTC-DRGs in the pair. In this proposed
rule, for FY 2007, there were no LTC-DRGs that fell into this category.
The second category of nonmonotonically increasing relative weights
for LTC-DRG pairs ``with and without CCs'' consists of one pair of LTC-
DRGs that has fewer than 25 cases, and each LTC-DRG would be grouped to
different low-volume quintiles in which the ``without CC'' LTC-DRG is
in a higher-weighted low-volume quintile than the ``with CC'' LTC-DRG.
For those pairs, based on our established methodology, we would combine
the LTCH cases and determine the case-weighted average charge for all
LTCH cases. The case-weighted average charge is determined by dividing
the total charges for all LTCH cases by the total number of LTCH cases
for the combined proposed LTC-DRG. Based on the case-weighted average
LTCH charge, we determine within which low-volume quintile the
``combined LTC-DRG'' is grouped. Both LTC-DRGs in the pair are then
grouped into the same low-volume quintile, thus have the same relative
weight. In this proposed rule, for FY 2007, there are no LTC-DRGs that
fell into this category.
The third category of nonmonotonically increasing proposed relative
weights for proposed LTC-DRG pairs ``with and without CCs'' consists of
one pair of proposed LTC-DRGs where one of the proposed LTC-DRGs has
fewer than 25 LTCH cases and is grouped to a low-volume quintile and
the other proposed LTC-DRG has 25 or more LTCH cases and has its own
proposed LTC-DRG relative weight, and the proposed LTC-DRG ``without
CCs'' has the proposed higher relative weight. Based on our established
methodology, we removed the proposed low-volume LTC-DRG from the
proposed low-volume quintile and combined it with the other proposed
LTC-DRG for the computation of a proposed new relative weight for each
of these proposed LTC-DRGs. This proposed new relative weight is
assigned to both proposed LTC-DRGs, so they each have the same proposed
relative weight. In this proposed rule, for FY 2007, 4 ``pairs'' of
proposed LTC-DRGs fall into this category: LTC-DRGs 94 and 95; LTC-DRGs
96 and 97; LTC-DRGs 141 and 142; and LTC-DRGs 292 and 293.
Step 6--Determine a proposed FY 2007 LTC-DRG relative weight for
proposed LTC-DRGs with no LTCH cases.
As we stated above, we determine the proposed relative weight for
each proposed LTC-DRG using charges reported in the December 2005
update of the FY 2005 MedPAR file. Of the 526 proposed LTC-DRGs for FY
2007, we identified 191 proposed LTC-DRGs for which there were no LTCH
cases in the database. That is, based on data from the FY 2005 MedPAR
file used in this proposed rule, no patients who would have been
classified to those proposed LTC-DRGs were treated in LTCHs during FY
2005 and, therefore, no charge data were reported for those proposed
LTC-DRGs. Thus, in the process of determining the proposed LTC-DRG
relative weights, we are unable to determine weights for these 191
proposed LTC-DRGs using the methodology described in Steps 1 through 5
above. However, because patients with a number of the diagnoses under
these proposed LTC-DRGs may be treated at LTCHs beginning in FY 2007,
we are proposing to assign proposed relative weights to each of the 191
proposed ``no volume'' LTC-DRGs based on clinical similarity and
relative costliness to one of the remaining 335 (526-191 = 335)
proposed LTC-DRGs for which we are able to determine proposed relative
weights, based on FY 2005 LTCH claims data.
As there are currently no LTCH cases in these proposed ``no
volume'' LTC-

[[Page 24061]]

DRGs, we determined proposed relative weights for the 191 proposed LTC-
DRGs with no LTCH cases in the FY 2005 MedPAR file used in this
proposed rule by grouping them to the appropriate proposed low-volume
quintile. This methodology is consistent with our methodology used in
determining proposed relative weights to account for the proposed low-
volume LTC-DRGs described above.
Our methodology for determining the proposed relative weights for
the proposed ``no volume'' LTC-DRGs is as follows: We crosswalk the
proposed no volume LTC-DRGs by matching them to other similar proposed
LTC-DRGs for which there were LTCH cases in the FY 2005 MedPAR file
based on clinical similarity and intensity of use of resources as
determined by care provided during the period of time surrounding
surgery, surgical approach (if applicable), length of time of surgical
procedure, post-operative care, and length of stay. We assign the
proposed relative weight for the applicable proposed low-volume
quintile to the proposed no volume LTC-DRG if the proposed LTC-DRG to
which it is crosswalked is grouped to one of the proposed low-volume
quintiles. If the proposed LTC-DRG to which the proposed no volume LTC-
DRG is crosswalked is not one of the proposed LTC-DRGs to be grouped to
one of the proposed low-volume quintiles, we compare the proposed
relative weight of the proposed LTC-DRG to which the proposed no volume
LTC-DRG is crosswalked to the proposed relative weights of each of the
proposed five quintiles and we assign the proposed no volume LTC-DRG
the relative weight of the proposed low-volume quintile with the
closest weight. For this proposed rule, a list of the proposed no
volume FY 2007 LTC-DRGs and the proposed FY 2007 LTC-DRG to which it is
crosswalked in order to determine the appropriate proposed low-volume
quintile for the assignment of a proposed relative weight for FY 2007
is shown in the chart below.
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To illustrate this methodology for determining the proposed
relative weights for the proposed 191 LTC-DRGs with no LTCH cases, we
are providing the following examples, which refer to the proposed no
volume LTC-DRGs crosswalk information for FY 2007 provided in the chart
above.
Example 1: There were no cases in the FY 2005 MedPAR file used for
this proposed rule for proposed LTC-DRG 3 (Craniotomy Age 0-17). Since
the procedure is similar in resource use and the length and complexity
of the procedures and the length of stay are similar, we determined
that proposed LTC-DRG 1 (Craniotomy Age >17 with CC), which is assigned
to proposed low-volume Quintile 1 for the purpose of determining the
proposed FY 2007 relative weights, would display similar clinical and
resource use. Therefore, we assign the same proposed relative weight of
proposed LTC-DRG 1 of 1.6479 (Quintile 5) for FY 2007 (Table 11 in the
Addendum to this proposed rule) to LTC-DRG 3.
Example 2: There were no LTCH cases in the FY 2005 MedPAR file used
in this proposed rule for LTC-DRG 91 (Simple Pneumonia and Pleurisy Age
0-17). Since the severity of illness in patients with bronchitis and
asthma is similar in patients regardless of age, we determined that
proposed LTC-DRG 90 (Simple Pneumonia and Pleurisy Age >17 Without CC)
would display similar clinical and resource use characteristics and
have a similar length of stay to proposed LTC-DRG 91. There were over
25 cases in proposed LTC-DRG 90. Therefore, it would not be assigned to
a proposed low-volume quintile for the purpose of determining the
proposed LTC-DRG relative weights. However, under our established
methodology, proposed LTC-DRG 91, with no LTCH cases, would need to be
grouped to a proposed low-volume quintile. We determined that the
proposed low-volume quintile with the closest weight to proposed LTC-
DRG 90 (0.4981) (refer to Table 11 in the Addendum to this proposed
rule) would be proposed low-volume Quintile 2 (0.5655) (refer to Table
11 in the Addendum to this proposed rule). Therefore, we assign
proposed LTC-DRG 91 a proposed relative weight of 0.5655 for FY 2007.
We note that we will continue to monitor the volume (that is, the
number of LTCH cases) that have few or no LTCH cases to ensure that our
proposed no volume LTC-DRG crosswalking and relative weight assignment
results in appropriate payments for such cases and does not result in
an unintended financial incentive for LTCHs to inappropriately admit
these types of cases.
Furthermore, we are proposing to establish proposed 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) for FY 2007 because Medicare will only
cover these procedures if they are performed at a hospital that has
been certified for the specific procedures by Medicare and presently no
LTCH has been so certified. Based on our research, we found that most
LTCHs only perform minor surgeries, such as minor small and large bowel
procedures, to the extent any surgeries are performed at all. Given the
extensive criteria that must be met to become certified as a transplant
center for Medicare, we believe it is unlikely that any LTCHs would
become certified as a transplant center. In fact, in the nearly 20
years since the implementation of the IPPS, there has never been a LTCH
that even expressed an interest in becoming a transplant center.
However, if in the future a LTCH applies for certification as a
Medicare-approved transplant center, we believe that the application
and approval procedure would allow sufficient time for us to determine
appropriate weights for the LTC-DRGs affected. At the present time, we
would only include these six transplant LTC-DRGs in the GROUPER program
for administrative purposes. Because we use the same GROUPER program
for LTCHs as is used under the IPPS, removing these LTC-DRGs would be
administratively burdensome.
Again, we note that as this system is dynamic, it is entirely
possible that the number of proposed LTC-DRGs with a zero volume of
LTCH cases based on the system will vary in the future. We used the
best most recent available claims data in the MedPAR file to identify
zero

[[Page 24068]]

volume LTC-DRGs and to determine the proposed relative weights in this
proposed rule.
Table 11 in the Addendum to this proposed rule lists the proposed
LTC-DRGs and their respective proposed relative weights, geometric mean
length of stay, and five-sixths of the geometric mean length of stay
(to assist in the determination of short-stay outlier payments under
Sec. 412.529) for FY 2007.
We also wish to point out that in section VI.A.5. of the preamble
of this proposed rule, we discuss our proposal to revise the
regulations for grandfathered HwHs, grandfathered hospital satellite
facilities, and grandfathered satellite units at Sec. Sec. 412.22(f),
412.22(h)(3); and 412.25(e)(3), respectively. In addition, in section
VI.A.6. of the preamble of this proposed rule, we discuss our proposal
to revise and clarify the existing policies governing the determination
of LTCHs' CCRs and the reconciliation of high-cost and short-stay
outlier payments under the LTCH PPS. (We note that these proposed
changes concerning the determination of LTCHs' CCRs and the
reconciliation of LTCH PPS high-cost and short-stay outlier payments
are the same as the changes proposed in the RY 2007 LTCH PPS proposed
rule (71 FR 674 through 4676 and 4690 through 4692). As discussed in
greater detail in that section, in response to comments and requests,
in this IPPS proposed rule, we are presenting the same proposed changes
to the policies governing the determination of LTCHs' CCRs and the
reconciliation of high-cost and short-stay outlier payments, and
providing additional information on the values of the proposed LTCH CCR
ceiling and the proposed statewide average LTCH CCRs that would be
effective October 1, 2006, rather than responding to comments or
finalizing any policy changes in the RY 2007 LTCH PPS final rule.)

G. Proposed Add-On Payments for New Services and Technologies

(If you choose to comment on issues in this section, please include
the caption ``New Technology'' at the beginning of your comment.)
1. Background
Sections 1886(d)(5)(K) and (L) of the Act establish a process of
identifying and ensuring adequate payment for new medical services and
technologies (sometimes collectively referred to in this section as
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the
Act specifies that a medical service or technology will be considered
new if it meets criteria established by the Secretary after notice and
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act
specifies that the process must apply to a new medical service or
technology if, ``based on the estimated costs incurred with respect to
discharges involving such service or technology, the DRG prospective
payment rate otherwise applicable to such discharges under this
subsection is inadequate.''
The regulations implementing this provision establish three
criteria for new medical services and technologies to receive an
additional payment. First, Sec. 412.87(b)(2) defines when a specific
medical service or technology will be considered new for purposes of
new medical service or technology add-on payments. The statutory
provision contemplated the special payment treatment for new medical
services or technologies until such time as data are available to
reflect the cost of the technology in the DRG weights through
recalibration. There is a lag of 2 to 3 years from the point a new
medical service or technology is first introduced on the market and
when data reflecting the use of the medical service or technology are
used to calculate the DRG weights. For example, data from discharges
occurring during FY 2005 are used to calculate the proposed FY 2007 DRG
weights in this proposed rule. Section 412.87(b)(2) provides that a
``medical service or technology may be considered new within 2 or 3
years after the point at which data begin to become available
reflecting the ICD-9-CM code assigned to the new medical service or
technology (depending on when a new code is assigned and data on the
new medical service or technology become available for DRG
recalibration). After CMS has recalibrated the DRGs, based on available
data, to reflect the costs of an otherwise new medical service or
technology, the medical service or technology will no longer be
considered `new' under the criterion for this section.''
The 2-year to 3-year period during which a medical service or
technology can be considered new would ordinarily begin with FDA
approval, unless there was some documented delay in bringing the
product onto the market after that approval (for instance, component
production or drug production had been postponed until FDA approval due
to shelf life concerns or manufacturing issues). After the DRGs have
been recalibrated to reflect the costs of an otherwise new medical
service or technology, the special add-on payment for new medical
services or technology ceases (Sec. 412.87(b)(2)).
For example, an approved new technology that received FDA approval
in October 2005 and entered the market at that time may be eligible to
receive add-on payments as a new technology until FY 2008 (discharges
occurring before October 1, 2007), when data reflecting the costs of
the technology would be used to recalibrate the DRG weights. Because
the FY 2008 DRG weights will be calculated using FY 2006 MedPAR data,
the costs of such a new technology would likely be reflected in the FY
2008 DRG weights.
Section 412.87(b)(3) further provides that, to receive special
payment treatment, new medical services or technologies must be
inadequately paid otherwise under the DRG system. To assess whether
technologies would be inadequately paid under the DRGs, we establish
thresholds to evaluate applicants for new technology add-on payments.
In the FY 2004 IPPS final rule (68 FR 45385, August 1, 2003), we
established the threshold at the geometric mean standardized charge for
all cases in the DRG plus 75 percent of 1 standard deviation above the
geometric mean standardized charge (based on the logarithmic values of
the charges and transformed back to charges) for all cases in the DRG
to which the new medical service or technology is assigned (or the
case-weighted average of all relevant DRGs, if the new medical service
or technology occurs in many different DRGs). Table 10 in the Addendum
to the FY 2004 IPPS final rule (68 FR 45648) listed the qualifying
threshold by DRG, based on the discharge data that we used to calculate
the FY 2004 DRG weights.
However, section 503(b)(1) of Pub. L. 108-173 amended section
1886(d)(5)(K)(ii)(I) of the Act to provide for ``applying a threshold *
* * that is the lesser of 75 percent of the standardized amount
(increased to reflect the difference between cost and charges) or 75
percent of 1 standard deviation for the diagnosis-related group
involved.'' The provisions of section 503(b)(1) apply to classification
for fiscal years beginning with FY 2005. We updated Table 10 from the
Federal Register document that corrected the FY 2004 final rule (68 FR
57753, October 6, 2003), which contained the thresholds that we used to
evaluate applications for new service or technology add-on payments for
FY 2005, using the section 503(b)(1) measures stated above, and posted
these new thresholds on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp.
In the FY 2005 IPPS final rule (in

