[Federal Register: May 12, 2006 (Volume 71, Number 92)]
[Rules and Regulations]
[Page 27797-27939]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12my06-25]
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Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Part 412
Medicare Program; Prospective Payment System for Long-Term Care
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and
Clarification; Final Rule
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 412
[CMS-1485-F]
RIN 0938-AO06
Medicare Program; Prospective Payment System for Long-Term Care
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and
Clarification
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final Rule.
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SUMMARY: This final rule updates the annual payment rates for the
Medicare prospective payment system (PPS) for inpatient hospital
services provided by long-term care hospitals (LTCHs). The payment
amounts and factors used to determine the updated Federal rates that
are described in this final rule have been determined for the LTCH PPS
rate year July 1, 2006 through June 30, 2007. The annual update of the
long-term care diagnosis-related group (LTC-DRG) classifications and
relative weights remains linked to the annual adjustments of the acute
care hospital inpatient diagnosis-related group system, and will
continue to be effective each October 1. The outlier threshold for July
1, 2006, through June 30, 2007, is also derived from the LTCH PPS rate
year calculations. We are also finalizing policy changes and making
clarifications.
DATES: This final rule is effective July 1, 2006.
FOR FURTHER INFORMATION CONTACT:
Tzvi Hefter, (410) 786-4487 (General information).
Judy Richter, (410) 786-2590 (General information, payment
adjustments for special cases, and onsite discharges and readmissions,
interrupted stays, co-located providers, and short-stay outliers).
Michele Hudson, (410) 786-5490 (Calculation of the payment rates,
LTC-DRGs, relative weights and case-mix index, market basket, wage
index, budget neutrality, and other payment adjustments).
Ann Fagan, (410) 786-5662 (Patient classification system).
Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and cost-to-
charge ratios).
Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted
stay, and transition period).
Nancy Kenly, (410) 786-7792 (Federal rate update and case-mix
index).
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Legislative and Regulatory Authority
B. Criteria for Classification as a LTCH
1. Classification as a LTCH
2. Hospitals Excluded from the LTCH PPS
C. Transition Period for Implementation of the LTCH PPS
D. Limitation on Charges to Beneficiaries
E. Administrative Simplification Compliance Act (ASCA) and
Health Insurance Portability and Accountability Act (HIPAA)
Compliance
II. Publication of Proposed Rulemaking
III. Summary of Major Contents of this Final Rule
A. Update Changes
B. Policy Changes
C. MedPAC Recommendations
D. Impact
IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications
and Relative Weights
A. Background
B. Patient Classifications into DRGs
C. Organization of DRGs
D. Update of LTC-DRGs
E. ICD-9-CM Coding System
1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
2. Maintenance of the ICD-9-CM Coding System
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
F. Method for Updating the LTC-DRG Relative Weights
V. Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate
Year
A. Overview of the Development of the Payment Rates
B. LTCH PPS Market Basket
1. Overview of the RPL Market Basket
2. Methodology for the Operating Portion of the RPL LTCH PPS
Market Basket
3. Methodology for the Capital Portion of the RPL Market Basket
4. Market Basket Estimate for the 2007 LTCH PPS Rate Year
C. Standard Federal Rate for the 2007 LTCH PPS Rate Year
1. Background
2. Description of a Preliminary Model of an Update Framework
under the LTCH PPS
3. Update to the Standard Federal Rate for the 2007 LTCH PPS
Rate Year
4. Standard Federal Rate for the 2007 LTCH PPS Rate Year
D. Calculation of LTCH Prospective Payments for the 2007 LTCH
PPS Rate Year
1. Adjustment for Area Wage Levels
a. Background
b. Geographic Classifications/Labor Market Area Definitions
c. Labor-Related Share
d. Wage Index Data
2. Adjustment for Cost-of-Living in Alaska and Hawaii
3. Adjustment for High-Cost Outliers (HCOs)
a. Background
b. Cost-to-charge ratios (CCRs)
c. Establishment of the Fixed-Loss Amount
d. Reconciliation of Outlier Payments Upon Cost Report
Settlement
4. Other Payment Adjustments
5. Budget Neutrality Offset to Account for the Transition
Methodology
6. One-time Prospective Adjustment to the Standard Federal Rate.
VI. Other Policy Changes for the 2007 LTCH PPS Rate Year
A. Adjustments for Special Cases
1. Adjustment of Short-Stay Outlier (SSO) Cases
a. Changes to the Method for Determining the Payment Amount for
SSO Cases
b. Changes to the Determination of Cost-to-Charge Ratios (CCRs)
and Reconciliation of SSO Cases
2. The 3-day or Less Interruption of Stay Policy
B. Special payment provisions for LTCH hospitals within
hospitals (HwHs) and LTCH satellites
VII. Computing the Adjusted Federal Prospective Payments for the
2007 LTCH PPS Rate Year
VIII. Transition Period
IX. Payments to New LTCHs
X. Method of Payment
XI. Monitoring
XII. MedPAC Recommendations
A. Discussion of MedPAC's March 2006 Report to Congress:
Medicare Payment Policy
B. RTI Report on MedPAC's June 2004 Recommendations
XIII. Health Care Information Transparency Initiative
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis
Addendum--Tables
Appendix A--Description of a Preliminary Model of an Update Framework
Under the LTCH PPS
Acronyms
Because of the many terms to which we refer by acronym in this
final rule, we are listing the acronyms used and their corresponding
terms in alphabetical order below:
3M 3M Health Information Systems
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
APR All patient refined
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L.
107-105)
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L.
106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Benefits Improvement and Protection Act of 2000
(Pub. L. 106-554)
BLS Bureau of Labor Statistics
CBSA Core-based statistical area
CC Complications and comorbidities
CCR Cost-to-charge ratio
C&M Coordination and maintenance
CMI Case-mix index
[[Page 27799]]
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated metropolitan statistical area
COLA Cost-of-living adjustment
COPS Medicare conditions of participation
CPI Consumer Price Indexes
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
ECI Employment Cost Indexes
FI Fiscal intermediary
FY Federal fiscal year
HCO High-cost outlier
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L.
104-191)
HIPC Health Information Policy Council
HwHs Hospitals within hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision,
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare code editor
MDC Major diagnostic categories
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
MMA Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (Pub. L. 108-173)
MSA Metropolitan statistical area
NAICS North American Industrial Classification System
NCHS National Center for Health Statistics
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
QIO Quality Improvement Organization (formerly Peer Review
organization (PRO))
RIA Regulatory impact analysis
RPL Rehabilitation psychiatric long-term care (hospital)
RTI Research Triangle Institute, International
RY Rate year (begins July 1 and ends June 30)
SIC Standard industrial code
SNF Skilled nursing facility
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-
248)
UHDDS Uniform hospital discharge data set
I. Background
A. Legislative and Regulatory Authority
Section 123 of the Medicare, Medicaid, and SCHIP [State Children's
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA)
(Pub. L. 106-113) as amended by section 307(b) of the Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA) (Pub. L. 106-554) provides for payment for both the operating
and capital-related costs of hospital inpatient stays in long-term care
hospitals (LTCHs) under Medicare Part A based on prospectively set
rates. The Medicare prospective payment system (PPS) for LTCHs applies
to hospitals described in section 1886(d)(1)(B)(iv) of the Social
Security Act (the Act), effective for cost reporting periods beginning
on or after October 1, 2002.
Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a
hospital which has an average inpatient length of stay (as determined
by the Secretary) of greater than 25 days.'' Section
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative
definition of LTCHs: Specifically, a hospital that first received
payment under section 1886(d) of the Act in 1986 and has an average
inpatient length of stay (LOS) (as determined by the Secretary of
Health and Human Services (the Secretary)) of greater than 20 days and
has 80 percent or more of its annual Medicare inpatient discharges with
a principal diagnosis that reflects a finding of neoplastic disease in
the 12-month cost reporting period ending in FY 1997.
Section 123 of the BBRA requires the PPS for LTCHs to be a per
discharge system with a diagnosis-related group (DRG) based patient
classification system that reflects the differences in patient
resources and costs in LTCHs while maintaining budget neutrality.
Section 307(b)(1) of the BIPA, among other things, mandates that
the Secretary shall examine, and may provide for, adjustments to
payments under the LTCH PPS, including adjustments to DRG weights, area
wage adjustments, geographic reclassification, outliers, updates, and a
disproportionate share adjustment.
In a Federal Register document issued on August 30, 2002, we
implemented the LTCH PPS authorized under BBRA and BIPA (67 FR 55954).
This system uses information from LTCH patient records to classify
patients into distinct long-term care diagnosis-related groups (LTC-
DRGs) based on clinical characteristics and expected resource needs.
Payments are calculated for each LTC-DRG and provisions are made for
appropriate payment adjustments. Payment rates under the LTCH PPS are
updated annually and published in the Federal Register.
The LTCH PPS replaced the reasonable cost-based payment system
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH
with a cost reporting period beginning on or after October 1, 2002.
(The regulations implementing the TEFRA reasonable cost-based payment
provisions are located at 42 CFR part 413.) With the implementation of
the PPS for acute care hospitals authorized by the Social Security
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the
Act, certain hospitals, including LTCHs, were excluded from the PPS for
acute care hospitals and were paid their reasonable costs for inpatient
services subject to a per discharge limitation or target amount under
the TEFRA system. Generally, for each cost reporting period, a
hospital-specific ceiling on payments was determined by multiplying the
hospital's updated target amount by the number of total current year
Medicare discharges. The August 30, 2002 final rule further details the
payment policy under the TEFRA system (67 FR 55954).
In the August 30, 2002 final rule, we also presented an in-depth
discussion of the LTCH PPS, including the patient classification
system, relative weights, payment rates, additional payments, and the
budget neutrality requirements mandated by section 123 of the BBRA. The
same final rule that established regulations for the LTCH PPS under
part 412, subpart O, also contained LTCH provisions related to covered
inpatient services, limitation on charges to beneficiaries, medical
review requirements, furnishing of inpatient hospital services directly
or under arrangement, and reporting and recordkeeping requirements. We
refer readers to the August 30, 2002 final rule for a comprehensive
discussion of the research and data that supported the establishment of
the LTCH PPS (67 FR 55954).
On June 6, 2003, we published a final rule in the Federal Register
(68 FR 34122) that set forth the FY 2004 annual update of the payment
rates for the Medicare PPS for inpatient hospital services furnished by
LTCHs. It also changed the annual period for which the payment rates
are effective. The annual updated rates are now effective from July 1
through June 30 instead of from October 1 through September 30.
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We refer to the July through June time period as a ``long-term care
hospital rate year'' (LTCH PPS rate year). In addition, we changed the
publication schedule for the annual update to allow for an effective
date of July 1. The payment amounts and factors used to determine the
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate
year. While the LTCH payment rate update is effective July 1, the
annual update of the LTC-DRG classifications and relative weights are
linked to the annual adjustments of the acute care hospital inpatient
DRGs and are effective each October 1.
On May 6, 2005, we published the Prospective Payment System for
Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes,
and Clarifications final rule (70 FR 24168) (hereinafter referred to as
the RY 2006 LTCH PPS final rule). In this rule, we set forth the 2006
LTCH PPS rate year annual update of the payment rates for the Medicare
PPS for inpatient hospital services provided by LTCHs. We also
discussed clarification of the notification policy for co-located LTCHs
and satellite facilities. The RY 2006 LTCH PPS final rule also included
a provision to extend the surgical DRG exception in the 3-day or less
interruption of stay policy at Sec. 412.531, as well as a provision
that clarified and modified existing notification requirements for the
purpose of implementing Sec. 412.532.
B. Criteria for Classification as a LTCH
1. Classification as a LTCH
Under the existing regulations at Sec. 412.23(e)(1) and (e)(2)(i),
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to
be paid under the LTCH PPS, a hospital must have a provider agreement
with Medicare and must have an average Medicare inpatient LOS of
greater than 25 days. Alternatively, Sec. 412.23(e)(2)(ii) states that
for cost reporting periods beginning on or after August 5, 1997, a
hospital that was first excluded from the PPS in 1986 and can
demonstrate that at least 80 percent of its annual Medicare inpatient
discharges in the 12-month cost reporting period ending in FY 1997 have
a principal diagnosis that reflects a finding of neoplastic disease,
must have an average inpatient LOS for all patients, including both
Medicare and non-Medicare inpatients, of greater than 20 days.
Section 412.23(e)(3) provides that, subject to the provisions of
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average
Medicare inpatient LOS, specified under Sec. 412.23(e)(2)(i) is
calculated by dividing the total number of covered and noncovered days
of stay of Medicare inpatients (less leave or pass days) by the number
of total Medicare discharges for the hospital's most recent complete
cost reporting period. Section 412.23 also provides that subject to the
provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section,
the average inpatient LOS specified under Sec. 412.23(e)(2)(ii) is
calculated by dividing the total number of days for all patients,
including both Medicare and non-Medicare inpatients (less leave or pass
days) by the number of total discharges for the hospital's most recent
complete cost reporting period.
In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the
procedure for calculating a hospital's inpatient average length of stay
(ALOS) for purposes of classification as a LTCH. That is, if a
patient's stay includes days of care furnished during two or more
separate consecutive cost reporting periods, the total days of a
patient's stay would be reported in the cost reporting period during
which the patient is discharged (69 FR 25705). Therefore, we revised
the regulations at Sec. 412.23(e)(3)(ii) to specify that, effective
for cost reporting periods beginning on or after July 1, 2004, in
calculating a hospital's ALOS, if the days of an inpatient stay involve
days of care furnished during two or more separate consecutive cost
reporting periods, the total number of days of the stay are considered
to have occurred in the cost reporting period during which the
inpatient was discharged.
Fiscal intermediaries (FIs) verify that LTCHs meet the ALOS
requirements. We note that the inpatient days of a patient who is
admitted to a LTCH without any remaining Medicare days of coverage,
regardless of the fact that the patient is a Medicare beneficiary, will
not be included in the above calculation. Because Medicare would not be
paying for any of the patient's treatment, data on the patient's stay
would not be included in the Medicare claims processing systems. As
described in Sec. 409.61, in order for both covered and noncovered
days of a LTCH hospitalization to be included, a patient admitted to
the LTCH must have at least one remaining benefit day (68 FR 34123).
The FI's determination of whether or not a hospital qualified as a
LTCH is based on the hospital's discharge data from the hospital's most
recent complete cost reporting period (Sec. 412.23(e)(3)) and is
effective at the start of the hospital's next cost reporting period
(Sec. 412.22(d)). However, if the hospital does not meet the ALOS
requirement as specified in Sec. 412.23(e)(2)(i) and (ii), the
hospital may provide the intermediary with data indicating a change in
the ALOS by the same method for the period of at least 5 months of the
immediately preceding 6-month period (69 FR 25676). Our interpretation
of the current regulations at Sec. 412.23(e)(3) was to allow hospitals
to submit data using a period of at least 5 months of the most recent
data from the immediately preceding 6-month period.
As we stated in the FY 2004 Inpatient Prospective Payment System
(IPPS) final rule, published August 1, 2003, prior to the
implementation of the LTCH PPS, we did rely on data from the most
recently submitted cost report for purposes of calculating the ALOS (68
FR 45464). The calculation to determine whether an acute care hospital
qualifies for LTCH status was based on total days and discharges for
LTCH inpatients. However, with the implementation of the LTCH PPS, for
the ALOS specified under Sec. 412.23(e)(2)(i), we revised Sec.
412.23(e)(3)(i) to only count total days and discharges for Medicare
inpatients (67 FR 55970 through 55974). In addition, the ALOS specified
under Sec. 412.23(e)(2)(ii) is calculated by dividing the total number
of days for all patients, including both Medicare and non-Medicare
inpatients (less leave or pass days) by the number of total discharges
for the hospital's most recent complete cost reporting period. As we
discussed in the FY 2004 IPPS final rule, we are unable to capture the
necessary data from our present cost reporting forms (68 FR 45464).
Therefore, we have notified FIs and LTCHs that until the cost reporting
forms are revised, for purposes of calculating the ALOS, we will be
relying upon census data extracted from Medicare Provider Analysis and
Review (MedPAR) files that reflect each LTCH's cost reporting period
(68 FR 45464). Requirements for hospitals seeking classification as
LTCHs that have undergone a change in ownership, as described in Sec.
489.18, are set forth in Sec. 412.23(e)(3)(iv).
2. Hospitals Excluded from the LTCH PPS
The following hospitals are paid under special payment provisions,
as described in Sec. 412.22(c) and, therefore, are not subject to the
LTCH PPS rules:
Veterans Administration hospitals.
Hospitals that are reimbursed under State cost control
systems approved under 42 CFR part 403.
Hospitals that are reimbursed in accordance with
demonstration projects
[[Page 27801]]
authorized under section 402(a) of the Social Security Amendments of
1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or section 222(a) of the
Social Security Amendments of 1972 (Pub. L. 92-603) (42 U.S.C. 1395b-1
(note)) (Statewide all-payer systems, subject to the rate-of-increase
test at section 1814(b) of the Act).
Nonparticipating hospitals furnishing emergency services
to Medicare beneficiaries.
C. Transition Period for Implementation of the LTCH PPS
In the August 30, 2002 final rule, we provided for a 5-year
transition period from reasonable cost-based reimbursement to a full
Federal prospective payment based on 100 percent of the Federal rate
for LTCHs (67 FR 56038). However, existing LTCHs and LTCHs that are not
defined as new in Sec. 412.533(d) have the option to elect to be paid
based on 100 percent of the Federal prospective payment. During the 5-
year period, two payment percentages are to be used to determine a
LTCH's total payment under the PPS. The blend percentages are as shown
in Table 1.
Table 1
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Reasonable
Prospective cost-based
Cost reporting periods beginning on or payment reimbursement
after federal rate rate
percentage percentage
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October 1, 2002......................... 20 80
October 1, 2003......................... 40 60
October 1, 2004......................... 60 40
October 1, 2005......................... 80 20
October 1, 2006......................... 100 0
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D. Limitation on Charges to Beneficiaries
In the August 30, 2002 final rule, we presented an in-depth
discussion of beneficiary liability under the LTCH PPS (67 FR 55974
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we
clarified that the discussion of beneficiary liability in the August
30, 2002 final rule was not meant to establish rates or payments for,
or define Medicare-eligible expenses. Under Sec. 412.507, as
consistent with other established hospital prospective payment systems,
a LTCH may not bill a Medicare beneficiary for more than the deductible
and coinsurance amounts as specified under Sec. 409.82, Sec. 409.83,
and Sec. 409.87 and for items and services as specified under Sec.
489.30(a) if the Medicare payment to the LTCH is the full LTC-DRG
payment amount. However, under the LTCH PPS, Medicare will only pay for
days for which the beneficiary has coverage until the short-stay
outlier (SSO) threshold is exceeded. (See section V.A.1.a. of this
preamble.) Therefore, if the Medicare payment was for a SSO case (Sec.
412.529) that was less than the full LTC-DRG payment amount because the
beneficiary had insufficient remaining Medicare days, the LTCH could
also charge the beneficiary for services delivered on those uncovered
days (Sec. 412.507).
E. Administrative Simplification Compliance Act (ASCA) and Health
Insurance Portability and Accountability Act (HIPAA) Compliance
Claims submitted to Medicare must comply with both the
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105),
and Health Insurance Portability and Accountability Act (HIPAA) (Pub.
L. 104-191). Section 3 of the ASCA requires that the Medicare Program
deny payment under Part A or Part B for any expenses for items or
services ``for which a claim is submitted other than in an electronic
form specified by the Secretary.'' Section 1862(h) of the Act (as added
by section 3(a) of the ASCA) provides that the Secretary shall waive
such denial in two types of cases and may also waive such denial ``in
such unusual cases as the Secretary finds appropriate.'' (Also, see 68
FR 48805, August 15, 2003, implementing section 3 of the ASCA.) Section
3 of the ASCA operates in the context of the Administrative
Simplification provisions of HIPAA, which include, among other
provisions, the transactions and code sets standards requirements
codified as 45 CFR parts 160 and 162, subparts A and I through R
(generally known as the Transactions Rule). The Transactions Rule
requires covered entities, including covered providers, to conduct
covered electronic transactions according to the applicable
transactions and code sets standards.
II. Publication of Proposed Rulemaking
On January 27, 2006, we published the RY 2007 LTCH PPS proposed
rule in the Federal Register (71 FR 4648 through 4779) that set forth
the proposed annual update to the payments for the Medicare prospective
payment system (PPS) for inpatient hospital services provided by long-
term care hospitals (LTCHs) for the 2007 LTCH PPS rate year. (The
annual update of the LTC-DRG classifications and relative weights for
FY 2007 remains linked to the annual adjustments of the acute care
hospital inpatient DRG system, which will be published by August 1,
2006 and will be effective October 1, 2006.
In the RY 2007 LTCH PPS proposed rule (71 FR 4648 through 4779), we
discussed the proposed annual update to the payment rates for the
Medicare LTCH PPS, as well as other proposed policy changes. The
following is a summary of the major areas that we addressed in the
proposed rule.
In the proposed rule, we discussed the LTCH PPS patient
classification and the relative weights which remain linked to the
annual adjustments of the acute care hospital inpatient DRG system, and
are based on the annual revisions to the International Classification
of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes
effective each October 1. (See section IV. of this preamble.)
In addition, we proposed to adopt the ``Rehabilitation,
Psychiatric, Long-Term Care (RPL)'' market basket under the LTCH PPS in
place of the excluded hospital with capital market basket. (See section
V.B. of this preamble.)
We also proposed a zero percent update to the LTCH PPS Federal rate
for the 2007 LTCH PPS rate year instead of the most recent estimate of
the LTCH
[[Page 27802]]
PPS market basket. (See section V.C. of this preamble.)
In that same proposed rule, we discussed the proposed prospective
payment rate for RY 2007, and the applicable adjustments to the
proposed payment rates, including the proposed revisions to the wage
index, the proposed cost-of-living adjustment factors, the proposed
outlier threshold, and the proposed transition period budget neutrality
factor for the 2007 LTCH PPS rate year. We also proposed revisions to
the cost-to-charge ratio and reconciliation provisions as they apply to
LTCH outlier payment policies. (See section V.C. and V.D. of this
preamble.)
In addition, we discussed our proposal to revise the LTCH PPS
labor-related share based on RPL market basket and our proposal to
revise the labor-related and non-labor related shares of the Federal
rate based on the RPL market basket. We also proposed to postpone the
deadline for making the one-time prospective adjustment for the Federal
rate at Sec. 412.523(d)(3). (See section V.D. of this preamble.)
Also, we proposed to revise the existing payment adjustment for SSO
cases by reducing the part of the current payment formula that is based
on costs and adding a fourth component to the current payment formula.
We also proposed to sunset the surgical DRG exception to the payment
policy established under the 3-day or less interruption of stay
regulations at Sec. 412.531(a)(1). (See section VI.A. of this
preamble.)
For LTCH hospitals within hospitals (HwHs) and LTCH satellites, we
proposed to clarify at Sec. 412.534(c) that under the policy for
adjusting the LTCH PPS payment based on the amount that would be
determined under the IPPS payment methodology, we will calculate the
LTCH PPS payment amount that is equivalent to what would otherwise be
paid under the IPPS. We also proposed to codify in regulations the
general formula we currently use to give affect to the regulations as
they pertain to calculating an amount under subpart O that is
equivalent to an amount that would be determined under Sec. 412.1(a).
(See section VI.B. of this preamble.)
In the same proposed rule, we discussed our on-going monitoring
protocols under the LTCH PPS. (See section XI. of this preamble.)
In addition, we discussed the recommendations made by the Research
Triangle Institute, International's (RTI) evaluation of the feasibility
of adopting recommendations made in the June 2004 MedPAC Report. (See
section XII. of this preamble.)
We also analyzed the impact of the proposed changes presented in
the proposed rule on Medicare expenditures, Medicare-participating
LTCHs, and Medicare beneficiaries. (See section XIV. of this preamble.)
In Appendix A of the proposed rule, we presented a description of a
preliminary model of an update framework under the LTCH PPS that we may
propose to use in the future for purposes of the annual updating of the
LTCH PPS Federal rate in future years.
We received a total of 860 timely comments on the proposed rule.
The major issues addressed by the commenters included: The proposed
update framework; the proposed RPL framework; the proposed update to
the Federal rate for RY 2007; the proposed high cost outlier (HCO)
threshold for RY 2007; the proposed revision to the cost-to-charge
ratios and reconciliation provisions as they apply to LTCH outlier
payment policies; the proposed sunsetting of the surgical-DRG exception
to the 3-day or less interruption of stay policy; the proposed SSO
policy; the proposed postponement of the one-time prospective
adjustment to the standard Federal rate; the proposed clarification of
the present policy for adjusting the LTCH PPS payment for LTCH HwHs and
LTCH satellites; and discussion of the recommendations made by RTI.
Summaries of the public comments received and our responses to
those comments are described below under the appropriate heading.
III. Summary of the Major Contents of This Final Rule
In this final rule, we are setting forth the annual update to the
payment rates for the Medicare LTCH PPS, as well as finalizing other
policy changes. The following is a summary of the major areas that we
are addressing in this final rule.
A. Update Changes
In section IV of this preamble, we discuss the LTCH PPS patient
classification and the relative weights which remain linked to the
annual adjustments of the acute care hospital inpatient DRG system,
which are based on the annual revisions to the International
Classification of Diseases, Ninth Revision, Clinical Modification (ICD-
9-CM) codes effective each October 1.
In section V. through XII. of this preamble, we specify the factors
and adjustments used to determine the LTCH PPS rates that are
applicable to the 2007 LTCH PPS rate year, including revisions to the
wage index, the applicable adjustments to payments, cost-of-living
adjustment factors, the outlier threshold, the budget neutrality
factor, MedPAC recommendations and monitoring.
In section V.B. of this preamble, we are adopting the
``Rehabilitation, Psychiatric, Long-Term Care (RPL)'' market basket
under the LTCH PPS in place of the excluded hospital with capital
market basket. We are also revising the labor-related share (and non-
labor related share) of the Federal rate based on the RPL market
basket. (See section V.D.1.c. of this preamble).
As discussed in section V.C. of this preamble, we are implementing
a zero percent update to the LTCH PPS Federal rate for the 2007 LTCH
PPS rate year based on an adjustment to the most recent estimate of the
LTCH PPS market basket to account for apparent case-mix increase.
While we proposed to revise the cost-to-charge ratio and
reconciliation provisions as they apply to LTCH outlier payment
policies, we are not making these changes in this final rule; rather,
in response to comments, we are again proposing these policies in the
FY 2007 IPPS proposed rule, and we are including additional data
requested by commenters.
B. Policy Changes
In section V.D.6. of this preamble, we are postponing the deadline
for making the one-time prospective adjustment for the Federal rate at
Sec. 412.523(d)(3).
In section VI.A. of this preamble, we are revising the existing
payment adjustment for SSO cases. Also in section VI.A. of this
preamble, we are sunsetting the surgical DRG exception to the payment
policy established under the 3-day or less interruption of stay
regulations at Sec. 412.531(a)(1).
In section VI.B. of this preamble, for LTCH hospitals within
hospitals (HwHs) and LTCH satellites, we are clarifying at Sec.
412.534(c) the policy for adjusting the LTCH PPS payment based on the
amount that would be determined under the IPPS methodology. We state
the methodology used for calculating the LTCH PPS payment amount that
is equivalent to what would otherwise be paid under the IPPS. We are
also codifying in regulations the general formula we currently use to
give affect to the regulations as they pertain to calculating an amount
under subpart O that is equivalent to an amount that would be
determined under Sec. 412.1(a).
C. MedPAC Recommendations
In section XII.A. of this preamble, we discuss the recommendation
made in
[[Page 27803]]
the March 2006 Report to Congress: Medicare Payment Policy to eliminate
an update to payment rates for long-term care services for RY 2007.
In section XII.B. of this preamble, we discuss Research Triangle
Institute, International's (RTI) evaluation of the feasibility of
adopting recommendations made in the June 2004 MedPAC report.
In Appendix A of this final rule, we present a description of a
preliminary model of an update framework under the LTCH PPS that we may
propose to use in the future for purposes of the annual updating of the
LTCH PPS Federal rate in future years.
D. Impact
In section XV. of this preamble, we analyze the impact of the
changes presented in this final rule on Medicare expenditures,
Medicare-participating LTCHs, and Medicare beneficiaries.
IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications
and Relative Weights
A. Background
Section 123 of the BBRA specifically requires that the Secretary
implement a PPS for LTCHs (that is, a per discharge system with a DRG-
based patient classification system reflecting the differences in
patient resources and costs in LTCHs while maintaining budget
neutrality). Section 307(b)(1) of the BIPA modified the requirements of
section 123 of the BBRA 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 DRGs
that have been modified to account for different resource use of LTCH
patients as well as the use of the most recently available hospital
discharge data.''
In accordance with section 123 of the BBRA as amended by section
307(b)(1) of the BIPA and Sec. 412.515, we use information derived
from LTCH PPS patient records to classify these cases into distinct
LTC-DRGs based on clinical characteristics and estimated resource
needs. The LTC-DRGs used as the patient classification component of the
LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. We
assign an appropriate weight to the LTC-DRGs to account for the
difference in resource use by patients exhibiting the case complexity
and multiple medical problems characteristic of LTCHs.
In a departure from the IPPS, we use low volume LTC-DRGs (less than
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not
typically treat the full range of diagnoses as do acute care hospitals.
In order to manage the large number of low volume DRGs (all DRGs with
fewer than 25 cases), we group low volume DRGs into 5 quintiles based
on average charge per discharge. (A listing of the current composition
of low volume quintiles used in determining the FY 2006 LTC-DRG
relative weights appears in the FY 2006 IPPS final rule (70 FR 47329
through 47332). A listing of the composition of proposed low volume
quintiles used in determining the proposed FY 2007 LTC-DRG relative
weights appears in the FY 2007 IPPS proposed rule (71 FR 24054 through
24058). We also account for adjustments to payments for cases in which
the stay at the LTCH is less than or equal to five-sixths of the
geometric ALOS and classify these cases as SSO cases. (A detailed
discussion of the application of the Lewin Group model that was used to
develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule
(67 FR 55978).)
B. Patient Classifications into DRGs
Generally, under the LTCH PPS, a Medicare payment is made at a
predetermined specific rate for each discharge; that payment varies by
the LTC-DRG to which a beneficiary's stay is assigned. Cases are
classified into LTC-DRGs for payment based on the following six data
elements:
(1) Principal diagnosis.
(2) Up to eight additional diagnoses.
(3) Up to six procedures performed.
(4) Age.
(5) Sex.
(6) Discharge status of the patient.
As indicated in the August 30, 2002 LTCH PPS final rule, upon the
discharge of the patient from an LTCH, the LTCH must assign appropriate
diagnosis and procedure codes from the most current version of the ICD-
9-CM. HIPAA transactions and code sets standards regulations (45 CFR
parts 160 and 162) require that no later than October 16, 2003, all
covered entities must comply with the applicable requirements of
subparts A and I through R of part 162. Among other requirements, those
provisions direct covered entities to use the ASC X12N 837 Health Care
Claim: Institutional, Volumes 1 and 2, version 4010, and the applicable
standard medical data code sets for the institutional health care claim
or equivalent encounter information transaction. (See 45 CFR 162.1002
and 45 CFR 162.1102).
Medicare FIs enter the clinical and demographic information into
their claims processing systems and subject this information to a
series of automated screening processes called the Medicare Code Editor
(MCE). These screens are designed to identify cases that require
further review before assignment into a DRG can be made. During this
process, the following types of cases are selected for further
development:
Cases that are improperly coded. (For example, diagnoses
are shown that are inappropriate, given the sex of the patient. Code
68.6, Radical abdominal hysterectomy, would be an inappropriate code
for a male.)
Cases including surgical procedures not covered under
Medicare. (For example, organ transplant in a non-approved transplant
center.)
Cases requiring more information. (For example, ICD-9-CM
codes are required to be entered at their highest level of specificity.
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262,
Other severe protein-calorie malnutrition, contains all appropriate
digits, but if it is reported with either fewer or more than 3 digits,
the claim will be rejected by the MCE as invalid.)
Cases with principal diagnoses that do not usually justify
admission to the hospital. (For example, code 437.9, unspecified
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the
principal diagnosis.)
After screening through the MCE, each claim will be classified into
the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As
indicated in the August 30, 2002 LTCH PPS final rule, the Medicare
GROUPER software, which is used under the LTCH PPS, is specialized
computer software, and is the same GROUPER software program used under
the IPPS. The GROUPER software was developed as a means of classifying
each case into a DRG on the basis of diagnosis and procedure codes and
other demographic information (age, sex, and discharge status).
Following the LTC-DRG assignment, the Medicare FI determines the
prospective payment by using the Medicare PRICER program, which
accounts for hospital-specific adjustments. Under the LTCH PPS, we
provide an opportunity for the LTCH to review the LTC-DRG assignments
made by the FI and to submit additional information within a specified
timeframe as specified in Sec. 412.513(c).
The GROUPER software is used both to classify past cases in order
to measure relative hospital resource consumption to establish the DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the
[[Page 27804]]
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 under both the IPPS (Sec. 412.60(e)) and the LTCH PPS
(Sec. 412.517). As discussed in greater detail in sections IV.D. and
E. of this preamble, with the implementation of section 503(a) of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) (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 (FY) (October 1 and April 1) as required by the statute for
the IPPS (69 FR 48954 through 48957). Specifically, as we discussed in
the FY 2006 IPPS final rule, 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 FY on April 1 (70 FR 47323). 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, published in accordance with HIPAA.
C. Organization of DRGs
The DRGs are organized into 25 major diagnostic categories (MDCs),
most of which are based on a particular organ system of the body; the
remainder involve multiple organ systems (such as MDC 22, Burns).
Accordingly, the principal diagnosis determines MDC assignment. Within
most MDCs, cases are then divided into surgical DRGs and medical DRGs.
Surgical DRGs are assigned based on a surgical hierarchy that orders
operating room (O.R.) procedures or groups of O.R. procedures by
resource intensity. The GROUPER software program does not recognize all
ICD-9-CM procedure codes as procedures that affect DRG assignment, that
is, procedures which are not surgical (for example, EKG), or minor
surgical procedures (for example, 86.11, Biopsy of skin and
subcutaneous tissue).
The medical DRGs are generally differentiated on the basis of
diagnosis. Both medical and surgical DRGs may be further differentiated
based on age, sex, discharge status, and presence or absence of
complications or comorbidities (CC). We note that CCs are defined by
certain secondary diagnoses not related to, or not inherently a part
of, the disease process identified by the principal diagnosis. (For
example, the GROUPER software would not recognize a code from the
800.0x series, Skull fracture, as a CC when combined with principal
diagnosis 850.4, Concussion with prolonged loss of consciousness,
without return to preexisting conscious level.) In addition, we note
that the presence of additional diagnoses does not automatically
generate a CC, as not all DRGs recognize a comorbid or complicating
condition in their definition. (For example, DRG 466, Aftercare without
History of Malignancy as Secondary Diagnosis, is based solely on the
principal diagnosis, without consideration of additional diagnoses for
DRG determination.)
In its June 2000, Report to Congress, MedPAC recommended that the
Secretary ``* * * improve the hospital inpatient prospective payment
system by adopting, as soon as practicable, diagnosis-related group
refinements that more fully capture differences in severity of illness
among patients'' (Recommendation 3A, p. 63). In response to that
recommendation, we determined at that time that it was not practical to
develop a refinement to inpatient hospital DRGs based on severity due
to time and resource requirements. However, this does not preclude us
from development of a severity-adjusted DRG refinement in the future.
That is, a refinement to the list of CCs could be incorporated into the
existing DRG structure. It is also possible that a more comprehensive
severity adjusted structure may be created if a new code set is
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic
coding) and ICD-10-PCS (for procedure coding) or by other code sets, a
severity concept may be built into the resulting DRG assignments. Of
course, any change to the code set would be adopted through the process
established in the HIPAA Administrative Simplification Standards
provisions.
In its March 2005 Report to Congress, ``Physician-Owned Specialty
Hospitals,'' MedPAC recommended that the Secretary improve payment
accuracy in the hospital IPPS by, among other things, ``refining the
current DRGs to more fully capture differences in severity of illness
among patients'' (Recommendation 1, p. 93). In the FY 2006 IPPS final
rule (70 FR 47474 through 47479), we stated that we expected to make
changes to the DRGs to better reflect severity of illness and we
indicated that we plan to conduct a comprehensive review of the CCs
list for FY 2007. We also indicated that we are considering the
possibility of proposing to use the All Patient Refined (APR) DRGs
under the IPPS for FY 2007. We explained that we did not propose to
adopt the APR-DRGS under the IPPS for FY 2006 because it would
represent a significant undertaking that could have a substantial
effect on all hospitals and there was insufficient time to fully
analyze a change of that magnitude. However, 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 CC
list as part of a complete analysis of the MedPAC recommendations that
we planned to perform over the next year, we established cardiovascular
DRGs 547 through 558 as described in the FY 2006 IPPS final rule (70 FR
47474 through 47478).
In the FY 2007 IPPS proposed rule, we present the proposed changes
to the DRG system for FY 2007 (71 FR 24049). In that rule, we proposed
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 (71 FR 24049). As we also noted in that proposed
rule, in its March 1, 2005 Report to Congress on Medicare Payment
Policy (page 64) and Recommendation 1 in the 2005 Report to Congress on
Physician-Owned Specialty Hospitals, MedPAC recommended that CMS, among
other things, refine the current DRGs under the IPPS to more fully
capture differences in severity of illness among patients. In
evaluating this MedPAC recommendation for the IPPS, we are evaluating
the APR-DRG Grouper used by MedPAC in its analysis. Based on this
analysis, we developed a consolidated severity adjusted DRG system that
we believe could be a better alternative for recognizing severity of
illness among the Medicare population that we are considering to
propose for future use under the IPPS. As discussed above in this
section, the LTCH PPS uses the same patient classification system (that
is, DRGs). In response to MedPAC recommendations that severity adjusted
DRGs be adopted under the IPPS, we are examining the possibility of
adopting a consolidated version of the APR-DRGs. In the event that
severity adjusted DRGs, such as the consolidated severity adjusted
DRGs, are adopted under the IPPS, we would need to consider whether to
revise the patient classification system under the LTCH PPS. Any
proposed changes to the patient classification system would be done
through notice and comment rulemaking.
[[Page 27805]]
D. Update of LTC-DRGs
For FY 2006, the LTC-DRG patient classification system was based on
LTCH data from the FY 2004 MedPAR file, which contained hospital bills
data from the March 2005 update. The patient classification system
consists of 526 DRGs that formed the basis of the FY 2006 LTCH PPS
GROUPER program. The 526 LTC-DRGs included two ``error DRGs.'' As in
the IPPS, we included two error DRGs in which cases that cannot be
assigned to valid DRGs will be grouped. These two error DRGs are DRG
469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470
(Ungroupable). (See the FY 2006 IPPS final rule (70 FR 47323 through
47341)). The other 524 LTC-DRGs are the same DRGs used in the IPPS
GROUPER program for FY 2006 (Version 23.0).
In the past, the annual update to the CMS DRGs was based on the
annual revisions to the ICD-9-CM codes and was effective each October
1. The ICD-9-CM coding update process was revised as discussed in
greater detail in the FY 2005 IPPS final rule (69 FR 48954 through
48957). Specifically, section 503(a) of the MMA includes a requirement
for updating ICD-9-CM codes twice a year instead of the current process
of annual updates on October 1 of each year. This requirement is
included as part of the amendments to the Act relating to recognition
of new medical technology under the IPPS. (For additional information
on this provision, including its implementation and its impact on the
LTCH PPS, refer to the FY 2005 IPPS final rule (69 FR 48952 through
48957) and the RY 2006 LTCH PPS final rule (70 FR 24172 through
24177).)
As discussed in the RY 2006 LTCH PPS final rule, with the
implementation of section 503(a) of the MMA, there is the possibility
that one feature of the GROUPER software program may be updated twice
during a Federal FY (October 1 and April 1) as required by the statute
for the IPPS (70 FR 24173 through 24175). 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 FY on April 1.
No new LTC-DRGs will be created or deleted. Consistent with our current
practice, any changes to the DRGs or relative weights will be made at
the beginning of the next Federal FY (October 1). Therefore, there will
not 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, issued under HIPAA.
As we explained in the FY 2006 IPPS final rule, historically in the
health care industry annual changes to the ICD-9-CM codes were
effective for discharges occurring on or after October 1 each year (70
FR 47323). 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. The patient classification system used under the LTCH PPS
(LTC-DRGs) is based on the DRG patient classification system used under
the IPPS, which historically had been updated annually and effective
for discharges occurring on or after October 1 through September 30
each year. As we also mentioned, the ICD-9-CM coding update process was
revised as a result of the implementation of section 503(a) of the MMA,
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 the FY 2005 IPPS final rule,
this requirement is included as part of the amendments to the Act
relating to recognition of new medical technology under the IPPS (69 FR
48954 through 48957). Section 503(a) of the MMA amended section
1886(d)(5)(K) of the Act by adding a new paragraph (vii) which states
that ``the Secretary shall provide for the addition of new diagnosis
and procedure codes on April 1 [sic] 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 will improve 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, 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.
Updates to the GROUPER software for both the IPPS and the LTCH PPS
(for 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 since we do not publish a midyear IPPS rule,
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 until the following October 1. Any
coding updates will be available through the websites provided in
section IV.E. 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 an 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 the MMA, 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 through an April 1 update.
Discharges between October 1, 2005, and September 30, 2006,
(Federal FY 2006) are using Version 23.0 of the GROUPER software for
both the IPPS and the LTCH PPS. Consistent with our current practice,
any changes to the DRGs or relative weights will be made at the
beginning of the Federal FY (October 1). We will notify LTCHs of any
revised LTC-DRG relative weights based on the final DRGs and the
applicable version of the GROUPER software program that will be
effective October 1, 2006, in the annual IPPS proposed and final rules.
At the September 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
[[Page 27806]]
ICD-9-CM coding system will 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 next update to
the LTC-DRGs and relative weights for FY 2007 will be presented in the
FY 2007 IPPS proposed and final rules. Furthermore, we would notify
LTCHs of any revisions to the GROUPER software used under the IPPS and
LTCH PPS that would be implemented April 1, 2007. As noted previously
in this section, in the FY 2007 IPPS proposed rule (71 FR 24050), we
proposed to use Version 24.0 of the CMS GROUPER, which would be used
under the IPPS for FY 2007, to classify cases for LTCH PPS discharges
that would occur on or after October 1, 2006 and on or before September
30, 2007.
E. ICD-9-CM Coding System
1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
Because the assignment of a case to a particular LTC-DRG will help
determine the amount that will be paid for the case, it is important
that the coding is accurate. Classifications and terminology used in
the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as
recommended to the Secretary by the National Committee on Vital and
Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set,
National Center for Health Statistics, April 1980'') and as revised in
1984 by the Health Information Policy Council (HIPC) of the Department
of Health and Human Services (HHS).
We note 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 HIPAA Administrative Simplification Act of 1996 (45
CFR part 162). Furthermore, the UHDDS was used as a standard for the
development of policies and programs related to hospital discharge
statistics by both governmental and nongovernmental sectors for over 30
years. In addition, the following definitions (as described in the 1984
Revision of the UHDDS, approved by the Secretary for use starting
January 1986) are requirements of the ICD-9-CM coding system, and have
been used as a standard for the development of the CMS DRGs:
Diagnoses are defined to include all diagnoses that affect
the current hospital stay.
Principal diagnosis is defined as the condition
established after study to be chiefly responsible for occasioning the
admission of the patient to the hospital for care.
Other diagnoses (also called secondary diagnoses or
additional diagnoses) are defined as all conditions that coexist at the
time of admission, that develop subsequently, or that affect the
treatment received or the LOS or both. Diagnoses that relate to an
earlier episode of care that have no bearing on the current hospital
stay are excluded.
All procedures performed will be reported. This includes
those that are surgical in nature, carry a procedural risk, carry an
anesthetic risk, or require specialized training.
We provide LTCHs with a 60-day window after the date of the notice
of the initial LTC-DRG assignment to request review of that assignment.
Additional information may be provided by the LTCH to the FI as part of
that review.
2. Maintenance of the ICD-9-CM Coding System
The ICD-9-CM Coordination and Maintenance (C&M) Committee is a
Federal interdepartmental committee, co-chaired by the National Center
for Health Statistics (NCHS) and CMS, that is charged with maintaining
and updating the ICD-9-CM system. The C&M Committee is jointly
responsible for approving coding changes, and developing errata,
addenda, and other modifications to the ICD-9-CM to reflect newly
developed procedures and technologies and newly identified diseases.
The C&M Committee is also responsible for promoting the use of Federal
and non-Federal educational programs and other communication techniques
with a view toward standardizing coding applications and upgrading the
quality of the classification system.
The NCHS has lead responsibility for the ICD-9-CM diagnosis codes
included in the Tabular List and Alphabetic Index for Diseases, while
we have the lead responsibility for the ICD-9-CM procedure codes
included in the Tabular List and Alphabetic Index for Procedures. The
C&M Committee encourages participation by health-related organizations
in this process and holds public meetings for discussion of educational
issues and proposed coding changes twice a year at the CMS Central
Office located in Baltimore, Maryland. The agenda and dates of the
meetings can be accessed on our Web site at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes
.
As discussed previously in this section of the preamble, section
503(a) of the MMA includes a requirement for updating ICD-9-CM codes
twice a year instead of the current process of annual updates on
October 1 of each year. This requirement will improve the recognition
of new technologies under the IPPS by accounting for them in the
GROUPER software at an earlier date. Because this new statutory
requirement could have a significant impact on health care providers,
coding staff, publishers, system maintainers, and software systems,
among others, we solicited comments on our proposed provisions to
implement this requirement as part of the FY 2005 IPPS proposed rule
(69 FR 28220 through 28221). We responded to comments and published our
new policy regarding the updating of ICD-9-CM codes in the FY 2005 IPPS
final rule (69 FR 48954 through 48957).
While this new requirement states that the Secretary shall not
adjust the payment of the DRG classification for any codes created for
use on April 1, DRG software and other systems will have to be updated
in order to recognize and accept the new codes. If any coding changes
were implemented on April 1, the Medicare GROUPER software program used
under both the IPPS and the LTCH PPS would need to be revised to
reflect the new ICD-9-CM codes because the LTC-DRGs are the same DRGs
used under the IPPS. Furthermore, although the GROUPER software used
under both the IPPS and the LTCH PPS would need to be revised to
accommodate the new codes effective April 1, there would be no
additions or deletions of DRGs nor would the relative weights used
under the IPPS and the LTCH PPS, respectively, be changed until the
annual update on October 1 (to the extent that those changes are
warranted), just as they are historically updated. As the LTCH PPS is
based on the IPPS, we adopted the same approach used under the IPPS for
potential April 1 ICD-9-CM coding changes. That is, we will assign any
new diagnosis codes or procedure codes to the same DRG in which its
predecessor code was assigned, so there will be no DRG impact in terms
of potential DRG assignment until the following October 1. We will
maintain the current method of publicizing any new code changes, as
noted below. Current addendum and code title information is published
on the CMS web page at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp.
Summary tables showing
new, revised, and deleted code titles are also posted on the following
CMS web page: http://www.cms.hhs.gov/
[[Page 27807]]
ICD9ProviderDiagnosticCodes/07--summarytables.asp. Information on ICD-
9-CM diagnosis codes can be found at http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/.
Information on new, revised, and deleted
ICD-9-CM codes is also available in the American Hospital Association
(AHA) publication, the Coding Clinic for ICD-9-CM. AHA also distributes
information to publishers and software vendors. We also send copies of
all ICD-9-CM coding changes to our contractors for use in updating
their systems and providing education to providers.
If the April 1 changes are made to ICD-9-CM diagnosis or procedure
codes, LTCHs will be required to obtain the new codes, coding books, or
encoder updates, and make other system changes in order to capture and
report the new codes. When we implemented section 503(a) of the MMA in
the FY 2005 IPPS final rule, we indicated that we were aware of the
additional burden this will have on health care providers.
It should be noted 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 for discussing updates
to the ICD-9-CM has been an open process through the ICD-9-CM C&M
Committee since 1995. Any requestor who makes 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 will be
given the opportunity to present the merits of their proposed new code.
At the September 2005 C&M Committee meeting, no new codes were
proposed for update on April 1, 2006. While no DRG additions or
deletions or changes to relative weights will occur prior to the usual
October 1 update, in the event any new codes were created to describe
new technologies and medical services through an April 1, 2006 update,
under our policy established in the RY 2006 final rule (70 FR 24176),
LTCH systems would have been expected to recognize and report those new
codes through the channels as described in this section.
The ICD-9-CM coding changes that have been adopted by the C&M
Committee would become effective either at the beginning of each
Federal FY (October 1) or, in the case of codes created to capture new
technology, April 1 of each year. Coders will be expected to use the
most current ICD-9-CM codes, as updated. Because we do not publish a
mid-year IPPS rule, the currently accepted avenues of information
dissemination will be used to inform all ICD-9-CM code users of any
changes to the coding system. These avenues were described in section
IV.D. of this preamble and were discussed at length in the FY 2005 IPPS
final rule (69 FR 48956). Coders in LTCHs using the updated ICD-9-CM
coding system will be on the same schedule as the rest of the health
care industry. In the past, the updated ICD-9-CM was not available for
use until October 1 of each year.
Therefore, because the LTCH PPS and the IPPS use the same GROUPER
software, the LTCH PPS will be directly affected by the statutory
mandates directed at the IPPS as amended by section 503(a) of the MMA.
(We note that there is no statutory requirement in the LTCH PPS to make
additional payments for new technology.) The practical effect of this
provision is that the GROUPER software must accept new ICD-9-CM codes
reflecting the incorporation of new technologies into inpatient
treatment at an acute care hospital prior to the scheduled annual
update of the GROUPER software. Despite the fact that there are no
provisions for additional payments for new technology under the LTCH
PPS as there are under the IPPS, statutory compliance requires an
alteration of the GROUPER software used under the IPPS, and since the
LTCH PPS uses the same GROUPER software that is used under the IPPS,
this consequently means that the GROUPER software used under the LTCH
PPS would change. While DRG assignments would not change from October 1
through September 30, it is possible that there could be additional new
ICD-9-CM diagnosis and procedure codes during that time, which would be
assigned to predecessor DRGs. For both the IPPS and LTCH coders, it is
possible that there will be ICD-9-CM codes in effect from October 1
through March 31, with additional ICD-9-CM codes in effect from April 1
through September 30. 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).
Of particular note to LTCHs are the invalid diagnosis codes (Table
6C) and the invalid procedure codes (Table 6D) located in the annual
proposed and final rules for the IPPS. Claims with invalid codes are
not processed by the Medicare claims processing system.
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
We emphasize the need for proper coding by LTCHs. Inappropriate
coding of cases can adversely affect the uniformity of cases in each
LTC-DRG and produce inappropriate weighting factors at recalibration.
We continue to urge LTCHs to focus on improved coding practices.
Because of concerns raised by LTCHs concerning correct coding, we have
asked the AHA to provide additional clarification or instruction on
proper coding in the LTCH setting. The AHA will provide this
instruction via their established process of addressing questions
through their publication, the Coding Clinic for ICD-9-CM. Written
questions or requests for clarification may be addressed to the Central
Office on ICD-9-CM, American Hospital Association, One North Franklin,
Chicago, IL 60606. A form for question(s) is available for download and
can be mailed on AHA's Web site at: http://www.ahacentraloffice.org. In
addition, current coding guidelines are available at the NCHS Web site:
http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm#conv.
