[Federal Register: August 1, 2000 (Volume 65, Number 148)] [Rules and Regulations] [Page 47104-47153] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr01au00-14] [[pp. 47104-47153]] Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2001 Rates [[Continued from page 47103]] [[Page 47103]] these hospitals would be negatively impacted, if more hospitals were made eligible for DSH payments. D. Severity-Adjusted DRGs (Recommendation 3A: June Report) Recommendation: The Secretary should improve the hospital inpatient prospective payment system by adopting, as soon as practicable, DRG refinements that more fully capture differences in severity of illness among patients. At the same time, she should make the DRG payment rates more accurate by basing the DRG relative weights on the national average of hospitals' relative values in each DRG. Response: For its analysis, MedPAC used the severity classifications from the all patient refined diagnosis related groups (APR-DRG) system. According to MedPAC, under this system each patient is initially assigned to 1 of 355 APR-DRGs. Each APR-DRG is broken into four severity classes: minor, moderate, major or extreme. Assignment to these classes within the APR-DRG is based on specific combinations of secondary diagnoses, age, procedures, and other factors. This process yields 1,420 distinct groups, compared with fewer than 500 DRGs. The MedPAC points out that "to avoid creating refined DRGs that might have unstable relative weights, the Secretary should be selective in adopting clinical distinctions similar to those reflected in the APR- DRGs. This will require carefully weighing the benefits of more accurate clinical and economic distinctions against the potential for instability in relative weights based on small numbers of cases (p. 64)." The MedPAC's predecessor, the Prospective Payment Assessment Commission, made a similar recommendation in 1995. In the June 2, 1995 proposed rule (60 FR 29246), we agreed with the Commission's judgment that adopting the severity DRGs would tend to reduce discrepancies between payments and costs for individual cases and thereby improve payment equity among hospitals. In the same rule, we also agreed with the Commission that basing DRG weights on standardized charges results in weights that are somewhat distorted as measures of the relative costliness of treating a typical case in each DRG, and that the hospital-specific relative value method of setting weights may reduce or eliminate distortions present in the current system. However, in our discussion on DRG refinements in the same rule (60 FR 29209) we reiterated our position published in the final rule on September 1, 1992 (57 FR 39761) that we would not propose to make significant changes to the DRG classification system, unless we are able either to improve our ability to predict coding changes by validating in advance the impact that potential DRG changes may have on coding behavior, or to make methodological changes to prevent building the inflationary effects of the coding changes into future program payments. In addition, we would need specific legislative authority to offset, through adjustments to the standardized amounts, any significant anticipated increase in payments attributable to changes in coding practices caused by significant changes to the DRG classification system. Because we have not been granted this authority, we do not believe it would be appropriate to adopt revised severity- adjusted DRGs at this time. E. DRG-Specific Outlier Offsets (Recommendation 3B: June Report) Recommendation: Congress should amend the law to change the method now used to finance outlier payments under the hospital inpatient prospective payment system. Projected outlier payments in each DRG should be financed through an offsetting adjustment to the relative weight for the category, rather than the current flat adjustment to the national average base payment amounts. Response: Under this recommendation, outlier payments would be financed through an offset to the relative weight of each DRG based on the proportion of outlier cases in that DRG, rather than an overall offset to the standardized amounts as is done currently. This would more directly relate payments under each DRG to the proportion of outlier cases occurring within that DRG. Because the effects on DRG weights of implementing severity refinements, changing the method used to calculate DRG relative weights, and adopting DRG-specific outlier financing are interactive, we believe that we should make appropriate changes concurrently. Therefore, as stated in our response to recommendation 3A, we would not recommend that Congress implement this recommendation until we are able to offset, through adjustments to the standardized amounts, any significant anticipated increase in payments attributable to changes in coding practices caused by significant changes to the DRG classification system. In addition, we are concerned that any benefits of adopting the Commission's recommendation would not outweigh the additional complexity and variation it would add to the already complex process of calculating outlier thresholds so that outlier payments are projected to equal a certain percentage between 5 and 6 of DRG payments. F. Gradual Implementation of DRG Refinement and DRG-Specific Outlier Offsets (Recommendation 3C: June Report) Recommendation: To avoid imposing extraordinary financial burdens on individual providers, the Congress should ensure that the case-mix measurement and outlier financing policies recommended earlier are implemented gradually over a period of several years. Further, the Congress should consider including protective policies, such as exemptions or hold-harmless provisions, for providers in circumstances in which vulnerable populations' access to care might be disrupted. Response: The Commission's analyses show that implementing its case-mix measurement and outlier financing recommendations would substantially change PPS payments for many hospitals and may impose heavy burdens on individual hospitals. The Commission believes that many of these hospitals could accommodate the changes in an orderly way under traditional phase-in mechanisms. The Commission also states that some hospitals, including some groups of rural hospitals, may need longer term relief from the financial impact of these changes. The Commission suggests that this relief might include such approaches as targeted additional payments, hold-harmless provisions, and temporary or permanent exemptions. We are concerned that implementing the Commission's recommendations may increase the need for special payment