Federal Register, Volume 75 Issue 140 (Thursday, July 22, 2010)

[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Notices]
[Pages 42836-42884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17621]

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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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Medicare Program; Inpatient Rehabilitation Facility Prospective Payment
System for Federal Fiscal Year 2011; Notice

Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 /
Notices

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1344-N]
RIN 0938-AP89

Medicare Program; Inpatient Rehabilitation Facility Prospective
Payment System for Federal Fiscal Year 2011

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

ACTION: Notice.

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SUMMARY: This notice updates the payment rates for inpatient
rehabilitation facilities (IRFs) for Federal fiscal year (FY) 2011 (for
discharges occurring on or after October 1, 2010 and on or before
September 30, 2011) as required under section 1886(j)(3)(C) of the
Social Security Act (the Act). Section 1886(j)(5) of the Act requires
the Secretary to publish in the Federal Register on or before the
August 1 that precedes the start of each fiscal year, the
classification and weighting factors for the IRF prospective payment
system's (PPS) case-mix groups and a description of the methodology and
data used in computing the prospective payment rates for that fiscal
year.

DATES: Effective Date: The updated IRF prospective payment rates are
effective for IRF discharges occurring on or after October 1, 2010 and
on or before September 30, 2011 (FY 2011).

FOR FURTHER INFORMATION CONTACT:
Julie Stankivic, (410) 786-5725.
Susanne Seagrave, (410) 786-0044.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
A. Historical Overview of the Inpatient Rehabilitation Facility
Prospective Payment System (IRF PPS)
B. Operational Overview of the Current IRF PPS
II. Summary of Provisions of the Notice
III. Update to the Case-Mix Group (CMG) Relative Weights and Average
Length of Stay Values for FY 2011
IV. Updates to the Facility-Level Adjustment Factors
V. FY 2011 IRF PPS Federal Prospective Payment Rates
A. Adjustment to the FY 2010 IRF PPS Federal Prospective Payment
Rates, Reflecting Adjustments to the Rehabilitation, Psychiatric,
and Long-term Care Hospital (RPL) Market Basket Increase Factor in
Accordance with Sections 3401(d) of the Patient Protection and
Affordable Care Act (Affordable Care Act) as Amended by Section
10319 of the Same Act and by Section 1105(c) of the Health Care and
Education Reconciliation Act of 2010
B. Market Basket Increase Factor and Labor-Related Share for FY
2011
C. Area Wage Adjustment
D. Description of the IRF Standard Payment Conversion Factor and
Payment Rates for FY 2011
E. Example of the Methodology for Adjusting the Federal
Prospective Payment Rates
VI. Update to Payments for High-Cost Outliers under the IRF PPS
A. Adjustment to the Outlier Threshold Amount for FY 2010,
Reflecting Adjustments to the RPL Market Basket Increase Factor in
Accordance with Sections 3401(d) of the Patient Protection and
Affordable Care Act (Affordable Care Act) as Amended by Section
10319 of the Same Act and by Section 1105 of the Health Care and
Education Reconciliation Act of 2010
B. Update to the Outlier Threshold Amount for FY 2011
C. Update to the IRF Cost-to-Charge Ratio Ceilings
VII. Collection of Information Requirements
VIII. Waiver of Proposed Rulemaking
IX. Regulatory Impact Analysis
A. Overall Impact
B. Anticipated Effects of the Notice
C. Alternatives Considered
D. Accounting Statement
E. Conclusion
Addendum

Acronyms

Because of the many terms to which we refer by acronym in this
notice, we are listing the acronyms used and their corresponding terms
in alphabetical order below.
ADC Average Daily Census
ASCA Administrative Simplification Compliance Act of 2002,
Public Law 107-105
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Balanced Budget Refinement Act of 1999, Public
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Benefits Improvement and Protection Act of 2000,
Public Law 106-554
CBSA Core-Based Statistical Area
CCR Cost-to-Charge Ratio
CFR Code of Federal Regulations
CMG Case-Mix Group
DRG Diagnostic Related Group
DSH Disproportionate Share Hospital
FI Fiscal Intermediary
FR Federal Register
FTE Full-time Equivalent
FY Federal Fiscal Year
HCFA Health Care Financing Administration
HHH Hubert H. Humphrey Building
HIPAA Health Insurance Portability and Accountability Act of
1996, Public Law 104-191
IOM Internet Only Manual
IPF Inpatient Psychiatric Facility
IPPS Inpatient Prospective Payment System
IRF Inpatient Rehabilitation Facility
IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment
Instrument
IRF PPS Inpatient Rehabilitation Facility Prospective Payment
System
IRVEN Inpatient Rehabilitation Validation and Entry
LTCH Long Term Care Hospital
LIP Low-Income Percentage
MA Medicare Advantage
MAC Medicare Administrative Contractor
MBPM Medicare Benefit Policy Manual
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007,
Public Law 110--173
OMB Office of Management and Budget
PAI Patient Assessment Instrument
PPS Prospective Payment System
QIC Qualified Independent Contractors
RAC Recovery Audit Contractors
RAND RAND Corporation
RFA Regulatory Flexibility Act of 1980, Public Law 96-354
RIA Regulatory Impact Analysis
RIC Rehabilitation Impairment Category
RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital
SCHIP State Children's Health Insurance Program

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility
Prospective Payment System (IRF PPS)

Section 4421 of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-
33, enacted on August 5, 1997), as amended by section 125 of the
Medicare, Medicaid, State Children's Health Insurance Program (SCHIP)
Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113, enacted
November 29, 1999) and by section 305 of the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, Pub. L.
106-554, enacted December 21, 2000) provides for the implementation of
a per discharge prospective payment system (PPS) under section 1886(j)
of the Social Security Act (the Act) for inpatient rehabilitation
hospitals and inpatient rehabilitation units of a hospital (hereinafter
referred to as IRFs).
Payments under the IRF PPS encompass inpatient operating and
capital costs of furnishing covered rehabilitation services (that is,
routine, ancillary, and capital costs) but not direct graduate medical
education costs, costs of approved nursing and allied health education
activities, bad debts, and other services or items outside the scope of
the IRF PPS. Although a complete discussion of the IRF PPS provisions
appears in the original FY 2002 IRF PPS final rule (66 FR 41316) and
the FY 2006 IRF PPS final rule (70 FR 47880), we are providing below a

