[Federal Register: August 1, 2000 (Volume 65, Number 148)]
[Rules and Regulations]
[Page 47025-47054]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au00-12]
Table of Contents
Provisions of the Balanced Budget Refinement Act of 1999; 
Hospital Inpatient Payments and Rates and Costs of Graduate Medical Education 

 Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal 
  Year 2001 Rates



  
I. Background 
  
 II. Changes to DRG Classifications and Relative 
    Weights 
  
 III. Changes to the Hospital Wage Index 
  
IV. Other Decisions and Changes to the Prospective 
    Payment System for Inpatient Operating Costs and Graduate Medical Education 
    Costs 
  
V. The Prospective Payment System for Capital-Related 
    Costs: The Last Year of the Transition Period 
  
VI. Changes for Hospitals and Hospital Units Excluded 
    from the Prospective Payment System  
  
VII. MedPAC Recommendations 
  
VIII. Other Required Information 


 Tables

  Note: For purposes of this final rule, and to avoid confusion, we have retained 
  the designations of Tables 1 through 5 that were first used in the September 
  1, 1983 initial prospective payment final rule (48 FR 39844). Tables 1A, 1C, 
  1D, 1E (a new table, as described in section II of this Addendum), 3C, 4A, 4B, 
  4C, 4D, 4E, 4F, 5, 6A, 6B, 6C, 6D, 6E, 6F, 6G, 7A, 7B, 8A, and 8B are presented 
  below. The tables presented below are as follows: 
 

  
Table 1A--National Adjusted Operating Standardized 
    Amounts, Labor/ Nonlabor 
  
Table 1C--Adjusted Operating Standardized 
    Amounts for Puerto Rico, Labor/Nonlabor 
  
Table 1D--Capital Standard Federal Payment 
    Rate 
  
Table 1E--National Adjusted Operating Standardized 
    Amounts for Sole Community Hospitals, Labor/Nonlabor 
  
Table 3C--Hospital Case Mix Indexes for Discharges 
    Occurring in Federal Fiscal Year 1999 and Hospital Average Hourly Wage for 
    Federal Fiscal Year 2001 Wage Index 
  
Table 4A--Wage Index and Capital Geographic 
    Adjustment Factor (GAF) for Urban Areas 
  
Table 4B--Wage Index and Capital Geographic 
    Adjustment Factor (GAF) for Rural Areas 
  
Table 4C--Wage Index and Capital Geographic 
    Adjustment Factor (GAF) for Hospitals That Are Reclassified 
  
Table 4D--Average Hourly Wage for Urban Areas 
  
Table 4E--Average Hourly Wage for Rural Areas 
  
Table 4F--Puerto Rico Wage Index and Capital 
    Geographic Adjustment Factor (GAF) 
  
Table 5--List of Diagnosis Related Groups 
    (DRGs), Relative Weighting Factors, Geometric and Arithmetic Mean Length of 
    Stay  
  
Table 6A--New Diagnosis Codes 
  
Table 6B--New Procedure Codes  
  
Table 6C--Invalid Diagnosis Codes  
  
Table 6D--Revised Diagnosis Code Titles  
  
Table 6E--Revised Procedure Codes  
  
Table 6F--Additions to the CC Exclusions 
    List  
  
Table 6G--Deletions to the CC Exclusions 
    List  
  
Table 7A--Medicare Prospective Payment System 
    Selected Percentile Lengths of Stay (FY 99 MEDPAR Update 03/00 GROUPER V17.0) 
  
Table 7B--Medicare Prospective Payment System, 
    Selected Percentile Lengths of Stay (FY99 MEDPAR update 03/00 Grouper V.18.0) 
  
Table 8A--Statewide Average Operating Cost-to-Charge 
    Ratios for Urban and Rural Hospitals (Case Weighted) March 2000 
  
Table 8b.--Statewide Average Capital Cost-to-Charge 
    Ratios (Case Weighted) March 2000 


Appendices 

  
Appendix A : Regulatory Impact Analysis 
  
Appendix B: Technical Appendix on the Capital 
    Cost Model and Required Adjustments 
  
Appendix C: Recommendation of Update Factors 
    for Operating Cost Rates of Payment for Inpatient Hospital Services 

[[Page 47025]]

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Part II

Department of Health and Human Services

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Health Care Financing Administration

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42 CFR Part 410, et al.

Medicare Program; Provisions of the Balanced Budget Refinement Act of
1999; Hospital Inpatient Payments and Rates and Costs of Graduate
Medical Education; Final Rules

[[Page 47026]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 410, 412, 413, 482, and 485

[HCFA-1131-IFC]
RIN 0938-AK20


Medicare Program; Provisions of the Balanced Budget Refinement
Act of 1999; Hospital Inpatient Payments and Rates and Costs of
Graduate Medical Education

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period implements, or
conforms the regulations to, certain statutory provisions relating to
Medicare payments to hospitals for inpatient services that are
contained in the Medicare, Medicaid, and State Children's Health
Insurance Program Balanced Budget Refinement Act of 1999 (Public Law
106-113). These provisions relate to reclassification of hospitals from
urban to rural status, reclassification of certain hospitals for
purposes of payment during Federal fiscal year 2000, critical access
hospitals, payments to hospitals excluded from the hospital inpatient
prospective payment system, and payments for indirect and direct
graduate medical education costs.
    Many of the provisions of Public Law 106-113 modify changes to the
Social Security Act made by the Balanced Budget Act of 1997 (P.L. 105-
33). These provisions are already in effect in accordance with Public
Law 106-113.

DATES: Effective Date: This interim final rule with comment period is
effective on August 1, 2000.
    Comment Period: Comments will be considered if received at the
appropriate address, as provided below, no later than 5 p.m. on August
31, 2000.

ADDRESSES: Mail written comments (an original and three copies) to the
following address only: Health Care Financing Administration,
Department of Health and Human Services, Attention: HCFA-1131-IFC, P.O.
Box 8010, Baltimore, MD 21244-1850.
    If you prefer, you may deliver by courier your written comments (an
original and three copies) to one of the following addresses:

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

    Comments mailed to the indicated addresses may be delayed and could
be considered late.
    Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-1131-IFC.
    Comments received timely will be available for public inspection as
they are received, generally beginning approximately 3 weeks after
publication of a document, in Room 443-G of the Department's offices at
200 Independence Avenue, SW, Washington, DC, on Monday through Friday
of each week from 8:30 a.m. to 5 p.m. (phone: (202) 690-7890).
    For comments that relate to information collection requirements,
mail a copy of comments to the following addresses:

Health Care Financing Administration, Office of Information Services,
Security and Standards Group, Division of HCFA Enterprise Standards,
Room N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.
Attn: John Burke HCFA-1131-IFC; and
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 3001, New Executive Office Building, Washington, DC 20503,
Attn: Allison Herron Eydt HCFA-1131-IFC, HCFA Desk Officer

FOR FURTHER INFORMATION CONTACT:
Steve Phillips, (410) 786-4531, Operating Prospective Payment, Wage
Index, and Reclassifications
Tzvi Hefter, (410) 786-4487, Excluded Hospitals, Graduate Medical
Education, and Critical Access Hospital Issues

SUPPLEMENTARY INFORMATION:

Availability of Copies and Electronic Access

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and modem to call (202) 512-1661; type swais, then login as guest (no
password required).

I. Background: Program Summary

    Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. Section 1886(g) of the Act requires the
Secretary to pay for the capital-related costs of hospital inpatient
stays under a prospective payment system. Under these prospective
payment systems, Medicare payment for hospital inpatient operating and
capital-related costs is made at predetermined, specific rates for each
hospital discharge. Discharges are classified according to a list of
diagnosis-related groups (DRGs). Payment for cases within each DRG is
weighted to account for the average resources used to treat patients
within that DRG. In addition, these payments are adjusted by a wage
index (and a geographic adjustment factor derived from the wage index
in the case of capital payments) to account for the varying costs of
labor across areas, and by separate adjustment factors for the
additional operating costs associated with graduate medical education
(GME) and for treating a disproportionate share of low-income patients.
    Certain specialty hospitals are excluded from the prospective
payment system. Under section 1886(d)(1)(B) of the Act, the following
classes of hospitals and hospital units are excluded from the
prospective payment system: psychiatric hospitals and units,
rehabilitation hospitals and units, children's hospitals, long-term
care hospitals, and cancer hospitals. For these hospitals and units,
Medicare payment for operating costs is based on

[[Page 47027]]

reasonable costs subject to a hospital-specific annual limit.
    Under sections 1814(l) and 1834(g) of the Act, payments are made to
critical access hospitals (CAHs) (that is, rural nonprofit hospitals or
facilities that meet certain statutory requirements) for inpatient and
outpatient services on a reasonable cost basis. Reasonable cost is
determined under the provisions of section 1861(v)(i)(A) of the Act and
existing regulations under 42 CFR Parts 413 and 415.
    Under section 1886(a)(4) of the Act, costs of approved educational
activities are excluded from the operating costs of inpatient hospital
services. Hospitals with approved GME programs are paid for the direct
costs of GME in accordance with section 1886(h) of the Act; the amount
of payment for direct GME costs for a cost reporting period is based on
the hospital's costs per resident in a base year and the hospital's
number of residents in that period.
    The regulations governing the hospital inpatient prospective
payment system are located in 42 CFR Part 412. The regulations
governing excluded hospitals and hospital units and the regulations
governing direct GME are located in 42 CFR Part 413. The regulations
governing CAHs are located in 42 CFR Part 485.

II. Provisions of the Interim Final Rule With Comment Period

    On November 29, 1999, the Medicare, Medicaid, and State Children's
Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999
(Pub. L. 106-113) was enacted. Public Law 106-113 made a number of
changes to the Act affecting Medicare payments to hospitals for
inpatient services. Many of the provisions of Public Law 106-113 are
modifications to provisions of the Act included in the Balanced Budget
Act of 1997 (Pub. L. 105-33). Some of the provisions of Public Law 106-
113 became effective prior to, or shortly after, its passage on
November 29, 1999. Other provisions do not become effective until
Federal fiscal year (FY) 2001 or later. The provisions of Public Law
106-113 that are effective beginning October 1, 2000, were included in
the proposed rule for FY 2001 Medicare hospital inpatient prospective
payment system published in the Federal Register on May 5, 2000 (65 FR
26281) which is being finalized in this issue of the Federal Register.
    The following is a summary of the policy changes we are
implementing in this interim final rule with comment period as a result
of Public Law 106-113:

A. Changes Relating to Payments for Operating Costs under the Hospital
Inpatient Prospective Payment System

     Reclassification of Certain Counties. We are implementing
the provisions of section 152(a) of Public Law 106-113 that
reclassified hospitals in certain designated counties for purposes of
making payments to those hospitals under section 1886(d) of the Act for
FY 2000. The counties affected by this provision are identified under
section III of this preamble.
     Wage Index. We are implementing sections 153 and 154 of
Public Law 106-113 that contain provisions affecting the wage indexes
of specific Metropolitan Statistical Areas (MSA). Under section 153,
the Hattiesburg, Mississippi FY 2000 wage index is to be calculated
including wage data from Wesley Medical Center. Under section 154, the
Allentown-Bethlehem-Easton, Pennsylvania MSA FY 2000 wage index is to
be calculated including wage data for Lehigh Valley Hospital.
     Reclassification of Certain Urban Hospitals as Rural
Hospitals. We are implementing section 401 of Public Law 106-113 which
directed the Secretary to treat certain hospitals located in urban
areas as being located in the rural area of their State if the hospital
meets statutory criteria and files an application with HCFA. This
provision is effective on January 1, 2000.
     Indirect Medical Education (IME) Adjustment. We are
implementing section 111 of Public Law 106-113 which provides for an
additional payment to teaching hospitals equal to the additional amount
the hospitals would have been paid for FY 2000 if the IME adjustment
formula (which reflects the higher indirect operating costs associated
with GME) for FY 2000 had remained the same as for FY 1999.
     Medicare-Dependent, Small Rural Hospitals. We are
implementing section 404 of Public Law 106-113 which extends the
Medicare-dependent, small rural hospital (MDH) program and its current
payment methodology for an additional 5 years, from FY 2002 through FY
2006.