exceptions for various categories of hospitals to ensure continued access to care for many Medicare beneficiaries. Before recommending implementation of these refinements to the payment system, they must be examined to determine how the changes would impact hospitals financially and strategies would need to be developed for countering effects that could endanger beneficiaries' access to quality health care. G. Congress Should Grant the Secretary the Authority to Offset Payments for Anticipated Coding Changes (Recommendation 3D: June Report) Recommendation: The Congress should give the Secretary explicit authority to adjust the hospital inpatient base payment amounts if anticipated [[Page 47104]] coding improvements in response to refinements in case-mix measurement are expected to increase aggregate payments by a substantial amount during the forthcoming year. This adjustment should be separate from the annual update. Further, the Congress should require the Secretary to measure the extent of actual coding improvements based on the bills providers submit for payment and make a timely adjustment to correct any substantial forecast error. Response: In the past, whenever significant refinements to the DRGs have been implemented, there have been unanticipated payment increases as hospitals have responded with changes to their coding practices, resulting in more cases being assigned to higher-weighted DRGs than estimated when the DRG relative weights were calculated. We anticipate that a similar effect would occur following implementation of refined DRGs. Therefore, we agree with MedPAC's recommendation that Congress give the Secretary explicit authority to adjust the hospital inpatient base payment amounts if anticipated coding improvements in response to refinements in case-mix measurement are expected to increase aggregate payments by a substantial amount during the forthcoming year. We also agree that adjustments to correct substantial forecast errors would be appropriate. H. Fold Inpatient Direct GME Costs Into the Prospective Payment System (Recommendation 3E: June Report) Recommendation: Congress should fold inpatient direct graduate medical education costs into prospective payment system payment rates through a revised teaching hospital adjustment. The new adjustment should be set such that the subsidy provided to teaching hospitals would be added to the IME adjustment. This recommendation should be implemented with a reasonable transition to limit the impact on hospitals of substantial changes in Medicare payments and to ensure that beneficiaries have continued access to the services that teaching hospitals provide. Response: MedPAC cites two primary reasons for its recommendation: to improve payment equity among teaching hospitals by eliminating the wide variation in current hospital-specific GME payment amounts, and to establish that GME payments are a part of patient care costs. MedPAC proposes three options for folding direct GME costs into PPS in terms of its impact on total payments: fold inpatient direct GME costs into the prospective payment rates, holding aggregate payments and special payments to teaching hospitals constant; fold inpatient direct GME costs into the prospective payment rates, holding aggregate payments constant, and redistributing teaching hospital subsidies across all hospitals; and fold inpatient direct GME costs into prospective payment rates with no constraint on aggregate payments and no teaching hospital subsidy. The commission recommends the first option. While we do not disagree with MedPAC's objectives, we believe that there are still some significant issues related to these recommendations. First, Congress has already taken steps towards addressing the direct GME payment variation. Section 311 of the BBRA of 1999 established a 70 percent floor and a 140 percent ceiling based on a national average per resident amount for direct GME payment purposes for FYs 2001 through 2005. While we agree with the objective of decreasing the variation in the current per resident amounts, the same objective can be achieved by moving to a national, rather than hospital-specific, per resident amount. Second, MedPAC asserts that folding the direct GME payments into the prospective payment system will establish that GME payments are payments to account for the increased costs of inpatient care due to residency training. However, we would note the current direct GME payments are distributed on the basis of Medicare's patient share, based on the percentage of total Medicare inpatient days to total hospital inpatient days. It is unclear exactly how MedPAC's recommendation would better associate GME payments with the increased costs of patient care without rebasing the current IME adjustment to more appropriately reflect the empirical estimate of those increased costs, both direct and indirect. Furthermore, the current distribution of IME payments is not directly linked to the involvement of residents providing patient care, but instead is based on each Medicare discharge, adjusted for the other payment factors. In addition, if the recommended teaching adjustment is a mechanism for accounting for the extra costs of inpatient training, it seems inappropriate to include residents not training in inpatient settings in a payment for inpatient care costs. Third, MedPAC estimates show that the IME adjustment for operating payments would be only 3.2 percent, if it were based on the empirical relationship between costs and the ratio of residents to hospital beds. This is significantly less than the adjustment of 5.5 percent, which is the adjustment set for the end of the phase-in under current law. MedPAC asserts that approximately $1.5 billion of the IME payments to teaching hospitals result from paying more than the empirical estimate suggests. Under MedPAC's recommendation, the direct GME payments would essentially be added to current IME payments. However, we feel that it is inappropriate to revise the teaching adjustment in such a way that would constitute a further add-on to the current IME payments which MedPAC believes are excessive. Before such a change is adopted, Congress should determine a more accurate level at which to set the IME adjustment. In addition, we note that MedPAC recommends folding the direct GME costs into the prospective payment system based on the most recent cost reports. The costs associated with GME, however, are no longer routinely audited by the fiscal intermediaries. Any reconstitution of the direct GME payment methodology based on recent cost reports would require further extensive audit work by the fiscal