Table 10 of the Addendum), we included the final thresholds that were
being used to evaluate applicants for new technology add-on payments
for FY 2006. (Refer to

[[Page 24069]]

section IV.D. of the preamble to the FY 2005 IPPS final rule (69 FR
49084, August 11, 2004) for a discussion of a revision of the
regulations to incorporate the change made by section 503(b)(1) of Pub.
L. 108-173.) Table 10 of the Addendum to the FY 2006 final rule (70 FR
47680) contained the final thresholds that are being used to evaluate
applications for new technology add-on payments for FY 2007.
Section 412.87(b)(1) of our existing regulations provides that a
new technology is an appropriate candidate for an additional payment
when it represents ``an advance that substantially improves, relative
to technologies previously available, the diagnosis or treatment of
Medicare beneficiaries.'' For example, a new technology represents a
substantial clinical improvement when it reduces mortality, decreases
the number of hospitalizations or physician visits, or reduces recovery
time compared to the technologies previously available. (Refer to the
September 7, 2001 final rule (66 FR 46902) for a complete discussion of
this criterion.)
The new medical service or technology add-on payment policy
provides additional payments for cases with high costs involving
eligible new medical services or technologies while preserving some of
the incentives under the average-based payment system. The payment
mechanism is based on the cost to hospitals for the new medical service
or technology. Under Sec. 412.88, Medicare pays a marginal cost factor
of 50 percent for the costs of a new medical service or technology in
excess of the full DRG payment. If the actual costs of a new medical
service or technology case exceed the DRG payment by more than the 50-
percent marginal cost factor of the newmedical service or technology,
Medicare payment is limited to the DRG payment plus 50 percent of the
estimated costs of the new technology.
The report language accompanying section 533 of Pub. L. 106-554
indicated Congressional intent that the Secretary implement the new
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033,
106th Cong., 2nd Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of
the Act requires that the adjustments to annual DRG classifications and
relative weights must be made in a manner that ensures that aggregate
payments to hospitals are not affected. Therefore, in the past, we
accounted for projected payments under the new medical service and
technology provision during the upcoming fiscal year at the same time
we estimated the payment effect of changes to the DRG classifications
and recalibration. The impact of additional payments under this
provision was then included in the budget neutrality factor, which was
applied to the standardized amounts and the hospital-specific amounts.
Section 1886(d)(5)(K)(ii)(III) of the Act, as amended by section
503(d)(2) of Pub. L. 108-173, provides that there shall be no reduction
or adjustment in aggregate payments under the IPPS due to add-on
payments for new medical services and technologies. Therefore, add-on
payments for new medical services or technologies for FY 2005 and later
years are not budget neutral.
Applicants for add-on payments for new medical services or
technologies for FY 2008 must submit a formal request, including a full
description of the clinical applications of the medical service or
technology and the results of any clinical evaluations demonstrating
that the new medical service or technology represents a substantial
clinical improvement, along with a significant sample of data to
demonstrate the medical service or technology meets the high-cost
threshold, no later than October 15, 2006. Applicants must submit a
complete database no later than December 30, 2006. Complete application
information, along with final deadlines for submitting a full
application, will be available at our Web site: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp.
To allow interested parties to

identify the new medical services or technologies under review before
the publication of the proposed rule for FY 2008, the Web site will
also list the tracking forms completed by each applicant.
2. Public Input Before Publication of This Notice of Proposed
Rulemaking on Add-On Payments
Section 1886(d)(5)(K)(viii) of the Act, as amended by section
503(b)(2) of Pub. L. 108-173, provides for a mechanism for public input
before publication of a notice of proposed rulemaking regarding whether
a medical service or technology represents a substantial clinical
improvement or advancement. The process for evaluating new medical
service and technology applications requires the Secretary to--
Provide, before publication of a proposed rule, for public
input regarding whether a new service or technology represents an
advance in medical technology that substantially improves the diagnosis
or treatment of Medicare beneficiaries.
Make public and periodically update a list of the services
and technologies for which applications for add-on payments are
pending.
Accept comments, recommendations, and data from the public
regarding whether a service or technology represents a substantial
clinical improvement.
Provide, before publication of a proposed rule, for a
meeting at which organizations representing hospitals, physicians,
manufacturers, and any other interested party may present comments,
recommendations, and data regarding whether a new service or technology
represents a substantial clinical improvement to the clinical staff of
CMS.
In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2007
before publication of this FY 2007 IPPS proposed rule, we published a
notice in the Federal Register on December 23, 2005 (70 FR 76315) and
held a town hall meeting at the CMS Headquarters Office in Baltimore,
MD, on February 16, 2006. In the announcement notice for the meeting,
we stated that the opinions and alternatives provided during the
meeting would assist us in our evaluations of applications by allowing
public discussions of the substantial clinical improvement criterion
for each of the FY 2007 new medical service and technology add-on
payment applications before the publication of this FY 2007 IPPS
proposed rule.
Approximately 35 participants registered and attended the town hall
meeting in person, while additional participants listened over an open
telephone line. The participants focused on presenting data on the
substantial clinical improvement aspect of their products, as well as
the need for additional payments to ensure access to Medicare
beneficiaries. In addition, we received written comments regarding the
substantial clinical improvement criterion for the applicants. We
considered these comments in our evaluation of each new application for
FY 2007 in this proposed rule. We have summarized these comments or, if
applicable, indicated that no comments were received, at the end of the
discussion of the individual applications. We received two general
comments about application of the newness and substantial clinical
improvement criteria.
Comment: AdvaMed encouraged CMS to amend the definition of
substantial clinical improvement for the IPPS new technology provision
to conform with the outpatient definition of substantial clinical
improvement used in 2001. Specifically, AdvaMed requests that

[[Page 24070]]

after ``decreased pain, bleeding, or other quantifiable symptom,'' CMS
should insert, the following language: ``such as convenience,
durability, ease of operation or make other improvements in quality of
life.''
Response: We believe we addressed this concern in the FY 2006 IPPS
final rule (70 FR 47360). We use similar standards to evaluate
substantial clinical improvement in the IPPS and OPPS and, in both
systems, we employ identical language to explain and elaborate on the
kinds of considerations that are taken into account in determining
whether a new technology represents a substantial clinical improvement.
We do not believe a change to the regulations text is necessary.
Comment: AdvaMed commented that CMS should not use ``substantial
similarity'' to evaluate newness without also determining whether the
product is a substantial clinical improvement. AdvaMed argues that CMS
is applying a concept that is not defined in regulations. If CMS
applies the concept as part of determining whether a product is new
without evaluating substantial clinical improvement, AdvaMed commented
that we should define substantial similarity through notice and comment
rulemaking.
Response: We addressed this comment in the FY 2006 IPPS final rule
(70 FR 47350 through 47351). We refer readers to that final rule for a
detailed response to this comment.
Section 1886(d)(5)(K)(ix) of the Act, as added by section 503(c) of
Pub. L. 108-173, requires that, before establishing any add-on payment
for a new medical service or technology, the Secretary shall seek to
identify one or more DRGs associated with the new technology, based on
similar clinical or anatomical characteristics and the costs of the
technology and assign the new technology into a DRG where the average
costs of care most closely approximate the costs of care using the new
technology. No add-on payment shall be made if the new technology is
assigned to a DRG that most closely approximates its costs.
At the time an application for new technology add-on payments is
submitted, the DRGs associated with the new technology are identified.
We only determine that a new DRG assignment is necessary or a new
technology add-on payment is appropriate when the payment under these
currently assigned DRGs is not adequate and the technology otherwise
meets the newness, cost, and substantial clinical improvement criteria.
In this proposed rule, we evaluate whether new technology add-on
payments will continue in FY 2007 for the three technologies that
currently receive such payments. In addition, we present our
evaluations of three applications for add-on payments in FY 2007.
3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments
a. Kinetra[supreg] Implantable Neurostimulator for Deep Brain
Stimulation
Medtronic, Inc. submitted an application for approval of the
Kinetra[supreg] implantable neurostimulator device for new technology
add-on payments for FY 2005. In the IPPS final rule for FY 2005 (69 FR
49019, August 11, 2004), we approved Kinetra[supreg] for new technology
add-on payments.
As noted above, the period for which technologies are eligible to
receive new technology add-on payments is 2 to 3 years after the
product becomes available on the market and data reflecting the cost of
the technology are reflected in the DRG weights. This technology
received FDA approval on December 16, 2003. Therefore, the technology
will be beyond the 2- to 3-year period during which it can be
considered new during FY 2007. Therefore, we are proposing to
discontinue add-on payments for the Kinetra[supreg] rechargeable,
implantable neurostimulator device for FY 2007.
The manufacturer has submitted a request that we consider a higher
paying DRG assignment for dual array neurostimulator pulse generator
cases. We have taken this request into consideration and have reviewed
the FY 2005 Medicare charge data for cases that use implantable
neurostimulator for deep brain stimulation. Our findings and a full
discussion of this issue can be found in Section II.D.2.a. of the
preamble of this proposed rule.
b. Endovascular Graft Repair of the Thoracic Aorta
W. L. Gore & Associates, Inc. submitted an application for
consideration of its Endovascular Graft Repair of the Thoracic Aorta
(GORE TAG) for new technology add-on payments for FY 2006. The
manufacturer argued that endovascular stent-grafting of the descending
thoracic aorta provides a less invasive alternative to the traditional
open surgical approach required for the management of descending
thoracic aortic aneurysms. The GORE TAG device is a tubular stent-graft
mounted on a catheter-based delivery system, and it replaces the
synthetic graft normally sutured in place during open surgery. The
device was initially identified using ICD-9-CM procedure code 39.79
(Other endovascular repair (of aneurysm) of other vessels). The
applicant also requested a unique ICD-9-CM procedure code. As noted in
Table 6B of the FY 2006 IPPS final rule (70 FR 47637), new procedure
code 39.73 (Endovascular implantation of graft in thoracic aorta) was
assigned to this technology.
In the FY 2006 IPPS final rule (70 FR 47356), we approved the GORE
TAG device for new technology add-on payment for FY 2006. We noted that
any substantially similar device that is FDA-approved before or during
FY 2006 that uses the same ICD-9-CM procedure code as GORE TAG and
falls into the same DRGs as those approved for new technology add-on
payments may also receive the new technology add-on payment associated
with this technology in FY 2006.
FDA approved GORE TAG on March 23, 2005. The technology remains
within the 2-to 3-year period during which it can be considered new.
Therefore, we are proposing to continue add-on payments for the
endovascular graft repair of the thoracic aorta for FY 2007.
c. Restore[supreg] Rechargeable Implantable Neurostimulator
Medtronic Neurological submitted an application for new technology
add-on payments for its Restore[supreg] Rechargeable Implantable
Neurostimulator for FY 2006. The Restore[supreg] Rechargeable
Implantable Neurostimulator is designed to deliver electrical
stimulation to the spinal cord to block the sensation of pain. The
technology standard for neurostimulators uses internal sealed batteries
as the power source to generate the electrical current. These internal
batteries have finite lives, and require replacement when their power
has been completely discharged. According to the manufacturer, the
Restore[supreg] Rechargeable Implantable Neurostimulator ``represents
the next generation of neurostimulator technology, allowing the
physician to set the voltage parameters in such a way that fully meets
the patient's requirements to achieve adequate pain relief without fear
of premature depletion of the battery.'' The applicant stated that the
expected life of the Restore rechargeable battery is 9 years, compared
to an average life of 3 years for conventional neurostimulator
batteries. We approved new technology add-on payments for all
rechargeable, implantable neurostimulators for FY

[[Page 24071]]