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general description of the IRF PPS for fiscal years (FYs) 2002 through
2010.
Under the IRF PPS from FY 2002 through FY 2005, as described in the
FY 2002 IRF PPS final rule (66 FR 41316), the Federal prospective
payment rates were computed across 100 distinct (Case-Mix Group) CMGs.
We constructed 95 CMGs using rehabilitation impairment categories
(RICs), functional status (both motor and cognitive), and age (in some
cases, cognitive status and age may not be a factor in defining a CMG).
In addition, we constructed five special CMGs to account for very short
stays and for patients who expire in the IRF.
For each of the CMGs, we developed relative weighting factors to
account for a patient's clinical characteristics and expected resource
needs. Thus, the weighting factors accounted for the relative
difference in resource use across all CMGs. Within each CMG, we created
tiers based on the estimated effects that certain comorbidities would
have on resource use.
We established the Federal PPS rates using a standardized payment
conversion factor (formerly referred to as the budget neutral
conversion factor). For a detailed discussion of the budget neutral
conversion factor, please refer to our FY 2004 IRF PPS final rule (68
FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR
47880), we discussed in detail the methodology for determining the
standard payment conversion factor.
We applied the relative weighting factors to the standard payment
conversion factor to compute the unadjusted Federal prospective payment
rates under the IRF PPS from FYs 2002 through 2005. Within the
structure of the payment system, we then made adjustments to account
for interrupted stays, transfers, short stays, and deaths. Finally, we
applied the applicable adjustments to account for geographic variations
in wages (wage index), the percentage of low-income patients, location
in a rural area (if applicable), and outlier payments (if applicable)
to the IRF's unadjusted Federal prospective payment rates.
For cost reporting periods that began on or after January 1, 2002
and before October 1, 2002, we determined the final prospective payment
amounts using the transition methodology prescribed in section
1886(j)(1) of the Act. Under this provision, IRFs transitioning into
the PPS were paid a blend of the Federal IRF PPS rate and the payment
that the IRF would have received had the IRF PPS not been implemented.
This provision also allowed IRFs to elect to bypass this blended
payment and immediately be paid 100 percent of the Federal IRF PPS
rate. The transition methodology expired as of cost reporting periods
beginning on or after October 1, 2002 (FY 2003), and payments for all
IRFs now consist of 100 percent of the Federal IRF PPS rate.
We established a CMS Web site as a primary information resource for
the IRF PPS. The Web site URL is http://www.cms. gov/
InpatientRehabFacPPS/ and may be accessed to download or view
publications, software, data specifications, educational materials, and
other information pertinent to the IRF PPS.
Section 1886(j) of the Act confers broad statutory authority upon
the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF
PPS final rule (70 FR 47880) and in correcting amendments to the FY
2006 IRF PPS final rule (70 FR 57166) that we published on September
30, 2005, we finalized a number of refinements to the IRF PPS case-mix
classification system (the CMGs and the corresponding relative weights)
and the case-level and facility-level adjustments. These refinements
included the adoption of the Office of Management and Budget's (OMB)
Core-Based Statistical Area (CBSA) market definitions, modifications to
the CMGs, tier comorbidities, and CMG relative weights, implementation
of a new teaching status adjustment for IRFs, revision and rebasing of
the market basket index used to update IRF payments, and updates to the
rural, low-income percentage (LIP), and high-cost outlier adjustments.
Beginning with the FY 2006 IRF PPS final rule (70 FR 47908 through
47917), the market basket index used to update IRF payments is a 2002-
based market basket reflecting the operating and capital cost
structures for freestanding IRFs and long-term care hospitals (LTCHs)
(hereafter referred to as the rehabilitation, psychiatric, and long-
term care (RPL) market basket). Any reference to the FY 2006 IRF PPS
final rule in this notice also includes the provisions effective in the
correcting amendments. For a detailed discussion of the final key
policy changes for FY 2006, please refer to the FY 2006 IRF PPS final
rule (70 FR 47880 and 70 FR 57166).
In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined
the IRF PPS case-mix classification system (the CMG relative weights)
and the case-level adjustments, to ensure that IRF PPS payments would
continue to reflect as accurately as possible the costs of care. For a
detailed discussion of the FY 2007 policy revisions, please refer to
the FY 2007 IRF PPS final rule (71 FR 48354).
In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the
Federal prospective payment rates and the outlier threshold, revised
the IRF wage index policy, and clarified how we determine high-cost
outlier payments for transfer cases. For more information on the policy
changes implemented for FY 2008, please refer to the FY 2008 IRF PPS
final rule (72 FR 44284), in which we published the final FY 2008 IRF
Federal prospective payment rates.
After publication of the FY 2008 IRF PPS final rule (72 FR 44284),
section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007
(MMSEA, Pub. L. 110-173, enacted December 29, 2007), amended section
1886(j)(3)(C) of the Act to apply a zero percent increase factor for
FYs 2008 and 2009, effective for IRF discharges occurring on or after
April 1, 2008. Section 1886(j)(3)(C) of the Act required the Secretary
to develop an increase factor to update the IRF Federal prospective
payment rates for each FY. Based on the legislative change to the
increase factor, we revised the FY 2008 Federal prospective payment
rates for IRF discharges occurring on or after April 1, 2008. Thus, the
final FY 2008 IRF Federal prospective payment rates that were published
in the FY 2008 IRF PPS final rule (72 FR 44284) were effective for
discharges occurring on or after October 1, 2007 and on or before March
31, 2008; and the revised FY 2008 IRF Federal prospective payment rates
were effective for discharges occurring on or after April 1, 2008 and
on or before September 30, 2008. The revised FY 2008 Federal
prospective payment rates are available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.
In the FY 2009 IRF PPS final rule (73 FR 46370), we updated the CMG
relative weights, the average length of stay values, and the outlier
threshold; clarified IRF wage index policies regarding the treatment of
``New England deemed''counties and multi-campus hospitals; and revised
the regulation text in response to section 115 of the MMSEA to set the
IRF compliance percentage at 60 percent (``the 60 percent rule'') and
continue the practice of including comorbidities in the calculation of
compliance percentages. We also applied a zero percent market basket
increase factor for FY 2009 in accordance with section 115 of the
MMSEA. For more information on the policy changes implemented for FY
2009, please refer to the FY 2009 IRF PPS final rule (73 FR 46370), in
which

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we published the final FY 2009 IRF Federal prospective payment rates.
In the FY 2010 IRF PPS final rule (74 FR 39762) and in correcting
amendments to the FY 2010 IRF PPS final rule (74 FR 50712) that we
published on October 1, 2009, we updated the Federal prospective
payment rates, the CMG relative weights, the average length of stay
values, the rural, LIP, and teaching status adjustment factors, and the
outlier threshold; implemented new IRF coverage requirements for
determining whether an IRF claim is reasonable and necessary; and
revised the regulation text to require IRFs to submit patient
assessments on Medicare Advantage (Medicare Part C) patients for use in
the 60 percent rule calculations. Any reference to the FY 2010 IRF PPS
final rule in this notice also includes the provisions effective in the
correcting amendments. For more information on the policy changes
implemented for FY 2010, please refer to the FY 2010 IRF PPS final rule
(74 FR 39762 and 74 FR 50712), in which we published the final FY 2010
IRF Federal prospective payment rates.
After publication of the FY 2010 IRF PPS final rule (74 FR 39762),
section 3401(d) of the Patient Protection and Affordable Care Act
(Affordable Care Act, Pub. L. 111-148, enacted March 23, 2010), as
amended by section 10319 of the same act and by section 1105 of the
Health Care and Education Reconciliation Act of 2010, amended section
1886(j)(3)(C) of the Act and added section 1886(j)(3)(D). Section
1886(j)(3)(C) of the Act requires the Secretary to develop an adjusted
market basket increase factor using applicable productivity and other
adjustments as defined by the Act. This adjusted market basket increase
factor is to be used to update the IRF Federal prospective payment
rates for each FY from 2012 forward. Section 1886(j)(3)(D)(i)(1)
defines the adjustment that is to be applied to the market basket
increase factor in FYs 2010 and 2011. The Secretary is to reduce the
market basket increase factor by 0.25 percentage point for FY 2010.
Notwithstanding these provisions, in accordance with paragraph (p) of
section 3401 of the Affordable Care Act, the adjusted FY 2010 rate is
only to be applied to discharges occurring on or after April 1, 2010.
Section 1886(j)(3)(D)(i)(I) of the Act also requires the Secretary to
reduce the market basket increase factor by 0.25 percentage point for
FY 2011. Based on these legislative changes to section 1886(j)(3), we
adjust the FY 2010 Federal prospective payment rates, and apply these
rates to IRF discharges occurring on or after April 1, 2010. Thus, the
final FY 2010 IRF Federal prospective payment rates that were published
in the FY 2010 IRF PPS final rule (74 FR 39762) were used for
discharges occurring on or after October 1, 2009 and on or before March
31, 2010; and the adjusted FY 2010 IRF Federal prospective payment
rates apply to discharges occurring on or after April 1, 2010. The
adjusted FY 2010 Federal prospective payment rates are available on the
CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_
DataFiles.asp#TopOfPage.
In addition, sections 1886(j)(3)(C) and (D) of the Act also
affected the FY 2010 IRF outlier threshold amount because they required
an adjustment to the FY 2010 RPL market basket increase factor, which
changed the standard payment conversion factor for FY 2010.
Specifically, the original FY 2010 IRF outlier threshold amount was
determined based on the original estimated FY 2010 RPL market basket
increase factor of 2.5 percent and the standard payment conversion
factor of $13,661. However, as adjusted, the IRF prospective payments
are based on the adjusted RPL market basket increase factor of 2.25
percent and the revised standard payment conversion factor of $13,627.
In order to maintain estimated outlier payments for FY 2010 equal to
the established standard of 3 percent of total estimated IRF PPS
payments for FY 2010, we revised the IRF outlier threshold amount for
FY 2010 for discharges occurring on or after April 1, 2010. The revised
IRF outlier threshold amount for FY 2010 is discussed in more detail in
section VI.A of this notice.

B. Operational Overview of the Current IRF PPS

As described in the FY 2002 IRF PPS final rule, upon the admission
and discharge of a Medicare Part A fee-for-service patient, the IRF is
required to complete the appropriate sections of a patient assessment
instrument (PAI), designated as the Inpatient Rehabilitation Facility-
Patient Assessment Instrument (IRF-PAI). In addition, beginning with
IRF discharges occurring on or after October 1, 2009, the IRF is also
required to complete the appropriate sections of the IRF-PAI upon the
admission and discharge of each Medicare Part C (Medicare Advantage)
patient, as described in the FY 2010 IRF PPS final rule. All required
data must be electronically encoded into the IRF-PAI software product.
Generally, the software product includes patient classification
programming called the GROUPER software. The GROUPER software uses
specific IRF-PAI data elements to classify (or group) patients into
distinct CMGs and account for the existence of any relevant
comorbidities.
The GROUPER software produces a five-digit CMG number. The first
digit is an alpha-character that indicates the comorbidity tier. The
last four digits represent the distinct CMG number. Free downloads of
the Inpatient Rehabilitation Validation and Entry (IRVEN) software
product, including the GROUPER software, are available on the CMS Web
site at http://www.cms.gov/InpatientRehabFacPPS/06_Software.asp.
Once a patient is discharged, the IRF submits a Medicare claim as a
Health Insurance Portability and Accountability Act of 1996 (HIPAA,
Pub. L. 104-191, enacted August 21, 1996), compliant electronic claim
or, if the Administrative Simplification Compliance Act of 2002 (ASCA,
Pub. L. 107-105, enacted December 27, 2002) permits, a paper claim (a
UB-04 or a CMS-1450 as appropriate) using the five-digit CMG number and
sends it to the appropriate Medicare fiscal intermediary (FI) or
Medicare Administrative Contractor (MAC). Claims submitted to Medicare
must comply with both ASCA and HIPAA.
Section 3 of the ASCA amends section 1862(a) of the Act by adding
paragraph (22) which requires the Medicare program, subject to section
1862(h) of the Act, to 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, in turn, provides that the Secretary shall waive
such denial in situations in which there is no method available for the
submission of claims in an electronic form or the entity submitting the
claim is a small provider. In addition, the Secretary also has the
authority to waive such denial ``in such unusual cases as the Secretary
finds appropriate.'' For more information we refer the reader to the
final rule, ``Medicare Program; Electronic Submission of Medicare
Claims'' (70 FR 71008, November 25, 2005). CMS instructions for the
limited number of Medicare claims submitted on paper are available at:
http://www.cms.gov/manuals/downloads/clm104c25.pdf.)
Section 3 of the ASCA operates in the context of the administrative
simplification provisions of HIPAA, which include, among others, the
requirements for transaction standards and code sets codified in 45
CFR, parts 160 and 162, subparts A and I through