B. Additional Changes Relating to Direct GME and Indirect Medical
Education

     Initial Residency Period for Child Neurology Residency
Programs. We are implementing section 312 of Public Law 106-113 which
provides that in determining the number of residents for purposes of
GME and IME payments, the period of board eligibility and the initial
residency period for child neurology is the period of board eligibility
for pediatrics plus 2 years. This provision applies on and after July
1, 2000, to residency programs that began before, on, or after November
29, 1999.
     Residents on Approved Leave of Absences. We are
implementing section 407(a) of Public Law 106-113 which provides that,
for purposes of determining a hospital's full-time equivalent (FTE) cap
for direct GME payments and the IME adjustment, a hospital may count an
individual to the extent that the individual would have been counted as
a primary care resident for purposes of the FTE cap but for the fact
that the individual was on maternity or disability leave or a similar
approved leave of absence. The provision relating to direct GME is
effective with cost reporting periods beginning on or after November
29, 1999. The provision relating to the IME adjustment applies to
discharges occurring in cost reporting periods beginning on or after
November 29, 1999.
     Expansion of Number of Unweighted Residents in Rural
Hospitals. We are implementing section 407(b) of Public Law 106-113
which provides that a rural hospital's resident FTE count for direct
GME and IME may not exceed 130 percent of the number of unweighted
residents that the rural hospital counted in its most recent cost
reporting period ending on or before December 31, 1996. The provision
relating to direct GME applies to cost reporting periods beginning on
or after April 1, 2000. The provision relating to the IME adjustment
applies to discharges occurring on or after April 1, 2000.
     Urban Hospitals with Rural Training Tracks or Integrated
Rural Tracks. We are implementing section 407(c) of Public Law 106-113
which allows an urban hospital that establishes separately accredited
approved medical residency training programs (or rural training tracks)
in a rural area or has an accredited training program with an
integrated rural track to receive an FTE cap adjustment for purposes of
direct GME and IME. The provision is effective with cost reporting
periods beginning on or after April 1, 2000, for direct GME, and with
discharges occurring on or after April 1, 2000, for IME.
     Residents Training at Certain Veterans Affairs Hospitals.
We are implementing section 407(d) of Public Law 106-113 which provides
that a non-Veterans Affairs (VA) hospital may receive a temporary
adjustment to its FTE cap to reflect residents who were training at a
VA hospital and were transferred on or after January 1, 1997, and
before July 31, 1998, to the non-VA

[[Page 47028]]

hospital because the program at the VA hospital would lose its
accreditation by the Accreditation Council on Graduate Medical
Education if the residents continued to train at the facility. This
provision applies as if it was included in the enactment of Public Law
105-33, that is, for direct GME, with cost reporting periods beginning
on or after October 1, 1997, and for IME, for discharges occurring on
or after October 1, 1997. If a hospital is owed payments as a result of
this provision, payments must be made immediately.

C. Payments for Nursing and Allied Health Education: Utilization of
Medicare+Choice Enrollees

    We are implementing section 541 of Public Law 106-113 which
provides an additional payment to hospitals that receive payments under
section 1861(v) of the Act for approved nursing and allied health
education programs to reflect utilization of Medicare+Choice enrollees.
This provision is effective for portions of cost reporting periods in a
year beginning with calendar year 2000.

D. Changes Relating to Hospitals and Hospital Units Excluded From the
Prospective Payment System

    We are implementing section 121 of Public Law 106-113 which amended
section 1886(b)(3)(H) of the Act to direct the Secretary to provide for
an appropriate wage adjustment to the caps on the target amounts for
psychiatric hospitals and units, rehabilitation hospitals and units,
and long-term care hospitals for cost reporting periods beginning on or
after October 1, 1999.

E. Changes Relating to Critical Access Hospitals (CAHs)

    We are implementing--
     Section 401(b)(2) of Public Law 106-113, which contains a
conforming change to incorporate the reclassifications made by section
401(a) of Public Law 106-113 to the CAH criteria (section
1820(c)(2)(B)(i) of the Act). This provision is effective beginning on
January 1, 2000.
     Section 403(a) of Public Law 106-113, which deletes the
96-hour length of stay restriction on inpatient care in a CAH and
authorizes a period of stay that does not exceed, on an annual, average
basis, 96 hours per patient. This provision is effective beginning on
November 29, 1999.
     Section 403(b) of Public Law 106-113, which allows for-
profit hospitals to qualify for CAH status. This provision is effective
beginning on November 29, 1999.
     Section 403(c) of Public Law 106-113, which allows
hospitals that have closed within 10 years prior to November 29, 1999,
or hospitals that downsized to a health clinic or health center, to be
designated as CAHs if they satisfy the established criteria for
designation, other than the requirement for existing hospital status.
     Section 403(e) of Public Law 106-113, which eliminates the
Medicare Part B deductible and coinsurance for clinical diagnostic
laboratory tests furnished by a CAH on an outpatient basis. This
provision is effective with respect to services furnished on or after
November 29, 1999.
     Section 403(f) of Public Law 106-113, entitled
"Participation in Swing Bed Program," which amended sections
1883(a)(1) and (c) of the Act.

F. Changes Relating to Hospital Swing Bed Program

    We are implementing section 408(a) of Public Law 106-113 which
eliminates the requirement for a hospital to obtain a certification of
need to use acute care beds as swing beds for skilled nursing facility
(SNF) level of care patients; and section 408(b) of Public Law 106-113
which eliminates constraints on the length of stay in swing beds for
rural hospitals with 50 to 100 beds. These provisions are effective on
the first day after the expiration of the transition period for
prospective payments for covered SNF services under the Medicare
program (that is, at the end of the transition period for the SNF
prospective payments system that began with the facility's first cost
reporting period beginning on or after July 1, 1998 and extend through
the end of the facility's third cost reporting period after this date).

III. Reclassification of Certain Counties

    Under section 152(a) of Public Law 106-113 hospitals in certain
counties are deemed to be located in specified areas for purposes of
payment to the hospitals under the hospital inpatient prospective
payment system, for discharges occurring during FY 2000. For payment
purposes, hospitals under section 152(a) are to be treated as though
they were reclassified for purposes of both the standardized amount and
the wage index. We have calculated FY 2000 wage indexes for hospitals
in the affected counties. These wage indexes are listed below. No other
hospitals' FY 2000 wage indexes were affected, including those
hospitals in the areas to which these affected hospitals were
reclassified, as well as nonreclassified hospitals located in the areas
from which these hospitals were reclassified.
    Section 152(a) provides that, for purposes of making payments under
section 1886(d) of the Act for FY 2000--
     To hospitals in Iredell County, North Carolina, Iredell
County is deemed to be located in the Charlotte-Gastonia-Rock Hill,
North Carolina-South Carolina MSA;
     To hospitals in Orange County, New York, Orange County is
deemed to be located in the New York, New York MSA;
     To hospitals in Lake County, Indiana and Lee County,
Illinois, Lake County and Lee County are deemed to be located in the
Chicago, Illinois MSA;
     To hospitals in Hamilton-Middletown, Ohio, Hamilton-
Middletown is deemed to be located in the Cincinnati, Ohio-Kentucky-
Indiana MSA;
     To hospitals in Brazoria County, Texas, Brazoria County is
deemed to be located in the Houston, Texas MSA;
     To hospitals in Chittenden County, Vermont, Chittenden
County is deemed to be located in the Boston-Worcester-Lawrence-Lowell-
Brockton, Massachusetts-New Hampshire MSA.
    In accordance with section 153 of Public Law 106-113, for
discharges occurring during FY 2000, the Hattiesburg, Mississippi MSA
wage index was recalculated by including the wage data for Wesley
Medical Center. In accordance with section 154(a), the Allentown-
Bethlehem-Easton, Pennsylvania MSA FY 2000 wage index was recalculated
by including the wage data for Lehigh Valley Hospital.
    The following table shows the changes to the FY 2000 wage index
values and geographic adjustment factors for capital payments for the
hospitals in the affected areas. Hospitals affected by section 152(a)
of Public Law 106-113 will now also be considered reclassified for
purposes of the standardized amount.

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                                                                                                         New
                                                   New MSA (for wage index and          New wage     geographic
               County or MSA                           standardized amount)               index      adjustment
                                                                                                    factor (GAF)
----------------------------------------------------------------------------------------------------------------
Iredell County, NC.........................  1520...................................        0.9434        0.9609

[[Page 47029]]

Orange County, NY..........................  5600...................................        1.4342        1.2801
Lake County, IN............................  1600...................................        1.0750        1.0508
Lee County, IL.............................  1600...................................        1.0750        1.0508
Hamilton-Middletown, OH....................  1640...................................        0.9419        0.9598
Brazoria County, TX........................  3360...................................        0.9388        0.9577
Chittenden County, VT......................  1123...................................        1.1359        1.0912
Hattiesburg, MS MSA........................  MSA is not new.........................        0.7634        0.8312
Allentown-Bethlehem-Easton, PA MSA.........  MSA is not new.........................        1.0228        1.0156
----------------------------------------------------------------------------------------------------------------

IV. Reclassifications of Hospitals (Sections 401(a) and (b) of
Public Law 106-113 and 42 CFR 412.63(b), 412.90(e), 412.102, and
New 412.103)

A. Permitting Reclassification of Certain Urban Hospitals as Rural
Hospitals

    Under Medicare law, the location of a hospital can affect its
payment methodology as well as whether the facility qualifies for
special treatment both for operating and for capital payments. Whether
a facility is situated in an urban or a rural area will, for example,
affect payments based on the wage index values and Federal standardized
amounts specific to the area. Similarly, the percentage increase in
payments made to hospitals that treat a disproportionate share of low-
income patients is based, in part, on its urban/rural status, as are
determinations regarding a hospital's qualification as a sole community
hospital (SCH), rural referral center (RRC), CAH, or other special
category of facility. Section 1886(d)(2)(D) of the Act defines an
"urban area" as an area within a MSA as defined by the Office of
Management and Budget. The same provision defines a "large urban
area," with respect to any fiscal year, as an urban area that the
Secretary determines (in the publications described in section
1886(e)(5) of the Act before the fiscal year) has a population of more
than 1 million as determined based on the most recent available
published Census Bureau data. Section 1886(d)(2)(D) of the Act further
defines a "rural area" as an area that is outside of a "large"
urban area or "other" urban area. Since FY 1995, the average
standardized amount for hospitals located in rural areas and "other"
urban areas has been equal, as provided for in section
1886(b)(3)(B)(i)(X) of the Act.
    Several provisions of the Act provide procedures under which a
hospital can apply for reclassification from one geographic area to
another: section 1886(d)(8)(B) of the Act, which provides that if
certain conditions are met, the Secretary shall treat a hospital
located in a rural county adjacent to one or more urban areas as being
located in the urban area to which the greatest number of workers in
the county commute; and section 1886(d)(10) of the Act, which
establishes the Medicare Geographic Classification Review Board (MGCRB)
process to permit hospitals to be reclassified for purposes of the
standardized amount or the wage index if they meet criteria established
by the Secretary.
    Section 401(a) of Public Law 106-113, which amended section
1886(d)(8) by adding a new paragraph (E), directs the Secretary to
treat any subsection (d) hospital located in an urban area as being
located in the rural area of the State in which the hospital is located
if the hospital files an application (in the form and manner determined
by the Secretary) and meets one of the following criteria:
     The hospital is located in a rural census tract of a MSA
(as determined under the most recent modification of the Goldsmith
Modification, originally published in the Federal Register on February
27, 1992 (57 FR 6725));
     The hospital is located in an area designated by any law
or regulation of the State as a rural area (or is designated by the
State as a rural hospital);
     The hospital would qualify as a RRC, or as a SCH if the
hospital were located in a rural area; or
     The hospital meets any other criteria specified by the
Secretary.
    The statutory effective date of this provision is January 1, 2000.
    The Goldsmith Modification, one of the qualifying statutory
criteria, evolved from an outreach grant program sponsored by the
Office of Rural Health Policy of the Health Resources and Services
Administration (HRSA). The program's purpose was to establish an
operational definition of rural populations lacking easy geographic
access to health services. Using 1980 Census Bureau data, Dr. Harold F.
Goldsmith and his associates created a methodology for identification
of census tracts that were located within a large metropolitan county
of at least 1,225 square miles but were so isolated from the
metropolitan core by distance or physical features as to be more rural
than urban in character. The most important criterion used to identify
these census tracts is the comparatively few residents in these areas,
less than 15 percent of the labor force, who commute to work in the
metropolitan core and suburbs. Appendix A of this interim final rule
with comment period lists the identified urban counties with census
tracts that may qualify as rural under the most recent Goldsmith
Modification (January 1, 2000). The amendments made by section 401 of
Public Law 106-113 enable a hospital located in one of these areas to
be treated as if it were situated in the rural area of the State in
which it is located. In making determinations under section
1886(d)(8)(E) of the Act, we will utilize the most recent Goldsmith
Modification which reflects data based on the 1990 census.
    Additionally, section 401(a) of Public Law 106-113 includes
hospitals "* * * located in an area designated by any law or
regulation of such State as a rural area (or is designated by such
State as a rural hospital)." We are requiring that a hospital's
designation as rural be in the form of either State law or regulation
if it is the basis for a hospital's request for urban to rural
reclassification under section 1886(d)(8)(E) of the Act. We believe
this will help ensure that the provision is implemented consistently
among States.
    Finally, a hospital also may seek to qualify for reclassification
premised on the fact that, had it been located in a rural area, it
would have qualified as an RRC or as an SCH. The hospital would need to
satisfy the criteria set forth in section 1886(d)(5)(C) of the Act (as
implemented in regulations at Sec. 412.96) as a RRC, or the criteria
set forth in section 1886(d)(5)(D) of the Act (as implemented in
regulations at Sec. 412.92) as an SCH.
    Although the statute authorizes the Secretary to specify further
qualifying criteria for a section 1886(d)(8)(E) reclassification, we do
not believe that additional criteria are warranted at this

[[Page 47030]]

time. However, we invite comment specifically on whether the criteria
in this interim final rule are sufficient at this time, and if not,
what additional criteria should be incorporated.
    Section IV.C. of this preamble contains information on the
application process for requesting reclassification under the section
401 provision.
    A hospital that is reclassified as rural under section
1886(d)(8)(E) of the Act, as added by section 401(a) of Public Law 106-
113, is treated as rural for all purposes of payment under the Medicare
inpatient hospital prospective payment system (section 1886(d) of the
Act), including standardized amount (Secs. 412.60 et seq.), wage index
(Sec. 412.63), and disproportionate share calculations (Sec. 412.106)
as of the effective date of the reclassification.