2006. Cases involving these devices, made by any manufacturer, are
identified by the presence of newly created ICD-9-CM code 86.98
(Insertion or replacement of dual array rechargeable neurostimulator
pulse generator).
As noted above, the period for which technologies are eligible to
receive new technology add-on payments is 2 to 3 years after the
product becomes available on the market and data reflecting the cost of
the technology are reflected in the DRG weights. The FDA approved the
Restore[supreg] Rechargeable Implantable Neurostimulator in 2005.
However, as noted above and in the FY 2006 IPPS final rule (70 FR
47357), at least one similar product was approved by the FDA as early
as April 2004. Nevertheless, consistent with current policy (70 FR
47362) and decisions for prior products (that is, bone morphogenetic
products and CRT-D devices), we are proposing to continue new
technology add-on payments for rechargeable, implantable
neurostimulators in FY 2007 because the product will be beyond the 3-
year period only in the latter 6 months of the fiscal year.
4. FY 2007 Applications for New Technology Add-On Payments
a. C-Port[supreg] Distal Anastomosis System
Cardica, Inc. submitted an application for new technology add-on
payments for FY 2007 for its Cardica C-Port[supreg] Distal Anastomosis
System. The manufacturer states that the C-Port[supreg] System is
indicated for all patients requiring a vein as a conduit during a
coronary bypass operation for bypassing a coronary artery stenosis or
occlusion. The manufacturer contends that the C-Port[supreg] System is
specifically designed to create a reliable and consistent end-to-side
anastomosis between a conduit, such as a venous graft, and a small
arterial vessel during the bypass surgery. The device consists of eight
stainless steel clips and a delivery system. Once the vein graft has
been loaded into the device and the device positioned against the
target vessel, the anastomosis is created by pushing a single button.
Cardica, Inc. states the main purpose of the device is to replace a
conventional hand-sewn, distal anastomosis with an automated,
compliant, mechanical anastomosis.
The C-Port[supreg] System was granted section 510(K) approval from
the FDA on November 10, 2005. While the device appears to meet the
criteria for being considered new based on its FDA approval date, we
are concerned that various forms of surgical staples and clips have
been used for more than a decade in a wide range of surgical
procedures. In fact, the FDA found that the C-Port[supreg] System ``is
substantially equivalent to the predicate devices with regard to
indications, device characteristics, method of use, labeling and
materials.'' Thus, given its similarity to other devices currently on
the market, we are concerned that the C-Port[supreg] System may not
qualify as new. We welcome comments on whether this device is new and
how it can be distinguished from predicate devices that perform the
same or a similar function.
We also note that there is currently no ICD-9-CM code used to
identify how the anastomosis is performed. The surgical technique used
to graft the bypass to the arterial vessel is part of the surgical
procedure itself and is not separately identified in our current coding
structure. Thus, if a new code is created, we would be creating a code
that is a subset of the surgical procedure that identifies whether the
graft was performed by hand-sewing or using a device like the C-
Port[supreg] System, a distinction that has been unnecessary to date
for inpatient hospital payments. Furthermore, we note that such a
coding distinction would only be necessary for the new technology add-
on payment period if the device met all of the criteria. Once the new
technology add-on payments are completed, the surgical technique used
for the anasotomosis would not need to be identified because the code
that describes the grafting procedure would be the same whether or not
this technology is used.
The applicant made several arguments in support of the device
meeting the cost criterion. Cardica, Inc. estimates that the cost of
each device will be approximately $1,200. The applicant assumes a
hospital markup of 100 percent, with an average use of 2.5 C-Port
devices per case. Therefore it estimates that the total average charge
per patient will be $6,000. The C-Port[supreg] System would be used
when a coronary artery bypass graft is performed. Thus, we are
assessing whether it meets the cost criterion in relation to the
threshold for DRGs 106 (Coronary Bypass with Percutaneous Transluminal
Coronary Angioplasty), 547 (Coronary Bypass with Cardiac Catheter with
Major CV Diagnosis), 548 (Coronary Bypass with Cardiac Catheter without
Major CV Diagnosis), 549 (Coronary Bypass without Cardiac Catheter with
Major CV Diagnosis), and 550 (Coronary Bypass without Cardiac Catheter
without Major CV Diagnosis). We note that the data analysis for this
technology is slightly unusual, as the DRGs to which the technology
would have been assigned in FY 2005 (the MedPAR data we are currently
using) are DRGs 107 and 109. These DRGs were terminated in FY 2006, and
4 new coronary bypass DRGs were created for these cases (DRGs 547, 548,
549, and 550). The manufacturer provided estimates showing a case-
weighted threshold for DRGs 106, 547, 548, 549 and 550 of $75,373. The
applicant projects a 20-percent market penetration for the device in FY
2007 or its use in approximately 23,000 cases across the 5 DRGs. The
applicant submitted data showing average standardized charges for cases
using the C-Port[supreg] System of $80,887. Therefore, the applicant
argued that the device meets the cost threshold for a new technology
add-on payment. Our internal data analysis of the technology, using the
FY 2005 MedPAR data and Table 10 thresholds for FY 2005, shows a case-
weighted threshold of $68,416. We identified cases using coronary
bypass procedure codes 36.10, 36.11, 36.12, 36.13 and 36.14, and
concluded that the case-weighted average standardized charge for these
bypass cases was $79,394. Thus, our internal data also suggest that the
device may meet the cost threshold.
The applicant made several arguments in support of the device
meeting the substantial clinical improvement criterion. The
manufacturer argues that the C-Port[supreg] creates a reliable and
fully compliant end-to-side anastomosis between a vein graft and a
coronary artery, in less time than is required to create a hand-sewn
distal anastomosis. The applicant also states that the C-Port[supreg]
System integrates deployment of the anastomotic clips and creation of
the arteriotomy, thus enabling deployment to occur without occlusion of
blood flow through the target vessel. However, we note that the
applicant submitted evidence suggesting that the device does not always
produce reliable anastomoses; specifically, a study of 130 patients
receiving 132 devices reported 13 incomplete anastomoses in 12
patients, and the study also noted that additional manual stitches were
required in the majority of the patients studied. Therefore, we are
concerned that these studies suggest that the C-Port[supreg] System may
not represent a substantial clinical improvement over the traditional
hand-sewn technique. At the town hall meeting, the applicant noted that
these results were associated with inexperience preparing the target
vessel, vein thickness assessment, proper device alignment and
anastomosis site selection rather than problems with the

[[Page 24072]]

device itself. The applicant believes that these problems will become
infrequent as surgeons have more experience with the device. We welcome
further information from commenters that would suggest how the product
meets the substantial clinical improvement criterion.
We received the following public comments at the new technology
town hall meeting regarding whether this technology meets the
substantial clinical improvement criteria:
Comment: The manufacturer argued that this technology meets the
substantial clinical improvement criterion because:
It achieves higher patency rates at 6 months compared to
conventional hand-sown anastomoses.
Use of the device will result in less surgeon-to-surgeon
variability in the quality of the anastomosis compared to hand sewing.
The device leads to reduced operative time.
The product allows for the creation of an anastomosis
during minimally invasive surgery.
In addition, we received written comments expressing support for
approval of new technology add-on payments for the C-Port[supreg]
System. These commenters noted that:
The device allows the anastomosis to be completed quickly,
reducing patient complications during surgery from ischemia.
The device will allow for smaller incisions during heart
surgery and physicians will not have to position their hands in the
chest cavity in order to hand-sew the anastomosis.
The rapidly deployed anastomosis clamp provides patients
with a surgical alternative where one would otherwise not be available
due to the comorbidities associated with the more invasive CABG
procedures.
Response: We appreciate the time and effort the applicant took to
present at the town hall meeting. We will consider the information
presented in the written comments and at the town hall meeting, and
welcome objective data that will support the assertions presented above
by the commenters.
b. NovoSeven[supreg] for Intracerebral Hemorrhage
The Pinnacle Health Group in conjunction with Novo Nordisk Inc.
(the manufacturer) submitted an application for new technology add-on
payments for FY 2007 for NovoSeven[supreg] for Intracerebral
Hemorrhage. The technology is a drug that promotes hemostasis by
activating clotting factors. The applicant is seeking new technology
add-on payments for the use of its product in the treatment of
intracerebral hemorrhage (ICH) using ICD-9-CM diagnosis code 431
(Intracerebral hemorrhage).
On March 25, 1999, the FDA approved NovoSeven[supreg] for the
treatment of bleeding episodes in patients with hemophilia A or B with
inhibitors to Factor VIII or Factor IX. The applicant is now seeking
FDA approval for the additional indication of ICH in patients without
hemophilia or other clotting abnormalities. The applicant noted that it
expects FDA approval sometime in the first quarter of 2007. Because the
technology is not currently FDA approved, we are not presenting our
full analysis on whether the technology meets the criteria for the new
technology add-on payment in this proposed rule. However, we note that
the applicant did submit the information below on the cost and
substantial clinical improvement criteria.
Cases using the NovoSeven[supreg] are assigned to DRG 14
(Intracranial Hemorrhage or Cerebral Infraction). The applicant expects
NovoSeven[supreg] to be used in 20 to 35 percent of patients with ICH
diagnosis code 431 in FY 2007. The applicant searched the FY 2004
MedPAR and found a total of 31,407 cases with a principal diagnosis
code of ICH. The condition was present as a secondary diagnosis in
32,730 cases. The average standardized charge per case was $18,752.12
when ICH was the principal diagnosis and $19,045.58 when ICH was the
secondary diagnosis. The applicant submitted data demonstrating that
the technology costs a total of $7,265, including the costs for the
drug, sterile water, IV supplies, nursing services, pharmaceuticals,
and followup CT scan. However, some of these costs (for example,
nursing and pharmacy) are not part of the drug or technology itself and
are normal operating costs included in the Medicare DRG payment for the
inpatient stay and cannot be considered ``new.'' Therefore, based on
data from the applicant, the total cost for this technology is $5,997.
We then added the revised cost of the technology to determine a total
average standardized charge per case of $24,749.12 when ICH was the
principal diagnosis and $25,455.58 when it was the secondary diagnosis.
The threshold for DRG 14 is $23,807. Based on the analysis above, the
applicant maintains that NovoSeven[supreg] meets the cost criterion
because the average standardized charge per case exceeds the threshold
for DRG 14.
The applicant also maintained that the technology meets the
substantial clinical improvement criterion. The applicant explained
that several studies have shown a correlation between the size of the
intracranial hematoma and the mortality rate of patients with ICH
within 30 days. As a result, Recombinant Coagulation Factors VIIa
(rFVIIa), such as NovoSeven[supreg], are being explored as a treatment
option for ICH.
The applicant further explained that NovoSeven[supreg] activates
prothrombin to thrombin by binding factor VIIa to exposed tissue
factor, which then activates Factor IX into IXa and Factor X into Xa.
The applicant noted that use of rFVIIa for hemophilia patients showed
an 84-percent efficacy rate, with only one fatality and no major
adverse events or evidence of disseminated intravascular coagulation.
The applicant stated that the use of rFVIIa in a nonhemophilia
population was safe across a wide range of doses.
In addition, a recent randomized trial published in the New England
Journal of Medicine \11\ researched 399 patients with ICH diagnosed by
CT within 3 hours after onset who received either placebo or one of
three doses of NovoSeven[supreg] (40[mu]g, 80[mu]g, or 160[mu]g). Some
of the outcomes reported from the study for those patients treated with
NovoSeven[supreg] compared to placebo include: Mortality was reduced by
38 percent; the odds of improving by one level on the modified Rankin
Scale at 90 days doubled; and the proportion of patients who died or
were severely disabled declined from 69 percent in the placebo group to
53 percent in the treatment group (combined for all three levels of
doses). The applicant noted that the study concluded that ultra early
hemostatic therapy within 4 hours after the onset of ICH with rFVIIa
significantly reduced the growth of the hemorrhage, reduced mortality,
and improved the functional outcomes at 3 months, thus demonstrating
substantial clinical improvement.
---------------------------------------------------------------------------

\11\ Mayer, S.A., et al. ``Recombinant Activated Factor VII for
Acute Intracerebral Hemorrhage.'' New England Journal of Medicine,
Vol. 352, No. 8, pp. 777-785, 2005.
---------------------------------------------------------------------------

We received no public comments regarding this application for new
technology add-on payments at the town hall meeting.
c. X STOP Interspinous Process Decompression System
St. Francis Medical Technologies submitted an application for new
technology add-on payments for the X STOP Interspinous Process
Decompression System for FY 2007.

[[Page 24073]]

Lumbar spinal stenosis describes a condition that occurs when the
spaces between bones in the spine become narrowed due to arthritis and
other age-related conditions. This narrowing, or stenosis, causes
nerves coming from the spinal cord to be compressed, thereby causing
symptoms including pain, numbness, and weakness. It particularly causes
symptoms when the spine is in extension, as occurs when a patient
stands fully upright or leans back. The X STOP device is inserted
between the spinous processes of adjacent vertebrae in order to provide
a minimally invasive alternative to conservative treatment (exercise
and physical therapy) and invasive surgery (spinal fusion). It works by
limiting the spine extension that compresses the nerve roots while
still preserving as much motion as possible. The device is inserted in
a relatively simple, primarily outpatient procedure using local
anesthesia. However, in some circumstances, the physician may prefer to
admit the patient for an inpatient stay. The manufacturer has described
the device as providing ``a new minimally invasive, stand-alone
alternative treatment for lumbar spinal stenosis.''
The X STOP Interspinous Process Decompression system received
premarket approval from the FDA on November 21, 2005. The device is
currently described by ICD-9-CM code 84.58 (Implantation of
Interspinous process decompression device) (excluding: fusion of spine
(codes 81.00 through 81.08, and 81.30 through 81.39)). This ICD-9-CM
code went into effect on October 1, 2005.
The manufacturer provided data in support of the device meeting the
cost threshold criterion. The applicant stated that there would be an
average of 1.6 units used per case. Each unit costs $5,500; therefore,
the technology is expected to cost $8,800 per case. The device is
currently assigned to DRGs 499 (Back and Neck Procedures Except Spinal
Fusion with CC) and 500 (Back and Neck Procedures Except Spinal Fusion
without CC). The manufacturer projected that there would be
approximately 424 patients eligible to receive the device in DRG 499 in
FY 2007, while there may be approximately 1,700 patients who receive
the device in DRG 500. The manufacturer also provided data for cases
involved in the clinical trials. The average standardized charge for
the cases in FY 2004 was $24,065. The weighted threshold for DRGs 499
and 500 is $20,096. However, the manufacturer argued that because
significantly less than 20 percent of patients receiving the X STOP
experienced complications or had comorbidities, the threshold should be
calculated by estimating that 20 percent of patients would be assigned
to DRG 499 and 80 percent would to DRG 500. The manufacturer stated in
its application that, using this methodology, the applicable threshold
should be $19,796. Using either calculation, it appears that the
technology meets the cost threshold for new technology add-on payments.
The applicant also submitted information in support of its claim of
substantial clinical improvement. The manufacturer stated that the X
STOP device is placed between the spinous processes to limit extension
of the symptomatic level(s), yet allowing flexion, axial rotation, and
lateral bending (that is, the device limits pressure on the spinal
nerves and the resulting pain symptoms when the patient is in an
upright position or leans backward while also preserving the patient's
ability to turn side-to-side, bend forward, and to turn to either
side). The applicant contends that this technology provides an
alternative with improved clinical outcomes to conservative and
surgical treatments. The manufacturer further stated that the device
may offer a new alternative to lumbar spinal decompression procedures
such as laminectomy and laminotomy. Additional information included in
the application suggests that the device preserves spinal motion and is
superior to a spinal decompression procedure that requires concomitant
fusion (with or without instrumentation). The applicant argued that the
advantages over spinal decompression include reduced risk, shorter
hospital stay, and earlier improvement in pain and function. The
manufacturer further contends that disease progression at adjacent
levels is minimal following X STOP implantation compared to the known
risk associated with surgical decompression and concomitant fusion. The
applicant stated that the X STOP is comparable to traditional surgical
decompression of lumbar spinal stenosis with respect to improved
quality of life postoperatively. According to the applicant, the device
provides advantages over nonoperative care, including better symptom
relief, improved function, and increased patient satisfaction.
We believe that the device satisfies the newness and cost threshold
criteria for new technology add-on payments. However, we are concerned
that the information included with the application may raise issues
about substantial clinical improvement. During the FDA approval
process, the Center for Devices and Radiological Health (CDRH) Advisory
Panel voted against premarket approval (PMA) in August 2004 because of
concerns about proper patient selection as well as the lack of
objective endpoints, especially radiographic endpoints. The Panel also
mentioned the overall low clinical efficacy rate in the study
population. The device subsequently received PMA approval, but only on
the condition that it be used in the context of a long term (5 year)
follow-up study. We welcome information from commenters that addresses
the concerns raised by the CDRH Advisory Panel or other information
bearing on the issue of whether this product meets the substantial
clinical improvement criterion.
We received the following public comments through the new
technology town hall meeting process regarding this application for
add-on payments.
Comment: The applicant asserted that the X STOP Interspinous
Process Decompression system has the following advantages:
It retains spinal anatomy and all spinal structures.
The device allows for increased function and less pain
after implantation as evidenced by radiographic measures that showed
increases in the spinal canal area by 18 percent, diameter by 9
percent, and subarticular diameter (the route that the nerves exit the
spine) by 50 percent. In lateral view: area increased by 25 percent and
width by 41 percent.
The X STOP is a reversible procedure that causes no damage
to facets or disks.
The device allows for a treatment option for patients that
cannot undergo surgeries with general anesthesia.
The rate of complications associated with implantation of
the device is below 1 percent.
Response: We will evaluate these assertions as we further consider
this application for new technology add-on payments for the final rule.
We also note that the study that the applicant summarized at the town
hall meeting for the X STOP used a randomized study that targeted
lumbar spinal stenosis patients with mild to moderate symptoms. The
control group did not require operative care. We welcome information
from the comments that demonstrates how the study populations showed
substantial clinical improvement compared to the control group.
We note that the town hall meeting produced contradictory
information regarding whether this procedure is generally performed in
inpatient or