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R (generally known as the Transactions Rule). The Transactions Rule
requires covered entities, including covered healthcare providers, to
conduct covered electronic transactions according to the applicable
transaction standards. (See the program claim memoranda issued and
published by CMS at: http://www.cms.gov/ElectronicBillingEDITrans/ and
listed in the addenda to the Medicare Intermediary Manual, Part 3,
section 3600).
The Medicare FI or MAC processes the claim through its software
system. This software system includes pricing programming called the
``PRICER'' software. The PRICER software uses the CMG number, along
with other specific claim data elements and provider-specific data, to
adjust the IRF's prospective payment for interrupted stays, transfers,
short stays, and deaths, and then applies the applicable adjustments to
account for the IRF's wage index, percentage of low-income patients,
rural location, and outlier payments. For discharges occurring on or
after October 1, 2005, the IRF PPS payment also reflects the new
teaching status adjustment that became effective as of FY 2006, as
discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

II. Summary of Provisions of the Notice

In this notice, we use the methods described in the FY 2010 IRF PPS
final rule (74 FR 39762) to update the Federal prospective payment
rates for FY 2011 using updated FY 2009 IRF claims and FY 2008 IRF cost
report data. No policy changes are being proposed in this notice.
Furthermore, we explain the self-implementing changes resulting from
the provisions in section 1886(j)(3)(C) and (D) of the Act, as
described above.
In summary, this notice:
Describes the adjustments to the FY 2010 IRF PPS Federal
prospective payment rates and outlier threshold amount for IRF
discharges occurring on or after April 1, 2010, in accordance with
Section 3401(d) of the Affordable Care Act as amended by Section 10319
of the Same Act and by section 1105(c) of the Health Care and Education
Reconciliation Act of 2010, as discussed in more detail in sections V.A
and VI.A of this notice.
Updates the FY 2011 IRF PPS relative weights and average
length of stay values using the most current and complete Medicare
claims and cost report data in a budget neutral manner, as discussed in
section III of this notice.
Updates the FY 2011 IRF PPS payments rates by a market
basket increase factor, based upon the most current data available,
with a 0.25 percentage point reduction as required by section
1886(j)(3)(D)(i)(I) of the Act, as described in section V.B of this
notice.
Updates the FY 2011 IRF PPS payment rates by the FY 2011
wage index and the labor-related share in a budget neutral manner, as
discussed in sections V.B and V.C of this notice.
Describes the calculation of the IRF Standard Payment
Conversion Factor for FY 2011, as discussed in section V.D of this
notice.
Updates the outlier threshold amount for FY 2011, as
discussed in section VI.B of this notice.
Updates the cost-to-charge ratio (CCR) ceilings for FY
2011, as discussed in section VI.C of this notice.
This notice does not contain any revisions to existing regulation
text.

III. Update to the Case-Mix Group (CMG) Relative Weights and Average
Length of Stay Values for FY 2011

As specified in 42 CFR 412.620(b)(1), we calculate a relative
weight for each CMG that is proportional to the resources needed by an
average inpatient rehabilitation case in that CMG. For example, cases
in a CMG with a relative weight of 2, on average, will cost twice as
much as cases in a CMG with a relative weight of 1. Relative weights
account for the variance in cost per discharge due to the variance in
resource utilization among the payment groups, and their use helps to
ensure that IRF PPS payments support beneficiary access to care as well
as provider efficiency.
As required by statute, we always use the most recent available
data to update the CMG relative weights and average lengths of stay.
For FY 2011, we used FY 2009 IRF claims and FY 2008 IRF cost report
data. These data are the most current and complete data available at
this time. Currently, less than 20 percent of the FY 2009 IRF cost
report data are available for analysis, but the majority of the FY 2009
IRF claims data are available for analysis.
We will apply these data using the methodologies that were
established in the FY 2002 IRF PPS final rule (66 FR 41316). In
calculating the CMG relative weights, we use a hospital-specific
relative value method to estimate operating (routine and ancillary
services) and capital costs of IRFs. The process used to calculate the
CMG relative weights for this notice is as follows:
Step 1. We calculate the CMG relative weights by estimating the
effects that comorbidities have on costs.
Step 2. We adjust the cost of each Medicare discharge (case) to
reflect the effects found in the first step.
Step 3. We use the adjusted costs from the second step to calculate
CMG relative weights, using the hospital-specific relative value
method.
Step 4. We normalize the FY 2011 CMG relative weights to the same
average CMG relative weight from the CMG relative weights implemented
in the FY 2010 IRF PPS final rule (74 FR 39762).
Consistent with the methodology that we have used to update the IRF
classification system in each instance in the past, we are updating the
CMG relative weights for FY 2011 in such a way that total estimated
aggregate payments to IRFs for FY 2011 are the same with or without the
changes (that is, in a budget neutral manner) by applying a budget
neutrality factor to the standard payment amount. To calculate the
appropriate budget neutrality factor for use in updating the FY 2011
CMG relative weights, we use the following steps:
Step 1. Calculate the estimated total amount of IRF PPS payments
for FY 2011 (with no updates to the CMG relative weights).
Step 2. Apply the updates to the CMG relative weights (as discussed
above) to calculate the estimated total amount of IRF PPS payments for
FY 2011.
Step 3. Divide the amount calculated in step 1 by the amount
calculated in step 2 to determine the budget neutrality factor (0.9942)
that maintains the same total estimated aggregate payments in FY 2011
with and without the updates to the CMG relative weights.
Step 4. Apply the budget neutrality factor (0.9942) to the FY 2010
IRF PPS standard payment amount after the application of the budget-
neutral wage adjustment factor.
In section V.D of this notice, we discuss the use of the existing
methodology to calculate the standard payment conversion factor for FY
2011.
The CMG relative weights and average length of stay values for FY
2011 are presented below in Table 1.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C
Generally, updates to the CMG relative weights result in some
increases and some decreases to the CMG relative weight values. Table 2
shows how the application of the revisions for FY 2011 will affect
particular CMG relative weight values, which affect the overall
distribution of payments within CMGs and tiers. Note that, because we
are implementing the CMG relative weight revisions in a budget neutral
manner (as described above), total estimated aggregate payments to IRFs
for FY 2011 will not be affected as a result of the CMG relative weight
revisions. However, the revisions will affect the distribution of
payments within CMGs and tiers.
[GRAPHIC] [TIFF OMITTED] TN22JY10.019

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As Table 2 shows, over 98 percent of all IRF cases are in CMGs and
tiers that will experience less than a 5 percent change (either
increase or decrease) in the CMG relative weight value as a result of
the revisions for FY 2011. The largest increase in the CMG relative
weight values affecting the most cases is a 3.0 percent increase in the
CMG relative weight value for CMG 0802--Replacement of Lower Extremity
Joint, with a motor score between 37.05 and 49.55--in the ``no
comorbidity'' tier. In the FY 2009 data, 12,149 IRF discharges were
classified into this CMG and tier. We believe that the higher costs
reported by IRFs for this CMG and tier in FY 2009, compared with the
costs reported in FY 2008, may continue to reflect the IRF trend away
from admitting lower-severity joint replacement cases in favor of
higher-severity joint replacement cases. We believe that this may be
evidence of a response, at least in part, to Medicare's ``60 percent''
rule, and the increased focus on the medical review of IRF cases. As we
said in the FY 2009 IRF PPS proposed rule (73 FR 22680), these policies
likely increase the complexity of patients being admitted to IRFs,
especially among the lower-extremity joint replacement cases with no
comorbidities, which often do not meet the 60 percent rule criteria and
have been the focus of a lot of the medical review activities.
The largest decrease in a CMG relative weight value affecting the
most cases is a 0.5 percent decrease in the CMG relative weight for CMG
A0110--Stroke, with motor score less than 22.35 and patient age less
than 84.5 years--in the ``no comorbidity'' tier. In the FY 2009 IRF
claims data, this change affects 16,829 cases. The decrease in the
relative weight for CMG A0110 follows the same trend that is occurring
in all 10 of the CMGs for stroke in the FY 2008 IRF cost report data
and the FY 2009 IRF claims data that were used to update the CMG
relative weights in this notice. That is, IRFs are reporting slightly
lower costs for stroke patients that are classified into the ``no
comorbidity'' tier and the next-lowest paying tier 3, with the relative
weight values for CMG 0110 for FY 2011 decreasing by 0.5 percent in the
``no comorbidity'' tier and decreasing by 0.4 percent in tier 3,
compared with FY 2010. At the same time, however, IRFs are reporting
higher costs for stroke patients that are classified into the 2
highest-paying tiers--tiers 1 and 2--with the relative weight values
for CMG 0110 for FY 2011 increasing by 6.5 percent and 1.8 percent in
tiers 1 and 2, respectively, compared with FY 2010.
The changes in the average length of stay values for FY 2011,
compared with the FY 2010 average length of stay values, are small and
do not show any particular trends in IRF length of stay patterns.