B. Conforming Changes Under Section 401(b) of Public Law 106-113

    Section 401(b) of Public Law 106-113 sets forth conforming
statutory changes relating to urban to rural reclassifications under
section 401(a) of Public Law 106-113:
     Section 401(b)(1) provides that if a hospital is being
treated as being located in a rural area under section 1886(d)(8)(E) of
the Act (for purposes of section 1886(d) of the Act), the hospital will
also be treated under section 1833(t) of the Act as being located in a
rural area. This provision is being addressed in a separate document.
     Section 401(b)(2) amends section 1820(c)(2)(B)(i) of the
Act by extending the reclassification provisions of section 401(a) to
the CAH program. A hospital that otherwise would have fulfilled the
requirements for designation as a CAH had it been located in a rural
area is now eligible for consideration as a CAH if it is treated as
being located in a rural area under section 1886(d)(8)(E) of the Act,
as added by section 401(a) of Public Law 106-113. (A list of certain
existing hospitals that have been identified as being located in
Goldsmith areas is included in Appendix B of this interim final rule
with comment period.) A more detailed discussion of the effect on the
CAH program in light of this provision, as well as the additional
amendments to section 1820(c)(2)(B)(i) of the Act included in Public
Law 106-113, is provided in section X.B. of this preamble.

C. Application Procedures

    The statute provides that a hospital seeking reclassification from
urban to rural under section 1886(d)(8)(E) of the Act must submit an
application "in a form and manner determined by the Secretary." We
are providing that a facility seeking reclassification under section
401(a) or (b) of Public Law 106-113 must apply in writing to the HCFA
Regional Office and include documentation satisfying the criteria on
which its request is based. For information about where to submit an
application, hospitals may contact their fiscal intermediaries or
utilize the HCFA website at www.hcfa.gov/medicare/regions/default.htm>.
The application must be mailed; facsimile or other electronic means are
not acceptable.
1. Qualification Through the Goldsmith Modification Criteria
    We are specifying that hospitals seeking reclassification through
the Goldsmith Modification criteria must include specific census tract
information with their application that can be obtained through the
following steps:
    (a) The hospital must determine whether it is located within one of
the urban counties containing one or more Goldsmith areas included in
Appendix A of this interim final rule with comment period.
    (b) Since only certain census tracts within these listed counties
qualify as Goldsmith areas, a hospital that identifies its county in
the listing must find the tract number assigned to its specific street
location by the U.S. Census Bureau. One way to determine this is
through an interactive website provided by the U.S. Census Bureau:
http:/tier2.census.gov/ctsl/ctsl.htm>.
    (c) The hospital must include the 4-digit census tract number in
its application to the HCFA Regional Office. The HCFA Regional Office
will utilize census tract data to determine whether the census tract in
which the hospital is located is situated in a Goldsmith area.
2. Qualification by State Designation
    For hospitals selecting reclassification under qualification by
State designation, we are providing that the hospital's application
must include a copy of the State law or regulation that verifies either
the requesting hospital is situated in an area designated rural by the
State or that the hospital has been designated as a rural hospital. The
application must also note the effective date of the rural designation.
3. Qualification as an RRC or as an SCH
    For hospitals seeking reclassification under qualification as an
RRC or as an SCH, we are providing that the hospital's application must
include documentation that supports the hospital's assertion that,
other than its urban location, it satisfies the criteria set forth in
section 1886(d)(5)(C) of the Act as an RRC, as implemented in
regulations at Sec. 412.90; or as an SCH as set forth in section
1886(d)(5)(D) of the Act and implemented in regulations at Sec. 412.92.
The HCFA Regional Office will review the application in a manner
consistent with its current procedures in the case of a hospital in a
rural area that applies for RRC or SCH status (except for the
requirement that the hospital be located in a rural area).

D. Filing and Effective Dates

    We are establishing the date of receipt of the application by the
HCFA Regional Office as the filing date. The HCFA Regional Office will
review the application and forward its approval or disapproval to the
hospital within 60 calendar days from the filing date. The HCFA
Regional Office also will forward a copy of its decision to the HCFA
Central Office and the fiscal intermediary. A hospital that satisfies
any of the criteria for rural reclassification under section 401(a) of
Public Law 106-113 will be treated as being located in the rural area
of the State in which it is located as of its application filing date.
    The statutory effective date of the amendments made by section 401
of Public Law 106-113 is January 1, 2000. To allow hospitals a grace
period for filing applications to accommodate this effective date, we
are providing that a qualifying hospital whose application is received
by HCFA on or before September 1, 2000, will be considered as being
located in the rural area of its State for purposes of section 1886(d)
of the Act as of January 1, 2000. Following that grace period, a
hospital's filing date is the date on which a complete application is
received by HCFA. A qualifying hospital that bases its application for
rural reclassification under section 1886(d)(8)(E) of the Act on its
satisfaction of either SCH or RRC criteria, and that files on or before
September 1, 2000, will benefit from the grace period and will be
considered as being located in the rural area of its State as of
January 1, 2000, unless the hospital withdraws its request as described
in section IV.D.3 of this preamble. Once the hospital is rural, it may
seek either an SCH or an RRC status by following a two-step process
described respectively, in sections IV.D.1 and IV.D.2 of this preamble.
The process for approval of the hospital as either an SCH or an RRC
must be consistent with the processes currently in place for approving
these applications. We note that whereas SCH designation is effective
30 days after written notification of HCFA's approval,

[[Page 47031]]

under Sec. 412.92(b)(2)(i), the effective date of RRC designation,
under 1886(d)(5)(C)(i) of the Act, is linked to the beginning of a
hospital's reporting period.
1. A Hospital Reclassified as Rural Seeking Designation as an SCH
    A hospital that bases its application for rural reclassification on
its satisfaction of all SCH criteria set forth in Sec. 412.92, except
rural location, may seek subsequent designation as an SCH if HCFA
determines that it qualifies to be treated as rural under section
1886(d)(8)(E) of the Act. The hospital must indicate this intent on its
application for rural reclassification. Designation as an SCH for such
hospital, therefore, would be a two-step process: (1) The hospital's
reclassification as rural for all payment purposes as of its filing
date under section 1886(d)(8)(E) of the Act; and (2) the now-rural
hospital's request for SCH status, which would be effective 30 days
following the date of HCFA's written notification of approval, as set
forth in the regulations at Sec. 412.92(b)(2)(i).
    In order to implement section 401(a) of Public Law 106-113 in the
most expeditious and efficient manner, allowing for necessary payment
system modifications, for the grace period which extends from January
1, 2000 to September 1, 2000, we are bundling the above two operations:
the rural reclassification of a hospital, under section 401(a) of
Public Law 106-113, and the designation of the hospital as an SCH. A
hospital that has applied for rural status based on its eligibility as
an SCH and also is applying to become an SCH, will be granted SCH
status as of January 1, 2000, if it satisfies the conditions for SCH
designation in Sec. 412.92, except for rural location as of January 1,
2000, and its application is filed by September 1, 2000.
2. Hospitals Reclassified as Rural Seeking Designation as a RRC
    A hospital qualifying for rural reclassification under section
401(a) of Public Law 106-113 because it satisfies RRC criteria under
Sec. 412.96, except for rural location, will be considered rural for
all payment purposes as of January 1, 2000, if its application is
received by September 1, 2000. After September 1, 2000, when the grace
period expires, the filing date is the date HCFA receives the
hospital's complete application. If the hospital seeks designation as a
RRC, the hospital must state its intent to apply for RRC status on its
application for rural reclassification under section 1886(d)(8)(E) of
the Act. Designation as an RRC for such a hospital, therefore, is a
two-step process: (1) The hospital's classification as rural for all
payment purposes as of its filing date under section 1886(d)(8)(E) of
the Act; and (2) the now rural hospital's request for RRC status by way
of a letter to the Regional Office during the quarter preceding the
start of a cost reporting period, referencing the data it previously
submitted for rural status. If approved, the hospital is designated an
RRC at the start of the hospital's next cost reporting period under
section 1886(d)(5)(C)(i) of the Act (55 FR 36059). Therefore, whereas
the grace period would grant rural status under section 1886(d)(8)(E)
of the Act to such a hospital filing on or before September 1, 2000,
statutory requirements preclude us from granting RRC status
simultaneously as we are able to do in the case of SCHs described
above.
3. Withdrawal of an Application for Rural Reclassification
    A hospital may withdraw an application for rural reclassification
at any time prior to the date of HCFA's decision on whether or not the
hospital qualifies for rural reclassification under section
1886(d)(8)(E) of the Act.
4. Cancellation of Rural Reclassification
    We are specifying that a hospital seeking cancellation of rural
status established under section 1886(d)(8)(E) of the Act must submit
its written request to HCFA not less than 120 days prior to the end of
its current cost reporting period. With the beginning of the hospital's
next cost reporting period, the hospital will be treated as being
located in an urban area.

E. Changes in the Regulations

    We are adding a new Sec. 412.103 to incorporate the provisions on
the urban to rural reclassification options set forth in section
1886(d)(8)(E) of the Act, as added by section 401(a) of Public Law 106-
113, and the application procedures for requesting reclassification. A
formula for transition payments to hospitals located in an area that
has undergone geographic reclassification from urban to rural is set
forth in section 1886(d)(8)(A) of the Act and implemented in
regulations at Secs. 412.90 and 412.102. We are revising existing
Secs. 412.63(b)(1) and 412.90(e) and the title of Sec. 412.102 to
clarify the distinction between hospital reclassification from urban to
rural and the geographic reclassification (or redesignation) of an
urban area to rural.
    We are revising Sec. 485.610 by redesignating paragraph (b)(4) as
paragraph (b)(5) and adding a new paragraph (b)(4) to reflect the
conforming provision of section 401(b)(2) of Public Law 106-113.

V. Medicare-Dependent, Small Rural Hospitals (Section 404 of Public
Law 106-113 and 42 CFR 412.90(j) and 412.108)

    Section 404 of Public Law 106-113 added a 5-year extension of the
Medicare-dependent, small rural hospital (MDH) program (FY 2002 through
FY 2006). This category of hospitals was originally created by section
6003(f) of the Omnibus Budget Reconciliation Act of 1989 (Public Law
101-239), which added section 1886(d)(5)(G) to the Act.
    As set forth in section 1886(d)(5)(G) of the Act, in order to be
classified as an MDH, a hospital must meet all of the following
criteria:
     The hospital is located in a rural area.
     The hospital has 100 or fewer beds.
     The hospital is not classified as an SCH (as defined at
Sec. 412.92).
     In the hospital's cost reporting period that began during
FY 1987, not less than 60 percent of its inpatient days or discharges
were attributable to inpatients entitled to Medicare Part A benefits.
    As provided by the law, MDHs were eligible for a special payment
adjustment under the prospective payment system, effective for cost
reporting periods beginning on or after April 1, 1990 and ending on or
before March 31, 1993. Hospitals classified as MDHs were paid using the
same methodology applicable to SCHs, that is, based on whichever of the
following rates yielded the greatest aggregate payment for the cost
reporting period:
     The national Federal rate applicable to the hospital.
     The updated hospital-specific rate using FY 1982 cost per
discharge.
     The updated hospital-specific rate using FY 1987 cost per
discharge.
    Section 13501(e)(1) of the Omnibus Budget Reconciliation Act of
1993 (Public Law 103-66) extended the MDH provision through FY 1994 and
provided that, after the hospital's first three 12-month cost reporting
periods beginning on or after April 1, 1990, the additional payment to
an MDH whose applicable hospital-specific rate exceeded the Federal
rate was limited to 50 percent of the amount by which the hospital-
specific rate exceeded the Federal rate.
    Section 4204(a)(3) of Public Law 105-33 reinstated the MDH special
payment for discharges occurring on or after October 1, 1997 and before
October 1, 2001, but did not revise either the

[[Page 47032]]

qualifying criteria for these hospitals or the payment methodology.
    Section 404(a) of Public Law 106-113 extended the MDH provision to
discharges occurring on or after October 1, 2002 and before October 1,
2006.
    We are revising Secs. 412.90(j) and 412.108 to reflect the
extension of the MDH program.