[[Page 24074]]

outpatient settings. The presenter indicated that over 90 percent of
his patients were treated as outpatients. The manufacturer noted 90
percent of non-U.S. patients and approximately two-thirds of U.S.
patients since FDA approval have been treated in inpatient settings.
While the setting where the procedure is typically performed has no
bearing on whether the product represents a substantial clinical
improvement, we note that we believe the physician should select the
most appropriate site to perform the procedure based on the clinical
needs of the patient.

III. Proposed Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts ``for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level.'' In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of statistical areas established by the Office of Management and Budget
(OMB). A discussion of the proposed FY 2007 hospital wage index based
on the statistical areas, including OMB's revised definitions of
Metropolitan Areas, appears under section III.B. of this preamble.
Beginning October 1, 1993, section 1886(d)(3)(E) of the Act
requires that we update the wage index annually. Furthermore, this
section provides that the Secretary base the update on a survey of
wages and wage-related costs of short-term, acute care hospitals. The
survey should measure the earnings and paid hours of employment by
occupational category, and must exclude the wages and wage-related
costs incurred in furnishing skilled nursing services. This provision
also requires us to make any updates or adjustments to the wage index
in a manner that ensures that aggregate payments to hospitals are not
affected by the change in the wage index. The proposed adjustment for
FY 2007 is discussed in section II.B. of the Addendum to this proposed
rule.
As discussed below in section III.H. of this preamble, we also take
into account the geographic reclassification of hospitals in accordance
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating
the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary
is required to adjust the standardized amounts so as to ensure that
aggregate payments under the IPPS after implementation of the
provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act
are equal to the aggregate prospective payments that would have been
made absent these provisions. The proposed budget neutrality adjustment
for FY 2007 is discussed in section II.A.4.b. of the Addendum to this
proposed rule.
Section 1886(d)(3)(E) of the Act also provides for the collection
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in
order to construct an occupational mix adjustment to the wage index. A
discussion of the occupational mix adjustment that we propose to apply
beginning October 1, 2006 (the proposed FY 2007 wage index) appears
under section III.C. of this preamble.

B. Core-Based Statistical Areas for the Proposed Hospital Wage Index

(If you choose to comment on issues in this section, please include
the caption ``CBSAs'' at the beginning of your comment.)
The wage index is calculated and assigned to hospitals on the basis
of the labor market area in which the hospital is located. In
accordance with the broad discretion under section 1886(d)(3)(E) of the
Act, beginning with FY 2005, we define hospital labor market areas
based on the Core-Based Statistical Areas (CBSAs) established by OMB
and announced in December 2003 (69 FR 49027). OMB defines a CBSA,
beginning in 2003, as ``a geographic entity associated with at least
one core of 10,000 or more population, plus adjacent territory that has
a high degree of social and economic integration with the core as
measured by commuting ties.'' The standards designate and define two
categories of CBSAs: Metropolitan Statistical Areas (MSAs) and
Micropolitan Statistical Areas (65 FR 82235).
According to OMB, MSAs are based on urbanized areas of 50,000 or
more population, and Micropolitan Statistical Areas (referred to in
this discussion as Micropolitan Areas) are based on urban clusters with
a population of at least 10,000 but less than 50,000. Counties that do
not fall within CBSAs are deemed ``Outside CBSAs.'' In the past, OMB
defined MSAs around areas with a minimum core population of 50,000, and
smaller areas were ``Outside MSAs.''
The general concept of the CBSAs is that of an area containing a
recognized population nucleus and adjacent communities that have a high
degree of integration with that nucleus. The purpose of the standards
is to provide nationally consistent definitions for collecting,
tabulating, and publishing Federal statistics for a set of geographic
areas. CBSAs include adjacent counties that have a minimum of 25
percent commuting to the central counties of the area. (This is an
increase over the minimum commuting threshold of 15 percent for
outlying counties applied in the previous MSA definition.)
The revised CBSAs established by OMB comprised MSAs and
Micropolitan Areas based on Census 2000 data. (A copy of the
announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.
) The revised

definitions recognize 49 MSAs and 565 Micropolitan Areas, and
extensively changed the composition of many of the MSAs that existed
prior to the revisions.
The revised area designations resulted in a higher wage index for
some areas and a lower wage index for others. Further, some hospitals
that were previously classified as urban are now in rural areas. Given
the significant payment impacts upon some hospitals because of these
changes, we provided a transition period to the new labor market areas
in the FY 2005 IPPS final rule (69 FR 49027 through 49034). As part of
that transition, we allowed urban hospitals that became rural under the
new definitions to maintain their assignment to the MSA where they were
previously located for the 3-year period of FY 2005, FY 2006, and FY
2007. Specifically, these hospitals were assigned the wage index of the
urban area to which they previously belonged. (For purposes of the wage
index computation, the wage data of these hospitals remained assigned
to the statewide rural area in which they are located.) The hospitals
receiving this transition will not be considered urban hospitals;
rather, they will maintain their status as rural hospitals. Thus, the
hospital would not be eligible, for example, for a large urban add-on
payment under the capital PPS. In other words, it is the wage index,
but not the urban or rural status, of these hospitals that is being
affected by this transition. The higher wage indices that these
hospitals are receiving are also being taken into consideration in
determining whether they qualify for the out-migration adjustment
discussed in section III.I. of this preamble and the amount of any
adjustment.

[[Page 24075]]

FY 2007 will be the third year of this transition period. We will
continue to assign the wage index for the urban area in which the
hospital was previously located through FY 2007. In order to ensure
this provision remains budget neutral, we will continue to adjust the
standardized amount by a transition budget neutrality factor to account
for these hospitals. Doing so is consistent with the requirement of
section 1886(d)(3)(E) of the Act that any ``adjustments or updates [to
the adjustment for different area wage levels] * * * shall be made in a
manner that assures that aggregate payments * * * are not greater or
less than those that would have been made in the year without such
adjustment.''
Beginning in FY 2008, these hospitals will receive their statewide
rural wage index, although they will be eligible to apply for
reclassification by the MGCRB both during this transition period and in
subsequent years. These hospitals will be considered rural for
reclassification purposes.
Consistent with the FY 2005 and FY 2006 IPPS final rules, as we did
beginning in FY 2006, for FY 2007 we are proposing to provide that
hospitals receive 100 percent of their wage index based upon the CBSA
configurations. Specifically, we will determine for each hospital a
proposed wage index for FY 2007 employing wage index data from FY 2003
hospital cost reports and using the CBSA labor market definitions.

C. Proposed Occupational Mix Adjustment to the Proposed FY 2007 Index

(If you choose to comment on issues in this section, please include
the caption ``Occupational Mix Adjustment'' at the beginning of your
comment.)
As stated earlier, section 1886(d)(3)(E) of the Act provides for
the collection of data every 3 years on the occupational mix of
employees for each short-term, acute care hospital participating in the
Medicare program, in order to construct an occupational mix adjustment
to the wage index, for application beginning October 1, 2004 (the FY
2005 wage index). The purpose of the occupational mix adjustment is to
control for the effect of hospitals' employment choices on the wage
index. For example, hospitals may choose to employ different
combinations of registered nurses, licensed practical nurses, nursing
aides, and medical assistants for the purpose of providing nursing care
to their patients. The varying labor costs associated with these
choices reflect hospital management decisions rather than geographic
differences in the costs of labor.
1. Development of Data for the Proposed Occupational Mix Adjustment
In the FY 2005 IPPS final rule (69 FR 49034), we discussed in
detail the data we used to calculate the occupational mix adjustment to
the FY 2005 wage index. For the proposed FY 2007 wage index, we are
proposing to use the same CMS Wage Index Occupational Mix Survey and
Bureau of Labor Statistics (BLS) data that we used for the FYs 2005 and
2006 wage indices, with two exceptions. The CMS survey requires
hospitals to report the number of total paid hours for directly hired
and contract employees in occupations that provide the following
services: Nursing, physical therapy, occupational therapy, respiratory
therapy, pharmacy, dietary and medical and clinical laboratory. These
services each include several standard occupational classifications
(SOCs), as defined by the BLS' Occupational Employment Statistics (OES)
survey. For the proposed FY 2007 wage index, we are using revised
survey data for 16 hospitals that took advantage of the opportunity we
afforded hospitals to submit changes to their occupational mix data
during the FY 2007 wage index data collection process (see the
discussion of wage data corrections process under section III.J. of
this preamble). We also excluded survey data for hospitals that became
designated as CAHs since the original survey data were collected and
for hospitals for which there are no corresponding cost report data for
the FY 2007 wage index. The proposed FY 2007 wage index includes
occupational mix data from 3,362 out of 3,580 hospitals (93.9 percent
response rate). The results of the occupational mix survey are included
in the chart below.
BILLING CODE 4120-01-P

[[Page 24076]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.019

[[Page 24077]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.020

BILLING CODE 4120-01-C
2. Calculation of the Proposed FY 2007 Occupational Mix Adjustment
Factor and the Proposed FY 2007 Occupational Mix Adjusted Wage Index
For the proposed FY 2007 wage index, we are proposing to use the
same methodology that we used to calculate the occupational mix
adjustment to the FY 2005 and FY 2006 wage indices (69 FR 49042 and 70
FR 47367). We are proposing to use the following steps for calculating
the proposed FY 2007 occupational mix adjustment factor and the
proposed FY 2007 occupational mix adjusted wage index:
Step 1--For each hospital, the percentage of the general service
category attributable to an SOC is determined by dividing the SOC hours
by the general service category's total hours. Repeat this calculation
for each of the 19 SOCs.
Step 2--For each hospital, the weighted average hourly rate for an
SOC is determined by multiplying the percentage of the general service
category (from Step 1) by the national average hourly rate for that SOC
from the 2001 BLS OES survey, which was used in calculating the
occupational mix adjustment for the FY 2005 wage index. The 2001 OES
survey is BLS' latest available hospital-specific survey. (See Chart 4
in the FY 2005 IPPS final rule, 69 FR 49038.) Repeat this calculation
for each of the 19 SOCs.