In conjunction with the cooperating parties (AHA, the American
Health Information Management Association (AHIMA), and NCHS), we
reviewed actual medical records and are concerned about the quality of
the documentation under the LTCH PPS, as was the case at the beginning
of the IPPS. We fully believe that, with experience, the quality of the
documentation and coding will improve, as it did for the IPPS. The
cooperating parties have plans to assist their members with improvement
in documentation and coding issues for the LTCHs through specific
questions and coding guidelines. The importance of good documentation
is emphasized in the revised ICD-9-CM Official Guidelines for Coding
and Reporting: ``A joint effort between the attending physician and
coder is essential to achieve complete and accurate documentation, code
assignment, and reporting of diagnoses and procedures. The importance
of consistent, complete documentation in the medical record cannot be
overemphasized. Without this documentation, the application of all
coding guidelines is a difficult, if not impossible, task'' (Coding
Clinic for ICD-9-CM, Fourth Quarter 2002, page 115).
To improve medical record documentation, LTCHs should be aware that
if the patient is being admitted for continuation of treatment of an
acute or
[[Page 27808]]
chronic condition, guidelines at Section I.B.10 of the Coding Clinic
for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable for the
selection of principal diagnosis. To clarify coding advice issued in
the August 30, 2002 final rule (67 FR 55979), at Guideline I.B.12, Late
Effects, we state that a late effect is considered to be the residual
effect (condition produced) after the acute phase of an illness or
injury has terminated (Coding Clinic for ICD-9-CM, Fourth Quarter 2002,
page 129). Regarding whether a LTCH should report the ICD-9-CM code(s)
for an unresolved acute condition instead of the code(s) for late
effects of rehabilitation, we emphasize that each case must be
evaluated on its unique circumstances and coded appropriately.
Depending on the documentation in the medical record, either a code
reflecting the acute condition or rehabilitation could be appropriate
in a LTCH.
Since implementation of the LTCH PPS, our Medicare FIs have
conducted training and provided assistance to LTCHs in correct coding.
We have also issued manuals containing procedures as well as coding
instructions to LTCHs and FIs. We will continue to conduct training and
provide guidance on an as-needed basis. We also refer readers to the
detailed discussion on correct coding practices in the August 30, 2002
LTCH PPS final rule (67 FR 55981 through 55983). Additional coding
instructions and examples will be published in the Coding Clinic for
ICD-9-CM.
F. Method for Updating the LTC-DRG Relative Weights
As discussed in the August 30, 2002 LTCH PPS final rule that
implemented the LTCH PPS, under the LTCH PPS, each LTCH will receive a
payment that represents an appropriate amount for the efficient
delivery of care to Medicare patients (67 FR 55984). The system must be
able to account adequately for each LTCH's case-mix in order to ensure
both a fair distribution of Medicare payments and access to adequate
care for those Medicare patients whose care is more costly. Therefore,
in Sec. 412.523(c), we adjust the standard Federal PPS rate by the
LTC-DRG relative weights in determining payment to LTCHs for each case.
Under this payment system, relative weights for each LTC-DRG are a
primary element used to account for the variations in cost per
discharge and resource utilization among the payment groups as
described in Sec. 412.515. To ensure that Medicare patients who are
classified to each LTC-DRG have access to an appropriate level of
services and to encourage efficiency, we calculate a relative weight
for each LTC-DRG that represents the resources needed by an average
inpatient LTCH case in that LTC-DRG. For example, cases in a LTC-DRG
with a relative weight of 2 will, on average, cost twice as much as
cases in a LTC-DRG with a weight of 1.
As we discussed in the FY 2006 IPPS final rule, the LTC-DRG
relative weights effective under the LTCH PPS for Federal FY 2006 were
calculated using the March 2005 update of FY 2004 MedPAR data and
Version 23.0 of the GROUPER software (70 FR 47325). We use total days
and total charges in the calculation of the LTC-DRG relative weights.
By nature, LTCHs often specialize in certain areas, such as
ventilator-dependent patients and rehabilitation and wound care. Some
case types (DRGs) may be treated, to a large extent, in hospitals that
have, from a perspective of charges, relatively high (or low) charges.
Distribution of cases with relatively high (or low) charges in specific
LTC-DRGs has the potential to inappropriately distort the measure of
average charges. To account for the fact that cases may not be randomly
distributed across LTCHs, we use a hospital-specific relative value
method to calculate relative weights. We believe this method removes
this hospital-specific source of bias in measuring average charges.
Specifically, we reduce the impact of the variation in charges across
providers on any particular LTC-DRG relative weight by converting each
LTCH's charge for a case to a relative value based on that LTCH's
average charge. (See the FY 2006 IPPS final rule for further
information on the hospital-specific relative value methodology (70 FR
47328 through 47329).)
To account for LTC-DRGs with low volume (that is, with fewer than
25 LTCH cases), we grouped those low volume LTC-DRGs into 1 of 5
categories (quintiles) based on average charges, for the purposes of
determining relative weights. For FY 2006, based on the FY 2004 MedPAR
data, we identified 171 LTC-DRGs that contained between 1 and 24 cases.
This list of low volume LTC-DRGs was then divided into 1 of the 5 low
volume quintiles, each containing a minimum of 34 LTC-DRGs (171/5 = 34
with 1 LTC-DRG as a remainder). Each of the low volume LTC-DRGs grouped
to a specific quintile received the same relative weight and ALOS using
the formula applied to the regular LTC-DRGs (25 or more cases). (See
the FY 2006 IPPS final rule for further explanation of the development
and composition of each of the 5 low volume quintiles for FY 2006 (70
FR 47329 through 47332).)
After grouping the cases in the appropriate LTC-DRG, we calculated
the relative weights by first removing statistical outliers and cases
with a LOS of 7 days or less. Next, we adjusted the number of cases
remaining in each LTC-DRG for the effect of short-stay outlier cases
under Sec. 412.529. The short-stay adjusted discharges and
corresponding charges were used to calculate ``relative adjusted
weights'' in each LTC-DRG using the hospital-specific relative value
method. We also adjusted the LTC-DRG relative weights to account for
nonmonotonically increasing relative weights. That is, we made an
adjustment if cases classified to the LTC-DRG ``with complications or
comorbidities (CCs)'' of a ``with CC''/''without CC'' pair had a lower
average charge than the corresponding LTC-DRG ``without CCs'' by
assigning the same weight to both LTC-DRGs in the ``with CC''/''without
CC'' pair. (See the FY 2006 IPPS final rule for further details on the
steps for calculating the LTC-DRG relative weights (70 FR 47336 through
47341).)
In addition, of the 526 LTC-DRGs in the LTCH PPS for FY 2006, based
on LTCH cases in the FY 2004 MedPAR files, we identified 196 LTC-DRGs
for which there were no LTCH cases in the database. That is, no
patients who would have been classified to those DRGs were treated in
LTCHs during FY 2004 and, therefore, no charge data were reported for
those DRGs. Thus, in the process of determining the relative weights of
LTC-DRGs, we were unable to determine weights for these 196 LTC-DRGs
using the method described in this section of the preamble. However,
since patients with a number of the diagnoses under these LTC-DRGs may
be treated at LTCHs beginning in FY 2006, we assigned relative weights
to each of the 196 ``no volume'' LTC-DRGs based on clinical similarity
and relative costliness to one of the remaining 330 (526-196 = 330)
LTC-DRGs for which we were able to determine relative weights, based on
the FY 2004 claims data. (A list of the current no-volume LTC-DRGs and
further explanation of their FY 2006 relative weight assignment can be
found in the FY 2006 IPPS final rule (70 FR 47337 through 47341).)
Furthermore, for FY 2006, we established LTC-DRG relative weights
of 0.0000 for heart, kidney, liver, lung, and simultaneous pancreas/
kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513,
respectively) because Medicare will only cover these procedures if they
are performed at a
[[Page 27809]]
hospital that has been certified for the specific procedures by
Medicare and presently no LTCH has been so certified. If in the future,
however, a LTCH applies for certification as a Medicare-approved
transplant center, we believe that the application and approval
procedure would allow sufficient time for us to propose appropriate
weights for the LTC-DRGs affected. At the present time, we included
these 6 transplant LTC-DRGs in the GROUPER software program for
administrative purposes. As the LTCH PPS uses the same GROUPER software
program for LTCHs as is used under the IPPS, removing these DRGs would
be administratively burdensome.
As we noted previously, there were no new ICD-9-CM code requests
for an April 1, 2006 update. Therefore, Version 23.0 of the DRG GROUPER
software established in the FY 2006 IPPS final rule (70 FR 47284
through 47322) will continue to be effective until October 1, 2006.
Moreover, the LTC-DRGs and relative weights for FY 2006 established in
that same IPPS final rule (70 FR 47681 through 47689) will continue to
be effective until October 1, 2006, (just as they would have been even
if there had been any new ICD-9-CM code requests for an April 1, 2006
update). Accordingly, Table 3 in the Addendum to this final rule lists
the LTC-DRGs and their respective relative weights, geometric ALOS, and
five-sixths of the geometric ALOS that we will continue to use for the
period of July 1, 2006 through September 30, 2006. (This table is the
same as table 11 of the Addendum to the FY 2006 IPPS final rule (70 FR
47681 through 47689). The next update to the ICD-9-CM coding system was
presented in the FY 2007 IPPS proposed rule (since there will be no
April 1, 2006 updates to the ICD-9-CM coding system). In addition, the
proposed DRGs and GROUPER for FY 2007 that would be used for the IPPS
and the LTCH PPS, effective October 1, 2006, were presented in the IPPS
FY 2007 proposed rule in the Federal Register (71 FR 24049 through
24068). As discussed in that proposed rule, we proposed to calculate
the proposed LTC-DRG relative weights for FY 2007 using total Medicare
allowable charges from FY 2005 Medicare LTCH bill data from the
December 2005 update of the MedPAR file, which were the best available
data at that time, and we used the proposed Version 24.0 of the CMS
GROUPER, which would be the same GROUPER that we proposed to use under
the IPPS in FY 2007 to classify cases. Furthermore, to calculate the
final LTC-DRG relative weights for FY 2007, we proposed that if more
recent data are available (for example, data from the March 2006 update
of the MedPAR file), we would use that data and use the finalized
Version 24.0 of the CMS GROUPER. Table 11 of the Addendum to the FY
2007 IPPS proposed rule lists the proposed LTC-DRGs and their
respective proposed relative weights, proposed geometric ALOS, and
proposed five-sixths of the geometric ALOS that would be effective for
LTCH PPS discharges occurring on or after October 1, 2006 through
September 30, 2007 (71 FR 24394 through 24403).
V. Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate
Year
A. Overview of the Development of the Payment Rates
The LTCH PPS was effective for a LTCH's first cost reporting period
beginning on or after October 1, 2002. Effective with that cost
reporting period, LTCHs are paid, during a 5-year transition period, on
the basis of an increasing proportion of the LTCH PPS Federal rate and
a decreasing proportion of a hospital's payment under the reasonable
cost-based payment system, unless the hospital makes a one-time
election to receive payment based on 100 percent of the Federal rate
(see Sec. 412.533). New LTCHs (as defined at Sec. 412.23(e)(4)) are
paid based on 100 percent of the Federal rate, with no phase-in
transition payments.
The basic methodology for determining LTCH PPS Federal prospective
payment rates is set forth in the regulations at Sec. 412.515 through
Sec. 412.532. Below we discuss the factors that will be used to update
the LTCH PPS standard Federal rate for the 2007 LTCH PPS rate year that
will be effective for LTCH discharges occurring on or after July 1,
2006 through June 30, 2007. When we implemented the LTCH PPS in the
August 30, 2002 final rule (67 FR 56029 through 56031), we computed the
LTCH PPS standard Federal payment rate for FY 2003 by updating the best
available (FY 1998 or FY 1999) Medicare inpatient operating and capital
costs per case data, using the excluded hospital market basket.
Section 123(a)(1) of the BBRA requires that the PPS developed for
LTCHs be budget neutral for the initial year of implementation.
Therefore, in calculating the standard Federal rate under Sec.
412.523(d)(2), we set total estimated LTCH PPS payments equal to
estimated payments that would have been made under the reasonable cost-
based payment methodology had the PPS for LTCHs not been implemented.
Section 307(a) of the BIPA specified that the increases to the
hospital-specific target amounts and the cap on the target amounts for
LTCHs for FY 2002 provided for by section 307(a)(1) of the BIPA shall
not be considered in the development and implementation of the LTCH
PPS.
Furthermore, as specified at Sec. 412.523(d)(1), the standard
Federal rate is reduced by an adjustment factor to account for the
estimated proportion of outlier payments under the LTCH PPS to total
estimated LTCH PPS payments (8 percent). For further details on the
development of the FY 2003 standard Federal rate, see the August 30,
2002 LTCH PPS final rule (67 FR 56027 through 56037), and for
subsequent updates to the LTCH PPS Federal rate, refer to the following
final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140),
RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), and RY 2006
LTCH PPS final rule (70 FR 24179 through 24180).
B. LTCH PPS Market Basket
Historically, the Medicare program used a market basket to account
for price increases of the services furnished by providers. The market
basket used for the LTCH PPS includes both operating and capital-
related costs of LTCHs because the LTCH PPS uses a single payment rate
for both operating and capital-related costs. The development of the
LTCH PPS standard Federal rate is discussed in further detail in the
August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56033).
In the August 30, 2002 final rule (67 FR 56016 through 56017 and
56030), which implemented the LTCH PPS, we established the use of the
excluded hospital with capital market basket as the LTCH PPS market
basket. The excluded hospital market basket was used to update the
limits on LTCHs' operating costs for inflation under the former
reasonable cost-based (TEFRA) payment system. We explained in that same
final rule that we believe that the use of the excluded hospital market
basket to update LTCHs' costs for inflation was appropriate because the
excluded hospital market basket (with a capital component) measures
price increases of the services furnished by excluded hospitals,
including LTCHs. Since the costs of LTCHs are included in the excluded
hospital market basket, this market basket index, in part, also
reflects the costs of LTCHs. However, in order to capture the total
costs (operating and capital-related) of LTCHs, we added a capital
component to the excluded hospital market basket for use under the LTCH
PPS. We refer to this index as the ``Excluded Hospital
[[Page 27810]]
with Capital'' market basket. Currently, the excluded hospital with
capital market basket used to update LTCH PPS payments is based on 1997
Medicare cost report data and includes Medicare participating
psychiatric, rehabilitation, long term care, cancer, and childrens
hospitals (68 FR 34137). (For further details on the development of the
FY 1997-based excluded hospital with capital market basket used under
the LTCH PPS, see the RY 2004 LTCH PPS final rule (68 FR 34134 through
34137)).
In the RY 2006 LTCH PPS final rule (70 FR 24179), we noted that
based on our research, we did not develop a market basket specific to
LTCH services. Presently, we are still unable to create a separate
market basket specifically for LTCHs due to the small number of
facilities and the limited data that are provided (for instance,
approximately 15 percent of LTCHs reported contract labor cost data for
2002). We noted in that same final rule that we would discuss the use
of the ``Rehabilitation, Psychiatric and Long-Term Care (RPL) market
basket'' under the LTCH PPS, which is currently used under the
inpatient rehabilitation facility (IRF) PPS. The RPL market basket is
based on the operating and capital costs of IRFs, inpatient psychiatric
facilities (IPFs) and LTCHs. Since all IRFs are now paid under the IRF
PPS Federal payment rate, nearly all LTCHs are paid 100 percent of the
Federal rate under the LTCH PPS, and most IPFs are transitioning to
payment based on 100 percent of the Federal per diem payment amount
under the IPF PPS (payments will be based on 100 percent of the Federal
rate for cost reporting periods beginning on or after January 1, 2008),
under the broad authority conferred upon the Secretary by section 123
of the BBRA as amended by section 307(b) of the BIPA to develop the
LTCH PPS, in the RY 2007 LTCH PPS proposed rule (71 FR 4659), we
proposed to adopt the RPL market basket as the appropriate market
basket of goods and services under the LTCH PPS for discharges
occurring on or after July 1, 2006. In that proposed rule, we proposed
that we would adopt the RPL market basket based on FY 2002 cost report
data beginning in the 2007 LTCH PPS rate year, under the LTCH PPS. We
chose to use the FY 2002 Medicare cost reports because these are the
most recent, relatively complete cost data for IRFs, IPFs, and LTCHs
serving Medicare beneficiaries.
As also discussed in that proposed rule, the RPL market basket
reflects the operating and capital cost structures for IRFs, IPFs, and
LTCHs. We proposed to exclude children's hospitals, cancer hospitals,
and religious nonmedical healthcare institutions (RNHCIs) from the RPL
market basket because their payments are based entirely on reasonable
costs subject to rate-of-increase limits established under the
authority of section 1886(b) of the Act, and implemented in Sec.
413.40. Children's hospitals, cancer hospitals, and RNHCIs are not
reimbursed under a PPS. Also, based on FY 2002 data, the cost
structures for these hospitals are noticeably different than the cost
structures of the IRFs, IPFs, and LTCHs. The services offered in IRFs,
IPFs, and LTCHs are typically more labor-intensive than those offered
in cancer hospitals, children's hospitals, and RNHCIs. Therefore, the
compensation cost weights for IRFs, IPFs, and LTCHs are larger than
those in cancer hospitals, children's hospitals, and RNHCIs. In
addition, the depreciation cost weights for IRFs, IPFs, and LTCHs are
noticeably smaller than those for children's hospitals, cancer
hospitals, and RNCHIs. Therefore, including the fact that IRFs, IPFs,
and LTCHs are subject to a PPS while children's hospitals, cancer
hospitals and RNCHIs continue to receive payment based on reasonable
costs, we believe a market basket based on the data of IRFs, IPFs, and
LTCHs is appropriate to use under the LTCH PPS since it is the best
available data that would reflect the cost structures of LTCHs.
Comment: We received several comments supporting our proposal to
adopt the RPL market basket based on FY 2002 cost report data under the
LTCH PPS, beginning in the 2007 LTCH PPS rate year. Along with their
endorsement of this proposal, a few commenters stated that the proposed
capital weight methodology may be skewed. As previously stated in this
rule, we stated in the proposed rule that the depreciation cost weights
for IRFs, IPFs, and LTCHs are smaller than those for children's and
cancer hospitals. The commenter noted that since most LTCHs are ``units
within hospitals'' (that is, hospitals-within-hospitals), the proposed
methodology may be more heavily aligned with a ``unit'' perspective as
proposed to a ``freestanding hospital'' perspective. The commenters
claim that freestanding LTCHs will have higher depreciation costs,
which are probably closer to those associated with children's and
cancer hospitals.
Response: The RPL market basket is based on data from freestanding
IRFs, IPFs, and LTCHs. As a general rule, we do not include hospital-
based facilities in our market baskets because expense data for a
hospital-based facility are influenced by the allocation of overhead
over the entire institution. Due to this method of allocation, total
expenses will be correct, but the expenses of the individual components
may be skewed. The cost structures of freestanding LTCHs should reflect
purchasing patterns of the average LTCH.
Our analysis of depreciation cost weights is based on freestanding
facilities. This depreciation cost weight (depreciation costs as a
percent of total capital costs) for freestanding LTCHs is approximately
57 percent compared to 85 percent for children's and cancer hospitals.
Therefore, we do not believe that the proposed capital weight
methodology is skewed (that is, more heavily aligned with a hospital-
based perspective since they are not included in our market basket).
Rather, we believe the RPL market basket accurately reflects the
capital cost structure of freestanding LTCHs serving Medicare
beneficiaries.
In the following discussion, we provide a background on market
baskets and describe the methodologies we used to develop the operating
and capital portions of the FY 2002-based RPL market basket that we are
adopting for use under the LTCH PPS beginning in RY 2007 under broad
authority conferred upon the Secretary by section 123 of the BBRA as
amended by section 307(b) of the BIPA.
1. Overview of the RPL Market Basket
The RPL market basket is a fixed weight, Laspeyres-type price index
that is constructed in three steps. First, a base period is selected
(in this case, FY 2002) and total base period expenditures are
estimated for a set of mutually exclusive and exhaustive spending
categories based upon type of expenditure. Then the proportion of total
costs that each category represents is determined. These proportions
are called cost or expenditure weights. Second, each expenditure
category is matched to an appropriate price or wage variable, referred
to as a price proxy. In nearly every instance, these price proxies are
price levels derived from publicly available statistical series that
are published on a consistent schedule, preferably at least on a
quarterly basis. Finally, the expenditure weight for each cost category
is multiplied by the level of its respective price proxy for a given
period. The sum of these products (that is, the expenditure weights
multiplied by their price levels) for all cost categories yields the
composite index level of the market basket in a given period. Repeating
this step for other periods produces a series of market basket levels
over time. Dividing an
[[Page 27811]]
index level for a given period by an index level for an earlier period
produces a rate of growth in the input price index over that time
period.
A market basket is described as a fixed-weight index because it
answers the question of how much it would cost, at another time, to
purchase the same mix of goods and services purchased to provide
hospital services in a base period. The effects on total expenditures
resulting from changes in the quantity or mix of goods and services
(intensity) purchased subsequent to the base period are not measured.
In this manner, the market basket measures only pure price change. Only
when the index is rebased would the quantity and intensity effects be
captured in the cost weights. Therefore, we rebase the market basket
periodically so that cost weights reflect changes in the mix of goods
and services that hospitals purchase (hospital inputs) to furnish
patient care between base periods.
The terms rebasing and revising, while often used interchangeably,
actually denote different activities. Rebasing means moving the base
year for the structure of costs of an input price index (for example,
shifting the base year cost structure from FY 1997 to FY 2002).
Revising means changing data sources, methodology, or price proxies
used in the input price index. In this final rule, we are rebasing and
revising the market basket used to update the LTCH PPS. Specifically,
as noted above in this section and as we proposed in the RY 2007 LTCH
PPS proposed rule (71 FR 4659 through 4666), beginning in the 2007 LTCH
PPS rate year, we are using the FY 2002-based RPL market basket, which
is described in greater detail below in this section.
2. Methodology for the Operating Portion of the RPL Market Basket
The operating portion of the FY 2002-based RPL market basket
consists of several major cost categories derived from the FY 2002
Medicare cost reports for IRFs, IPFs, and LTCHs: Wages, drugs,
professional liability insurance (PLI), and a residual ``all other''
category. We choose to use the FY 2002 Medicare cost reports because
these are the most recent, relatively complete cost data for IRFs,
IPFs, and LTCHs serving Medicare beneficiaries. Generally, if detailed
cost data are not available for these Medicare cost reports, we prefer
to use the IPPS hospital Medicare cost reports to supplement IPF, IRF,
and LTCH data because this is a comprehensive source of cost data for
hospitals serving Medicare beneficiaries. When the IPPS Medicare cost
report data are not available, we choose the best publicly available
data source, such as the Bureau of Economic Analysis Input-Output (I-O)
Tables.
We use the IRF, IPF, and LTCH Medicare cost reports to derive these
major cost categories for the RPL market basket which include wages,
drugs, PLI, and a residual ``all other'' category. As stated above in
this section, we are using FY 2002 as the base year because we believe
this is the most recent, relatively complete year of Medicare cost
report data. Due to insufficient Medicare cost report data for IRFs,
IPFs, and LTCHs, we will develop cost weights for benefits, contract
labor, and blood and blood products using the FY 2002-based IPPS market
basket (70 FR 23384), which we explain in more detail later in this
section. For example, less than 30 percent of IRFs, IPFs, and LTCHs
reported benefit cost data in FY 2002. We noticed an increase in the
cost data for these expense categories over the last 4 years. (We note
that in the future, there may be sufficient IRF, IPF, and LTCH cost
report data to develop the weights for these expenditure categories.)
Since the cost weights for the RPL market basket are based on
facility costs, we are limiting our sample to hospitals with a Medicare
average length of stay (ALOS) within a comparable range of the total
facility ALOS. We believe this provides a more accurate reflection of
the structure of costs for Medicare treatments. Our goal is to measure
cost shares that are reflective of case-mix and practice patterns
associated with providing services to Medicare beneficiaries.
We are using those cost reports for IRFs and LTCHs whose Medicare
ALOS is within 15 percent (that is, 15 percent higher or lower) of the
total facility ALOS for the hospital. This is the same edit applied to
the FY 1992-based and FY 1997-based excluded hospital with capital
market basket. Consistent with the development of the RPL market basket
adopted under the IRF PPS in the FY 2006 IRF PPS final rule (70 FR
47909), we will use 15 percent because it includes those LTCHs and IRFs
whose Medicare ALOS is within approximately 5 days of the facility
ALOS. We believe this edit provides us with a representative sample of
LTCHs and IRFs serving Medicare beneficiaries.
We are using a less stringent measure of Medicare ALOS for IPFs
whose ALOS is within 30 or 50 percent (depending on the total facility
ALOS) of the total facility ALOS. This less stringent edit allows us to
increase our sample size by over 150 reports and produce a cost weight
more consistent with the overall facility. When developing the FY 1997-
based excluded hospital with capital market basket, the edit we applied
to IPFs was based on the best available data at the time.
The detailed cost categories under the residual (that is, the
remaining portion of the market basket after excluding wages and
salaries, drugs, and professional liability cost weights) are derived
from the FY 2002-based IPPS market basket and the 1997 Benchmark I-O
Tables published by the Bureau of Economic Analysis, U.S. Department of
Commerce. The FY 2002-based IPPS market basket was developed using FY
2002 Medicare hospital cost reports with the most recent and detailed
cost data (70 FR 47388). The 1997 Benchmark I-O is the most recent,
comprehensive source of cost data for all hospitals. The RPL cost
weights for benefits, contract labor, and blood and blood products were
derived using the FY 2002-based IPPS market basket. For example, the
ratio of the benefit cost weight to the wages and salaries cost weight
in the FY 2002-based IPPS market basket was applied to the RPL wages
and salaries cost weight to derive a benefit cost weight for the RPL
market basket. The remaining RPL operating cost categories were derived
using the 1997 Benchmark I-O Tables, aged to 2002 using relative price
changes. (The methodology we used to age the data involves applying the
annual price changes from the price proxies to the appropriate cost
categories. We repeat this practice for each year.) Therefore, using
this methodology, roughly 59 percent of the RPL market basket is
accounted for by wages, drugs, and PLI data from FY 2002 Medicare cost
report data for IRFs, IPFs, and LTCHs.
Comment: Several commenters propose that we regularly re-analyze
the RPL cost report data, which are the basis of the RPL market basket.
They note that the methodology used for the RPL market basket includes
data from the IPPS hospital market basket. These commenters encouraged
us to work with providers to improve the cost reports from IRFs, IPFs,
and LTCHs to ensure that the data used for the RPL market basket
represent only the types of excluded hospitals for which the RPL market
basket was developed. Furthermore, they believe that improving the data
reported on the cost reports of IRFs, IPFs, and LTCHs would not only
refine the RPL market basket but also would improve the accuracy of the
labor-related share to which the wage index is applied.
Response: As noted above in this section, we rely on the IPPS
hospital cost report data to supplement the IRF, IPF, and LTCH Medicare
cost report
[[Page 27812]]
data for benefits, contract labor, and blood and blood products. For
example, the ratio of the benefit cost weight to the wages and salaries
cost weight in the FY 2002-based IPPS market basket is applied to the
RPL wages and salaries cost weight to derive a benefit cost weight for
the RPL market basket. We did not directly use the IPPS Medicare cost
report data, rather we used these data to determine the relationships
between benefits, contract labor, and blood and blood products with
wages and salaries. The wages and salaries cost weight in the RPL
market basket is derived using the IRF, IPF and LTCH Medicare cost
reports and accounts for 50 percent of the RPL market basket. As noted
above in this section and as discussed in the RY 2007 LTCH PPS proposed
rule (71 FR 4660), due to data limitations, this was the best
methodology for developing the latter cost weights.
We agree with the commenters that improving the data reported on
the cost reports of IRFs, IPFs, and LTCHs could improve the RPL market
basket and labor-related share. We have noticed this data improvement
on other provider-type cost reports. Therefore, we encourage IRFs,
IPFs, and LTCHs to fully complete their cost reports; this would help
us in developing the most complete and accurate market basket possible.
We will continue to analyze RPL cost report data on a regular basis.
The following is a summary outlining the choice of the proxies we
used for the operating portion of the market basket. The price proxies
for the capital portion are described in more detail in section V.B.3.
of this preamble. With the exception of the Professional Liability
proxy, all the price proxies for the operating portion of the RPL
market basket are based on Bureau of Labor Statistics (BLS) data and
are grouped into one of the following BLS categories:
Producer Price Indexes (PPIs) measure price changes for
goods sold in other than retail markets. PPIs are preferable price
proxies for goods that hospitals purchase as inputs in producing their
outputs because the PPIs would better reflect the prices faced by
hospitals. For example, we will use a special PPI for prescription
drugs, rather than the Consumer Price Index (CPI) for prescription
drugs because hospitals generally purchase drugs directly from the
wholesaler. The PPIs that we use measure price change at the final
stage of production.
Consumer Price Indexes (CPIs) measure changes in the
prices of final goods and services bought by the typical consumer.
Because they may not represent the price faced by a producer, we use
CPIs only if an appropriate PPI were not available, or if the
expenditures were more similar to those of retail consumers in general
rather than purchases at the wholesale level. For example, the CPI for
food purchases away from home is used as a proxy for contracted food
services.
Employment Cost Indexes (ECIs) measure the rate of change
in employee wage rates and employer costs for employee benefits per
hour worked. These indexes are fixed-weight indexes and strictly
measure the change in wage rates and employee benefits per hour.
Appropriately, they are not affected by shifts in employment mix.
We evaluated the price proxies using the criteria of reliability,
timeliness, availability, and relevance. Reliability indicates that the
index is based on valid statistical methods and has low sampling
variability. Widely accepted statistical methods ensure that the data
were collected and aggregated in a way that can be replicated. Low
sampling variability is desirable because it indicates that the sample
reflects the typical members of the population. (Sampling variability
is variation that occurs by chance because a sample was surveyed rather
than the entire population.)
Timeliness implies that the proxy is published regularly,
preferably at least once a quarter. The market baskets are updated
quarterly, and therefore, it is important that the underlying price
proxies be up-to-date, reflecting the most recent data available. We
believe that using proxies that are published regularly (at least
quarterly, when possible) helps to ensure that we are using the most
recent data available to update the market basket. We strive to use
publications that are disseminated frequently because we believe that
this is an optimal way to stay abreast of the most current data
available. Availability means that the proxy is publicly available. We
prefer that our proxies are publicly available because this will help
ensure that our market basket updates are as transparent to the public
as possible. In addition, this enables the public to be able to obtain
the price proxy data on a regular basis.
Finally, relevance means that the proxy is applicable and
representative of the cost category weight to which it is applied. The
CPIs, PPIs, and ECIs selected by us for this final rule meet these
criteria. Therefore, we believe that they continue to be the best
measure of price changes for the cost categories to which they would be
applied.
We note that the proxies are the same as those used for the FY
1997-based excluded hospital with capital market basket, which is
currently used under the LTCH PPS, and are the same proxies as those
used for the FY 2002-based excluded hospital market basket that is used
to update the reasonable cost-based portion of LTCHs' blended
transition payments (70 FR 47399 through 47403). Because these proxies
meet our criteria of reliability, timeliness, availability, and
relevance, we believe they continue to be the best measure of price
changes for the cost categories. For further discussion on the FY 1997-
based excluded hospital with capital market basket, see the RY 2004
LTCH PPS final rule (68 FR 34134 through 34136). For further discussion
on the FY 2002-based excluded hospital market basket, see the FY 2006
IPPS final rule (70 FR 47400 through 47403).
Table 2 sets forth the complete 2002-based RPL market basket
including cost categories, weights, and price proxies for the operating
portion of the market basket. The price proxies for the capital portion
are described in more detail in the capital methodology section. For
comparison purposes, the corresponding FY 1997-based excluded hospital
with capital market basket, which is currently used under the LTCH PPS,
is also listed.
Wages and salaries are 52.895 percent of total costs for the FY
2002-based RPL market basket compared to 47.335 percent for the FY
1997-based excluded hospital with capital market basket. Employee
benefits are 12.982 percent for the FY 2002-based RPL market basket
compared to 10.244 percent for the FY 1997-based excluded hospital with
capital market basket. As a result, compensation costs (wages and
salaries plus employee benefits) for the FY 2002-based RPL market
basket are 65.877 percent of costs compared to 57.579 percent for the
FY 1997-based excluded hospital with capital market basket. Of the 8
percentage-point difference between the compensation shares,
approximately 3 percentage points are due to the new base year (FY 2002
instead of FY 1997), 3 percentage points are due to revised LOS edit
(that is, including only IRFs and LTCHs whose Medicare ALOS is within
15 percent of the total facility ALOS for the hospital and including
only IPFs whose Medicare ALOS in within 30 or 50 percent of the total
facility ALOS), and the remaining 2 percentage points are due to the
exclusion of other types of IPPS-excluded hospitals (that is, only
including IPFs, IRFs, and LTCHs in the market basket and excluding
childrens hospitals, cancer hospitals, and RNCHIs).
[[Page 27813]]
Table 2.--FY 2002-Based RPL Market Basket Cost Categories, Weights, and Proxies With FY 1997-Based Excluded
Hospital With Capital Market Basket Used for Comparison
----------------------------------------------------------------------------------------------------------------
FY 1997-based
excluded FY 2002-based
Expense categories hospital with RPL market FY 2002 RPL market basket price
capital market basket proxies
basket
----------------------------------------------------------------------------------------------------------------
Total...................................... 100.000 100.000
Compensation....................... 57.579 65.877
Wages and Salaries *................... 47.335 52.895 ECI--Wages and Salaries, Civilian
Hospital Workers.
Employee Benefits *.................... 10.244 12.982 ECI--Benefits, Civilian Hospital
Workers.
Professional Fees, Non-Medical............. 4.423 2.892 ECI--Compensation for Professional,
Specialty & Technical Workers.
Utilities.................................. 1.180 0.656
Electricity............................ 0.726 0.351 PPI--Commercial Electric Power.
Fuel Oil, Coal, etc.................... 0.248 0.108 PPI--Refined Petroleum Products.
Water and Sewage....................... 0.206 0.197 CPI-U--Water & Sewage Maintenance.
Professional Liability Insurance........... 0.733 1.161 CMS Professional Liability Premium
Index.
All Other Products and Services............ 27.117 19.265
All Other Products..................... 17.914 13.323
Pharmaceuticals........................ 6.318 5.103 PPI Prescription Drugs.
Food: Direct Purchase.................. 1.122 0.873 PPI Processed Foods & Feeds.
Food: Contract Service................. 1.043 0.620 CPI--U Food Away From Home.
Chemicals.............................. 2.133 1.100 PPI Industrial Chemicals.
Blood and Blood Products **............ 0.748
Medical Instruments.................... 1.795 1.014 PPI Medical Instruments &
Equipment.
Photographic Supplies.................. 0.167 0.096 PPI Photographic Supplies.
Rubber and Plastics.................... 1.366 1.052 PPI Rubber & Plastic Products.
Paper Products......................... 1.110 1.000 PPI Converted Paper & Paperboard
Products.
Apparel................................ 0.478 0.207 PPI Apparel.
Machinery and Equipment................ 0.852 0.297 PPI Machinery & Equipment.
Miscellaneous Products................. 0.783 1.963 PPI Finished Goods less Food &
Energy.
All Other Services......................... 9.203 5.942
Telephone.............................. 0.348 0.240 CPI-U Telephone Services.
Postage................................ 0.702 0.682 CPI-U Postage.
All Other: Labor Intensive............. 4.453 2.219 ECI--Compensation for Private
Service Occupations.
All Other: Non-labor Intensive......... 3.700 2.800 CPI-U All Items.
Capital-Related Costs...................... 8.968 10.149
Depreciation........................... 5.586 6.186
Fixed Assets........................... 3.503 4.250 Boeckh Institutional Construction
23-year useful life.
Movable Equipment...................... 2.083 1.937 WPI Machinery & Equipment 11-year
useful life.
Interest Costs......................... 2.682 2.775
Nonprofit.............................. 2.280 2.081 Average yield on domestic municipal
bonds (source: Moody's Aaa bonds
vintage).
For Profit............................. 0.402 0.694 Average yield on Moody's AAA bonds
vintage weighted (23 years).
Other Capital-Related Costs............ 0.699 1.187 CPI-U Residential Rent.
----------------------------------------------------------------------------------------------------------------
* Labor-related.
** Blood and blood-related products are included in miscellaneous products.
Note: Due to rounding, weights may not sum to total.
The following is an explanation of the expense categories from
Table 2.
a. Wages and Salaries
For measuring the price growth of wages in the FY 2002-based RPL
market basket, consistent with our proposal, we will use the ECI for
wages and salaries for civilian hospital workers as the proxy for wages
in the RPL market basket. The RPL market basket uses the BLS'
Employment Cost Indexes (ECIs) as proxies for wages and salaries, and
benefits for civilian industry workers classified in the Standard
Industrial Code (SIC) 806, Hospitals. However, beginning April 28,
2006, with the publication of March 2006 data, the ECIs will be
converted from the SIC system to the North American Industrial
Classification System (NAICS). The NAICS-based ECI for hospitals (NAICS
622) is similar (at least 90 percent identical) to the SIC-based ECI
for hospitals. Therefore, when they are available, we will use the
NAICS-based ECIs for hospitals as proxies to reflect the rate-of-price
change for the wages and salaries and employee benefits cost categories
in the 2002-based RPL market basket. The RPL market basket and labor-
related share in this final rule will use the most recent data
available from BLS. We do not expect the RPL market basket and labor-
related share to change significantly when the conversion from the SIC
system to the NAICS system takes place.
b. Employee Benefits
The FY 2002-based RPL market basket uses the ECI for employee
benefits for civilian hospital workers.
c. Nonmedical Professional Fees
The ECI for compensation for professional and technical workers in
private industry will be applied to this category since it includes
occupations such as management and consulting, legal, accounting, and
engineering services.
d. Fuel, Oil, Coal, and Gasoline
The percentage change in the price of gas fuels as measured by the
PPI (Commodity Code 0552) will be applied to this component.
[[Page 27814]]
e. Electricity
The percentage change in the price of commercial electric power as
measured by the PPI (Commodity Code 0542) will be applied to
this component.
f. Water and Sewage
The percentage change in the price of water and sewage maintenance
as measured by the CPI for all urban consumers (CPI Code
CUUR0000SEHG01) will be applied to this component.
g. Professional Liability Insurance (PLI)
The FY 2002-based RPL market basket will use the percentage change
in hospital PLI premiums as estimated by the CMS Hospital Professional
Liability Index for the proxy of this category. In the FY 1997-based
excluded hospital with capital market basket, the same proxy was used.
We continue to research options for improving our proxy for PLI. This
research includes exploring various options for expanding our current
survey, including the identification of another entity that will be
willing to work with us to collect more complete and comprehensive
data. We are also exploring other options such as third party or
industry data that might assist us in creating a more precise measure
of PLI premiums. At this time, we have not identified a preferred
option, therefore there is no change in the proxy in this final rule.
h. Pharmaceuticals
The percentage change in the price of prescription drugs as
measured by the PPI (PPI Code PPI32541DRX) will be used as a
proxy for this cost category. This is a special index produced by BLS
as a proxy in the 1997-based excluded hospital with capital market
basket.
i. Food: Direct Purchases
The percentage change in the price of processed foods and feeds as
measured by the PPI (Commodity Code 02) will be applied to
this component.
j. Food: Contract Service
The percentage change in the price of food purchased away from home
as measured by the CPI for all urban consumers (CPI Code
CUUR0000SEFV) will be applied to this component.
k. Chemicals
The percentage change in the price of industrial chemical products
as measured by the PPI (Commodity Code 061) will be applied to
this component. While the chemicals hospitals purchase include
industrial as well as other types of chemicals, the industrial
chemicals component constitutes the largest proportion by far. Thus we
believe that Commodity Code 061 is the appropriate proxy.
l. Medical Instruments
The percentage change in the price of medical and surgical
instruments as measured by the PPI (Commodity Code 1562) will
be applied to this component.
m. Photographic Supplies
The percentage change in the price of photographic supplies as
measured by the PPI (Commodity Code 1542) will be applied to
this component.
n. Rubber and Plastics
The percentage change in the price of rubber and plastic products
as measured by the PPI (Commodity Code 07) will be applied to
this component.
o. Paper Products
The percentage change in the price of converted paper and
paperboard products as measured by the PPI (Commodity Code
0915) will be used.
p. Apparel
The percentage change in the price of apparel as measured by the
PPI (Commodity Code 381) will be applied to this component.
q. Machinery and Equipment
The percentage change in the price of machinery and equipment as
measured by the PPI (Commodity Code 11) will be applied to
this component.
r. Miscellaneous Products
The percentage change in the price of all finished goods less food
and energy as measured by the PPI (Commodity Code SOP3500)
will be applied to this component. Using this index will remove the
double-counting of food and energy prices, which are captured elsewhere
in the market basket. The weight for this cost category is higher, in
part, than in the 1997-based index because the weight for blood and
blood products (1.188) is added to it. In the 1997-based excluded
hospital with capital market basket, we included a separate cost
category for blood and blood products, using the BLS PPI for blood and
derivatives as a price proxy. A review of recent trends in the PPI for
blood and derivatives suggests that its movements may not be consistent
with the trends in blood costs faced by hospitals. While this proxy did
not match exactly with the products hospitals are buying, its trend
over time appears to be reflective of the historical price changes of
blood purchased by hospitals. However, an apparent divergence between
the BLS PPI for blood and derivatives and trends in blood costs faced
by hospitals over recent years led us to reevaluate whether the PPI for
blood and derivatives was an appropriate measure of the changing price
of blood. As discussed in the RY 2007 LTCH PPS proposed rule (71 FR
4663), we ran test market baskets classifying blood into three separate
cost categories: Blood and blood products; contained within chemicals
as was done for the 1992-based excluded hospital with capital market
basket; and, within miscellaneous products. These categories use as
proxies the following PPIs: The PPI for blood and blood products, the
PPI for chemicals, and the PPI for finished goods less food and energy,
respectively. Of these three proxies, the PPI for finished goods less
food and energy moved most like the recent blood cost and price trends.
In addition, the impact on the overall market basket by using different
proxies for blood was negligible, mostly due to the relatively small
weight for blood in the market basket.
Therefore, we are using the PPI for finished goods less food and
energy for the blood proxy because we believe it more appropriately
proxies price changes (not quantities or required tests) associated
with blood purchased by hospitals because it moved most like the recent
blood cost and price trends. (We note that we will continue to evaluate
this proxy for its appropriateness and will explore the development of
alternative price indexes to proxy the price changes associated with
this cost for presentation in a future proposed rule.)
s. Telephone
The percentage change in the price of telephone services as
measured by the CPI for all urban consumers (CPI Code
CUUR0000SEED) will be applied to this component.
t. Postage
The percentage change in the price of postage as measured by the
CPI for all urban consumers (CPI Code CUUR0000SEEC01) will be
applied to this component.
u. All Other Services, Labor Intensive
The percentage change in the ECI for compensation paid to service
workers employed in private industry will be applied to this component.
v. All Other Services, Nonlabor Intensive
The percentage change in the all items component of the CPI for all
urban
[[Page 27815]]
consumers (CPI Code CUUR0000SA0) will be applied to this
component.
3. Methodology for the Capital Portion of the RPL Market Basket
Unlike for the operating costs of the FY 2002-based RPL market
basket, we do not have IRF, IPF, and LTCH FY 2002 Medicare cost report
data for the capital cost weights, due to a change in the FY 2002
reporting requirements. Rather, as we proposed, in this final rule we
used these hospitals' expenditure data for the capital cost categories
of depreciation, interest, and other capital expenses for FY 2001, and
age the data to a FY 2002 base year using relevant price proxies. As
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4663), we
believe this is the best approach since these data are the most similar
to the capital cost structures of those IRFs, IPFs, and LTCHs serving
Medicare beneficiaries that require inpatient hospital services.
As we proposed, in this final rule we calculated weights for the
RPL market basket capital costs using the same set of Medicare cost
reports used to develop the operating share for IRFs, IPFS, and LTCHs
in order to use consistent expense data in developing the weights for
both operating and capital costs. The resulting capital weight for the
FY 2002 base year is 10.149 percent. This is based on FY 2001 Medicare
cost report data for IRFs, IPFs, and LTCHs, aged to FY 2002 using
relevant price proxies.
Lease expenses are not a separate cost category in the market
basket, but are distributed among the cost categories of depreciation,
interest, and other, reflecting the assumption that the underlying cost
structure of leases is similar to capital costs in general. As
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4664), we assume
10 percent of lease expenses are overhead and assigned them to the
other capital expenses cost category as overhead. We base this
assignment of 10 percent of lease expenses to overhead on the common
assumption that overhead is 10 percent of costs. The remaining lease
expenses are distributed to the three cost categories based on the
weights of depreciation, interest, and other capital expenses not
including lease expenses.
Depreciation contains two subcategories: Building and fixed
equipment, and movable equipment. The split between building and fixed
equipment and movable equipment was determined using the FY 2001
Medicare cost reports for IRFs, IPFs, and LTCHs. As explained in the RY
2007 LTCH PPS proposed rule (71 FR 4664), we believe this is the best
available data source because it reflects the capital cost structures
of those IRFs, IPFs, and LTCHs serving Medicare beneficiaries. In the
FY 2003 IPPS final rule, we also used this methodology to compute the
1997-based index (August 1, 2002; 67 FR 50044).
The total interest expense cost category is split between the
government/nonprofit and for-profit hospitals. The 1997-based excluded
hospital with capital market basket allocated 85 percent of the total
interest cost weight to the government nonprofit interest, proxied by
average yield on domestic municipal bonds, and 15 percent to for-profit
interest, proxied by average yield on Moody's Aaa bonds.
As we proposed, for this final rule we derive the split using the
relative FY 2001 Medicare cost report data for PPS hospitals on
interest expenses for the government/nonprofit and for-profit
hospitals. Due to insufficient Medicare cost report data for IPFs,
IRFs, and LTCHs, we used the same split used in the IPPS capital input
price index, which is 75 percent of the total interest cost weight of
the government/non-profit interest and 25 percent of for-profit
interest. As explained in the RY 2007 LTCH PPS proposed rule (71 FR
4664), we believe that this split reflects the latest relative cost
structure of interest expenses for hospitals because it is based on the
most recent complete hospital cost report data and, therefore, we use a
75-25 split to allocate interest expenses to government/nonprofit and
for-profit hospitals' interest as stated in the FY 2006 IPPS final rule
(70 FR 47408).
Since capital is acquired and paid for over time, capital expenses
in any given year are determined by both past and present purchases of
physical and financial capital. The vintage-weighted capital index is
intended to capture the long-term consumption of capital, using vintage
weights for depreciation (physical capital) and interest (financial
capital). These vintage weights reflect the purchase patterns of
building and fixed equipment and movable equipment over time.
Depreciation and interest expenses are determined by the amount of past
and current capital purchases. Therefore, we are using the vintage
weights to compute vintage-weighted price changes associated with
depreciation and interest expense.
Vintage weights are an integral part of the FY 2002-based RPL
market basket. Capital costs are inherently complicated and are
determined by complex capital purchasing decisions, over time, based on
factors such as interest rates and debt financing. In addition, capital
is depreciated over time instead of being consumed in the same period
it is purchased. The capital portion of the FY 2002-based RPL market
basket reflects the annual price changes associated with capital costs,
and is a useful simplification of the actual capital investment
process. As explained in the RY 2007 LTCH PPS proposed rule (71 FR
4664), by accounting for the vintage nature of capital, we are able to
provide an accurate, stable annual measure of price changes. Annual
nonvintage price changes for capital are unstable due to the volatility
of interest rate changes. Therefore, they do not reflect the actual
annual price changes for Medicare capital-related costs. The capital
component of the FY 2002-based RPL market basket will reflect the
underlying stability of the capital acquisition process and provide
hospitals with the ability to plan for changes in capital payments.
To calculate the vintage weights for depreciation and interest
expenses, we need a time series of capital purchases for building and
fixed equipment and movable equipment. We found no single source that
provides the best time series of capital purchases by hospitals for all
of the above components of capital purchases. As explained in the RY
2007 LTCH PPS proposed rule (71 FR 4664), the early Medicare Cost
Reports are not sufficiently completed to have capital data to meet
this need. While the AHA Panel Survey provides a consistent database
back to 1963, it does not provide annual capital purchases. However,
the AHA Panel Survey provides a time series of depreciation expenses
through 1997, which could be used to infer capital purchases over time.
From 1998 to 2001, hospital depreciation expenses were calculated by
multiplying the AHA Annual Survey total hospital expenses by the ratio
of depreciation to total hospital expenses from the Medicare cost
reports. Beginning in 2001, the AHA Annual Survey began collecting
depreciation expenses. We note that we hope to be able to propose to
use these data in proposed rebasings that would be presented in future
proposed rules.
In order to estimate capital purchases from AHA data on
depreciation and interest expenses, the expected life for each cost
category (building and fixed equipment, movable equipment, and debt
instruments) is needed. Due to insufficient Medicare cost report data
for IPFs, IRFs, and LTCHs, we use FY 2001 Medicare Cost Reports for
IPPS hospitals to determine the expected life of building and fixed
equipment and movable equipment. As explained in the RY 2007 LTCH PPS
proposed rule (71 FR 4664), we believe this data source
[[Page 27816]]
reflects the latest relative cost structure of depreciation expenses
for all hospital types, including IPFs, IRFs, and LTCHs, and is the
best available data at this time. The expected life of any piece of
equipment can be determined by dividing the value of the asset
(excluding fully depreciated assets) by its current year depreciation
amount. This calculation yields the estimated useful life of an asset
if depreciation were to continue at current year levels, assuming
straight-line depreciation. From the FY 2001 Medicare cost reports for
IPPS hospitals, the expected life of building and fixed equipment was
determined to be 23 years, and the expected life of movable equipment
was determined to be 11 years.
As we proposed, for this final rule we also used the fixed and
movable weights derived from FY 2001 Medicare cost reports for IPFs,
IRFs, and LTCHs to separate the depreciation expenses into annual
amounts of building and fixed equipment depreciation and movable
equipment depreciation because this is the best available data source.
By multiplying the annual depreciation amounts by the expected life
calculations from the FY 2001 Medicare cost reports, year-end asset
costs for building and fixed equipment and movable equipment are
determined. Then, we calculate a time series back to 1963 of annual
capital purchases by subtracting the previous year asset costs from the
current year asset costs. From this capital purchase time series we are
able to calculate the vintage weights for building and fixed equipment,
movable equipment, and debt instruments. An explanation of each of
these sets of vintage weights follows.