intermediaries. VIII. Other Required Information A. Requests for Data From the Public In order to respond promptly to public requests for data related to the prospective payment system, we have set up a process under which commenters can gain access to the raw data on an expedited basis. Generally, the data are available in computer tape or cartridge format; however, some files are available on diskette as well as on the Internet at http://www.hcfa.gov/stats/pubfiles.html. In our May 5, 2000 proposed rule, we published a list of data files that are available for purchase (65 FR 26318 through 26320). B. Information Collection Requirements Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:The need for the information collection and its usefulness in carrying out the proper functions of our agency. The accuracy of our estimate of the information collection burden. [[Page 47105]] The quality, utility, and clarity of the information to be collected. Recommendations to minimize the information collection burden on the affected public, including automated collection techniques. In the May 5, 2000 proposed rule, we solicited public comment on each of the information collection requirements in Secs. 412.77, 412.92, and 485.643 described below. Section 412.77, Determination of the hospital-specific rate for inpatient operating costs for certain sole community hospitals based on a Federal fiscal year 1996 base period, and Sec. 412.92, Special treatment: sole community hospitals. Sections 412.77(a)(2) and 412.92(d)(1)(ii) state that an otherwise eligible hospital that elects not to receive payment based on its hospital-specific rate as determined under Sec. 412.77 must notify its fiscal intermediary of its decision prior to the beginning of its cost reporting period beginning on or after October 1, 2000. We estimate that it will take each hospital that notifies its intermediary of its election not to receive payments based on its hospital-specific rate as determined under Sec. 412.77 an hour to draft and send its notice. However, we are unable at this time to determine how many hospitals will make this election and, therefore, will need to notify their intermediaries of their decision. Section 485.643, Condition of participation: Organ, tissue, and eye procurement. It is important to note that because of the inherent flexibility of this final regulation, the extent of the information collection requirements is dependent upon decisions that will be made either by the CAH or by the CAH in conjunction with the OPO or the tissue and eye banks, or both. Thus, the paperwork burden on individual CAHs will vary and is subject, in large part, to their decisionmaking. The burden associated with the requirements of this section include: (1) The requirement to maintain protocol documentation demonstrating that the five requirements of this section have been met; (2) the requirement for a CAH to notify an OPO, a tissue bank, or an eye bank of any imminent or actual death; and (3) the time required for a hospital to document and maintain OPO referral information. We estimate that, on average, the requirement to maintain protocol documentation demonstrating that the requirements of this section have been met will impose one hour of burden on each CAH (on 161 CAHs) on an annual basis, resulting in a total of 161 annual burden hours. The CoP in this section will require CAHs to notify the OPO about every death that occurs in the CAH. The average Medicare hospital has approximately 165 beds and 200 deaths per year. However, by statute and regulation, CAHs may use no more than 15 beds for acute care services. Assuming that the number of deaths in a hospital is related to the number of acute care beds, there should be approximately 18 deaths per year in the average CAH. We estimate that the average notification telephone call to the OPO takes 5 minutes. Based on this estimate, a CAH would need approximately 90 minutes per year to notify the OPO about all deaths and imminent deaths. Under the CoP, a CAH may agree to have the OPO determine medical suitability for tissue and eye donation or may have alternative arrangements with a tissue bank and an eye bank. These alternative arrangements could include the CAH's direct notification of the tissue and eye bank of potential tissue and eye donors or direct notification of all deaths. If a CAH chose to contact both a tissue bank and an eye bank directly on all deaths, it could need an additional 180 minutes per year (that is, 5 minutes per call) in order to call both the tissue and eye bank directly. Again, the impact is small, and this regulation permits the CAH to decide how this process will take place. We note that many communities already have a one-phone call system in place. In addition, some OPOs are also tissue banks or eye banks, or both. A CAH that chooses to use the OPO's tissue and eye bank services in these localities would need to make only one telephone call on every death. We estimate that additional time would be needed by the CAH to annotate the patient record or fill out a form regarding the disposition of a call to the OPO, the tissue bank, or the eye bank, or all three. This recordkeeping should take no more than 5 minutes to record each disposition or call. Therefore, all of the paperwork burden associated with the call(s) could add up to an additional 270 minutes per year per CAH. In summary, the information collection requirements of this section would be a range of 3 to 6 hours per CAH annually. We did not receive any comments on the proposed information collection and recordkeeping requirements. These new information collection and recordkeeping requirements have been submitted to the Office of Management and Budget (OMB) for review under the authority of PRA. These requirements will not be effective until they have been approved by OMB. The requirements associated with a hospital's application for a geographic redesignation, codified in Part 412, are currently approved by OMB under OMB approval number 0938-0573, with an expiration date of September 30, 2002. List of Subjects 42 CFR Part 410 Health facilities, Health professions, Kidney diseases, Laboratories, Medicare, Rural areas, X-rays. 42 CFR Part 412 Administrative practice and procedure, Health facilities, Medicare, Puerto Rico, Reporting and recordkeeping requirements. 42 CFR Part 413 Health facilities, Kidney diseases, Medicare, Puerto Rico, Reporting and recordkeeping requirements. 42 CFR Part 485 Grant programs-health, Health facilities, Medicaid, Medicare, Reporting and recordkeeping requirements. 