IV. Updates to the Facility-Level Adjustment Factors

Section 1886(j)(3)(A)(v) of the Act confers broad authority upon
the Secretary to adjust the per unit payment rate ``by such * * *
factors as the Secretary determines are necessary to properly reflect
variations in necessary costs of treatment among rehabilitation
facilities.'' For example, we adjust the Federal prospective payment
amount associated with a CMG to account for facility-level
characteristics such as an IRF's LIP percentage, teaching status, and
location in a rural area, if applicable, as described in Sec.
412.624(e). In the FY 2010 IRF PPS final rule (74 FR 39762), we updated
the adjustment factors for calculating the rural, LIP, and teaching
status adjustments based on the most recent three years worth of IRF
claims data (at that time, FY 2006, FY 2007, and FY 2008) and the most
recent available corresponding IRF cost report data. As discussed in
the FY 2010 IRF PPS proposed rule (74 FR 21060 through 21061), we
observed relatively large year-to-year fluctuations in the underlying
data used to compute the adjustment factors, especially the teaching
status adjustment factor. Therefore, we implemented a three-year moving
average approach to updating the facility-level adjustment factors in
the FY 2010 IRF PPS final rule (74 FR 39762) to provide greater
stability and predictability of Medicare payments for IRFs. Each year,
we review the major components of the IRF PPS to maintain and enhance
the accuracy of the payment system. For FY 2010, we implemented a
change to our methodology that was designed to decrease the IRF PPS
volatility by using a three-year moving average to calculate the
facility-level adjustment factors. This year, we are evaluating the
effectiveness of the new methodology in stabilizing the IRF PPS rate
structure. We plan to then, if necessary, propose further adjustments
through a future rulemaking process.

V. FY 2011 IRF PPS Federal Prospective Payment Rates

A. Adjustment to the FY 2010 IRF PPS Federal Prospective Payment Rates,
Reflecting Adjustments to the Rehabilitation, Psychiatric, and Long-
Term Care Hospital (RPL) Market Basket Increase Factor in Accordance
With Sections 3401(d) of the Patient Protection and Affordable Care Act
(Affordable Care Act) as Amended by Section 10319 of the Same Act and
by Section 1105(c) of the Health Care and Education Reconciliation Act
of 2010

As discussed previously in this notice, sections 1886(j)(3)(C) and
(D) of the Act require the increase factor to be reduced by 0.25
percentage point for FY 2010 and FY 2011. In accordance with paragraph
(p) of section 3401 of the Affordable Care Act, the adjusted FY 2010
market basket increase factor is only applied to discharges on or after
April 1, 2010. Thus, we revised the FY 2010 IRF Federal prospective
payment rates for all IRF discharges occurring on or after April 1,
2010 to reflect an adjusted market basket increase factor of 2.25
percent, instead of the 2.5 percent market basket increase factor for
FY 2010 that was published in the FY 2010 IRF PPS final rule (74 FR
39778). Revising the market basket increase factor for FY 2010 from 2.5
percent to 2.25 percent changes the FY 2010 standard payment conversion
factor from the $13,661 that was published in the FY 2010 IRF PPS final
rule (74 FR 39780) to $13,627. This change also affects the outlier
threshold amount for FY 2010, as discussed further in section VI.A of
this notice. The revised FY 2010 Federal prospective payment rates are
available on the CMS Web site at http://www.cms.gov/
InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.

B. Market Basket Increase Factor and Labor-Related Share for FY 2011

Section 1886(j)(3)(C) of the Act requires the Secretary to
establish an increase factor that reflects changes over time in the
prices of an appropriate mix of goods and services included in the
covered IRF services, which is referred to as a market basket index.
According to section 1886(j)(3)(A)(i) of the Act, the increase factor
shall be used to update the IRF Federal prospective payment rates for
each FY. Sections 1886(j)(3)(C) and (D) of the Act require the
application of a 0.25 percentage point reduction to the market basket
increase factor for FYs 2010 and 2011. Thus, in this notice, we are
updating the IRF PPS payments for FY 2011 by a market basket increase
factor based upon the

[[Page 42849]]

most current data available, with a 0.25 percentage point reduction as
required by section 1886(j)(3)(D)(i)(I) of the Act.
For this notice, we have used the same methodology described in the
FY 2006 IRF PPS final rule (70 FR 47880 at 47908 through 47917) to
compute the FY 2011 market basket increase factor and labor-related
share. Using this method and the IHS Global Insight, Inc. forecast for
the second quarter of 2010 of the 2002-based RPL market basket, the FY
2011 RPL market basket increase factor is 2.5 percent. IHS Global
Insight is an economic and financial forecasting firm that contracts
with CMS to forecast the components of providers' market baskets.
In accordance with sections 1886(j)(3)(C) and (D) of the Act, a
reduction of 0.25 percentage point is then applied to the FY 2011 RPL
market basket increase factor of 2.5 percent. Thus, the adjusted RPL
market basket increase factor is 2.25 percent for FY 2011.
Also, using the methodology described in the FY 2006 IRF PPS final
rule (70 FR 47880, 47908 through 47917), we are updating the IRF labor-
related share for FY 2011. Using this method and the IHS Global
Insight, Inc. forecast for the second quarter of 2010 of the 2002-based
RPL market basket, the IRF labor-related share for FY 2011 is the sum
of the FY 2011 relative importance of each labor-related cost category.
This figure reflects the different rates of price change for these cost
categories between the base year (FY 2002) and FY 2011. As shown in
Table 3, the FY 2011 labor-related share is 75.271 percent.
[GRAPHIC] [TIFF OMITTED] TN22JY10.020

C. Area Wage Adjustment

Section 1886(j)(6) of the Act requires the Secretary to adjust the
proportion of rehabilitation facilities' costs attributable to wages
and wage-related costs (as estimated by the Secretary from time to
time) by a factor (established by the Secretary) reflecting the
relative hospital wage level in the geographic area of the
rehabilitation facility compared to the national average wage level for
those facilities. The Secretary is required to update the IRF PPS wage
index on the basis of information available to the Secretary on the
wages and wage-related costs to furnish rehabilitation services. Any
adjustments or updates made under section 1886(j)(6) of the Act for a
FY are made in a budget neutral manner.
In the FY 2009 IRF PPS final rule (73 FR 46378), we maintained the
methodology described in the FY 2006 IRF PPS final rule to determine
the wage index, labor market area definitions, and hold harmless policy
consistent with the rationale outlined in the FY 2006 IRF PPS final
rule (70 FR 47880, 47917 through 47933).
For FY 2011, we are maintaining the policies and methodologies
described in the FY 2009 IRF PPS final rule relating to the labor
market area definitions and the wage index methodology for areas with
wage data. Thus, we are using the Core-Based Statistical area (CBSA)
labor market area definitions and the FY 2010 pre-reclassification and
pre-floor hospital wage index data. In accordance with section
1886(d)(3)(E) of the Act, the FY 2010 pre-reclassification and pre-
floor hospital wage index is based on data submitted for hospital cost
reporting periods beginning on or after October 1, 2005 and before
October 1, 2006 (that is, 2006 cost report data).
The labor market designations made by the OMB include some
geographic areas where there are no hospitals and, thus, no hospital
wage index data on which to base the calculation of the IRF PPS wage
index. We have used the same methodology discussed in the FY 2008 IRF
PPS final rule (72 FR 44299) to address those geographic areas where
there are no hospitals and, thus, no hospital wage index data on which
to base the calculation of the FY 2011 IRF PPS wage index.
Additionally, we are incorporating the CBSA changes published in
the most recent OMB bulletin that applies to the hospital wage data
used to determine the current IRF PPS wage index. The changes were
nominal and did not represent substantive changes to the CBSA-based
designations. Specifically, OMB added or deleted certain CBSA numbers
and revised certain titles. The OMB bulletins are available online at
http://www.whitehouse.gov/omb/bulletins/index.html.
To calculate the wage-adjusted facility payment for the payment
rates set forth in this notice, we multiply the unadjusted Federal
payment rate for IRFs by the FY 2011 RPL labor-related share (75.271
percent) to determine the labor-related portion of the standard payment
amount. We then multiply the labor-related portion by the applicable
IRF wage index from the tables in the addendum to this notice. Table 1
is for urban areas, and Table 2 is for rural areas.
Adjustments or updates to the IRF wage index made under section
1886(j)(6) of the Act must be made in a budget neutral manner. We
calculate a