VI. Changes to the IME Adjustment (Section 111 of Public Law 106-
113 and 42 CFR 412.105(d)(3))

    Section 1886(d)(5)(B) of the Act provides that prospective payment
hospitals that have residents in an approved GME program receive an
additional payment to reflect the higher indirect operating costs
associated with GME. The regulations regarding the calculation of this
additional payment, known as the IME adjustment, are located at
Sec. 412.105.
    Section 111(a) of Public Law 106-113 amended section 1886(d)(5)(B)
of the Act by modifying the transition for the IME adjustment. The IME
adjustment factor is calculated using a formula multiplier that is
represented as c in the following equation: c  x  [(1 + r).\.405\-1].
The variable r represents the hospital's resident-to-bed ratio.
    Public Law 105-33 established the formula multiplier for discharges
occurring during FY 2000 at 1.47. However, section 111(b) of Public Law
106-113 provides for special payments to each hospital to reflect the
amount of IME payments if c equaled 1.6 for discharges occurring during
FY 2000, rather than 1.47. In accordance with section 111(b)(2) of
Public Law 106-113, these special payments will not affect any other
payments, determinations, or budget neutrality adjustments under
section 1886(d) of the Act.
    Under amendments enacted by section 111(a) of Public Law 106-113,
for discharges occurring during FY 2001, the formula multiplier is
1.54. Changes to the factor for discharges occurring in FY 2001 were
addressed in the proposed rule on FY 2001 hospital inpatient
prospective payment system rates and changes that was published in the
Federal Register on May 5, 2000 (65 FR 26281) and that will be
finalized by August 1, 2000. Changes to the factor for discharges
occurring in FY 2002 and thereafter are discussed in the final rule to
be published by August 1, 2000.
    We are amending Sec. 412.105(d)(3) to reflect the additional
payment provided for discharges occurring during FY 2000 under section
111(b)(1) of Public Law 106-113.

VII. Payment for Costs of GME

    Under section 1886(h) of the Act, Medicare pays hospitals for the
direct costs of GME. The payments are based on the number of residents
trained by the hospital. Section 1886(h) of the Act, as revised by
Public Law 105-33, caps the number of residents a hospital may count
for direct GME and IME. In general, the total number of residents in
the fields of allopathic or osteopathic medicine in a hospital may not
exceed the number of such FTE residents in the hospital with respect to
the hospital's most recent cost reporting period ending on or before
December 31, 1996. In the regulations we published on August 29, 1997
(62 FR 46003), May 12, 1998 (63 FR 26327), July 31, 1998 (63 FR 40986),
and July 30, 1999 (64 FR 41517), we established special rules for
adjusting the FTE resident caps for indirect and direct GME for new
medical residency programs. Public Law 106-113 further revised sections
1886(d) and 1886(h) of the Act to allow a hospital's caps to be
adjusted if certain additional criteria are met.

A. Counting Primary Care Residents on Certain Approved Leaves of
Absence in Base-Year FTE Count (Section 407(a)(1) of Public Law 106-113
and new 42 CFR 412.105(f)(1)(xi) and 413.86(g)(9))

    The limit that was placed on the number of residents that a
hospital may count for purposes of direct GME and IME is based on the
number of residents in the hospital's most recent cost reporting period
ending on or before December 31, 1996. In the situation where a primary
care resident was previously training in a hospital's residency
program, but was on an approved leave of absence during the hospital's
most recent cost reporting period ending on or before December 31,
1996, the hospital's FTE cap may be lower than it would have been had
the resident not been on an approved leave of absence. Section 407(a)
of Public Law 106-113 amended section 1886(h)(4)(F) of the Act to
direct the Secretary to count an individual for purposes of determining
a hospital's FTE cap, to the extent that the individual would have been
counted as a primary care resident for purposes of the FTE cap but for
the fact that the individual was on maternity or disability leave or a
similar approved leave of absence.
    The statute allows a hospital to receive an adjustment for those
residents to its individual FTE cap of up to three additional FTE
residents. We are providing in this interim final rule with comment
period that, in order for a hospital to receive this adjustment, the
leave of absence must have been approved by the residency program
director to allow the residents to be absent from the program and
return to the program after the absence. We are requiring that no later
than 6 months after the date of publication of this interim final rule,
the hospital must submit a request to the fiscal intermediary for an
adjustment to its FTE cap and must provide contemporaneous
documentation of the approval of the leave of absence by the residency
program director, specific to each additional resident that is to be
counted for purposes of the adjustment. For example, a letter to the
resident by the residency program director before the resident takes
the leave would be sufficient documentation of prior approval of the
leave of absence.
    Under section 407(a)(3) of Public Law 106-113, this provision is
effective for direct GME FTE counts with cost reporting periods
beginning on or after November 29, 1999, and for IME FTE counts, with
discharges occurring in cost reporting periods beginning on or after
November 29, 1999.
    We are adding new Secs. 412.105(f)(1)(xi) and 413.86(g)(9) to
incorporate the provisions of section 407(a) of Public Law 106-113.

B. Adjustments to the FTE Cap for Rural Hospitals (Section 407(b)(1) of
Public Law 106-113 and 42 CFR 412.105(f)(l)(iv) and 413.86(g)(4))

    Public Law 105-33 included several provisions with the intent of
encouraging physician training and practice in rural areas. Section
1886(h)(4)(H)(i) of the Act, as added by section 4623 of Public Law
105-33, directed the Secretary, in promulgating rules for the purpose
of the FTE cap, to give special consideration to facilities that meet
the needs of underserved rural areas. Consistent with the intent of
this provision, section 407(b) of Public Law 106-113 provides a 30-
percent expansion of a rural hospital's direct and indirect FTE count
for purposes of establishing the hospital's individual FTE cap.
Specifically, section 407(b) provides that, effective for direct GME
with cost reporting periods beginning on or after April 1, 2000, and
for IME, with discharges occurring on or after April 1, 2000, the FTE
count may not exceed 130 percent of the number of unweighted residents
the rural hospital counted in its most recent cost reporting period
ending on or before December 31, 1996.
    For example, if a hospital located in a rural area had 10
unweighted FTEs for its count for both direct GME and IME in its most
recent cost reporting period

[[Page 47033]]

ending on or before December 31, 1996, under this new provision the
hospital would have a FTE cap of 13 unweighted FTEs, instead of 10
unweighted FTEs, because the hospital is located in a rural area. The
revised FTE cap is equal to 130 percent of the number of unweighted
residents in its most recent cost reporting period ending on or before
December 31, 1996. The rural hospital's new FTE cap, effective April 1,
2000, is now 13 FTEs. However, if a hospital located in a rural area
had zero unweighted FTEs for its count for both direct GME and IME in
its most recent cost reporting period ending on or before December 31,
1996, under this new provision, this hospital would receive no
adjustment to its FTE cap (130 percent of zero is zero FTEs).
    We are incorporating the provisions of section 407(b) of Public Law
106-113 in Secs. 412.105(f)(1)(iv) and 413.86(g)(4).

C. Rural Track FTE Limitation for Purposes of GME and IME for Urban
Hospitals That Establish Separately Accredited Approved Medical
Programs in a Rural Area (Section 407(c) of Public Law 106-113 and new
42 CFR 412.105(f)(1)(x) and 413.86(g)(11))

    Section 407(c) of Public Law 106-113 amended section 1886(h)(4)(H)
of the Act to add a provision that, in the case of a hospital that is
not located in a rural area but establishes separately accredited
approved medical residency training programs (or rural tracks) in a
rural area or has an accredited training program with an integrated
rural track, an adjustment may be made to the hospital's cap on the
number of residents in order to encourage the training of physicians in
rural areas. For direct GME, the amendment applies to payments to
hospitals for cost reporting periods beginning on or after April 1,
2000; for IME, the amendment applies to discharges occurring on or
after April l, 2000.
    Section 407(c) of Public Law 106-113 does not define "rural
tracks" or an "integrated rural track," nor are these terms defined
elsewhere in the Social Security Act or in any applicable Federal
regulations. Currently, there are a number of accredited residency
programs, particularly 3-year primary care residency programs, in which
residents train for 1 year of the program at an urban hospital and are
then rotated for training for the other 2 years of the 3-year program
to a rural facility. These separately accredited "rural track"
programs are identified by the Accreditation Council of Graduate
Medical Education (ACGME) as "1-2" rural track programs. We are
implementing section 407(c) to address these "1-2" programs. In
addition, we are implementing section 407(c) to account for other
programs that are not "1-2" programs but which include rural training
portions.
    As stated above, there is no existing definition of "rural track"
or "integrated rural track." We are defining at Sec. 413.86(b) a
"rural track" and an "integrated rural track" as an approved
medical residency training program established by an urban hospital in
which residents train for a portion of the program at the urban
hospital and then rotate for a portion of the program to a rural
hospital(s) or to a rural nonhospital site(s). We note that "rural
track" and "integrated rural track," for purposes of this
definition, are synonymous.
    We are amending Sec. 413.86 to add paragraph (g)(11) (and amending
Sec. 412.105 to add paragraph (f)(1)(x)) to specify that, for direct
GME, for cost reporting periods beginning on or after April 1, 2000,
(or, for IME, for discharges occurring on or after April 1, 2000), an
urban hospital that establishes a new residency program, or has an
existing residency program, with a rural track (or an integrated rural
track) may include in its FTE count residents in those rural tracks, in
addition to the residents subject to the FTE cap at Sec. 413.86(g)(4).
An urban hospital may count the residents in the rural track up to a
"rural track FTE limitation" for that hospital. We are defining this
rural track FTE limitation at Sec. 413.86(b) as the maximum number of
residents (as specified at Sec. 413.86(g)(11)(i) through (vi)) training
in a rural track residency program that an urban hospital may include
in its FTE count, that is in addition to the number of FTE residents
already included in the hospital's FTE cap.
    Generally, the rural track policy is divided into two categories:
Rural track programs in which residents are rotated to a rural area for
at least two-thirds of the duration of the program; and rural track
programs in which residents are rotated to a rural area for less than
two-thirds of the duration of the program. These two categories are
then subdivided according to where the residents are training in the
rural area; the residents may be trained in a rural hospital or the
residents may be trained in a rural nonhospital site. To account for
rural track residency programs with rural rotations that have program
lengths greater than or less than 3 years, or that are not "1-2"
programs, we are specifying "two-thirds of the length of the
program," instead of "2 out of 3 program years," as a qualification
to count FTEs in the rural track.
    We are specifying that urban hospitals that wish to count FTE
residents in rural tracks, up to a rural track FTE limitation, must
comply with the conditions discussed below:
1. Rotating Residents for at Least Two-Thirds of the Program to a Rural
Hospital(s)
    We are specifying at Sec. 413.86(g)(11)(i) that if an urban
hospital rotates residents in the rural track program to a rural
hospital(s) for at least two-thirds of the duration of the program, the
urban hospital may include those residents in its FTE count for the
time the rural track residents spend at the urban hospital. The urban
hospital may include in its FTE count those residents in the rural
track training at the urban hospital, not to exceed its rural track FTE

limitation, determined as follows:
     For the first 3 years of the rural track's existence, the
rural track FTE limitation for each urban hospital will be the actual
number of FTE residents training in the rural track at the urban
hospital.
     Beginning with the fourth year of the rural track's
existence, the rural track FTE limitation is equal to the product of:
(a) The highest number of residents in any program year who, during the
third year of the rural track's existence, are training in the rural
track at the urban hospital or the rural hospital(s) and are designated
at the beginning of their training to be rotated to the rural
hospital(s) for at least two-thirds of the duration of the program; and
(b) the number of years those residents are training at the urban
hospital.
    We are utilizing the term "designated" at Sec. 413.86(g)(11)(i)
(as well as at Secs. 413.86(g)(11)(ii) and (iv)) to refer to the
calculation of the rural track FTE limitation. "Designated" means
that the residents must actually have enrolled in that rural track
program to rotate for a portion of the rural track program to a rural
area (either rural hospital(s) or rural nonhospital site(s)). To be
counted as an FTE in this first scenario, these enrolled residents must
actually rotate for at least two-thirds of the duration of the program
to a rural hospital(s). If a resident, at the beginning of his or her
training, intends to train in the rural area for at least two-thirds of
the duration of the program, but ultimately never does so, this
resident would be proportionately excluded from the urban hospital's
FTE count and rural track FTE count.
    We note that if the residents in the rural track are rotating to a
rural hospital(s), the rural hospital(s) may be eligible to count the
residents as part of