42 CFR Chapter IV is amended as set forth below: PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS A. Part 410 is amended as follows: 1. The authority citation for Part 410 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh). Sec. 410.152 [Amended] 2. In Sec. 410.152, paragraph (k)(2), the cross-reference "Sec. 413.70(c)" is removed and "Sec. 413.70(b)(2)(iii)(B)" is added in its place. PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES B. Part 412 is amended as follows: 1. The authority citation for Part 412 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh). 2. Section 412.2 is amended by revising the last sentence of paragraph (a) to read as follows: [[Page 47106]] Sec. 412.2 Basis of payment. (a) Payment on a per discharge basis. * * * An additional payment is made for both inpatient operating and inpatient capital-related costs, in accordance with subpart F of this part, for cases that are extraordinarily costly to treat. * * * * * Sec. 412.4 [Amended] 3. In Sec. 412.4(f)(3), the reference to "Sec. 412.2(e)" is removed and "Sec. 412.2(b)" is added in its place. 4. Section 412.63 is amended by: A. Revising paragraph (s). B. Redesignating paragraphs (t), (u), (v), and (w) as paragraphs (u), (v), (w), and (x) respectively. C. Adding a new paragraph (t). Sec. 412.63 Federal rates for inpatient operating costs for fiscal years after Federal fiscal year 1984. * * * * * (s) Applicable percentage change for fiscal year 2001. The applicable percentage change for fiscal year 2001 is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this subchapter) for sole community hospitals and the increase in the market basket index minus 1.1 percentage points for other hospitals in all areas. (t) Applicable percentage change for fiscal year 2002. The applicable percentage change for fiscal year 2002 is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this subchapter) minus 1.1 percentage points for hospitals in all areas. * * * * * 5. Section 412.73 is amended by: A. Revising paragraph (c)(12). B. Adding paragraphs (c)(13), (c)(14), and (c)(15). Sec. 412.73 Determination of the hospital-specific rate based on a Federal fiscal year 1982 base period. * * * * * (c) Updating base-year costs--* * * (12) For Federal fiscal years 1996 through 2000. For Federal fiscal years 1996 through 2000, the update factor is the applicable percentage change for other prospective payment hospitals in each respective year as set forth in Secs. 412.63(n) through (r). (13) For Federal fiscal year 2001. For Federal fiscal year 2001, the update factor is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this chapter). (14) For Federal fiscal year 2002. For Federal fiscal year 2002, the update factor is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this chapter) minus 1.1 percentage points. (15) For Federal fiscal year 2003 and for subsequent years. For Federal fiscal year 2003 and subsequent years, the update factor is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this chapter). * * * * * Sec. 412.75 [Amended] 6. In Sec. 412.75(d), the cross reference "Sec. 412.73 (c)(5) through (c)(12)" is removed and "Sec. 412.75(c)(15)" is added in its place. Sec. 412.76 [Redesignated] 7. Section 412.76 is redesignated as a new Sec. 412.78. 8. A new Sec. 412.77 is added to read as follows: Sec. 412.77 Determination of the hospital-specific rate for inpatient operating costs for certain sole community hospitals based on a Federal fiscal year 1996 base period. (a) Applicability. (1) This section applies to a hospital that has been designated as a sole community hospital, as described in Sec. 412.92, that received payment for its cost reporting period beginning during 1999 based on its hospital-specific rate for either fiscal year 1982 under Sec. 412.73 or fiscal year 1987 under Sec. 412.75, and that elects under paragraph (a)(2) of this section to be paid based on a fiscal year 1996 base period. If the 1996 hospital- specific rate exceeds the hospital-specific rates for either fiscal year 1982 or 1987, unless the hospital elects to the contrary, this rate will be used in the payment formula set forth under Sec. 412.92(d)(1). (2) Hospitals that are otherwise eligible for but elect not to receive payment on the basis of their Federal fiscal year 1996 updated costs per case must notify their fiscal intermediary of this decision prior to the end of their cost reporting period beginning on or after October 1, 2000, for which such payments would otherwise be made. If a hospital does not make the notification to its fiscal intermediary before the end of the cost reporting period, the hospital is deemed to have elected to have section 1886(b)(3)(I) of the Act apply to the hospital. (3) This section applies only to cost reporting periods beginning on or after October 1, 2000. (4) The formula for determining the hospital-specific costs for hospitals described under paragraph (a)(1) of this section is set forth in paragraph (f) of this section. (b) Based costs for hospitals subject to fiscal year 1996 rebasing. (1) General rule. Except as provided in paragraph (b)(2) of this section, for each hospital eligible under paragraph (a) of this section, the intermediary determines the hospital's Medicare Part A allowable inpatient operating costs, as described in Sec. 412.2(c), for the 12-month or longer cost reporting period ending on or after September 30, 1996 and before September 30, 1997, and computes the hospital-specific rate for purposes of determining prospective payment rates for inpatient operating costs as determined under Sec. 412.92(d). (2) Exceptions. (i) If the hospital's last cost reporting period ending before September 30, 1997 is for less than 12 months, the base period is the hospital's most recent 12-month or longer cost reporting period ending before the short period report. (ii) If the hospital does not have a cost reporting period ending on or after September 30, 1996 and before September 30, 1997, and does have a cost reporting period beginning on or after October 1, 1995 and before October 1, 1996, that cost reporting period is the base period unless the cost reporting period is for less than 12 months. If that cost reporting period is for less than 12 months, the base period is the hospital's most recent 12-month or longer cost reporting period ending before the short cost reporting period. If a hospital has no cost reporting period beginning in fiscal year 1996, the hospital will not have a hospital-specific rate based on fiscal year 1996. (c) Costs on a per discharge basis. The intermediary determines the hospital's average base-period operating cost per discharge by dividing the total operating costs by the number of discharges in the