[[Page 42850]]

budget neutral wage adjustment factor as established in the FY 2004 IRF
PPS final rule (68 FR 45689), codified at Sec. 412.624(e)(1), as
described in the steps below. We use the listed steps to ensure that
the FY 2011 IRF standard payment conversion factor reflects the update
to the wage indexes (based on the FY 2006 hospital cost report data)
and the labor-related share in a budget neutral manner:
Step 1. Determine the total amount of the estimated FY 2010 IRF PPS
rates, using the FY 2010 standard payment conversion factor and the
labor-related share and the wage indexes from FY 2010 (as published in
the FY 2010 IRF PPS final rule (74 FR 39762)).
Step 2. Calculate the total amount of estimated IRF PPS payments
using the FY 2010 standard payment conversion factor and the FY 2011
labor-related share and CBSA urban and rural wage indexes.
Step 3. Divide the amount calculated in step 1 by the amount
calculated in step 2. The resulting quotient is the FY 2011 budget
neutral wage adjustment factor of 1.0005.
Step 4. Apply the FY 2011 budget neutral wage adjustment factor
from step 3 to the FY 2010 IRF PPS standard payment conversion factor
after the application of the adjusted market basket update to determine
the FY 2011 standard payment conversion factor.
We discuss the calculation of the standard payment conversion
factor for FY 2011 in section V.D. of this notice.

D. Description of the IRF Standard Payment Conversion Factor and
Payment Rates for FY 2011

To calculate the standard payment conversion factor for FY 2011, as
illustrated in Table 4 below, we begin by applying the adjusted market
basket increase factor for FY 2011 that was adjusted in accordance with
sections 1886(j)(3)(C) and (D) of the Act (2.25 percent, or 2.5 percent
less 0.25 percentage point), to the standard payment conversion factor
for FY 2010 ($13,627). As described in section V.A of this notice, the
adjusted standard payment conversion factor of $13,627 for FY 2010
differs from the original FY 2010 standard payment conversion factor
that was published in the FY 2010 IRF PPS final rule (74 FR 39778)
because of the requirements of sections 1886(j)(3)(C) and (D) of the
Act. Applying the 2.25 percent adjusted market basket increase factor
for FY 2011 to the revised standard payment conversion factor for FY
2010 of $13,627 yields a standard payment amount of $13,934. Then, we
apply the budget neutrality factor for the FY 2011 wage index and labor
related share of 1.0005, which results in a standard payment amount of
$13,941. Then, we apply the budget neutrality factor for the revised
CMG relative weights of 0.9942, which results in a standard payment
amount of $13,860 for FY 2011.
[GRAPHIC] [TIFF OMITTED] TN22JY10.021

After the application of the CMG relative weights described in
section III of this notice, the resulting unadjusted IRF prospective
payment rates for FY 2011 are shown below in Table 5, ``FY 2011 Payment
Rates.''

[[Page 42851]]

[GRAPHIC] [TIFF OMITTED] TN22JY10.022

[[Page 42852]]

[GRAPHIC] [TIFF OMITTED] TN22JY10.023

[[Page 42853]]

[GRAPHIC] [TIFF OMITTED] TN22JY10.024

E. Example of the Methodology for Adjusting the Federal Prospective
Payment Rates

Table 6 illustrates the methodology for adjusting the Federal
prospective payments (as described in sections V.B through V.D of this
notice). The examples below are based on two hypothetical Medicare
beneficiaries, both classified into CMG 0110 (without comorbidities).
The unadjusted Federal prospective payment rate for CMG 0110 (without
comorbidities) appears in Table 5 above.
One beneficiary is in Facility A, an IRF located in rural Spencer
County, Indiana, and another beneficiary is in Facility B, an IRF
located in urban Harrison County, Indiana. Facility A, a rural non-
teaching hospital has a disproportionate share hospital (DSH)
percentage of 5 percent (which would result in a LIP adjustment of
1.0228), a wage index of 0.8529, and a rural adjustment of 18.4
percent. Facility B, an urban teaching hospital, has a DSH percentage
of 15 percent (which would result in a LIP adjustment of 1.0666), a
wage index of 0.8964, and a teaching status adjustment of 0.0610.
To calculate each IRF's labor and non-labor portion of the Federal
prospective payment, we begin by taking the unadjusted Federal
prospective payment rate for CMG 0110 (without comorbidities) from
Table 5 above. Then, we multiply the estimated labor-related share
(75.271) described in section V.B of this notice by the unadjusted
Federal prospective payment rate. To determine the non-labor portion of
the Federal prospective payment rate, we subtract the labor portion of
the Federal payment from the

[[Page 42854]]

unadjusted Federal prospective payment.
To compute the wage-adjusted Federal prospective payment, we
multiply the labor portion of the Federal payment by the appropriate
wage index found in the addendum in Tables 1 and 2. The resulting
figure is the wage-adjusted labor amount. Next, we compute the wage-
adjusted Federal payment by adding the wage-adjusted labor amount to
the non-labor portion.
Adjusting the wage-adjusted Federal payment by the facility-level
adjustments involves several steps. First, we take the wage-adjusted
Federal prospective payment and multiply it by the appropriate rural
and LIP adjustments (if applicable). Second, to determine the
appropriate amount of additional payment for the teaching status
adjustment (if applicable), we multiply the teaching status adjustment
(0.0610, in this example) by the wage-adjusted and rural-adjusted
amount (if applicable). Finally, we add the additional teaching status
payments (if applicable) to the wage, rural, and LIP-adjusted Federal
prospective payment rates. Table 6 illustrates the components of the
adjusted payment calculation.
[GRAPHIC] [TIFF OMITTED] TN22JY10.025

[[Page 42855]]

Thus, the adjusted payment for Facility A would be $31,532.60 and
the adjusted payment for Facility B would be $30,442.17.

VI. Update to Payments for High-Cost Outliers Under the IRF PPS

A. Adjustment to the Outlier Threshold Amount for FY 2010, Reflecting
the Adjustment to the FY 2010 RPL Market Basket in Accordance With
Sections 3401(d) of the Patient Protection and Affordable Care Act
(Affordable Care Act), as Amended by Section 10319 of the Same Act and
by Section 1105(c) of the Health Care and Education Reconciliation Act
of 2010

As discussed in section I.A of this notice, after publication of
the FY 2010 IRF PPS final rule (74 FR 39762), Affordable Care Act
amended section 1886(j)(3)(C) of the Act and added section
1886(j)(3)(D) which, in concert, required the application of a 0.25
percentage point reduction to the market basket increase factor for FY
2010. Notwithstanding these provisions, paragraph (p) of section 3401
of the Affordable Care Act provides that the adjusted FY 2010 rate is
only to be applied to discharges occurring on or after April 1, 2010.
Thus, based on the legislative change to the increase factor, we
revised the FY 2010 Federal prospective payment rates for IRF
discharges occurring on or after April 1, 2010.
In addition, the legislative change to the market basket increase
factor for FY 2010 also affects the FY 2010 IRF outlier threshold
amount because it reduces the FY 2010 RPL market basket increase
factor, which changes the standard payment conversion factor for FY
2010. Specifically, the FY 2010 IRF outlier threshold amount was
determined based on the estimated FY 2010 RPL market basket increase
factor of 2.5 percent and the standard payment conversion factor of
$13,661. However, for FY 2010 IRF discharges occurring on or after
April 1, 2010, IRF prospective payments are based on the adjusted RPL
market basket increase factor of 2.25 percent and the revised standard
payment conversion factor of $13,627. In order to maintain estimated
outlier payments in FY 2010 at the percentage adopted in our FY 2010
final rule, we revise the IRF outlier threshold amount for FY 2010 from
$10,652 that was published in the FY 2010 IRF PPS final rule (74 FR
39788) to $10,721 for FY 2010 IRF discharges occurring on or after
April 1, 2010. The outlier threshold amount of $10,652 continues to
apply for IRF discharges occurring on or after October 1, 2009 through
March 31, 2010. The revised IRF outlier threshold amount was computed
using the same data and the same methodology as was used to compute the
FY 2010 outlier threshold amount for the FY 2010 IRF PPS final rule (74
FR 39762).