As we proposed, for this final rule for building and fixed
equipment vintage weights, the real annual capital purchase amounts for
building and fixed equipment derived from the AHA Panel Survey are
used. The real annual purchase amount was used to capture the actual
amount of the physical acquisition, net of the effect of price
inflation. This real annual purchase amount for building and fixed
equipment was produced by deflating the nominal annual purchase amount
by the building and fixed equipment price proxy, the Boeckh
Institutional Construction Index. This is the same proxy used for the
FY 1997-based excluded hospital with capital market basket. As
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4664), we
believe this proxy continues to meet our criteria of reliability,
timeliness, availability, and relevance (discussed previously in this
final rule). Since building and fixed equipment has an expected life of
23 years, the vintage weights for building and fixed equipment are
deemed to represent the average purchase pattern of building and fixed
equipment over 23-year periods. With real building and fixed equipment
purchase estimates back to 1963, 16 23-year periods could be averaged
to determine the average vintage weights for building and fixed
equipment that are representative of average building and fixed
equipment purchase patterns over time. Vintage weights for each 23-year
period are calculated by dividing the real building and fixed capital
purchase amount in any given year by the total amount of purchases in
the 23-year period. This calculation is done for each year in the 23-
year period, and for each of the 16 23-year periods. The average of
each year across the 16 23-year periods is used to determine the 2002
average building and fixed equipment vintage weights.
For movable equipment vintage weights, as we proposed, for this
final rule the real annual capital purchase amounts for movable
equipment derived from the AHA Panel Survey are used to capture the
actual amount of the physical acquisition, net of price inflation. This
real annual purchase amount for movable equipment is calculated by
deflating the nominal annual purchase amount by the movable equipment
price proxy, the PPI for Machinery and Equipment. This is the same
proxy used for the FY 1997-based excluded hospital with capital market
basket. We believe this proxy, which meets our criteria, is the best
measure of price changes for this cost category. Since movable
equipment has an expected life of 11 years, the vintage weights for
movable equipment are deemed to represent the average purchase pattern
of movable equipment over an 11-year period. With real movable
equipment purchase estimates available back to 1963, 28 11-year periods
could be averaged to determine the average vintage weights for movable
equipment that are representative of average movable equipment purchase
patterns over time. Vintage weights for each 11-year period are
calculated by dividing the real movable capital purchase amount for any
given year by the total amount of purchases in the 11-year period. This
calculation is done for each year in the 11-year period, and for each
of the 28 11-year periods. The average of the 28 11-year periods is
used to determine the FY 2002 average movable equipment vintage
weights.
As we proposed, for this final rule for interest vintage weights,
the nominal annual capital purchase amounts for total equipment
(building and fixed, and movable) derived from the AHA Panel and Annual
Surveys are used. Nominal annual purchase amounts are used to capture
the value of the debt instrument. Since hospital debt instruments have
an expected life of 23 years, the vintage weights for interest are
deemed to represent the average purchase pattern of total equipment
over 23-year periods. With nominal total equipment purchase estimates
available back to 1963, 16 23-year periods could be averaged to
determine the average vintage weights for interest that are
representative of average capital purchase patterns over time. Vintage
weights for each 23-year period are calculated by dividing the nominal
total capital purchase amount for any given year by the total amount of
purchases in the 23-year period. This calculation is done for each year
in the 23-year period and for each of the 16 23-year periods. The
average of the 16 23-year periods is used to determine the FY 2002
average interest vintage weights. The vintage weights for the index are
presented in Table 3.
In addition to the price proxies for depreciation and interest
costs described above in the vintage weighted capital section, as we
proposed, for this final rule we used the CPI-U for Residential Rent as
a price proxy for other capital-related costs. Other capital-related
costs are mainly composed of taxes and insurance. There is no price
proxy for these specific costs; however, we believe the price changes
associated with these costs will be reflected in the price changes of
residential rent because rent is assumed to move with taxes and
insurance in order to maintain profit margins. The price proxies for
each of the capital cost categories are the same as those used for the
FY 2003 IPPS final rule (67 FR 50044) capital input price index.
[[Page 27817]]
Table 3.--CMS FY 2002-Based RPL Market Basket Capital Vintage Weights
----------------------------------------------------------------------------------------------------------------
Interest:
Fixed assets Movable capital-
Year (23 year assets (11 related (23
weights) year weights) year weights)
----------------------------------------------------------------------------------------------------------------
1............................................................... 0.021 0.065 0.010
2............................................................... 0.022 0.071 0.012
3............................................................... 0.025 0.077 0.014
4............................................................... 0.027 0.082 0.016
5............................................................... 0.029 0.086 0.019
6............................................................... 0.031 0.091 0.023
7............................................................... 0.033 0.095 0.026
8............................................................... 0.035 0.100 0.029
9............................................................... 0.038 0.106 0.033
10.............................................................. 0.040 0.112 0.036
11.............................................................. 0.042 0.117 0.039
12.............................................................. 0.045 .............. 0.043
13.............................................................. 0.047 .............. 0.048
14.............................................................. 0.049 .............. 0.053
15.............................................................. 0.051 .............. 0.056
16.............................................................. 0.053 .............. 0.059
17.............................................................. 0.056 .............. 0.062
18.............................................................. 0.057 .............. 0.064
19.............................................................. 0.058 .............. 0.066
20.............................................................. 0.060 .............. 0.070
21.............................................................. 0.060 .............. 0.071
22.............................................................. 0.061 .............. 0.074
23.............................................................. 0.061 .............. 0.076
-----------------------------------------------
Total....................................................... 1.000 1.000 1.000
----------------------------------------------------------------------------------------------------------------
4. Market Basket Estimate for the 2007 LTCH PPS Rate Year
As discussed previously in this final rule, beginning in the 2007
LTCH PPS rate year, we are adopting the FY 2002-based RPL market basket
as the appropriate market basket of goods and services under the LTCH
PPS. As discussed in greater detail below, we are implementing the
proposed zero percent reduction to the LTCH PPS Federal rate for the
2007 LTCH PPS rate year as discussed in the RY 2007 LTCH PPS proposed
rule (71 FR 4667 through 4670), rather than using an update based
solely on the most recent estimate of the LTCH PPS market basket as we
have done in the past. In addition, as we discuss in section V.D.1.c.
of this preamble, as we proposed, for this final rule we are revising
the LTCH PPS labor-related share based on the RPL market basket. In
Table 4, we are presenting a comparison of the most recent estimates of
the increase to the current LTCH PPS market basket (that is, the FY
1997-based excluded hospital with capital market basket) and the FY
2002-based RPL market basket.
In the RY 2007 LTCH PPS proposed rule (71 FR 4666), the most recent
estimate of the RPL market basket at that time for July 1, 2006 through
June 30, 2007 (the 2007 LTCH PPS rate year) was 3.6 percent, which was
based on Global Insight's 3rd quarter 2005 forecast with history
through the 2nd quarter of 2005. In this final rule, consistent with
our historical practice of using the most recent available data, based
on Global Insight's 1st quarter 2006 forecast with history through the
4th quarter of 2005, the most recent estimate of the RPL market basket
for July 1, 2006 through June 30, 2007 (the 2007 LTCH PPS rate year) is
3.4 percent. Global Insight, Inc. is a nationally recognized economic
and financial forecasting firm that contracts with CMS to forecast the
components of the market baskets. Using the current FY 1997-based
excluded hospital with capital market basket, Global Insight's 1st
quarter 2006 forecast, with history through the 4th quarter of 2005,
for the 2007 LTCH PPS rate year is also 3.4 percent. Table 4 compares
the FY 2002-based RPL market basket and the FY 1997-based excluded
hospital with capital market basket percent changes. For both the
historical and forecasted periods between FY 2000 and FY 2008, the
difference between the two market baskets is minor with the exception
of FY 2002, where the FY 2002-based RPL market basket increased \3/10\
of a percentage point higher than the FY 1997-based excluded hospital
with capital market basket. This is primarily due to the FY 2002-based
RPL having a larger compensation (that is, the sum of wages and
salaries and benefits) cost weight than the FY 1997-based index and the
price changes associated with compensation costs increasing much faster
than the prices of other market basket components. Also contributing is
the ``all other nonlabor intensive'' cost weight, which is smaller in
the FY 2002-based RPL market basket than in the FY 1997-based index, as
well as the slower price changes associated with these costs.
[[Page 27818]]
Table 4.--FY 2002-Based RPL Market Basket and FY 1997-Based Excluded
Hospital with Capital Market Basket, Percent Changes: 2000-2008
------------------------------------------------------------------------
FY 1997-based
Rebased FY 2002- excluded
Fiscal year (FY) based RPL market hospital market
basket basket with
capital
------------------------------------------------------------------------
Historical data:
RY 2001......................... 3.8 3.9
RY 2002......................... 4.1 3.8
RY 2003......................... 3.8 3.7
RY 2004......................... 3.6 3.6
RY 2005......................... 3.8 4.0
Average RY 2001-2005........ 3.8 3.8
Forecast:
RY 2006......................... 3.6 3.8
RY 2007......................... 3.4 3.4
RY 2008......................... 3.2 3.1
RY 2009......................... 2.9 2.8
Average RY 2006-2009........ 3.3 3.3
------------------------------------------------------------------------
CNTL08R3.SIM
C. Standard Federal Rate for the 2007 LTCH PPS Rate Year
1. Background
Under the existing regulations at Sec. 412.523(c)(3)(ii), we
update the standard Federal rate annually to adjust for the most recent
estimate of the projected increases in prices for LTCH inpatient
hospital services. We established this regulation in the August 30,
2002 final rule (67 FR 56030), which implemented the LTCH PPS, because
at that time we believed that was the most appropriate method for
updating the LTCH PPS Standard Federal rate annually for years after FY
2003. When we moved the date of the annual update of the LTCH PPS from
October 1 to July 1 in the RY 2004 LTCH PPS final rule (68 FR 34138),
we revised Sec. 412.523(c)(3) to specify that for LTCH PPS rate years
beginning on or after July 1, 2003, the annual update to the standard
Federal rate for the LTCH PPS would be equal to the previous rate
year's Federal rate updated by the most recent estimate of increases in
the appropriate market basket of goods and services included in covered
inpatient LTCH services because, at that time, we continued to believe
that was the most appropriate method for updating the LTCH PPS Standard
Federal rate annually for years after RY 2004. As established in the RY
2006 LTCH PPS final rule (70 FR 24179), based on the most recent
estimate of the excluded hospital with capital market basket, adjusted
to account for the change in the LTCH PPS rate year update cycle, the
current LTCH PPS standard Federal rate which is effective from July 1,
2005 through June 30, 2006 (the 2006 LTCH PPS rate year) is $38,086.04.
In the RY 2007 LTCH PPS proposed rule (71 FR 4667 through 4670), we
explain how we developed the proposed standard Federal rate for the
2007 LTCH PPS rate year. Specifically, we explained our rationale,
which was based on our ongoing monitoring activities, for proposing a
zero percent update to the standard Federal rate for the 2007 LTCH PPS
rate year, which was based on the most recent estimate in the RPL
market basket offset by an adjustment for changes in coding practices,
rather than proposing to solely use the most recent estimate of the
proposed RPL market basket as the update factor for the Federal rate
for the upcoming rate year. Therefore, in that proposed rule, we
proposed a standard Federal rate for the 2007 LTCH PPS rate year of
$38,086.04. In the discussion that follows, we explain how we developed
the final standard Federal rate for the 2007 LTCH PPS rate year.
Specifically, we explain our rationale, which is based on our ongoing
monitoring activities, for the zero percent update to the standard
Federal rate for the 2007 LTCH PPS rate year, which is based on the
most recent estimate in the RPL market basket offset by an adjustment
for changes in coding practices as discussed in greater detail below,
rather than solely using the most recent estimate of the RPL market
basket as the update factor for the Federal rate for the upcoming rate
year. Thus, the standard Federal rate for the 2007 LTCH PPS rate year
will be $38,086.04.
2. Description of a Preliminary Model of an Update Framework Under the
LTCH PPS
In the August 30, 2002 final rule (67 FR 56086), which implemented
the LTCH PPS, we stated that in the future we may propose to develop a
framework to update payments to LTCHs that would account for other
appropriate factors that affect the efficient delivery of services and
care provided to Medicare patients. A conceptual basis for the proposal
of developing an update framework in the future was presented in
Appendix B of that same final rule (67 FR 56086). In subsequent final
rules that updated the LTCH PPS standard Federal rate for years after
FY 2003, we explained that we did not propose an update framework
because we had not yet collected sufficient data to allow for the
analysis and development of a framework under the LTCH PPS (see 68 FR
34134, 69 FR 25682, and 70 FR 24179). Since the LTCH PPS was
implemented just slightly over 3 years ago (for cost reporting periods
beginning on or after October 1, 2002) and due to the time lag in the
availability of Medicare data, we continue to believe that we still do
not yet have sufficient data to develop an update framework upon which
to base the update to the standard Federal rate for the 2007 LTCH PPS
rate year.
As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4667),
although we do not have enough complete data at this time to update for
RY 2007 based on an update framework, we believe that the almost 2 full
years of data generated under the LTCH PPS is sufficient data to begin
the discussion of the development of a potential update framework that
we may propose to use in the future under the LTCH PPS for the annual
update to the LTCH standard Federal rate. Therefore, although we did
not propose to employ an analytical update framework in that proposed
rule to determine the 2007 LTCH PPS rate year update to the standard
Federal rate,
[[Page 27819]]
we presented a preliminary model of an update framework, using the best
available data and concepts, in Appendix A of that proposed rule, which
we may propose to adopt at some time in the future under the LTCH PPS.
Furthermore, in the RY 2007 LTCH PPS proposed rule, we solicited
comments on that preliminary update framework methodology and its
application, which we may propose to adopt at some time in the future
under the LTCH PPS. Also, we stated that we would appreciate comments
regarding recommendations to improve it.
We received a few comments on the preliminary model of an update
framework that was presented in Appendix A of the RY 2007 LTCH PPS
proposed rule (71 FR 4742 through 4747). In this final rule, we are
again presenting a preliminary model of an update framework, using the
best available data and concepts, which we may propose to adopt at some
time in the future under the LTCH PPS, in Appendix A of this final
rule. We have responded to the comments that we received on the
preliminary update framework model presented in the RY 2007 LTCH PPS
proposed rule in Appendix A of this final rule. We continue to solicit
comments on this preliminary update framework methodology and its
application, which we may propose to adopt at some time in the future
under the LTCH PPS. Also, we would appreciate comments regarding
recommendations to improve it. We note that this preliminary model of
an update framework for the LTCH PPS is based on the conceptual
discussion of a LTCH PPS update framework that was presented in the
August 30, 2002 final rule (67 FR 56086), and is similar to the update
framework formerly used to develop the operating IPPS annual update
recommendation (69 FR 28816 through 28817) and that which is currently
used under the capital IPPS for inpatient short-term acute-care
hospitals set forth at Sec. 412.308(c)(1)(ii).
3. Update to the Standard Federal Rate for the 2007 LTCH PPS Rate Year
Currently, under Sec. 412.523, the annual update to the LTCH PPS
standard Federal rate is equal to the most recent estimate of increases
in the prices of an appropriate market basket of goods and services
included in covered inpatient LTCH services (that is, presently, the
excluded hospital with capital market basket). As we indicated in
previous LTCH PPS final rules (67 FR 56014, 68 FR 34157, 69 FR 25712,
and 70 FR 24209 through 24213) and in the RY 2007 LTCH PPS proposed
rule (71 FR 4667), we have developed a monitoring system to assist us
in evaluating the LTCH PPS. We have used the results of these
monitoring efforts, along with the most recently available LTCH PPS
data to assess current payment adequacy under the LTCH PPS.
As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4667
through 4670), because we believe that current payments are more than
adequate to account for price increases in the services furnished by
LTCHs during the 2007 LTCH PPS rate year, under the broad authority
conferred upon the Secretary by section 123 of the BBRA as amended by
section 307(b) of the BIPA to include appropriate adjustments,
including updates, in the establishment of the LTCH PPS, we proposed to
revise Sec. 412.523(c)(3)(ii), to specify that, for discharges
occurring on or after July 1, 2006 and on or before June 30, 2007, the
standard Federal rate from the previous year would be updated by a
factor of zero percent. That is, the standard Federal rate for RY 2007
rate year would remain the same as the standard Federal rate in effect
during the 2006 rate year ($38,086.04).
In this final rule, as we discuss in greater detail below, because
we continue to believe that current payments are more than adequate to
account for price increases in the services furnished by LTCHs during
the 2007 LTCH PPS rate year, under the broad authority conferred upon
the Secretary by section 123 of the BBRA as amended by section 307(b)
of the BIPA to include appropriate adjustments, including updates, in
the establishment of the LTCH PPS, we are revising Sec.
412.523(c)(3)(ii), to specify that, for discharges occurring on or
after July 1, 2006 and on or before June 30, 2007, there will be a zero
percent update to the standard Federal rate from the previous year.
That is, the standard Federal rate for the July 1, 2006 through June
30, 2007 rate year will be $38,086.04.
As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4667),
and in the August 30, 2002 final rule (67 FR 56014), we describe an on-
going monitoring component of the new LTCH PPS that would enable us to
evaluate the impact of the new payment policies. We stated that, if our
data indicate that changes to the system might be warranted, we may
consider proposing revisions to these policies in the future. Since the
implementation of the LTCH PPS (for cost reporting periods beginning on
or after October 1, 2002), there has been tremendous growth in the
number of LTCHs reimbursed by Medicare. Specifically, the number of
LTCHs has almost doubled over the past 3 years from approximately 200
LTCHs in FY 2003 to 378 LTCHs at the start of FY 2005. In addition,
Medicare spending for LTCHs has also grown rapidly, as noted in
MedPAC's June 2004 Report to Congress (page 122). Rapid increases in
LTCH growth and Medicare spending under the LTCH PPS, in conjunction
with the fact that over 98 percent of LTCHs are currently paid based
fully on the Federal rate (rather than choosing to be paid under a
blend of the reasonable cost-based (TEFRA) payment amount and the LTCH
PPS Federal rate payment amount), prompted us to examine changes in
LTCHs' patient case-mix index (CMI) and margins under the LTCH PPS. As
discussed in greater detail in the RY 2007 LTCH PPS proposed rule (71
FR 4667 through 4670), we believe the proposed zero percent update
factor for RY 2007, which was based on the most recent estimate of the
proposed RPL market basket at that time, adjusted to account for coding
improvements, is supported by our findings regarding CMI, Medicare
margins, and patient census based on the most recent complete LTCH
data.
A LTCH's CMI is defined as its case weighted average LTC-DRG
relative weight for all its discharges in a given period. Changes in
CMI consist of two components: ``Real'' CMI changes and ``apparent''
CMI changes. Real CMI increase is defined as the increase in the
average LTC-DRG relative weights resulting from the hospital's
treatment of more resource intensive patients. Apparent CMI increase is
defined as the increase in CMI due to changes in coding practices.
Observed CMI increase is defined as real CMI increase plus the increase
in computed CMI due to changes in coding practices (including better
documentation of the medical record by physicians and more complete
coding of the medical record by coders). If LTCH patients have more
costly impairments, lower functional status, or increased
comorbidities, and thus require more resources in the LTCH, we will
consider this a real change in case-mix. Conversely, if LTCH patients
have the same impairments, functional status, and comorbidities but are
coded differently resulting in higher payment, we consider this an
apparent change in case-mix. We believe that changes in payment rates
should accurately reflect changes in LTCHs' true cost of treating
patients (real CMI increase), and should not be influenced by changes
in coding practices (apparent CMI increase). Apparent CMI increase
results in a case
[[Page 27820]]
being grouped to a LTC-DRG with a higher weight than it will be without
such changes in coding practices, which results in a higher LTCH PPS
payment that does necessarily reflect the true cost of treating the
patient. Therefore, in the RY 2007 LTCH PPS proposed rule (71 FR 4668),
under the broad discretionary authority conferred upon the Secretary by
section 123 of the BBRA as amended by section 307(b) of the BIPA to
include appropriate adjustments, including updates, in the
establishment of the LTCH PPS, we proposed to revise the annual update
to the LTCH PPS standard Federal rate set forth at Sec. 412.523(a)(2)
for the 2007 LTCH PPS rate year to adjust the payment amount for LTCH
inpatient hospital services to eliminate the effect of coding or
classification changes that do not reflect real changes in LTCHs' case-
mix. We explained that it is important to eliminate the effect of
coding or classification changes because they do not reflect the true
cost of treating patients.
As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4668),
we asked 3M Health Information Systems (3M) to examine changes in case-
mix and coding since the implementation of the LTCH PPS based on the
most recently available data. As part of their analysis, 3M compared FY
2003 LTCH claims data from the first year of implementation of the PPS
with the FY 2001 claims data (generated prior to the implementation of
the LTCH PPS), which is the same LTCH claims data used to develop the
LTCH PPS. The analysis performed by 3M indicated, among other things,
that the average annual CMI increase from FY 2001 to FY 2003 was 2.75
percent. Since coding of diagnoses was not a factor in determining
payments under the former reasonable cost-based (TEFRA) payment system,
and since payments were not directly tied to diagnosis codes, there was
no incentive for LTCHs to attempt to influence payments through changes
in coding practices. Therefore, it is reasonable to assume that the
observed 2.75 percent change in case-mix in the years prior to the
implementation of the LTCH PPS represent the value for the real CMI
increase (that is, we assume that the increase in case-mix is due to
treatment of more resource intensive patients rather than to
improvements in documentation or more complete coding of the medical
record during this period). Using the average annual 2.75 percent
observed CMI increase as a baseline, we separated the CMI increase
between FY 2003 and FY 2004 into the real CMI increase, which is based
on the treatment of more resource intensive patients, and the apparent
CMI increase, which is due to improvements in documentation and coding
practices.
As we also stated in the RY 2007 LTCH PPS proposed rule (71 FR
4668), the calculated observed CMI increase between FY 2003 and FY 2004
was 6.75 percent. Assuming that the real CMI increase observed (on
average) from FY 2001 to FY 2003 remained relatively constant into FY
2005, then the difference of 4.0 percent (6.75 percent minus 2.75
percent) represents the apparent CMI increase due to improvements in
documentation and coding. This is considerably higher than the 0.34
percent behavioral offset originally estimated by CMS actuaries, which
was used in the development of the FY 2003 LTCH PPS standard Federal
rate (67 FR 56033). Therefore, we stated our belief that a significant
portion of the 6.75 percent increase in CMI between FY 2003 and FY 2004
is due to changes in coding practices rather than the treatment of more
resource intensive patients.
In addition, in the RY 2007 LTCH PPS proposed rule (71 FR 4669), we
discussed an internal CMS analysis, which shows high Medicare margins
among LTCHs since the implementation of the LTCH PPS in FY 2003. We
calculated ``revenue-weighted'' Medicare margins, which are the sum of
LTCH inpatient Medicare revenue (payments) minus the sum of LTCH
inpatient Medicare expenses (costs) divided by the sum of LTCH
inpatient Medicare revenue (payments). This margin calculation, also
utilized by MedPAC in its analyses, is used to evaluate the overall
financial status of LTCHs. Specifically, our analysis found that LTCH
Medicare margins for FY 2003 (the first year of the LTCH PPS) were 7.8
percent and preliminary cost report data for FY 2004 reveal an even
higher Medicare margin of 12.7 percent.
We also noted that MedPAC is presently engaged in an evaluation of
payment adequacy for LTCHs, which upon completion, will be published in
the Commission's 2006 Reports to the Congress. In the RY 2007 LTCH PPS
proposed rule (71 FR 4668), we discussed the Commission's preliminary
findings that were presented at the October 7, 2005 public meeting. In
MedPAC's March 2006 Report to Congress on Medicare Payment Policy, the
Commission recommended that the update to the LTCH PPS Federal rate be
eliminated for RY 2007 (Section 4C; page 219). We also discussed the
review by a Medicare program safeguard contractor and other
investigations of LTCHs treating patients that do not require hospital-
level care.
Additionally, in the RY 2007 LTCH PPS proposed rule (71 FR 4670),
we noted that the proposed zero percent update for the 2007 LTCH PPS
rate year may make the one-time prospective adjustment to the LTCH PPS
Federal rate, provided for under Sec. 412.523(d)(3), unnecessary if
our comprehensive analysis of the LTCH PPS determines that LTCH PPS
payments and the costs for LTCH services become aligned as a result of
this change. We solicited comments on whether the proposed zero percent
for the 2007 LTCH PPS rate year is appropriate or if an alternative
percentage reduction should be applied to the standard Federal rate for
the 2007 LTCH PPS rate year. Specifically, as explained in greater
detail below, to the extent of our review of FY 2003 LTCH data (which
will include but, is not limited to changes in case-mix) show that, if
by coincidence after updating the Federal rate by zero percent for RY
2007, the standard Federal rate is appropriate, it is possible that any
further adjustment to the Federal rate may be unnecessary.
Comment: A few commenters stated that CMS, in proposing a zero
percent update to the Federal rate for RY 2007, failed to consider the
recent revisions to the guidelines for utilizing DRG 475 (``Respiratory
System Diagnosis with Ventilator Support'') that have resulted in
reduced payments to LTCHs, despite that the same resources are being
expended.
Response: As discussed in section III. of the preamble of this
final rule, the LTC-DRG assignments are based on GROUPER logic. The
GROUPER is a software product that analyzes coding information
submitted by hospitals, and subsequently makes a DRG assignment. CMS is
responsible for GROUPER maintenance, including the assignment of DRGs.
The DRG information is used to make payment to hospitals on behalf of
Medicare beneficiaries treated by these hospitals. In contrast, the
role of the AHA is to publish, in their document Coding Clinic for ICD-
9-CM, coding guidelines and advice as designated by the four
cooperating parties. The cooperating parties that have final approval
of the published coding advice are the AHA, the American Health
Information Management Association (AHIMA), CMS, and the National
Centers for Health Statistics.
While the commenters have noted ``revisions to the guidelines for
utilizing DRG 475'', it is not clear what guidelines are being cited.
To address this comment in a responsible manner,
[[Page 27821]]
we would need more information than has been provided by the
commenters. Furthermore, as discussed below in this preamble, the zero
percent update finalized in this final rule is an adjustment that we
have made to account for the case mix ``creep'' that was observed
during FY 2004. Accordingly, any subsequent ``revisions to guidelines''
would have no impact on our need to make this adjustment in determining
the RY 2007 Federal rate.
Comment: As an alternative to the proposed zero percent update, one
commenter encouraged CMS to work with the AHA in developing more
stringent coding practices as currently considered by the ``Coding
Clinic'' if it believes additional coding practices are needed.
Response: In section III.E.3. of this final rule, we emphasize the
need for proper coding by LTCHs. We also explain that inappropriate
coding of cases can adversely affect the uniformity of cases in each
LTC'DRG and produce inappropriate weighting factors at recalibration.
We continue to urge LTCHs to focus on improved coding practices.
Because of concerns raised by LTCHs concerning correct coding, we have
asked the AHA to provide additional clarification or instruction on
proper coding in the LTCH setting. As we noted earlier, the coding
guidelines currently published by the AHA are the result of the joint
collaboration of CMS, AHA, AHIMA, and the National Centers for Health
Statistics.
Comment: Many commenters expressed concern that the proposed
changes to the SSO policy in conjunction with the proposed zero percent
update would reduce hospital payments by nearly 15 percent, forcing
LTCHs to operate at a loss when treating Medicare patients. They urged
CMS to provide the full market basket update to the Federal rate for RY
2007.
Response: We disagree that the proposed zero percent update to the
Federal rate would have resulted in ``reduced'' hospital payments. In
the RY 2007 LTCH PPS proposed rule, we proposed to offset the market
basket by an amount equal to the increase in case mix that was due
solely to improved documentation and coding rather than changes in real
case mix. At the time of the proposed rule, that increase was within
rounding error of the market basket, and therefore resulted in a
proposed Federal rate for RY 2007 that was equal to the RY 2006 Federal
rate, and not a reduction to the RY 2006 Federal rate. We have provided
throughout this section of this final rule, as we did in the proposed
rule, our rationale for including an adjustment to account for changes
in coding practices in the determination of the RY 2007 Federal rate.
As discussed in the RY 2007 LTCH PPS proposed rule, and as discussed in
greater detail below, we analyzed changes in the LTCHs' CMI in
conjunction with a detailed analysis of LTCH margins since the
implementation of the LTCH PPS, and our zero percent update policy is
also based on these analyses.
In response to the commenters concern that the proposed changes to
the SSO policy could also force LTCHs to operate at a loss, in section
VI.A.1. of the preamble of this final rule below, we discuss the
changes to the SSO policy that we are establishing in this final rule,
and in section XV. of this final rule we discuss the projected impact
of those changes (as well as the other changes established in this
final rule) on estimated aggregate LTCH PPS payments for RY 2007.
Specifically, in our discussion of the estimated decrease in aggregate
LTCH PPS payments for RY 2007, we explain that we do not believe that
this change will result in an adverse impact on LTCHs because, as a
result of the change to the SSO payment formula, we believe that LTCHs
will significantly reduce the number of short-stay cases that they
admit. We believe that by paying appropriately for these SSO cases by
removing the financial incentive for LTCHs to admit those very short
stay cases that could otherwise receive appropriate treatment at an
acute-care hospital (and paid under the IPPS), LTCHs will change their
admission patterns for these patients. The estimated decrease in LTCH
PPS payments for RY 2007 was determined based on the current LTCH
admission pattern of SSO cases (that is, currently about 37 percent of
all LTCH cases), and we believe that the estimated decrease in LTCH
payments per discharge for RY 2007 discussed in section XV. of this
final rule will only occur if LTCHs were to continue to admit the same
number of SSO patients with very short lengths of stay. Furthermore, as
also discussed in section XV. of this final rule, we do not believe
that this change will force LTCHs to operate at a loss because, based
on our recent margins analysis (discussed in greater detail below in
this section). LTCH margins for FY 2003 are in excess of 7 percent, and
preliminary FY 2004 data shows margins in excess of 12 percent.
Therefore, we believe that even with an estimated decrease in LTCHs'
payments per discharge for the 2007 LTCH PPS rate year, LTCH PPS
payments will be sufficient to compensate LTCHs for the costs of the
efficient delivery of LTCH services to LTCH patients.
Comment: Several commenters believed that CMS should allow a full
market basket update to the LTCH PPS Federal rate for RY 2007. Other
commenters stated that the LTCH PPS Federal rate should be updated
annually by the most recent estimate of the market basket.
Response: As we have discussed throughout this section of the
preamble of this final rule, while we continue to believe that an
update to the 2007 LTCH PPS rate year should be based on the most
recent estimate of the LTCH PPS market basket, we believe it
appropriate that the market basket be offset by an adjustment to
account for changes in coding practices. Such an adjustment will
protect the integrity of the Medicare Trust Funds by ensuring that the
LTCH PPS payment rates better reflect the true costs of treating LTCH
patients. We wish to emphasize that the RY 2007 Federal rate update of
zero percent established in this final rule (as discussed in greater
detail below) is based on the estimate of the LTCH PPS market basket
for RY 2007. As we discussed in the RY 2007 LTCH PPS proposed rule and
as we have discussed in greater detail above in this section, we
believe that in determining the Federal rate update for RY 2007 it is
appropriate to apply an adjustment to the most recent estimate of the
LTCH PPS market basket to eliminate the effect of coding or
classification changes that do not reflect real changes in LTCHs' case-
mix. This adjustment is necessary in order to serve to account for
payments that were made based on improved coding (rather than increased
patient severity) in prior years.
As we noted in the RY 2007 LTCH PPS proposed rule (71 FR 4670) and
as we reiterate below, the revision to Sec. 412.525(c)(3) established
in this final rule will address an update to the LTCH PPS Federal rate
for the 2007 LTCH PPS rate year. We will propose future revisions to
Sec. 412.525(c)(3) to address future proposed updates to the LTCH PPS
Federal rates in future rate years based on an analysis of the most
recent LTCH data available that would be presented in upcoming LTCH
proposed rules. Furthermore, as discussed above in section IV.C.2. of
this preamble, we are also examining the potential for developing and
implementing an update framework under the LTCH PPS. We believe an
update framework, which would incorporate the market basket as one
component, will enhance the methodology for updating payments by
addressing factors such as case-mix, intensity, and productivity,
beyond
[[Page 27822]]
changes in pure input prices (measured by the market basket). (As noted
in section V.C.2 of this final rule, a preliminary model of an update
framework that may be proposed at some later date for future use under
the LTCH PPS is presented in Appendix A of this final rule.) However,
at this time, we are not proposing a specific annual update framework.
As noted above, we will wait until we have collected sufficient and
complete LTCH PPS data to evaluate payments and costs under the LTCH
PPS before proposing to establish such a framework for determining the
annual update to the LTCH PPS Federal rate in the future.
Comment: Many commenters stated that 3M's analysis of LTCH claims
data was flawed. They stated that because a number of LTCHs did not
transition to the LTCH PPS until FY 2004, using FY 2003 as a comparison
to FY 2001 was wrong. The commenters also suggested that CMS would need
to compare the CMI increases for LTCHs that elected reimbursement at
the full Federal rate at the beginning or some time during the
transition period to CMI increases for LTCHs that chose to go through
the full 5-year transition. They emphasized that since LTCHs were
transitioning to the LTCH PPS, it is unlikely that LTCHs were
aggressively coding the stays of their Medicare patients.
Response: We appreciate the commenters' concern that errors were
made in analyzing LTCHs' CMI data; however, we disagree with the
commenters that 3M's analysis of LTCH claims data was flawed. We
believe commenters erroneously presumed that coding improvement begins
on the date the LTCH elected to be reimbursed at the full Federal rate
under the LTCH PPS and not before. Because providers paid under the
transition blend have at least a portion of their payments based on the
Federal rate, which is based on ICD-9-CM diagnosis and the accurate
coding of procedure codes, we believe LTCHs still had an incentive to
improve coding while they were transitioning to the full Federal rate.
In addition, the commenters provide no evidence that the large increase
from the 2.75 percent average annual increase in CMI in the years prior
to the implementation of the LTCH PPS to the 6.75 percent increase in
LTCH CMI found between FY 2003 and FY 2004 resulted from a sudden
increase in patient acuity in one year, especially when analyzed in the
context of the relatively small increase in costs observed during this
same period.
Comment: A few commenters asserted that the average intensity of
Medicare inpatients has increased significantly from pre-PPS levels.
Therefore, they believe the assumption that ``real'' case-mix is 2.75
percent is faulty.
Response: As explained in the RY 2007 LTCH PPS proposed rule (71 FR
4668), we made the assumption that real case-mix was 2.75 percent based
on the average annual CMI increase in the three years prior to the full
implementation of the LTCH PPS (that is, between FY 2001 and FY 2003).
As we acknowledged in that same proposed rule, while it may be true
that the average intensity has increased from pre-PPS levels, it is not
supported by our analysis of the change in LTCHs' costs. As we stated
in the RY 2007 LTCH PPS proposed rule, we did not observe a large
increase in cost per discharge between FY 2003 and FY 2004, which we
would have expected if the observed CMI increase was due to real CMI
change (treating sicker patients). We would have expected to see a
large increase in costs per discharge to pay for the resources needed
to treat sicker patients if the CMI increase was due to ``real'' CMI
change.
We do not believe the assumption that the increase in ``real''
case-mix is 2.75 percent is faulty. A LTCH's CMI is defined as its case
weighted average LTC-DRG relative weight for all its discharges in a
given period. Changes in CMI consist of two components: ``Real'' CMI
changes and ``apparent'' CMI changes. As stated in the RY 2007 LTCH PPS
proposed rule, the 4.0 percent apparent CMI increase is a conservative
estimate when compared to the 5.35 percent apparent CMI increase that
would result if we had applied the information from past studies on
case-mix change to the analysis of the LTCHs CMI increase. Based on
past studies of IPPS case-mix change by the RAND Corporation, (``Has
DRG Creep Crept Up? Decomposing the Case-Mix Index Change Between 1987
and 1988'' by G. M. Carter, J.P. Newhouse, and D. A. Relles, R-4098-
HCFA/ProPAC (1991)), in updating IPPS rates we have consistently
assumed that real case-mix change for IPPS hospitals was a fairly
steady 1.0 to 1.4 percent per year. If we had applied this same
assumption to LTCHs, we would have concluded that nearly 5.35 percent
(6.75 percent minus 1.4 percent) of the change in case-mix during the
first year of the LTCH PPS is apparent CMI and not real CMI.
Consequently, if we had applied this more conservative estimate of real
case-mix increase, the proposed update to the Federal rate for RY 2007
would have been a reduction to the current Federal rate rather than
leaving the Federal rate unchanged.
Comment: Several commenters stated that CMS was unfairly penalizing
LTCHs twice for ``case mix creep'' (that is, the ``apparent'' CMI
increase between FYs 2003 and 2004). They stated that CMS had already
corrected any coding issues from FY 2004 by reweighting the LTC-DRGs
for FY 2006 based on that data, which resulted in an estimated 4.2
percent reduction in payments to LTCHs.
Response: Under the LTCH PPS, we determine LTC-DRG relative weights
as discussed in section III. of this preamble, to account for the
difference in resource use by patients exhibiting the case complexity
and multiple medical problems characteristic of LTCH patients. As we
discussed in the FY 2006 IPPS final rule (70 FR 47701 through 47702),
we recalibrated FY 2006 LTC-DRG relative weights based on an analysis
of LTCH claims data from the FY 2004 MedPAR file. Thus, FY 2004 LTCH
claims data, which reflected improved coding, were used to determine
the LTC-DRG relative weights used to pay LTCH PPS discharges occurring
during FY 2006.
While it is true that the reweighting of the LTC-DRGs using FY 2004
LTCH claims served to update the relative weights based on actual
claims data in each LTC-DRG, which also reflects coding improvements
that occurred in FY 2004, the recalibration of LTC-DRG weights only
corrects for any coding improvement for the purpose of making accurate
LTCH PPS payments in FY 2006. However, annual recalibration does not
serve to account for payments that were made based on improved coding
(rather than patient severity) in prior years. The case mix adjustment
to the market basket in determining the RY 2007 Federal rate is meant
to reduce current payments to account for the increase payments that
occurred in FY 2004 that resulted from the CMI increase that is
attributable to ``case-mix'' creep in that year. Therefore, we disagree
that providers are being penalized twice for the LTCH coding
improvements that occurred in FY 2004 (that is, ``case-mix creep'').
Comment: Several commenters contend that our margins analysis is
flawed. The commenters state that although we reported that preliminary
data showed LTCH margins of 12.7 percent for FY 2004, an examination of
MedPAC LTCH margin data shows that almost a quarter of LTCHs (23
percent) had negative Medicare margins in 2004. One of the commenters
also stated that MedPAC did not take into consideration the effect of
the ``25 percent rule'' on reimbursement to LTCH hospitals-within-
hospitals (HWHs) for admissions from the host hospital when modeling
LTCH Medicare margins. The
[[Page 27823]]
commenter also believes that in stating that the reported increases in
costs were not found to be commensurate with the reported increases in
CMI (and Medicare payments), CMS did not allow for any increase in
efficiency by LTCHs. However, in the update framework section (Appendix
A of the RY 2007 LTCH PPS proposed rule), the commenter points out that
CMS suggests that it may begin measuring efficiency, and may also
account for such a factor in a possible proposed future update
framework methodology. The commenter believes CMS is inconsistent with
regards to efficiency.
Response: As we explained in the RY 2007 LTCH PPS proposed rule,
the margins analysis was revenue-weighted (that is, calculated by
adding the total Medicare payments and expenses for all LTCHs). CMS and
MedPAC use this type of margin calculation to assess whether Medicare
payment rates to LTCHs (as a provider class) are adequate. The
commenter states that nearly one-quarter of LTCHs had negative margins
in FY 2004, we note that based on the preliminary data for FY 2004,
one-quarter of LTCHs had margins greater than 18 percent. Therefore, it
is reasonable and expected that we estimate aggregate positive LTCH
margins in excess of 12 percent for FY 2004, as stated below in this
section.
Based on data from the LTCHs' cost reports received as of December
31, 2005, updated LTCH margins analysis for this final rule continues
to show high Medicare margins among LTCHs since the implementation of
the LTCH PPS in FY 2003. As we did for the RY 2007 LTCH PPS proposed
rule, we calculated ``revenue-weighted'' Medicare margins, which are
the sum of hospital inpatient Medicare revenue (payments) minus the sum
of hospital inpatient Medicare expenses (costs) divided by the sum of
hospital inpatient Medicare revenue (payments). This margin
calculation, also utilized by MedPAC in its analyses, is used to
evaluate the overall financial status of LTCHs in general. In an
analysis of the latest available LTCH cost reports, we found that LTCH
Medicare margins for FY 2003 (the first year of the LTCH PPS) were 7.8
percent and preliminary cost report data for FY 2004 based on the most
recent update to the cost report data in HCRIS reveal an even higher
Medicare margin of 12.7 percent. For periods prior to the
implementation of the LTCH PPS (that is, FY 1999 through FY 2002), we
found that aggregate Medicare margins ranged between a minimum of -2.3
percent in FY 2000, and a maximum of 1.5 percent in FY 2002. MedPAC
also noted that LTCH HwHs were found to have higher margins than
freestanding LTCHs in RY 2004.
As mentioned by the commenter, when discussing MedPAC's modeling of
the 2006 LTCH PPS margins, MedPAC's 2006 LTCH PPS margins analysis did
not include the effect of the HwH ``25 percent rule,'' which is the
special payment provisions for LTCH HwHs and satellites that we
established at Sec. 412.534 in the FY 2005 IPPS final rule. Under this
policy we provide a payment adjustment for those patients discharged
from co-located LTCHs (that is, HwHs and satellites) admitted from host
hospitals that exceeded a specified percentage (in most cases, 25
percent). Medicare patients who reach HCO status in the host hospital
are excluded from the count of the percentage of patients admitted
directly from the host. We additionally provided a 4-year transition to
this policy for existing LTCH HwHs and satellites and those LTCH HwHs
paid under the LTCH PPS on October 1, 2005 and whose qualifying period
began on or before October 1, 2004; however, all other LTCHs are
immediately governed by the percentage thresholds established under
Sec. 412.534.
In the transcript of MedPAC's December 8, 2005 public meeting (p.
164), the MedPAC analyst noted that despite the desire to model the
effect of the HwH ``25 percent rule'' established at Sec. 412.534 when
modeling 2006 LTCH margins, they were unable to do so at that time
since the first year of the 5-year phase-in (FY 2005) was ``hold-
harmless'' and any fiscal impact (that is, percentage threshold
requirements specified at Sec. 412.534) are effective for cost
reporting periods beginning during the current fiscal year (FY 2006).
As we discussed in the FY 2005 IPPS final rule when we implemented the
``25 percent rule'' at Sec. 412.534 (69 FR 49771), we were unable to
estimate the impact of this policy because we anticipated behavioral
changes by both the host and the co-located LTCHs resulting from the
provision that exempts HCOs from the percentage threshold calculation.
We are unable to estimate the impact on new LTCHs that will be
immediately subject to the full threshold requirements established
following the implementation of those regulations.
As MedPAC noted at their public meeting, FY 2006 is the first year
of the 4-year phase-in of the threshold requirements established under
Sec. 412.534, and due to the lag time in the availability of data, we
currently do not have sufficient FY 2006 data to determine the effect
of the implementation of those requirements on LTCHs' behavior.
Therefore, we are still unable to estimate the impact of this policy.
However, since the policy at Sec. 412.534 exempts IPPS HCOs at the
acute-care host hospital from the LTCHs' percentage threshold
calculation (as noted above), and since, as noted earlier, the margins
for HwHs are higher than those of freestanding LTCHs, we believe that
even with some adjustments resulting in a decrease in some co-located
LTCHs' RY 2007 LTCH PPS payments due to the threshold requirements
under Sec. 412.534, Medicare payments to co-located LTCHs will exceed
the Medicare costs of the inpatient hospital services provided to its
patients even with a zero percent update to the Federal rate for RY
2007.
As discussed in the RY 2007 LTCH PPS proposed rule, the large
observed increase in LTCH case-mix was not accompanied by a
corresponding increase in Medicare costs. This is consistent with our
belief expressed earlier that a significant part of this observed
increase in case-mix is ``apparent'' and not ``real.'' In conjunction
with an increase in real case-mix we would have expected to see a
significant increase in costs per discharge, even taking into account
LTCH operating efficiencies, to pay for the resources needed to treat
sicker patients. Consistent with MedPAC's most recent research
discussed in its March 2006 Report to Congress (section 4C), our
margins analysis indicates that, in spite of the estimated real
increase in case-mix (severity of patients), payments to LTCHs under
the LTCH PPS are generally more than adequate to cover the Medicare
costs of the inpatient hospital services provided to LTCH patients.
As we also discussed in the RY 2007 LTCH PPS proposed rule,
although supported by our LTCHs' margins analysis, the zero percent
update to the Federal rate for RY 2007 is primarily based on our
analysis of case-mix. This analysis indicates that a significant
portion of the observed increase in case-mix from FY 2003 to FY 2004 is
due to changes in coding practices rather than an increase in the
severity of LTCHs' patients. Specifically, based on the latest
available LTCH cost report data, our analysis supports our adjustment
to account for changes in coding practices. Specifically, the most
recent available LTCH cost report data shows that, while payments
(revenue) per discharge increased in excess of the market basket
estimate for the period, costs (expenses) per discharge either
increased at a significantly lower rate or decreased
[[Page 27824]]
slightly for the same period (as discussed in greater detail below).
As noted by the commenter, the conceptual discussion of a
preliminary model of an update framework under the LTCH PPS presented
in the RY 2007 LTCH PPS proposed rule (71 FR 4742 through 4747),
accounts for efficiency as a component of the adjustments for
productivity and intensity. However, we have not assumed that the
reason costs have not increased commensurate with case-mix (and
payments) is due to increased efficiency by LTCHs. As stated
previously, the update framework was presented at this point as under
development and was not used to determine the proposed update to the
standard Federal rate for RY 2007. Furthermore, even the conceptual
model of the illustrative LTCH PPS update framework for RY 2007
presented in Appendix A for discussion purposes we had recommended a -
0.9 percent adjustment for productivity (an efficiency measure) based
on the productivity target used by MedPAC. This factor is based on BLS'
estimate of the 10-year moving national average rate of productivity
growth (71 FR 4746). This productivity adjustment in the illustrative
update framework assumes that an efficient LTCH can produce more output
(that is, inpatient hospital services) with the same inputs (that is,
labor and capital) such that the full increase in input costs does not
have to be passed on by the provider (71 FR 4744). Therefore, the
recommended efficiency measure of -0.9 percent adjustment included in
the illustrative update framework reduces the adjustment for input
prices (that is, market basket estimate) based on the expectation that
an efficient LTCH can produce the same output with slightly less than 1
percent less of the same inputs. In absence of accounting for a factor
that accounts for efficiency, we would expect that costs per discharge
would increase at about the same rate as the estimate of market basket,
which has previously been used to update the LTCH PPS Federal rate
annually, plus any increase that is based on an increase in patient
severity (that is, real case-mix). However, our analysis of LTCHs
payments and costs per discharge based on the latest available cost
report data supports our adjustment to account for changes in coding
practices because it shows that while payments (revenue) per discharge
increased approximately 15 percent from FY 2002 to FY 2003 (the first
year of the LTCH PPS), costs (expenses) per discharge increased by only
about 8 percent for the same period. Thus payments to LTCHs from FY
2002 to FY 2003 increased almost twice as much as the increase of costs
during the same period. Furthermore, based on the most recent available
LTCH cost report data for FY 2004, we found that while payments
(revenue) per discharge increased by approximately 5 percent from FY
2003 to FY 2004, costs (expenses) per discharge actually decreased
slightly (about 0.7 percent) for the same period.
As discussed in the RY 2007 LTCH PPS proposed rule, the
illustrative update framework shown in Appendix A is only a preliminary
model, and we solicited comments regarding improvements or refinements
to it that we will consider if we propose to adopt an update framework
in the future under the LTCH PPS. By nature, a PPS is a system based on
averages, and therefore we expect that LTCHs, like any provider type
that is under a PPS system, already have and will continue to become
more efficient with the implementation of the LTCH PPS. While
increasing efficiency in the services delivered in the treatment of
Medicare beneficiaries could result in some reduction in LTCHs'
Medicare costs by providing the same output (that is, inpatient
hospital services) with a minimum of waste, expense and effort, it is
unlikely that the significant difference between the increase in case-
mix (and payments per discharge) and change in costs per case
(discussed above in this section) is solely the result of increased
efficiency of LTCHs. As noted above, our illustrative update framework
only included a -0.9 percent adjustment for productivity, while our
margins analysis shows a substantially larger difference between the
change between payments per discharge and costs per discharge since the
implementation of the LTCH PPS, which we believe are due to factors
(that is, changes in coding practices) other than increased
efficiencies by LTCHs. As we stated in the proposed rule and as noted
above, we did not observe a significant increase in cost per discharge.
In fact, for FY 2004, the latest cost report data shows a decrease in
costs per discharge, which we would have expected to see if the
observed CMI increase was due to ``real'' CMI change (treating sicker
patients). In addition, as stated in the RY 2007 LTCH PPS proposed rule
and as discussed in greater detail in this section of this final rule,
a review by a Medicare program safeguard contractor and other anecdotal
findings of LTCHs treating patients that do not require hospital-level
care further supports the data analysis which show that the increase in
LTCHs' CMI is primarily due to factors other than real CMI.
Therefore, we disagree with the commenter that we failed to account
for efficiency in determining the update to the Federal rate for RY
2007. We believe that while there may be some reduction in LTCH costs
per discharge as a result of efficiency, the difference between LTCHs'
cost per discharge and payments per discharge is so profound that it
cannot be reasonably assumed that efficiency is the sole basis for that
difference. Rather, we believe it is the changes in coding practices,
discussed previously, that have led to the substantial difference
between LTCHs' cost per discharge and payments per discharge, which has
had a significant impact on LTCHs' margins.
Comment: One commenter noted that while the proposed zero percent
update appears in MedPAC's recommendations, the Congress has not agreed
to take action on MedPAC's recommendation to eliminate an update to the
RY 2007 payment rate.
Response: The proposal to provide a zero percent update to the LTCH
PPS Federal rate for RY 2007 was consistent with MedPAC's
recommendation. Although it is correct that the Congress has not taken
specific action to legislate MedPAC's recommendation as stated in the
RY 2007 LTCH PPS proposed rule, the Secretary has been given the broad
discretionary authority, under section 123 of the BBRA as amended by
section 307(b) of the BIPA, to include appropriate adjustments,
including updates, in the establishment of the LTCH PPS. We continue to
believe that our proposal to establish a zero percent update to the
Federal rate to account for ``apparent'' case-mix is appropriate for
the reasons discussed in the RY 2007 LTCH PPS proposed rule that were
also stated above and is within the broad discretionary authority
conferred upon the Secretary in section 123 of the BBRA as amended by
section 307(b) of the BIPA. In addition, as discussed above, our
margins analysis indicates that current payments are more than adequate
to account for price increases in the services furnished by LTCHs
during the 2007 LTCH PPS rate year.
Comment: One commenter urged CMS to enact the proposed zero percent
update for RY 2007 only if no modifications are made to the SSO payment
formulas. The commenter stated that this would be consistent with
MedPAC's recommendations based on no change in LTCH payment policies.