base period. For purposes of this section, a transfer as defined in Sec. 412.4(b) is considered to be a discharge. (d) Case-mix adjustment. The intermediary divides the average base- period cost per discharge by the hospital's case-mix index for the base period. (e) Updating base-period costs. For purposes of determining the updated base-period costs for cost reporting periods beginning in Federal fiscal year 1996, the update factor is determined using the methodology set forth in Sec. 412.73(c)(12) through (c)(15). (f) DRG adjustment. The applicable hospital-specific cost per discharge is multiplied by the appropriate DRG weighting factor to determine the hospital-specific base payment amount [[Page 47107]] (target amount) for a particular covered discharge. (g) Notice of hospital-specific rates. The intermediary furnishes a hospital eligible for rebasing a notice of the hospital-specific rate as computed in accordance with this section. The notice will contain a statement of the hospital's Medicare Part A allowable inpatient operating costs, the number of Medicare discharges, and the case-mix index adjustment factor used to determine the hospital's cost per discharge for the Federal fiscal year 1996 base period. (h) Right to administrative and judicial review. An intermediary's determination of the hospital-specific rate for a hospital is subject to administrative and judicial review. Review is available to a hospital upon receipt of the notice of the hospital-specific rate. This notice is treated as a final intermediary determination of the amount of program reimbursement for purposes of subpart R of part 405 of this chapter. (i) Modification of hospital-specific rate. (1) The intermediary recalculates the hospital-specific rate to reflect the following: (i) Any modifications that are determined as a result of administrative or judicial review of the hospital-specific rate determinations; or (ii) Any additional costs that are recognized as allowable costs for the hospital's base period as a result of administrative or judicial review of the base-period notice of amount of program reimbursement. (2) With respect to either the hospital-specific rate determination or the amount of program reimbursement determination, the actions taken on administrative or judicial review that provide a basis for the recalculations of the hospital-specific rate include the following: (i) A reopening and revision of the hospital's base-period notice of amount of program reimbursement under Secs. 405.1885 through 405.1889 of this chapter. (ii) A prehearing order or finding issued during the provider payment appeals process by the appropriate reviewing authority under Sec. 405.1821 or Sec. 405.1853 of this chapter that resolved a matter at issue in the hospital's base-period notice of amount of program reimbursement. (iii) An affirmation, modification, or reversal of a Provider Reimbursement Review Board decision by the Administrator of HCFA under Sec. 405.1875 of this chapter that resolved a matter at issue in the hospital's base-period notice of amount of program reimbursement. (iv) An administrative or judicial review decision under Sec. 405.1831, Sec. 405.1871, or Sec. 405.1877 of this chapter that is final and no longer subject to review under applicable law or regulations by a higher reviewing authority, and that resolved a matter at issue in the hospital's base-period notice of amount of program reimbursement. (v) A final, nonappealable court judgment relating to the base- period costs. (3) The adjustments to the hospital-specific rate made under paragraphs (i)(1) and (i)(2) of this section are effective retroactively to the time of the intermediary's initial determination of the rate. 9. Section 412.92 is amended by: A. Revising paragraph (d)(1). B. Redesignating paragraph (d)(2) as paragraph (d)(3). C. Adding a new paragraph (d)(2). Sec. 412.92 Special treatment: sole community hospitals. * * * * * (d) Determining prospective payment rates for inpatient operating costs for sole community hospitals--(1) General rule. For cost reporting periods beginning on or after April 1, 1990, a sole community hospital is paid based on whichever of the following amounts yields the greatest aggregate payment for the cost reporting period: (i) The Federal payment rate applicable to the hospitals as determined under Sec. 412.63. (ii) The hospital-specific rate as determined under Sec. 412.73. (iii) The hospital-specific rate as determined under Sec. 412.75. (iv) For cost reporting periods beginning on or after October 1, 2000, the hospital-specific rate as determined under Sec. 412.77 (calculated under the transition schedule set forth in paragraph (d)(2) of this section), if the sole community hospital was paid for its cost reporting period beginning during 1999 on the basis of the hospital- specific rate specified in paragraph (d)(1)(ii) or (d)(1)(iii) of this section, unless the hospital elects otherwise under Sec. 412.77(a)(1). (2) Transition of FY 1996 hospital-specific rate. The intermediary calculates the hospital-specific rate determined on the basis of the fiscal year 1996 base period rate as follows: (i) For Federal fiscal year 2001, the hospital-specific rate is the sum of 75 percent of the greater of the hospital-specific rates specified in paragraph (d)(1)(ii) or (d)(1)(iii) of this section, plus 25 percent of the hospital-specific rate specified in paragraph (d)(1)(iv) of this section. (ii) For Federal fiscal year 2002, the hospital-specific rate is the sum of 50 percent of the greater of the hospital-specific rates specified in paragraph (d)(1)(ii) or (d)(1)(iii) of this section plus 50 percent of the hospital-specific rate specified in paragraph (d)(1)(iv) of this section. (iii) For Federal fiscal year 2003, the hospital-specific rate is the sum of 25 percent of the greater of the hospital-specific rates specified in paragraph (d)(1)(ii) or (d)(1)(iii) of this section, plus 75 percent of the hospital-specific rate specified in paragraph (d)(1)(iv) of this section. (iv) For Federal fiscal year 2004 and any subsequent fiscal years, the hospital-specific rate is 100 percent of the hospital-specific rate specified in paragraph (d)(1)(iv) of this section. * * * * * 10. Section 412.105 is amended by: A. Revising paragraph (d)(3)(v). B. Adding a new paragraph (d)(3)(vi). C. Republishing paragraph (f)(1) introductory text and revising paragraph (f)(1)(vii). D. Adding new paragraphs (f)(1)(viii) and (f)(1)(ix). E. Revising paragraph (g). Sec. 412.105 Special treatment: Hospitals that incur indirect costs for graduate medical education programs. * * * * * (d) Determination of education