B. Update to the Outlier Threshold Amount for FY 2011

Section 1886(j)(4) of the Act provides the Secretary with the
authority to make payments in addition to the basic IRF prospective
payments for cases incurring extraordinarily high costs. A case
qualifies for an outlier payment if the estimated cost of the case
exceeds the adjusted outlier threshold. We calculate the adjusted
outlier threshold by adding the IRF PPS payment for the case (that is,
the CMG payment adjusted by all of the relevant facility-level
adjustments) and the adjusted threshold amount (also, adjusted by all
of the relevant facility-level adjustments). Then, we calculate the
estimated cost of a case by multiplying the IRF's overall cost-to-
charge (CCR) by the Medicare allowable covered charge. If the estimated
cost of the case is higher than the adjusted outlier threshold, we make
an outlier payment for the case equal to 80 percent of the difference
between the estimated cost of the case and the outlier threshold.
In the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), we
discussed our rationale for setting the outlier threshold amount for
the IRF PPS so that estimated outlier payments would equal 3 percent of
total estimated payments. For the 2002 IRF PPS final rule, we analyzed
various outlier policies using 3, 4, and 5 percent of the total
estimated payments, and we concluded that an outlier policy set at 3
percent of total estimated payments would optimize the extent to which
we could reduce the financial risk to IRFs of caring for high-cost
patients, while still providing for adequate payments for all other
(non-high cost outlier) cases.
Subsequently, we updated the IRF outlier threshold amount in the
FYs 2006 through 2010 IRF PPS final rules (70 FR 47880, 70 FR 57166, 71
FR 48354, 72 FR 44284, 73 FR 46370, 74 FR 39762, respectively) to
maintain estimated outlier payments at 3 percent of total estimated
payments. We also stated in the FY 2009 final rule (FR 73 46287) that
we would continue to analyze the estimated outlier payments for
subsequent years and adjust the outlier threshold amount as appropriate
to maintain the 3 percent target.
To update the IRF outlier threshold amount for FY 2011 in this
notice, we are using FY 2009 claims data and the same methodology that
we used to set the initial outlier threshold amount in the FY 2002 IRF
PPS final rule (66 FR 41362 through 41363), which is also the same
methodology that we used to update the outlier threshold amounts for
FYs 2006 through 2010. Based on an analysis of this updated data, we
estimate that IRF outlier payments as a percentage of total estimated
payments are approximately 3.1 percent in FY 2010. Although we are
still analyzing the reasons for this unexpected increase in outlier
payments in the FY 2009 IRF claims data, we note that IPPS hospitals
experienced about the same magnitude increase in outlier payments in FY
2009 (from 5.1 percent to 5.3 percent). Based on this updated analysis,
we will update the FY 2011 outlier threshold amount to ensure that
estimated FY 2011 outlier payments are approximately 3 percent of total
estimated IRF payments. The outlier threshold amount of $10,721 for
discharges occurring on or after April 1, 2010 will be changed to
$11,410 in FY 2011 to reduce estimated outlier payments and thereby
maintain estimated outlier payments at 3 percent of total estimated
aggregate IRF payments for FY 2011.

C. Update to the IRF Cost-to-Charge Ratio Ceilings

In accordance with the methodology stated in the FY 2004 IRF PPS
final rule (68 FR 45674, 45692 through 45694), we apply a ceiling to
IRFs' CCRs. Using the methodology described in that final rule, we are
updating the national urban and rural CCRs for IRFs, as well as the
national CCR ceiling for FY 2011, in this notice based on analysis of
the most recent data that is available. We apply the national urban and
rural CCRs in the following situations:
New IRFs that have not yet submitted their first Medicare
cost report.
IRFs whose overall CCR is in excess of the national CCR
ceiling for FY 2011, as discussed below.
Other IRFs for which accurate data to calculate an overall
CCR are not available.
Specifically, for FY 2011, we estimate a national average CCR of
0.620 for rural IRFs, which we calculate by taking an average of the
CCRs for all rural IRFs using their most recently submitted cost report
data. Similarly, we estimate a national average CCR of 0.489 for urban
IRFs, which we calculate by taking an average of the CCRs for all urban
IRFs using their most recently submitted cost report data. We apply
weights to both of these averages using the IRFs' estimated costs,
meaning that the CCRs of IRFs with higher costs factor more heavily

[[Page 42856]]

into the averages than the CCRs of IRFs with lower costs. For this
notice, we have used the most recent available cost report data (FY
2008). This includes all IRFs whose cost reporting periods began on or
after October 1, 2007, and before October 1, 2008. If, for any IRF, the
FY 2008 cost report was missing or had an ``as submitted'' status, we
used data from a previous fiscal year's (that is, FY 2004 through FY
2007) settled cost report for that IRF. We do not use cost report data
from before FY 2004 for any IRF because changes in IRF utilization
since FY 2004 resulting from the 60 percent rule and IRF medical review
activities suggest that these older data do not adequately reflect the
current cost of care.
In addition, in accordance with past practice, we set the national
CCR ceiling at 3 standard deviations above the mean CCR. Using this
method, the national CCR ceiling is set at 2.94 for FY 2011. This means
that, if an individual IRF's CCR exceeds this ceiling of 2.94 for FY
2011, we would replace the IRF's CCR with the appropriate national
average CCR (either rural or urban, depending on the geographic
location of the IRF). We calculate the national CCR ceiling by:
Step 1. Taking the national average CCR (weighted by each IRF's
total costs, as discussed above) of all IRFs for which we have
sufficient cost report data (both rural and urban IRFs combined).
Step 2. Estimating the standard deviation of the national average
CCR computed in step 1.
Step 3. Multiplying the standard deviation of the national average
CCR computed in step 2 by a factor of 3 to compute a statistically
significant reliable ceiling.
Step 4. Adding the result from step 3 to the national average CCR
of all IRFs for which we have sufficient cost report data, from step 1.

VII. Collection of Information Requirements

This document does not impose information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1995.

VIII. Waiver of Proposed Rulemaking

We ordinarily publish a notice of proposed rulemaking in the
Federal Register to provide a period for public comment before the
provisions of a rule take effect. We can waive this procedure, however,
if we find good cause that notice and comment procedures are
impracticable, unnecessary, or contrary to the public interest and we
incorporate a statement of finding and its reasons in the notice. We
find that it is unnecessary to undertake notice and comment rulemaking
for the updates in this notice because the update does not make any
substantive changes in policy, but merely reflects the application of
previously established methodologies. In addition, new sections
1886(j)(3)(C) and (D) of the Act require the application of an ``Other
Adjustment'' to the update to the IRF PPS increase factor in FYs 2010
and 2011. We applied the statutorily-required adjustments in this
notice. We find that notice and comment rulemaking is unnecessary to
implement those statutory provisions because they are self-implementing
provisions of law, not requiring the exercise of any discretion on the
part of the Secretary. Therefore, under 5 U.S.C. 553(b)(3)(B), for good
cause, we waive notice and comment procedures.

IX. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this notice as required by
Executive Order 12866 (September 30, 1993, Regulatory Planning and
Review), the Regulatory Flexibility Act (RFA, September 19, 1980, Pub.
L. 96-354), section 1102(b) of the Social Security Act, section 202 of
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive
Order 13132 on Federalism (August 4, 1999), and the Congressional
Review Act (5 U.S.C. 804(2)).
Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). A regulatory impact
analysis (RIA) must be prepared for a major notice with economically
significant effects ($100 million or more in any one year). We estimate
that this notice is economically significant, as measured by the $100
million threshold and hence also a major rule under the Congressional
Review Act. To estimate the total impact of the updates described in
this notice, we compare the FY 2011 estimated payments with the revised
FY 2010 estimated payments. The revised FY 2010 estimated payments
reflect the revised Federal prospective payment rates and outlier
threshold amount that applied to IRF discharges occurring on or after
April 1, 2010, in accordance with sections 1886(j)(3)(C) and (D) of the
Act, as described in sections V.A and VI.A of this notice. Based on
this analysis, we estimate that the total impact of these updates on FY
2011 IRF PPS payments will be an increase of approximately $135
million.
The Regulatory Flexibility Act (RFA) requires agencies to analyze
options for regulatory relief of small entities, if a rule has a
significant impact on a substantial number of small entities. For
purposes of the RFA, small entities include small businesses, nonprofit
organizations, and small governmental jurisdictions. Most IRFs and most
other providers and suppliers are small entities, either by nonprofit
status or by having revenues of $7 million to $34.5 million in any one
year. (For details, see the Small Business Administration's final rule
that set forth size standards for health care industries, at 65 FR
69432 at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf, November 17, 2000.) Because we lack data on
individual hospital receipts, we cannot determine the number of small
proprietary IRFs or the proportion of IRFs' revenue that is derived
from Medicare payments. Therefore, we assume that all IRFs (an
approximate total of 1,200 IRFs, of which approximately 60 percent are
nonprofit facilities) are considered small entities and that Medicare
payment constitutes the majority of their revenues. The Department of
Health and Human Services generally uses a revenue impact of 3 to 5
percent as a significance threshold under the RFA. As shown in Table 7,
we estimate that the net revenue impact of this notice on all IRFs is
to increase estimated payments by approximately 2.16 percent, with only
one category of IRFs (32 urban IRFs in the New England region)
estimated to receive an increase in estimated payments of greater than
3 percent (3.19 percent). Thus, we do not anticipate that this notice
would have a significant impact on a substantial number of small
entities. Medicare fiscal intermediaries, Medicare Administrative
Contractors, and carriers are not considered to be small entities.
Individuals and States are not included in the definition of a small
entity.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a Metropolitan
Statistical Area and has fewer than 100 beds. As discussed in

[[Page 42857]]

detail below, the rates and policies set forth in this notice will not
have an adverse impact on rural hospitals based on the data of the 182
rural units and 21 rural hospitals in our database of 1,171 IRFs for
which data were available.
Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-04, enacted on March 22, 1995) also requires that agencies assess
anticipated costs and benefits before issuing any rule whose mandates
require spending in any one year of $100 million in 1995 dollars,
updated annually for inflation. In 2010, that threshold level is
approximately $135 million. This notice will not impose spending costs
on State, local, or tribal governments, in the aggregate, or by the
private sector, of $135 million.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a final rule that imposes
substantial direct requirement costs on State and local governments,
preempts State law, or otherwise has Federalism implications. As stated
above, this notice will not have a substantial effect on State and
local governments, preempt State law, or otherwise have a Federalism
implication.