[[Page 24078]]

Step 3--For each hospital, the hospital's adjusted average hourly
rate for a general service category is computed by summing the weighted
hourly rate for each SOC within the general category. Repeat this
calculation for each of the seven general service categories.
Step 4--For each hospital, the occupational mix adjustment factor
for a general service category is calculated by dividing the national
adjusted average hourly rate for the category by the hospital's
adjusted average hourly rate for the category. (The national adjusted
average hourly rate is computed in the same manner as Steps 1 through
3, using instead, the total SOC and general service category hours for
all hospitals in the occupational mix survey database.) Repeat this
calculation for each of the seven general service categories. If the
hospital's adjusted rate is less than the national adjusted rate
(indicating the hospital employs a less costly mix of employees within
the category), the occupational mix adjustment factor will be greater
than 1.0000. If the hospital's adjusted rate is greater than the
national adjusted rate, the occupational mix adjustment factor will be
less than 1.0000.
Step 5--For each hospital, the occupational mix adjusted salaries
and wage-related costs for a general service category are calculated by
multiplying the hospital's total salaries and wage-related costs (from
Step 5 of the unadjusted wage index calculation in section III.F. of
this preamble) by the percentage of the hospital's total workers
attributable to the general service category and by the general service
category's occupational mix adjustment factor (from Step 4 above).
Repeat this calculation for each of the seven general service
categories. The remaining portion of the hospital's total salaries and
wage-related costs that is attributable to all other employees of the
hospital is not adjusted for occupational mix.
Step 6--For each hospital, the total occupational mix adjusted
salaries and wage-related costs for a hospital are calculated by
summing the occupational mix adjusted salaries and wage-related costs
for the seven general service categories (from Step 5) and the
unadjusted portion of the hospital's salaries and wage-related costs
for all other employees. To compute a hospital's occupational mix
adjusted average hourly wage, divide the hospital's total occupational
mix adjusted salaries and wage-related costs by the hospital's total
hours (from Step 4 of the unadjusted wage index calculation in section
III.F. of this preamble).
Step 7--To compute the occupational mix adjusted average hourly
wage for an urban or rural area, sum the total occupational mix
adjusted salaries and wage-related costs for all hospitals in the area,
then sum the total hours for all hospitals in the area. Next, divide
the area's occupational mix adjusted salaries and wage-related costs by
the area's hours.
Step 8--To compute the national occupational mix adjusted average
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours
for all hospitals in the Nation. Next, divide the national occupational
mix adjusted salaries and wage-related costs by the national hours. The
proposed national occupational mix adjusted average hourly wage for FY
2007 is $29.6213. (This figure represents a 100 percent adjustment for
occupational mix.)
Step 9--To compute the occupational mix adjusted wage index, divide
each area's occupational mix adjusted average hourly wage (Step 7) by
the national occupational mix adjusted average hourly wage (Step 8).
Step 10--To compute the Puerto Rico specific occupational mix
adjusted wage index, follow Steps 1 through 9 above. The proposed
Puerto Rico occupational mix adjusted average hourly wage for FY 2007
is $12.9490. (This figure represents a 100 percent adjustment for
occupational mix.)
An example of the occupational mix adjustment was included in the
FY 2005 IPPS final rule (69 FR 49043).
For the FY 2006 final wage index, we used the unadjusted wage data
for hospitals that did not submit occupational mix survey data. For
calculation purposes, this equates to applying the national SOC mix to
the wage data for these hospitals, because hospitals having the same
mix as the Nation would have an occupational mix adjustment factor
equaling 1.0000. In the FYs 2005 and 2006 IPPS final rule (69 FR 49035
and 70 FR 47368), we noted that we would revisit this matter with
subsequent collections of the occupational mix data. Because we are
using essentially the same survey data for the proposed FY 2007
occupational mix adjustment that we used for FYs 2005 and 2006, with
the only exceptions as stated in section III.C.1. of this preamble, we
are treating the wage data for hospitals that did not respond to the
survey in this same manner for the proposed FY 2007 wage index.
In implementing an occupational mix adjusted wage index based on
the above calculation, the proposed wage index values for 17 rural
areas (36.2 percent) and 204 urban areas (52.8 percent) would decrease
as a result of the adjustment. Five rural areas (10.6 percent) and 106
urban areas (27.5 percent) would experience a decrease of 1 percent or
greater in their wage index values. The largest negative impact for a
rural area would be 1.8 percent and for an urban area, 4.2 percent.
Meanwhile, 30 rural areas (63.8 percent) and 178 urban areas (46.1
percent) would experience an increase in their wage index values.
Although these results show that rural hospitals would gain the most
from an occupational mix adjustment to the wage index, their gains may
not be as great as might have been expected. Further, it might not have
been anticipated that approximately one-third of rural hospitals would
actually fare worse under the adjustment. Overall, a fully implemented
occupational mix adjusted wage index would have a redistributive effect
on Medicare payments to hospitals.
In the FY 2006 IPPS final rule (70 FR 47368), we indicated that,
for future data collections, we would revise the occupational mix
survey to allow hospitals to provide both salaries and hours data for
each of the employment categories that are included on the survey. We
also indicated that we would assess whether future occupational mix
surveys should be based on the calendar year or if the data should be
collected on a fiscal year basis as part of the Medicare cost report.
(One logistical problem is that cost report data are collected yearly,
but occupational mix survey data are collected only every 3 years.)
In a document published in the Federal Register on October 14, 2005
(70 FR 60092), we proposed a new survey, the 2006 Medicare Wage Index
Occupational Mix Survey. The 2006 survey provides for the collection of
data on hospital-specific wages and hours for a 6-month reporting
period (January 1, 2006 through June 30, 2006), as well as additional
clarification of the definitions for the occupational categories, an
expansion of the registered nurse category to include functional
subcategories, the exclusion of average hourly rate data associated
with advance practice nurses, and the transfer of each general service
category that comprised less than 4 percent of total hospital employees
in the 2003 survey to the ``all other occupations'' category. The
results of the 2006 occupational mix survey will be used to adjust the
IPPS wage index beginning with FY 2008. On February 10, 2006, we

[[Page 24079]]

published in the Federal Register a notice with a 30-day comment period
for the 2006 survey (71 FR 7047). We will provide a full discussion of
the 2006 survey design, the survey results, and the methodology for
calculating and applying the new occupational mix adjustment in the FY
2008 IPPS proposed rule.
In our continuing efforts to meet the information needs of the
public, we are providing via the Internet three additional public use
files (PUFs) for the proposed occupational mix adjusted wage index
concurrently with the publication of this proposed rule: (1) A file
including each hospital's unadjusted and adjusted average hourly wage
(FY 2007 Proposed Rule Occupational Mix Adjusted and Unadjusted Average
Hourly Wage by Provider); (2) a file including each CBSA's adjusted and
unadjusted average hourly wage (FY 2007 Proposed Rule Occupational Mix
Adjusted and Unadjusted Average Hourly Wage and Pre-Reclassified Wage
Index by CBSA); and (3) a file including each hospital's occupational
mix adjustment factors by occupational category (Provider Occupational
Mix Adjustment Factors for Each Occupational Category). These
additional files are posted on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS.
We also plan to post these files via the Internet

with future applications of the occupational mix adjustment.

D. Worksheet S-3 Wage Data for the Proposed FY 2007 Wage Index Update

(If you choose to comment on issues in this section, please include
the caption ``Wage Data'' at the beginning of your comment.)
The proposed FY 2007 wage index values (effective for hospital
discharges occurring on or after October 1, 2006 and before October 1,
2007) in section II.B. of the Addendum to this proposed rule are based
on the data collected from the Medicare cost reports submitted by
hospitals for cost reporting periods beginning in FY 2003 (the FY 2006
wage index was based on FY 2002 wage data).
The proposed FY 2007 wage index includes the following categories
of data associated with costs paid under the IPPS (as well as
outpatient costs):
Salaries and hours from short-term, acute care hospitals
(including paid lunch hours and hours associated with military leave
and jury duty).
Home office costs and hours.
Certain contract labor costs and hours (which includes
direct patient care, certain top management, pharmacy, laboratory, and
nonteaching physician Part A services).
Wage-related costs, including pensions and other deferred
compensation costs.
Consistent with the wage index methodology for FY 2006, the
proposed wage index for FY 2007 also excludes the direct and overhead
salaries and hours for services not subject to IPPS payment, such as
SNF services, home health services, costs related to GME (teaching
physicians and residents) and certified registered nurse anesthetists
(CRNAs), and other subprovider components that are not paid under the
IPPS. The proposed FY 2007 wage index also excludes the salaries,
hours, and wage-related costs of hospital-based rural health clinics
(RHCs), and Federally qualified health centers (FQHCs) because Medicare
pays for these costs outside of the IPPS (68 FR 45395). In addition,
salaries, hours, and wage-related costs of CAHs are excluded from the
wage index, for the reasons explained in the FY 2004 IPPS final rule
(68 FR 45397).
Data collected for the IPPS wage index are also currently used to
calculate wage indices applicable to other providers, such as SNFs,
home health agencies, and hospices. In addition, they are used for
prospective payments to IRFs, IPFs, and LTCHs, and for hospital
outpatient services. We note that, in the IPPS rules, we do not address
comments pertaining to the wage indices for non-IPPS providers. Such
comments should be made in response to separate proposed rules for
those providers.

E. Verification of Worksheet S-3 Wage Data

(If you choose to comment on this section, please include the
caption ``Wage Data'' at the beginning of your comment.)
The wage data for the proposed FY 2007 wage index were obtained
from Worksheet S-3, Parts II and III of the FY 2003 Medicare cost
reports. Instructions for completing the Worksheet S-3, Parts II and
III are in the Provider Reimbursement Manual, Part I, sections 3605.2
and 3605.3. The data file used to construct the proposed wage index
includes FY 2003 data submitted to us as of March 1, 2006. As in past
years, we performed an intensive review of the wage data, mostly
through the use of edits designed to identify aberrant data.
We asked our fiscal intermediaries to revise or verify data
elements that resulted in specific edit failures. Some unresolved data
elements are included in the calculation of the proposed FY 2007 wage
index. We instructed the fiscal intermediaries to complete their data
verification of questionable data elements and to transmit any changes
to the wage data no later than April 14, 2006. We believe all
unresolved data elements will be resolved by the date the final rule is
issued. The revised data will be reflected in the final rule.
Also, as part of our editing process, we removed the data for 215
hospitals from our database: 178 hospitals designated as CAHs between
February 18, 2005, the cutoff date for exclusion of CAHs from the FY
2006 wage index, and February 17, 2006, the cutoff date for CAH
exclusion for the FY 2007 wage index (that is, 7 or more days prior to
the posting of the preliminary February 24, 2006 PUF), and 30 hospitals
were low Medicare utilization hospitals or failed edits that could not
be corrected because the hospitals terminated the program or changed
ownership. In addition, we removed the wage data for 7 hospitals with
incomplete or inaccurate data resulting in zero or negative, or
otherwise aberrant, average hourly wages. We have notified the fiscal
intermediaries of these hospitals and will continue to work with the
fiscal intermediaries to correct these data until we finalize our
database to compute the final wage index. The data for these hospitals
will be included in the final wage index if we receive corrected data
that pass our edits. As a result, the proposed FY 2007 wage index is
calculated based on FY 2003 wage data from 3,580 hospitals.
In constructing the proposed FY 2007 wage index, we include the
wage data for facilities that were IPPS hospitals in FY 2003, even for
those facilities that have since terminated their participation in the
program as hospitals, as long as those data do not fail any of our
edits for reasonableness. We believe that including the wage data for
these hospitals is, in general, appropriate to reflect the economic
conditions in the various labor market areas during the relevant past
period. However, we exclude the wage data for CAHs as discussed in 68
FR 45397.
Section 4410 of Pub. L. 105-33 provides that, for the purposes of
section 1886(d)(3)(E) of the Act, for discharges occurring on or after
October 1, 1997, the area wage index applicable to any hospital that is
located in an urban area of a State may not be less than the area wage
index applicable to hospitals located in rural areas in the State. This
provision is commonly referred to as the ``rural floor.'' In the August
11, 2004 IPPS final rule (69 FR 49109), we discussed situations where a
State has only urban areas and no geographically rural areas, or a
State has geographically rural areas but no IPPS hospitals are located
in those rural

[[Page 24080]]

areas. As a result, these States did not have rural IPPS hospitals from
which to compute and apply a ``rural floor.'' In that final rule, we
developed a policy for imputing a ``rural floor'' for these States,
effective for the FYs 2005, 2006, and 2007 wage indices, so that a
``rural floor'' could be applicable to IPPS urban hospitals in those
States in the same manner that a ``rural floor'' is applicable to IPPS
urban hospitals in States that have IPPS rural hospitals. We revised
the regulations at Sec. 412.64(h) to describe the methodology for
computing the imputed ``rural floors'' for these States and to define
an all-urban State. Specifically, Sec. 412.64(h)(5) defines an all-
urban State as ``a State with no rural areas * * * or a State in which
there are no hospitals classified as rural. A State with rural areas
and with hospitals reclassified as rural under Sec. 412.103 is not an
all-urban State.''
We have received questions as to what area wage index CMS would
apply in the instance where a new rural IPPS hospital opens in a State
that has an imputed ``rural floor'' because it has rural areas but had
no hospitals classified as rural. In addition, we have been asked
whether a new IPPS hospital could submit its wages and hours data to be
used in computing the wage index, even though the hospital did not file
a cost report as an IPPS provider for the cost report base year that is
used in calculating that wage index.
A new hospital can be an entirely new facility that did not exist
before, or it can be a hospital that participated in Medicare under a
previous provider number, but has acquired a new Medicare provider
number (such as when a CAH converts to IPPS status, or vice versa). As
a new IPPS hospital (in this case, rural), the hospital would not yet
have filed any wages and hours data on a Medicare cost report. Even in
the situation where a new IPPS hospital previously participated in
Medicare as another provider type (such as a CAH) and was able to
develop its wages and hours data for the wage index base year,
consistent with section 1886(d)(3)(E) of the Act which specifies that
the wage index must be based on data from short-term, acute care
hospitals, CMS could not include the hospital's wages and hours from a
period during which the hospital was not an IPPS provider. Furthermore,
even once the hospital files its first Medicare cost report under the
new IPPS provider number, that first cost report is not used in
computing the wage index for the hospital's geographic area until 4
years later. This is because a current fiscal year's wage index is
computed from cost reports that are 4 years prior to that current
fiscal year. Consequently, the only wage index that would be available
for such a new IPPS rural hospital in the first 3 years of the
hospital's existence is the imputed ``rural floor.'' Therefore, if a
new rural IPPS hospital opens in a State that has an imputed ``rural
floor'' and has rural areas, the hospital would receive the imputed
``rural floor'' as its wage index until its first cost report is
contemporaneous with the cost reporting period being used to develop a
given fiscal year's wage index.