[[Page 47034]]

its FTE count. If the rural track residency program is a new residency
program as specified in redesignated Sec. 413.86(g)(12), the rural
hospital may be eligible to receive an FTE cap adjustment for those
residents training in the rural track for the time those residents are
training at the rural hospital(s), in accordance with the provisions of
existing Sec. 413.86(g)(6)(iii). If the rural track residency program
is an existing residency program, a rural hospital may be eligible to
count the FTE residents training in the rural track at the rural
hospital(s), in accordance with the provisions of Sec. 413.86(g)(4), as
amended in this interim final rule to implement section 407(b)(1) of
Public Law 106-113.
2. Rotating Residents for at Least Two-Thirds of the Program to a Rural
Nonhospital Site
    We are specifying at Sec. 413.86(g)(11)(ii) that if an urban
hospital rotates residents in the rural track program to a rural
nonhospital site(s) for at least two-thirds of the duration of the
program, the urban hospital may include those residents in its FTE
count, subject to the requirements under existing Sec. 413.86(f)(4).
The urban hospital may include in its FTE count those residents in the
rural track, not to exceed its rural track FTE limitation, determined
as follows:
     For the first 3 years of the rural track's existence, the
rural track FTE limitation for each urban hospital will be the actual
number of FTE residents training in the rural track at the urban
hospital and the rural nonhospital site.
     Beginning with the fourth year of the rural track's
existence, the rural track FTE limitation is equal to the product of:
(a) The highest number of residents in any program year who, during the
third year of the rural track's existence, are training in the rural
track at the urban hospital and are designated at the beginning of
their training to be rotated to a rural nonhospital site(s) for at
least two-thirds of the duration of the program and the rural
nonhospital site(s); and, (b) the number of years in which the
residents are expected to complete each program based on the minimum
accredited length for the type of program.
    We note that we specify at Sec. 413.86(g)(11)(ii) that an urban
hospital may include in its FTE count those residents in the rural
track rotating to a rural nonhospital site, subject to the requirements
under Sec. 413.86(f)(4). The regulations at Sec. 413.86(f)(4) provide,
in part, that a hospital that incurs "all or substantially all" of
the costs of training residents in a nonhospital site may include those
residents in determining the number of FTE residents (not to exceed the
FTE cap) for that hospital. Under this new rural track policy, where
the urban hospital rotates residents for at least two-thirds of the
residency program to a rural nonhospital site, the urban hospital would
be eligible to include in its FTE count residents training in the rural
track up to its rural track FTE limitation, but the urban hospital must
still reimburse the rural nonhospital site for the costs of training
those residents, as specified under Sec. 413.86(f)(4).
    An example of this second scenario is where urban hospital A has a
new internal medicine residency program that was established July 1,
1998, and rotates six PGY (program year) 2s and five PGY 3s in the
third year of the program to rural nonhospital site B. In the third
year of the program, five PGY 1s who will subsequently rotate to the
rural nonhospital site are training at hospital A. If hospital A is
complying with the requirements at Sec. 413.86(f)(4) by incurring all
or substantially all of the cost of the training at rural nonhospital
site B, beginning with the fourth year of the program, hospital A will
receive a rural track FTE limitation of 18 FTEs, because the highest
number of residents training at either hospital A or rural nonhospital
site B is six PGY 2s at rural nonhospital site B and the minimum
accredited length for internal medicine is 3 years (thus, six PGY 2s
x  3 years = 18 FTEs). (Note that for the first 3 years of the new
rural track program, the actual count of residents training in the
rural track at both hospital A and rural nonhospital site B will be
hospital A's rural track FTE count (and rural track FTE limitation for
the first 3 years of the new rural track program).)
3. Rotating Residents for Less Than Two-Thirds of the Program to a
Rural Hospital(s)
    We are specifying at Sec. 413.86(g)(11)(iii) that if an urban
hospital rotates residents in the rural track program to a rural
hospital(s) for periods of time that are less than two-thirds of the
duration of the program, the urban hospital may not include those
residents in its FTE count (if the urban hospital FTE count exceeds the
urban hospital FTE cap), nor may the urban hospital include those
residents when calculating its rural track FTE count. However, we note
that, in this scenario, if the rural track residency program is a new
residency program as specified in redesignated Sec. 413.86(g)(12), the
rural hospital may be eligible to receive an FTE cap adjustment for
those residents training in the rural track, in accordance with the
provisions of existing Sec. 413.86(g)(6)(iii). If the rural track
residency program is an existing residency program, a rural hospital
may count the FTE residents training in the rural track at the rural
hospital(s), in accordance with the provisions of Sec. 413.86(g)(4), as
amended, to incorporate the provisions of section 407(b)(1) of Public
Law 106-113.
    We are not permitting an urban hospital to count the FTE of
residents in a rural track rotating to a rural hospital(s) for less
than two-thirds the duration of the program (either as part of the
urban hospital's FTE count or as part of its rural track FTE
limitation), because to do so would inappropriately allow the urban
hospital to circumvent the FTE caps (assuming the urban hospital's FTE
count exceeds its FTE cap) by creating a new program with minimal
training in a rural track. However, in this situation, like the other
three provisions that concern the training of residents in rural areas,
we will allow Medicare payment for the rural portion of the training to
the rural hospital.
4. Rotating Residents for Less Than Two-Thirds of the Program to a
Rural Nonhospital Site
    We are specifying at Sec. 413.86(g)(11)(iv) that if an urban
hospital rotates residents in the rural track program to a rural
nonhospital site(s) for periods of time that are less than two-thirds
of the duration of the program, the urban hospital may include those
residents in its FTE count, subject to the requirements under existing
Sec. 413.86(f)(4). The urban hospital may include in its FTE count
those residents in the rural track, not to exceed its rural track FTE
limitation, determined as follows:
     For the first 3 years of the rural track's existence, the
rural track FTE limitation for the urban hospital will be the actual
number of FTE residents training in the rural track at the rural
nonhospital site.
     Beginning with the fourth year of the rural track's
existence, the rural track FTE limitation is equal to the product of:
(a) the highest number of residents in any program year who, during the
third year of the rural track's existence, are training in the rural
track at the rural nonhospital site(s); and (b) the length of time in
which the residents are being trained at the rural nonhospital site(s).
    We note that, in this situation, an urban hospital would not be
able to count the FTE for the rural track

[[Page 47035]]

resident while the resident is training at the urban hospital (unless
the urban hospital's FTE count does not exceed its FTE cap). The rural
track FTE count and the rural track FTE limitation for the urban
hospital would be limited to account for the residents training at the
rural nonhospital site.
    As in the second scenario at new Sec. 413.86(g)(11)(ii), we are
specifying at Sec. 413.86(g)(11)(iv) that an urban hospital may include
in its FTE count those residents in the rural track rotating to a rural
nonhospital site, subject to the requirements under Sec. 413.86(f)(4).
Under this new rural track policy, where the urban hospital rotates
residents for less than two-thirds of the residency program to a rural
nonhospital site, the urban hospital would be eligible to include in
its FTE count residents training in the rural track up to its rural
track FTE limitation, but the urban hospital must still reimburse the
rural nonhospital site for the costs of training those residents, as
specified under Sec. 413.86(f)(4).
    We note that, in this last scenario, we are allowing the urban
hospital to receive a rural track FTE limitation even in situations
where it is rotating residents to a rural area for a minimal period of
time (less than two-thirds the duration of the program). We believe
that this last scenario can be distinguished from the third scenario in
which the urban hospital is rotating residents to a rural area for a
minimal portion of the program but to a rural hospital instead of a
rural nonhospital site. In the third scenario, we are allowing Medicare
payment to go to the rural hospital for the portion of the urban
hospital program that involves rural training (but not to the urban
hospital, since the rural hospital is receiving an FTE cap adjustment
for that training). However, in the last scenario, we are allowing the
urban hospital to include the rural track residents in its FTE count
(and as part of its rural track FTE limitation), based on how long it
rotates the residents to the rural nonhospital site (and also incurs
all or substantially all of the training costs). We do not believe that
the urban hospital can circumvent its FTE cap in this last scenario
because it will only count the rural track residents based on the
portion of training in the rural nonhospital site (assuming the urban
hospital's FTE count exceed its FTE cap).
    An example of this last scenario would be in the situation where
urban hospital C establishes a new residency program in FY 2001 by
training six PGY 1s in the first year of the program's existence at the
urban hospital. In the second year of the program, urban hospital C
trains six PGY 1s and rotates the (now) six PGY 2s to rural nonhospital
site D. In the third year of the program, urban hospital C trains seven
PGY 1s, zero PGY 2s (rotating the six PGY 2s to rural nonhospital site
D) and six PGY 3s. Urban hospital C would receive a rural track FTE
limitation of zero FTEs in the first year of the program's existence,
since urban hospital C did not rotate any residents to a rural
nonhospital site in that first year; in the second year of the program,
urban hospital C may count six FTE residents above its FTE cap as its
second year rural track FTE limitation, since it rotated six PGY 2s to
rural nonhospital site D in that second year; in the third year of the
program, urban hospital C may count six FTE residents above its FTE cap
as its third year rural track FTE limitation, as well, since it rotated
six PGY 2s to the rural nonhospital site D in the third year. Finally,
beginning with the fourth year of the rural track program's existence,
urban hospital C will receive a rural track FTE limitation of seven
FTEs (seven PGY 1 residents training at urban hospital C that are
designated to rotate for one year of their training to rural
nonhospital site D  x  1 year of training at rural nonhospital site D),
assuming urban hospital C complies with the requirements at
Sec. 413.86(f)(4) that urban hospital C incurs all or substantially all
of the costs of training the six residents in rural nonhospital site D.
5. Conditions That Apply to All Urban Hospitals
    We are specifying that all urban hospitals that wish to count FTE
residents in rural tracks, not to exceed their respective rural track
FTE limitations, must comply with each of the following conditions, as
stated at Secs. 413.86(g)(11)(v) and (vi):
    (a) A hospital may not include in its rural track limitation or its
FTE count (assuming the hospital's FTE count exceeds its cap), FTE
residents who are training in a rural track residency program that were
already included as part of the hospital's FTE cap (if the rural track
program was in existence during the hospital's most recent cost
reporting period ending on or before December 31, 1996).
    (b) A hospital must base its count of residents in a rural track on
written contemporaneous documentation that each resident enrolled in a
rural track program at the urban hospital intends to rotate for a
portion of the residency program to a rural area. For example, written
contemporaneous documentation might be a letter of intent signed and
dated by the rural track residency program director and the resident at
the time of the resident's entrance into the rural track program as a
PGY 1.
    (c) All residents who are included by the hospital as part of its
FTE count (not to exceed its rural track FTE limitation) must
ultimately train in the rural area.
    (d) If HCFA finds that residents who are included by the urban
hospital as part of its FTE count did not actually complete the
training in the rural area, HCFA will reopen the urban hospital's cost
report within the 3-year reopening period (as specified in
Sec. 405.1885) and adjust the hospital's Medicare GME payments (and,
where applicable, the hospital's rural track FTE limitation).

D. Not Counting Against Numerical Limitation Certain Residents
Transferred From a Department of Veterans Affairs Hospital's Residency
Program That Loses Accreditation (Section 407(d) of Public Law 106-113
and new 42 CFR 412.105(f)(1)(xii) and 413.86(g)(10))

    Section 407(d) of Public Law 106-113 addresses the situation where
residents were training in a residency training program at a Veterans
Affairs (VA) hospital and then were transferred on or after January 1,
1997, and before July 31, 1998, to a non-VA hospital because the
program in which the residents were training would lose its
accreditation by the ACGME if the residents continued to train at the
VA hospital. In this situation, the non-VA hospital may receive a
temporary adjustment to its FTE cap to reflect those residents who were
transferred to the non-VA hospital for the duration that those
transferred residents were training at the non-VA hospital. We are
specifying that, in order to receive this adjustment, the non-VA
hospital must submit a request to its fiscal intermediary for a
temporary adjustment to its FTE cap, document that the hospital is
eligible for this temporary adjustment by identifying the residents who
have come from the VA hospital, and specify the length of time the
adjustment is needed.
    We note that section 407(d) of Public Law 106-113 only refers to
programs that would lose their accreditation by the ACGME. This
provision does not apply to accreditation by the American Osteopathy
Association (AOA), the American Podiatry Association (APA), or the
American Dental Association (ADA).
    Under section 407(d)(3) of Public Law 106-113, this policy is
effective as if included in the enactment of Public Law 105-33, that
is, for direct GME, with cost reporting periods beginning

[[Page 47036]]

on or after October 1, 1997, and for IME, discharges occurring on or
after October 1, 1997. If a hospital is owed payments as a result of
this provision, payments must be made immediately.
    We are adding new Secs. 412.105(f)(1)(xii) and 413.86(g)(10) to
incorporate the provisions of section 407(d) of Public Law 106-113.