Response: As the fiduciary of the Medicare Trust Fund, we are
responsible for reexamining our payment systems and revising those
[[Page 27825]]
payment systems, if necessary, to ensure that appropriate payments are
made for the efficient delivery of care to Medicare patients. This
requires that we periodically reexamine the policy components of our
payment systems and propose changes accordingly. As we discussed in
greater detail in the RY 2007 LTCH PPS proposed rule (71 FR 4667
through 4670), we believe our findings regarding LTCHs' CMI increase,
Medicare margins, and patient census supported our proposal of a zero
percent update for RY 2007. As discussed in that same proposed rule, we
believe that an adjustment to the most recent estimate of the LTCH PPS
market basket to account for the effects of changes in coding practices
is important to eliminate the effect of coding or classification
changes because, as discussed in greater detail in this section, they
do not reflect the true cost of treating patients.
Also in the RY 2007 LTCH PPS proposed rule, we proposed changes to
the SSO policy based on our review of that policy along with many other
LTCH PPS policies and LTCH behavior. As we discussed in that same
proposed rule (71 FR 4685 through 4690), the proposed revision to the
SSO policy would, among other things, reduce the unintended financial
incentive for LTCHs to admit short-stay patients that may exist under
the current SSO policy, and therefore, based on the most recent
complete data available, we believe revisions to the current SSO
policies are necessary and in no way should they be tied to the change
made regarding the update for RY 2007. (In section VI.A.1. of the
preamble below, we discuss the changes to the SSO policy that we are
establishing in this final rule.)
Therefore, because the intended purposes of the proposed adjustment
to the SSO policy and the proposed Federal rate update for RY 2007 are
different, as explained above, we believe changes to these policies
should be evaluated independently. Although, as discussed in greater
detail below in section V.A.1. of this preamble, we are modifying the
proposed SSO policy for the RY 2007 LTCH PPS final rule. As we
discussed in this section, we continue to believe that an adjustment to
the most recent estimate of the LTCH PPS market basket to account for
the effects of changes in coding practices in determining the update to
the Federal rate for RY 2007 is also necessary and appropriate.
Comment: Many commenters noted that the Medicare Program Safeguard
Contractor Review of one LTCH is not representative data upon which to
base the proposed zero percent adjustment.
Response: As stated in the RY 2007 LTCH PPS proposed rule, the
information obtained from the Medicare Program Safeguard Contractor
Review and the other anecdotal investigations of LTCHs treating
patients that do not require hospital-level care was only one factor of
our analysis. As discussed in that same proposed rule and as reiterated
above, the primary factors upon which our proposal to determine an
update to the Federal rate for RY 2007 was our CMI analysis and our
Medicare margins analysis. We agree with the commenters that we are not
aware of any determination made to indicate that LTCHs consistently
admit non-hospital level patients.
Comment: One commenter stated that while it may be true that some
LTCHs posted significant positive margins and saw significant increases
in their case-mix, not all LTCHs had that experience. The commenter
questioned how hospitals with negative margins would survive with a
zero percent update in RY 2007. Another commenter stated that ``older''
LTCHs should be ``grandfathered'' from implementation of the proposed
zero percent update for RY 2007. The commenter states that
grandfathering ``older'' LTCHs would ensure that these hospitals are
not affected by the perceived abuses of other newer hospitals.
Response: Prior to the implementation of the LTCH PPS, LTCHs were
reimbursed under reasonable cost principles (TEFRA), which established
payments to LTCHs based on hospital-specific limits for inpatient
operating costs. However, in response to the industry's advocacy for a
PPS for LTCHs, in section 123 of the BBRA as amended by section 307(b)
of the BIPA, the Congress directed the Secretary of HHS to develop a
per-discharge PPS for payment for LTCHs. The LTCH PPS was implemented
in FY 2003.
By definition, payments under a PPS are predicated on averages.
Therefore, while it may be true that some ``older'' LTCHs may not have
experienced as large of an increase in case mix between FY 2003 and FY
2004, the same could be true of some LTCHs in other categories. In
addition, our findings reveal that while some LTCHs endured negative
margins, one-quarter of all LTCHs posted margins greater than 18
percent. Because, in general, PPS policies are based on averages, we do
not believe it would be appropriate to exclude or ``grandfather''
hospital groups based on their Medicare participation date from
implementation of the Federal rate update for RY 2007. Therefore, the
RY 2007 Federal rate established in this final rule, as discussed
below, will be applicable to an LTCH regardless of the age of the
facility.
Comment: A few commenters questioned how CMS could justify
proposing a zero update to the Federal rate for RY 2007, while at the
same time proposing to postpone the implementation of the one-time
adjustment to account for differences between actual and estimated
payments for the first year of the LTCH PPS due to coding and other
factors until July 1, 2008. One commenter asserted that this approach
is contrary to PPS design and undermines the integrity and
predictability of the payment system. The commenter also stated that
CMS should pursue a one-time adjustment independent of a market basket
update for RY 2007. Another commenter stated that CMS should use the
zero update as the one-time adjustment and not extend the deadline.
Response: The commenters are referring to the one-time prospective
adjustment at Sec. 412.523(d)(3), which states that the Secretary may
make a one-time prospective adjustment to the LTCH PPS rates by October
1, 2006, so that the effect of any significant difference between
actual payments and estimated payments for the first year of the LTCH
PPS would not be perpetuated in the LTCH PPS rates for future years. As
discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4681 through
4684), the purpose of this one-time adjustment is to ensure that
ultimately, total payments under the LTCH PPS are ``budget neutral'' to
what total payments would have been if the LTCH PPS were not
implemented in FY 2003, by correcting for possible significant errors
in the calculation of the FY 2003 LTCH PPS standard Federal rate. The
one-time adjustment would ensure that any errors in past estimates
would not be perpetuated in the LTCH PPS rates for future years, while
the proposed adjustment to account for coding practices in the proposed
update to the Federal rate for RY 2007 is intended to adjust payments
made in FY 2004 to account for the increase in CMI due to improved
documentation and coding rather than an increase in patient severity.
Therefore, because the intended purposes of the adjustments are
different, as explained above, we disagree with the commenter that the
zero percent update to the Federal rate for RY 2007 is ``contrary to
the PPS design and undermines the integrity and predictability of the
payment system.'' Furthermore, we do not believe that the proposed zero
percent update to the Federal rate for RY 2007 should replace the
possible one-time budget neutrality
[[Page 27826]]
adjustment or vice versa since the intended purposes of the adjustments
are different (as explained above in this section). However, as we
noted in the RY 2007 LTCH PPS proposed rule and as we reiterated above,
it is possible that the proposed zero percent update for the 2007 LTCH
PPS rate year may make the one-time prospective adjustment to the LTCH
PPS Federal rate, provided for under Sec. 412.523(d)(3), unnecessary
if our comprehensive analysis of the LTCH PPS determines that LTCH PPS
payments and the costs for LTCH services have become aligned as a
result of this change. Specifically, the purpose of the one-time budget
neutrality adjustment under Sec. 412.523(d)(3) is intended to account
for possible significant errors in the various factors and assumptions
(not just case-mix increase) used in calculating the FY 2003 standard
Federal rate. To the extent our review of FY 2003 LTCH data show, if by
coincidence after updating the Federal rate by zero percent for RY
2007, that the standard Federal rate is appropriate, any further
adjustment to the Federal rate may be unnecessary. Similarly, if our
comprehensive analysis of the LTCH PPS determines that the current
Federal rate, which is based on the FY 2003 standard Federal rate, is
inappropriate (that is, either too high or too low), then an adjustment
under Sec. 412.523(d)(3) would be necessary.
As discussed in greater detail in the RY 2007 LTCH PPS proposed
rule (71 FR 4680 through 4682), we proposed to extend the deadline for
making the possible one-time adjustment until July 1, 2008 because we
do not now believe that we will have sufficient data to make the
determination by the current deadline of October 1, 2006. Specifically,
as discussed in greater detail below in section V.D.6. of this
preamble, we believe that only through a thorough analysis of the most
comprehensive and accurate data from the first year of the
implementation of the LTCH PPS for FY 2003 (including settled and fully
audited cost reports) would we be able to reliably determine whether
the one-time prospective adjustment to the standard Federal rate, which
if issued would have an impact on all future payments under the LTCH
PPS, should be proposed. Given the lag time required for typical cost
report settlement involving submission, desk review, and in some cases
an audit, which can take approximately 2 additional years to complete
(and we expect to audit a number of LTCH cost reports for the purpose
of this analysis), we do not believe that the October 1, 2006 deadline
established in Sec. 412.523(d)(3) is now reasonable or realistic. In
fact, we believe that for providers whose FY 2003 cost reporting
periods began at the end of FY 2003 (that is, September 2003) and ended
in August 2004, we would be in possession of the most reliable cost
report data indicating the actual costs of the Medicare program of the
LTCH PPS during the year in which we established the Federal payment
rate by July 2007 and any proposed correction, if finalized, could then
be implemented on July 1, 2008.
To summarize, despite the concerns expressed by the commenters, as
discussed above, we continue to believe that our CMI analysis and
Medicare margins analysis are sound. We continue to believe that an
update to the 2007 LTCH PPS rate year based on the LTCH PPS market
basket, offset by an adjustment to account for changes in coding
practices, is appropriate to protect the integrity of the Medicare
Trust Fund by ensuring that the LTCH PPS payment rates better reflect
the true costs of treating LTCH patients.
Therefore, in this final rule, under the broad discretionary
authority conferred upon the Secretary by section 123 of the BBRA as
amended by section 307(b) of the BIPA to include appropriate
adjustments, including updates, in the establishment of the LTCH PPS,
as proposed, we are revising the annual update to the LTCH PPS standard
Federal rate set forth at Sec. 412.523(a)(2) for the 2007 LTCH PPS
rate year to adjust the payment amount for LTCH inpatient hospital
services to eliminate the effect of coding or classification changes
that do not reflect real changes in LTCHs' case-mix. As discussed in
the RY 2007 LTCH PPS proposed rule and as reiterated above, it is
important to eliminate the effect of coding or classification changes
because, they do not reflect the true cost of treating patients.
Specifically, in this final rule, we are revising Sec.
412.523(c)(3)(iii) to specify that the standard Federal rate for the
LTCH PPS rate year beginning July 1, 2006 and ending June 30, 2007,
will be the standard Federal rate from the previous year, as explained
below. A zero percent update factor will reflect an adjustment to the
market basket update to account for the increase in the apparent case-
mix in the prior period. As explained in the RY 2007 LTCH PPS proposed
rule (71 FR 4669), based on our analysis of the observed LTCH case-mix
increase, we estimate that 4 percent of the 6.75 percent calculated
observed LTCH CMI increase is due to improvements in documentation and
coding and not due to an increase in the severity of the patients being
treated at LTCHs. As previously noted, the Federal payment rate was
offset by 0.34 percent to reflect expected behavioral changes,
including changes in coding. The recent estimate of apparent CMI
increase (4 percent) indicates that an additional 3.66 percent
adjustment (4 percent apparent CMI increase minus 0.34 percent
behavioral offset) should be made to the Federal payment rate to
account for improvements in coding.
Therefore, in the RY 2007 LTCH PPS proposed rule (71 FR 4669), we
proposed a zero percent update by offsetting the most recent estimate
of the proposed RPL market basket for RY 2007 of 3.6 percent by an
adjustment for changes in coding practices of 3.66 (that is, 4.0 - 0.34
= 3.66), which is within rounding of zero percent. As discussed above
in section V.B.4. of this final rule, the most recent estimate of the
RPL market basket for RY 2007 is 3.4 percent, which is 0.2 percent
lower than the estimate of the RPL market basket for RY 2007 at the
time of the development of the proposed rule. Although we note the most
recent update of the market basket discussed in this final rule is 0.2
percent lower than the estimate of the market basket discussed in the
RY 2007 LTCH PPS proposed rule, we continue to believe that a zero
percent update to the Federal rate for RY 2007 is appropriate and will
account for changes in coding practices that do not reflect increased
severity of LTCH patients for the reasons discussed below. As discussed
in greater detail above, changes in CMI consist of ``real'' CMI changes
and ``apparent'' CMI changes. In determining the proposed zero percent
update to the Federal rate for RY 2007, we measured LTCHs' observed
case-mix increase between FY 2003 and FY 2004, and we used the average
case-mix increase from the 3 years prior to the implementation of the
LTCH PPS as a proxy for the portion of that observed case-mix increase
that we consider to be ``real.'' We do not believe that there is a
significant difference between the most recent estimate of the market
basket for RY 2007 (3.4 percent) and the estimate used in the RY 2007
LTCH PPS proposed rule (3.6 percent). Furthermore, there could be some
minimal variation in how much of the observed case-mix increase
represents real case-mix changes. In addition, because the proposed
update for RY 2007 at proposed Sec. 412.523(c)(3)(iii) explicitly
specified that the RY 2007 standard Federal rate would be the previous
LTCH PPS rate year updated by an update factor of zero percent, we
believe some commenters may not have
[[Page 27827]]
been aware that the final update for RY 2007 could have been different
than (that is, greater than or less than) zero percent. Thus, we
believe that the best approach in this final rule is to adopt an update
factor of zero percent. For these reasons, we believe that a zero
percent update to the Federal rate for RY 2007 will appropriately
account for changes in coding practices that do not reflect increased
severity of LTCH patients. We note that, as discussed above, a zero
percent update is consistent with MedPAC's LTCH PPS update
recommendation for RY 2007. Therefore, in this final rule, under the
broad discretionary authority conferred upon the Secretary by section
123(a) of the BBRA as amended by section 307(b) of the BIPA to include
appropriate adjustments, including updates, in the establishment of the
LTCH PPS, for the reasons discussed previously in this final rule, we
are establishing a zero percent update to the standard Federal rate for
RY 2007. Accordingly, we are specifying under Sec. 412.525(c)(3)(iii)
that the standard Federal rate for the LTCH PPS rate year July 1, 2006
through June 30, 2007, will be the standard Federal rate from the
previous LTCH PPS rate year. Based on the zero percent update to the
Federal rate for RY 2007 LTCH PPS rate year, the LTCH PPS standard
Federal rate for the 2007 LTCH PPS rate year will be $38,086.04, as
discussed in section V.C.4. of this final rule.
As discussed in section V.B.4. of this preamble, the most recent
estimate of the LTCH PPS market basket is 3.4 percent for the 2007 LTCH
PPS rate year. If we were not revising Sec. 412.523(c)(3) to provide a
zero percent update to the standard Federal rate for the 2007 LTCH PPS
rate year to account for changes in coding that do not reflect real
changes in the severity and cost of LTCH patients presented in this
final rule, under existing Sec. 412.523(c)(3)(ii) the update would be
3.4 percent. We also note that although we are establishing a zero
percent update to the Federal rate for RY 2007 in this final rule, we
continue to believe that, based on the sizeable Medicare margins among
LTCHs, the standard Federal rate for the 2007 LTCH PPS rate year
established in this final rule will not affect beneficiary access to
LTCH services since LTCHs would continue to be paid adequately to
reflect the cost of resources needed to treat Medicare beneficiaries.
As we noted in the RY 2007 LTCH PPS proposed rule (71 FR 4670), the
revision to Sec. 412.525(c)(3) established in this final rule will
only address an update to the LTCH PPS Federal rate through the 2007
LTCH PPS rate year. We will propose future revisions to Sec.
412.525(c)(3) to address future proposed updates to the LTCH PPS
Federal rates in future rate years based on an analysis of the most
recent available LTCH data that would be presented in upcoming LTCH
proposed rules. As noted previously in this final rule and in the
August 30, 2002 final rule (67 FR 56097), we are examining the
potential for developing and implementing an update framework under the
LTCH PPS. We believe an update framework, used in combination with the
market basket, will enhance the methodology for updating payments by
addressing factors beyond changes in pure input prices (measured by the
market basket) such as case-mix, intensity, and productivity. (As noted
in section V.C.2 of this final rule, a preliminary model of an update
framework that may be proposed at some later date for future use under
the LTCH PPS is presented in Appendix A of this final rule.) However,
we are not proposing a specific annual update framework until we have
collected sufficient complete LTCH PPS data to evaluate payments and
costs under the LTCH PPS.
As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4670),
currently as implemented in Sec. 412.523(d)(3), we are providing for
the possibility of making a one-time prospective adjustment to the LTCH
PPS rates so that any significant difference from actual payments and
the estimated payments for the first year of the LTCH PPS is not
perpetuated in the prospective payment rates for future years. As
discussed in section V.D.5. of this final rule, we are not making an
adjustment to the LTCH PPS rates under Sec. 412.523(d)(3) in this
final rule; however, we will continue to collect and interpret new data
to determine if an adjustment should be proposed in the future. In
addition, as also discussed in section IV.D.5. of this final rule, we
are postponing the deadline of the possible one-time prospective
adjustment to the LTCH PPS rates provided for in Sec. 412.523(d)(3) to
July 1, 2008 in order to maximize the availability of data used to
conduct a comprehensive evaluation of the LTCH PPS. However, as
explained above in this section, the zero percent update to the Federal
rate for the 2007 LTCH PPS rate year may make this one-time prospective
adjustment to the LTCH PPS Federal rate unnecessary if our
comprehensive analysis of the LTCH PPS determines that LTCH PPS
payments and the costs for LTCH services become aligned as a result of
this change.
4. Standard Federal Rate for the 2007 LTCH PPS Rate Year
In the RY 2006 LTCH PPS final rule (70 FR 24180), we established a
standard Federal rate of $38,086.04 for the 2006 LTCH PPS rate year
that was based on the best available data and policies established in
that final rule. In the RY 2007 LTCH PPS proposed rule (71 FR 4670), we
proposed a standard Federal rate of $38,086.04 for the 2007 LTCH PPS
rate year based on the best available data and policies presented in
that proposed rule. As we stated in that proposed rule, the standard
Federal rate of $38,086.04 was already adjusted for differences in
case-mix, wages, cost-of-living, and high-cost outlier (HCO) payments.
Therefore, we did not propose to make additional adjustments in the RY
2006 LTCH PPS standard Federal rate for those factors (70 FR 24180). In
this final rule, we are revising Sec. 412.523(c)(3) to establish a
standard Federal rate based on a zero percent update as discussed above
in section V. B. of this final rule. Therefore, based on the zero
percent update, the standard Federal rate for RY 2007 will be
$38,086.04. Since the standard Federal rate for the 2007 LTCH PPS rate
year has already been adjusted for differences in case-mix, wages,
cost-of-living, and HCO payments, we are not making any additional
adjustments in the standard Federal rate for these factors.
D. Calculation of LTCH Prospective Payments for the 2007 LTCH PPS Rate
Year
The basic methodology for determining prospective payment rates for
LTCH inpatient operating and capital-related costs is set forth in
Sec. 412.515 through Sec. 412.532. In accordance with Sec. 412.515,
we assign appropriate weighting factors to each LTC-DRG to reflect the
estimated relative cost of hospital resources used for discharges
within that group as compared to discharges classified within other
groups. The amount of the prospective payment is based on the standard
Federal rate, established under Sec. 412.523, and adjusted for the
LTC-DRG relative weights, differences in area wage levels, cost-of-
living in Alaska and Hawaii, HCOs, and other special payment provisions
(SSOs under Sec. 412.529 and interrupted stays under Sec. 412.531).
In accordance with Sec. 412.533, during the 5-year transition
period, payment is based on the applicable transition blend percentage
of the adjusted Federal rate and the reasonable cost-based payment rate
unless the LTCH makes a one-time election to receive payment based on
[[Page 27828]]
100 percent of the Federal rate. A LTCH defined as ``new'' under Sec.
412.23(e)(4) is paid based on 100 percent of the Federal rate with no
blended transition payments (Sec. 412.533(d)). As discussed in the
August 30, 2002 final rule (67 FR 56038), and in accordance with Sec.
412.533(a), the applicable transition blends are as shown in Table 5.
Table 5
------------------------------------------------------------------------
Reasonable
Cost reporting periods beginning on or Federal rate cost-based
after percentage payment rate
percentage
------------------------------------------------------------------------
October 1, 2002......................... 20 80
October 1, 2003......................... 40 60
October 1, 2004......................... 60 40
October 1, 2005......................... 80 20
October 1, 2006......................... 100 0
------------------------------------------------------------------------
Accordingly, for cost reporting periods beginning during FY 2005
(that is, on or after October 1, 2004, and on or before September 30,
2005), blended payments under the transition methodology are based on
40 percent of the LTCH's reasonable cost-based payment rate and 60
percent of the adjusted LTCH PPS Federal rate. For cost reporting
periods that begin during FY 2006 (that is, on or after October 1, 2005
and on or before September 30, 2006), blended payments under the
transition methodology will be based on 20 percent of the LTCH's
reasonable cost-based payment rate and 80 percent of the adjusted LTCH
PPS Federal rate. For cost reporting periods beginning on or after
October 1, 2006 (FY 2007), Medicare payment to LTCHs will be determined
entirely (100 percent) under the LTCH PPS Federal rate.
1. Adjustment for Area Wage Levels
a. Background
Under the authority of section 123 of the BBRA as amended by
section 307(b) of the BIPA, we established an adjustment to the LTCH
PPS Federal rate to account for differences in LTCH area wage levels at
Sec. 412.525(c). The labor-related share of the LTCH PPS Federal rate,
currently estimated by the excluded hospital with capital market
basket, is adjusted to account for geographic differences in area wage
levels by applying the applicable LTCH PPS wage index. The applicable
LTCH PPS wage index is computed using wage data from inpatient acute
care hospitals without regard to reclassification under sections
1886(d)(8) or 1886(d)(10) of the Act. Furthermore, as we discussed in
the August 30, 2002 LTCH PPS final rule (67 FR 56015), we established a
5-year transition to the full wage adjustment. The applicable wage
index phase-in percentages are based on the start of a LTCH's cost
reporting period as shown in Table 6.
Table 6.--LTCH PPS Wage Index Phase-In Percentages
------------------------------------------------------------------------
Cost reporting periods beginning Phase-In percentage of the full wage
on or after index
------------------------------------------------------------------------
October 1, 2002.................. \1/5\ (20 percent).
October 1, 2003.................. \2/5\ (40 percent).
October 1, 2004.................. \3/5\ (60 percent).
October 1, 2005.................. \4/5\ (80 percent).
October 1, 2006.................. \5/5\ (100 percent).
------------------------------------------------------------------------
For example, for cost reporting periods beginning on or after
October 1, 2004 and on or before September 30, 2005 (FY 2005), the
applicable LTCH wage index value is three-fifths of the applicable full
LTCH PPS wage index value. Similarly, for cost reporting periods
beginning on or after October 1, 2005 and on or before September 30,
2006 (FY 2006), the applicable LTCH wage index value will be four-
fifths of the applicable full LTCH PPS wage index value. The wage index
adjustment will be completely phased-in beginning with cost reporting
periods beginning in FY 2007, that is, for cost reporting periods
beginning on or after October 1, 2006, the applicable LTCH wage index
value will be the full (five-fifths) LTCH PPS wage index value. As we
established in the August 30, 2002 LTCH PPS final rule (67 FR 56018),
the applicable full LTCH PPS wage index value is calculated from acute-
care hospital inpatient wage index data without taking into account
geographic reclassification under sections 1886(d)(8) and (d)(10) of
the Act.
In that same final rule (67 FR 56018), we stated that we would
continue to reevaluate LTCH data as they become available and would
propose to adjust the phase-in if subsequent data support a change. As
we discussed in the RY 2006 LTCH PPS final rule (70 FR 24181), because
the LTCH PPS was only recently implemented (slightly over 2 years) and
because of the time lag in availability of cost report data, sufficient
new data have not been generated that would enable us to conduct a
comprehensive reevaluation of the appropriateness of adjusting the
phase-in. As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR
4670), we have reviewed the most recent data (FY 2002 through FY 2004)
available and did not find any evidence to support a change in the 5-
year phase-in of the wage index. Specifically, our statistical analysis
still does not show a significant relationship between LTCHs' costs and
their geographic location. Therefore, in that proposed rule, we did not
propose a change to the phase-in of the adjustment for area wage levels
under Sec. 412.525(c). We received no comments on the phase-in of the
wage index. Therefore, as we proposed, we are making no change in the
5-year phase-in of the wage index in this final rule.
[[Page 27829]]
b. Geographic Classifications/Labor Market Area Definitions
As discussed in the August 30, 2002 LTCH PPS final rule, which
implemented the LTCH PPS (67 FR 56015 through 56019), in establishing
an adjustment for area wage levels under Sec. 412.525(c), the labor-
related portion of a LTCH's Federal prospective payment is adjusted by
using an appropriate wage index based on the labor market area in which
the LTCH is located. In the 2006 LTCH PPS rate year final rule (70 FR
24184 through 24185), in Sec. 412.525(c), we revised the labor market
area definitions used under the LTCH PPS effective for discharges
occurring on or after July 1, 2005 based on the Office of Management
and Budget's (OMB) Core Based Statistical Area (CBSA) designations
based on 2000 Census data because we believe that those new labor
market area definitions will ensure that the LTCH PPS wage index
adjustment most appropriately accounts for and reflects the relative
hospital wage levels in the geographic area of the hospital as compared
to the national average hospital wage level. As set forth in Sec.
412.525(c)(2), a LTCH's wage index is determined based on the location
of the LTCH in an urban or rural area as defined in Sec.
412.64(b)(1)(ii)(A) through (C). An urban area under the LTCH PPS is
defined at Sec. 412.64(b)(1)(ii)(A) and (B). In general, an urban area
is defined as a Metropolitan Statistical Area (MSA) as defined by the
OMB. (In addition, a few counties located outside of MSAs are
considered urban as specified at Sec. 412.64(b)(1)(ii)(B).) Under
Sec. 412.64(b)(1)(ii)(C), a rural area is defined as any area outside
of an urban area.
We note that these are the same CBSA-based designations implemented
for acute care inpatient hospitals under the IPPS at Sec. 412.64(b)
effective October 1, 2004 (69 FR 49026 through 49034). For further
discussion of the labor market area (geographic classification)
definitions used under the LTCH PPS, see the 2006 LTCH PPS rate year
final rule (70 FR 24182 through 24191).
c. Labor-Related Share
In the August 30, 2002 LTCH PPS final rule (67 FR 56016), we
established a labor-related share of 72.885 percent based on the
relative importance of the labor-related share of operating costs
(wages and salaries, employee benefits, professional fees, postal
services, and all other labor-intensive services) and capital costs of
the excluded hospital with capital market basket based on FY 1992 data.
In the June 6, 2003 final rule (68 FR 34142), in conjunction with our
revision and rebasing of the excluded hospital with capital market
basket from a FY 1992 to a FY 1997 base year, we discussed revising the
labor-related share based on the relative importance of the labor-
related share of operating and capital costs of the excluded hospital
with capital market basket based on FY 1997 data. However, in the June
6, 2003 final rule (68 FR 34142), while we adopted the revised and
rebased FY 1997-based LTCH PPS market basket as the LTCH PPS update
factor for the 2004 LTCH PPS rate year, we decided not to update the
labor-related share under the LTCH PPS pending further analysis of the
current labor share methodology.
In LTCH PPS final rules subsequent to the FY 2003 LTCH PPS final
rule in which we established the current labor-related share (68 FR
34142, 69 FR 25685 through 25686 and 70 FR 24182), we explained that
the primary reason that we did not update the LTCH PPS labor-related
share for the 2004, 2005 and 2006 LTCH PPS rate years was because of
data and methodological concerns, which was the same reason for not
updating the labor-related share under the IPPS for FY 2004 (68 FR
45467 through 45468) and FY 2005 (69 FR 49069)), which are equally
applicable to the LTCH PPS. We indicated that we would conduct further
analysis to determine the most appropriate methodology and data for
determining the labor-related share. We also stated that we would
propose to update the IPPS and excluded hospital labor-related shares,
if necessary, once our research is complete.
In the FY 2006 IPPS final rule, the labor-related share under the
IPPS that is ``estimated by the Secretary from time to time'' as
specified in section 1886(d)(3)(E) of the Act was revised and rebased
based on the FY 2002-based IPPS hospital market basket for discharges
occurring on or after October 1, 2005 using our established methodology
of defining the labor-related share as the national average proportion
of operating costs that are attributable to wages and salaries, fringe
benefits, professional fees, contract labor, and labor intensive
services. Therefore, the IPPS labor-related share ``estimated by the
Secretary from time to time'' was calculated by adding the relative
weights for these operating cost categories. In that same final rule we
stated that we continue to believe, as we stated in the past, that
these operating cost categories likely are related to, are influenced
by, or vary with the local markets (70 FR 47392 through 47393). (We
note that section 403 of the MMA amended sections 1886(d)(3)(E) and
1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ
62 percent as the labor-related share under the IPPS unless this
employment ``would result in lower payments than would otherwise be
made.'') In that same final rule, we also revised and rebased the
excluded hospital market basket, which is used to update the reasonable
cost-based portion of LTCHs' blended transition payments (70 FR 47399
through 47403).
As we stated previously, once our research into the labor-related
share methodology was complete, we would update the IPPS and excluded
hospital labor-related shares based on that research and the best
available data if necessary. In the RY 2007 LTCH PPS proposed rule (71
FR 4671 through 4672), we proposed to update the LTCH PPS labor-related
share based on the proposed RPL market basket (which is described in
section V.B. of this preamble). As explained in that proposed rule, we
proposed to adopt the RPL market basket under the LTCH PPS because we
believe that this market basket would be developed based on the best
available data that reflect the cost structures of LTCHs. Therefore, we
proposed to revise the LTCH PPS labor-related share from 72.885 percent
(as established in the August 30, 2002 final rule (67 FR 56016) based
on the FY 1997-based excluded hospital with capital market basket) to
75.923 percent based on the relative importance of the labor-related
share of operating costs (wages and salaries, employee benefits,
professional fees, and all other labor-intensive services) and capital
costs of the RPL market basket based on FY 2002 data. We also proposed
that if more recent data become available before the publication of the
final rule and if we ultimately revise the LTCH PPS labor-related share
based on the proposed FY 2002-based RPL market basket, we would use
that data to determine the labor-related share for the 2007 LTCH PPS
rate year in the final rule.
We received no comments on our proposal to update the LTCH PPS
labor-related share based on the RPL market basket beginning in RY
2007. (As discussed above, we received a few comments on our proposal
to adopt the RPL market basket under the LTCH PPS. Those comments and
responses are presented in section V.B. of this preamble.) Therefore,
in this final rule, we are updating the LTCH PPS labor-related share
based on the RPL market basket (which is described in section V.B. of
this preamble). We are adopting the RPL market basket under the LTCH
PPS because we believe that this market
[[Page 27830]]
basket was developed based on the best available data that reflect the
cost structures of LTCHs. As discussed in section V.B. of this
preamble, we now have data from the first quarter of 2006 in
determining the FY 2002-based RPL market basket. Based on this more
recent data, in this final rule, we are revising the LTCH PPS labor-
related share from 72.885 percent (as established in the August 30,
2002 final rule (67 FR 56016) based on the FY 1997-based excluded
hospital with capital market basket) to 75.665 percent based on the
relative importance of the labor-related share of operating costs
(wages and salaries, employee benefits, professional fees, and all
other labor-intensive services) and capital costs of the RPL market
basket based on FY 2002 data, as discussed in greater detail below in
this final rule. As discussed in the RY 2007 LTCH PPS proposed rule (71
FR 4672), consistent with our historical practice, the labor-related
share is determined by identifying the national average proportion of
operating costs that are related to, influenced by, or varies with the
local labor market. Using our current definition of labor-related, the
labor-related share is the sum of the relative importance of wages and
salaries, fringe benefits, professional fees, labor-intensive services,
and a portion of the capital share from an appropriate market basket.
We are using the FY 2002-based RPL market basket costs to determine the
labor-related share for the LTCH PPS effective for discharges occurring
on or after July 1, 2006 as it is based on the most recent available
data. The labor-related share for the 2007 LTCH PPS rate year will be
the sum of the relative importance of each labor-related cost category,
and will reflect the different rates of price change for these cost
categories between the base year (FY 2002) and the 2007 LTCH PPS rate
year. Based on the most recent available data, the sum of the relative
importance for 2007 LTCH PPS rate year for operating costs (wages and
salaries, employee benefits, professional fees, and labor-intensive
services) will be 71.586, as shown in Table 7. The portion of capital
that is influenced by the local labor market is estimated to be 46
percent, which is the same percentage used in the FY 1997-based
excluded hospital with capital market basket currently used under the
LTCH PPS. Since the relative importance for capital will be 8.867
percent of the FY 2002-based RPL market basket for the 2007 LTCH PPS
rate year based on the latest available data, we are multiplying the
estimated portion of capital influenced by the local labor market (46
percent) by the relative importance for capital of the FY 2002-based
RPL market basket (8.867 percent) to determine the labor-related share
of capital for the 2007 LTCH PPS rate year. The result will be 4.079
percent (0.46 x 8.867 percent), which we add to 71.586 percent for the
operating cost amount to determine the total labor-related share for
the 2007 LTCH PPS rate year. Thus, based on the latest available data,
we are using a labor-related share of 75.665 percent under the LTCH PPS
for the 2007 LTCH PPS rate year. This labor-related share is determined
using the same methodology as employed in calculating the current LTCH
labor-related share (67 FR 56016).
Table 7 shows the 2007 LTCH PPS rate year relative importance
labor-related share using the FY 2002-based RPL market basket and the
current relative importance labor-related share using the FY 1997-based
excluded hospital with capital market basket.
Table 7.--Total Labor-Related Share--Relative Importance for the 2007
for the RPL Market Basket and the Excluded Hospital With Capital Market
Basket
------------------------------------------------------------------------
FY 1997-based
FY 2002-based excluded
RPL market hospital with
basket capital market
relative basket
Cost category importance importance
(percent) for (percent
the 2007 LTCH currently used
PPS rate year under relative
the LTCH PPS)
------------------------------------------------------------------------
Wages and salaries...................... 52.506 48.021
Employee benefits....................... 14.042 11.534
Professional fees....................... 2.886 4.495
Postal Services*........................ .............. 0.635
All other labor-intensive services**.... 2.152 4.411
-------------------------------
Subtotal............................ 71.586 69.096
===============================
Labor-related share of capital costs.... 4.079 3.222
===============================
Total........................... 75.665 72.318
------------------------------------------------------------------------
* No longer considered labor related.
** Other labor intensive services includes landscaping services,
services to buildings, detective and protective services, repair
services, laundry services, advertising, auto parking and repairs,
physical fitness facilities, and other government enterprises.
d. Wage Index Data
In the RY 2006 LTCH PPS final rule (70 FR 24190 through 24191), we
established LTCH PPS wage index values for the 2006 LTCH PPS rate year
calculated from the same data (generated in cost reporting periods
beginning during FY 2000) used to compute the FY 2005 acute care
hospital inpatient wage index data without taking into account
geographic reclassification under sections 1886(d)(8) and (d)(10) of
the Act because that was the best available data at that time. The LTCH
wage index values applicable for discharges occurring on or after July
1, 2005 through June 30, 2006 are shown in Table 1 (for urban areas)
and Table 2 (for rural areas) in the Addendum to the RY 2006 LTCH PPS
final rule. Acute care hospital inpatient wage index data are also used
to establish the wage index adjustment used in the IRF PPS, HHA PPS,
and SNF PPS. As we discussed in the August 30, 2002 LTCH PPS final
[[Page 27831]]
rule (67 FR 56019), since hospitals that are excluded from the IPPS are
not required to provide wage-related information on the Medicare cost
report and because we would need to establish instructions for the
collection of this LTCH data in order to establish a geographic
reclassification adjustment under the LTCH PPS, the wage adjustment
established under the LTCH PPS is based on a LTCH's actual location
without regard to the urban or rural designation of any related or
affiliated provider.
In the RY 2007 LTCH PPS proposed rule (71 FR 4673), under the broad
authority conferred upon the Secretary by section 123 of the BBRA as
amended by section 307(b) of the BIPA to determine appropriate
adjustments under the LTCH PPS, for the 2007 LTCH PPS rate year, we
proposed to use the same data (generated in cost reporting periods
beginning during FY 2002) that was used to compute the FY 2006 acute
care hospital inpatient wage index data without taking into account
geographic reclassification under sections 1886(d)(8) and (d)(10) of
the Act to determine the applicable wage index values under the LTCH
PPS because these data (FY 2002) are the most recent complete data. In
that same proposed rule, we explained that we are continuing to propose
to use IPPS wage data as a proxy to determine the LTCH wage index
values for the 2007 LTCH PPS rate year because both LTCHs and acute-
care hospitals are required to meet the same certification criteria set
forth in section 1861(e) of the Act to participate as a hospital in the
Medicare program and they both compete in the same labor markets, and
therefore experience similar wage-related costs. We also noted that
these data are the same FY 2002 acute care hospital inpatient wage data
that were used to compute the FY 2006 wage indices currently used under
the IPPS, SNF PPS and HHA PPS. The proposed wage index values that
would be applicable for discharges occurring on or after July 1, 2006
through June 30, 2007 are shown in Table 1 (for urban areas) and Table
2 (for rural areas) in the Addendum to the RY 2007 LTCH PPS proposed
rule (71 FR 4747 through 4771).
We received no comments on the proposed wage index values that
would be applicable for discharges occurring on or after July 1, 2006
through June 30, 2007. Therefore, in this final rule, under the broad
authority conferred upon the Secretary by section 123 of the BBRA as
amended by section 307(b) of the BIPA to determine appropriate
adjustments under the LTCH PPS, for the 2007 LTCH PPS rate year, we are
using the same data (generated in cost reporting periods beginning
during FY 2002) that was used to compute the FY 2006 acute care
hospital inpatient wage index data without taking into account
geographic reclassification under sections 1886(d)(8) and (d)(10) of
the Act to determine the applicable wage index values under the LTCH
PPS because these data (FY 2002) are the most recent complete data. We
are continuing to use IPPS wage data as a proxy to determine the LTCH
wage index values for the 2007 LTCH PPS rate year because both LTCHs
and acute-care hospitals are required to meet the same certification
criteria set forth in section 1861(e) of the Act to participate as a
hospital in the Medicare program and they both compete in the same
labor markets, and therefore experience similar wage-related costs.
These data are the same FY 2002 acute care hospital inpatient wage data
that were used to compute the FY 2006 wage indices currently used under
the IPPS, SNF PPS and HHA PPS. The LTCH wage index values that will be
applicable for discharges occurring on or after July 1, 2006 through
June 30, 2007, are shown in Tables 1 (for urban areas) and Tables 2
(for rural areas) in the Addendum to this final rule.
As discussed in section V.D.1.a. of this preamble, the applicable
wage index phase-in percentages are based on the start of a LTCH's cost
reporting period beginning on or after October 1st of each year during
the 5-year transition period. Thus, for cost reporting periods
beginning on or after October 1, 2004 and before October 1, 2005 (FY
2005), the labor portion of the standard Federal rate is adjusted by
three-fifths of the applicable LTCH wage index value. For cost
reporting periods beginning on or after October 1, 2005 and before
October 1, 2006 (FY 2006), the labor portion of the standard Federal
rate is adjusted by four-fifths of the applicable LTCH wage index
value. Specifically, for a LTCH's cost reporting period beginning
during FY 2006, for discharges occurring on or after July 1, 2006
through June 30, 2007, the applicable wage index value will be four-
fifths of the full FY 2006 acute care hospital inpatient wage index
data, without taking into account geographic reclassification under
sections 1886(d)(8) and (d)(10) of the Act (shown in Tables 1 and 2 in
the Addendum to this final rule).
Because the phase-in of the wage index does not coincide with the
LTCH PPS rate year (July 1st through June 30th), most LTCHs will
experience a change in the wage index phase-in percentages during the
LTCH PPS rate year. For example, during the 2007 LTCH PPS rate year,
for a LTCH with a January 1 fiscal year, the four-fifths wage index
will be applicable for the first 6 months of the 2007 LTCH PPS rate
year (July 1, 2006 through December 31, 2006) and the full (five-
fifths) wage index will be applicable for the second 6 months of the
2007 LTCH PPS rate year (January 1, 2007 through June 30, 2007). We
also note that some providers will still be in the third year of the 5-
year phase-in of the LTCH wage index (that is, those LTCHs who entered
the 5-year phase-in during their cost reporting periods that began
between July 1, 2003 and September 30, 2003). For the remainder of
those LTCHs' FY 2005 cost reporting periods that will coincide with the
first 3 months of RY 2007, the applicable wage index value will be
three-fifths of the full FY 2006 acute care hospital inpatient wage
index data, without taking into account geographic reclassification
under sections 1886(d)(8) and (d)(10) of the Act (as shown in Tables 1
and 2 in the Addendum to this final rule). Since there are no longer
any LTCHs in their cost reporting period that began during FY 2003 and
FY 2004 (the first and second years of the 5-year wage index phase-in),
we are no longer showing the \1/5\ and \2/5\ wage index values in
Tables 1 and 2 in the Addendum to this final rule.
2. Adjustment for Cost-of-Living in Alaska and Hawaii
In the August 30, 2002 final rule (67 FR 56022), we established,
under Sec. 412.525(b), a cost-of-living adjustment (COLA) for LTCHs
located in Alaska and Hawaii to account for the higher costs incurred
in those States. In the RY 2006 LTCH PPS final rule (70 FR 24191), for
the 2006 LTCH PPS rate year, we established that we make a COLA to
payments for LTCHs located in Alaska and Hawaii by multiplying the
standard Federal payment rate by the appropriate factor listed in Table
I. of that same final rule.
Similarly, in the RY 2007 LTCH PPS proposed rule (71 FR 4673
through 4674), under broad authority conferred upon the Secretary by
section 123 of the BBRA as amended by section 307(b) of the BIPA to
determine appropriate adjustments under the LTCH PPS, for the 2007 LTCH
PPS rate year we proposed to make a COLA to payments to LTCHs located
in Alaska and Hawaii by multiplying the standard Federal payment rate
by the factors listed in Table 8 of that proposed rule because those
were currently the most recent available data. Those factors were
obtained from the U.S. Office of
[[Page 27832]]
Personnel Management (OPM) and are currently used under the IPPS. In
addition, we also proposed that if OPM releases revised COLA factors
before March 1, 2006, we would use them for the development of the
payments for the 2007 LTCH rate year and publish them in the LTCH PPS
final rule.
We received no comments on the proposed COLA factors for LTCHs
located in Alaska and Hawaii for RY 2007. We also note that OPM has not
released revised COLA factors since the publication of the RY 2007 LTCH
PPS proposed rule. Therefore, in this final rule, under broad authority
conferred upon the Secretary by section 123 of the BBRA as amended by
section 307(b) of the BIPA to determine appropriate adjustments under
the LTCH PPS, for the 2007 LTCH PPS rate year we are making a COLA to
payments to LTCHs located in Alaska and Hawaii by multiplying the
standard Federal payment rate by the factors listed in Table 8 because
these are currently the most recent available data. These factors are
obtained from OPM and are currently used under the IPPS.
Table 8.--Cost-of-Living Adjustment Factors for Alaska and Hawaii
Hospitals for the 2007 LTCH PPS Rate Year
------------------------------------------------------------------------
------------------------------------------------------------------------
Alaska:
All areas.................................................. 1.25
Hawaii:
Honolulu County............................................ 1.25
Hawaii County.............................................. 1.165
Kauai County............................................... 1.2325
Maui County................................................ 1.2375
Kalawao County............................................. 1.2375
------------------------------------------------------------------------
3. Adjustment for High-Cost Outliers (HCOs)
a. Background
Under the broad authority conferred upon the Secretary by section
123 of the BBRA as amended by section 307(b) of the BIPA, in the
regulations at Sec. 412.525(a), we established an adjustment for
additional payments for outlier cases that have extraordinarily high
costs relative to the costs of most discharges. Providing additional
payments for outliers strongly improves the accuracy of the LTCH PPS in
determining resource costs at the patient and hospital level. These
additional payments reduce the financial losses that would otherwise be
caused by treating patients who require more costly care and,
therefore, reduce the incentives to underserve these patients. We set
the outlier threshold before the beginning of the applicable rate year
so that total estimated outlier payments are projected to equal 8
percent of total estimated payments under the LTCH PPS. Outlier
payments under the LTCH PPS are determined consistent with the IPPS
outlier policy.
Under Sec. 412.525(a), we make outlier payments for any discharges
if the estimated cost of a case exceeds the adjusted LTCH PPS payment
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the
amount used to limit the loss that a hospital will incur under the
outlier policy for a case with unusually high costs. This results in
Medicare and the LTCH sharing financial risk in the treatment of
extraordinarily costly cases. Under the LTCH PPS HCO policy, the LTCH's
loss is limited to the fixed-loss amount and a fixed percentage of
costs above the marginal cost factor. We calculate the estimated cost
of a case by multiplying the overall hospital cost-to-charge ratio
(CCR) by the Medicare allowable covered charge. In accordance with
Sec. 412.525(a)(3), we pay outlier cases 80 percent of the difference
between the estimated cost of the patient case and the outlier
threshold (the sum of the adjusted Federal prospective payment for the
LTC-DRG and the fixed-loss amount).
Under the LTCH PPS, we determine a fixed-loss amount, that is, the
maximum loss that a LTCH can incur under the LTCH PPS for a case with
unusually high costs before the LTCH will receive any additional
payments. We calculate the fixed-loss amount by estimating aggregate
payments with and without an outlier policy. The fixed-loss amount will
result in estimated total outlier payments being projected to be equal
to 8 percent of projected total LTCH PPS payments. Currently, MedPAR
claims data and CCRs based on data from the most recent provider
specific file (PSF) (or to the applicable Statewide average CCR if a
LTCH's CCR data are faulty or unavailable) are used to establish a
fixed-loss threshold amount under the LTCH PPS.
b. Cost-To-Charge Ratios (CCRs)
In determining outlier payments, we calculate the estimated cost of
the case by multiplying the LTCH's overall CCR by the Medicare
allowable charges for the case.
As we discussed in greater detail in the June 9, 2003 IPPS HCO
final rule (68 FR 34506 through 34516), because the LTCH PPS HCO policy
(Sec. 412.525) is modeled after the IPPS outlier policy, we believed
that it and the SSO policy (Sec. 412.529) are susceptible to the same
payment vulnerabilities that became evident under the IPPS, and
therefore, merited revision. Thus, we revised the HCO policy at Sec.
412.525(a) and short-stay policy at Sec. 412.529 in that same final
rule for the determination of LTCHs' CCRs and the reconciliation of
outlier payments.
As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4674),
under the LTCH PPS, a single prospective payment per discharge is made
for both inpatient operating and capital-related costs, and therefore,
we compute a single ``overall'' or ``total'' CCR for LTCHs based on the
sum of their operating and capital costs (as described in Chapter 3,
section 150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-
4)) as compared to total charges. Specifically, a LTCH's CCR is
calculated by dividing a LTCH's total Medicare costs (that is, the sum
of its operating and capital inpatient routine and ancillary costs)
divided by its total Medicare charges (that is, the sum of its
operating and capital inpatient routine and ancillary charges).
In the RY 2007 LTCH PPS proposed rule (71 FR 4674 through 4676, and
4690 through 4692), we discussed our current methodology for
determining hospitals' CCRs under the LTCH PPS HCO and SSO policies,
and we presented a proposal to refine our methodology for determining
the annual CCR ceiling and statewide average CCRs. In that same
proposed rule, we also discussed our existing policy for the
reconciliation of LTCH PPS high-cost and SSO payments along with our
proposal to codify in subpart O of part 412 those policies, including
proposed modifications and editorial clarifications to the existing
policies.
Historically, annual updates to the LTCH CCR ceiling and statewide
average CCRs have been effective October 1. In the RY 2007 LTCH PPS
proposed rule, we proposed revisions to the policies governing the
determination of LTCHs' CCRs and the reconciliation of HCO and SSO
payments which would be effective October 1, 2006. In addition, we
stated that the specific LTCH CCR ceiling and statewide average CCRs
reflecting these proposed policy changes, which would be effective
October 1, 2006, and would be presented in the annual IPPS proposed and
final rules.
We received a few specific comments concerning the proposed changes
to the policies governing the determination of LTCHs' CCRs. Several
other commenters referenced one of the specific comments of another
commenter on the proposed changes to the methodology for determining
LTCH CCRs in their own comments on the RY 2007 LTCH PPS proposed rule.
Based on a commenter's synopsis of our proposed changes
[[Page 27833]]
concerning the determination of LTCH's CCRs, we believe that the
commenters clearly understood the nature and purpose of the proposed
changes. However, the commenters stated that in the RY 2007 LTCH PPS
proposed rule, we did not provide an analysis of the effect of the
proposed change, nor did we provide an example of the new CCR values
under this proposed methodology. Another commenter did not ``object in
concept to the proposed combination of [IPPS] operating and capital
cost-to-charge ratios' to compute a ``total'' CCR for each IPPS
hospital by adding together each hospital's operating CCR and its
capital CCR from which to compute the LTCH CCR ceiling and applicable
statewide average CCRs. However, the commenter also pointed out that we
did not provide any impact data and requested that we defer adoption of
the proposed change until such data are provided for comment.
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24126 through
24135), we again proposed these same changes to the policies governing
the determination of LTCHs' CCRs and the reconciliation of HCO and SSO
payments that we proposed in the RY 2007 LTCH PPS proposed rule. Along
with that proposal, we also included in that IPPS proposed rule the
values of the proposed LTCH CCR ceiling (1.131) and the proposed
statewide average LTCH CCRs (as shown in Table 8C of the FY 2007 IPPS
proposed rule; 71 FR 24377) that would be effective October 1, 2006,
based on our proposed policy changes (along with the proposed values of
the LTCH CCR ceiling and statewide average CCRs that would be
determined under our current methodology). Therefore, in this final
rule, we are not finalizing any changes to the policies governing the
determination of LTCHs' CCRs or the reconciliation of LTCH PPS HCO and
SSO payments. We will further respond to any comments received on the
proposal concerning changes to the policies governing the determination
of LTCHs' CCRs and the reconciliation of LTCH PPS HCO and SSO payments
presented again in the FY 2007 IPPS proposed rule (71 FR 24126 through
24132) in the FY 2007 IPPS final rule that will be published this
summer.
c. Establishment of the Fixed-Loss Amount
When we implemented the LTCH PPS, as discussed in the August 30,
2002 final rule (67 FR 56022 through 56026), under the broad authority
of section 123 of the BBRA as amended by section 307(b) of the BIPA, we
established a fixed-loss amount so that total estimated outlier
payments are projected to equal 8 percent of total estimated payments
under the LTCH PPS. To determine the fixed-loss amount, we estimate
outlier payments and total LTCH PPS payments for each case using claims
data from the MedPAR files. Specifically, to determine the outlier
payment for each case, we estimate the cost of the case by multiplying
the Medicare covered charges from the claim by the LTCH's hospital
specific CCR. Under Sec. 412.525(a)(3), if the estimated cost of the
case exceeds the outlier threshold (the sum of the adjusted Federal
prospective payment for the LTC-DRG and the fixed-loss amount), we pay
an outlier payment equal to 80 percent of the difference between the
estimated cost of the case and the outlier threshold (the sum of the
adjusted Federal prospective payment for the LTC-DRG and the fixed-loss
amount).
In the RY 2006 LTCH PPS final rule (70 FR 24194), in calculating
the fixed-loss amount that would result in outlier payments projected
to be equal to 8 percent of total estimated payments for the 2006 LTCH
PPS rate year, we used claims data from the December 2004 update of the
FY 2004 MedPAR files and CCRs from the December 2004 update of the PSF,
as that was the best available data at that time. As we discussed in
that same final rule (70 FR 24193 through 24194), we believe that CCRs
from the PSF were the best available CCR data for determining LTCHs'
PPS payments during the 2006 LTCH PPS rate year because they were the
most recently available CCRs (at that time) actually used to make LTCH
PPS payments.