F. Computation of the Proposed FY 2007 Unadjusted Wage Index

(If you choose to comment on issues in this section, please include
the caption ``Unadjusted Wage Index'' at the beginning of your
comment.)
The method used to compute the proposed FY 2007 wage index without
an occupational mix adjustment follows:
Step 1--As noted above, we based the proposed FY 2007 wage index on
wage data reported on the FY 2003 Medicare cost reports. We gathered
data from each of the non-Federal, short-term, acute care hospitals for
which data were reported on the Worksheet S-3, Parts II and III of the
Medicare cost report for the hospital's cost reporting period beginning
on or after October 1, 2002 and before October 1, 2003. In addition, we
included data from some hospitals that had cost reporting periods
beginning before October 2002 and reported a cost reporting period
covering all of FY 2003. These data were included because no other data
from these hospitals would be available for the cost reporting period
described above, and because particular labor market areas might be
affected due to the omission of these hospitals. However, we generally
describe these wage data as FY 2003 data. We note that, if a hospital
had more than one cost reporting period beginning during FY 2003 (for
example, a hospital had two short cost reporting periods beginning on
or after October 1, 2002 and before October 1, 2003), we included wage
data from only one of the cost reporting periods, the longer, in the
wage index calculation. If there was more than one cost reporting
period and the periods were equal in length, we included the wage data
from the later period in the wage index calculation.
Step 2--Salaries--The method used to compute a hospital's average
hourly wage excludes certain costs that are not paid under the IPPS. In
calculating a hospital's average salaries plus wage-related costs, we
subtracted from Line 1 (total salaries) the GME and CRNA costs reported
on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3,
5 and 5.01, home office salaries reported on Line 7, and excluded
salaries reported on Lines 8 and 8.01 (that is, direct salaries
attributable to SNF services, home health services, and other
subprovider components not subject to the IPPS). We also subtracted
from Line 1 the salaries for which no hours were reported. To determine
total salaries plus wage-related costs, we added to the net hospital
salaries the costs of contract labor for direct patient care, certain
top management, pharmacy, laboratory, and nonteaching physician Part A
services (Lines 9 and 10), home office salaries and wage-related costs
reported by the hospital on Lines 11 and 12, and nonexcluded area wage-
related costs (Lines 13, 14, and 18).
We note that contract labor and home office salaries for which no
corresponding hours are reported were not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are
excluded if no corresponding salaries are reported for those employees
on Line 4.
Step 3--Hours--With the exception of wage-related costs, for which
there are no associated hours, we computed total hours using the same
methods as described for salaries in Step 2.
Step 4--For each hospital reporting both total overhead salaries
and total overhead hours greater than zero, we then allocated overhead
costs to areas of the hospital excluded from the wage index
calculation. First, we determined the ratio of excluded area hours (sum
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01,
7, and Part III, Line 13 of Worksheet S-3). We then computed the
amounts of overhead salaries and hours to be allocated to excluded
areas by multiplying the above ratio by the total overhead salaries and
hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed
the amounts of overhead wage-related costs to be allocated to excluded
areas using three steps: (1) We determined the ratio of overhead hours
(Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2,
3, 4.01, 5, 5.01, 6, 6.01, 7, 8, and 8.01); (2) we computed overhead
wage-related costs by multiplying the overhead hours ratio by wage-
related costs reported on Part II, Lines 13, 14, and 18; and (3) we
multiplied the computed overhead wage-related costs by the above
excluded area hours ratio. Finally, we subtracted the computed overhead
salaries, wage-related costs, and hours associated with excluded areas
from the

[[Page 24081]]

total salaries (plus wage-related costs) and hours derived in Steps 2
and 3.
Step 5--For each hospital, we adjusted the total salaries plus
wage-related costs to a common period to determine total adjusted
salaries plus wage-related costs. To make the wage adjustment, we
estimated the percentage change in the employment cost index (ECI) for
compensation for each 30-day increment from October 14, 2002, through
April 15, 2004, for private industry hospital workers from the BLS'
Compensation and Working Conditions. We use the ECI because it reflects
the price increase associated with total compensation (salaries plus
fringes) rather than just the increase in salaries. In addition, the
ECI includes managers as well as other hospital workers. This
methodology to compute the monthly update factors uses actual quarterly
ECI data and assures that the update factors match the actual quarterly
and annual percent changes. The factors used to adjust the hospital's
data were based on the midpoint of the cost reporting period, as
indicated below.

Midpoint of Cost Reporting Period
------------------------------------------------------------------------
Adjustment
After Before factor
------------------------------------------------------------------------
10/14/2002.................................. 11/15/2002 1.06058
11/14/2002.................................. 12/15/2002 1.05679
12/14/2002.................................. 01/15/2003 1.05304
01/14/2003.................................. 02/15/2003 1.04915
02/14/2003.................................. 03/15/2003 1.04513
03/14/2003.................................. 04/15/2003 1.04108
04/14/2003.................................. 05/15/2003 1.03713
05/14/2003.................................. 06/15/2003 1.03325
06/14/2003.................................. 07/15/2003 1.02948
07/14/2003.................................. 08/15/2003 1.02584
08/14/2003.................................. 09/15/2003 1.02231
09/14/2003.................................. 10/15/2003 1.01878
10/14/2003.................................. 11/15/2003 1.01510
11/14/2003.................................. 12/15/2003 1.01127
12/14/2003.................................. 01/15/2004 1.00743
01/14/2004.................................. 02/15/2004 1.00367
02/14/2004.................................. 03/15/2004 1.00000
03/14/2004.................................. 04/15/2004 0.99644
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning
January 1, 2003 and ending December 31, 2003 is June 30, 2003. An
adjustment factor of 1.02948 would be applied to the wages of a
hospital with such a cost reporting period. In addition, for the data
for any cost reporting period that began in FY 2003 and covered a
period of less than 360 days or more than 370 days, we annualized the
data to reflect a 1-year cost report. Dividing the data by the number
of days in the cost report and then multiplying the results by 365
accomplishes annualization.
Step 6--Each hospital was assigned to its appropriate urban or
rural labor market area before any reclassifications under section
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the
Act. Within each urban or rural labor market area, we added the total
adjusted salaries plus wage-related costs obtained in Step 5 for all
hospitals in that area to determine the total adjusted salaries plus
wage-related costs for the labor market area.
Step 7--We divided the total adjusted salaries plus wage-related
costs obtained under both methods in Step 6 by the sum of the
corresponding total hours (from Step 4) for all hospitals in each labor
market area to determine an average hourly wage for the area.
Step 8--We added the total adjusted salaries plus wage-related
costs obtained in Step 5 for all hospitals in the Nation and then
divided the sum by the national sum of total hours from Step 4 to
arrive at a national average hourly wage. Using the data as described
above, the proposed national average hourly wage is $29.6008.
Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8.
Step 10--Following the process set forth above, we developed a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. (The national Puerto Rico
standardized amount is adjusted by a wage index calculated for all
Puerto Rico labor market areas based on the national average hourly
wage as described above.) We added the total adjusted salaries plus
wage-related costs (as calculated in Step 5) for all hospitals in
Puerto Rico and divided the sum by the total hours for Puerto Rico (as
calculated in Step 4) to arrive at an overall proposed average hourly
wage of $12.9564 for Puerto Rico. For each labor market area in Puerto
Rico, we calculated the Puerto Rico-specific wage index value by
dividing the area average hourly wage (as calculated in Step 7) by the
overall Puerto Rico average hourly wage.
Step 11--Section 4410 of Pub. L. 105-33 provides that, for
discharges on or after October 1, 1997, the area wage index applicable
to any hospital that is located in an urban area of a State may not be
less than the area wage index applicable to hospitals located in rural
areas in that State. (For all-urban States, we established an imputed
floor (69 FR 49109). Furthermore, this wage index floor is to be
implemented in such a manner as to ensure that aggregate IPPS payments
are not greater or less than those that would have been made in the
year if this section did not apply. For FY 2007, this change affects
187 hospitals in 62 urban areas. The areas affected by this provision
are identified by a footnote in Tables 4A-1 and 4A-2 in the Addendum of
this proposed rule.

G. Computation of the Proposed FY 2007 Blended Wage Index

(If you choose to comment on issues in this section, please include
the caption ``Blended Wage Index'' at the beginning of your comment.)
For the final FY 2005 and FY 2006 wage indices, we used a blend of
the occupational mix adjusted wage index and the unadjusted wage index.
Specifically, we adjusted 10 percent of the FY 2005 and FY 2006 wage
index adjustment factor by a factor reflecting occupational mix. We
refer readers to the FY 2005 IPPS final rule at 69 FR 49052 and the FY
2006 IPPS final rule at 70 FR 47376 for a detailed discussion of the
blended wage index. For FY 2007, we are proposing to apply the same
blended wage index as we did in FYs 2005 and 2006, so that 10 percent
of the wage index is adjusted by a factor reflecting occupational mix.
We believe this is prudent policy because we are relying on the same
survey data used in FYs 2005 and 2006.
In computing the occupational mix adjustment for the proposed FY
2007 wage index, we used the occupational mix survey data that we
collected for the FY 2006 wage index, replacing the survey data for 16
hospitals that submitted revised data, and excluding the survey data
for hospitals with no corresponding Worksheet S-3 wage data for the FY
2007 wage index.
With 10 percent of the proposed FY 2007 wage index adjusted for
occupational mix, the proposed national average hourly wage is $29.6029
and the Puerto Rico-specific average hourly wage is $12.9557. The wage
index values for 17 rural areas (36.2 percent) and 200 urban areas
(51.8 percent) would decrease as a result of the adjustment. These
decreases would be minimal; the largest negative impact for a rural
area would be 0.18 percent and for an urban area, 0.42 percent.
Conversely, 29 rural areas (61.7 percent) and 173 urban areas (44.8
percent) would benefit from this adjustment, with 1 urban area
increasing 2.2 percent and 2 rural areas increasing 0.38 percent. As
there are no significant differences between the FY 2006 and the FY
2007 occupational mix survey data and results, we believe it is
appropriate to again apply the occupational mix to 10 percent of the
proposed FY 2007 wage index. (See Appendix A to this proposed rule for

[[Page 24082]]

further analysis of the impact of the occupational mix adjustment on
the proposed FY 2007 wage index.)
The proposed wage index values for FY 2007 (except those for
hospitals receiving wage index adjustments under section 505 of Pub. L.
108-173) are shown in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F in the
Addendum to this proposed rule.
Tables 3A and 3B in the Addendum to this proposed rule list the 3-
year average hourly wage for each labor market area before the
redesignation of hospitals, based on FYs 2005, 2006, 2007 cost
reporting periods. Table 3A lists these data for urban areas and Table
3B lists these data for rural areas. In addition, Table 2 in the
Addendum to this proposed rule includes the adjusted average hourly
wage for each hospital from the FY 2001 and FY 2002 cost reporting
periods, as well as the FY 2003 period used to calculate the proposed
FY 2007 wage index. The 3-year averages are calculated by dividing the
sum of the dollars (adjusted to a common reporting period using the
method described previously) across all 3 years, by the sum of the
hours. If a hospital is missing data for any of the previous years, its
average hourly wage for the 3-year period is calculated based on the
data available during that period.
The proposed wage index values in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-
2, and 4F and the average hourly wages in Tables 2, 3A, and 3B in the
Addendum to this proposed rule include the proposed occupational mix
adjustment.

H. Proposed Revisions to the Wage Index Based on Hospital
Redesignations

(If you choose to comment on issues in this section, please include
the caption ``Hospital Redesignations and Reclassifications'' at the
beginning of your comment.)
1. General
Under section 1886(d)(10) of the Act, the Medicare Geographic
Classification Review Board (MGCRB) considers applications by hospitals
for geographic reclassification for purposes of payment under the IPPS.
Hospitals must apply to the MGCRB to reclassify by September 1 of the
year preceding the year during which reclassification is sought.
Generally, hospitals must be proximate to the labor market area to
which they are seeking reclassification and must demonstrate
characteristics similar to hospitals located in that area. The MGCRB
issues its decisions by the end of February for reclassifications that
become effective for the following fiscal year (beginning October 1).
The regulations applicable to reclassifications by the MGCRB are
located in Sec. Sec. 412.230 through 412.280.
Section 1886(d)(10)(D)(v) of the Act provides that, beginning with
FY 2001, a MGCRB decision on a hospital reclassification for purposes
of the wage index is effective for 3 fiscal years, unless the hospital
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of
the Act provides that the MGCRB must use the 3 most recent years'
average hourly wage data in evaluating a hospital's reclassification
application for FY 2003 and any succeeding fiscal year.
Section 304(b) of Pub. L. 106-554 provides that the Secretary must
establish a mechanism under which a statewide entity may apply to have
all of the geographic areas in the State treated as a single geographic
area for purposes of computing and applying a single wage index, for
reclassifications beginning in FY 2003. The implementing regulations
for this provision are located at Sec. 412.235.
Section 1886(d)(8)(B) of the Act requires the Secretary to treat a
hospital located in a rural county adjacent to one or more urban areas
as being located in the MSA to which the greatest number of workers in
the county commute, if the rural county would otherwise be considered
part of an urban area under the standards for designating MSAs and if
the commuting rates used in determining outlying counties were
determined on the basis of the aggregate number of resident workers who
commute to (and, if applicable under the standards, from) the central
county or counties of all contiguous MSAs. In light of the new CBSA
definitions and the Census 2000 data that we implemented for FY 2005
(69 FR 49027), we undertook to identify those counties meeting these
criteria. The eligible counties are identified under section III.H.4.
of this preamble.
2. Effects of Reclassification
Section 1886(d)(8)(C) of the Act provides that the application of
the wage index to redesignated hospitals is dependent on the
hypothetical impact that the wage data from these hospitals would have
on the wage index value for the area to which they have been
redesignated. These requirements for determining the wage index values
for redesignated hospitals is applicable both to the hospitals located
in rural counties deemed urban under section 1886(d)(8)(B) of the Act
and hospitals that were reclassified as a result of the MGCRB decisions
under section 1886(d)(10) of the Act. Therefore, as provided in section
1886(d)(8)(C) of the Act,\12\ the wage index values were determined by
considering the following:
---------------------------------------------------------------------------