E. Initial Residency Period for Child Neurology Residency Programs
(Section 312 of Public Law 106-113 and 42 CFR 413.86(g)(1))

    Generally, section 1886(h)(5)(F) of the Act defines the term
"initial residency period" to mean the "period of board
eligibility." The period of board eligibility is defined in section
1886(h)(5)(G) of the Act as the period recognized by ACGME as specified
in the Graduate Medical Education Directory which is published by the
American Medical Association. The initial residency period limitation
was designed to limit full Medicare payment for direct GME to the time
required to train in a single specialty. Therefore, the initial
residency period is determined based on the minimum time required for a
resident to become board eligible in a specialty and the published
periods included in the Graduate Medical Education Directory. During
the initial residency period, the residents are weighted at 1.0 FTE for
purposes of Medicare payment. Residents seeking additional specialty or
subspecialty training are weighted at 0.5 FTE.
    In order to become board eligible in child neurology, residents
must complete training in more than one specialty. Thus, for example,
before the effective date of section 312 of Public Law 106-113, if a
resident enrolled in a child neurology residency program by first
completing 2 years of training in pediatrics (which is associated with
a 3-year initial residency period), followed by 3 years of training in
child neurology, the resident would be limited by the initial residency
period of pediatrics. Section 312 of Public Law 106-113 amended section
1886(h)(5) of the Act by adding at the end a clause (v) which states
that "in the case of a resident enrolled in a child neurology
residency training program, the period of board eligibility and the
initial residency period shall be the period of board eligibility for
pediatrics plus 2 years." (The initial residency period for pediatrics
is currently 3 years). The amendments made by section 312(a) of Public
Law 106-113 applies to future child neurology residents and to child
neurology residents who have already begun their training (for whom an
initial residency period was already established). However, it does not
apply to residents who have completed their child neurology training
before July 1, 2000.
    We are revising Sec. 413.86(g)(1) to reflect that, effective on or
after July 1, 2000, for residency programs that began before, on, or
after November 29, 1999, the period of board eligibility and the
initial residency period for child neurology is now the period of board
eligibility for pediatrics plus 2 years. We note that the initial
residency period is the same for all child neurology residents,
regardless of whether or not the resident completes the first year of
training in pediatrics or neurology.
    Following are four examples of how a child neurology resident's FTE
status would be determined:
    Example 1: Assume the resident completes 2 years of training in
pediatrics followed by 3 years of training in child neurology.
    Before Public Law 106-113:

Year 1: July 1, 1997-June 30, 1998. 1.0 FTE
Year 2: July 1, 1998-June 30, 1999. 1.0 FTE
Year 3: July 1, 1999-June 30, 2000. 1.0 FTE
Year 4: July 1, 2000-June 30, 2001. 0.5 FTE
Year 5: July 1, 2001-June 30, 2002. 0.5 FTE

    After Public Law 106-113:

Year 1: July 1, 1997-June 30, 1998. 1.0 FTE
Year 2: July 1, 1998-June 30, 1999. 1.0 FTE
Year 3: July 1, 1999-June 30, 2000. 1.0 FTE
Year 4: July 1, 2000-June 30, 2001. 1.0 FTE
Year 5: July 1, 2001-June 30, 2002. 1.0 FTE
    Example 2: Assume the resident completes 2 years of training in
pediatrics followed by 3 years of training in child neurology.
    Before Public Law 106-113:

Year 1: July 1, 1996-June 30, 1997. 1.0 FTE
Year 2: July 1, 1997-June 30, 1998. 1.0 FTE
Year 3: July 1, 1998-June 30, 1999. 1.0 FTE
Year 4: July 1, 1999-June 30, 2000. 0.5 FTE
Year 5: July 1, 2001-June 30, 2001. 0.5 FTE
    After Public Law 106-113:

Year 1: July 1, 1996-June 30, 1997. 1.0 FTE
Year 2: July 1, 1997-June 30, 1998. 1.0 FTE
Year 3: July 1, 1998-June 30, 1999. 1.0 FTE
Year 4: July 1, 1999-June 30, 2000. 0.5 FTE
Year 5: July 1, 2000-June 30, 2001. 1.0 FTE
    Example 3: Assume the resident completes 1 year of neurology
training, followed by 1 year of pediatrics training, followed by 3
years of child neurology training.

    Note: The initial residency period for neurology is currently 4
years.

    Before Public Law 106-113:

Year 1: July 1, 1997-June 30, 1998. 1.0 FTE
Year 2: July 1, 1998-June 30, 1999. 1.0 FTE
Year 3: July 1, 1999-June 30, 2000. 1.0 FTE
Year 4: July 1, 2000-June 30, 2001. 1.0 FTE
Year 5: July 1, 2001-June 30, 2002. 0.5 FTE

    After Public Law 106-113:

Year 1: July 1, 1997-June 30, 1998. 1.0 FTE
Year 2: July 1, 1998-June 30, 1999. 1.0 FTE
Year 3: July 1, 1999-June 30, 2000. 1.0 FTE
Year 4: July 1, 2000-June 30, 2001. 1.0 FTE
Year 5: July 1, 2001-June 30, 2002. 1.0 FTE
    Example 4: Assume the resident completes 1 year of neurology
training, followed by 1 year of pediatrics training, followed by 3
years of child neurology training.

    Note: The initial residency period for neurology is currently 4
years.

    Before Public Law 106-113:

Year 1: July 1, 1996-June 30, 1997. 1.0 FTE
Year 2: July 1, 1997-June 30, 1998. 1.0 FTE
Year 3: July 1, 1998-June 30, 1999. 1.0 FTE
Year 4: July 1, 1999-June 30, 2000. 1.0 FTE
Year 5: July 1, 2000-June 30, 2001. 0.5 FTE

    After Public Law 106-113:

Year 1: July 1, 1996-June 30, 1997. 1.0 FTE
Year 2: July 1, 1997-June 30, 1998. 1.0 FTE
Year 3: July 1, 1998-June 30, 1999. 1.0 FTE
Year 4: July 1, 1999-June 30, 2000. 1.0 FTE
Year 5: July 1, 2000-June 30, 2001. 1.0 FTE

F. Technical Amendment

    It has come to our attention that the first sentence of existing
Sec. 413.86(g)(1) contains a technical error. The first sentence of
this paragraph reads "For purposes of this section, an initial
residency period is the number of years necessary to satisfy the
minimum requirements for certification in a specialty or subspecialty,
plus one year." This section of the regulation was revised as a result
of section 13563(b) of Public Law 103-66, and was effective only until
June 30, 1995. Generally, effective July 1, 1995, an initial residency
period is defined as the minimum number of years required for board
eligibility. Therefore, we are revising the first sentence of paragraph
(g)(1) of Sec. 413.86 accordingly. The remainder of paragraph (g)(1) of
Sec. 413.86 is unchanged.

VIII. Additional Payment to Hospitals That Operate Approved Nursing
and Allied Health Education Programs (Section 541 of Public Law
106-113 and 42 CFR 413.86(d) and new 413.87)

    Under sections 1861(v) and 1886(a) of the Act, hospitals that
operate approved nursing or allied health education programs may be
eligible for the pass-through payment under the prospective payment
system. Section 1886(h) of the Act establishes the methodology for
determining payments to hospitals for the direct costs of GME programs.
Section 1886(h) of the Act, as implemented in regulations at
Sec. 413.86, specifies that Medicare payments for direct costs of GME
are based on a prospectively determined per resident amount (PRA). The
PRA is multiplied by the number of FTE residents working in all areas
of the hospital complex (and nonhospital sites, where applicable), and
the hospital's Medicare share of total inpatient days to determine
Medicare's direct GME payment.
    Section 1886(h)(3)(D) of the Act, as added by section 4624 of
Public Law 105-33, provides a 5-year phase-in of payments to teaching
hospitals for direct costs of GME associated with

[[Page 47037]]

services to Medicare+Choice (managed care) enrollees for portions of
cost reporting periods occurring on or after January 1, 1998. The
amount of payment for direct GME is equal to the product of the PRA,
the number of FTE residents working in all areas of the hospital (and
nonhospital sites, if applicable), the ratio of the number of inpatient
bed days that are attributable to Medicare+Choice enrollees to total
inpatient bed days, and an applicable percentage. The applicable
percentages are 20 percent for portions of cost reporting periods
occurring in calendar year 1998, 40 percent in calendar year 1999, 60
percent in calendar year 2000, 80 percent in calendar year 2001, and
100 percent in calendar year 2002 and subsequent years. (Section
1886(d)(11) of the Act, as added by section 4622 of Public Law 105-33,
provides a 5-year phase-in of payments to teaching hospitals for IME
associated with services to Medicare+Choice enrollees for portions of
cost reporting periods occurring on or after January 1, 1998, as well.
However, the Medicare+Choice IME payments are irrelevant for the
purposes of this section of the interim final rule, because although
section 541 of Public Law 106-113 affects the payments for
Medicare+Choice direct GME, it in no way affects the payments for
Medicare+Choice IME.)
    Section 541 of Public Law 106-113 further amended section 1886 of
the Act by adding subsection (l) and amending section 1886(h)(3)(D) to
provide for additional payments to hospitals for nursing and allied
health education programs associated with services to Medicare+Choice
enrollees. Hospitals that, under Sec. 413.85, operate approved nursing
or allied health education programs and receive Medicare reasonable
cost reimbursement for these programs would receive additional
payments. This provision is effective for portions of cost reporting
periods occurring in a calendar year, beginning with calendar year
2000.
    Section 1886(l) of the Act, as added by section 541 of Public Law
106-113, specifies the methodology to be used to calculate these
additional payments and places a limitation on the total amount that is
projected to be expended in any calendar year; that is, $60 million. In
this document, we refer to the total amount of $60 million or less as
the payment "pool." We emphasize that we use the term "pool" solely
for ease of reference; the term reflects an estimated dollar figure, a
number that is plugged into a formula to calculate the amount of
additional payments. The term "pool" does not refer to a discrete
fund of money that is set aside in order to make the additional
payments (thus, for example, if the estimated "pool" is $50 million,
we use the number 50 million to calculate the amount of additional
payments, but this does not mean that we set aside $50 million in a
separate fund from which we make the additional payments). The total
amount of additional payments associated with utilization of
Medicare+Choice enrollees is based on the ratio of total direct GME
payments for Medicare+Choice enrollees to total Medicare direct GME
payments, multiplied by the total Medicare nursing and allied health
education payments. A hospital would receive its share of these
additional payments in proportion to the amount of Medicare nursing and
allied health education payments received in the cost reporting period
that ended in the fiscal year that is 2 years prior to the current
calendar year, to the total amount of nursing and allied health
payments made to all hospitals in that cost reporting period. Section
541(b) of Public Law 106-113 amended section 1886(h)(3) of the Act to
provide that direct GME payments for Medicare+Choice utilization will
be reduced to account for the additional payments that are made for
nursing and allied health education programs under the provisions of
section 1886(l) of the Act.
    We are implementing section 541 by establishing regulations at new
Sec. 413.87 to incorporate the provisions of section 1886(l) of the
Act. We are specifying the rules for a hospital's eligibility to
receive the additional payment under section 1886(l), the requirements
for determining the additional payment to each eligible hospital, and
the methodologies for calculating each additional payment and for
calculating the payment "pool." These provisions are discussed below:

A. Qualifying Conditions for Payment

    We are providing that, for portions of cost reporting periods
occurring on or after January 1, 2000, a hospital that operates a
nursing or allied health education program in accordance with
Sec. 413.85 may receive an additional payment amount associated with
Medicare+Choice utilization if it meets two conditions.
    First, section 541 of Public Law 106-113 directs the Secretary to
determine the amount of payment for each hospital based on an "* * *
estimate of the ratio of the amount of payments made under section
1861(v) to the hospital for nursing and allied health education
activities for the hospital's cost reporting period ending in the
second preceding fiscal year to the total of such amounts for all
hospitals for such cost reporting periods." (Emphasis added).
Accordingly, we are providing that the hospital must have received
reasonable cost Medicare payment for a nursing or allied health
education program(s) in its cost reporting period(s) ending in the
fiscal year that is 2 years prior to the current calendar year. For
example, if the current calendar year is calendar year 2000, the fiscal
year that is 2 years prior to calendar year 2000 is FY 1998. In this
example, if a hospital did not receive reasonable cost payment for
approved nursing or allied health education programs in FY 1998, but
first establishes these programs and receives such payment as specified
in Sec. 413.85 after FY 1998, the hospital will only be eligible to
receive an additional payment amount in the calendar year that is 2
years after the respective fiscal year. For example, if the hospital
establishes a nursing or allied health program in FY 1999, it will
first be eligible to receive an additional payment amount in calendar
year 2001.
    Second, section 541 of Public Law 106-113 states, "For portions of
cost reporting periods occurring in a year (beginning with 2000), the
Secretary shall provide for an additional payment amount for any
hospital that receives payments for the costs of approved educational
activities for nurse and allied health professional training * * *."
(Emphasis added). Accordingly, we are specifying that the hospital also
must be receiving reasonable costs payment for its nursing or allied
health education program(s) in the current calendar year to receive
these additional payments for nursing and allied health training.