As we also discussed in the RY 2006 LTCH PPS rate year final rule
(70 FR 24192 through 24193), we calculated a single fixed-loss amount
for the 2006 LTCH PPS rate year based on the version 22.0 of the
GROUPER, which was the version in effect as of the beginning of the
LTCH PPS rate year (that is, July 1, 2005 for the 2006 LTCH PPS rate
year). In addition, we applied the current outlier policy under Sec.
412.525(a) in determining the fixed-loss amount for the 2006 LTCH PPS
rate year; that is, we assigned the applicable Statewide average CCR
only to LTCHs whose CCRs exceeded the ceiling (and not when they fell
below the floor). Accordingly, we used the FY 2005 IPPS combined
operating and capital CCR ceiling of 1.409 (70 FR 24192). (Our
rationale for using the FY 2005 combined IPPS operating and capital CCR
ceiling for LTCHs is stated in section V.D.3.b. of this preamble.) As
noted in that same final rule, in determining the fixed-loss amount for
the 2006 LTCH PPS rate year using the CCRs from the PSF, there were no
LTCHs with missing CCRs or with CCRs in excess of the current ceiling
and, therefore, there was no need for us to independently assign the
applicable Statewide average CCR to any LTCHs in determining the fixed-
loss amount for the 2006 LTCH PPS rate year (as this may have already
been done by the FI in the PSF in accordance with the established
policy).
Accordingly, in the RY 2006 LTCH PPS final rule (70 FR 24194), we
established a fixed-loss amount of $10,501 for the 2006 LTCH PPS rate
year. Thus, we pay an outlier case 80 percent of the difference between
the estimated cost of the case and the outlier threshold (the sum of
the adjusted Federal LTCH PPS payment for the LTC-DRG and the fixed-
loss amount of $10,501).
In the RY 2007 LTCH PPS proposed rule (71 FR 4676 through 4678), we
used the June 2005 update of the FY 2004 MedPAR claims data to
determine a fixed-loss amount that would result in outlier payments
projected to be equal to 8 percent of total estimated payments, based
on the policies described in that proposed rule, because those data
were the most recent complete LTCH data available at that time.
Furthermore, we proposed to determined the fixed-loss amount based on
the version of the GROUPER that would be in effect as of the beginning
of the 2007 LTCH PPS rate year (July 1, 2006), that is, Version 23.0 of
the GROUPER (70 FR 47324).
As also discussed in the RY 2007 LTCH PPS proposed rule (71 FR
4676), we used CCRs from the June 2005 update of the PSF for
determining the fixed-loss amount for the 2007 LTCH PPS rate year as
they were the most recent complete available data at that time. We
further proposed that if more recent CCR data are available, we propose
to use it for determining the fixed-loss amount for the 2007 LTCH PPS
rate year in the final rule. In determining the proposed fixed-loss
amount for the 2007 LTCH PPS rate year, we also used the current FY
2006 applicable IPPS combined operating and capital CCR ceiling of
1.423 and Statewide average CCRs (as discussed in the FY 2006 IPPS
final rule (70 FR 47496) and established in Transmittal 692 (September
30, 2005)) such that the current applicable Statewide average CCR will
be assigned if, among other things, a LTCH's CCR exceeded the current
ceiling (1.423). As explained in the RY 2007 LTCH PPS proposed rule (71
FR 4677), our rationale for using the existing LTCH CCR ceiling and
[[Page 27834]]
Statewide average CCRs to determine the proposed RY 2007 fixed-loss
amount even though we proposed to change our methodology for
determining the CCR ceiling and Statewide average CCRs effective for
discharges occurring on or after October 1, 2006, was because, based on
our analysis of the data used to determine the FY 2006 LTCH CCR
ceiling, we believe that the proposed methodology change would result
in a minor change in the numerical value of the LTCH CCR ceiling, and
therefore, would have a negligible effect on the LTCHs' CCRs used to
determine the proposed fixed-loss amount for the 2007 LTCH PPS rate
year. Moreover, as we noted in that same proposed rule, in determining
the proposed fixed-loss amount for the 2007 LTCH PPS rate year using
the CCRs from the PSF, there was no need for us to independently assign
the applicable Statewide average CCR to any LTCHs (as this may have
already been done by the FI in the PSF in accordance with our
established policy).
In the RY 2007 LTCH PPS proposed rule (71 FR 4677), based on the
data and policies described in that proposed rule, the proposed fixed-
loss amount would be $18,489 for the 2007 LTCH PPS rate year. Thus, we
would pay an outlier case 80 percent of the difference between the
estimated cost of the case and the outlier threshold (the sum of the
adjusted Federal LTCH payment for the LTC-DRG and the fixed-loss amount
of $18,489). We also noted that the proposed fixed-loss amount for the
2007 LTCH PPS rate year was significantly higher than the current
fixed-loss amount of $10,501. In that proposed rule, we explained that
the change in the proposed fixed-loss amount was primarily due to the
projected decrease in LTCH PPS payments resulting from the proposed
change in the SSO policy under Sec. 412.529 and the changes to the
LTC-DRG relative weights for FY 2006. Specifically, because we
projected approximately an 11 percent decrease in aggregate LTCH PPS
payments in the 2007 LTCH PPS rate year based on the proposed policies
presented in the proposed rule, we believed that a proposed increase in
the fixed-loss amount would be appropriate and necessary to maintain
the requirement that estimated outlier payments would equal 8 percent
of estimated total LTCH PPS payments, as required under Sec.
412.525(a). Maintaining the proposed fixed-loss amount at the current
level would result in HCO payments that significantly exceed the
current regulatory requirement that estimated outlier payments will be
projected to equal 8 percent of estimated total LTCH PPS payments.
We also noted that in the August 30, 2002 final rule (67 FR 56022
through 56024), based on our regression analysis, we established the
outlier target at 8 percent of estimated total LTCH PPS payments to
allow us to achieve a balance between the ``conflicting considerations
of the need to protect hospitals with costly cases, while maintaining
incentives to improve overall efficiency.'' In that same final rule (67
FR 56023), we also explained that our regression analysis showed that
additional increments of outlier payments over 8 percent (that is,
raising the outlier target to a larger percentage than 8 percent) would
reduce financial risk, but by successively smaller amounts. Since
outlier payments are included in budget neutrality calculations,
outlier payments would be funded by prospectively reducing the non-
outlier PPS payment rates by the proportion of projected outlier
payments to projected total PPS payments in the absence of outlier
payments; the higher the outlier target, the greater the (prospective)
reduction to the base payment rate in order to maintain budget
neutrality. Therefore, as another alternative to the proposed increase
to the fixed-loss amount for RY 2007, in the RY 2007 LTCH PPS proposed
rule (71 FR 4677 through 4678), we solicited comments on whether we
should revisit the regression analysis discussed above in this section
that was used to establish the existing 8 percent outlier target, using
the most recent available data to evaluate whether the current outlier
target of 8 percent should be adjusted, and therefore may result in
less of an increase in the fixed-loss amount for RY 2007.
As an alternative to proposing to raise the fixed-loss amount for
FY 2007, in the RY 2007 LTCH PPS proposed rule (71 FR 4677), we also
examined adjusting the marginal cost factor (that is, the percentage
that Medicare will pay of the estimated cost of a case that exceeds the
sum of the adjusted Federal prospective payment for the LTC-DRG and the
fixed-loss amount for LTCH PPS outlier cases as specified in Sec.
412.525(a)(3)), as a means of ensuring that estimated outlier payments
would be projected to equal 8 percent of estimated total LTCH PPS
payments. As we established in the August 30, 2002 final rule (67 FR
56022 through 56026), under the LTCH PPS HCO policy at Sec.
412.525(a)(3), the marginal cost factor is currently equal to 80
percent. A marginal cost factor equal to 80 percent means that, for an
outlier case, we pay the LTCH 80 percent of the difference between the
estimated cost of the case and the outlier threshold (the sum of the
adjusted Federal rate for the LTC-DRG PPS payment and the fixed-loss
amount).
Comment: Several commenters opposed any option that would allow CMS
to revisit the regression analysis that was used to establish the
existing 80 percent marginal cost factor and existing outlier target of
8 percent. The commenters explained that the LTCH PPS is still in its
early stages and further changes to the marginal cost factor or 8
percent outlier target would result in instability to the system. The
commenters cautioned against making any premature changes to the
factors affecting HCO payments to LTCHS, particularly the marginal cost
factor and outlier target established by regulation. Also, the
commenters agreed that keeping the marginal cost factor at 80 percent
and the outlier pool at 8 percent better identifies LTCH patients that
are truly unusually costly cases, and that the policy appropriately
addresses outlier cases that are significantly more expensive than non-
outlier cases.
One commenter expressed concern about the proposed significant
increase to the fixed-loss amount for RY 2007 and urged CMS to exempt
LTCHs that have high case mix levels (that is, over 1.5) from this
policy since they are more likely to have high cost cases. As an
alternative, the commenter suggested that we increase the marginal cost
factor to 90 percent or 100 percent instead of 80 percent.
Response: We agree with the commenters that based on the regression
analysis done for the implementation of the LTCH PPS (August 30, 2002;
68 FR 56022 through 56026), keeping the marginal cost factor at 80
percent and the outlier pool at 8 percent best identifies LTCH patients
that are truly unusually costly cases, and that such a policy
appropriately addresses LTCH HCO cases that are significantly more
expensive than non-outlier cases. Furthermore, as we stated in the
August 30, 2002 final rule (67 FR 56023 through 56027) that implemented
the LTCH PPS, the marginal cost factor is designed to ensure ``a
balance between the need to protect LTCHs financially, while
encouraging them to treat expensive patients and maintaining the
incentives of a PPS to improve the efficient delivery of care.''
Therefore, as supported by many commenters, we did not revisit the
regression analysis that was used to establish the existing 80 percent
marginal cost factor and existing outlier target of 8 percent for this
final rule. Accordingly, we are not making
[[Page 27835]]
any changes to the marginal cost factor or outlier target for RY 2007
in this final rule.
We do not believe that it is necessary or appropriate to exempt
LTCHs that have a high CMI from any changes to the HCO policy that
would be established for RY 2007. We disagree with the commenter that a
high case mix necessarily correlates to a higher likelihood of having
unusually HCO cases. A LTCH's case-mix is defined as its case weighted
average LTC-DRG relative weight for all its discharges in a given
period. The relative weight for each LTC-DRG 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 2.0 will, on average,
cost twice as much as cases in an LTC-DRG with a weight of 1.0, and
therefore, on average, are paid twice as much as well. Thus, a ``high''
case-mix level is an indication of the level of intensity of the types
of patients treated at a LTCH and not necessarily an indication of
treating a large number of unusually high cost cases. In fact, LTCHs
could have a relatively ``high'' CMI but have few or no HCO cases.
Therefore, we are not adopting the commenters' suggestion to exempt
LTCHs that have high case mix levels from any changes to the HCO policy
that would be established for RY 2007.
Furthermore, increasing the marginal cost factor to 90 percent or
100 percent instead of 80 percent for hospitals with high case-mix
would result in an increase in total estimated outlier payments
because, as we explained in the RY 2006 LTCH PPS final rule (70 FR
24195), we would pay a larger percentage of the estimated costs that
exceed the outlier threshold (the sum of the adjusted Federal rate for
the LTC-DRG and the fixed-loss amount). For example, if we were to
increase the marginal cost factor to 90 percent without raising the
fixed-loss amount or 8 percent outlier target, we would pay outlier
cases an additional 10 percent (90 percent minus 80 percent) of the
estimated costs that exceed the outlier threshold. This alternative
would result in estimated outlier payments which would exceed the
existing 8 percent outlier target required by the regulations.
As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4677),
keeping the marginal cost factor at the current level of 80 percent
while proposing to raise the fixed-loss amount to a level that will
generate an estimated aggregate 8 percent outlier payments would afford
more financial protection to LTCHs than proposing to lower the marginal
cost factor and retain the current fixed loss amount. A relatively
higher fixed-loss amount identifies fewer cases as HCO cases since the
amount that the estimated cost of the case must exceed before the case
qualifies as a HCO case is higher. However, this policy better
identifies LTCH patients that are truly unusually costly cases, which
is consistent with our intent of the LTCH HCO policy as stated when we
implemented the LTCH PPS in the August 30, 2002 final rule (67 FR
56025). As we discussed in that same final rule (67 FR 56023 through
56024), our analysis of payment-to-cost ratios for outlier cases showed
that a marginal cost factor of 80 percent appropriately addresses
outlier cases that are significantly more expensive than nonoutlier
cases, while simultaneously maintaining the integrity of the LTCH PPS.
Therefore, as supported by several commenters, we are not revising the
existing 80 percent marginal cost factor, and are not adopting the
commenter's recommendation to increase the marginal cost factor.
To summarize, consistent with the regression analysis that was used
to establish the existing marginal cost factor and existing outlier
target for RY 2007, the marginal cost factor will remain at 80 percent
and estimated outlier payments will remain at 8 percent. As we stated
in the RY 2007 LTCH PPS proposed rule (71 FR 4678), after revisiting
the issue and an analysis of the most recent complete available data,
due to the lag time in the availability of data, we now believe the
most appropriate time to revisit any changes in the outlier policy
(among other things), which would affect future LTCH PPS payment rates,
would be after the conclusion of the 5-year transition period when we
expect to have several years of data generated after the implementation
of the LTCH PPS.
Comment: One commenter believes that the estimated proposed
reduction to aggregate LTCH PPS payments that would result from the
proposed changes to the SSO policy causes a ``perverse'' consequence of
an increase to the fixed-loss amount, thus lowering reimbursement for
long-term, high cost cases. The commenter believes that LTCHs would
suffer a double penalty of lower payments due to the proposed SSO
policy and the proposed increase to the HCO fixed-loss amount. The
commenter added that CMS has not provided an explanation how LTCHs
would finance the added cost of these long stay, high cost cases (as a
result of the proposed increase to the outlier threshold).
One commenter noted that the proposed increase to the fixed-loss
amount would cause hospitals that do not have many SSO cases to be
inadequately reimbursed for their high cost cases. The commenter also
added that the proposed increase to the fixed-loss amount coupled with
the proposed zero percent increase to the Federal Rate would serve as a
disincentive for LTCHs to accept patients with high costs and who also
exceed the ALOS, thereby affecting patient access for these cases.
Another commenter stated that the proposed increase to the outlier
threshold failed to consider the acuity of patients and is based only
on mathematics. The commenter added that the proposed adjustment to the
fixed-loss amount would increase LTCHs' loss on these cases before they
qualify for an additional payment as HCOs. The commenter recommended
that if CMS believes an increase to the fixed-loss amount is warranted,
CMS should increase the fixed-loss amount the same amount as the annual
update factor.
Several other commenters also expressed concern about the
significant proposed increase to the fixed-loss amount and along with
other commenters requested that CMS review and reconsider the proposed
increase to the fixed-loss amount and consider establishing a lower
fixed loss amount (than the proposed fixed-loss amount) for RY 2007 in
the LTCH PPS final rule so that HCO cases receive appropriate payments.
Response: While we understand the commenters concerns about the
proposed increase to the fixed-loss amount, as we discussed in the RY
2007 LTCH PPS proposed rule (71 FR 4677), the proposed increase to the
fixed-loss amount had a direct correlation to our estimated decrease in
aggregate LTCH PPS payments for RY 2007 that we projected would result
primarily due to the proposed changes to the SSO policy.
Although some of the commenters did suggest different alternatives
to updating the fixed-loss amount, those suggestions are either not
consistent with maintaining estimated outlier payments at the projected
8 percent of total estimated payments or would require us to lower the
marginal cost factor in order to maintain estimated outlier payments at
8 percent of total estimated payments, which several commenters
opposed. As we discussed above and consistent with the recommendation
of several commenters, we did not revisit the regression analysis that
was used as a basis to
[[Page 27836]]
establish the existing marginal cost factor and existing 8 percent
outlier target, the marginal cost factor will remain at 80 percent and
the outlier target will remain at 8 percent for RY 2007. Maintaining
the fixed-loss amount at the current level, as we discussed in the RY
2007 LTCH PPS proposed rule (71 FR 4677) would result in HCO payments
that significantly exceed the current regulatory requirement that
estimated outlier payments are projected to equal 8 percent of
estimated total LTCH PPS payments. Based on our regression analysis, we
established the outlier target at 8 percent of estimated total LTCH PPS
payments to allow us to achieve a balance between the ``conflicting
considerations of the need to protect hospitals with costly cases,
while maintaining incentives to improve overall efficiency.'' That
regression analysis also showed that additional increments of outlier
payments over 8 percent (that is, raising the outlier target to a
larger percentage than 8 percent) would reduce financial risk, but by
successively smaller amounts. Outlier payments are budget neutral, and
therefore, outlier payments are funded by prospectively reducing the
non-outlier PPS payment rates by projected total outlier payments. The
higher the outlier target, the greater the (prospective) reduction to
the base payment that would need to be applied to the Federal rate in
order to maintain budget neutrality (August 30, 2002; 67 FR 56022
through 56024).
As we also discussed in the RY 2007 LTCH PPS proposed rule (71 FR
4678), under the LTCH PPS HCO policy at Sec. 412.525(a)(3), at a
marginal cost factor equal to 80 percent, Medicare pays the LTCH 80
percent of the difference between the estimated cost of the case and
the outlier threshold (the sum of the adjusted Federal rate for the
LTC-DRG PPS payment and the fixed-loss amount). The marginal cost
factor is designed to ensure ``a balance between the need to protect
LTCHs financially, while encouraging them to treat expensive patients
and maintaining the incentives of a prospective payment system to
improve the efficient delivery of care.'' Our regression analysis
showed that a marginal cost factor of 80 percent appropriately
addresses outlier cases that are significantly more expensive than
nonoutlier cases. Specifically, our analysis of payment-to-cost ratios
for outlier cases showed that a marginal cost factor of 80 percent
appropriately addresses outlier cases that are significantly more
expensive than nonoutlier cases, while simultaneously maintaining the
integrity of the LTCH PPS. Thus, the existing outlier policy (that is,
the 8 percent outlier target in conjunction with the 80 percent
marginal cost factor) derived from our regression analysis is designed
to maintain the balance between providing an incentive for LTCHs to
treat expensive patients and improving the efficient delivery of care.
(August 30, 2002; (67 FR 56022 through 56026)
As discussed in greater detail below, we continue to believe that
an increase to the fixed-loss amount is appropriate. The intent of the
HCO policy, as stated when we implemented the LTCH PPS, is to make an
additional payment to LTCHs for cases that truly have unusually high
costs. We disagree with the commenter who believes that LTCHs would be
penalized twice by lowering payments as a result of the changes to the
SSO policy and the increase to the HCO fixed-loss amount. Although the
changes to the SSO policy result in an estimated decrease in aggregate
LTCH PPS payments, which necessitates an increase to the HCO fixed-loss
amount, as discussed above, we are maintaining the existing 8 percent
outlier target. Therefore, although we are lowering aggregate estimated
outlier payments; they will continue to be projected to be equal to 8
percent of total estimate LTCH PPS payments. However, we acknowledge
that an increase to the fixed-loss amount will increase a LTCH's loss
on a specific case before it qualifies for an additional payment as
HCOs, as pointed out a few commenters; however, as we explained in the
RY 2007 LTCH PPS proposed rule (71 FR 4678), because a relatively
higher fixed-loss amount identifies fewer cases as HCO cases (since the
amount that the estimated cost of the case must exceed before the case
qualifies as a HCO case is higher), such a policy better identifies
LTCH patients that are truly unusually costly cases.
As discussed above, the intent of the HCO policy is to provide an
additional payment to LTCH cases that truly have unusually high costs.
We would remind the commenter who pointed out that we did not provide
an explanation of how LTCHs would finance HCO cases with an increase to
the fixed-loss amount that, if we would not increase the fixed-loss
amount, HCO payments would represent significantly more than 8 percent
of estimated total LTCH PPS payments. Thus, the cases that would
receive an additional HCO payment would no longer represent the cases
that truly have unusually high costs as compared to the universe of
``typical'' LTCH cases, and warrant an additional HCO payment.
Furthermore, as discussed above, HCO payments are budget neutral and
are funded by prospectively reducing the non-outlier PPS payment rates
by projected total outlier payments. The higher the outlier target, the
greater the (prospective) reduction to the base payment that would need
to be applied to the Federal rate in order to maintain budget
neutrality. Therefore, we continue to believe that it is appropriate to
increase the fixed-loss amount in order to maintain outlier payments at
the projected 8 percent of total estimated payments. Such a policy
continues to appropriately identify cases that are truly HCO cases
(that is, cases with an unusually high cost). Because maintaining an 8
percent outlier target necessitates an increase to the fixed-loss
amount and will appropriately identify unusually costly cases, we do
not believe that increasing the fixed-loss amount will result in a
disincentive for LTCHs to accept patients with high costs or exceed the
ALOS. In fact, for LTCHs, in general, a case that should receive a high
cost outlier payment is typically high cost because the patient has a
longer than ALOS. Moreover, the industry has stated in many of its
comments submitted on the RY 2007 LTCH PPS proposed rule that it has no
way of determining a LTCH's LOS upon admission. Therefore, we do not
believe that the increase to the fixed-loss amount established in this
final rule, which is significantly lower than the proposed RY 2007
fixed-loss amount (as discussed below), will result in these patients
not being treated at LTCHs. Furthermore, as we discuss in the impact
analysis presented in section XV. of this final rule, since based on
our margins analysis LTCH PPS payments appear to be more than adequate
to cover the costs of the efficient delivery of care to patients at
LTCHs, based on this margins analysis, we do not expect that an
increase to the fixed-loss amount will result in an adverse financial
impact on affected LTCHs nor will there be an effect on beneficiaries'
access to care. Also, for the reasons discussed above, we are not
adopting the commenter's suggestion to update the fixed-loss by the
most recent estimate of the LTCH PPS market basket since that would
result in estimated outlier payments in excess of 8 percent of
estimated total LTCH PPS payments. Because an increase in HCO payments
would result in an offset to the Federal rate, thereby lowering the
payment rate to all LTCH cases, such a result could underpay inlier
LTCH cases that typically consume the average resource of the
particular LTC-DRG.
[[Page 27837]]
In response to the commenter that believes that the estimated
proposed changes to the SSO policy causes a ``perverse'' consequence of
an increase to the fixed-loss amount, we believe that it is
inappropriate to maintain the current (that is, lower) fixed-loss
amount, which would increase aggregate estimated outlier payments
beyond 8 percent. The HCO policy was intended to identify only a
limited percentage of aggregate LTCH PPS payments for an additional
payment for unusually costly cases. As noted above, the LTCH PPS HCO
policy is budget neutral and, therefore, reduces payments to LTCHs for
SSO cases, many of which most likely do not require the full measure of
resources available in a hospital that has been established to treat
patients requiring long-stay hospital-level care (as discussed in
greater detail below in section V.A.1.a. of this preamble). As
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4677), the
proposed increase to the fixed-loss amount was primarily due to the
projected decrease in aggregate LTCH PPS payments resulting from the
change in the SSO policy in order to maintain the requirement that
estimated outlier payments would equal only 8 percent of estimated
total LTCH PPS payments, as required under Sec. 412.525(a). If we
would not increase the fixed-loss amount, HCO payments would represent
significantly more than 8 percent of estimated total LTCH PPS payments.
Thus, the cases that would receive an additional HCO payment would no
longer represent the cases that truly have unusually high costs as
compared to the universe of ``typical'' LTCH cases, and warrant an
additional HCO payment. This is because, as we discussed in the August
30, 2002 final rule (67 FR 56022) when we implemented the LTCH PPS, our
regression analysis showed that an 8 percent outlier target would
achieve the balance of reducing financial risk for the treatment of
unusually costly cases, reducing incentives to underserve costly
beneficiaries, and improving overall fairness of the PPS. Furthermore,
we note that the 8 percent outlier target under the LTCH PPS is
significantly higher than the outlier target under the IPPS. The
outlier thresholds under the IPPS are set so that operating IPPS
outlier payments are projected to be only 5.1 percent of total
operating IPPS DRG payments (70 FR 47501).
Several commenters based their comments on the assumption that long
lengths of stay or high patient acuity (for example, case-mix) are
directly related to whether a case should receive a HCO payment. As we
explained above in section IV.C.3. of this preamble, we do not agree
that a case with a high case-mix necessarily correlates to a higher
likelihood of the case having an unusually high cost. A case with a
``high case-mix'' is a case that is grouped to a LTC-DRG with a
``high'' relative weight. The relative weight of the LTC-DRG 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 2.0 will, on
average, cost twice as much as cases in a LTC-DRG with a weight of 1.0,
and therefore, on average, are paid twice as much as well. Thus, a
``high'' case-mix for a particular case is an indication of the
relatively ``high'' level of intensity of that patient relative to LTCH
patients in other LTC-DRGs but not necessarily an indication of
unusually high cost for patients within that LTC-DRG. In fact, a case
could have a relatively ``high'' case-mix (that is, in a LTC-DRG with a
``high'' relative weight and therefore higher LTC-DRG payment) but have
the same costs or cost less than other cases in that same LTC-DRG,
which receive an appropriate payment based on the relative weight of
that LTC-DRG. Therefore, as discussed in greater detail above, we
believe that an increase to the fixed-loss amount is appropriate in
order to maintain the requirement that estimated outlier payments equal
8 percent of estimated total LTCH PPS payments, a level, which based on
our regression analysis, we believe most appropriately identifies
unusually high cost cases.
The policy change for SSO cases established in this final rule (as
discussed in section IV.A.1.a. of this preamble) is intended to revise
payments for SSO cases to an appropriate level. The fact that a
particular LTCH does not treat many SSO cases does not have any impact
on the effect of the change to the SSO policy on the HCO fixed-loss
amount. This is because, under our existing HCO policy, estimated
aggregate outlier payments are projected to equal 8 percent of
estimated aggregate LTCH PPS payments. As discussed in greater detail
above, the intent of the HCO policy is to provide an additional payment
to LTCH cases that truly have unusually high costs. We would remind
commenters who stated that an increase to the fixed-loss amount would
cause LTCHs that do not have many SSO cases to be inadequately
reimbursed for their HCO cases, that if we would not increase the
fixed-loss amount, cases that do not necessarily represent cases that
truly have unusually high costs as compared to the universe of
``typical'' LTCH cases would receive a HCO payment. Furthermore, if we
were to raise aggregate HCO payments in excess of the current 8 percent
outlier target, we would have to lower the Federal rate by the amount
that projected total outlier payments would exceed the current 8
percent outlier target. Such a prospective adjustment to the Federal
rate would reduce payments to ``typical'' LTCH cases, which based on
our regression analysis, could result in inadequate reimbursement to
those inlier cases. Therefore, we disagree with the commenters that an
increase to the fixed-loss amount would cause LTCHs that do not have
many SSO cases to be inadequately reimbursed for their HCO cases.
In conclusion, in 2003, when we became aware that IPPS and LTCH PPS
HCO (and SSO) policies were susceptible to payment vulnerabilities, we
proposed and ultimately finalized changes to the HCO (and SSO) policies
that were in the regulations at that time. Historically, it is our
practice that when upon review of an existing policy and we find that a
change in that policy is necessary, we establish appropriate changes
through the notice and comment rulemaking process. Consistent with this
historical practice, we reviewed the current HCO policy at Sec.
412.525(a), as discussed in greater detail above. As recommended by
many commenters, we have reviewed our methodology for determining the
fixed-loss amount for RY 2007 in this final rule to ensure that both
LTCH HCO cases and LTCH inlier cases receive appropriate payments
(since, as discussed above, outlier payments under the LTCH PPS are
budget neutral). Accordingly, based on this review, as we discussed in
the RY 2007 LTCH PPS proposed rule and as we discuss in greater detail
above in this section, we believe that an increase to the fixed-loss
amount for RY 2007 is appropriate. We are using the same methodology
that we proposed to use in the RY 2007 proposed rule to calculate the
fixed-loss amount for RY 2007 in this final rule (using updated data
and the policies established in this final rule, as described below) in
order to maintain estimated outlier payments at the projected 8 percent
of total estimated payments. However, as we discuss in greater detail
below in section V.A.1.a of this preamble, based on the comments we
received concerning the proposed changes to the SSO policy, we are
revising our proposed changes to the SSO policy that will be
established in this final rule. We
[[Page 27838]]
estimate that the final SSO policy established in this final rule will
result in a significantly smaller decrease in aggregate LTCH PPS
payments for RY 2007. Accordingly, although the fixed-loss amount for
RY 2007 is higher than current fixed-loss amount ($10,501), since under
the final SSO policy aggregate payments will no longer be reduced by
over 11 percent, but rather we estimate aggregate payments will only be
reduced by about 4 percent. Therefore, to maintain estimated outlier
payments at the projected 8 percent of total estimated payments, it is
not necessary for us to raise the fixed-loss amount as much as in the
RY 2007 LTCH PPS proposed rule. Consequently, the final fixed-loss
amount for RY 2007 (discussed in greater detail below) is $14,887,
which is considerably less than the proposed RY 2007 fixed-loss amount
of $18,489.
As stated above, we annually determine the fixed-loss amount so
that estimated outlier payments are projected to equal 8 percent of
total estimated LTCH PPS payments. In this final rule for the 2007 LTCH
PPS rate year, we used the December 2005 update of the FY 2005 MedPAR
claims data to determine a fixed-loss amount that would result in
outlier payments projected to be equal to 8 percent of total estimated
payments, based on the policies described in this final rule, because
these data are the most recent complete LTCH data available.
Furthermore, as noted previously, we determined the fixed-loss amount
based on the version of the GROUPER that would be in effect as of the
beginning of the 2007 LTCH PPS rate year (July 1, 2006), that is,
Version 23.0 of the GROUPER (70 FR 47324).
We also used CCRs from the December 2005 update of the PSF for
determining the fixed-loss amount for the 2007 LTCH PPS rate year as
they are currently the most recent complete available data. In
determining the fixed-loss amount for the 2007 LTCH PPS rate year, we
are using the current FY 2006 applicable IPPS combined operating and
capital CCR ceiling of 1.423 and Statewide average CCRs (as discussed
in the FY 2006 IPPS final rule (70 FR 47496) and established in
Transmittal 692 (September 30, 2005)) such that the current applicable
Statewide average CCR would be assigned if, among other things, a
LTCH's CCR exceeded the current ceiling (1.423). Our reason for using
the existing LTCH CCR ceiling and Statewide average CCRs to determine
the RY 2007 fixed-loss amount even though we have proposed to change
our methodology for determining the CCR ceiling and Statewide average
CCRs effective for discharges occurring on or after October 1, 2006 in
the FY 2007 IPPS proposed rule (71 FR 23996), is because we believe
that this methodology change would result in a minor change in the
numerical value of the LTCH CCR ceiling based on our analysis of the
data used to determine the proposed FY 2007 LTCH CCR ceiling, and
therefore, would have a negligible effect on the LTCHs' CCRs used to
determine the fixed-loss amount for the 2007 LTCH PPS rate year.
Moreover, we note that in determining the fixed-loss amount for the
2007 LTCH PPS rate year using the CCRs from the PSF, there was no need
for us to independently assign the applicable Statewide average CCR to
any LTCHs (as this may have already been done by the FI in the PSF in
accordance with our established policy). (Currently, the applicable FY
2006 IPPS Statewide averages can be found in Tables 8A and 8B of the FY
2006 IPPS final rule (70 FR 47672).)
Accordingly, based on the data and policies described in this final
rule, the fixed-loss amount will be $14,887 for the 2007 LTCH PPS rate
year. Thus, we will pay an outlier case 80 percent of the difference
between the estimated cost of the case and the outlier threshold (the
sum of the adjusted Federal LTCH payment for the LTC-DRG and the fixed-
loss amount of $14,887). We note that the fixed-loss amount for the
2007 LTCH PPS rate year is higher than the current fixed-loss amount of
$10,501. This change in the fixed-loss amount will primarily be due to
the projected decrease in LTCH PPS payments resulting from the change
in the SSO policy under Sec. 412.529 (discussed in greater detail in
section VI.A.1. of this preamble), and the changes to the LTC-DRG
relative weights for FY 2006 (as discussed in the FY 2006 IPPS final
rule (70 FR 47355)). Because we are projecting approximately a 4
percent decrease in estimated aggregate LTCH PPS payments in the 2007
LTCH PPS rate year (as discussed in section XV. of this final rule), we
believe that an increase in the fixed-loss amount is appropriate and
necessary to maintain the requirement that estimated outlier payments
would equal 8 percent of estimated total LTCH PPS payments, as required
under Sec. 412.525(a). As discussed in greater detail above, an
outlier target of 8 percent of estimated total LTCH PPS payments allows
us to achieve a balance between the ``conflicting considerations of the
need to protect hospitals with costly cases, while maintaining
incentives to improve overall efficiency'' (67 FR 56022 through 56024).
We note that the fixed-loss amount of $14,887 is substantially
lower than the proposed RY 2007 fixed-loss amount of $18,489 (71 FR
4676 through 4678). Furthermore, we note that the fixed-loss amount of
$14,887 is significantly lower than the FY 2003 fixed-loss amount of
$24,450 (67 FR 56023), the 2004 LTCH PPS rate year fixed-loss amount of
$19,590 (68 FR 34144), and the 2005 LTCH PPS rate year fixed-loss
amount of $17,864 (69 FR 25688), all of which were in effect during the
time period that we are currently estimating positive Medicare margins
(as discussed in greater detail in section V.C.3 of this preamble).
Thus, during the years when the fixed-loss amount was greater than the
$14,887 established for RY 2007 in this final rule, the majority of
LTCHs operated with positive Medicare margins, and therefore, we do not
expect that a fixed-loss amount of $14,887 will result in an adverse
impact of LTCHs in RY 2007. Moreover, we believe the fixed-loss amount
of $14,887 will appropriately identify unusually costly LTCH cases
while maintaining the integrity of the LTCH PPS. Thus, under the broad
authority of section 123(a)(1) of the BBRA and section 307(b)(1) of the
BIPA, we are establishing a fixed-loss amount of $14,887 based on the
best available LTCH data and the policies presented in this final rule
because, we believe an increase in the fixed-loss amount is appropriate
and necessary to maintain estimated outlier payments equal to 8 percent
of estimated total LTCH PPS payments, as required under Sec.
412.525(a).
d. Reconciliation of Outlier Payments Upon Cost Report Settlement
In the June 9, 2003 HCO final rule (68 FR 34508 through 34512), we
established a policy for LTCHs that provided that, effective for LTCH
PPS discharges occurring on or after August 8, 2003, any reconciliation
of outlier payments will be based upon the actual CCR computed from the
costs and charges incurred in the period during which the discharge
occurs. In that same final rule, we also established that, for
discharges occurring on or after August 8, 2003, at the time of any
reconciliation, outlier payments may be adjusted to account for the
time value of any underpayments or overpayments based upon a widely
available index to be established in advance by the Secretary and will
be applied from the midpoint of the cost reporting period to the date
of reconciliation. (We note that, in that same final rule (68 FR
34513), we
[[Page 27839]]
also established similar changes to the SSO policy under the LTCH PPS
at Sec. 412.529(c)(5)(ii).) These changes regarding the reconciliation
of outlier payments under the LTCH PPS were made in conjunction with
the changes regarding the determination of LTCH's CCRs that we
established under Sec. 412.525(a)(4) in the June 9, 2003 IPPS HCO
final rule, as discussed in greater detail in section V.D.3.b. of this
preamble. (We note that the instructions for implementing these
regulations under both the IPPS and the LTCH PPS are discussed in
further detail in Program Memorandum Transmittal A-03-058. Additional
information on the administration of the reconciliation process under
the IPPS is provided in CMS Program Transmittal 707 (October 12, 2005;
Change Request 3966). We note that irrespective of the changes to the
HCO and SSO policies presented in this final rule, we are currently
developing additional instructions on the administration of the
existing reconciliation process under the LTCH PPS that will be similar
to the IPPS reconciliation process.)
In the RY 2007 LTCH PPS proposed rule (71 FR 4678 through 4679),
for discharges occurring on or after October 1, 2006, we proposed to
codify into the LTCH PPS section of the regulations (subpart O of part
42 of the CFR) the provisions concerning the reconciliation of LTCH PPS
outlier payments, including editorial clarifications, that would more
precisely describe the application of those policies along with the
proposed changes to our methodology for determining the annual LTCH CCR
ceiling and applicable Statewide average CCRs under the LTCH PPS
(discussed previously in this final rule).
As discussed above in section VI.D.3.b. of this preamble, we
received a few specific comments concerning the proposed changes to the
policies governing the determination of LTCHs' CCRs. In light of those
comments, in the FY 2007 IPPS proposed rule (71 FR 24126 through
24132), we proposed the same changes to the policies governing the
determination of LTCHs' CCRs and the reconciliation of HCO and SSO
payments that we proposed in the RY 2007 LTCH PPS proposed rule.
Therefore, in this final rule, we are not finalizing any changes to the
policies governing the determination of LTCHs' CCRs or the
reconciliation of LTCH PPS HCO and SSO payments. We will respond
further to any comments received on the proposal concerning changes to
the policies governing the determination of LTCHs' CCRs and the
reconciliation of LTCH PPS HCO and SSO payments presented again in the
FY 2007 IPPS proposed rule (71 FR 24126 through 24135) in the FY 2007
IPPS final rule that will be published this summer.
4. Other Payment Adjustments
As indicated earlier, we have broad authority under section
123(a)(1) of the BBRA as amended by section 307(b) of the BIPA to
determine appropriate adjustments under the LTCH PPS, including whether
(and how) to provide for adjustments to reflect variations in the
necessary costs of treatment among LTCHs. Thus, in the August 30, 2002
final rule (67 FR 56014 through 56027), we discussed our extensive data
analysis and rationale for not implementing an adjustment for
geographic reclassification, rural location, treating a
disproportionate share of low-income patients (DSH), or indirect
medical education (IME) costs. In that same final rule, we stated that
we would collect data and reevaluate the appropriateness of these
adjustments in the future once more LTCH data become available after
the LTCH PPS is implemented.
As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4679
through 4680), because the LTCH PPS has only been implemented for
slightly over 3 years and there is a time lag in data availability,
sufficient new data has not been generated that would enable us to
conduct a comprehensive reevaluation of these payment adjustments. We
now believe that after the completion of the 5-year transition,
sufficient new data that will be generated while LTCHs are subject to
the LTCH PPS may be available for a comprehensive reevaluation of
payment adjustments such as geographic reclassification, rural
location, DSH, and IME. Nonetheless, we reviewed the limited data that
was available and find no evidence to support additional policy
changes. Therefore, in that proposed rule, we did not propose to make
any adjustments for geographic reclassification, rural location, DSH,
or IME. We also stated that we will continue to collect and interpret
new data as they become available in the future to determine if these
data support proposing any additional payment adjustments.
Specifically, as we discuss in greater detail in the RY 2007 LTCH PPS
proposed rule (71 FR 4679 through 4680), we proposed to revisit the
possible one-time prospective adjustment to the LTCH PPS rates at Sec.
412.523(d)(3), and after further analysis and evaluation we now believe
that it would be appropriate to wait for the conclusion of the 5-year
transition to 100 percent fully Federal payments under the LTCH PPS, to
maximize the availability of data that are reflective of LTCH behavior
in response to the implementation of the LTCH PPS to be used to conduct
a comprehensive evaluation of the potential payment adjustment policies
(such as rural location, DSH and IME) in conjunction with our
evaluation of the possibility of making a one-time prospective
adjustment to the LTCH PPS rates provided for at Sec. 412.523(d)(3).
We received no comments on any potential adjustments for geographic
reclassification, rural location, DSH, or IME. In addition, we received
no comments on our proposal to conduct a comprehensive reevaluation of
payment adjustments such as geographic reclassification, rural
location, DSH, and IME after the completion of the 5-year transition
once sufficient new data is generated while LTCHs are subject to the
LTCH PPS may be available. Therefore, in this final rule, we are not
making any adjustments for geographic reclassification, rural location,
DSH, or IME. Furthermore, we will conduct a comprehensive reevaluation
of payment adjustments such as geographic reclassification, rural
location, DSH, and IME after the completion of the 5-year transition
once we believe that sufficient new data that has been generated while
LTCHs are subject to the LTCH PPS is available.
5. Budget Neutrality Offset To Account for the Transition Methodology
Under Sec. 412.533, we implemented a 5-year transition, during
which a LTCH is paid an increasing percentage of the LTCH PPS Federal
prospective payment and a decreasing percentage of its payments based
on the reasonable cost-based payment methodology for each discharge.
Furthermore, we allow a LTCH (other than those defined as ``new'' under
Sec. 412.23(e)(4) to elect to be paid based on 100 percent of the
standard Federal rate in lieu of the blended methodology.
The standard Federal rate was determined as if all LTCHs will be
paid based on 100 percent of the standard Federal rate. As stated
earlier, we provide for a 5-year transition period that allows LTCHs to
receive payments based partially on the reasonable cost-based
methodology. In order to maintain budget neutrality for FY 2003 as
required by section 123(a)(1) of the BBRA during the 5-year transition
period, we reduce all LTCH Medicare payments (whether a LTCH elects
payment based on 100 percent of the Federal rate or whether a LTCH is
being paid under the transition blend
[[Page 27840]]
methodology) to account for the cost of the applicable transition
period methodology in a given LTCH PPS rate year.
Specifically, we reduce all LTCH Medicare payments during the 5-
year transition by a factor that is equal to 1 minus the ratio of the
estimated TEFRA reasonable cost-based payments that would be made if
the LTCH PPS was not implemented, to the projected total Medicare
program PPS payments (that is, payments made under the transition
methodology and the option to elect payment based on 100 percent of the
Federal rate).
In the RY 2006 LTCH PPS final rule (70 FR 24202), based on the best
available data at that time, we projected that approximately 98 percent
of LTCHs will be paid based on 100 percent of the standard Federal rate
rather than receive payment under the transition blend methodology for
the 2006 LTCH PPS rate year. Using the same methodology described in
the August 30, 2002 final rule (67 FR 56034), this projection, which
used updated data and inflation factors, was based on our estimate that
either: (1) A LTCH has already elected payment based on 100 percent of
the Federal rate prior to the start of the 2006 LTCH PPS rate year
(July 1, 2005); or (2) a LTCH would receive higher payments based on
100 percent of the 2006 LTCH PPS rate year standard Federal rate
compared to the payments it would receive under the transition blend
methodology. Similarly, we projected that the remaining 2 percent of
LTCHs will choose to be paid based on the applicable transition blend
methodology (as set forth under Sec. 412.533(a)) because they would
receive higher payments than if they were paid based on 100 percent of
the 2006 LTCH PPS rate year standard Federal rate.
Also in the RY 2006 LTCH PPS final rule (70 FR 24202), based on the
best available data at that time and policy revisions described in that
same rule, we projected that the full effect of the remaining 2 years
of the transition period (including the election option) would result
in a cost to the Medicare program of approximately $1.675 million.
Specifically, for the RY 2006 LTCH PPS, we estimated that the cost of
the transition would be approximately $1 million. Because this amount
is only a small percentage of total LTCH PPS payments for the 2006 LTCH
PPS rate year (estimated at over $3 billion), the formula that we use
to establish the budget neutrality offset to account for the additional
costs of the transition period resulted in a factor of zero percent.
Therefore, in that same final rule, we established a 0.0 percent
reduction (a budget neutrality offset of 1.000) to all LTCH payments in
the 2006 LTCH PPS rate year to account for the $1 million estimated
cost of the transition period methodology (including the option to
elect payment based on 100 percent of the Federal rate). We also
indicated that we would use a budget neutrality offset for each of the
remaining years of the transition period to account for the estimated
costs for the respective LTCH PPS rate years. In that same final rule,
we estimated that there would be a 0.0 percent budget neutrality offset
to LTCH PPS payments during the remaining years of the transition
period since, we estimated at that time that the additional cost to the
Medicare program resulting from the transition period methodology would
be so small that the budget neutrality factor determined under our
established methodology would round to zero.
In the RY 2007 LTCH PPS proposed rule (71 FR 4680 through 4681),
based on the updated data using the same methodology established in the
August 30, 2002 final rule (67 FR 56034), we projected that
approximately 97 percent of LTCHs would be paid based on 100 percent of
the proposed standard Federal rate rather than receive payment under
the transition blend methodology during the 2007 LTCH PPS rate year.
Similarly, we projected that the remaining 3 percent of LTCHs would
choose to be paid based on the transition blend methodology at Sec.
412.533 because those payments are estimated to be higher than if they
were paid based on 100 percent of the proposed standard Federal rate.
The applicable transition blend percentage is applicable for a LTCH's
entire cost reporting period beginning on or after October 1 (unless
the LTCH elects payment based on 100 percent of the Federal rate). We
also noted that this projection was slightly lower than the projection
that 98 percent of LTCHs would be paid based on 100 percent of the
proposed standard Federal rate rather than receive payment under the
transition blend methodology during the 2006 LTCH PPS rate year
discussed in the RY 2006 LTCH PPS final rule (70 FR 24202). The reason
for this slight decrease is due to how our established methodology
(described in this section) determines which LTCHs would be projected
to receive payments based on 100 percent of the Federal rate in a given
rate year. Specifically, under our established methodology, if a LTCH
has not already elected payment based on 100 percent of the Federal
rate then we evaluate whether a LTCH would receive higher payments
based on 100 percent of the proposed standard Federal rate or under the
applicable transition blend methodology based on the most recent
available data. Based on the best available data at that time, we
projected that a few LTCHs that had not already elected payment based
on 100 percent of the Federal rate would make such an election for RY
2006 because we projected that their payments based on 100 percent of
the Federal rate would exceed their payments under the applicable
transition blend. Therefore, those LTCHs were counted in the number of
LTCHS that would be paid based on 100 percent of the Federal rate in RY
2006. However, based on the most recent available data used for the RY
2007 LTCH PPS proposed rule, the data showed that those LTCHs have not
elected to receive payments based on 100 percent of the Federal rate
and are being paid under the applicable transition blend methodology.
Under our methodology for determining the percentage of LTCHs paid
based on 100 percent of the federal rate, based on the most recent
available data, in the RY 2007 LTCH PPS proposed rule, we projected
that for the RY 2007 LTCH PPS rate year, the applicable transition
blend methodology payments to those LTCHs would be greater than payment
based on 100 percent of the Federal rate, and therefore, those LTCHs
would not be included in the number of LTCHs that we estimate would be
paid based on 100 percent of the Federal rate in RY 2007.
Based on the policies presented in that proposed rule, we projected
a decrease in their estimated payments based on 100 percent of the
Federal rate in RY 2007 payment as compared to their estimated payments
based on 100 percent of the Federal rate in RY 2006 primarily as a
result of the proposed changes to the SSO policy and the proposed
increase in the outlier fixed-loss amount. Because we projected a
decrease in payments based on 100 percent of the Federal rate for these
LTCHs, the estimated RY 2007 payments based on the applicable
transition blend methodology are now higher than their estimated RY
2007 payments based on 100 percent of the Federal rate, and therefore,
we did not project that these LTCHs would elect payment based on 100
percent of the Federal rate for RY 2007. Thus, the slight decrease in
the our projection in the number of LTCHs that would be paid based on
100 percent of the Federal rate for the 2007 LTCH PPS rate year is
appropriate.
Based on the best available data and the proposed policies
described in the RY 2007 LTCH PPS proposed rule, we
[[Page 27841]]
projected that, in the absence of a transition budget neutrality
offset, the full effect of the final full year of the transition period
(including the election option) as compared to payments as if all LTCHs
would be paid based on 100 percent of the Federal rate would result in
a cost to the Medicare program of approximately 2.8 million.
Accordingly, using the methodology established in the August 30, 2002
LTCH PPS final rule (67 FR 56034), in the RY 2007 LTCH PPS proposed
rule (71 FR 4681), we proposed a 0.1 percent reduction (a budget
neutrality offset of 0.999) to all LTCHs' payments for discharges
occurring on or after July 1, 2006 and through June 30, 2007, to
account for the estimated cost of the transition period methodology
(including the option to elect payment based on 100 percent of the
Federal rate) of approximately $2.8 million for the 2007 LTCH PPS rate
year.
We received no comments on our proposed 0.1 percent reduction (a
budget neutrality offset of 0.999) to all LTCHs' payments for
discharges occurring on or after July 1, 2006 and through June 30,
2007, to account for the estimated cost of the transition period
methodology (including the option to elect payment based on 100 percent
of the Federal rate). In this final rule, based on the updated data
using the same methodology established in the August 30, 2002 final
rule (67 FR 56034), we are projecting that approximately 98 percent of
LTCHs will be paid based on 100 percent of the standard Federal rate
rather than receive payment under the transition blend methodology
during the 2007 LTCH PPS rate year. This projection, which used updated
data, as described above, is based on our estimate that either: (1) A
LTCH has already elected payment based on 100 percent of the Federal
rate prior to the beginning of the 2007 LTCH PPS rate year (July 1,
2006); or (2) a LTCH would receive higher payments based on 100 percent
of the standard Federal rate compared to the payments they would
receive under the transition blend methodology. Similarly, we project
that the remaining 2 percent of LTCHs will choose to be paid based on
the transition blend methodology at Sec. 412.533 because those
payments are estimated to be higher than if they were paid based on 100
percent of the standard Federal rate. The applicable transition blend
percentage is applicable for a LTCH's entire cost reporting period
beginning on or after October 1 (unless the LTCH elects payment based
on 100 percent of the Federal rate). We note that this projection is
slightly lower than the projection that 98 percent of LTCHs will be
paid based on 100 percent of the standard Federal rate rather than
receive payment under the transition blend methodology during the 2006
LTCH PPS rate year discussed in the RY 2006 LTCH PPS final rule (70 FR
24202). As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4681)
and as reiterated above, we believe that the slight decrease in our
projection in the number of LTCHs that would be paid based on 100
percent of the Federal rate for the 2007 LTCH PPS rate year is
appropriate.
Based on the best available data and the policies described in this
final rule, we are projecting that in absence of a transition budget
neutrality offset, the full effect of the final full year of the
transition period (including the election option) as compared to
payments as if all LTCHs will be paid based on 100 percent of the
Federal rate would result in a negligible cost to the Medicare program.
Specifically, based on the most recent available data, we estimate that
the cost of the transition period methodology (including the option to
elect payment based on 100 percent of the Federal rate) will be less
than $1 million in RY 2007. As discussed above, to account for the cost
of the transition methodology in a given LTCH PPS rate year during the
5-year transition, we reduce all LTCH Medicare payments by a factor
that is equal to 1 minus the ratio of the estimated reasonable cost-
based payments that would have been made if the LTCH PPS had not been
implemented to the projected total Medicare program PPS payments (that
is, payments made under the transition methodology and the option to
elect payment based on 100 percent of the Federal rate). Because we
estimate that the additional cost of the transition period methodology
(including the option to elect payment based on 100 percent of the
Federal rate) will be less than $1 million for the 2007 LTCH PPS rate
year and because this amount is a small percentage of total LTCH PPS
payments (estimated at over $5 billion, as shown in Table 9), the
formula that we have used to establish the budget neutrality offset in
prior years results in a factor (as described above) that we reduce all
LTCH Medicare payments by to account for those additional costs of zero
(as a function of rounding). In addition, as discussed in the RY 2007
LTCH PPS proposed rule (71 FR 4681), we are no longer projecting a
small cost for the 2008 LTCH PPS rate year (July 1, 2007 through June
30, 2008) even though some LTCH's will have a cost reporting period for
the 5th year of the transition period which will be concluding in the
first 3 months of the 2008 LTCH PPS rate year because based on the most
available data, we are projecting that the vast majority of LTCHs will
have made the election to be paid based on 100 percent of the Federal
rate rather than the transition blend which will result in a negligible
cost to the Medicare program.)