adjustment factor. * * * (3) * * * (v) For discharges occurring during fiscal year 2001, 1.54. (vi) For discharges occurring on or after October 1, 2001, 1.35. * * * * * (f) Determining the total number of full-time equivalent residents for cost reporting periods beginning on or after July 1, 1991. (1) For cost reporting periods beginning on or after July 1, 1991, the count of full-time equivalent residents for the purpose of determining the indirect medical education adjustment is determined as follows: * * * * * (vii) If a hospital establishes a new medical residency training program, as defined in Sec. 413.86(g)(9) of this subchapter, the hospital's full-time equivalent cap may be adjusted in accordance with the provisions of Secs. 413.86(g)(6)(i) through (iv) of this subchapter. (viii) A hospital that began construction of its facility prior to August 5, 1997, and sponsored new medical residency training programs on [[Page 47108]] or after January 1, 1995 and on or before August 5, 1997, that either received initial accreditation by the appropriate accrediting body or temporarily trained residents at another hospital(s) until the facility was completed, may receive an adjustment to its full-time equivalent cap in accordance with the provisions of Sec. 413.86(g)(7) of this subchapter. (ix) A hospital may receive a temporary adjustment to its full-time equivalent cap to reflect residents added because of another hospital's closure if the hospital meets the criteria specified in Sec. 413.86(g)(8) of this subchapter. * * * * * (g) Indirect medical education payment for managed care enrollees. For portions of cost reporting periods occurring on or after January 1, 1998, a payment is made to a hospital for indirect medical education costs, as determined under paragraph (e) of this section, for discharges associated with individuals who are enrolled under a risk- sharing contract with an eligible organization under section 1876 of the Act or with a Medicare+Choice organization under title XVIII, Part C of the Act during the period, according to the applicable payment percentages described in Secs. 413.86(d)(3)(i) through (d)(3)(v) of this subchapter. 11. In Sec. 412.106, the introductory text of paragraph (e) is republished and paragraphs (e)(4) and (e)(5) are revised to read as follows: Sec. 412.106 Special treatment: Hospitals that serve a disproportionate share of low-income patients. * * * * * (e) Reduction in payment for FYs 1998 through 2002. The amounts otherwise payable to a hospital under paragraph (d) of this section are reduced by the following: * * * * * (4) For FY 2001, 3 percent. (5) For FY 2002, 4 percent. * * * * * 12. Section 412.230 is amended by: A. Adding a new paragraph (a)(5)(iv). B. Republishing the introductory text of paragraph (e)(1). C. Revising paragraph (e)(1)(iii) and (e)(1)(iv). Sec. 412.230 Criteria for an individual hospital seeking redesignation to another rural area or an urban area. (a) General. * * * (5) Limitations on redesignation. * * * (iv) An urban hospital that has been granted redesignation as rural under Sec. 412.103 cannot receive an additional reclassification by the MGCRB based on this acquired rural status as long as such redesignation is in effect. * * * * * (e) Use of urban or other rural area's wage index--(1) Criteria for use of area's wage index. Except as provided in paragraphs (e)(3) and (e)(4) of this section, to use an area's wage index, a hospital must demonstrate the following: * * * * * (iii) One of the following conditions apply: (A) With respect to redesignations for Federal fiscal year 1994 through 2001, the hospital's average hourly wage is at least 108 percent of the average hourly wage of hospitals in the area in which the hospital is located; or (B) With respect to redesignations for Federal fiscal year 2002 and later years, the hospital's average hourly wage is, in the case of a hospital located in a rural area, at least 106 percent, and, in the case of a hospital located in an urban area, at least 108 percent of the average hourly wage of hospitals in the area in which the hospital is located; and (iv) One of the following conditions apply: (A) For redesignations effective before fiscal year 1999, the hospital's average hourly wage weighted for occupational categories is at least 90 percent of the average hourly wages of hospitals in the area to which it seeks redesignation. (B) With respect to redesignations for fiscal year 1994 through 2001, the hospital's average hourly wage is equal to at least 84 percent of the average hourly wage of hospitals in the area to which it seeks redesignation. (C) With respect to redesignations for fiscal year 2002 and later years, the hospital's average hourly wage is equal to, in the case of a hospital located in a rural area, at least 82 percent, and in the case of a hospital located in an urban area, at least 84 percent of the average hourly wage of hospitals in the area to which it seeks redesignation. * * * * * PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED PAYMENT RATES FOR SKILLED NURSING FACILITIES C. Part 413 is amended as follows: 1. The authority citation for Part 413 is revised to read as follows: Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and (n), 1871, 1881, 1883, and 1886 of the Social Security Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 1395hh, 1395rr, 1395tt, and 1395ww). 2. In Sec. 413.40, paragraph (a)(3) is amended by revising paragraph (B) of the definition of "ceiling" and paragraph (d)(4) is revised, to read as follows: Sec. 413.40 Ceiling on the rate of increase in hospital inpatient costs. (a) Introduction. * * * (3) Definitions. * * * Ceiling. * * * (B) The hospital-within-a-hospital has discharged to the other hospital and subsequently readmitted more than 5 percent (that is, in excess of 5.0 percent) of the total number of Medicare inpatients discharged from the hospital-within-a-hospital in that cost reporting period. * * * * * (d) Application of the target amount in determining the amount of payment. * * * (4) Continuous improvement bonus payments. (i) For cost reporting periods beginning on or after October 1, 1997 and ending before October 1, 2000, eligible hospitals (as defined in paragraph (d)(5) of this section) receive payments in addition to those in paragraph (d)(2) of this section, as applicable. These payments are equal to the lesser of-- (A) 50 percent of the amount by which the operating costs are less than the expected costs for the period; or (B) 1 percent of the ceiling. (ii) For cost reporting periods beginning on or after October 1, 2000, and ending before September 30, 2001, eligible