\12\ Although section 1886(d)(8)(C)(iv)(I) of the Act also
provides that the wage index for an urban area may not decrease as a
result of redesignated hospitals if the urban area wage index is
already below the wage index for rural areas in the State in which
the urban area is located, the provision was effectively made moot
by section 4410 of Pub. L. 105-33, which provides that the area wage
index applicable to any hospital that is located in an urban area of
a State may not be less than the area wage index applicable to
hospitals located in rural areas in that State. For all-urban
States, CMS established an imputed floor (69 FR 49109). Also,
section 1886(d)(8)(C)(iv)(II) of the Act provides that an urban
area's wage index may not decrease as a result of redesignated
hospitals if the urban area is located in a State that is composed
of a single urban area.
---------------------------------------------------------------------------

If including the wage data for the redesignated hospitals
would reduce the wage index value for the area to which the hospitals
are redesignated by 1 percentage point or less, the area wage index
value determined exclusive of the wage data for the redesignated
hospitals applies to the redesignated hospitals.
If including the wage data for the redesignated hospitals
reduces the wage index value for the area to which the hospitals are
redesignated by more than 1 percentage point, the area wage index
determined inclusive of the wage data for the redesignated hospitals
(the combined wage index value) applies to the redesignated hospitals.
If including the wage data for the redesignated hospitals
increases the wage index value for the urban area to which the
hospitals are redesignated, both the area and the redesignated
hospitals receive the combined wage index value. Otherwise, the
hospitals located in the urban area receive a wage index excluding the
wage data of hospitals redesignated into the area.
The wage data for a reclassified urban hospital is
included in both the wage index calculation of the area to which the
hospital is reclassified (subject to the rules described above) and the
wage index calculation of the urban area where the hospital is
physically located.
Rural areas whose wage index values would be reduced by
excluding the wage data for hospitals that have been redesignated to
another area continue to have their wage index values calculated as if
no redesignation had occurred (otherwise, redesignated rural hospitals
are excluded from the calculation of the rural wage index).
The wage index value for a redesignated rural hospital
cannot be reduced below the wage index value for the rural areas of the
State in which the hospital is located.
In cases where urban hospitals have reclassified to rural
areas under 42 CFR

[[Page 24083]]

412.103, the urban hospital wage data are: (a) Included in the rural
wage index calculation, unless doing so would reduce the rural wage
index; and (b) included in the urban area where the hospital is
physically located.
3. FY 2007 MGCRB Reclassifications
At the time this proposed rule was constructed, the MGCRB had
completed its review of FY 2007 reclassification requests. There are
214 hospitals approved by the MGCRB for wage index reclassifications
for FY 2007. Because MGCRB wage index reclassifications are effective
for 3 years, hospitals reclassified during FY 2005 or FY 2006 are
eligible to continue to be reclassified based on prior
reclassifications to current MSAs during FY 2007. There were 299
hospitals reclassified for wage index for FY 2006, and 395 hospitals
reclassified for wage index for FY 2005. Some of the hospitals that
reclassified for FY 2005 and FY 2006 have elected not to continue their
reclassifications in FY 2007 because, under the revised labor market
area definitions, they are now physically located in the areas to which
they previously reclassified. Of all of the hospitals approved for
reclassification for FY 2005, FY 2006, and FY 2007, 766 hospitals are
in a reclassification status for FY 2007.
Prior to FY 2004, hospitals had been able to apply to be
reclassified for purposes of either the wage index or the standardized
amount. Section 401 of Pub. L. 108-173 established that all hospitals
will be paid on the basis of the large urban standardized amount,
beginning with FY 2004. Consequently, all hospitals are paid on the
basis of the same standardized amount, which made such
reclassifications moot. Although there could still be some benefit in
terms of payments for some hospitals under the DSH payment adjustment
for operating IPPS, section 402 of Pub. L. 108-173 equalized DSH
payment adjustments for rural and urban hospitals, with the exception
that the rural DSH adjustment is capped at 12 percent (except that RRCs
and, effective for discharges occurring on or after October 1, 2006,
MDHs have no cap). (A detailed discussion of this application appears
in section IV.I. of the preamble of the FY 2005 IPPS final rule (69 FR
49085). The exclusion of MDHs from the 12 percent DSH cap under Pub. L.
109-171 is discussed under Section IV.F.4. of this preamble.)
Under Sec. 412.273, hospitals that have been reclassified by the
MGCRB are permitted to withdraw their applications within 45 days of
the publication of a proposed rule. The request for withdrawal of an
application for reclassification or termination of an existing 3-year
reclassification that would be effective in FY 2007 must be received by
the MGCRB within 45 days of the publication of this proposed rule. If a
hospital elects to withdraw its wage index application after the MGCRB
has issued its decision, but within 45 days of the publication of the
proposed rule, it may later cancel its withdrawal in a subsequent year
and request the MGCRB to reinstate its wage index reclassification for
the remaining fiscal year(s) of the 3-year period (Sec.
412.273(b)(2)(i)). The request to cancel a prior withdrawal must be in
writing to the MGCRB no later than the deadline for submitting
reclassification applications for the following fiscal year (Sec.
412.273(d)). For further information about withdrawing, terminating, or
canceling a previous withdrawal or termination of a 3-year
reclassification for wage index purposes, we refer the reader to Sec.
412.273, as well as the August 1, 2002 IPPS final rule (67 FR 50065)
and the August 1, 2001 IPPS final rule (66 FR 39887).
Changes to the wage index that result from withdrawals of requests
for reclassification, wage index corrections, appeals, and the
Administrator's review process will be incorporated into the wage index
values published in the final rule. These changes may affect not only
the wage index value for specific geographic areas, but also the wage
index value redesignated hospitals receive; that is, whether they
receive the wage index that includes the data for both the hospitals
already in the area and the redesignated hospitals. Further, the wage
index value for the area from which the hospitals are redesignated may
be affected.
Applications for FY 2008 reclassifications are due to the MGCRB by
September 1, 2006. We note that this is also the deadline for canceling
a previous wage index reclassification withdrawal or termination under
Sec. 412.273(d). Applications and other information about MGCRB
reclassifications may be obtained, beginning in mid-July 2006, via the
CMS Internet Web site at: http://www.cms.hhs.gov/mgcrb/, or by calling

the MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520
Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
4. Proposed FY 2007 Redesignations Under Section 1886(d)(8)(B) of the
Act
Beginning October 1, 1988, section 1886(d)(8)(B) of the Act
required us to treat a hospital located in a rural county adjacent to
one or more urban areas as being located in the MSA if certain criteria
were met. Prior to FY 2005, the rule was that a rural county adjacent
to one or more urban areas would be treated as being located in the MSA
to which the greatest number of workers in the county commute, if the
rural county would otherwise be considered part of an urban area under
the standards published in the Federal Register on January 3, 1980 (45
FR 956) for designating MSAs (and New England County Metropolitan Areas
(NECMAs)), and if the commuting rates used in determining outlying
counties (or, for New England, similar recognized areas) were
determined on the basis of the aggregate number of resident workers who
commute to (and, if applicable under the standards, from) the central
county or counties of all contiguous MSAs (or NECMAs). Hospitals that
met the criteria using the January 3, 1980 version of these OMB
standards were deemed urban for purposes of the standardized amounts
and for purposes of assigning the wage data index.
Effective beginning FY 2005, we use OMB's 2000 CBSA standards and
the Census 2000 data to identify counties qualifying for redesignation
under section 1886(d)(8)(B) for the purpose of assigning the wage index
to the urban area. The chart below contains the listing of the rural
counties designated as urban under section 1886(d)(8)(B) of the Act
that we are proposing to use for FY 2007. For discharges occurring on
or after October 1, 2006, hospitals located in the first column of this
chart will be redesignated for purposes of using the wage index of the
urban area listed in the second column.

Rural Counties Redesignated as Urban Under Section 1886(d)(8)(B) of the
Act
[Based on CBSAs and Census 2000 Data]
------------------------------------------------------------------------
Rural county CBSA
------------------------------------------------------------------------
Cherokee, AL........................... Rome, GA.
Macon, AL.............................. Auburn-Opelika, AL.

[[Page 24084]]

Talladega, AL.......................... Anniston-Oxford, AL.
Hot Springs, AR........................ Hot Springs, AR.
Windham, CT............................ Hartford-West Hartford-East
Hartford, CT.
Bradford, FL........................... Gainesville, FL.
Flagler, FL............................ Deltona-Daytona Beach-Ormond
Beach, FL.
Hendry, FL............................. West Palm Beach-Boca Raton-
Boynton, FL.
Levy, FL............................... Gainesville, FL.
Walton, FL............................. Fort Walton Beach-Crestview-
Destin, FL.
Banks, GA.............................. Gainesville, GA.
Chattooga, GA.......................... Chattanooga, TN-GA.
Jackson, GA............................ Atlanta-Sandy Springs-Marietta,
GA.
Lumpkin, GA............................ Atlanta-Sandy Springs-Marietta,
GA.
Morgan, GA............................. Atlanta-Sandy Springs-Marietta,
GA.
Peach, GA.............................. Macon, GA.
Polk, GA............................... Atlanta-Sandy Springs-Marietta,
GA.
Talbot, GA............................. Columbus, GA-AL.
Bingham, ID............................ Idaho Falls, ID.
Christian, IL.......................... Springfield, IL.
DeWitt, IL............................. Bloomington-Normal, IL.
Iroquois, IL........................... Kankakee-Bradley, IL.
Logan, IL.............................. Springfield, IL.
Mason, IL.............................. Peoria, IL.
Ogle, IL............................... Rockford, IL.
Clinton, IN............................ Lafayette, IN.
Henry, IN.............................. Indianapolis, IN.
Spencer, IN............................ Evansville, IN-KY.
Starke, IN............................. Gary, IN.
Warren, IN............................. Lafayette, IN.
Boone, IA.............................. Ames, IA.
Buchanan, IA........................... Waterloo-Cedar Falls, IA.
Cedar, IA.............................. Iowa City, IA.
Allen, KY.............................. Bowling Green, KY.
Assumption Parish, LA.................. Baton Rouge, LA.
St. James Parish, LA................... Baton Rouge, LA.
Allegan, MI............................ Holland-Grand Haven, MI.
Montcalm, MI........................... Grand Rapids-Wyoming, MI.
Oceana, MI............................. Muskegon-Norton Shores, MI.
Shiawassee, MI......................... Lansing-East Lansing, MI.
Tuscola, MI............................ Saginaw-Saginaw Township North,
MI.
Fillmore, MN........................... Rochester, MN.
Dade, MO............................... Springfield, MO.
Pearl River, MS........................ Gulfport-Biloxi, MS.
Caswell, NC............................ Burlington, NC.
Granville, NC.......................... Durham, NC.
Harnett, NC............................ Raleigh-Cary, NC.
Lincoln, NC............................ Charlotte-Gastonia-Concord, NC-
SC.
Polk, NC............................... Spartanburg, NC.
Los Alamos, NM......................... Santa Fe, NM.
Lyon, NV............................... Carson City, NV.
Cayuga, NY............................. Syracuse, NY.
Columbia, NY........................... Albany-Schenectady-Troy, NY.
Genesee, NY............................ Rochester, NY.
Greene, NY............................. Albany-Schenectady-Troy, NY.
Schuyler, NY........................... Ithaca, NY.
Sullivan, NY........................... Poughkeepsie-Newburgh-
Middletown, NY.
Wyoming, NY............................ Buffalo-Niagara Falls, NY.
Ashtabula, OH.......................... Cleveland-Elyria-Mentor, OH.
Champaign, OH.......................... Springfield, OH.
Columbiana, OH......................... Youngstown-Warren-Boardman, OH-
PA.
Cotton, OK............................. Lawton, OK.
Linn, OR............................... Corvallis, OR.
Adams, PA.............................. York-Hanover, PA.
Clinton, PA............................ Williamsport, PA.
Greene, PA............................. Pittsburgh, PA.
Monroe, PA............................. Allentown-Bethlehem-Easton, PA-
NJ.
Schuylkill, PA......................... Reading, PA.
Susquehanna, PA........................ Binghamton, NY.
Clarendon, SC.......................... Sumter, SC.
Lee, SC................................ Sumter, SC.
Oconee, SC............................. Greenville, SC.
Union, SC.............................. Spartanburg, SC.