B. Calculating the Additional Payment Amount

    The Medicare fiscal intermediary will determine if the hospital is
eligible to receive the additional payment by applying the two criteria
specified in section VIII.A.1. of this preamble. For portions of cost
reporting periods occurring on or after January 1, 2000, an eligible
hospital will receive the additional payment amount calculated
according to the following steps:
    Step 1: Determine the hospital's total Medicare payments received
for approved nursing or allied health education programs based on data
from the settled cost reports for the period(s) ending in the fiscal
year that is 2 years prior to the current calendar year.
    For example, if the current calendar year is 2000, determine the
hospital's total nursing or allied health education payments made in
its cost reporting period ending in FY 1998. If a hospital

[[Page 47038]]

has more than one cost reporting period ending in that fiscal year, the
fiscal intermediary will sum the nursing and allied health payments
made to the hospital over those cost reporting periods.
    Step 2: Determine the ratio of the individual hospital's total
nursing or allied health payments from Step 1, to the total of all
nursing and allied health education program payments made across all
hospitals for all cost reporting periods ending in the fiscal year that
is 2 years prior to the current calendar year.
    To determine these total payments, we will use the best available
cost reporting data for the applicable hospitals from the Hospital Cost
Report Information System (HCRIS) that is for cost reporting periods in
the fiscal year that is 2 years prior to the current calendar year. If
the necessary data are not included in HCRIS because a hospital files a
manual cost report, we will obtain the necessary data from the fiscal
intermediaries that serve those hospitals. If a hospital has more than
one cost reporting period ending in the fiscal year that is 2 years
prior to the current calendar year, we will include all of the
hospital's cost reports for those periods in our calculations. If a
hospital does not have a cost reporting period ending in the fiscal
year that is 2 years prior to the current calendar year (such as a
hospital with a long cost reporting period), the hospital will be
included in the calculations for the calendar year that is 2 years
after the fiscal year in which the long cost reporting period ends.
    Each calendar year, HCFA will determine and publish in a proposed
rule and a final rule the total amount of nursing and allied health
education payments made across all hospitals during the fiscal year
that is 2 years prior to the current calendar year.
    Step 3: Multiply the ratio calculated in step 2 by the
Medicare+Choice nursing and allied health payment "pool" (described
under section VIII.C. of this preamble) that is determined by HCFA for
the current calendar year.
    The resulting product is each respective hospital's additional
payment amount. We note that, as evidenced by the methodology outlined
above, in accordance with section 541 of Public Law 106-113, Congress
is not requiring each hospital's additional payment amount for a given
period to be based on the hospital's Medicare+Choice utilization in
that period.

C. HCFA Calculation of Medicare+Choice Nursing and Allied Health
Payment "Pool"

    In accordance with section 1886(l) of the Act, each calendar year,
HCFA estimates a total amount, not to exceed $60 million, which is the
basis for determining the additional payments for nursing and allied
health education associated with Medicare+Choice enrollees to hospitals
that operate approved nursing or allied health education programs. The
total amount is calculated in the following manner:
    Step 1: We determine the ratio of projected total Medicare+Choice
direct GME payments across all hospitals in the current calendar year
to projected total direct GME payments across all hospitals in the
current calendar year.
    Step 2: We multiply the ratio calculated in step 1 by projected
total nursing and allied health education reasonable cost payments
across all hospitals in the current calendar year.
    The resulting product of Step 1 and Step 2, not to exceed $60
million, is the Medicare+Choice nursing and allied health payment
"pool" for the current calendar year.
    The projections of Medicare+Choice direct GME, direct GME, and
nursing and allied health payments for a calendar year are based on
such payments from the best available cost report data from the HCRIS.
(For example, for calendar year 2000, the projections are based on the
best available cost report data from HCRIS 1998). These payment amounts
are then increased to the appropriate calendar year using the increases
allowed by section 1886(h) of the Act for these services (using the
percentage applicable for the current calendar year for Medicare+Choice
direct GME and the Consumer Price Index (CPI) increases for direct GME,
and assuming nursing and allied health remains a constant percentage of
inpatient hospital spending).

D. Proportional Reduction to Medicare+Choice Direct GME Payments

    In order for the Secretary to make the additional payments to
eligible hospitals operating approved nursing or allied health
education programs, section 1886(h)(3)(D) of the Act, as amended by
section 541(b) of Public Law 106-113, specifies that the Secretary will
carve out an estimated percentage of payments that are made to teaching
hospitals for direct GME associated with services to Medicare+Choice
enrollees. Specifically, the law provides that the estimated reductions
in Medicare+Choice direct GME payments must equal the estimated total
additional Medicare+Choice nursing and allied health education
payments. Because the data for the components of the formula used to
calculate this percentage will change each year (due to percentage
changes in the Medicare+Choice direct GME phase-in, changes in direct
GME payment amounts, and changes in nursing and allied health education
payment amounts), we will calculate and publish the applicable
percentage reduction each year in the proposed rule and the final rule
for the annual update to the hospital inpatient prospective payment
system rates. The percentage is estimated by calculating the ratio of
the Medicare+Choice nursing and allied health payment "pool" for the
current calendar year to the projected total Medicare+Choice direct GME
payments made across all hospitals for the current calendar year.

E. Calculation of Amounts for Calendar Year 2000

    The total amount of nursing and allied health education payments
made across all hospitals for cost reporting periods ending in FY 1998,
that is, 2 fiscal years prior to calendar year 2000, is estimated at
$220,622,805. We have calculated this amount for FY 2000 based upon
data from hospitals' cost reporting periods ending during FY 1998
(October 1, 1997 through September 30, 1998), as provided by section
541 of Public Law 106-113. (Section VIII.B. of this preamble provides a
more detailed explanation of how this amount was derived.) We note
that, if a hospital did not have a cost reporting period ending in FY
1998, such as a hospital with a long cost reporting period beginning in
FY 1997 and ending in FY 1999, the hospital was excluded from our
calendar year 2000 calculations (but will be included in our calendar
year 2001 calculations). We are including data for 1,257 hospitals in
the calendar year 2000 calculations. Ten of these hospitals had more
than one cost reporting period.
    According to the methodology outlined in section VIII.C. of this
preamble, we have estimated the Medicare+Choice nursing and allied
health education payment "pool" for calendar year 2000 to be
$26,272,140. The ratio of each hospital's nursing and allied health
education payments from its cost reporting period ending in FY 1998 to
total nursing and allied health education payments made from all cost
reporting periods ending in FY 1998 is then multiplied by $26,272,140
to determine each hospital's additional

[[Page 47039]]

payment amount (as described in section VIII.B. of this preamble).
    For calendar year 2000, the projected total Medicare+Choice direct
GME payments made to all hospitals is $250 million. Therefore,
consistent with the methodology described in section VIII.D. of this
preamble, the ratio for calendar year 2000 is $26,272,140 to $250
million, which equals a 10.5 percent reduction to each hospital's
Medicare+Choice direct GME payment during calendar year 2000.
    Accordingly, for portions of cost reporting periods occurring in
calendar year 2000, hospitals that receive Medicare+Choice direct GME
payments will have these payments reduced by 10.5 percent.
Specifically, each hospital with a calendar year cost reporting period
that is receiving Medicare+Choice direct GME payments will have those
payments reduced by 10.5 percent for the period of January through
December 2000. If a hospital does not have a calendar year cost
reporting period, then the reductions to its Medicare+Choice direct GME
payments will depend upon the portion of its cost reporting period that
falls within the current calendar year. For example, if a hospital has
an October through September fiscal year, its Medicare+Choice direct
GME payments from October through December 1999 will not be affected.
However, the hospital's Medicare+Choice direct GME payments from
January through September 2000 (from its FY 2000 cost reporting
period), and its Medicare+Choice direct GME payments from October
through December 2000 (from its FY 2001 cost reporting period), will be
reduced by 10.5 percent. Its Medicare+Choice direct GME payments for
the remainder of its FY 2001 cost reporting period, which extends from
January through September 2001, will be reduced by the applicable
percentage for calendar year 2001. Similarly, if a hospital has a July
through June cost reporting period, its Medicare+Choice direct GME
payments from July through December 1999 will not be affected. However,
its Medicare+Choice direct GME payments from January through June 2000,
and its Medicare+Choice direct GME payments from July through December
2000, will be reduced by 10.5 percent. Its Medicare+Choice direct GME
payments for the remainder of its cost reporting period, which extends
from January through June 2001, will be reduced by the applicable
percentage for calendar year 2001.
    In general, we note that hospitals that operate both GME and
nursing or allied health education programs should experience either a
net gain or loss as a result of this provision, because although their
Medicare+Choice direct GME payments will be reduced by a certain
percentage, their Medicare+Choice nursing and allied health payments
will be increased. However, hospitals that operate only GME programs
will see their Medicare reimbursement reduced, and hospitals that
operate only nursing or allied health education programs will see their
Medicare reimbursement increased.

F. Regulation Changes

    We are adding a new Sec. 413.87 to incorporate the provisions of
section 541 of Public Law 106-113. In addition, we are making a
conforming change to Secs. 413.86(d)(4) through (d)(6) to account for
the revised methodology in determining a hospital's Medicare+Choice
direct GME payments.

IX. Hospitals and Units Excluded From the Prospective Payment
System (Section 121 of Public Law 106-113 and 42 CFR
413.40(c)(4)(iii)(B) and 413.40(c)(4)(v))

A. Limitation on the Target Amounts

    In the August 29, 1997 final rule (62 FR 46018), in accordance with
section 4414 of Public Law 105-33, we implemented section 1886(b)(3)(H)
of the Act, which provides for caps on the target amounts for excluded
hospitals and units for cost reporting periods beginning on or after
October 1, 1997, through September 30, 2002. The caps on the target
amounts apply to the following three classes of excluded hospitals:
psychiatric hospitals and units, rehabilitation hospitals and units,
and long-term care hospitals. In establishing the caps on the target
amounts within each class of hospital for new hospitals, section
1886(b)(7)(C) of the Act, as amended by section 4416 of Public Law 105-
33, instructed the Secretary to provide an appropriate adjustment to
take into account area differences in average wage-related costs.
However, since the statutory language under section 4414 of Public Law
105-33 did not provide for the Secretary to account for area
differences in wage-related costs in establishing the caps on the
target amounts within each class of hospital for existing hospitals,
HCFA did not account for wage-related differences in establishing the
caps on the target amounts for existing facilities in FY 1998.
    Section 121 of Public Law 106-113, which amended section
1886(b)(3)(H) of the Act, directed the Secretary to provide for an
appropriate wage adjustment to the caps on the target amounts for
psychiatric hospitals and units, rehabilitation hospitals and units and
long-term care hospitals, effective for cost reporting periods
beginning on or after October 1, 1999, through September 30, 2002. For
purposes of calculating the caps, section 1886(b)(3)(H)(ii) of the Act
requires the Secretary to first "estimate the 75th percentile of the
target amounts for such hospitals within such class for cost reporting
periods ending during fiscal year 1996." Section 1886(b)(3)(H)(iii) of
the Act, as added by Public Law 106-113, requires the Secretary to
provide for "an appropriate adjustment to the labor-related portion of
the amount determined under such subparagraph to take into account
differences between average wage-related costs in the area of the
hospital and the national average of such costs within the same class
of hospital."
    For cost reporting periods beginning in FY 2000, we update the FY
1996 wage-neutralized national 75th percentile target amount for each
class of hospital by the market basket percentage increase up through
FY 2000. For cost reporting periods beginning during FY 2001 through
2002, we update the previous fiscal year's wage-neutralized national
75th percentile target amount for each class of hospital by the
applicable market basket percentage increase. In determining the
national 75th percentile target amount for each class of hospital and
consistent with the broad authority conferred on the Secretary by
section 1886(b)(3)(H)(iii) of the Act (as added by Public Law 106-113)
to determine the appropriate wage adjustment, we have accounted for
differences in wage-related costs by adjusting the caps on the target
amounts for each class of hospital (psychiatric, rehabilitation, and
long-term care) using the methodology described in the following
section.