psychiatric hospitals and units and long-tern care hospitals (as defined in paragraph (d)(5) of this section) receive payments in addition to those in paragraph (d)(2) of this section, as applicable. These payments are equal to the lesser of-- (A) 50 percent of the amount by which the operating costs are less than the expected costs for the period; or (B) 1.5 percent of the ceiling. (iii) For cost reporting periods beginning on or after October 1, 2001, and before September 30, 2002, eligible psychiatric hospitals and units and long-term care hospitals receive payments in addition to those in paragraph (d)(5) of this section, as applicable. These payments are equal to the lesser of-- (A) 50 percent of the amount by which the operating costs are less than the expected costs for the periods; or (B) 2 percent of the ceiling. * * * * * [[Page 47109]] 3. Section 413.70 is revised to read as follows: Sec. 413.70 Payment for services of a CAH. (a) Payment for inpatient services furnished by a CAH. (1) Payment for inpatient services of a CAH is the reasonable costs of the CAH in providing CAH services to its inpatients, as determined in accordance with section 1861(v)(1)(A) of the Act and the applicable principles of cost reimbursement in this part and in Part 415 of this chapter, except that the following payment principles are excluded when determining payment for CAH inpatient services: (i) Lesser of cost or charges; (ii) Ceilings on hospital operating costs; and (iii) Reasonable compensation equivalent (RCE) limits for physician services to providers. (2) Payment to a CAH for inpatient services does not include any costs of physician services or other professional services to CAH inpatients, and is subject to the Part A hospital deductible and coinsurance, as determined under subpart G of part 409 of this chapter. (b) Payment for outpatient services furnished by a CAH--(1) General. Unless the CAH elects to be paid for services to its outpatients under the method specified in paragraph (b)(3) of this section, the amount of payment for outpatient services of a CAH is the amount determined under paragraph (b)(2) of this section. (2) Reasonable costs for facility services. (i) Payment for outpatient services of a CAH is the reasonable costs of the CAH in providing CAH services to its outpatients, as determined in accordance with section 1861(v)(1)(A) of the Act and the applicable principles of cost reimbursement in this part and in Part 415 of this chapter, except that the following payment principles are excluded when determining payment for CAH outpatient services: (A) Lesser of costs or charges; (B) RCE limits; (C) Any type of reduction to operating or capital costs under Sec. 413.124 or Sec. 413.130(j)(7); and (D) Blended payment amounts for ambulatory surgical services, radiology services, and other diagnostic services; (ii) Payment to a CAH under paragraph (b)(2) of this section does not include any costs of physician services or other professional services to CAH outpatients, and is subject to the Part B deductible and coinsurance amounts, as determined under Secs. 410.152(k), 410.160, and 410.161 of this chapter. (iii) The following payment principles are used when determining payment for outpatient clinical diagnostic laboratory tests. (A) The amount paid is equal to 100 percent of the least of-- (1) Charges determined under the fee schedule as set forth in section 1833(h)(1) or section 1834(d)(1) of the Act; (2) The limitation amount for that test determined under section 1833(h)(4)(B) of the Act or the amount of the charges billed for the test; or (3) A negotiated rate established under section 1833(h)(6) of the Act. (B) Payment for outpatient clinical diagnostic laboratory tests is not subject to the Medicare Part B deductible and coinsurance amounts, as specified in Sec. 410.152(k) of this chapter. (3) Election to be paid reasonable costs for facility services plus fee schedule for professional services. (i) A CAH may elect to be paid for outpatient services in any cost reporting period under the method described in paragraphs (b)(3)(ii) and (b)(3)(iii) of this section. This election must be made in writing, made on an annual basis, and delivered to the intermediary at least 60 days before the start of each affected cost reporting period. An election of this payment method, once made for a cost reporting period, remains in effect for all of that period and applies to all services furnished to outpatients during that period. (ii) If the CAH elects payment under this method, payment to the CAH for each outpatient visit will be the sum of the following amounts: (A) For facility services, not including any services for which payment may be made under paragraph (b)(3)(ii)(B) of this section, the reasonable costs of the services as determined under paragraph (b)(2)(i) of this section; and (B) For professional services otherwise payable to the physician or other practitioner on a fee schedule basis, the amounts that otherwise would be paid for the services if the CAH had not elected payment under this method. (iii) Payment to a CAH is subject to the Part B deductible and coinsurance amounts, as determined under Secs. 410.152, 410.160, and 410.161 of this chapter. (c) Final payment based on cost report. Final payment to the CAH for CAH facility services to inpatients and outpatients furnished during a cost reporting is based on a cost report for that period, as required under Sec. 413.20(b). 4. Section 413.86 is amended by: A. Revising the first sentence of paragraph (d)(3). B. Revising the introductory text of paragraph (e)(3). C. Redesignating paragraph (e)(4) as paragraph (e)(5). D. Adding a new paragraph (e)(4). E. Revising newly designated paragraph(e)(5)(i)(B). F. Adding a new paragraph (e)(5)(iv). Sec. 413.86 Direct graduate medical education payments. * * * * * (d) Calculating payment for graduate medical education costs. * * * (3) Step Three. For portions of cost reporting periods occurring on or after January 1, 1998, the product derived in step one is multiplied by the proportion of the hospital's inpatient days attributable to individuals who are enrolled under a risk-sharing contract with an eligible organization under section 1876 of the Act and who are entitled to Medicare Part A or with a Medicare+Choice organization under Title XVIII, Part C of the Act. * * * (e) Determining per resident amounts for the base period. * * * (3) For cost reporting periods beginning on or after July 1, 1986. Subject to the provisions of paragraph (e)(4) of this section, for cost reporting periods beginning on or after July 1, 1986, a hospital's base-period per