[[Page 24085]]

Meigs, TN.............................. Cleveland, TN.
Bosque, TX............................. Waco, TX.
Falls, TX.............................. Waco, TX.
Fannin, TX............................. Dallas-Plano-Irving, TX.
Grimes, TX............................. College Station-Bryan, TX.
Harrison, TX........................... Longview, TX.
Henderson, TX.......................... Dallas-Plano-Irving, TX.
Milam, TX.............................. Austin-Round Rock, TX.
Van Zandt, TX.......................... Dallas-Plano-Irving, TX.
Willacy, TX............................ Brownsville-Harlingen, TX.
Buckingham, VA......................... Charlottesville, VA.
Floyd, VA.............................. Blacksburg-Christiansburg-
Radford, VA.
Middlesex, VA.......................... Virginia Beach-Norfolk-Newport
News, VA.
Page, VA............................... Harrisonburg, VA.
Shenandoah, VA......................... Winchester, VA-WV.
Island, WA............................. Seattle-Bellevue-Everett, WA.
Mason, WA.............................. Olympia, WA.
Wahkiakum, WA.......................... Longview, WA.
Jackson, WV............................ Charleston, WV.
Roane, WV.............................. Charleston, WV.
Green, WI.............................. Madison, WI.
Green Lake, WI......................... Fond du Lac, WI.
Jefferson, WI.......................... Milwaukee-Waukesha-West Allis,
WI.
Walworth, WI........................... Milwaukee-Waukesha-West Allis,
WI.
------------------------------------------------------------------------

As in the past, hospitals redesignated under section 1886(d)(8)(B)
of the Act are also eligible to be reclassified to a different area by
the MGCRB. Affected hospitals are permitted to compare the reclassified
wage index for the labor market area in Tables 4C-1 and 4C-2 in the
Addendum of this proposed rule into which they have been reclassified
by the MGCRB to the wage index for the area to which they are
redesignated under section 1886(d)(8)(B) of the Act. Hospitals may
withdraw from an MGCRB reclassification within 45 days of the
publication of this proposed rule.
5. Reclassifications Under Section 508 of Pub. L. 108-173
Under section 508 of Pub. L. 108-173, a qualifying hospital could
appeal the wage index classification otherwise applicable to the
hospital and apply for reclassification to another area of the State in
which the hospital is located (or, at the discretion of the Secretary,
to an area within a contiguous State). We implemented this process
through notices published in the Federal Register on January 6, 2004
(69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications
are applicable to discharges occurring during the 3-year period
beginning April 1, 2004, and ending March 31, 2007. Under section
508(b), reclassifications under this process do not affect the wage
index computation for any area or for any other hospital and cannot be
effected in a budget neutral manner.
Some hospitals currently receiving a section 508 reclassification
are eligible to reclassify to that same area under the standard
reclassification process as a result of the new labor market
definitions that we adopted for FY 2005. The governing regulations
indicate that ``if a hospital is already reclassified to a given
geographic area for wage index purposes for a 3-year period, and
submits an application to the same area for either the second or third
year of the 3-year period, that application will not be approved.''
However in the FY 2006 IPPS final rule (70 FR 47382), we stated that
hospitals that indicated in their FY 2007 MGCRB applications that they
agreed to waive their section 508 reclassification for the first 6
months of FY 2007 if they were granted a 3-year reclassification under
the traditional MGCRB process will not be subject to the rule cited
above. Thus, in applying for a 3-year MGCRB reclassification beginning
in FY 2007, hospitals that are already reclassified to the same area
under section 508 should have indicated in their MGCRB reclassification
requests that if they receive the MGCRB reclassification, they would
forfeit the section 508 reclassification for the first 6 months of FY
2007.
Under 1886(d)(10)(D)(v) of the Act, CMS has the authority to
``establish procedures'' under which a hospital may elect to terminate
a reclassification before the end of a 3-year period. In the FY 2006
IPPS final rule (70 FR 47382), we discussed our decision to exercise
this authority to establish a procedural rule for section 508 hospitals
to retain their section 508 reclassification through its expiration on
March 31, 2007, and reclassify under the regulations at 42 CFR Part
412, Subpart L, for the second half of FY 2007. The following
procedural rules will apply for section 508 hospitals that wish to
reclassify for the second half of FY 2007 (April 1, 2007, through
September 30, 2007):
For section 508 hospitals applying for individual reclassification
under Sec. 412.230--
(a) Hospitals must have applied for reclassification through the
MGCRB by the September 1, 2005 deadline.
(b) Section 508 hospitals that are approved by the MGCRB for
reclassification will have 45 days from the date this FY 2007 IPPS
proposed rule is published to cancel their section 1886(d)(10)
reclassification for either the first 6 months of FY 2007 or for the
entire fiscal year. Hospitals should note that if they fail to cancel
their section 1886(d)(10) reclassification by the deadline, they will
not receive their section 508 wage adjustment in FY 2007. To further
clarify--
Hospitals that cancel their section 1886(d)(10)
reclassification for the first 6 months receive their section 508
reclassification for October 1, 2006, through March 31, 2007, and their
section 1886(d)(10) reclassification for

[[Page 24086]]

April 1, 2007, through September 30, 2009.
Hospitals that cancel their section 1886(d)(10)
reclassification for the entire year will receive their section 508
reclassification for October 1, 2006, through March 31, 2007 and their
home area wage index for April 1, 2007, through September 30, 2007.
Hospitals that do not cancel their section 1886(d)(10)
reclassification will receive their section 1886(d)(10)
reclassification, not their section 508 reclassification, for the
entire fiscal year.
Hospital groups that include a section 508 hospital were also
permitted to submit section 1886(d)(10) reclassification applications
by the September 1, 2005 deadline. However, in order for a group
reclassification to be approved, either of the following conditions
needed to be met:
(a) The section 508 hospital that is part of the group waived its
section 508 reclassification for the first half of FY 2007. This is
necessary because the regulations at Sec. Sec. 412.232 and 412.234
state that all hospitals in a county must apply for reclassification as
a group. The hospitals either agreed to receive the same
reclassification or failed to qualify as a group. The Administrator
upheld this policy in an MGCRB appeal for FY 2006.
(b) Each member of the group agreed, in writing, at the time the
application was submitted September 1, 2005, that they cancelled the
group reclassification if granted for the first 6 months of FY 2007.
The section 1886(d)(10) reclassification then is effective only from
April 1, 2007, through September 30, 2007. In the FY 2006 final rule,
we stated that, under this scenario, the section 508 hospital receives
its section 508 reclassification from October 1, 2006, through March
31, 2007, and the remainder of the group receives the home wage index
for that time period. For April 1, 2007, through September 30, 2009,
the section 508 hospital and the remainder of the group receive the
group reclassification. The group may also cancel the April 1, 2007
through September 30, 2009 group reclassification within 45 days of
publication of this proposed rule.
We will apply a similar rule for purposes of the out-migration
adjustment for FY 2007 discussed in section III.I. of this preamble.
The statute states that a hospital cannot receive an out-migration
adjustment if it is reclassified under section 1886(d)(10) of the Act.
Therefore, eligible hospitals that are not reclassified during any part
of FY 2007 will, by default, receive an out-migration adjustment during
that time period. If the hospital is reclassified for all of FY 2007,
the hospital will be ineligible for the out-migration adjustment. If a
hospital has a half fiscal year reclassification, the hospital will be
eligible for the out-migration adjustment for the portion of the fiscal
year that it is not reclassified.
The procedural rules described in the FY 2006 IPPS final rule were
intended to address specific circumstances where individual and group
reclassifications involve a section 508 hospital. The rules were
designed to recognize the special circumstances of section 508 hospital
reclassifications ending mid-year during FY 2007 and were intended to
provide flexibility in our regulations that would allow previously
approved reclassifications to continue through March 31, 2007, and new
reclassifications to begin April 1, 2007, upon the conclusion of the
section 508 reclassifications. We have received questions about the
application of these special procedural rules to non-section 508
hospitals that are part of group applications that previously were
awarded an individual reclassification that continues into FY 2007.
These hospitals are concerned that the procedural rules imply that such
prior reclassification would be terminated beginning October 1, 2006,
because the rules specify that ``the remainder of the group receives
the home wage index'' for the period October 1, 2006, through March 31,
2007, if the group reclassification application specified that the
section 1886(d)(10) group reclassification would not begin until April
1, 2007. We did not specifically contemplate preexisting individual
reclassifications when we drafted the special procedural rules for
group reclassifications that involve section 508 hospitals. However, we
did not intend to adopt a less favorable policy for non-section 508
hospitals in a group with a pending individual geographic
reclassification than we did for section 508 hospitals. Thus, we are
clarifying our procedural rule with respect to non-section 508
hospitals with preexisting individual reclassifications that are part
of group reclassifications that include a section 508 hospital.
For the first half of FY 2007, we intend to either apply (a) the
area wage index where the hospital is physically located if there is no
reclassification pending, or (b) the hospital's individual
reclassification wage index if the hospital was part of a group awarded
a group reclassification and the group followed the procedural rules
for postponing reclassification until April 1, 2007. However, once the
hospital begins its new section 1886(d)(10) reclassification for the
period April 1, 2007, through September 30, 2009, any prior
reclassifications are permanently terminated, consistent with 42 CFR
412.274(b)(2)(ii). In fact, because any withdrawal of the group
reclassification must be received within 45 days of the publication of
this proposed rule, failure to meet this deadline would effectively
permanently terminate any remaining years of the individual
reclassification. Further, a non-section 508 hospital that is part of a
group reclassification that includes a section 508 hospital that will
not begin until April 1, 2007, will have the option of canceling its
preexisting reclassification for the entire year consistent with
section 412.274(b)(1)(ii) within 45 days of publication of this
proposed rule. Under this scenario, the hospital would receive its home
wage index for the first half of the year and the approved group
reclassification wage index for the second half of the year. We are
also reiterating that the special procedural rules that we have adopted
for half fiscal year reclassifications and terminations are intended
only to address the special circumstances created by section 508 of
Pub. L. 108-173 with respect to reclassifications beginning and ending
mid-way through a fiscal year. These special procedural rules do not
change any of the permanent provisions currently in effect with respect
to reclassifications under subpart L of 42 CFR Part 412.
As an example: Suppose Hospital A is a non-section 508 hospital
that was part of a group reclassification application for FYs 2007
through 2009 and such group contained a section 508 hospital. In
accordance with our special section 508 procedural rule, the entire
group would be considered to have agreed it would waive its group
reclassification for the first half of FY 2007. Hospital A also is
currently (for FY 2006) reclassified from Area X to Area Y for FYs 2006
through 2008. For the first half of FY 2007, Hospital A will continue
to receive its individual reclassification to Area Y; for the second
half of FY 2007, it will receive the group reclassification.
Hospital A may terminate its individual reclassification
(termination must be received within 45 days of publication of this
proposed rule), in which case it will receive its home wage index for
the first half of FY 2007 and the group reclassification for the second
half. Acceptance of the group reclassification effectively permanently
terminates the individual reclassification to Area Y.
Hospital A's group also has the option of withdrawing its group
reclassification (withdrawal must be received within 45 days of
publication of this proposed rule

[[Page 24087]]

and all members of the group must agree). If such withdrawal occurs,
the default rule is that Hospital A receives its FYs 2006 through 2008
individual reclassification for all of FY 2007.
If Hospital A wishes to receive its home wage index (plus any out-
migration adjustment, if applicable), it must also terminate the
individual reclassification for all of FY 2007 (termination must be
received within 45 days of publication of this proposed rule).
We show the reclassifications effective under the one-time appeal
process in Table 9B in the Addendum to this proposed rule. All section
1886(d)(10) reclassifications are listed in Table 9A in the Addendum to
this proposed rule.
6. Proposed Wage Indices for Reclassified Hospitals and Proposed
Reclassification Budget Neutrality Factor
Under the procedural rules described under section III.H.5. of this
preamble, different wage indices may be in effect for the first 6
months and the second 6 months of FY 2007. Specifically, section 508
hospitals that were approved for individual reclassification under
Sec. 412.230 have the opportunity to cancel their section 1886(d)(10)
reclassification for the first 6 months within 45 days of the
publication of this proposed rule and receive their section 508
reclassifications for October 1, 2006, through March 31, 2007, and
their section 1886(d)(10) reclassifications for April 1, 2007, through
September 30, 2009. The special procedural rule also applied to urban
county group applications including a section 508 hospital. In order
for the hospital to retain its section 508 reclassification for the
first 6 months, each member of the group must have agreed in writing,
at the time the application was submitted, that they cancel the group
reclassification if granted for the first 6 months of FY 2007. Under
this scenario, the section 508 hospital receives its section 508
reclassification from October 1, 2006, through March 31, 2007, and the
remainder of the group receives their preexisting individual
reclassification or home wage index for that time period. For April 1,
2007, through September 30, 2009, the section 508 hospital and the
remainder of the group receive the group reclassification.
The half fiscal year section 1886(d)(10) reclassifications
permitted under these procedural rules present issues related to the
calculation of the reclassified wage indices and reclassification
budget neutrality factor. Section 1886(d)(8)(C) of the Act provides
requirements for determining the wage index values for both hospitals
located in rural counties deemed urban under section 1886(d)(8)(B) of
the Act and hospitals that were reclassified as a result of the MGCRB
decisions under section 1886(d)(10) of the Act. As provided in the
statute, we are required to calculate a separate wage index for
hospitals reclassified to an area if including the wage data for the
reclassified hospitals would reduce the area wage index by more than 1
percent. Conceivably, we could calculate one reclassified wage index
for FY 2007 that would include the wage data of hospitals that are
reclassified to the area for any part of FY 2007. However, we are aware
of situations in which including the wage data from hospitals only
reclassifying for the second half of the fiscal year would change the
wage index for reclassified hospitals for the entire fiscal year, even
though the reclassification would only be in effect during the second
half of the fiscal year. We believe it would be unfair to have wage
indices affected for the first half of the fiscal year by including the
wage data for hospital reclassifications in effect only for the second
half of the fiscal year. We believe that the most equitable approach to
this issue would be to calculate separate wage indices for reclassified
hospitals for the first and second half of FY 2007. Therefore, we are
proposing to issue two separate reclassified wage indices for affected
areas (one effective from October 1, 2006, through March 31, 2007, and
a second reclassified wage index effective April 1, 2007, through
September 30, 2007). The reclassified wage indices would be calculated
based on the wage data for hospitals reclassified to the area in the
respective half of the fiscal year.
The half fiscal year reclassifications also have implications for
budget neutrality. The overall effect of geographic reclassification is
required by section 1886(d)(8)(D) of the Act to be budget neutral. We
apply an adjustment to the IPPS standardized amounts to ensure that the
effects of geographic reclassification are budget neutral. Because we
are proposing to calculate two separate reclassification wage indices
for the first half and the second half of FY 2007, it is conceivable
that we could apply budget neutrality separately for first and second
half fiscal year reclassifications. Under this scenario, we would issue
two separate IPPS standardized amounts for FY 2007. However, we believe
this approach would be administratively burdensome and perhaps cause
confusion in the provider community. For this reason, we are proposing
an alternative approach. We are proposing to calculate one budget
neutrality adjustment that reflects the average of the adjustments
required for first and second half fiscal year reclassifications,
respectively, as discussed in section II.A.4.b. of the Addendum to this
proposed rule.

I. Proposed FY 2007 Wage Index Adjustment Based on Commuting Patterns
of Hospital Employees

(If you choose to comment on issues in this section, please include
the caption ``Out-Migration Adjustment'' at the beginning of your
comment.)
In accordance with the broad discretion under section 1886(d)(13)
of the Act, as added by section 505 of Pub. L. 108-173, beginning with
FY 2005, we established a process to make adjustments to the hospital
wage index based on commuting patterns of hospital employees. T