Accordingly, using the methodology established in the August 30,
2002 LTCH PPS final rule (67 FR 56034), based on updated data and the
policies and rates presented in this final rule, we are implementing a
zero percent reduction (a budget neutrality offset of 1.000) to all
LTCHs' payments for discharges occurring on or after July 1, 2006 and
through June 30, 2007, to account for the estimated cost of the
transition period methodology (including the option to elect payment
based on 100 percent of the Federal rate) of less than $1 million for
the 2007 LTCH PPS rate year.
We note that this offset for the 2007 LTCH PPS rate year is the
same as the current zero percent transition period budget neutrality
offset established in the RY 2006 LTCH PPS final rule (70 FR 24202). We
also note that the transition period budget neutrality offset for the
2007 LTCH PPS rate year established in this final rule is slightly
lower than the proposed 0.999 percent budget neutrality offset proposed
in for the RY 2007 LTCH PPS proposed rule (71 FR 4681). This is because
we are now projecting that a few more LTCHs will elect payment based on
100 percent of the Federal rate than we projected when we determined
the transition period budget neutrality offset for the 2007 LTCH PPS
rate year based on the most recent available data in the RY 2007 LTCH
PPS proposed rule because we are no longer projecting as large of a
decrease in aggregate LTCH PPS payments for RY 2007 as a result of the
policies established in this final rule.
6. One-time Prospective Adjustment to the Standard Federal Rate
As we discussed in the August 30, 2002 final rule (67 FR 56036),
consistent with the statutory requirement for budget neutrality in
section 123(a)(1) of the BBRA, we intended that estimated aggregate
payments under the LTCH PPS for FY 2003 equal the estimated aggregate
payments that would be made if the LTCH PPS were not implemented. Our
methodology for estimating payments for purposes of the budget
neutrality calculations uses the best available data at the time and
necessarily reflects assumptions. As the LTCH PPS progresses, we are
[[Page 27842]]
monitoring payment data and will evaluate the ultimate accuracy of the
assumptions used in the budget neutrality calculations (for example,
inflation factors, intensity of services provided, or behavioral
response to the implementation of the LTCH PPS) described in the August
30, 2002 LTCH PPS final rule (67 FR 56027 through 56037). To the extent
these assumptions significantly differ from actual experience, the
aggregate amount of actual payments may turn out to be significantly
higher or lower than the estimates on which the budget neutrality
calculations were based.
Section 123(a)(1) of the BBRA as amended by section 307(b) of the
BIPA provides broad authority to the Secretary in developing the LTCH
PPS, including the authority for appropriate adjustments. Under this
broad authority, as implemented in the existing regulations at Sec.
412.523(d)(3), we have provided for the possibility of making a one-
time prospective adjustment to the LTCH PPS rates by October 1, 2006,
so that the effect of any significant difference between actual
payments and estimated payments for the first year of the LTCH PPS
would not be perpetuated in the LTCH PPS rates for future years. (As
discussed in greater detail below, as we proposed, we are extending the
deadline for making this adjustment to July 1, 2008, in this final
rule.)
In the RY 2006 LTCH PPS final rule (70 FR 24203), based on the best
available data at that time, we estimated that total Medicare program
payments for LTCH services over the next 5 LTCH PPS rate years would be
$3.32 billion for the 2006 LTCH PPS rate year; $3.38 billion for the
2007 LTCH PPS rate year; $3.48 billion for the 2008 LTCH PPS rate year;
$3.63 billion for the 2009 LTCH PPS rate year; and $3.79 billion for
the 2010 LTCH PPS rate year.
In the RY 2007 LTCH PPS proposed rule (71 FR 4681), consistent with
the methodology established in the August 30, 2002 final rule (67 FR
56036), based on the most recent available data at that time, we
estimate that total Medicare program payments for LTCH services for the
next 5 LTCH PPS rate years would be $5.27 billion for the 2007 LTCH PPS
rate year; $5.44 billion for the 2008 LTCH PPS rate year; $5.64 billion
for the 2009 LTCH PPS rate year; $5.88 billion for the 2010 LTCH PPS
rate year; and $6.15 billion for the 2011 LTCH PPS rate year. We also
noted that those 5-year spending estimates were significantly higher
that the 5-year spending estimates presented in the RY 2006 LTCH PPS
final rule (70 FR 24203). We explained that this is primarily due to an
adjustment by our Office of the Actuary (OACT) to account for the
significant increase in the expected number of LTCH discharges based on
the most recent available LTCH discharge data.
In this final rule, consistent with the methodology established in
the August 30, 2002 final rule (67 FR 56036), based on the most recent
available data, we estimate that total Medicare program payments for
LTCH services for the next 5 LTCH PPS rate years would be as shown in
Table 9.
Table 9.--Rate Year Estimate Total Medicare Program Payments for LTCH
Services
------------------------------------------------------------------------
Estimated
LTCH PPS rate year payments ($ in
billions)
------------------------------------------------------------------------
2007.................................................... $5.27
2008.................................................... 5.43
2009.................................................... 5.63
2010.................................................... 5.86
2011.................................................... 6.13
------------------------------------------------------------------------
In accordance with the methodology established in the August 30,
2002 LTCH PPS final rule (67 FR 56037), these estimates are based on
the most recent available data, including the projection that 98
percent of LTCHs would elect to be paid based on 100 percent of the
2007 LTCH PPS rate year standard Federal rate rather than the
applicable transition blend and an estimated increase in the number of
discharges from LTCHs. These estimates are also based on our estimate
of LTCH PPS rate year payments to LTCHs using OACT's most recent
estimate of the excluded hospital with capital market basket (currently
used under the LTCH PPS) of 3.4 percent for the 2007 LTCH PPS rate
year, 3.1 percent for the 2008 LTCH PPS rate year, 2.8 percent for the
2009 LTCH PPS rate year, 2.3 percent for the 2010 LTCH PPS rate year,
and 2.7 percent for the 2011 LTCH PPS rate year. (We note that,
although we are establishing a zero percent update to the LTCH PPS
Federal rate for RY 2007 (as discussed in section V.C.3. of this final
rule) OACT develops its spending projections based on existing policy
and therefore, changes that have not yet been implemented are not
reflected in the spending projections shown in this section.) We also
considered OACT's most recent projections of changes in Medicare
beneficiary enrollment that there would be a change in Medicare fee-
for-service beneficiary enrollment of -0.3 percent in the 2007 LTCH PPS
rate year, 0.1 percent in the 2008 LTCH PPS rate year, 0.2 percent in
the 2009 LTCH PPS rate year, -0.3 percent in the 2010 LTCH PPS rate
year, and -0.2 percent in the 2011 LTCH PPS rate year. (We note that,
based on the most recent available data, OACT is projecting a slight
decrease in Medicare fee-for-service Part A enrollment for the 2007,
2009 and 2010 LTCH PPS rate years, in part, because they are projecting
an increase in Medicare managed care enrollment as a result of the
implementation of several provisions of the MMA of 2003.)
As we discussed in the RY 2006 LTCH PPS final rule (70 FR 24204),
because the LTCH PPS was only recently implemented, sufficient new data
has not been generated that would enable us to conduct a comprehensive
reevaluation of our budget neutrality calculations. Accordingly, we did
not make a one-time adjustment under Sec. 412.523(d)(3). As discussed
in the RY 2007 LTCH PPS proposed rule (71 FR 4682), at this time, we
still do not have sufficient new data to enable us to conduct a
comprehensive reevaluation of our budget neutrality calculations.
Therefore, in that proposed rule, we did not propose to make a one-time
adjustment under Sec. 412.523(d)(3) so that the effect of any
significant difference between actual payments and estimated payments
for the first year of the LTCH PPS is not perpetuated in the PPS rates
for future years. However, in that same proposed rule, we stated that
we will continue to collect and interpret new data as the data become
available in the future to determine if this adjustment should be
proposed.
Additionally, as also discussed in the RY 2007 LTCH PPS proposed
rule (71 FR 4682 through 4684), we believe that it would be appropriate
to postpone the requirement established in Sec. 412.523(d)(3) due to
the time lag in the availability of Medicare data upon which this
adjustment would be based. We explained that we believe that only
through a thorough analysis of the most comprehensive and accurate data
from the first year of the implementation of the LTCH PPS for FY 2003
(including settled and fully audited cost reports) would we be able to
reliably determine whether the one-time prospective adjustment to the
standard Federal rate, which if issued would have an impact on all
future payments under the LTCH PPS, should be proposed. Therefore, we
proposed to revise Sec. 412.523(d)(3) by postponing the October 1,
2006 deadline to July 1, 2008.
Comment: One commenter believes that CMS should be consistent and
conduct the one-time adjustment in the same manner and for the same
reasons as it has done for all PPSs. Specifically, the commenter states
that both the LTCH PPS and the IRF PPS are affected
[[Page 27843]]
by changes in coding practices resulting from the implementation of a
PPS; however, under the IRF PPS, CMS made a ``one-time'' adjustment
when it reduced the standard payment conversion factor (that is, the
IRF PPS base rate) by 1.9 percent in FY 2006 to account for changes in
coding practices that did not reflect actual changes in patient
severity based on an analysis performed by the Rand corporation. The
commenter also believes it is inequitable to treat LTCHs differently
than IRFs when accounting for payment increases due to changes in
coding by potentially penalizing LTCHs twice for changes, once by
providing no update and a second time, by extending the regulatory
timeframe to establish the one-time adjustment to the Federal rate,
since the proposed adjustment to account for case-mix increase that is
not real in determining the update for RY 2007 would be a permanent
adjustment that de facto reduces the rate of the increase of the
Federal rate. Therefore, the commenter stated that CMS should eliminate
the possible one-time adjustment as it would have already accomplished
the purposes of that adjustment by proposing a zero percent update to
the RY 2007 Federal rate.
In referring to the transition period budget neutrality adjustment,
one commenter states that CMS already employs a means to ensure budget
neutrality, and therefore, the extension of the deadline for the one-
time budget neutrality adjustment is unnecessary. Another commenter
stated that CMS should use the proposed zero percent update as the one-
time adjustment and not extend the deadline, while another commenter
stated that CMS should pursue a one-time adjustment independent of the
Federal rate update for RY 2007.
Some commenters contend that for CMS to propose to extend the
deadline for the possible one-time budget neutrality adjustment would
constitute ``an abuse of its statutory authority.'' These commenters
assert that by our own admission (citing the RY 2007 LTCH PPS proposed
rule (71 FR 4682)), we are already in possession of the data that is
needed to determine if the possible one-time budget neutrality
adjustment under Sec. 412.523(d)(3) is necessary. The commenters
question why if FY 2003 cost report data which is needed to determine
if the possible one-time budget neutrality adjustment is currently
available, we believe it is necessary to obtain more ``reliable'' cost
data for FY 2004 before deciding to impose the one-time (budget
neutrality) adjustment. These commenters believe that postponing the
deadline would allow CMS to ``wait until `any significant difference'
arises in the aggregate to trigger the [possibly] one-time [budget
neutrality] adjustment.'' Consequently, they recommended that CMS
withdraw its proposal to extend the deadline for exercising a one-time
prospective adjustment. CMS would therefore only have until October 1,
2006 to exercise the one-time adjustment, as originally contemplated.
Response: The commenter believes that we are being inconsistent
with our application of ``one-time'' adjustments under the IRF PPS and
the LTCH PPS since, in the FY 2006 IRF PPS final rule (70 FR 47880), we
applied a ``one-time'' adjustment of 1.9 percent to the standard
payment amount for FY 2006 to account for changes in provider coding
practices that did not reflect real changes in case mix, and in
determining the update to the LTCH PPS Federal rate for RY 2007, we
proposed to make an adjustment to account for changes in coding
practices that do not reflect real changes in case mix in addition to
the existing ``one-time'' budget neutrality adjustment at Sec.
412.523(d)(3). However, we believe that the commenter has mistakenly
assumed that the adjustment to the most recent estimate of the market
basket to account for changes in coding practices in determining the
proposed Federal rate for RY 2007 is the same as the possible one-time
prospective adjustment provided for under Sec. 412.523(d)(3). As we
stated above in this section, when we established the regulations at
Sec. 412.523(d)(3), we provided for the possibility of making a one-
time prospective adjustment to the LTCH PPS rates so that the effect of
any significant difference between actual payments and estimated
payments for the first year of the LTCH PPS would not be perpetuated in
the LTCH PPS rates for future years (August 30, 2002; 67 FR 56027
through 56037). The purpose of this one-time adjustment is to ensure
that total estimated payments under the LTCH PPS in FY 2003 were
``budget neutral'' to what total estimated payments would have been if
the LTCH PPS were not implemented in FY 2003 by correcting for possible
significant errors in the calculation of the LTCH PPS FY 2003 standard
Federal rate. However, as we discuss in greater detail above in section
IV.C.3. of this preamble, the proposed adjustment to the LTCH PPS
market basket to account for changes in coding practices for the
determination of the Federal rate for RY 2007 update is a separate
adjustment to the Federal rate. While the one-time adjustment would
ensure that any errors in past estimates would not be perpetuated in
the LTCH PPS rates for future years, the proposed adjustment to account
for coding practices in the proposed update to the Federal rate for RY
2007 is intended to adjust the Federal rate for increased payments made
in FY 2004 that resulted from an increase in CMI due to improved
documentation and coding rather than an increase in patient severity.
Therefore, because the intended purposes of the adjustments are
different, as explained above, we do not believe that we are acting in
an inconsistent manner by making two separate adjustments under the
LTCH PPS (one adjustment to account for changes in coding practices in
determining the RY 2007 Federal rate and the other under Sec.
412.523(d)(3) to ensure budget neutrality in the first year of the LTCH
PPS (FY 2003)). We also note that, although we made a ``one-time''
adjustment under the IRF PPS to account for the effect of coding or
classification changes that do not reflect real changes in case mix
that resulted in increased Medicare payments to IRFs for the time
period between 1999 and 2002, the statute does not preclude CMS from
making additional adjustments under the IRF PPS in the future based on
evidence of coding or classification changes that do not reflect real
changes in case mix, to the extent that such changes affect aggregate
IRF PPS payments.
In addition, we do not believe that the adjustment to the market
basket estimate to account for changes in coding practices in
determining the update to the LTCH PPS Federal rate for RY 2007
necessarily replaces the need for a possible one-time budget neutrality
adjustment. However, as we noted in the RY 2007 LTCH PPS proposed rule
and as we reiterated above, the zero percent update to the Federal rate
for the 2007 LTCH PPS rate year may make the one-time prospective
adjustment to the LTCH PPS Federal rate provided for under Sec.
412.523(d)(3) unnecessary. Specifically, to the extent our review of FY
2003 data (which will include, but is not limited to changes in case-
mix) shows that, if by coincidence after updating the Federal rate by
zero percent in RY 2007, the Federal rate is appropriate, it is
possible that any further adjustment to the Federal rate may be
unnecessary. Furthermore, as discussed in greater detail below, since
the intended purpose of the one-time adjustment at Sec. 412.523(d)(3)
is to ensure that total estimated payments under the LTCH PPS in FY
2003 were ``budget neutral'' to what total estimated payments would
have been if the LTCH
[[Page 27844]]
PPS were not implemented in FY 2003, we believe it is incumbent upon us
to extend the deadline for this adjustment to ensure that we are in
possession of the most reliable cost report data indicating the actual
LTCH costs during FY 2003. Therefore, as discussed above, because the
intended purposes of the adjustment to the market basket to account for
changes in coding practices in determining the RY 2007 Federal rate and
the possible ``one-time'' adjustment under Sec. 421.523(d)(3) are
different, we disagree with the commenter that LTCHs will be penalized
twice by establishing a zero percent update for RY 2007 and extending
the deadline for determining the possible ``one-time'' adjustment under
Sec. 412.523(d)(3).
We also disagree with the commenters' contention that our proposal
to extend the deadline for the possible one-time budget neutrality
adjustment would constitute ``an abuse of its statutory authority.''
Rather, as we stated in the RY 2007 LTCH PPS proposed rule (71 FR
4681)), section 123(a)(1) of the BBRA, required that the system
``maintain budget neutrality'' for FY 2003. Moreover, section 123(a)(1)
of the BBRA as amended by section 307(b)(1) of the BIPA confers broad
authority on the Secretary to make appropriate adjustments under the
LTCH PPS. Consequently, we believe we would be fulfilling our statutory
mandate to ensure that FY 2003 payments under the LTCH PPS are in fact
budget neutral. Under budget neutrality, estimated aggregate payments
under the LTCH prospective payment system would equal the estimated
aggregate payments that would be made if the LTCH PPS would not be
implemented for FY 2003. The methodology for determining the LTCH PPS
standard Federal rate for FY 2003 that would ``maintain budget
neutrality'' is described in considerable detail in the August 30, 2002
final rule (67 FR 56027 through 56037). As we discussed in that same
final rule, our methodology for estimating payments for the purposes of
budget neutrality calculations used the best available data and
necessarily reflects assumptions in estimating aggregate payments that
would be made if the LTCH PPS was not implemented. We also stated our
intentions to monitor LTCH PPS payment data to evaluate the ultimate
accuracy of the assumptions used in the budget neutrality calculations
(for example, inflation factors, intensity of services provided, or
behavioral response to the implementation of the LTCH PPS). To the
extent that those assumptions significantly differ from actual
experience, the aggregate amount of actual payments during FY 2003 may
actually be significantly higher or lower than the estimates upon which
the budget neutrality calculations were based. Therefore, in
implementing the LTCH PPS, the Secretary exercised his broad authority
in establishing the LTCH PPS and provided for the possibility of a one-
time prospective adjustment to the LTCH PPS rates at Sec.
412.523(d)(3). The purpose of that provision was to prevent any
significant difference between actual payments and estimated payments
for the first year of the LTCH PPS, when we established the budget
neutral Federal rate, as required by the statute (discussed
previously), from being perpetuated in the PPS rates for future years.
It is accurate that currently the most recent complete year of LTCH
cost report data is FY 2003 (the data which is needed to determine if
the possible one-time budget neutrality adjustment is necessary).
However, the vast majority of the FY 2003 LTCH cost report data is
currently only ``as submitted'' by the LTCH and has not yet been
reviewed before being settled (or audited) by the FI. LTCH cost report
data from FY 2004 is also currently available; however, it is only
partially complete (that is, not all LTCHs' FY 2004 cost reports are
available). As we explained in the RY 2007 LTCH PPS proposed rule (71
FR 4684), because of the lag time typically involved in the entire cost
report settlement process, currently we are not able to utilize the
most accurate and complete data reflecting the actual costs incurred by
LTCHs for cost reporting periods beginning during FY 2003 because the
majority of LTCHs' FY 2003 cost reports are not as yet settled.
Specifically, as noted in the RY 2007 LTCH PPS proposed rule, there are
many LTCHs with cost reporting periods from September 1 through August
30, which first became subject to the LTCH PPS on September 1, 2003.
Given the lag time required for typical cost report settlement
involving submission, desk review, and in some cases an audit, which
can take approximately 2 additional years to complete (and we expect to
audit a number of LTCH cost reports for the purpose of this analysis),
we do not believe that the October 1, 2006 deadline established at
Sec. 412.523(d)(3) is any longer reasonable or realistic. In fact, we
believe that it would be inappropriate to develop and propose such an
adjustment that would be effective by October 1, 2006, as required by
the current regulations, to the Federal rate under Sec. 412.523(d)(3)
when we do not believe that we are in possession of the most reliable
cost report data indicating the actual costs of LTCHs during the year
in which we established the LTCH PPS (FY 2003). As we explained in the
RY 2007 LTCH PPS proposed rule (71 FR 4684), we believe that we will be
in possession of the most reliable FY 2003 cost report data reflecting
the actual costs of LTCHs during the year in which we established the
standard Federal payment rate for LTCHs with an August 2004 fiscal year
ending date by July 2007. Therefore, any proposed adjustment could then
be proposed, and if ultimately finalized, implemented on July 1, 2008.
Furthermore, we believe that having additional years of data that were
generated under the LTCH PPS (such as FY 2004 LTCH cost report data,
and possibly partially complete FY 2005 LTCH cost report data) may be
useful in assisting us in evaluating the settled and audited FY 2003
LTCH cost report data. Subsequent years data may be helpful in
determining if the possible one-time budget neutrality adjustment under
Sec. 412.523(d)(3) is necessary, as it may help us to identify
aberrant or erroneous FY 2003 data.
In the RY 2007 LTCH PPS proposed rule (71 FR 4685), we emphasized
the distinction between the sufficiency of the data utilized for the
analysis that supported the proposed update to the Federal rate for RY
2007 and the proposal to postpone the possible one-time prospective
adjustment to the Federal rate at Sec. 412.523(d)(3). Specifically,
the RY 2007 update to the Federal rate is based on the best data from
FY 2004, including case-mix data, which is derived from the MedPAR
files, and data analysis coordinated by OACT, ORDI, and assisted by 3M.
The LTCH claims data used to make this case-mix adjustment are current
and accurate and are not dependent upon the cost report settlement
process. However, the data review that we believe necessary for the
comprehensive analysis of the accuracy of the Federal payment rate
under Sec. 412.523(d)(3), which would be applied prospectively (and
therefore has the potential to affect all future LTCH PPS Federal
rates), is dependent on settled Medicare cost report data that we
expect will be available by July 2007. We believe that only through a
thorough analysis of the most comprehensive and accurate data from the
first year of the implementation of the LTCH PPS for FY 2003 (including
settled and fully audited cost reports) will we be able to reliably
determine whether a one-time prospective adjustment to the Federal
[[Page 27845]]
rate should be proposed. Therefore, we believe that postponing the
deadline for this possible one-time prospective adjustment until July
1, 2008 will allow us to have the best available data from the first
year of the LTCH PPS (FY 2003) upon which to base such an adjustment.
We disagree with the commenters that suggest that the transition
period budget neutrality adjustment should make it unnecessary to
postpone the deadline for making the possible one-time budget
neutrality adjustment under Sec. 412.523(d)(3). As discussed above in
section V.D.5. of this preamble, during each year of the 5-year
transition period, we reduce all LTCH Medicare payments (whether an
LTCH elects payment based on 100 percent of the Federal rate or whether
an LTCH is being paid under the transition blend methodology) to
account for the cost of the applicable transition period methodology in
a given LTCH PPS rate year. We established this adjustment because the
standard Federal rate was determined as if all LTCHs would be paid
based on 100 percent of the standard Federal rate. However, since we
provided for a 5-year transition period that allows LTCHs to choose to
receive blended payments based partially on the reasonable cost-based
methodology, it was necessary to make a budget neutrality adjustment
that accounts for the additional costs to the Medicare program that
result from the increased payments to LTCHs that choose to receive
blended payments. As reiterated above, we separately provided for the
possibility of making a one-time prospective adjustment to the LTCH PPS
rates at Sec. 412.523(d)(3) so that the effect of any significant
difference between actual payments and estimated payments for the first
year of the LTCH PPS would not be perpetuated in the LTCH PPS rates for
future years. Therefore, as explained above, because the intended
purposes of the adjustments are vastly different, we do not believe
that the transition period budget neutrality adjustment can replace the
need for a possible one-time budget neutrality adjustment.
To summarize, we believe that postponing the deadline for this
possible one-time prospective adjustment until July 1, 2008 will allow
us to have the best available data from the first year of the LTCH PPS
(FY 2003) upon which to base an adjustment. Therefore, in this final
rule, we are postponing the deadline for the possible one-time budget
neutrality adjustment under Sec. 412.523(d)(3). Accordingly, in this
final rule, under broad authority conferred upon the Secretary by
section 123 of the BBRA as amended by section 307(b) of the BIPA to
include appropriate adjustments in the development of the LTCH PPS, we
are revising Sec. 412.523(d)(3) to specify that the Secretary will
review payments under the LTCH PPS and may make a one-time prospective
adjustment to the LTCH PPS rate on or before July 1, 2008, so that the
effect of any significant difference between actual payments and
estimated payments for the first year of the LTCH PPS is not
perpetuated in the LTCH PPS rates for future years. Finally, as we
discussed in the RY 2007 LTCH PPS proposed rule and as stated above in
section IV.D.4. of this preamble, we note that we intend to revisit our
earlier determinations as to the appropriateness of other payment
adjustments (for example, DSH, or IME) at the same time that we would
establish the possible one-time prospective adjustment by July 1, 2008.
VI. Other Policy Changes for the 2007 LTCH PPS Rate Year
A. Adjustments for Special Cases
1. Adjustment for Short-Stay Outlier (SSO) Cases
a. Changes to the Method for Determining the Payment Amount for SSO
Cases
In the August 30, 2002 rule for the LTCH PPS, under Sec. 412.529,
we established a special payment policy for SSO cases, that is cases
with a LOS of less than or equal to five-sixths of the geometric ALOS
for each LTC-DRG. When we established the SSO policy, we explained that
``[a] short-stay outlier case may occur when a beneficiary receives
less than the full course of treatment at the LTCH before being
discharged. These patients may be discharged to another site of care or
they may be discharged and not readmitted because they no longer
require treatment. Furthermore, patients may expire early in their LTCH
stay'' (67 FR 55995). Also in the August 30, 2002 final rule, we stated
that when we first described the policy, in the March 27, 2002 proposed
rule, ``* * * we based the proposed policy on the belief that many of
these patients could have been treated more appropriately in an acute
hospital subject to the acute care hospital inpatient prospective
payment system'' (67 FR 55995). Therefore, under the LTCH PPS, we
implemented a special payment adjustment for SSO cases. Under the
existing SSO policy at Sec. 412.529, for LTCH PPS discharges with a
LOS of up to and including five-sixths (\5/6\) of the geometric ALOS
for the LTC-DRG, in general, we adjust the per discharge payment under
the LTCH PPS by the lesser of 120 percent of the estimated cost of the
case, 120 percent of the LTC-DRG specific per diem amount multiplied by
the LOS of that discharge, or the full LTC-DRG payment.
As noted previously, generally LTCHs are defined by statute as
having an ALOS of greater than 25 days. We stated that we believe that
the SSO payment adjustment results in more appropriate payments, since
these cases most likely would not receive a full course of an LTCH-
level of treatment in such a short period of time and the full LTC-DRG
payment may not always be appropriate. Payment-to-cost ratios simulated
for LTCHs, for the cases described above, indicated that if LTCHs
received a full LTC-DRG payment for those cases, they would be
significantly ``overpaid'' for the resources they have actually
expended in treating those patients.
In establishing the SSO policy, we also believed that providing a
reduced payment for SSO cases would discourage hospitals from admitting
patients for whom they would not provide complete treatment to maximize
Medicare payments. We also believed that the policy did not severely
penalize providers that, in good faith, had admitted a patient and
provided some services before realizing that the beneficiary could
receive more appropriate treatment at another site of care. As we
explained in the FY 2003 LTCH PPS final rule, establishing an SSO
payment for these types of cases addressed the incentives inherent in a
discharge-based prospective payment system for LTCHs for treating
patients with a short LOS (67 FR 55995 through 56000).
When we established the SSO adjustment at the outset of the LTCH
PPS, we noted in the August 30, 2002 final rule that the regression
analyses and simulations based on prior years' LTCH claims data
generated under the former reasonable cost-based (TEFRA) system, upon
which we based many of our policy determinations regarding the design
of the LTCH PPS for FY 2003, indicated that nearly half of LTCH cases
would be paid on an adjusted per discharge amount based on the SSO
payment policy established at Sec. 412.529 once the LTCH PPS was
implemented. However, as we stated in that rule, we believe that ``* *
* this data analysis does not necessarily predict the future behavior
of LTCHs operating under a prospective payment system. The data used in
the analysis are a product or reflection of the practice patterns of
hospitals that operate under the mechanisms of the TEFRA payment
system, which are different from the principles of a prospective
payment
[[Page 27846]]
system. However, these are the best data available upon which we can
simulate LTCH behavior under the new LTCH prospective payment system.
We believe that once the LTCH prospective payment system is
implemented, the practice patterns of LTCHs will change. We anticipate
that hospitals will alter their admission, treatment, and discharge
patterns. Thus, we fully expect that an increasing majority of cases
will be reimbursed on an unadjusted per discharge basis during the
transition from reasonable cost-based reimbursement to prospective
payments'' (67 FR 55999).
As we noted in the August 30, 2003 final rule, ``* * *[B]ased on
our experience in implementing other Medicare prospective payment
systems, we fully expect that as new data are received, we may revisit
policy decisions described in this final rule. Furthermore, our Office
of Research, Development, and Information (ORDI)] will be tracking the
impact of the prospective payments on LTCHs, other hospitals that treat
long-term care patients, and other post-acute care providers, which
will enable us to determine whether additional policy changes are
warranted'' (67 FR 55999).
A change in the SSO policy was published in the RY 2004 LTCH PPS
final rule (68 FR 34148), following a reexamination of the impact of
the SSO policy on subclause (II) LTCHs authorized by section
1886(d)(1)(B)(iv)(II) of the Act which we implemented at Sec.
412.23(e)(2)(ii). At that time, we revised certain aspects of the SSO
policy to meet the specific needs of this type of LTCH. This provision
provided an exception to the general definition of an LTCH set forth in
section 1886(d)(1)(B)(iv)(I) of the Act, implemented at Sec.
412.23(e)(2)(i), specifying that to qualify as an LTCH, a hospital must
have first been excluded as an LTCH in calendar year (CY) 1986, have an
inpatient ALOS of greater than 20 days, and demonstrate that 80 percent
or more of its annual Medicare inpatient discharges in the 12-month
cost reporting period ending in FY 1997 have a principal diagnosis that
reflects a finding of neoplastic disease (62 FR 46016 and 46026). In
the RY 2004 final rule, we particularly noted that the Congress
recognized the existence and importance of a distinct category of LTCHs
that might not otherwise warrant exclusion from the acute care
inpatient PPS under subclause (I) but which nonetheless fulfilled a
unique and vital role in serving a particular subset of Medicare
patients. Consistent with existing policies that differentiated
subclause (II) LTCHs from other LTCHs, we determined that it was
reasonable for us to consider whether or not a policy that was designed
for LTCHs designated under subclause (I) could reasonably and equitably
be applied to a subclause (II) LTCH without some measure of adjustment.
Therefore, in the RY 2004 LTCH PPS final rule, we provided an
additional adjustment to the SSO policy for subclause (II) LTCHs.
Specifically, in the RY 2004 LTCH PPS final rule (68 FR 34147 through
34148), we made a temporary adjustment to the applicable percentages
used in the SSO payment formula at Sec. 412.529(c) (applied to the
cost of the SSO case or the per diem LTC-DRG payment) used to calculate
Medicare payments under the SSO policy. Specifically, at existing Sec.
412.529(c)(4) for LTCHs designated under section 1886(d)(1)(B)(iv)(II)
of the Act and Sec. 412.23(e)(2)(ii), we established a temporary
adjustment that will sunset upon such hospitals' first cost reporting
period beginning on or after October 1, 2006. Under existing policy,
Medicare payment to a subclause (I) LTCH for SSOs is the least of the
following: 120 percent of the LTC-DRG per diem amount multiplied by the
LOS of the discharge; 120 percent of the estimated cost of the case; or
the full LTC-DRG. Under this temporary adjustment at Sec.
412.529(c)(4) for a subclause (II) LTCH, we substitute the following
percentages for the 120 percent figure used for subclause (I) hospitals
in the SSO payment formula at Sec. 412.529(c). For discharges,
occurring on or after July 1, 2003, for cost reporting periods
beginning during the first year of the 5-year LTCH PPS transition
period for subclause (II) LTCHs, the SSO percentage is 195 percent. For
discharges occurring in the cost reporting periods beginning during the
second year of the transition period, the applicable SSO percentage is
193 percent; for discharges occurring in cost reporting periods
beginning during the third year of the transition period, the
applicable percentage is 165 percent; for discharges occurring in the
cost reporting period beginning during the fourth year of the
transition, the percentage is 136 percent; and for discharges occurring
in cost reporting periods beginning during the fifth year of the 5-year
transition (and for discharges occurring in all future cost reporting
periods), the SSO percentage for ``subclause (II)'' LTCHs would also be
120 percent, that is, the same as it is currently for all other LTCHs
under the LTCH PPS.
As we continue to monitor the SSO policy, as we discussed in the RY
2007 LTCH PPS proposed rule (71 FR 4636), an analysis of LTCH claims
data from the FY 2004 MedPAR files (using version 23.0 of the GROUPER),
reveals that approximately 37 percent of LTCH discharges continue to be
paid under the provisions of the existing SSO policy at Sec. 412.529.
As noted previously, at the outset of the LTCH PPS, the data upon which
we based our system indicated that 48.4 percent of patients admitted to
LTCHs fell into the category of SSOs, a percentage that we believed to
be inappropriately high, given that the LTCHs are excluded by statute
from the IPPS since it is understood that LTCHs are established to care
for patients requiring long-term hospital-level care. We believed our
existing policy accounted for the fact that an LTCH in good faith could
admit a patient and provide some services before realizing that the
beneficiary would receive more appropriate treatment at another site of
care. But in establishing the SSO policy, which provided a reduced
payment for cases with a LOS that is up to and including five-sixths of
the geometric ALOS for the LTC-DRG, it was our intent to not encourage
hospitals to admit patients for whom a long-term hospital stay was not
appropriate. We were concerned that these inappropriate admissions
could be made to maximize payment (67 FR 55995). As noted previously,
when this policy was established, at the start of the LTCH PPS for cost
reporting periods beginning on or after October 1, 2002, nearly one-
half (48.4 percent) of all LTCH cases would have been paid as SSOs.
However, we believed that the percentage of SSOs would drop
significantly from 48.4 percent once the LTCH PPS was implemented. As
we stated in the RY 2007 LTCH PPS proposed rule, we expressed our
concern that the existing SSO payment adjustment at Sec. 412.529,
which generally will pay a per discharge amount based upon the lesser
of 120 percent of the specific LTC-DRG per diem amount (multiplied by
the LOS); 120 percent of the estimated costs of the case; or the full
LTC-DRG payment as specified in existing Sec. 412.529(c)(1), may
unintentionally have provided a financial incentive for LTCHs to admit
patients more appropriately treated in other settings.
In the August 30, 2002 final rule, when we first presented our
rationale for establishing the SSO policy, we noted that since LTCHs
are defined by statute as generally having an ALOS greater than 25
days, we had proposed payment adjustments to make appropriate payment
for cases that may have been transferred from an acute
[[Continued on page 27847]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 27847-27896]] Medicare Program; Prospective Payment System for Long-Term Care
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and
Clarification
[[Continued from page 27846]]
[[Page 27847]]
hospital prematurely'' (67 FR 55999). We continue to have these
concerns, and we believe that our data indicate that after more than 3
years of the LTCH PPS, a policy reexamination is both necessary and
appropriate when so many SSO cases have short lengths of stay. In fact,
a large percentage of SSOs have a LOS of 14 days or less. To address
these concerns, in the RY 2007 LTCH PPS proposed rule, consistent with
the Secretary's broad authority ``to provide for appropriate
adjustments to the long-term hospital payment system * * *''
established under section 123 of the BBRA as amended by section
307(b)(1) of BIPA, we proposed to reduce the current adjustment at
existing Sec. 412.529(c)(1)(ii), which is based on 120 percent of the
estimated costs of the case, to 100 percent of the estimated costs of
the case for discharges occurring on or after July 1, 2006. We believe
that by reducing the Medicare payment to the LTCH for a specific SSO
case so that it would not exceed the estimated costs incurred for that
case, we would be removing what we believe could be a financial
incentive that the current policy has established to treat short stay
cases in LTCHs. We are not changing the payment option of 120 percent
of the per diem for a specific LTC-DRG multiplied by the LOS for that
case because of the specific calculations upon which we based this
aspect of the SSO policy adjustment. As described in detail in the FY
2003 final rule LTCH PPS, when we first established the SSO policy, we
found that five-sixths of the geometric ALOS would be the SSO threshold
where the full LTC-DRG payment would be made at 120 percent. That is,
by adjusting the per discharge payment by paying at 120 percent of the
per diem LTC-DRG payment, once a stay reaches five-sixths of the
geometric ALOS for the LTC-DRG, the full LTC-DRG payment will have been
made. We continue to believe that this specific methodology, which
results in a gradual increase in payment as the LOS increases without
producing a payment ``cliff'' at any one point, provides a reasonable
payment option under the SSO policy. (67 FR 55997, August 30, 2002)
As discussed in the RY 2007 LTCH PPS proposed rule, we believe that
this proposed revision to the SSO payment methodology reducing the 120
percent of cost option to 100 percent of costs would further discourage
inappropriate admissions of these patients to LTCHs because we will be
removing the financial incentive to admit cases that do not typically
belong in LTCHs but would be more appropriately treated in another
setting (for example, an inpatient acute care hospital). Further, since
the vast majority of LTCH patients are admitted directly from IPPS
acute-care hospitals, a fact verified by our patient data files
(National Claims History Files), a recent MedPAC Report (June 2003, p.
79), and by research done by the Urban Institute at the outset of the
LTCH PPS and by RTI, as we discussed in the RY 2007 LTCH PPS proposed
rule, we believe that the admission of short-stay patients at LTCHs may
indicate premature and even inappropriate discharges from the referring
acute care hospitals. For example, if an acute care hospital patient
required additional inpatient services, it would usually be most
appropriate for the acute care hospital to continue to treat the
patient rather than discharging and admitting the patient to a LTCH for
a short-stay episode.
To remove what may be an inappropriate financial incentive for a
LTCH to admit a short-stay case, as well as, to discourage LTCHs from
behaving like acute care hospitals by having a significant number of
cases with lengths of stay more typical of acute care hospitals and
also to discourage LTCHs from admitting patients that could be
premature discharges from acute care hospitals, in the RY 2007 LTCH PPS
proposed rule, we also proposed to add a fourth payment method to the
three alternatives under Sec. 412.529(c) for SSO cases. Specifically,
we proposed to revise Sec. 412.529 to provide that for discharges from
LTCHs described in Sec. 412.23(e)(2)(i) occurring on or after July 1,
2006, payment for a SSO case would be the least of the following: 120
percent of the per diem amount for a specific LTC-DRG multiplied by the
LOS of the discharge; 100 percent of the estimated costs of the case
(which we proposed to change from the existing 120 percent of estimated
costs); the full LTCH PPS payment for the LTC-DRG; or a payment amount
under the LTCH PPS that is comparable to the payment that would
otherwise be paid under the IPPS.
We explained that this additional component to the SSO payment
formula would be particularly appropriate because it reflects our
concern that generally, LTCHs that admit SSO patients with lengths of
stay more typical of an acute care hospital may be, in fact, behaving
like acute care hospitals. Therefore, we proposed to include an
alternative payment method under the LTCH PPS SSO adjustment that could
result in a LTCH PPS payment to the LTCH for a SSO stay that would be
comparable to what Medicare would pay to an acute care hospital for the
same DRG. Furthermore, since over 80 percent of all LTCH patients (FY
2003 MedPAR) are admitted from acute care hospitals to LTCHs, of which
many become SSOs, an acute care hospital's discharge of a patient who
is still in need of acute-level care may indicate a premature and
inappropriate discharge from the acute care hospital and an
inappropriate admission to the LTCH, which would result in a second,
Medicare payment for the case of the patient to the LTCH for what is
actually one episode of care. We established a similar payment
adjustment under the LTCH PPS at Sec. 412.534 for a LTCH HwH or LTCH
satellite for which greater than 25 percent (or the appropriate
specified percentage) of its patients were admitted from a host
hospital in the FY 2005 IPPS final rule (69 FR 49191 through 49214).
Under that policy, unless the patient reached high cost outlier (HCO)
status at the acute care hospital prior to discharge, Medicare payments
to the LTCH HwH or satellite for those cases in excess of the
applicable threshold are based upon the lesser of a payment otherwise
payable under the LTCH PPS or a LTCH PPS amount equivalent to what
would have been paid for such a discharge under the IPPS. This payment
adjustment reflected our belief that if patient-shifting between a host
hospital and its co-located LTCH exceeded a specific threshold, the
onsite LTCH was functioning as a de facto unit of the acute care
hospital, a configuration not permitted by section 1886(d)(1)(B) of the
Act, which authorizes rehabilitation and psychiatric units but not LTCH
units of acute care hospitals. We reasoned that if the patient was in
effect, being treated in a ``unit'' of the acute care hospital, it was
reasonable to revise the payment methodology and take this into
account. For LTCH HwH or satellite discharges in excess of the 25
percent (or appropriate percentage) threshold, therefore, as specified
in Sec. 412.534, Medicare will make a payment based upon the lesser of
the LTCH PPS payment otherwise payable under subpart O and an amount
under this subpart that is equivalent to an amount that would be paid
under the IPPS.
As we discussed in the RY 2007 LTCH PPS proposed rule, we believe
that adapting the underlying premise of the payment adjustment at Sec.
412.534 to a new payment adjustment method under the SSO policy would
be particularly appropriate, since we were concerned (and our data
seemed to confirm) that LTCHs may be admitting patients that would
otherwise be treated in acute care hospitals, as evidenced by lengths
of stay at LTCHs more in
[[Page 27848]]
keeping with an acute care hospital stay, than the considerably longer
lengths of stay characteristic of LTCHs. We believed that under this
proposed additional payment method under the LTCH PPS for SSO patients,
the LTCH could receive a Medicare LTCH PPS payment comparable to that
which would be paid under the IPPS.
As we also discussed in the RY 2007 LTCH PPS proposed rule, we are
very concerned that acute care hospitals may be shifting some of their
potentially longer stay patients to LTCHs, resulting in a high
incidence of SSOs at LTCHs. This pattern may indicate a premature
discharge from the acute care hospital (where less than a full course
of treatment was delivered) and an unnecessary admission to the LTCH.
The payment adjustment at Sec. 412.534, based on the 25 percent (or
applicable percentage) threshold, focused on inappropriate patient
movement between co-located providers. However, we do not believe that
co-location is a prerequisite to inappropriate patient-shifting between
an acute care hospital and a LTCH.
As indicated previously, section 123 of the BBRA, as amended by
section 307(b)(1) of the BIPA confers broad discretionary authority on
the Secretary to implement a prospective payment system for LTCHs,
including providing for appropriate adjustments to the payment system.
This broad authority gives the Secretary great flexibility to fashion a
LTCH PPS based on both original policies as well as concepts borrowed
from other payments systems that are adapted, where appropriate, to the
LTCH context. In the instant case, our finalized SSO policy utilizes,
in large part, principles from the IPPS payment methodology and builds
upon those concepts to create a LTCH PPS payment adjustment that
results in an appropriate payment for those inpatient stays that we
believe are not characteristic of LTCHs but could be more appropriately
treated in another setting.
Consequently, in the discussion that follows, as we explained in
the RY 2007 LTCH PPS proposed rule, for the sake of clarity, we use
phrases such as ``IPPS DRG relative weights,'' and the ``IPPS labor-
related share,'' in describing features of the IPPS that we would use
in calculating LTCH PPS payments under this new alternative adjustment.
We want to emphasize, however, that such a payment would not be an IPPS
payment but rather, a payment under the LTCH PPS that is generally
comparable to a payment under the IPPS payment methodology. Therefore,
for Medicare payments for SSO cases under the LTCH PPS we proposed to
add a fourth option that would be ``an amount under subpart O that is
comparable to an amount that otherwise would be paid under the IPPS''
that would be calculated based on the sum of the applicable operating
and capital IPPS rates in effect at the time of the discharge from the
LTCH, as established in the applicable IPPS final rule published
annually in the Federal Register. This would be necessary since, under
the IPPS, there are separate Medicare rates for operating (subpart D of
part 412) and capital (subpart M of part 412) costs to acute care
hospitals; while, under the LTCH PPS, there is a single payment for the
operating and capital costs of the inpatient hospital services provided
to LTCH Medicare patients. We also proposed to add that ``an amount
under subpart O that is comparable to an amount that otherwise would be
paid under the IPPS'' would be calculated including the applicable
differences in resource use (that is, IPPS DRG relative weights),
differences in area wage levels (that is, wage index), a COLA for
hospitals located in Alaska and Hawaii, the treatment of a
disproportionate share of low income patients (DSH), if applicable, and
an adjustment for indirect medical education (IME), if applicable. (We
would emphasize that, under this proposed policy, Medicare payments,
payable under subpart O, would be ``comparable'' to what would
otherwise be paid under the IPPS, rather than ``equal'' to an IPPS
payment because, as we explained, there are specific features of the
IPPS that do not directly translate into the LTCH PPS, so there would
be no way to assure that LTCH payments are ``equal'' to an amount that
would be paid under the IPPS. In using the word ``comparable,'' to
describe this payment alternative to the existing SSO policy, we
intended to make clear that such payments would be calculated by
applying IPPS principles to achieve a close approximation of payments
that would be made under the IPPS, recognizing the fact that not all
components of the IPPS can be carried out precisely in the LTCH PPS
context.)
Specifically, in the RY 2007 LTCH PPS proposed rule, we proposed
that we would calculate an amount payable under subpart O comparable to
what would otherwise be paid under the IPPS for the costs of inpatient
operating services which would be based on the standardized amount
determined under Sec. 412.64(c), adjusted by the applicable DRG
weighting factors determined under Sec. 412.60. This amount would be
further adjusted to account for different area wage levels by
geographic area using the applicable IPPS labor-related share, based on
the CBSA where the LTCH is physically located as set forth at Sec.
412.525(c) and using the IPPS wage index for non-reclassified hospitals
published in the annual IPPS final rule. (In the RY 2006 LTCH PPS final
rule (70 FR 24200), we discuss the inapplicability of geographic
reclassification procedures for LTCHs.) For LTCHs located in Alaska and
Hawaii, this amount would also be adjusted by the applicable proposed
COLA factor used under the IPPS published annually in the IPPS final
rule. (Currently these same COLA factors are used under both the IPPS
and the LTCH PPS.)
Additionally, this SSO proposed revised payment adjustment
alternative (that is, an amount comparable to what would be paid under
the IPPS for the case) could also include a DSH adjustment (see Sec.
412.106), if applicable. Under the proposed revision to the LTCH PPS
SSO payment adjustment in the case of a LTCH that is a teaching
hospital, we explained that we would determine the IME payment
adjustment for the LTCH by imputing a limit on the number of full-time
equivalent (FTE) residents that may be counted for IME (IME cap) based
on the LTCH's direct GME cap as set forth at Sec. 413.79(c)(2) (which
would already have been established for a LTCH which had residency
programs). Thus, we proposed calculating an IME payment for the LTCH
that is comparable to the IPPS payment formula set forth at Sec.
412.105. Under the IPPS IME payment regulations at Sec. 412.105 limits
were established on the number of FTE residents a hospital is permitted
to count for IME payments based on the number of residents reported by
the hospital 1996 cost report. The use of a proxy for the IME cap would
be necessary because it would not be appropriate to apply the IPPS IME
rules literally in the context of this LTCH PPS payment adjustment.
Thus, we proposed calculating an IME payment for a LTCH that is a
teaching hospital that is comparable to the IPPS payment formula set
forth at Sec. 412.105. The use of a proxy for the IME cap would be
necessary because it would not be appropriate to apply the IPPS IME
rules literally in the context of this LTCH PPS payment adjustment.
This IME FTE resident cap under the IPPS would not translate
appropriately to a LTCH. Since a LTCH was not paid IME in 1996 it would
not have reported any FTE residents for IME purposes on its 1996 cost
report. Therefore, we proposed using the LTCH's direct GME
[[Page 27849]]
resident cap for the purpose of calculating the proposed payment
adjustment alternative for SSOs. We believed this proposal was
reasonable since it would cap the number of FTE residents that could be
counted for IME payment purposes of calculating a comparable IME
payment based on the best available data on residency programs at LTCHs
(which could be computed from direct GME data for LTCHs that had
residency programs). Using an imputed IME FTE resident cap based on GME
data would enable us to factor an adjustment for indirect costs of
residency programs into a Medicare payment under the LTCH PPS for those
SSO cases where the least of the payment alternatives is an amount
under the LTCH PPS comparable to what would be paid under the IPPS.
Both a DSH adjustment and an IME adjustment, as necessary, could be
computed from data already collected on the LTCH's cost report.
Therefore, we proposed to refer to the LTCH's direct GME resident
cap for the purpose of calculating the proposed payment adjustment
alternative for SSOs. We believed this proposal was reasonable since it
would cap the number of FTE residents that could be counted for
purposes of calculating a comparable IME payment based on the best
available data on residency programs at LTCHs (which could be computed
from direct GME data for LTCHs that had residency programs).
As we discussed in the RY 2007 LTCH PPS proposed rule, under this
proposed LTCH PPS payment adjustment, an amount payable under subpart O
comparable to what would be paid under the IPPS would also include
payment for inpatient capital-related costs, based on the proposed
revision to the LTCH PPS SSO payment adjustment. In the case of a LTCH
that is a teaching hospital, we explained that we would determine the
comparable IME payment adjustment for the LTCH by imputing a limit on
the number of full-time equivalent (FTE) residents that may be counted
for IME (IME cap) based on the LTCH's direct GME cap as set forth at
Sec. 413.79(c)(2) (which would already have been established for a
LTCH which had residency programs) and the capital Federal rate at
Sec. 412.308(c), which would be adjusted by the applicable IPPS DRG
weighting factors at Sec. 412.60, as set forth at Sec. 412.312(b). We
proposed that this amount would be further adjusted by the applicable
geographic adjustment factors set forth at Sec. 412.316, including
wage index (based on the CBSA where a LTCH is physically located and
derived from the IPPS wage index for non-reclassified hospitals as
published in the annual IPPS final rule), and large urban location, if
applicable.
We note that we proposed that ``a LTCH PPS payment amount
comparable to what would be paid under the IPPS'' would not include
additional payments for extraordinarily high cost cases under the IPPS
outlier policy (Sec. 412.80(a)(3)). Under existing LTCH PPS policy, a
SSO case that meets the criteria for a LTCH PPS HCO payment at Sec.
412.525(a)(1) (that is, if the estimated costs of the case exceed the
adjusted LTC-DRG SSO payment plus the fixed loss amount) would receive
an additional payment under the LTCH PPS HCO policy at Sec. 412.525(a)
(67 FR 56026, August 30, 2002). For purposes of HCOs under the proposed
SSO policy, we would continue to use a fixed-loss amount calculated
under Sec. 412.525(a), and not a fixed-loss amount based on Sec.
412.80(a). Medicare would pay the LTCH 80 percent of the costs of the
case that exceed the sum of the applicable option of the least of the
four proposed payment options, described above, and the fixed-loss
amount determined under Sec. 412.525(a). As we discussed in the RY
2007 LTCH PPS proposed rule, we used the term ``comparable'' in the
proposed fourth payment alternative so that the public will realize
that this payment alternative is not exactly the same as the one that
is similarly worded in Sec. 412.534(c)(2), (d)(1), and (e)(1),
discussed in section VI.B. of the RY 2007 proposed rule.