B. Anticipated Effects of the Notice

1. Basis and Methodology of Estimates
This notice sets forth updates to the IRF PPS rates contained in
the FY 2010 final rule, as revised by sections 1886(j)(3)(C) and (D) of
the Act for IRF discharges occurring on or after April 1, 2010, as
described in sections V.A and VI.A of this notice. Specifically, this
notice sets forth updates to the CMG relative weights and length of
stay values, the wage index, and the outlier threshold for high-cost
cases. This notice also implements a 0.25 percentage point reduction to
the FY 2011 RPL market basket increase factor in accordance with
sections 1886(j)(3)(C) and (D) of the Act.
We estimate that the FY 2011 impact will be a net increase of $135
million in payments to IRF providers. The impact analysis in Table 7 of
this notice represents the projected effects of the updates to IRF PPS
payments for FY 2011 compared with the revised estimated IRF PPS
payments in FY 2010. The revised FY 2010 estimated payments reflect the
revised Federal prospective payment rates and outlier threshold amount
that applied to IRF discharges occurring on or after April 1, 2010, in
accordance with sections 1886(j)(3)(C) and (D) of the Act, as described
in sections V.A and VI.A of this notice. We determine the effects by
estimating payments while holding all other payment variables constant.
We use the best data available, but we do not attempt to predict
behavioral responses to these changes, and we do not make adjustments
for future changes in such variables as number of discharges or case-
mix.
We note that certain events may combine to limit the scope or
accuracy of our impact analysis, because such an analysis is future-
oriented and, thus, susceptible to forecasting errors because of other
changes in the forecasted impact time period. Some examples could be
legislative changes made by the Congress to the Medicare program that
would impact program funding, or changes specifically related to IRFs.
Although some of these changes may not necessarily be specific to the
IRF PPS, the nature of the Medicare program is such that the changes
may interact, and the complexity of the interaction of these changes
could make it difficult to predict accurately the full scope of the
impact upon IRFs.
In updating the rates for FY 2011, we are implementing standard
annual revisions described in this notice (for example, the update to
the wage and market basket indexes used to adjust the Federal rates).
We are also implementing a 0.25 percentage point reduction to the FY
2011 RPL market basket increase factor in accordance with sections
1886(j)(3)(C) and (D) of the Act. We estimate that these revisions will
increase payments to IRFs by approximately $140 million.
The aggregate change in estimated payments associated with this
notice is an increase in payments to IRFs of $135 million for FY 2011.
We estimate that the application of the FY 2011 RPL market basket
increase factor, as reduced by 0.25 percentage point in accordance with
sections 1886(j)(3)(C) and (D) of the Act, will increase aggregate
payments to IRFs by $140 million. However, we estimate a $5 million
decrease in aggregate payments to IRFs due to the update to the outlier
threshold amount to decrease estimated outlier payments from
approximately 3.1 percent in FY 2010 to 3.0 percent in FY 2011. Taken
together, these updates will result in a net change in estimated
payments from FY 2010 to FY 2011 of $135 million.
The effects of the changes that impact IRF PPS payment rates are
shown in Table 7. The following changes that affect the IRF PPS payment
rates are discussed separately below:
The effects of the update to the outlier threshold amount,
from approximately 3.1 percent to 3.0 percent of total estimated
payments for FY 2011, consistent with section 1886(j)(4) of the Act.
The effects of the annual market basket update (using the
RPL market basket) to IRF PPS payment rates, as required by section
1886(j)(3)(A)(i) and section 1886(j)(3)(C) of the Act, including the
0.25 percentage point reduction for FY 2011 in accordance with sections
1886(j)(3)(C) and (D) of the Act.
The effects of applying the budget-neutral labor-related
share and wage index adjustment, as required under section 1886(j)(6)
of the Act.
The effects of the budget-neutral changes to the CMG
relative weights and average length of stay values, under the authority
of section 1886(j)(2)(C)(i) of the Act.
The total change in estimated payments based on the FY
2011 payment updates relative to the revised estimated FY 2010
payments. The revised FY 2010 estimated payments reflect the adjusted
Federal prospective payment rates and outlier threshold amount that
apply to IRF discharges occurring on or after April 1, 2010, in
accordance with sections 1886(j)(3)(C) and (D) of the Act.
2. Description of Table 7
The table below categorizes IRFs by geographic location, including
urban or rural location, and location with respect to CMS's nine census
divisions (as defined on the cost report) of the country. In addition,
the table divides IRFs into those that are separate rehabilitation
hospitals (otherwise called freestanding hospitals in this section),
those that are rehabilitation units of a hospital (otherwise called
hospital units in this section), rural or urban facilities, ownership
(otherwise called for-profit, non-profit, and government), and by
teaching status. The top row of the table shows the overall impact on
the 1,171 IRFs included in the analysis.
The next 12 rows of Table 7 contain IRFs categorized according to
their geographic location, designation as either a freestanding
hospital or a unit of a hospital, and by type of ownership; all urban,
which is further divided into urban units of a hospital, urban
freestanding hospitals, and by type of ownership; and all rural, which
is further divided into rural units of a hospital, rural freestanding
hospitals, and by type of ownership. There are 968 IRFs located in
urban areas included in our analysis. Among these, there are 768 IRF
units of hospitals located in urban areas and 200 freestanding IRF
hospitals located in urban areas. There are 203