B. Wage-Neutralized National 75th Percentile Target Amounts

    In determining the wage-neutralized national 75th percentile target
amount for each class of hospital, we used FY 1996 hospital cost report
data and determined the labor-related portion of each hospital's FY
1996 target amount by multiplying its target amount by the most recent
actuarial estimate of the labor-related portion of excluded hospital
costs (or 0.71553). This actuarial estimate of the labor-related share
of excluded hospital costs reflects revisions made in connection with
other revisions to the excluded hospital market basket published in the
August 29, 1997 final rule (62 FR 45996). Based on the most recent
estimate of the relative weights of the labor cost

[[Page 47040]]

categories (wages and salaries, employee benefits, professional fees,
postal services, and all other labor intensive services), the labor-
related portion is 71.553 percent. The remaining 28.447 percent is the
most recent estimate of the nonlabor-related portion. Similarly, we
determined the nonlabor-related portion of each hospital's FY 1996
target amount by multiplying its target amount by the actuarial
estimate of the nonlabor-related portion of costs (or 0.28447).
    Next, we wage-neutralized each hospital's FY 1996 target amount by
dividing the labor-related portion of each hospital's FY 1996 target
amount by the hospital's FY 2000 hospital wage index under the hospital
inpatient prospective payment system (see Sec. 412.63), as shown in
Tables 4A and 4B of the July 30, 1999 final rule (64 FR 41585). The FY
2000 wage index is the most current wage index available. Moreover, the
FY 2000 hospital inpatient prospective payment system wage index was
calculated using FY 1996 data. Within the specified class of hospital,
each hospital's FY 1996 target amount was wage-neutralized using the
published FY 2000 wage index. Each hospital's wage-neutralized FY 1996
target amount was calculated by adding the nonlabor-related portion of
its target amount and the wage-neutralized labor-related portion of its
target amount.
    This methodology for wage-neutralizing each hospital's target
amount to determine the national 75th percentile of the target amounts
for each class of hospital is identical to the methodology we utilized
for the wage index adjustment described in the August 29, 1997 final
rule (62 FR 46020) to calculate the wage-adjusted 110 percent of the
national median target amounts for new excluded hospitals and units.
Again, we recognize that wages may differ for prospective payment
hospitals and excluded hospitals and units, but we believe that the
wage data reflect area differences in wage-related costs.
    In light of the short timeframe we have for implementing section
121 of Public Law 106-113 for cost reporting provisions beginning in FY
2000, the FY 2000 wage data for acute care hospitals was the most
feasible data source to determine the wage-neutralized national 75th
percentile target amounts since reliable wage data for hospitals and
hospital units excluded from the prospective payment system is not
available.
    Within each class of hospital, the wage-neutralized national 75th
percentile target amounts were determined by arraying the hospitals'
wage-neutralized FY 1996 target amounts. The wage-neutralized national
75th percentile target amount for each class of hospital is then
separated into a labor-related share and a nonlabor-related share based
on actuarial estimates of 71.553 percent labor-related share and 28.447
percent nonlabor-related share.
    In the July 30, 1999 final rule (64 FR 41557), based on the
national 75th percentile of the target amounts for cost reporting
periods ending during FY 1996 (which did not account for area wage-
related differences), updated by the market basket percentage increase
to FY 2000, we had established the caps on the target amounts for
existing excluded hospitals and units as follows:
     Psychiatric hospitals and units: $11,100
     Rehabilitation hospitals and units: $20,129
     Long-term care hospitals: $39,712
    Using the wage-neutralized national 75th percentile of the target
amounts for cost reporting periods ending during FY 1996, updated by
the applicable market basket percentage increase to FY 2000, and the
wage adjustment provided for under the amendments made by Public Law
106-113, we are establishing the labor-related share and nonlabor-
related share of the FY 2000 wage-neutralized national 75th percentile
target amounts for each class of hospital to determine a hospital's FY
2000 cap on the target amount as follows:

----------------------------------------------------------------------------------------------------------------
                                                                              Labor-related    Nonlabor-related
                     Class of excluded hospital or unit                           share              share
----------------------------------------------------------------------------------------------------------------
Psychiatric................................................................           $7,863              $3,126
Rehabilitation.............................................................           14,666               5,831
Long-Term Care.............................................................           28,321              11,259
----------------------------------------------------------------------------------------------------------------

    We note that the March 2000 Program Memorandum (Transmittal Number
A-00-16) issued to all Medicare fiscal intermediaries listed incorrect
amounts for the labor-related portion and nonlabor-related portion of
the wage-neutralized caps on the target amounts for FY 2000. The FY
2001 proposed rule (65 FR 26314) also listed incorrect amounts for the
labor-related portion and nonlabor-related portion of the proposed FY
2001 wage-neutralized national 75th percentile caps on the target
amounts. The correct labor-related and nonlabor-related portions of the
wage-neutralized national 75th percentile cap on the target amount for
FY 2000 for each class of hospital are listed above. The correct labor-
related and nonlabor-related portions of the FY 2001 wage-neutralized
national 75th percentile caps on the target amounts for each class of
hospital will be included in the FY 2001 hospital inpatient prospective
payment system final rule to be published by August 1, 2000.
    The estimates of the national 75th percentile of the target amounts
were developed from the best available data on the hospital-specific
target amounts for cost reporting periods ending during fiscal year
1996 and then updated by the market basket percentage increase for FY
2000. We used the data that have been reported to HCFA for over 3,000
hospitals and units within the three classes of hospitals specified by
the statute. We note that, with respect to long-term care hospitals, we
used the same data (provider universe and target amount figures for
hospitals within that class) as were used to establish the caps on the
target amounts for long-term care hospitals published in the May 12,
1998 final rule (63 FR 26347). The data for psychiatric hospitals and
units and rehabilitation hospitals and units used to establish the caps
on the target amounts for these classes of hospitals included updates
to the hospital's FY 1996 target amounts resulting from settling cost
reports that previously had not been settled prior to August 1997 when
the final rule establishing the caps on the target amounts for existing
excluded hospitals was published.

C. Wage-Adjusted Target Amounts

    We are specifying that, within each class of hospital, a hospital's
wage-adjusted cap on the target amount per discharge for FY 2000 is
determined by adding the hospital's nonlabor-related portion of the
wage-neutralized national 75th percentile cap to its wage-adjusted
labor-related portion of the national 75th percentile cap. A hospital's
wage-adjusted labor-related portion of the target amount is calculated
by multiplying the labor-related portion of the wage-neutralized
national 75th

[[Page 47041]]

percentile cap for the hospital's class by the hospital's applicable
wage index. For FY 2000, a hospital's applicable wage index is the wage
index under the hospital inpatient prospective payment system (see
Sec. 412.63) for cost reporting periods beginning on or after October
1, 1999, and ending on or before September 30, 2000 as shown in Tables
4A and 4B of the July 30, 1999 final rule (64 FR 41585). The FY 1996
wage-neutralized national 75th percentile target amount for each class
of hospital updated through FY 2000 by the applicable market basket
percentage increase for excluded hospitals and hospital units used to
determine a hospital's limitation on its FY 2000 target amount. For FY
2000, a hospital's FY 2000 limitation on its target amount is used to
determine payments for excluded hospitals and units under
Sec. 413.40(d). The FY 2000 acute care hospital wage index is used to
wage-adjust the labor-related portion of the FY 2000 wage-neutralized
national 75th percentile target amount within the specified class of
hospital since it is used to provide for an appropriate wage adjustment
by accounting for differences in area wage-related costs in FY 2000
hospital inpatient prospective payment system payments. As we stated
previously in this section, we recognize that wages may differ for
prospective payment hospitals and excluded hospitals and units, but we
believe that these wage data reflect area differences in wage-related
costs. A hospital's applicable wage index is the wage index value for
the area in which the hospital or unit is physically located (MSA or
rural area) without taking into account prospective payment system
hospital reclassification under section 1886(d)(10) of the Act, and
section 1886(d)(8) of the Act as amended by section 401 of Public Law
106-113.

D. Changes in the Regulations

    We are revising Secs. 413.40(c)(4)(iii)(B) and (c)(4)(v) to
incorporate the changes in the methodology used to determine the
limitation on the target amounts for psychiatric hospitals and units,
rehabilitation hospitals and units, and long-term care hospitals, as
provided for under the amendments made by section 121 of Public Law
106-113.

X. Critical Access Hospitals (CAHs)

A. Background: The Medicare Rural Hospital Flexibility Program and CAHs

    Section 4201 of Public Law 105-33 amended section 1820 of the Act
to create a nationwide Medicare Rural Hospital Flexibility (MRHF)
Program to replace the 7-State Essential Access Community Hospital/
Rural Primary Care Hospital (EACH/RPCH) program. Under section
1820(c)(2) of the Act, as amended, a State could designate certain
rural hospitals as CAHs if they were located a specified distance from
other hospitals, made 24-hour emergency care available, and kept
inpatients for a limited period of time. Additionally, CAH staffing
requirements differed from those of other hospitals under Medicare and
CAHs received payment for inpatient and outpatient services on the
basis of reasonable cost. A comprehensive discussion of CAHs within the
context of the MRHF Program may be found in the August 29, 1997 Federal
Register (62 FR 45970 and 46008-46010).
    Sections 401(b) and 403 of Public Law 106-113 modified the CAH
program set forth in section 1820 of the Act.

B. Permitting Certain Facilities To Be Designated as CAHs (Section
401(b) of Public Law 106-113 and 42 CFR 485.610)

    One of the threshold criteria for designation as a CAH under
section 1820(c)(2)(B)(i) of the Act is that the hospital must be rural
as defined in section 1886(d)(2)(D) of the Act. Section IV. of this
preamble discusses the option of urban to rural classification for a
"subsection (d)" hospital authorized by section 401(a) of Public Law
106-113 under an amendment to section 1886(d)(8) of the Act. Section
401(b)(2) of Public Law 106-113 amended section 1820(c)(2)(B)(i) of the
Act to authorize a State to designate a hospital in an urban area as a
CAH if, under one of the criteria set forth in section 1886(d)(8)(E) of
the Act, it would be treated as being located in the rural area of the
State in which the hospital is located. Section 401(b)(2) only provides
authority for a hospital to meet the rural requirement. We note that
the hospital would have to otherwise meet the statutory and regulatory
requirements governing CAH designation.
    The first criteria in section 401(a) specified that a hospital will
be treated as located in a rural area if the hospital is located in a
rural census tract of an MSA, as determined under the most recent
Goldsmith Modification, originally published in the Federal Register on
February 27, 1992. A listing of existing hospitals that may qualify as
CAHs because they are located in Goldsmith areas is included in
Appendix B of this interim final rule with comment period.
    The application procedures and effective dates for an urban
hospital seeking to reclassify as rural and thus eligible for CAH
designation are set forth in the new regulation at Sec. 412.103 that
implements section 401(a), and discussed in section IV.C. of this
interim final rule with comment period. We also are revising the
regulation concerning CAH location at Sec. 485.610(b) to reflect this
amendment.

C. Other Legislative Changes Affecting CAHs

1. 96-hour Average Length of Stay Standard (Section 403(a) of Public
Law 106-113 and 42 CFR 485.620(b))
    Prior to the enactment of Public Law 106-113, section
1820(c)(2)(B)(iii) of the Act limited CAH designation only to
facilities that provided inpatient care to each patient for a period of
time not to exceed 96 hours, unless a longer period was required
because of inclement weather or other emergency conditions, or a peer
review organization (PRO) or equivalent entity, on request, waived the
96-hour restriction. Section 403(a) of Public Law 106-113 amended
section 1820(c)(2)(B)(iii) of the Act to require that the 96-hour limit
on stays be applied on an annual average basis, and to delete the
provisions regarding waiver of longer stays. Therefore, CAHs will be
permitted to keep some individual patients more than 96 hours without a
waiver request, so long as the facility's average length of acute stays
in any 12-month cost reporting period is not more than 96 hours.
    The effective date of this provision is November 29, 1999.
    We are revising the conditions of participation for length of stay
for CAHs at Sec. 485.620(b) to reflect this change.
2. For-Profit Facilities (Section 403(b) of Public Law 106-113 and 42
CFR 485.610(a))
    Prior to enactment of Public Law 106-113, section 1820(c)(2)(B) of
the Act allowed only nonprofit or public hospitals to be designated as
CAHs. Section 403(b) of Public Law 106-113 revises section
1820(c)(2)(B) of the Act to remove the words "nonprofit or public"
before "hospitals," thus enabling for-profit hospitals to qualify for
CAH status.
    We are revising the conditions of participation related to the
status and location for CAHs at Sec. 485.610(a) to reflect this change.
3. Closed and Downsized Hospitals (Section 403(c) of Public Law 106-113
and 42 CFR 485.610(a)(1))
    Under section 1820(c)(2) of the Act, CAH designation was available
only to facilities currently operating as hospitals. Section 403(c) of
Public Law 106-113 amended the statute to permit

[[Page 47042]]

a State to designate as a CAH a facility that previously was a hospital
but ceased operations on or after November 29, 1989 (10 years prior to
the enactment of Public Law 106-113), if that facility fulfills the
criteria under section 1820(c)(2)(B) of the Act for CAH designation as
of the effective date of its designation. The amendment also allows
State CAH designation for facilities that previously had been
hospitals, but are currently State-licensed health clinics or health
centers if they meet the revised criteria for CAH designation under
section 1820(c)(2)(B) of the Act as of the effective date of
designation.
    We are revising the CAH criteria for State certification at
Sec. 485.610(a)(1) to reflect this change.
4. Elimination of Coinsurance for Clinical Diagnostic Laboratory Tests
Furnished by a CAH (Section 403(e) of Public Law 106-113 and 42 CFR
410.152 and 413.70))
    Under the law in effect before the enactment of Public Law 106-113,
clinical diagnostic laboratory services furnished by a CAH to its
outp