Therefore, in the RY 2007 proposed rule, we proposed two changes to
the existing SSO payment provision. First, we proposed to decrease the
percentage of costs in the current SSO payment formula (that is, 120
percent of the costs) to 100 percent of costs. Secondly, we proposed to
add a fourth option that Medicare would pay an LTCH PPS payment amount
comparable to the amount that would have otherwise been paid under the
IPPS for such a case, if that amount is lower than the other three
payment alternatives.
As we discussed in the RY 2007 LTCH PPS proposed rule, we
established special provisions for the SSO policy for subclause (II)
LTCHs in the RY 2004 LTCH PPS final rule (68 FR 34147). We proposed to
exempt subclause (II) LTCHs from the proposed additional revisions to
the SSO policy discussed above until the 5th year of the phase-in of
the LTCH PPS for such a LTCH (that is, for discharges occurring during
cost reporting periods beginning on or after October 1, 2006). This
proposed approach is consistent with our existing policy as it applies
to subclause (II) LTCHs in that these LTCHs do not become subject to
the specific SSO percentages established for subclause (I) LTCHs until
cost reporting periods beginning on or after October 1, 2006.
Therefore, since the percentages applied under the proposed SSO policy
for subclause (II) LTCHs would not be reduced to 120 percent until the
fifth year of the transition, the proposed reduction from 120 percent
of the estimated costs of the case to 100 percent of the estimated
costs would not apply to a subclause (II) LTCH until that time, nor
would the additional proposed alternative, of an amount payable under
Subpart O comparable to the amount that would otherwise be paid under
the IPPS, apply to discharges from a subclause (II) LTCH until such a
LTCH's cost reporting period beginning on or after October 1, 2006.
Therefore, under the proposed policy discussed in the RY 2007 LTCH PPS
proposed rule, SSO discharges at a subclause (II) LTCH that had a
January 1 through December 31 cost reporting period, for example, would
be subject to the proposed changes to the SSO provision (including the
proposed reduction to 100 percent of costs and the proposed addition of
the fourth option of ``a payment comparable to what would otherwise
have been paid under the IPPS'') for discharges occurring on or after
the start of its 5th year of the transition on January 1, 2007.
The proposal to exempt subclause (II) LTCHs from the proposed
revisions to the SSO policy that would be effective beginning in RY
2007 until cost reporting periods beginning on or after October 1, 2006
was consistent with our understanding of Congressional intent in
establishing this special category of LTCHs in section 4417(b) of the
BBA. The Congress provided an exception to the general definition of
LTCHs under subclause (I) and subclause (II). In the RY 2004 LTCH PPS
final rule (68 FR 34148), we evaluated the SSO policy for subclause
(II) LTCHs, and we noted that the unique Congressional mandate set
forth in section 1886(d)(1)(B)(iv)(II) of the Act circumscribes such a
LTCHs' admission policies to the extent that it is being identified as
a LTCH to provide a particular type of service (for which the ALOS is
greater than 20 days) to a particular population (at least 80 percent
have a principal diagnosis of neoplastic disease). We stated that we
believed that a LTCH in this category might not be able to readily
address the type of patients and the costs it incurs for those patients
as would LTCHs described under subclause (I). We believed that it was
necessary to adjust the original short stay policy for
[[Page 27850]]
subclause (II) LTCHs during the 5-year transition period, so that a
LTCH of this type could continue to serve its community, as intended by
the Congress (68 FR 34148).
As we discussed in the RY 2007 LTCH PPS proposed rule, we proposed
that hospitals that qualify as subclause (II) LTCHs would become
subject to the proposed changes to the SSO provision, when a subclause
(II) LTCH would become fully subject to the general SSO policy at Sec.
412.529, which will be for discharges occurring in the first cost
reporting period beginning on or after October 1, 2006.
We received many comments on our proposed revisions to the SSO
policy representing the views of trade associations representing LTCHs,
both for-profit and not-for-profit LTCH groups, medical corporations
that include LTCHs, state medical societies, a Chamber of Commerce,
legislators, physicians and other hospital staff, and several
interested citizens. In general, commenters did not support our
proposed policy and the payment reductions to LTCHS that would result
if it was finalized.
Comment: Several commenters supported CMS's goal of analyzing the
role of LTCHs as one of several treatment settings among post-acute
providers for Medicare beneficiaries. However, they urged us not to
finalize the portion of the proposed SSO policy that would include the
alternative payment option for payment comparable to the IPPS payment
amount. These commenters believe that finalizing this policy would
result in drastic payment reductions and consequential losses to the
LTCHs. One commenter noted that our proposed policies had made it
necessary to answer the following question: ``Where is the proper place
for LTCHs along the continuum of care for Medicare beneficiaries and
how is this place substituted for in areas where there are no or few
LTCHs.'' The commenter further stated that this was ``a proper question
to ask for a prudent purchaser of care'' but urged us to arrive at a
``clinically-based'' answer to this question.
Response: We appreciate the commenters' recognition of the very
serious issues regarding LTCHs underlying our proposed policy
revisions. The commenter is also correct in questioning the role of
LTCHs in the continuum of beneficiary care. As a provider category,
LTCHs were created by section 1886(d)(1)(B)(iv)(I) of the Act and
defined by the statute: a LTCH is ``a hospital which has an average
inpatient LOS (as determined by the Secretary) of greater than 25
days.'' (Subclause (II) LTCHs, discussed below in these responses,
which were established under the BBA of 1997, function under highly
specific requirements.) As a ``prudent purchaser of care,'' we believe
that we have the mandate to appropriately pay for the hospital-level
services provided to Medicare beneficiaries. The RTI study, that is
discussed in section XII.B. of the preamble to this final rule,
represents a highly significant step in the direction of evaluating the
clinical role for LTCHs. In addition to the RTI study, there is
considerable attention being focused by CMS on issues of substitution
of services among provider types, and the potential for the development
of a uniform assessment tool across post-acute providers. As RTI
evaluates the feasibility of identifying clinically-based criteria for
LTCH patients, it continues to concern us that patients with the same
general medical profile as these LTCH patients are also being treated
nationally at acute care hospitals, generally as HCOs. Although, as
described in detail in our responses below, we are not finalizing this
specific revision to the SSO policy, as proposed, we continue to be
concerned about the significant number of extremely short-stay patients
currently receiving treatment at LTCHs, a provider type that is
distinguished solely by its focus on long-stay hospital-level care.
Comment: While many commenters urged us not to finalize the
proposed formula for SSO payments that included the option of an IPPS-
comparable payment amount, they did express considerable understanding
of our concerns about the payment incentives inherent in the existing
SSO policy, particularly with regards to the very short stays. We
received numerous suggestions on an approach more targeted with the
goals of avoiding excessive payment for such very short stays, avoiding
underpayment of appropriate admissions, and also avoiding any payment
incentives that would allow LTCHs to retain patients unnecessarily to
exceed the SSO thresholds. Although opposing these proposed revisions,
one commenter encouraged us to modify the proposed policy to strike a
balance between payment adequacy and financial incentives.
A number of commenters urged us to establish a category of very
short stay discharges (VSSDs) mirroring the payment policy for stays of
1 through 7 days that we proposed when we designed the LTCH PPS (67 FR
13453, March 22, 2002) suggesting that we continue to pay the remainder
of SSO cases under the existing SSO policy. The commenters presented
several other variations in the definition of a VSSD and also
suggestions for a SSO policy payment methodology, which include:
VSSD cases would be defined as cases with a LOS of less
than \1/6\ of the geometric ALOS. These VSSDs would be paid under our
proposed policy.
VSSD cases should be defined from 1 through 5 or 7 days,
and be reimbursed at 100 percent of cost.
VSSD cases should be reimbursed at a percentage of cost
(for example, 95 percent) with the 5 percent reallocated to other SSO
payment levels.
Define VSSD cases as 10 to 20 percent of the geometric
ALOS: (1) Reduce costs from 120 percent to 100 percent for VSSD cases;
(2) For other cases up to \5/6\ of the geometric mean LOS, 110 percent
costs.
Create three categories of SSO cases--VSSD cases,
intermediate short stay cases, and all other short stay cases up to \5/
6\ (existing definition of SSO): (1) A VSS case is a case that has a
LOS equal to or less than \2/6\ of the geometric ALOS for a LTC-DRG and
paid the lesser of the three existing options with 100 percent of cost
(instead of 120 percent); (2) Intermediate short stay cases would be
between \5/6\ of the geometric ALOS and \4/6\ of the geometric ALOS,
and paid the lesser of the three existing options with 110 to 115
percent of cost (instead of 120 percent); (3) All others would be those
cases that exceed \4/6\ of the geometric ALOS but are less than or
equal to \5/6\ of the geometric ALOS and paid the least of three
existing options with 115 to 120 percent of cost.
For cases with lengths of stay less than or equal to 20
percent of the geometric ALOS, use IPPS-comparable payment rates.
For VSSD cases, the SSO payment should be 100 percent of
costs for 8-20 day stays and the full LTC-DRG for stays of 20 or more
days. LTCH cases with a LOS greater than 20 days should be removed from
the SSO definition.
For cases where the ALOS is equal to or less than 20
percent of the geometric mean LOS, Medicare should pay less than cost
(that is, at 80 percent or 90 percent of cost) and reallocate the
remainder to other LTCH PPS payments.
Pay all SSO patients at 110 percent of cost.
For VSSD cases, payments should be 100 percent costs or 22
percent per diem; for stays of 8 days through the up to \5/6\ the
geometric ALOS, use the same method as presently used.
Convert the IPPS comparable payment to per diem (similar
to transfer DRG methodology) and pay based on
[[Page 27851]]
the actual number of days that a patient is in the LTCH without capping
the payment at the full IPPS DRG to recognize the amount of resources
and effort expended by the LTCH.
Pay SSOs under an additional LTC-DRG similar to CMG 5000
under the IRF PPS if the LOS is below a certain number of days. It
would receive a low fixed payment.
Response: We have carefully evaluated the comments that we received
on the proposed modifications to the SSO payment policy. Specifically,
we understand the commenters' concerns that applying the option of an
IPPS-comparable payment to all SSO cases at LTCHs would result not only
in paying for very short stay cases under this policy, but also could
result in making such a payment under the same LTCH PPS SSO policy
option for a patient who is treated for a relatively long stay.
Accordingly, under our finalized policy, we believe that it is
appropriate to provide that as the length of a SSO stay increases, the
case begins to resemble a more ``typical'' LTCH stay and
consequentially, it is appropriate that payment should be based
increasingly more on what would otherwise be payable under the LTCH
PPS. Therefore, under the SSO policy at Sec. 412.529, effective for
discharges occurring on or after July 1, 2006, we will pay the lesser
of 100 percent of the estimated costs for the discharge, 120 percent of
the per diem of the LTC-DRG multiplied by the LOS, the full LTC-DRG
payment, or a blend of the comparable IPPS per diem payment amount
(capped at the full IPPS comparable payment amount) and the 120 percent
of the LTC-DRG per diem payment amount (as described in greater detail
below). The IPPS comparable payment amount portion of the blend at
Sec. 412.529 is determined in the same manner as we proposed in the RY
2007 LTCH PPS proposed rule (71 FR 4688 through 4690), and as described
above in this section. (As noted elsewhere, the SSO policy has been a
feature of the LTCH PPS since its inception for FY 2003 based on data
analysis of FY 1998 and 1999 MedPAR files. The data simulations and
projections upon which the existing policy was based, as well as
alternatives that we evaluated, are detailed in the FY 2003 final rule
for the LTCH PPS (67 FR 55954, 55995-56006).)
We are not establishing a category of VSSDs or VSSOs, suggested by
a significant number of commenters for the same reason that we
originally decided not to distinguish such cases at the inception of
the LTCH PPS for FY 2003 (67 FR 55954, 56000 through 56002). At that
time, we determined that such a policy produced a payment ``cliff,'' by
which a significantly higher payment would result from an 8 day stay
than from a 7 day stay. Although we agree that generally, LTCH stays of
7 days or less are the most obvious example of a stay that should not
be treated at an LTCH (and some of the commenters suggested a VSSD
threshold of as few as 5 days), we believe that the policy that we are
finalizing, described in detail below, addresses this concern without
providing an inappropriate payment incentive for extending a patient
stay at an LTCH. The payment alternative that we are finalizing is
based on recognizing the distinction between the shortest stays and
those stays that, although still technically are SSOs, more typically
represent the type of cases for which the LTCH provider category was
established.
In this final rule, therefore, under the SSO policy at revised
Sec. 412.529, beginning with discharges occurring during RY 2007, we
will pay the lesser of 100 percent of the estimated costs of the
discharge (as we proposed in the RY 2007 LTCH PPS proposed rule), 120
percent of the LTC-DRG per diem payment amount multiplied by the LOS,
the full LTC-DRG payment, or an LTCH PPS payment based on a blend of
the IPPS-comparable per diem payment amount (capped at the full IPPS
comparable payment amount), and the 120 percent of the LTC-DRG per diem
payment amount (as derived from a feature of the existing SSO policy)
(as described in greater detail below).
We are providing for this fourth option based on the above
described blend of payments because, as noted above, we believe that as
the length of a SSO stay increases, the case begins to resemble a more
``typical'' LTCH stay as defined under section 1886(d)(1)(B)(IV)(I) of
the Act and envisioned by the statutes authorizing the establishment of
the LTCH PPS. Consequentially, under the blend alternative to the SSO
policy at Sec. 412.529(c)(2)(iv) that we are establishing in this
final rule, as the LOS of the SSO case increases, the percentage of the
IPPS comparable per diem amount will decrease and the percentage of the
120 percent of the LTC-DRG specific per diem amount will increase. We
are further ``capping'' the IPPS-comparable per diem portion of the
blend option at an amount comparable to the full IPPS payment amount,
described below, for a specific DRG. We believe that capping the IPPS
comparable per diem amount portion of the blend option of the SSO
payment formula at the full IPPS comparable payment amount is
consistent with the overall premise of the blend alternative, stated
above. In capping the IPPS-comparable portion of the blend payment at
an amount that would be comparable to the full IPPS comparable payment
amount, we affirm the underpinnings of the revised SSO policy that we
are finalizing, which are, that as the LOS of a LTCH hospitalization
increases, the treatment resources and costs associated with the stay
are more in keeping with typical payments under the LTCH PPS and less
comparable to an IPPS stay. The IPPS-comparable amount under this
finalized SSO payment option, will be determined by the methodology
that we proposed in the RY 2007 proposed rule for the fourth option to
the SSO payment adjustment. Although we are not finalizing that policy,
we are adopting the definition of ``IPPS comparable'' established in
the RY 2007 LTCH PPS proposed rule.
We would also note that the patient classification system for both
the IPPS and the LTCH PPS is the DRG system. The only distinction
between the DRG systems used by the IPPS and the LTCH PPS is the
weights assigned to each DRG that we derive from the data emerging from
acute care hospitals and LTCHs, respectively. Under the blend payment
option for SSOs described below, as the LOS of a SSO increases, the
percentage of the payments based on the LTC-DRGs will increase and the
percentage of the payment based on the IPPS-comparable payment derived
from the IPPS DRGs will decrease.
Specifically, in the RY 2007 LTCH PPS proposed rule, we proposed
that we would calculate an amount payable under subpart O comparable to
what would otherwise be paid under the IPPS for the costs of inpatient
operating services which would be based on the standardized amount
determined under Sec. 412.64(c), adjusted by the applicable DRG
weighting factors determined under Sec. 412.60 as specified at Sec.
412.64(g). This amount would be further adjusted to account for
different area wage levels by geographic area using the applicable IPPS
labor-related share, based on the CBSA where the LTCH is physically
located as set forth at Sec. 412.525(c) and using the IPPS wage index
for non-reclassified hospitals published in the annual IPPS final rule.
(In the RY 2006 LTCH PPS final rule (70 FR 24200), we discuss the
inapplicability of geographic reclassification procedures for LTCHs.)
For LTCHs located in Alaska and Hawaii, this amount would also be
adjusted by the applicable proposed
[[Page 27852]]
COLA factor used under the IPPS published annually in the IPPS final
rule. (Currently these same COLA factors are used under both the IPPS
and the LTCH PPS.)
Additionally, this SSO proposed revised payment adjustment
alternative (that is, an amount comparable to what would be paid under
the IPPS for the case) could also include a DSH adjustment (see Sec.
412.106), if applicable.
Under the proposed revision to the LTCH PPS SSO payment adjustment
in the case of a LTCH that is a teaching hospital, we explained that we
would determine the IME payment adjustment for the LTCH by imputing a
limit on the number of full-time equivalent (FTE) residents that may be
counted for IME (IME cap) based on the LTCH's direct GME cap as set
forth at Sec. 413.79(c)(2) (which would already have been established
for a LTCH which had residency programs). Thus, we proposed calculating
an IME payment for this LTCH that is comparable to the IPPS payment
formula set forth at Sec. 412.105. The use of a proxy for the IME cap
would be necessary because it would not be appropriate to apply the
IPPS IME rules literally in the context of this LTCH PPS payment
adjustment. Under the IPPS, IME payment regulations at Sec. 412.105,
limits were established on the number of FTE residents a hospital is
permitted to count for IME payments based the number of residents
reported by the hospital 1996 cost report. This IME FTE resident cap
under the IPPS would not translate appropriately to a LTCH. Since a
LTCH was not paid IME in 1996 it would not have reported any FTE
residents for IME purposes on its 1996 cost report. Therefore, we
proposed using the LTCH's direct GME cap for the purpose of calculating
the proposed payment adjustment alternative for SSOs. We believed this
proposal was reasonable since it would cap residents for IME payment
purposes based on the best available data on residency programs at
LTCHs (which could be computed from direct GME data for LTCHs that had
residency programs). Using an imputed GME cap would enable us to factor
an adjustment for residency programs into a Medicare payment under the
LTCH PPS for those SSO cases where the least of the payment
alternatives is an amount under the LTCH PPS comparable to what would
be paid under the IPPS. Both a DSH adjustment and an IME adjustment, as
necessary, could be computed from data already collected on the LTCH's
cost report.
As we discussed in the RY 2007 LTCH PPS proposed rule, an IPPS
comparable amount under the LTCH PPS for the purposes of the SSO
payment adjustment, would also include payment for inpatient capital-
related costs, based on the capital Federal rate at Sec. 412.308(c),
which would be adjusted by the applicable IPPS DRG weighting factors.
This amount would be further adjusted by the applicable geographic
adjustment factors set forth at Sec. 412.316, including wage index
(based on the CBSA where a LTCH is physically located and derived from
the IPPS wage index for non-reclassified hospitals as published in the
annual IPPS final rule), and large urban location, if applicable.
A LTCH PPS payment amount comparable to what would be paid under
the IPPS would not include additional payments for extraordinarily high
cost cases under the IPPS outlier policy (Sec. 412.80(a)). Under
existing LTCH PPS policy, a SSO case that meets the criteria for a LTCH
PPS HCO payment at Sec. 412.525(a)(1) (that is, if the estimated costs
of the case exceed the adjusted LTC-DRG SSO payment plus the fixed-loss
amount) would receive an additional payment under the LTCH PPS HCO
policy at Sec. 412.525(a) (67 FR 56026; August 30, 2002). For purposes
of HCOs under the proposed SSO policy, we would continue to use a
fixed-loss amount calculated under Sec. 412.525(a), and not a fixed-
loss amount based on Sec. 412.80(a). Medicare would pay the LTCH 80
percent of the costs of the case that exceed the sum of the applicable
option and the fixed-loss amount determined under Sec. 412.525(a). As
we discussed in the RY 2007 LTCH PPS proposed rule, we used the term
``comparable'' in the proposed fourth payment alternative so that the
public will realize that this payment alternative is not exactly the
same as the one that is similarly worded in Sec. 412.534(c)(2),
(d)(1), and (e)(1), discussed in section VI.B. of the RY 2007 LTCH PPS
proposed rule.
Therefore, under the SSO policy that we are finalizing in this
final rule, we are providing for a blend alternative under the LTCH PPS
at Sec. 412.529(c)(2)(iv), that is based on a percentage of the
payment calculated using the standard Federal payment rate and LTC-DRG
weights utilized under the LTCH PPS and, as described above, a
percentage of the paymentscomparable to the standard Federal rates, DRG
weights, and applicable payment policies established under the IPPS.
Specifically, for the ``LTCH'' component of this SSO payment
option, the percentage based of the 120 percent of the LTC-DRG per diem
amount will be based on the ratio of the (covered) LOS of the case to
the lesser of the SSO threshold for the LTC-DRG (that is, \5/6\ of the
geometric ALOS of the LTC-DRG) or 25 days (as discussed below). In
addition, the LOS in the numerator may not exceed the number of days in
the denominator (that is, the percentage may not exceed 100 percent).
The remaining percent of the blend alternative at Sec.
412.529(c)(2)(iv) (that is, 100 percent minus the percentage that is
based on the 120 percent of the LTC-DRG per diem amount explained
above) will be applied to the IPPS comparable per diem amount, detailed
above. For purposes of the blend payment option, we have also specified
that the IPPS comparable per diem amount will be capped at the full
IPPS comparable amount, as explained below.
In explaining this blend payment option, we want to emphasize,
there has been no change in our existing policy at Sec. 412.503
regarding Medicare payment for covered days under the LTCH PPS.
Therefore, under the SSO policy at revised Sec. 412.529, including the
above described blend option, until the SSO threshold (\5/6\ the ALOS
for each LTC-DRG) is exceeded at which point a full LTC-DRG payment is
generated, Medicare payment for a specific case is based on the number
of days of coverage remaining to each beneficiary. We also want to note
that in determining the percentage of the LTC-DRG-based portion of the
blend option, we utilize the lesser of 25 days or the SSO threshold
(\5/6\ ALOS of each LTC-DRG) as the number divided into the covered
days of the stay. In keeping with the underlying premise of the blend
option under the SSO policy, we believe that as the length of a SSO
stay increases, the stay more closely resembles a characteristic LTCH
stay. Consequently, for specific purposes of the blend, we believe that
utilizing the ``greater than 25 day'' statutory definition as a
benchmark for identifying an appropriate LTCH hospitalization
recognizes Congressional intent in establishing LTCHs as a distinct
provider category. In computing the blend option, therefore, as
described below, we believe that it is both fair and reasonable that
for each patient stay, we utilize the lesser of the LTC-DRG's specific
SSO threshold or 25 days as the denominator.
The following example illustrates how the blend alternative at
Sec. 412.529(c)(2)(iv) would be determined where the LTCH patient has
a covered LOS of 11 days, has an estimated cost of $11,775, and is
grouped to hypothetical DRG XYZ. For purposes of this example, for DRG
XYZ, the full LTC-DRG payment is $38,597.41, the LTCH PPS geometric
ALOS is 33.6 days,
[[Page 27853]]
the LTCH PPS SSO threshold (that is, \5/6\ of the geometric ALOS) is
28.0 days, the full IPPS comparable amount is $8,019.82, and the IPPS
geometric ALOS is 4.5 days. For this example, the blend alternative at
Sec. 412.529(c)(2)(iv) would be calculated as follows:
Step (1): Determine the LTC-DRG per diem portion of the
blend alternative at Sec. 412.529(c)(2)(iv).
(a) The 120 percent of the LTC-DRG per diem amount for the 11 days
stay is equal to the full LTC-DRG payment divided by the geometric ALOS
of LTC-DRG XYZ multiplied by the covered LOS and multiplied by 1.2.
[GRAPHIC] [TIFF OMITTED] TR12MY06.000
(b) The percentage of the 120 percent of the LTC-DRG per diem
amount for 11 days is calculated by dividing the covered LOS by the
lesser of the \5/6\ ALOS of LTC-DRG XYZ or 25 days (that is, 11 days /
25 days = 0.44). (In this example, 25 days was used in the denominator
since the \5/6\ ALOS of LTC-DRG XYZ (28.0 days) is greater than 25
days. If the \5/6\ ALOS of LTC-DRG XYZ was less than 25 days, that
value would have been used in the denominator of this calculation. In
addition, the LOS in the numerator may not exceed the number of days in
the denominator (that is, the percentage may not exceed 100 percent).
(c) Determine the LTC-DRG per diem portion of the blend alternative
at Sec. 412.529(c)(2)(iv) by multiplying the percentage determined in
Step 1b by the 120 percent of the LTC-DRG per diem amount for the 11
days (from Step 1a) (that is, 0.44 x $15,163.28 = $6,671.84).
Step (2): Determine the IPPS comparable per diem portion
of the blend alternative at Sec. 412.529(c)(2)(iv).
(a) The IPPS comparable per diem amount is equal to the full IPPS
comparable amount divided by the geometric ALOS of IPPS DRG XYZ
multiplied by the covered LOS (that is, $8,019.82 / 4.5 days x 11 days
= $19,604.00. However, since this amount exceeds the full IPPS
comparable amount ($8,019.82), only the full IPPS comparable amount
($8,019.82) will be used in the blend alternative calculation.
(b) The percentage of the IPPS comparable per diem amount is
calculated by subtracting the percentage determined in Step 1b from 100
percent (that is, 1 minus the covered LOS divided by the lesser of the
\5/6\ ALOS of DRG XYZ or 25 days) or 1 minus 0.44 (as shown in Step 1b
= 0.56).
(c) Determine the payment amount of the IPPS comparable per diem
portion of the blend alternative at Sec. 412.529(c)(2)(iv) for the 11-
day stay by multiplying the percentage determined in Step 2b by the
IPPS comparable per diem amount (from Step 2a), (that is, 0.56 x
$8,019.82 = $4,491.10).
Step (3): Compute the total payment amount of the blend
alternative at Sec. 412.529(c)(2)(iv) by adding the LTC-DRG per diem
portion (Step 1c) and the IPPS comparable per diem portion (Step 2c),
(that is, 6,671.84 + $4,491.10 = $11,162.94).
Table 10 provides detailed instructions for calculating payments
using the blend alternative.
BILLING CODE 4120-01-P
[[Page 27854]]
[GRAPHIC] [TIFF OMITTED] TR12MY06.001
BILLING CODE 4120-01-C
[[Page 27855]]
In this example, the SSO payment would equal $11,162.94 (using the
blend alternative at Sec. 412.529(c)(2)(iv)) since it is lower than
100 percent of cost ($11,775), 120 percent of the LTC-DRG per diem
($15,163.28), and the full LTC-DRG payment ($38,597.41).
If, in the above example, the covered LOS of the patient would have
been 24 days, the blend alternative percentage of the 120 percent of
the LTC-DRG per diem amount in step 1b would be 0.96 (instead of 0.44)
and the blend percentage of the IPPS comparable per diem amount in step
2c would be 0.04 (instead of 0.56). For a covered LOS of 24 days, the
120 percent of the LTC-DRG per diem amount would be $33,083.97. The
comparable IPPS per diem amount would be $42,772.37, which is greater
than the full IPPS comparable amount ($8,019.82). Thus, for a covered
LOS of 24 days, the amount determined under the blend alternative at
Sec. 412.529(c)(2)(iv) would be as follows:
$32,080.97=[(0.96 x $33,083.52) + (0.04 x $8,019.82)].
As the LOS of an SSO case approaches the SSO threshold (that is,
\5/6\ of the geometric ALOS of the LTC-DRG), the amount determined
under the blend alternative at Sec. 412.529(c)(2)(iv) more closely
approximates a full LTC-DRG payment. For instance, in the example with
a covered LOS of 24 days discussed above, the amount determined under
the blend alternative at Sec. 412.529(c)(2)(iv) ($32,080.97) is
approximately 83 percent of the full LTC-DRG payment ($38,597.41).
For cases with very short lengths of stay (that is, even less than
the IPPS ALOS), the IPPS comparable per diem amount portion of the
blended payment amount would be less than the full IPPS comparable
payment amount based on the per diem calculation described above, which
would be a percentage of the full IPPS comparable payment. Furthermore,
as described below, as the LOS reaches the lower of the five-sixths SSO
threshold or 25 days, the payment could be equal to the full LTC-DRG
(based on existing SSO policy). Because we are limiting the denominator
of the blend percentage to the lesser of the \5/6\ ALOS or 25 days, for
SSO cases in LTC-DRGs that have an SSO threshold of greater than or
equal to 25 days and that have a covered LOS of 25 days or more, the
blend alternative at Sec. 412.529(c)(2)(iv) will equal 120 percent of
the LTC-DRG per diem amount determined under Sec. 412.529(d)(1). For
instance, in the example presented above in this section, where the SSO
threshold for DRG XYZ is equal to 28.0 days, for an LTCH patient with a
covered LOS of either 25, 26, 27 or 28 days, the blend alternative at
Sec. 412.529(c)(2)(iv) will equal 120 percent of the LTC-DRG per diem
amount based on the covered LOS of the stay (that is, $33,083.52 for a
25-day LOS). Under this revised SSO policy, once the covered LOS equals
25 days, Medicare payment for an SSO case would be based on the lesser
of 100 percent of the estimated cost of the case, 120 percent of the
per diem LTC-DRG multiplied by the LOS or the full LTC-DRG since the
blend option as described above, at that 25-day point, will be based on
100 percent of the LTC-DRG per diem payment amount and 0 percent of the
IPPS comparable per diem payment amount. Therefore, once the LOS is 25
days or more, the blend method ceases to apply for purposes of
calculating the payment amount and instead, the payment amount for the
fourth option is equal to one of the other options: 120 percent of the
LTC-DRG per diem amount. In this example, calculation of SSO payment
for days 26, 27, or 28 would be based on the lesser of those
alternatives and if the patient remained at the LTCH on or after day
29, the SSO threshold would be exceeded and a full LTC-DRG would be
generated.
Although we did not adopt many of the commenters' suggestions that
we distinguish VSSO or VSSD cases and pay them either at or below cost,
we do believe that this finalized payment policy for SSO cases endorses
their premise that such cases do not fit the typical profile of LTCH
cases and it can be reasonably argued that such cases should not be
paid similarly to those that are more characteristic of LTCH cases. In
general, we believe that our finalized policy, which transitions from a
larger percentage of the LTCH PPS payment that is based on the IPPS
comparable per diem amount to a higher proportion of payment based on
the 120 percent of the LTC-DRG per diem amount as the LOS increases,
realistically addresses our significant concerns that the shortest LOS
cases could have continued to be treated at an acute care hospital and
not require an LTCH stay and therefore payments to LTCHs under the LTCH
PPS should be adjusted accordingly.
Comment: We received numerous comments that praised the quality
care given to Medicare beneficiaries by the LTCHs in their areas and
urged us not to make significant cuts in Medicare payments which they
fear would result in reduced services. The commenters asserted that,
coupled with CMS' decision to maintain LTCH standard Federal rates from
RY 2006, revision of the payment adjustment for SSO patients will be
detrimental to the industry as costs of providing care will exceed
payment. The commenters further stated that underpayment to LTCHs will
cause patients with complex medical conditions to lose access to
appropriate care and increase costs to acute care hospitals which will
be forced to continue caring for these sicker patients. The commenters
believed that the revised SSO payment policy, as proposed, would have a
profound impact on the entire health care system of their communities
since their LTCHs are a critical component of the state health care
delivery system. They state that since LTCHs offer specialized services
not available elsewhere, severe cutbacks for LTCHs could resonate
throughout the entire health care system. One commenter noted that CMS
made a statement that it does not expect any changes in quality of care
or access to services for Medicare beneficiaries under the LTCH PPS
based on proposed rule policies. However, one of the commenters
believes, to the contrary, a decrease in payments will have pervasive
effects on LTCHs. Moreover, the commenter pointed out that the impact
of changes in our payments to LTCHs because of the proposed SSO policy
revisions will not only affect services offered to ``the most
vulnerable patients,'' but also will have an impact on the staff of the
LTCHs. Several of the commenters specify that they envision that acute
care hospitals will be overtaxed and incur additional costs without
being able to free up ICU beds for patients who need short-term acute
care services. They also state that the acute care hospitals in their
communities may not be able to meet patient needs for those needing
LTCH services.
Response: We understand the serious concerns expressed by the
commenters and, although we are not finalizing the particular SSO
policy revisions as it was proposed, we want to assure the commenters
that we are aware of their concerns. We also agree that if a Medicare
beneficiary is appropriately referred, and admitted, to one of the
approximately 400 LTCHs in the United States for a complex medical
condition, the beneficiary could receive excellent medical care from a
highly trained and committed professional staff. As discussed above in
this section, we revisited the specific proposed payment revisions to
the SSO policy based on the many clear and well-crafted comments that
we received, and the policy that we are finalizing will not have the
more
[[Page 27856]]
extensive financial consequences on longer SSO cases expected by the
commenters from the proposed policy changes. As explained in more
detail in the impact section of this notice, we estimate that the
financial impact on LTCHs from this final policy will be significantly
less than the original proposed policy.
Therefore, we do not believe that the revisions to the SSO policy
that we are finalizing will result in LTCHs going out of business nor
that significant services would have to be curtailed with dire
consequences for beneficiaries, staff or the local medical care system.
As noted elsewhere, our data indicates that for FY 2003, the aggregate
margins for LTCHs were 7.8 percent and for 2004, they were 12.7
percent. Therefore, we believe that even with decreased Medicare
payments for SSO patients, such as we are envisioning based on this
finalized payment policy and detailed in the Impact (see section XV. to
this final rule), we believe that LTCHs will generally be able to
continue delivering high quality medical care to their patients. We
continue to believe, however, that acute-care hospitals should not be
discharging patients to LTCHs without having provided a full episode of
care and we also continue to have concerns about LTCHs admitting those
short stay patients who could otherwise continue to be treated in acute
care hospitals. We have revised our policy under the SSO adjustment and
in finalizing the blend option for paying SSO patients, we do not
believe that we are requiring any additional determinations nor are we
creating any circumstance that should not already be incorporated in
the determination to admit a patient to an LTCH following treatment at
an acute care hospital.
Comment: Numerous commenters argued that our proposed IPPS-
comparable payment option under the SSO policy, if finalized, could be
expected to discourage physicians from discharging patients from acute
care hospitals and admitting them to LTCHs. Thus, they charged that we
were establishing a system wherein clinical judgment is being trumped
by determinations based solely on payment. The commenters further
stated that since physicians discharge patients to LTCHs because it is
in the patients' best interests, we would be substituting our judgment
for a physician, setting a very dangerous precedent. Furthermore,
physicians cannot be expected to guess the LOS or the death of a
severely ill patient upon admittance to the LTCH. The commenters also
note that there is available data supporting the medical determination
that physicians are discharging patients to the LTCH setting because
the patient's needs are better served in the LTC setting than in an
acute care hospital setting.
Response: As stated above in this section, we have revised our
proposed IPPS-comparable payment option in light of the comments that
we have received and after further data and policy analysis. Contrary
to what the commenter states, however, the policy objective underlying
the proposed SSO rule was to preclude LTCHs and physicians from taking
advantage of a system that significantly overpays for patients that do
not require the extensive resources that such high payments are
intended to support. As discussed later, we recognize that some SSO
cases are unavoidable due to death or an unexpected clinical
improvement and early discharge. However, we have noted that in a
community where both acute care and LTCH beds are available, patients
are routinely transferred from the acute care hospital to the LTCH for
the remainder of care just because the LTCH resource is available. We
are concerned that this trend has increased exponentially because it
provides an acceptable disposition of the patient for the physician,
and because it is an expeditious means of lowering the acute hospital
LOS and costs. There is no question that the multidisciplinary approach
for certain complex patients (for example, ventilator weaning) is
appropriate. However, we are very concerned that the LTCH is assuming
the role of the acute care hospital for many other patients, at a far
higher cost, which it is possible to do as long as the LTCH continues
to maintain an ALOS of 25 days for purposes of qualifying for payments
under the LTCH. We do not believe, moreover, that the payment policy
option that we are finalizing for SSO discharges will deter physicians
from delivering appropriate care to beneficiaries or from making
appropriate referrals to LTCHs. We are seeking, in finalizing this
payment policy, to remove any financial incentive that could encourage
an LTCH to admit a patient from an acute-care hospitals prior to that
patient having received a full episode of care at the acute care
hospital.
Comment: Several commenters cited a study centered at Barlow
Respiratory Hospital that charted the course of ventilator weaning
treatment for 1419 medically unstable patients at 23 LTCHs from March
2002 through February 2003. The study reports that more than 50 percent
of this group of patients were weaned from the ventilators and
evidenced improvement both neurologically and functionally. The
commenters assert that this study exemplifies the excellent level of
care for such patients at LTCHs.
Response: We agree with the commenters that the results of the
``Barlow'' study indicate a significant rate of very positive outcomes
for the very sick LTCH patients who were included in the study. In the
late 1990s, we sponsored a ventilator demonstration study which
included, among other acute care settings, the Mayo Clinic and Temple
University Hospital, that also reported impressive results. We further
understand that the results of the Barlow study were used for the
establishment of national ventilator-weaning protocols issued by the
National Institutes of Health and that input from the Temple University
program continues to be critical in formulating national standards. We
believe that these programs established a level of excellence that
should be emulated by all hospital-level facilities that treat
ventilator-dependent patients, including acute care hospitals, LTCHs,
and IRFs. Accordingly, we believe it is not simply the fact that the
patient is treated at a LTCH that is critical to predicting positive
results. Rather, it is the type of clinical intervention that is
furnished to the patient at the hospital. In many cases that
intervention is currently exemplified at acute care IPPS hospitals, as
well as at LTCHs.
Comment: Several commenters claim that even for what we would term
``appropriate'' admissions, our proposed payment option under the SSO
policy that could generate an IPPS-comparable payment will erect
barriers to the use of LTCHs. One commenter described the typical LTCH
patient: An elderly patient with persistent multiple-system failures
who is de-conditioned and protocol-resistant. The commenter asserted
that these patients respond impressively to the aggressive blending of
therapeutic interventions, interdisciplinary teams, and medical
intervention that is not otherwise available in the community or
tertiary hospital setting. The commenter states that from ``a case rate
reimbursement perspective,'' grouping such a ``treatment-resistant''
population with the rest of the general acute care population is highly
inappropriate. Two commenters asserted that even when adjusted for
HCOs, acute care hospitals are not designed or intended to provide
service to long-term care-type patients. The commenters emphasized that
acute care hospitals are not designed to provide extended care
services, unlike LTCHs, with their specially trained expert staff and
clinicians and multi-disciplinary approaches. LTCHs, noted one
commenter, are like acute care
[[Page 27857]]
hospitals but must sustain a high level of care for longer periods.
Response: Under this fourth payment option, as the LOS increases,
the payment for such cases under the LTCH PPS will be based on a
decreasing percentage of an IPPS-comparable per diem amount and an
increasing percentage of the LTC-DRG per diem payment amount. We
believe that this payment adjustment recognizes the particular
expertise of LTCHs treating a population who require long-term care
because the payment percentage based on the 120 percent of the LTC-DRG
per diem amount increases (and the payment percentage based on the
IPPS-comparable per diem amount decrease) as the patient LOS increases.
However, we do not agree with the statement that ``acute care hospitals
are not designed to provide extended care services'' such as is the
care provided in LTCHs. Although there may be communities with LTCHs
where the acute care hospitals may have functionally ``restricted''
their services because of the presence of these LTCHs, as well as the
financial advantages and clinical niche that they have sought to fill,
acute care hospitals are equipped to provide services to the same
population, and the IPPS under which they are paid, is calibrated based
on the resources needed to treat those patients. Moreover, because
there are over 3,500 acute care hospitals and approximately only 400
LTCHs, which are not distributed uniformly throughout the U.S. (for
example, few are located in California), many acute care hospitals are
providing care for the vast majority of Medicare beneficiaries
requiring the type of care described by the above commenters. Our FY
2005 MedPAR files indicate that 20 percent of cases treated at acute
care hospitals nationwide have lengths of stay between 7 and 14 days
(that is, 2,386,057 out of a total of 11,855,205 cases). Additionally,
5.2 percent of acute care hospital cases (617,219) or have LOS greater
than 14 days. We believe, that in those acute care hospitals, to
paraphrase the final commenter, those patients are receiving in an
acute care hospital paid under the IPPS, the ``high level of care for
longer periods,'' they would also receive as patients at an LTCH.
Comment: Several commenters claimed that we based our proposed
revision of the SSO policy that could have resulted in an IPPS-
comparable payment for a particular SSO case, on the incorrect
assumption that ``short stay'' LTCH patients are clinically similar to
short term acute care hospital patients. They assert that the SSO
thresholds (\5/6\ of the geometric ALOS for each LTC-DRG) were never
meant to be a measure of the appropriateness of an LTCH admission, but
rather, were mathematically derived from the per diem payment amounts,
which were based on a methodology that would produce a payment-to-cost
ratio for SSO cases close to one. Furthermore, one commenter states the
presence of a SSO patient does not indicate a premature discharge from
an acute care hospital, citing that at this commenter's LTCHs, 11
percent of the patients had previously qualified as HCOs at the
referring acute care hospital. Additionally, the commenters asserted
that we are mistaken in its claim that LTCHs can foresee the LOS for
patients admitted to LTCHs or predict likely deaths, where in
actuality, upon admission, there is generally no substantial clinical
difference between long stay and ``short stay'' patients. Commenters
found it to be incongruous that a patient in LTC-DRG 475 (Respiratory
System Diagnosis with Ventilator Support) would still be an SSO patient
(for example, 28 days for LTC-DRG 475) and could be hospitalized in an
LTCH for greater than 25 days (the definition of an LTCH). A case such
as this could be appropriately treated in a LTCH. The commenters noted
that physicians cannot and should not be asked to predict the LOS or
the likely death of severely ill patients. Commenters further asserted
that we have made an erroneous assumption that LOS equates to
``severity of illness'' (SOI) and is a proxy for the appropriateness of
an admission. However, the commenters assert that this is not the case.
They point to another incorrect belief in the proposed rule that LTCHs
function like acute care hospitals when they have patients for the same
LOS. On the contrary, the commenters assert that SSO patients are being
admitted because they look just like ``inliers,'' and we have proposed
that LTCHs absorb payment rates that bear no relationship to the costs
of furnishing patient care at the LTCH level.
Furthermore, based on claims analysis, using the APR-DRGs, the
medical complexity and mortality rates of SSO patients, as measured by
the SOI and ``risk of mortality'' (ROM) standards are very similar to
that of the LTCH ``inlier'' patient population. The commenters further
presented comparisons between these measures for SSO patients and for
patients with the same DRGs in acute care hospitals, indicating that 52
percent of all patients admitted to LTCHs were in the highest APR-DRG
ROM categories, whereas only 24 percent of acute care patients are in
those same categories, resulting in a total percentage of APR-DRGs 3
and 4 at LTCHs among the SSO population that is approximately double
that of acute care hospitals. The commenters noted that higher patient
acuity correlates to higher utilization of facility resources, and
hence, higher costs, which argues against our proposed policy that
would significantly lower reimbursements for SSO cases. Several
commenters also provided a comparison of case mix indices (CMI) for
LTCH SSO cases and cases at acute care hospitals. The commenters assert
that SSOs at LTCHs have a relative CMI that parallels the CMI of LTCH
``inlier'' cases at LTCHs and which is 72 percent higher than the
comparable CMI at acute care hospitals.
Response: We are well aware that not every SSO patient can be so
identified at the time of admission to an LTCH. We further recognize
that many patients who will eventually be defined as SSO patients
because their LTCH stay is equal to or less than \5/6\ of the GMLOS for
their particular LTC-DRG, may, upon admission, present the same
severity of illness and risk of mortality as ``inlier'' LTCH patients.
In this respect, the assertions and data presented by the commenters
comparing the SOI and ROM based on the APR-DRGs of SSO patients to
those of ``inliers'' were persuasive, and coupled with additional
considerations, we revisited our proposed payment policy for SSO cases.
We agree that SSO thresholds described by the commenters were never
meant to be a measure of the appropriateness of an LTCH admission, but
rather, were mathematically derived from the per diem payment amounts.
We believe this enabled us to arrive at a reasonable payment policy at
the outset of the LTCH PPS for cases that had lengths of stay
significantly shorter than those patients fitting the typical profile
of those who should be treated at LTCHs. We recognize that an LTCH
admission could be a medically complex one (an appropriate LTCH
admission) with a relatively long LOS and still be considered an SSO
case. We also acknowledge that, in some cases, LTCH admissions could
also have qualified as HCOs at the referring acute care hospital. We
still have concerns, however, that patients in LTC-DRGs with
significantly shorter stays than the ALOS for that particular DRG might
have been unnecessarily admitted to the LTCH rather than receiving all
of their care in the acute care hospital. In addition, we are adjusting
the LTCH PPS to appropriately pay for those stays that consume far less
than a full array
[[Page 27858]]
of services in the LTCH for the particular LTC-DRG.
We believe this to be the case since our data indicates a
correlation between the LOS at an acute care hospital for a patient
following treatment at the highest level of intensity (ICU or CCU),
that is, the number of ``recuperative'' days, and whether or not the
patient was admitted to an LTCH upon discharge from the acute care
hospital. As Table 11 indicates, an analysis of the CY 2004 MedPAR
files revealed that for the specified DRGs for acute care cases
following ICU/CCU days, there were significantly fewer ``recuperative''
days for acute care HCO patients that were discharged and admitted to
an LTCH than for those patients that were discharged directly from the
acute care hospital. For acute care cases in DRGs 475 (Respiratory
system diagnosis with ventilator support) and DRG 483 (Trach with
mechanical vent 96+ hours or PDX except face, mouth and neck
diagnosis), the number of ``recuperative'' days were considerably
shorter at the acute care hospital if there was a discharge followed by
an admission to an LTCH. We believe that this data confirms MedPAC's
assertion in the June 2004 Report to the Congress that ``patients who
use LTCHs have shorter acute hospital lengths of stay than similar
patients'' (p. 125).
Table 11.--LOS, ICU/CCU LOS, and Post-ICU/CCU LOS for Selected Inpatient DRGs by Post-Discharge Status
[Live discharges only]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Acute High Cost Outlier
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inlier Outlier
DRG Cases LOS ICU/CCU Post ICU/ Cases LOS ICU/CCU Post ICU/
days CCU days days CCU days
--------------------------------------------------------------------------------------------------------------------------------------------------------
475--no LTCH.................................................... 65,937 10.5 6.4 4.1 3,887 32.5 20.5 12
475--LTCH....................................................... 3,286 12.5 9.5 3 515 29.6 22.6 7
483--no LTCH.................................................... 11,726 31.5 21.8 9.7 3,257 73.6 53.6 20
483--LTCH....................................................... 8,920 26.6 23.3 3.3 2,353 45.7 41 4.7
001--no LTCH.................................................... 22,174 9 4.2 4.8 1,271 29.2 16.9 12.3
001--LTCH....................................................... 477 13.4 8.2 5.2 125 29 21.8 7.2
014--no LTCH.................................................... 216,972 5.5 1.7 3.8 1,257 28.1 13.5 14.6
014--LTCH....................................................... 3,145 7.9 3.5 4.4 108 24.2 16.9 7.3
148--no LTCH.................................................... 117,537 10.5 2.4 8.1 6,552 33.5 14.5 19
148--LTCH....................................................... 1,623 16 6.3 9.7 763 31.7 17.9 13.8
012--no LTCH.................................................... 53,838 5.2 0.7 4.5 294 27.7 9.6 18.1
012--LTCH....................................................... 329 6.8 1.4 5.4 11 20.8 11.5 9.3
087--no LTCH.................................................... 68,976 6.5 2.1 4.4 476 29.9 14 15.9
087--LTCH....................................................... 1,192 9.3 4.4 4.9 37 24.7 15.1 9.6
079--no LTCH.................................................... 139,412 8 1.3 6.7 1,429 34 9.3 24.7
079--LTCH....................................................... 2,543 10 2.7 7.3 73 30.5 10.5 20
088--no LTCH.................................................... 387,285 4.8 0.8 4 501 30 9.3 20.7
088--LTCH....................................................... 2,474 7.3 2.1 5.2 32 30.4 13 17.4
089--no LTCH.................................................... 488,931 5.6 0.9 4.7 1,067 27.9 8.8 19.1
089--LTCH....................................................... 2,999 8 2.2 5.8 53 29.2 13.5 15.7
416--no LTCH.................................................... 194,850 7.4 1.6 5.8 3,660 28.7 13.3 15.4
416--LTCH....................................................... 3,749 9.7 3.8 5.9 390 25.6 18.1 7.5
482--no LTCH.................................................... 4,841 9.8 3.3 6.5 241 35.2 14.9 20.3
482--LTCH....................................................... 145 13 6.5 6.5 31 33.3 21.8 11.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
We further agree that some SSO patients become so by virtue of
death or a faster than expected recovery and early discharge, and that
in certain LTC-DRGs, the SSO threshold still requires a relatively long
hospital stay (for example, DRG 475, Respiratory System Diagnosis with
Ventilator Support). However, in the absence of better admission
criteria, we still are concerned that LTCHs are admitting some SSO
patients that could have received their full care at the acute care
hospital and/or SNF level facility.
However, we do not agree with two comparisons made by a
considerable number of the commenters concerning the SOI and ROM of
LTCH SSO patients to those of acute care patients based on similar
lengths of stay and case-mix indices. Although we will not be
finalizing the specific proposed SSO payment policy option that the
commenters were opposing, we believe that it is essential to evaluate
the basis of these last comparisons.
These commenters submitted data indicating that even though they
may be inpatients grouped to the same DRG, for the same number of days,
a SSO patient at a LTCH is much sicker and has a greater chance of
dying than does the acute care patient. Although we will not be
finalizing the specific proposed SSO payment policy option that the
commenters were opposing, we believe that it is essential to evaluate
the basis of these last comparisons.
Generally, even a patient in an appropriate LTCH admission that has
been previously hospitalized in an acute care hospital received the
diagnostic work up and major interventional treatment during that
initial stay. Assuming that the patient continued to need hospital-
level care after being somewhat stabilized and was discharged to a
LTCH, the discharge to a LTCH could have been determined as clinically
appropriate. The clinical status of this patient at this point cannot
be reasonably compared to a typical patient who is treated in the acute
care hospital and who is grouped to the same DRG. This is the case
because the original patient has already been treated at that initial
level and has required additional hospital-level care either by
remaining at the acute care hospital, which would be paid for under the
IPPS (perhaps as a HCO), or by being admitted to a LTCH where the stay
could either be a SSO or an ``inlier.'' The only valid comparison of
the SOIs and ROMs of two such patients in the context of the
commenter's concerns,
[[Page 27859]]
would be to contrast the SOI and ROMs of the patient at the LTCH with
the patient who, following the same initial intervention at the acute
care hospital, continued treatment at the acute care hospital.
We understand that the proposed option that could have resulted in
paying for a SSO stay based on the IPPS-comparable amount would have
resulted in significant payment reductions to LTCHs for all SSO cases,
even those that by all clinical measures could be considered
appropriate LTCH patients. However, we still believe that modifications
to the SSO policy are necessary to ensure that payments for those cases
appropriately reflect the resources necessary to treat those patients,
which we believe are not the same as the resources necessary to treat a
patient requiring the full level of care available at a LTCH, with
lengths of stay over the SSO threshold for the LTC-DRG. At the outset
of the LTCH PPS, we established the SSO payment adjustment to address
this distinction which we continue to believe is a valid and reasonable
consideration for Medicare payments to LTCHs (67 FR 55995, August 30,
2002).