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IRFs located in rural areas included in our analysis. Among these,
there are 182 IRF units of hospitals located in rural areas and 21
freestanding IRF hospitals located in rural areas. There are 382 for-
profit IRFs. Among these, there are 317 IRFs in urban areas and 65 IRFs
in rural areas. There are 721 non-profit IRFs. Among these, there are
597 urban IRFs and 124 rural IRFs. There are 68 government-owned IRFs.
Among these, there are 54 urban IRFs and 14 rural IRFs.
The remaining three parts of Table 7 show IRFs grouped by their
geographic location within a region and by teaching status. First, IRFs
located in urban areas are categorized with respect to their location
within a particular one of the nine CMS geographic regions. Second,
IRFs located in rural areas are categorized with respect to their
location within a particular one of the nine CMS geographic regions. In
some cases, especially for rural IRFs located in the New England,
Mountain, and Pacific regions, the number of IRFs represented is small.
Finally, IRFs are grouped by teaching status, including non-teaching
IRFs, IRFs with an intern and resident to average daily census (ADC)
ratio less than 10 percent, IRFs with an intern and resident to ADC
ratio greater than or equal to 10 percent and less than or equal to 19
percent, and IRFs with an intern and resident to ADC ratio greater than
19 percent.
The estimated impacts of each payment update described in this
notice to the facility categories listed above are shown in the columns
of Table 7. The description of each column is as follows:
Column (1) shows the facility classification categories described
above.
Column (2) shows the number of IRFs in each category in our FY 2009
analysis file.
Column (3) shows the number of cases in each category in our FY
2009 analysis file.
Column (4) shows the estimated effect of the adjustment to the
outlier threshold amount.
Column (5) shows the estimated effect of the update to the IRF PPS
payment rates, which includes a 2.5 percent market basket increase
factor with the 0.25 percentage point reduction in accordance with
sections 1886(f)(3)(C) and (D) of the Act.
Column (6) shows the estimated effect of the update to the IRF
labor-related share and wage index, in a budget neutral manner.
Column (7) shows the estimated effect of the update to the CMG
relative weights and average length of stay values, in a budget neutral
manner.
Column (8) compares our estimates of the payments per discharge,
incorporating all of the payment updates reflected in this notice for
FY 2011 to our estimates of the revised payments per discharge in FY
2010. The revised FY 2010 estimated payments reflect the revised
Federal prospective payment rates and outlier threshold amount that
became effective for IRF discharges occurring on or after April 1,
2010, in accordance with sections 1886(j)(3)(C) and (d) of the Act, as
described in sections V.A and VI.A of this notice.
The average estimated increase for all IRFs is approximately 2.16
percent. This estimated net increase includes the effects of the RPL
market basket increase factor for FY 2011 of 2.5 percent, reduced by
0.25 percentage point in accordance with sections 1886(j)(3)(C) and (D)
of the Act. It also includes the approximate 0.1 percent overall
estimated decrease in estimated IRF outlier payments from the update to
the outlier threshold amount. Since we are making the updates to the
IRF wage index and the CMG relative weights in a budget-neutral manner,
they will not affect total estimated IRF payments in the aggregate.
However, as described in more detail in each section, they will affect
the estimated distribution of payments among providers.
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3. Impact of the Update to the Outlier Threshold Amount
The outlier threshold adjustment is presented in column 4 of Table
7. In the FY 2010 IRF PPS final rule (74 FR 39786 through 39788), we
used FY 2008 IRF claims data (the best, most complete data available at
that time) to set the outlier threshold amount for FY 2010 so that
estimated outlier payments would equal 3 percent of total estimated
payments for FY 2010. As discussed in section VI.A of this notice, we
revised the outlier threshold amount for IRF discharges occurring on or
after April 1, 2010 to reflect the reduction to the RPL market basket
that was made in accordance with sections 1886(J)(3)(C) and (D) of the
Act and to ensure that estimated IRF outlier payments for FY 2010 would
continue to equal 3 percent of total estimated payments for FY 2010.
This revised analysis was done using the same data and the same
methodology that was used to set the FY 2010 outlier threshold amount
for the FY 2010 IRF PPS final rule (74 FR 39786 through 39788).
However, for this notice, we are updating our analysis using FY
2009 IRF claims data and, based on this updated analysis, we estimate
that IRF outlier payments as a percentage of total estimated IRF
payments are 3.1 percent in FY 2010. Thus, we are adjusting the outlier
threshold amount in this notice to set total estimated outlier payments
equal to 3 percent of total estimated payments in FY 2011. The
estimated change in total IRF payments for FY 2011, therefore, includes
an approximate 0.1 percent decrease in payments because the estimated
outlier portion of total payments is estimated to decrease from
approximately 3.1 percent to 3 percent.
The impact of this outlier adjustment update (as shown in column 4
of Table 7) is to decrease estimated overall payments to IRFs by about
0.09 percent. We do not estimate that any group of IRFs will experience
an increase in payments from this update. We estimate the largest
decrease in payments to be a 0.41 percent decrease in estimated
payments to rural IRFs in the Pacific region, which is due to the small
number of IRFs in that region (5) and the high volume of outlier
payments paid to those IRFs.
4. Impact of the Market Basket Update to the IRF PPS Payment Rates,
Including the 0.25 Percentage Point Reduction to the RPL Market Basket
Increase Factor in Accordance with Sections 1886(j)(3)(C) and (D) of
the Act
The adjusted market basket update to the IRF PPS payment rates is
presented in column 5 of Table 7. In the aggregate the update would
result in a net 2.25 percent increase in overall estimated payments to
IRFs. This net increase reflects the estimated RPL market basket
increase factor for FY 2011 of 2.5 percent, and the 0.25 percentage
point reduction to the RPL market basket increase factor in accordance
with sections 1886(j)(3)(C) and (D) of the Act.
5. Impact of the CBSA Wage Index and Labor-Related Share
In column 6 of Table 7, we present the effects of the budget
neutral update of the wage index and labor-related share. The changes
to the wage index and the labor-related share are discussed together
because the wage index is applied to the labor-related share portion of
payments, so the changes in the two have a combined effect on payments
to providers. As discussed in section V.B of this notice, the labor-
related share decreased from 75.779 percent in FY 2010 to 75.271
percent in FY 2011.
In the aggregate, since these updates to the wage index and the
labor-related share are applied in a budget-neutral manner as required
under section 1886(j)(6) of the Act, we do not estimate that these
updates will affect overall estimated payments to IRFs. However, we
estimate that these updates will have small distributional effects. For
example, we estimate the largest increase in estimated payments from
the update to the CBSA wage index and labor-related share to be a 0.94
percent increase for urban IRFs in the New England region. In addition,
we estimate a 0.17 percent decrease in overall payments to rural IRFs,
with the largest decrease in estimated payments of 1.22 percent for
rural IRFs in the New England region.
6. Impact of the Update to the CMG Relative Weights and Average Length
of Stay Values
In column 7 of Table 7, we present the effects of the budget
neutral update of the CMG relative weights and average length of stay
values. In the aggregate we do not estimate that these updates will
affect overall estimated payments to IRFs. However, we estimate that
these updates will have small distributional effects, with the largest
decrease in payments as a result of these updates being a 0.30 percent
decrease to rural IRFs in the Pacific region and the largest increase
in payments as a result of these updates being a 0.20 percent increase
to rural IRFs in the West North Central region.

C. Alternatives Considered

Because we have determined that this notice would have a
significant economic impact on IRFs and on a substantial number of
small entities, we will discuss the alternative changes to the IRF PPS
that we considered.
Section 1886(j)(3)(C) of the Act requires the Secretary to update
the IRF PPS payment rates by an increase factor that reflects changes
over time in the prices of an appropriate mix of goods and services
included in the covered IRF services. Thus, we did not consider
alternatives to updating payments using the estimated RPL market basket
increase factor for FY 2011. However, as noted previously in this
notice, sections 1886(j)(3)(C) and (D) of the Act require the Secretary
to apply a 0.25 percentage point reduction to the market basket
increase factor for FY 2011. Thus, in accordance with the recently
amended section 1886(j)(3)(C) of the Act, we are updating IRF Federal
prospective payments in this notice by 2.25 percent (which equals the
2.5 percent estimated RPL market basket increase factor for FY 2011
reduced by 0.25 percentage points, as required by sections
1886(f)(3)(C) and (D) of the Act).
We considered maintaining the existing CMG relative weights and
average length of stay values for FY 2011. However, in light of
recently available data and our desire to ensure that the CMG relative
weights and average length of stay values are as reflective as possible
of recent changes in IRF utilization and case mix, we believe that it
is appropriate to update the CMG relative weights and average length of
stay values at this time to ensure that IRF PPS payments continue to
reflect as accurately as possible the current costs of care in IRFs.
We considered maintaining the existing outlier threshold amount for
FY 2011 because updating the outlier threshold amount has an estimated
negative effect on IRF payments and, therefore, on small entities. If
we were to maintain the FY 2010 outlier threshold amount, more outlier
cases would have qualified for the additional outlier payments in FY
2011. However, analysis of updated FY 2009 data indicates that
estimated outlier payments would exceed 3 percent of total estimated
payments for FY 2011 unless we updated the outlier threshold

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amount. Also, we estimate that the overall effect of this update on
estimated payments to IRFs is small (less than 1 percent).

D. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 8 below, we
have prepared an accounting statement showing the classification of the
expenditures associated with the provisions of this notice. This table
provides our best estimate of the increase in Medicare payments under
the IRF PPS as a result of the updates presented in this notice based
on the data for 1,171 IRFs in our database. All estimated expenditures
are classified as transfers to Medicare providers (that is, IRFs).
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E. Conclusion

Overall, the estimated payments per discharge for IRFs in FY 2011
are projected to increase by 2.16 percent, compared with the revised
estimated payments in FY 2010, as reflected in column 8 of Table 7. As
noted previously, the revised FY 2010 estimated payments reflect the
revised Federal prospective payment rates and outlier threshold amount
that became effective for IRF discharges occurring on or after April 1,
2010, in accordance with sections 1886(j)(3)(C) and (D) of the Act, as
described in sections V.A and VI.A of this notice. IRF payments per
discharge are estimated to increase 2.17 percent in urban areas and
2.05 percent in rural areas, compared with the revised estimated FY
2010 payments. Payments to rehabilitation units in rural areas are
estimated to increase by 2.03 percent per discharge, and payments to
rehabilitation units in urban areas are estimated to increase by 2.20
percent per discharge. Payments to rehabilitation freestanding
hospitals in rural and urban areas are estimated to increase 2.15
percent per discharge.
Overall, no IRFs are estimated to experience a net decrease in
payments as a result of the updates in this notice. The largest payment
increase is estimated at 3.19 percent for urban IRFs located in the New
England region. This is due to the larger than average positive effect
of the FY 2011 CBSA wage index and labor-related share updates for
urban IRFs in this region.
In accordance with the provisions of Executive Order 12866, this
Notice was reviewed by the Office of Management and Budget.

Authority: Catalog of Federal Domestic Assistance Program No.
93.773, Medicare--Hospital Insurance; and Program No. 93.774,
Medicare--Supplementary Medical Insurance Program.

Dated: May 13, 2010.
Marilyn Tavenner,
Acting Administrator and Chief Operating Officer, Centers for Medicare
& Medicaid Services.
Approved: July 14, 2010.
Kathleen Sebelius,
Secretary.
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[FR Doc. 2010-17621 Filed 7-16-10; 4:15 pm]
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