We believe that the finalized payment policy for SSO cases,
described above, responds to the concerns stated by these commenters.
That is, since LTCHs are certified as acute care hospitals that are
distinguished, by virtue of their greater than 25-day ALOS, for
Medicare payments under the LTCH PPS, per discharge payments are based
upon the high utilization of resources and long stays generally
associated with a specific type of patient. Therefore, we will be
paying SSO patients based on the least of 100 percent of the estimated
costs, 120 percent of the LTC-DRG per diem multiplied by the LOS, the
full LTC-DRG payment, or a blend of the IPPS comparable per diem
payment amount capped at the full IPPS comparable payment amount and
the 120 percent of the LTC-DRG per diem payment amount. (The specifics
of this option are detailed in responses above.) We believe that this
option is both fair and reasonable because as the length of a SSO stay
increases, the case begins to resemble a LTCH stay that requires the
full resources of a LTCH, as we believe was envisioned by the Congress
when they crafted the statutory definition of a ``subclause (I)'' LTCH,
``a hospital which has an inpatient LOS (as determined by the
Secretary) of greater than 25 days'' in section 1886(d)(1)(B)(iv)(I) of
the Act, and thus, is more appropriate for payment under the LTCH PPS.
As noted above, LTC-DRG weights and payment rates under the LTCH PPS
have been calculated to reflect services delivered to Medicare
beneficiaries with complex medical conditions that result in a greater
use of hospital resources, long inpatient stays, and significantly
higher Medicare payments.
It remains a significant concern, however, that in some cases LTCH
admissions are encouraged and facilitated by the referring acute care
hospital to reduce the acute hospital LOS, rather than on the basis of
objective LTCH admission criteria leading to higher numbers of SSO
patients inappropriately admitted to LTCHs. (For this reason, we have
awarded a contract to RTI, discussed in section XII of this final rule,
for the purpose of evaluating the feasibility of establishing such
objective criteria.) We are also concerned that in areas where LTCH
beds are plentiful, the ALOS data indicates that physicians may be less
likely to adhere to objective LTCH admission criteria to reduce acute
care hospital LOS and also to achieve a satisfactory patient
disposition, neither of which are the intended functions of LTCHs.
Comment: Many commenters asked that we not finalize the proposed
SSO policy revisions, stating that the SSO payment option that could
pay the LTCH based on an amount comparable to what would otherwise have
been paid under the IPPS was not based on solid data analysis and
supportable conclusions. In fact, a number of commenters asserted that
the proposed policy was not based on data but rather on ``erroneous and
unsubstantiated assumptions'' that all SSO patients are inappropriately
admitted to LTCHs and inappropriately discharged from acute care
hospitals. The commenters noted that, because of the way in which the
policy was formulated, the percentage of LTCH cases that are paid under
the SSO payment policy was a function of the SSO threshold and the
dispersion of cases above and below the ALOS for the LTC-DRGs, that is,
statistically, the SSO definition at \5/6\ of the geometric ALOS would
necessarily produce approximately 37 percent of cases as SSOs.
Therefore, under the commenters belief that given the regulatory \5/6\
definition of SSOs, which we had not proposed to change, the percentage
of SSO cases was not amenable to change just based upon LTCHs admission
policies. One commenter noted that for a significant number of patients
to fall below \5/6\ ALOS for a LTC-DRG is expected in a LTCH.
Additionally, commenters noted that a case may qualify as a SSO because
the patient has run out of covered days, regardless of the actual LOS
in the LTCH and that in establishing our policy for qualifying as a
LTCH (that is, meeting the average greater than 25 day LOS for a
particular cost reporting period), we have recognized the
``appropriateness'' of including ``total'' rather than just ``covered''
days of a stay, since regardless of the payer, if the patient is still
receiving hospital-level care, the facility is functioning like a LTCH.
For this reason, these commenters urged us to remove such cases from
the calculations we used to develop a SSO payment policy. Some
commenters expressed concerns about the reliability of the data that
underlay our policy proposals and asserted that our proposals are based
on faulty assumptions, insufficient data, and a fundamental lack of
understanding of the valuable care LTCHs provide. Moreover, the
commenters assert that LTCH patients are just not the same type of
patients as acute patients; they believe that our proposed policies
indicate that we are unaware of the distinction between acute care
patients and patients at LTCHs. They further claim that they did not
believe that the public was able to submit meaningful comments to our
proposed policies because of our data flaws, our biases, and the
resulting policies that we proposed.
Response: As stated in the previous response, we believe that we do
have a thorough understanding of the types of cases in which LTCHs
specialize but we are also aware that the vast majority of LTCH
patients are admitted following treatment at acute care hospitals. The
patient's stay at the acute care hospital generated a Medicare payment
under the IPPS, and the subsequent admission to a LTCH, an acute care
hospital with an ALOS of greater than 25 days, will generate an
additional Medicare payment. To protect the Medicare Trust Fund from
what may be inappropriate and/or unnecessary payments, and to ensure
that the program is not paying twice for the same episode of care, we
feel that it is essential that we evaluate those cases that are
admitted for an unusually short stay following an initial treatment at
another acute care hospital to acute care hospitals that specialize in
long-stay care, since that second stay will trigger another Medicare
payment. In MedPAC's June 2004 Report to the Congress, the Commission
stated that, ``* * * Living near a LTCH increases a beneficiary's
probability of using such a facility. For example, living in a market
area with a LTCH quadruples the probability of LTCH use. Being
hospitalized in an acute hospital with a LTCH located within the
hospital also
[[Page 27860]]
quadruples the probability that a beneficiary will use a long-term care
hospital'' (page 125).
Although we acknowledge that our establishment of the \5/6\ of the
geometric ALOS threshold, from a statistical standpoint, will result in
approximately 37 percent of LTCH cases being defined as SSOs, we are
still extremely concerned with the number of cases that are being
treated in LTCHs that fall considerably below the geometric ALOS for
any given LTC-DRG. In fact, as stated previously, in the commenters
various and specific suggestions for how to reasonably and fairly pay
SSOs, the commenters themselves drew a distinction between those cases
that fall within the definition of a SSO but are more in keeping with
the LOS generally associated with a LTCH (for example, a case assigned
to LTC-DRG 482 with SSO threshold of 32.1 days, would still be paid as
a SSO if the patient was treated in the LTCH for 25 days) and those
cases that many commenters referred to as ``Very Short Stay Outliers
(VSSO)'' or ``Very Short Stay Discharges (VSSD).'' In the finalized SSO
policy, described elsewhere in these responses, the payment formula
particularly takes into account our very strong belief that LTCHs are
acute care hospitals that specialize in treating patients requiring
``long-stay'' hospital-level care. The LTCH PPS has been designed and
calibrated to pay specifically for that type of care. Since the
inception of the LTCH PPS, when we established the SSO adjustment (67
FR 5594 through 55995, August 30, 2002) under our payment regulations
at Sec. 412.529, we have provided that if a LTCH treats patients not
requiring a long stay, Medicare pays the LTCH based on the applicable
payment adjustment option, described above. Furthermore, as we revise
the payment options in this final rule for the SSO policy, we continue
to believe that such a payment adjustment is reasonable for all short
stay patients, including those that die shortly after their admission
to the LTCH. The FY 2004 MedPAR data indicates that 43 percent of all
patients that die in LTCHs are deaths that occur within the first 14
days of the stay, with 35 percent of SSO deaths occurring within the
first 7 days following admission. As we have since the inception of the
LTCH PPS, we continue to believe that Medicare payments for those death
cases occurring within the SSO threshold should be determined under the
SSO policy since the length of the patient's treatment in the LTCH did
not utilize the full measure of hospital resources for which the full
LTC-DRG payment was calibrated.
Conversely, our data indicates that of all SSO cases, approximately
60 percent of the discharges are 14 days or less and also that acute
care hospitals treat a significant percentage of patients for longer
than the 5 day ALOS. (In acute care hospitals, paid under the IPPS,
over 20 percent, in the aggregate, of patients that are treated have a
LOS of between 14 and 7 days.) Therefore, as described below, we
believe that the SSO policy that we are finalizing under the LTCH PPS
provides a fair and reasonable payment, in light of the above stated
concerns that the short-term hospital-level care that LTCHs provide for
many SSO cases may be substituting for care that could otherwise be
delivered at acute care hospitals and for which at best, Medicare would
otherwise pay under the IPPS.
Under the new option of our finalized policy, we recognize that, as
the length of a SSO stay increases, the case begins to more resemble a
more ``typical'' LTCH stay and therefore, it is more appropriate for
payment to reflect the amount otherwise payable under the LTCH PPS.
Therefore, we will pay the lesser of 100 percent of the estimated costs
for the discharge, 120 percent of the per diem of the LTC-DRG
multiplied by the LOS, the full LTC-DRG payment, or a blend of the IPPS
comparable per diem payment amount capped at the full IPPS comparable
payment amount, and 120 percent of the LTC-DRG per diem payment amount.
For each day, as the LOS increases, the percentage of the IPPS-
comparable per diem amount will decrease and the percentage based on
the 120 percent of the LTC-DRG specific per diem amount will increase.
Because the formula uses the IPPS-comparable per diem amount, capped by
the full IPPS-comparable amount, for cases with very short lengths of
stay (that is, less than the IPPS ALOS), the IPPS-comparable amount
portion of the blended payment amount would be less than the full IPPS
comparable payment amount. Mathematically, as the LOS reaches the lower
of the \5/6\ SSO threshold or 25 days, the payment under the fourth
option, the blend (that is, zero percent of the IPPS comparable per
diem amount added to 100 percent of the 120 percent LTC-DRG per diem
amount) will be equal to the 120 percent of the LTC-DRG per diem
amount.
Under the LTCH PPS at Sec. 412.507 Medicare will pay for inpatient
care delivered only on those days that the beneficiary has coverage
until the LOS exceeds the SSO threshold and becomes an inlier stay.
Therefore, since the inception of the LTCH PPS for FY 2003, we
established the distinction between ``covered days'' and ``total days''
of a LTCH stay. At the point when a patient's benefits exhaust, the
patient is ``discharged for payment purposes'' and even though the
patient may continue to be hospitalized at the LTCH, Medicare will pay
only for the covered days, with the patient (or the patient's secondary
insurance) being responsible for the remaining days' LTCH costs. For
example, even though a patient could have been treated in an LTCH for
40 days, if upon admission, the patient only had 20 covered days
remaining, for Medicare payment purposes, the stay could qualify as a
SSO, unless the 20 covered days exceeded the \5/6\ threshold for the
LTC-DRG to which the case was grouped, at which point, the stay would
become an inlier stay and a full LTC-DRG payment would be generated.
Several commenters urged us to remove SSO cases occurring as a result
of such lapses of Medicare coverage from our revised SSO policy but
based on our data analysis, we will not be excluding benefit exhausted
cases from the policy. According to FY 2005 MedPAR data, these cases
constitute only 3.31 percent of SSO cases. It has been our policy since
the beginning of the LTCH PPS to count those stays during which
benefits are exhausted as SSOs if the covered portion of the stay is
less than \5/6\ of the geometric ALOS for the DRG. In this way, we
appropriately determine payment based on the part A-covered stay. At
the same time, we continue counting the total days of the stay for
purposes of qualification as a LTCH, because that calculation is
intended to reflect the length of care provided to Medicare
beneficiaries. Our policy, however, of including total days for
Medicare patients to identify hospitals qualifying (or continuing to
qualify) as LTCHs indicates our recognition that conceivably, a
beneficiary may be appropriately treated in a LTCH for example, for 40
days, and yet because the beneficiary had only 5 remaining benefit
days, would be reported in our claims data as a 5-day SSO case. We
would be interested in revisiting this issue and would solicit comments
to that end. For the present, however, since, as noted above, a very
small percentage of SSO cases are caused by beneficiaries exhausting
benefits, the above discussed benefits exhaust cases will continue to
be governed by the finalized SSO policy.
As stated above previously in this section, although we are not
finalizing the proposed SSO payment policy, we will address the
commenters concerns
[[Page 27861]]
questioning the integrity of the data upon which we based our proposed
policy for the IPPS-comparable option to payments under the SSO policy
and who also took great issue with our explanations for the proposed
policy. We believe that the commenters' concerns actually arose from
the anticipated impact of the proposed policy on their LTCHs, since the
issue of the major impact, an estimated 11 percent decrease in, an
aggregate payment, was the underlying concern raised by most
commenters, rather than actual doubts about the accuracy of our data.
We disagree that the public was denied the opportunity for meaningful
comment on our proposed policies, as we will discuss below. Further, we
believe this RY 2007 regulation cycle for the LTCH PPS actually
presents an excellent example of a rule-making experience as envisioned
by the Administrative Procedures Act, and the Secretary's general rule-
making authority as established under section 1871(b)(2) of the Act, as
well as demonstrating our responsiveness to public comment on proposed
policies. Reacting to several of the proposed provisions in the RY 2007
LTCH PPS proposed rule (71 FR 4648), industry stakeholders engaged
consultants, including the Lewin Group and Avalere Health LLC, that re-
analyzed our data used in the development of our proposed policy, as
well as our specific policy proposal for revision to SSO policy. Their
reports and findings were submitted to us along with the industry's
comments on the proposed rule and the reports were frequently quoted by
other commenters. As noted throughout these responses, based upon the
comments and serious proposals that we received (which are listed
above), as well as other information that was provided by stakeholders,
we revisited the proposed policy and in response to those concerns,
have, in fact, not finalized those aspects that the commenters found
the most troubling.
Therefore, rather than stakeholders being prevented from submitting
meaningful comments on the policies in the RY 2007 LTCH PPS proposed
rule, the actual sequence leading up to the finalized payment option
under the SSO policy, exemplifies the objectives of notice and comment
rule-making. As noted above, the resulting comments, have had a
significant impact on our revisiting and revising the proposed policy.
Comment: Two commenters suggested that rather than challenging the
cases that are admitted from acute care hospitals, we should be more
concerned about inappropriate admittances from non-hospital settings
such as SNFs or elsewhere.
Response: In response to the commenters' suggestion that we review
inappropriate admittances from non-hospital settings, after analyzing
recent data, we note that approximately 80 percent of the patients
admitted to the LTCHs come from the short term acute-care hospitals and
only 20 percent are admitted from other non-hospital settings. Since
SNFs do not offer hospital-level care but are still dealing with
patients with compromised health, we believe that generally, a decision
to transport a SNF patient to a hospital, would generally be made
because the patient appears to the medical professionals at the SNF to
be in need of a higher level of medical treatment or care than is
available at the SNF. (In fact, such patients would typically be
admitted to the acute care hospital rather than to a LTCH.) However,
both an acute-care hospital and a LTCH offer acute hospital-level care.
As discussed above, we are very concerned about the treatment of a
short-stay patient who could reasonably and effectively continue to be
treated in an acute-care hospital and paid for under the IPPS, being
admitted unnecessarily to a LTCH, which specializes in treating
patients requiring long-term hospital-level care and paid for under a
PPS which has been calibrated based upon the high resource use
associated with long patient stays. Furthermore, admission of such a
patient could also result in an unnecessary and inappropriate LTCH
hospitalization, which would also result in a second Medicare payment
for what was essentially, one episode of care.
Comment: Several commenters stated that although CMS claimed it had
insufficient data for a one-time adjustment to the standard Federal
rate, and proposed a postponement of this evaluation and potential
policy implementation, we asserted that we had sufficient data when we
proposed the payment revision to the SSO policy. The commenters believe
that if we have insufficient data for the purposes of determining the
former policy, we have insufficient data for the major policy change
signified by the proposed SSO payment policy revision. The commenters
stated that when comparing data from FY 2003 to FY 2004 for SSO cases,
there was a decrease of SSO cases from 48 percent in FY 2003 to 37
percent in FY 2004. Since FY 2004 was the second year of the transition
to full payments under the LTCH PPS and LTCHs were paid using a blend
(that is, 60 percent of payments were based on what would have been
paid under the reasonable cost-based (TEFRA) methodology), commenters
stated that the payment policy incentives we built into the PPS, which
were designed to discourage short stay patients, would not have been
reflected in FY 2004 data. Therefore, several commenters urged that we
reexamine the number of SSOs at the end of the transition or not before
reviewing FY 2005 data which is the first year that more than 50
percent of each LTCH PPS will be based on the Federal rate and impacted
by the SSO payment criteria. The commenters maintained that we will
only be able to determine whether the current SSO payment methodology
is fair after we compare more than one year of cost reporting data post
transition, a valid analysis of facility characteristics and resources
of LTCHs to acute care hospitals for the same DRGs.
Response: We do not believe that the position we have taken in
these two policy areas, establishing a revised payment option for SSO
cases and postponing the one-time adjustment to the standard Federal
rate is inconsistent. Rather, these proposals are based on two
different data sources that have different collection procedures and
different analytic potentials. We believe, for reasons explained below,
that the changes that we have made to the payment options for SSO
discharges are based on credible and sufficient data even though the
transition period to full payments under the Federal rate specified in
Sec. 412.533 is not yet complete. The data, which we utilized when we
designed the SSO policy at the outset of the LTCH PPS for FY 2003
(which is the basis for the 48 percent figure of the ``base year'' SSO
cases) was based on LTCH data generated during FY 2001 when LTCHs were
still being paid under the TEFRA system. Notwithstanding providing for
a 5-year transition and our earlier projections that in FY 2003
payments would be more generous under the blend (that is, we believed
that 49 percent would opt for the blend, whereas 51 percent would opt
for full Federal payments), the DRG-based per discharge payments under
the LTCH PPS provided an incentive so that, based on the data used in
the RY 2005 LTCH PPS final rule from the Provider Specific File at the
close of CY 2003, in fact, we estimated that 93 percent of LTCHs would
be paid fully under the LTCH PPS for RY 2005 (69 FR 25701, May 7,
2004). We believe that this indicates LTCH behavior at that point,
which was in the middle of the second year of the 5-year transition,
was being shaped by the incentives associated with all aspects of the
LTCH
[[Page 27862]]
PPS, from more accurate coding of LTC-DRGs, to the graduated payments
under the SSOs, as well as to the financial advantages inherent in 100
percent payment under the Federal rate. Furthermore, for purposes of
evaluating patient-level data, we use the MedPAR claims files which are
updated quarterly. Therefore, for FY 2004, using the best available
data for the RY 2007 LTCH PPS proposed rule, we were able to determine
that based on 118,525 cases from 337 LTCHs, 10,530 discharges have
lengths of stay of 7 days or less; 16,411 of 8 to 14 days; 36,989 of 15
to 25 days; and 54,595 of greater than 25 days. When we evaluated SSO
data, therefore, we did not base either the proposed revision of the
SSO policy or the finalized policy on isolated data. Rather, we
compared the data from FY 2001, which was used to formulate the LTCH
PPS, and the most recent available LTCH PPS discharge data available at
that time (that is, FY 2004).
At the outset of the LTCH PPS, we established a monitoring
component (discussed in section XI. in this preamble of this final
rule) which operates continually under the direction of our Office of
Research, Development, and Information (ORDI) and provides us with data
analysis and policy input. We will continue to monitor all aspects of
the LTCH PPS, including the SSO policy, particularly in light of the
finalized changes that we are making for RY 2007, focusing on the
impact of our revisions on LTCH behavior. As we noted in the RY 2007
LTCH PPS proposed rule, we would use the conclusion of the 5-year
transition (FY 2007) as a benchmark and for any adjustment under the
one-time adjustment in RY 2008. We plan to conduct a comprehensive
analysis of all of the payment adjustment policies, including our SSO
policy, issued at the inception of the LTCH PPS for FY 2003. This
payment analysis would be conducted to evaluate whether significant
revisions would be appropriate. Moreover, the analysis of cost reports,
and patient and facility characteristics mentioned by some of the
commenters were evaluated as part of the RTI study (which we expect to
be submitted in final form later this year) discussed in section XII of
this preamble.
The proposal to postpone the one-time potential adjustment to the
standard Federal rate is addressed in greater detail elsewhere in these
responses. However, we note that the data source for such an evaluation
would be LTCH cost reports (CMS HCRIS files) and, given that a LTCH is
permitted to submit its cost report within 6 months of the end of the
cost report period, plus the lag time required for typical cost report
settlement involving submission, desk review, and in some cases,
auditing, we did not believe that the October 1, 2006 deadline was
reasonable particularly in light of the potential significance of any
adjustment. Accordingly, we believe that in the context of the need to
make adjustments that will be based on cost report data, it is accurate
to state that the necessary data are not yet available. However, in the
context of the SSO change which is based, in part, on the LOS data
which are derived from claims information from the MedPAR files, those
data are currently available, and therefore, it is appropriate to
finalize that change based on existing data.
Comment: Several commenters suggested that prior to finalizing the
changes to the SSO policy specified in the RY 2007 LTCH PPS proposed
rule, we should first evaluate the impact of the 25 percent rule which
was based on many of the concerns that we expressed regarding movement
of patients prematurely from acute care hospitals to LTCHs.
Response: The regulation that the commenters refer to is ``Special
payment provisions for long-term care hospitals within hospitals and
satellites of long-term care hospitals'' which was implemented for
October 1, 2004, and which focused on high percentages of patients
being admitted to LTCH HwHs and satellites of LTCHs from host acute
care hospitals and which specified payment adjustments, in general, for
discharges in excess of 25 percent. We believe the SSO policy is not
related to the special payment provisions for long-term care HwHs and
satellites of LTCHs which was implemented for October 1, 2004, and
which focused on high percentages of patients being admitted to LTCH
HwHs and satellites of LTCHs from host acute-care hospitals and which
specified payment adjustments, in general, for discharges in excess of
LTCH 25 percent. The SSO policy addresses the appropriate payment
formula for patients with lengths of stay significantly below the
average for LTCHs patients in that LTC-DRG. Therefore, we see no
connection between the two policies and we believe that it is
unnecessary to postpone modifications to the SSO policy.
Comment: A few commenters questioned whether we had considered the
impact of the expanded post-acute transfer rule in formulating the
proposed changes in the SSO policy.
Response: The expanded post-acute care transfer policy, which was
finalized in the FY 2006 IPPS final rule (70 FR 47411), affects DRGs
that have a high volume of discharges to post-acute care facilities and
a disproportionate use of post-acute care services. The purpose of the
policy is to avoid providing an incentive for a hospital to transfer a
patient to another hospital early in the patient's stay to minimize
costs while still receiving the full DRG payment. Although we expect
that policy to have some impact on the discharge behavior of acute care
hospitals because the expanded policy will reduce payments to acute
care hospitals, under the IPPS, for discharges prior to reaching the
geometric ALOS for one of the included DRGs, it does not necessarily
affect the issues being addressed by the SSO policy change. Both of
these policies are ensuring that Medicare payments are appropriate
given the types of treatment provided in each setting. We believe that
the revised payment formula for SSO patients that we are finalizing
will appropriately pay LTCHs for delivering services to patients who do
not otherwise require the lengths of stay that are characteristic of
LTCHs. The SSO policy will address payments to LTCHs for patients
discharged from the acute care hospital even after the geometric ALOS.
Comment: Several commenters believe that we are incorrect that
LTCHs could be admitting patients not requiring long stays, noting that
LTCHs actually have a disincentive to admit short stay patients because
LTCH certification status can be at risk if the hospital does not
maintain an ALOS of more than 25 days.
Response: Under the TEFRA system, all inpatient days (whether
covered by Medicare or not) were included in the LOS computation, and
the mathematical determination was based upon the number of patient
days--during the cost reporting period when they occurred--divided by
discharges occurring during that same period of time (67 FR 55954,
55971). With the establishment of the per discharge LTCH PPS, we
restricted the patient count for purposes of qualifying as a LTCH
solely to Medicare patients (67 FR 55971), and we implemented the
policy of ``days following the discharges,'' under which, if a
patient's stay crosses two cost reporting periods, the total days of
that stay (both covered and non-covered days) would be included in the
computation during the cost-reporting period that the discharge
occurred (69 FR 257405, May 7, 2004).
Our data reveals that the general ALOS of most LTCHs varies only
slightly. Generally, LTCHs maintain an ALOS that is just over 25 days,
meeting the statutory definition of a LTCH, that
[[Page 27863]]
is, having an ALOS of greater than 25 days. Furthermore, we understand
that LTCHs closely monitor their yearly ALOS and that one extremely
long-stay case can mathematically offset for a number of short-stay
cases. From studying the hospital-specific data, we believe that this
is indeed the case for many LTCHs. We also believe that the payment
policy that has been utilized since the start of the LTCH PPS for FY
2003 has not operated as a financial disincentive for the admission of
patients who will not ultimately require long-stay hospital-level care.
In fact, we note that our data shows approximately 27,000 SSO cases
with a LOS of 14 days or less. This indicates that even with over 20
percent of their discharges having such a short ALOS, LTCHs have
maintained their greater than 25-day statutory ALOS. Therefore, we
believe that it is both possible for a LTCH to maintain its designation
and also admit many very short stay cases.
Comment: We received comments requesting that we exempt subclause
(II) LTCHs from the proposed changes to payments for SSO cases, which
under our proposed regulation would be subject for cost reporting
periods beginning on or after October 1, 2006. Because of the unique
mandate established by the Congress for these LTCHs, the commenters
believe that our proposed policy directly threatens the financial
integrity of subclause (II) LTCHs. The commenter noted that for FY
2004, we established a specific exception to the existing SSO policy
because they presented data that indicated that over 50 percent of
their patients would qualify as SSOs because of the Congress'
delineation of their unique census and mission. Therefore, the
commenter states, subclause (II) LTCHs cannot control either case mix
or LOS and most of our concerns about SSOs would be inapplicable to
such LTCHs because of this category of facility's unique services and
programs.
Response: By enacting section 4417(b) of the BBA, and providing an
exception to the general definition of a LTCH as set forth in section
1886(d)(1)(B)(iv)(I) of the Act, the Congress recognized the existence
and importance of a distinct category of LTCHs that might not otherwise
warrant exclusion from the acute care inpatient PPS under subclause
(I). Under this provision, which we implemented at Sec.
412.23(e)(2)(ii), to qualify as a subclause (II) LTCH, a hospital must
have first been excluded as a LTCH in CY 1986, have an inpatient ALOS
of greater than 20 days, and demonstrate that 80 percent or more of its
annual Medicare inpatient discharges in the 12-month reporting period
ending in Federal FY 1997 have a principal diagnosis that reflects a
finding of neoplastic disease. (62 FR 46016 and 46026, August 29,
1997.) Acknowledging the distinction between hospitals qualifying as
LTCHs under section 1886(d)(1)(B)(iv)(I) of the Act (subclause (I)
LTCHs), when we developed the PPS for LTCHs, we revised the greater
than 25 day ALOS criteria to include only Medicare patients for these
subclause (I) LTCHs. However, for LTCHs under section
1886(d)(1)(B)(iv)(II) of the Act (subclause (II) LTCHs), no change was
made to the methodology for calculating the LTCH's ALOS, since ``* * *
we have no reason to believe that the change in methodology for
determining the average inpatient LOS would better identify the
hospitals that Congress intended to exclude under subclause (II)'' (67
FR 55974, August 30, 2002). Consistent with existing policies that
differentiate between subclause (II) LTCHs and subclause (I) LTCHs, we
agree with the commenters that it is reasonable for CMS to consider
whether or not a policy that has been designed for LTCHs designated
under subclause (I) can reasonably and equitably be applied to a
subclause (II) LTCH without some measure of adjustment. Moreover, in
establishing this category of LTCHs, in effect, the Congress limited
its potential case-mix, therein distinguishing it even further from the
larger group of LTCHs. Since the theoretical foundations of a DRG-based
PPS are that where the costs of one case may exceed its payment, the
opposite is also likely to happen, and that where some types of cases
are always very expensive for a hospital to treat, others are, in
general, less costly, it is assumed that hospitals under a DRG-based
system, therefore, can typically exercise some influence over their
case-mix and their services to achieve fiscal stability. This option is
generally not open to subclause (II) LTCHs. According to CMS claims
data for CY 2001, at one subclause (II) LTCH, more than 93 percent of
Medicare patients expired. Over half of the patients at this hospital
would qualify as SSOs (97 percent of those SSOs expired), where others
had extremely long lengths of stay.
By establishing subclause (II) LTCHs, the Congress provided an
exception to the general definition of a LTCH under subclause (I), and
therein endorsed the unique mission of a particular type of hospital.
We do not believe that the Congress intended for policies put in place
for LTCHs described under subclause (I) to undermine the viability of a
LTCH described under subclause (II).
As we evaluated the SSO policy for subclause (II) LTCHs, we believe
that a LTCH in this category may not be able to readily address the
type of patients and the costs it incurs for those patients as would
LTCHs described under subclause (I).
Accordingly, we are not finalizing the specific options to the SSO
policy published in the RY 2007 LTCH PPS proposed rule for a subclause
(II) LTCH. We have revisited the relevant data for subclause (II) LTCHs
attendant upon receiving the comments, and we now believe that
retaining the existing SSO policy with the three current options to
govern Medicare SSO payments at the beginning of their first cost
reporting period beginning on or after October 1, 2006, continues to be
both reasonable and equitable for subclause (II) LTCHs as well as for
the Medicare program. Payments to subclause (II) LTCHs under the SSO
policy, therefore, will be governed by the specific percentages and
schedule at new Sec. 412.529(e)(2)(v). We consider the current
adjustment under the SSO policy for LTCHs designated under section
1886(d)(1)(B)(iv)(II) of the Act and Sec. 412.23(e)(2)(ii) to be a
reasonable and equitable response to the particular situation of a
subclause (II) LTCH under the LTCH PPS.
Comment: Several commenters noted that SSO policy has been a
feature of the LTCH PPS since the start of FY 2003, and, therefore,
payments for care to this population based upon SSO methodology were
anticipated in setting the standard Federal rate. The commenters stated
that to cut SSO payments so radically at this time raises issues
relating to the PPS's budget neutrality and to finalize the SSO policy
without a ``material increase in payment rates for inlier cases,''
casts doubts on the ongoing fairness of the overall payment system.
Response: We believe that commenters' when referring to the budget
neutrality requirement mean a system-wide budget neutrality
requirement. A system-wide budget neutrality requirement means,
specifically, payments under the LTCH PPS are always estimated to equal
estimated system-wide (that is, aggregate) payments that would have
been made under the reasonable cost-based (TEFRA) payment methodology
if the LTCH PPS were not implemented. We disagree with the commenter's
claim that the SSO policy violates the statutory requirement that the
LTCH PPS be budget neutral. We note that under section 123(a) of the
BBRA,
[[Page 27864]]
Congress required that the Secretary develop ``* * * a per discharge
prospective payment system for payment for inpatient hospital services
of long-term care hospitals described in section 1886(d)(1)(B)(iv) of
the Act (42 U.S.C. 1395ww(d)(1)(B)(iv)) under the Medicare program.
Such system shall include an adequate patient classification system
that is based on diagnosis-related groups (DRGs) and that reflects the
differences in patient resource use and costs, and shall maintain
budget neutrality.'' We have interpreted the requirement to ``maintain
budget neutrality'' to require that the Secretary set total estimated
prospective payments for FY 2003 equal to estimated payments that would
have been made under the TEFRA methodology if the PPS for LTCHs was not
implemented. It has been our consistent interpretation that the
statutory requirement for budget neutrality applies exclusively to FY
2003. In FY 2003, we set total estimated LTCH PPS payments for FY 2003
equal to estimated payments that would have been made under the TEFRA
methodology if the PPS for LTCHs was not implemented. Consequently, we
believe that we have satisfied the budget neutrality requirement under
the statute. Moreover, we have broad discretionary authority under
section 123(a)(1) of the BBRA as amended by section 307(b)(1) of the
BIPA to provide appropriate adjustments, including updates. Thus, we
are acting within that broad authority in establishing changes to the
SSO policy beginning in RY 2007.
There are several reasons that we do not believe that the Congress
intended perpetual system-wide budget neutrality. We note below, a
partial list of those reasons. For example, a system-wide budget
neutrality requirement that applies perpetually would affect the
Secretary's ability to operate the prospective payment system for LTCHs
efficiently. To illustrate, if the Secretary were to propose to adjust
payments upward in a particular instance because he finds that payments
are ``too low'', under a perpetual budget neutral system the Secretary
would be forced to reduce estimated payments for other cases to fund
the additional costs associated with the proposed adjustment. However,
this shifting of resources may then cause payments to LTCHs for those
cases that were being reduced to offset the proposed adjustment to then
be inappropriately ``too low.'' We do not believe the Congress intended
such a result for every adjustment that will be made to the LTCH PPS in
perpetuity. Rather, as with all dynamic and evolving systems, we
believe that based upon monitoring and the analysis of data, the
Secretary has the discretion and obligation to formulate polices and
establish payment adjustments that will ensure that the Secretary
continues to pay LTCHs appropriately for beneficiary care.
Also, we note that none of the statutory charges for the other
prospective payment systems (for example, IPPS, SNF PPS, IRF PPS)
require system-wide budget neutrality for perpetuity. We are not aware
of anything unique about LTCHs or the need to establish a LTCH PPS that
would have compelled the Congress to legislate a system that mandates
budget neutrality in perpetuity. Consequently, we do not believe that
in the instant case, the Congress departed from its consistent approach
for budget neutrality and intended to create a statute which applies a
completely different standard to the LTCH PPS.
As noted above, we will not be finalizing the specific IPPS-
comparable payment option that we proposed for SSO cases, but rather
have significantly modified the formula, in large part, because of our
responsiveness to our commenters' concerns. Despite this, we have no
reason to believe that ``inlier'' cases are being ``underpaid'' at
LTCHs. MedPAR data from FY 2003 and part of FY 2004 indicate an
aggregate 16.1 percent margin on LTCH inlier cases. We believe that the
SSO policy that we are finalizing, as described in detail above, is
reasonable and fair, and we see no additional need to increase payments
to LTCH inlier cases as a consequence of this policy.
Comment: We received one comment asking if we considered what would
be the impact on the calibration of the LTC-DRG weights under the
proposed changes in payments for SSOs.
Response: As discussed in the FY 2006 IPPS final rule when we
updated the LTC-DRGs and relative weights (70 FR 47336), the LTC-DRG
relative weights were adjusted for SSOs by using the ratio of the LOS
of the case to the geometric ALOS of the LTC-DRG and does not use the
actual payment amount (or cost) to adjust for SSO cases in the annual
recalibration of the LTC-DRG relative weights. Therefore, the changes
to the SSO policy would have no impact on the LTC-DRG relative weights.
Under the current LTC-DRG relative weight recalibration methodology,
there is no reason for changing how the LTC-DRG relative weights are
computed under the final SSO policy.
Comment: A number of commenters stated that the proposed IPPS-
comparable option for payment under the SSO policy is a violation of
the express will of the Congress in establishing the category of
hospitals that were excluded from the IPPS under section 1886(d)(1)(B)
of the Act. The commenters stated that under that provision the
Congress acknowledged that these excluded hospitals (that is, LTCHs,
IRFs, IPFs, childrens hospitals and cancer hospitals) could not
reasonably be paid under a DRG system that had been designed to pay for
treatment in acute care hospitals under the IPPS. Further, these
commenters stated that we had thwarted the intentions of the Congress
to establish a unique PPS that is specific to LTCHs in subsequent
legislation (that is, the BBRA of 1999 and the BIPA of 2000). The
commenters claimed that the proposed IPPS-comparable option to the SSO
payment policy would be forbidden under these enabling statutes because
such a payment option would ignore the ``differences in patient
resource use and cost'' at LTCHs. One commenter criticized our use of
the phrase ``a payment otherwise comparable to what would have been
paid under the IPPS'' as a disingenuous attempt to side-step the
Congressional mandate that the LTCHs not be paid based on the acute
care IPPS. Therefore, the commenter believes that we violated the
statutory intent that LTCHs be excluded from the IPPS in issuing the
proposed IPPS-comparable payment adjustment under the revised SSO
policy.
A number of commenters cite our proposed policy as a violation of
the Court's two-prong test for validity of a regulation established
under Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc.
467 U.S. 837, 842-843 (1984). Under the ruling, the Court asks whether
the Congress addressed, in clear language, the issue in question and,
if the answer is affirmative, the effect is given to the
``unambiguously expressed intent of the Congress.'' If the ``statute is
silent or ambiguous with respect to the specific issue,'' the Agency's
interpretation is allowed to stand as long as it is based on a
permissible construction of the statute.'' Id at 843. Deference to the
Agency's interpretation is ``only appropriate when the agency has
exercised its own judgment'' and is not based upon an erroneous view of
the law.
Response: In responding to the commenters' claims, we would first
reiterate that we are not finalizing the specifics of the proposed
IPPS-comparable option for payments under the SSO policy. In response
to commenters' concerns and following
[[Page 27865]]
further data and policy analysis we believe that the policy that we are
finalizing in this rule, and described in detail above, fairly
addresses a circumstance that we presume was not envisioned when the
Congress authorized the LTCH designation at section 1886(d)(1)(B)(I) of
the Act (that is, paying for a substantial number of short stay
patients--particularly those with extremely short stays--under a
payment system designed to treat long-stay patients). Moreover, we
believe that the quote used to establish Congressional intent actually
addresses the situation that we faced in determining how to pay for
short stay patients at a LTCH: ``[T]he DRG system was developed for
short-term acute care general hospitals and as currently constructed,
does not adequately take into account special circumstances of
diagnoses requiring long stays'' (Report of the Committee on Ways &
Means, U.S. House of Representatives to Accompany HR 1900, HR Report
No. 98-25, at 141 (1983) Legislative history of the 1983 SS
Amendments). We do not believe that we violated Congressional intent in
either the BBRA of 1999 or the BIPA of 2000 in establishing a payment
adjustment under the LTCH PPS that addresses our concerns about a
significant number of short stay patients being treated at LTCHs. As
indicated previously, section 123 of the BBRA, as amended by section
307(b)(1) of the BIPA confers broad discretionary authority on the
Secretary to implement a prospective payment system for LTCHs,
including providing for appropriate adjustments to the payment system.
This broad authority gives the Secretary great flexibility to fashion a
LTCH PPS based on both original policies as well as concepts borrowed
from other payments systems that are adapted, where appropriate, to the
LTCH context. In the instant case, our finalized SSO policy utilizes,
in large part, principles from the IPPS payment methodology and builds
upon those concepts to create a LTCH PPS payment adjustment that
results in an appropriate payment for those inpatient stays that we
believe could be more appropriately treated in another setting. The PPS
system authorized under both the BBRA and the BIPA emphasized the
specific needs, resource use, costs, and payments for the patients who
required hospital-level care for extended stays. Moreover, the
authority extended to the Secretary by the BIPA included the discretion
to ``provide for appropriate adjustments to the long-term hospital
payment system,'' which, from the inception of the LTCH PPS for FY
2003, we have interpreted to include the establishment of a payment
adjustment for discharges that have lengths of stay considerably less
than the ALOS and that receive significantly less than the full course
of treatment for a specific LTC-DRG'' (67 FR 55995; August 30, 2002).
Rather than our special payments for SSO violating the Congressional
mandate for a distinction between the payment systems for acute care
hospitals and, as according to the committee report cited above,
``diagnoses requiring long stays,'' we believe that our payment
policies are directly in accord with Congressional intent. We further
believe that the new option of the blended payment actually captures
Congressional intent since as the LOS appears to be more typical of the
type of stay for which the LTCH PPS was established, the payment is
based on a decreasing percentage of IPPS-comparable per diem payment
amount while the percentage of payment based on the 120 percent of the
LTC-DRG per diem payment amount increases. Therefore, we believe that
our finalized payment adjustment for SSOs under which one payment
option could be a blend of a percentage of an IPPS-comparable per diem
payment amount that will decrease in direct proportion to an increase
in the LOS and a percentage payment of the 120 percent LTC-DRG per diem
payment amount, which will increase based on the LOS at the LTCH, is
grounded in several existing Medicare payment adjustments. We also
believe that the gradually shifting percentage of the payment blend
recognizes the increasing use of resources and costs as the stay
lengthens, and it is consistent with the Ways and Means Committee's
above-cited definition of ``special circumstances of diagnoses
requiring long stays.''
We disagree with commenters that our LTCH PPS SSO policy that is
based on an IPPS comparable payment amount is a payment under the IPPS.
As indicated in various places throughout the preamble, section 123 of
the BBRA, as amended by section 307(b)(1) of the BIPA, confers broad
discretionary authority on the Secretary to implement a PPS for LTCHs,
including providing for appropriate adjustments to the system. This
broad authority gives the Secretary great flexibility to fashion a LTCH
PPS based on both original policies as well as concepts borrowed from
other payment systems that are adapted, where appropriate, to the LTCH
context. In the instant case, our finalized SSO policy utilizes
principles from the IPPS payment methodology and builds upon those
concepts to create a LTCH PPS payment adjustment that results in an
appropriate payment for those inpatient stays that we believe do not
typically belong in LTCHs but would be more appropriately treated in
another setting. In this final rule, we are further refining our
existing SSO policy. Therefore, we disagree with commenters that the
Secretary is acting in contradiction of the statute and inconsistently
with the Chevron doctrine.
Comment: Several commenters stated that when the Congress
established LTCHs, they were described as hospitals with ``an average
in patient LOS of greater than 25 days'' and that the statute did not
say that cases must stay a ``minimum of 25 days.'' The commenters
stated that the word ``average'' implies half of the lengths of stay
would be below 25 days. The commenters maintained that statements made
by CMS indicate that short stays at LTCHs are inappropriate. However,
the commenter claims that it was clearly the Congress's intent that in
establishing the definition of LTCHs, half of the patients would stay
for fewer than 25 days.
Response: We agree with the commenter that the statutory definition
of a LTCH as a hospital with an ALOS of greater than 25 days allows a
hospital to include short stay patients in meeting the average of
greater than 25 days threshold. However, in both the BBRA and the BIPA,
which authorized the development of the LTCH PPS, the Secretary was
granted considerable authority to examine and to provide appropriate
adjustments to the system. We believe that both in establishing LTCHs
as hospitals excluded from the IPPS and also in mandating the
development of the LTCH PPS, the Congress intended LTCHs to treat long-
stay patients with lengths of stay of approximately 25 days or more.
The specific policies that we have established under the LTCH PPS are
based on our interpretation of what the Congress intended for payment
to LTCHs in the treatment of patients requiring an extended stay that
could result in higher costs to the Medicare program. The SSO policy at
Sec. 412.529 is an example of the premises upon which we developed the
LTCH PPS since it provides for fractional payment of the LTC-DRG to a
LTCH for stays that do not require the full resources typical of LTCHs.
Similarly, the charge data generated from SSOs are given a fractional
weight in setting LTC-DRG weights as opposed to those cases that
generate a full LTC-DRG payment. Given the broad discretionary
authority conferred by the statute to develop the
[[Page 27866]]
LTCH PPS, we do not believe the Congress intended to limit the
Secretary's ability to make adjustment under the LTCH PPS for those
cases that do not receive the full resources of a case in the
respective LTC-DRG.
Comment: One commenter urged us to review how Medicare Advantage
views the use of LTCHs. If a patient covered by Medicare Advantage (MA)
is at risk of deconditioning, according to the commenter, the patient
is sent to a specific LTCH. This is because the prospects for
restoration are increased and, additionally, such a policy also opens
the plan's ICU and overall bed-day utilization rates.
Response: MA plans are required to furnish enrollees with all
medically necessary Medicare A and B services. Accordingly, MA
coordinated care plans must contract with Medicare certified hospitals
to ensure hospital access for its enrollees in the plan's service area.
In some areas where there are cooperating LTCHs, MA organizations may
elect to contract with LTCHs to provide care for their plan members.
However, the terms of these contracts, including payment rates, are
unique for each MA organization, its contracted providers (for example,
LTCHs), and hospitals. Therefore, we are not able to comment on the
particular situation to which the commenter is referring.
Comment: Several commenters stated that the proposed IPPS-
comparable payment adjustment option under the SSO policy created a
strong incentive to ``slow down provision of care'' because by
extending the stay of a SSO LTCH patient by a few days (depending upon
the particular LTC-DRG), a LTCH would receive the full LTC-DRG payment
rather than the least of the proposed SSO formula, which could result
in an IPPS-comparable payment to the LTCH. The commenters believe that
it is in the LTCHs' best interests not to discharge the patient because
the payment difference between the IPPS-comparable payment adjustment
and the full LTC-DRG payment is so significant, particularly for stays
approaching the \5/6\ geometric ALOS threshold. A number of commenters
stated that the proposed payment policy for SSOs actually inverted the
logic of the PPS and rather reinforced the former incentive of cost-
based reimbursement because more profit would be derived from longer
stays. The commenters urged us to reconsider the proposed policy
because they believe it contradicts the fundamental principle of a PPS,
which is to reward efficiency. Several commenters asserted that under
the proposed policy, successfully discharging the patient earlier
because of efficiency and expertise to alternative care settings
results in a financial penalty. Moreover, the commenters claimed this
rewards providers who keep patients through the threshold. Furthermore,
several commenters stated that our proposed revision to the SSO policy
(that is, the IPPS-comparable payment option), which commenters said
would significantly underpay SSO patients, countered the principles of
prospective payment. Other commenters asserted that all PPSs operated
in terms of an ``averaging principle'' which we were violating with the
proposed IPPS-comparable payment option under the SSO policy. One
commenter specified that ``SSO reimbursements are currently providing
the margins that keep overall PPS payments in balance by offsetting
losses on HCOs in particular.'' One aspect of this principle that they
claim we are violating, is that by eliminating the opportunity for
LTCHs to care for patients with costs that are less than Medicare
payments, we are eliminating chances for those LTCHs to overcome losses
by caring for patients whose costs of treatment exceed reimbursement
levels.
Response: We understand the commenters' concerns that our proposed
IPPS-comparable payment option under the SSO policy could extend
patient stays (that is, ``slowing down the provision of care'') to
exceed the threshold and thus be paid a full LTC-DRG payment. In
response to this comment and also to the claim that finalizing such a
policy could have the unintended effect of ``inverting'' the logic of
prospective payments so that an LTCH would reap financial benefits from
longer (perhaps less efficient) stays, we would reiterate that we are
not finalizing the specific proposed policy to which the commenters
refer. We believe that the policy that we are establishing in this
final rule more directly addresses our concerns that the current
payment formula under the LTCH PPS overpays for those very short-stay
SSO cases that could otherwise have been treated in a short-term acute-
care setting, while the final policy provides a higher payment amount
than the proposed policy for SSOs with longer lengths of stay. The
graduated payment scale, which increases the proportion of a LTC-DRG-
based payment while decreasing the proportion of an IPPS-comparable-
based payment, pays appropriately for long-stay cases while not
overpaying for very short SSO stays. Under this finalized policy,
Medicare will be paying more appropriately for the shorter stays that
we believe could otherwise be treated in an acute care hospital while
paying significantly more for those longer-stay cases that more closely
resemble typical LTCH cases. Moreover, we believe that the graduated
per diem increase of payments based on LTC-DRG weights in our final SSO
policy does not penalize LTCHs for effective care that could result in
an earlier discharge. Rather we believe that the policy provides for a
fair payment for the efficiency and expertise that, in the case of an
appropriate LTCH admission, could lead to a discharge that would be
somewhat below the five-sixths SSO threshold and thus be paid as a SSO.
Although we will be monitoring LTCH behavior, it is also our
expectation that this revised policy will provide minimal rewards for
unnecessarily lengthening a stay.
For the commenters that indicated that the SSO policy is
inconsistent with the averaging principle inherent in a PPS, we believe
it is very important to evaluate the adjustment in light of the
following. In a PPS there are numerous principles (for example,
appropriate payment, predictability, averaging, beneficiary access to
appropriate care, equity) that we try to balance simultaneously when
making policy decisions. The averaging principle, while an important
principle in the LTCH PPS, is not the only principle by which we make
our policy decisions. For example, in the case of SSOs and HCOs, we
must determine how to appropriately pay for aberrant cases that are
much shorter (in the case of short stays) and much costlier (in the
case of HCOs) when compared to typical cases in the relevant LTC-DRG.
In the case of short stays, if we failed to adjust the payment to
reflect that the case did not receive the full resources of a typical
LTCH stay for the particular DRG, the PPS payment would be greatly
``overpaying'' for the stay, may serve as an incentive to game the
system, and would waste valuable Trust Fund dollars. Similarly, in the
case of HCOs, if we did not adjust the payment to reflect the
extraordinary high costs that a LTCH was incurring for treating a
particular patient when compared to a typical case in the respective
LTC-DRG, we would be ``underpaying'' significantly for the case. We
have stated that providing additional money for HCOs strongly improves
the accuracy of the payment system as well as reduces the incentive to
under serve these patients (69 FR 55954 and 56022). Since we do not pay
short stays outliers or HCOs an amount paid to ``inliers''/cases that
have lengths of stay or costs commensurate with other cases in the
respective LTC-DRG, but instead make
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payment adjustments to reflect the unique circumstances of these cases,
the averaging principle is less heavily emphasized under these
circumstances to achieve equity, appropriate payments that accurately
reflect resource costs at the patient and hospital level, and
beneficiary access to medical care.
We believe that, given that LTCHs are defined as acute care
hospitals that have an average inpatient LOS of greater than 25 days,
the payment policies under the LTCH PPS appropriately reflect the
averaging principle. That is, where some cases within the inlier range
will have generated relatively lower costs, other cases will generate
higher costs and Medicare will pay a LTCH the same for both less and
more costly cases. The SSO policy, along with the HCO policy, addresses
payments for cases that fall outside the normal types of averaging in
the inlier range in the PPS and ensures that payment for SSO cases is
not greatly in excess of the resources required to treat those cases.
The payment system modeling and data projections that we generated in
developing the revised payment options for SSOs that we are finalizing
in this final rule at Sec. 412.529(c)(4), indicates that our payments
will be consistent with the particular way in which the ``averaging
principle'' is applied to the LTCH PPS, described above. Therefore,
this policy that we are finalizing does not represent a change from the
underlying premise of either the prospective payment or the particular
approach that we used in determining how to pay for short stays at
LTCHs since the outset of the LTCH PPS for FY 2003. We also believe
that this finalized policy should reduce any payment incentive under
the present SSO policy to admit short-stay patients who could otherwise
be treated at short term acute care hospitals paid for under the IPPS.
With regards to the commenters who noted that, ``SSO reimbursements
are currently providing the margins that keep overall PPS payments in
balance by offsetting losses on HCOs in particular,'' we would note
that MedPAR data from FY 2003 and part of FY 2004 also reveal that
payments to LTCHs for SSOs and inliers more than offset losses for HCOs
and, in fact, produces an aggregate average margin of 10.5 percent.
Furthermore, since the HCO threshold decreased from RY 2004 to RY 2005
from $19,590 to $17,864, it is probable that the aggregate margin for
the later period is even higher. Therefore, the policy that we are
finalizing will decrease the margins that our data indicates have
generally been realized by LTCHs for their SSO patients under the
existing SSO payment policy. In large part, these margins have resulted
from excessive payment for those very short-stay SSO cases. However, we
are not finalizing the proposed policy which would have significantly
reduced Medicare payments for all SSO discharges. We believe that the
revised SSO payment policy that we are finalizing addresses our
concerns with excessive payments for very short stay SSO cases while
providing a higher payment amount than the proposed policy for SSOs
with longer lengths of stay.
Comment: One commenter noted that payments under the SSO policy
that we have proposed under the IPPS-comparable option did not account
for cases that are SSOs at LTCH