resident amount is adjusted as follows: * * * * * (4) For cost reporting periods beginning on or after October 1, 2000 and ending on or before September 30, 2005. For cost reporting periods beginning on or after October 1, 2000 and ending on or before September 30, 2005, a hospital's per resident amount for each fiscal year is adjusted in accordance with the following provisions: (i) General provisions. For purposes of Sec. 413.86(e)(4)-- (A) Weighted average per resident amount. The weighted average per resident amount is established as follows: (1) Using data from hospitals' cost reporting periods ending during FY 1997, HCFA calculates each hospital's single per resident amount by adding each hospital's primary care and non-primary care per resident amounts, weighted by its respective FTEs, and dividing by the sum of the FTEs for primary care and non-primary care residents. (2) Each hospital's single per resident amount calculated under paragraph (e)(4)(i)(A)(1) of this section is standardized by the 1999 geographic adjustment factor for the physician fee schedule area (as determined under Sec. 414.26 of this chapter) in which the hospital is located. [[Page 47110]] (3) HCFA calculates an average of all hospitals' standardized per resident amounts that are determined under paragraph (e)(4)(i)(A)(2) of this section. The resulting amount is the weighted average per resident amount. (B) Primary care/obstetrics and gynecology and non-primary care per resident amounts. A hospital's per resident amount is an amount inclusive of any CPI-U adjustments that the hospital may have received since the hospital's base year, including any CPI-U adjustments the hospital may have received because the hospital trains primary care/ obstetrics and gynecology residents and non-primary care residents as specified under paragraph (e)(3)(ii) of this section. (ii) Adjustment beginning in FY 2001 and ending in FY 2005. For cost reporting periods beginning on or after October 1, 2000 and ending on or before September 30, 2005, a hospital's per resident amount is adjusted in accordance with paragraphs (e)(4)(ii)(A) through (e)(4)(ii)(C) of this section, in that order: (A) Updating the weighted average per resident amount for inflation. The weighted average per resident amount (as determined under paragraph (e)(4)(i)(A) of this section) is updated by the estimated percentage increase in the CPI-U during the period beginning with the month that represents the midpoint of the cost reporting periods ending during FY 1997 (that is, October 1, 1996) and ending with the midpoint of the hospital's cost reporting period that begins in FY 2001. (B) Adjusting for locality. The updated weighted average per resident amount determined under paragraph (e)(4)(ii)(A) of this section (the national average per resident amount) is adjusted for the locality of each hospital by multiplying the national average per resident amount by the 1999 geographic adjustment factor for the physician Fee schedule area in which each hospital is located, established in accordance with Sec. 414.26 of this subchapter. (C) Determining necessary revisions to the per resident amount. The locality-adjusted national average per resident amount, as calculated in accordance with paragraph (e)(4)(ii)(B) of this section, is compared to the hospital's per resident amount is revised, if appropriate, according to the following three categories: (1) Floor. For cost reporting periods beginning on or after October 1, 2000 and on or before September 30, 2001, if the hospital's per resident amount would otherwise be less than 70 percent of the locality-adjusted national average per resident amount for FY 2001 (as determined under paragraph (e)(4)(ii)(B) of this section), the per resident amount is equal to 70 percent of the locality-adjusted national average per resident amount for FY 2001. For subsequent cost reporting periods, the hospital's per resident amount is updated using the methodology specified under paragraph (e)(3)(i) of this section. (2) Ceiling. If the hospital's per resident amount is greater than 140 percent of the locality-adjusted national average per resident amount, the per resident amount is adjusted as follows for FY 2001 through FY 2005: (i) FY 2001. For cost reporting periods beginning on or after October 1, 2000 and on or before September 30, 2001, if the hospital's FY 2000 per resident amount exceeds 140 percent of the FY 2001 locality-adjusted national average per resident amount (as calculated under paragraph (e)(4)(ii)(B) of this section), then, subject to the provision stated in paragraph (e)(4)(ii)(C)(2)(iv) of this section, the hospital's per resident amount is frozen at the FY 2000 per resident amount and is not updated for FY 2001 by the CPI-U factor. (ii) FY 2002. For cost reporting periods beginning on or after October 1, 2001 and on or before September 30, 2002, if the hospital's FY 2001 per resident amount exceeds 140 percent of the FY 2002 locality-adjusted national average per resident amount, then, subject to the provision stated in paragraph (e)(4)(ii)(C)(2)(iv) of this section, the hospital's per resident amount is frozen at the FY 2001 per resident amount and is not updated for FY 2002 by the CPI-U factor. (iii) FY 2003 through FY 2005. For cost reporting periods beginning on or after October 1, 2002 and on or before September 30, 2005, if the hospital's per resident amount for the previous cost reporting period is greater than 140 percent of the locality-adjusted national average per resident amount for that same previous cost reporting period (for example, for cost reporting periods beginning in FY 2003, compare the hospital's per resident amount from the FY 2002 cost report to the hospital's locality-adjusted national average per resident amount from FY 2002), then, subject to the provision stated in paragraph (e)(4)(ii)(C)(2)(iv) of this section, the hospital's per resident amount is adjusted using the methodology specified in paragraph (e)(3)(i) of this section, except that the CPI-U applied for a 12-month period is reduced (but not below zero) by 2 percentage points. (iv) General rule for hospitals that exceed the ceiling. For cost reporting periods beginning on or after October 1, 2000 and on or before September 30, 2005, if a hospital's per resident amount exceeds 140 percent of the hospital's locality-adjusted national average per resident amount and it is adjusted under any of the criteria (e)(4)(ii)(C)(2)(i) through (iii) of this section, the current year per resident amount cannot be reduced below 140 percent of the locality- adjusted national average per resident amount. (3) Per resident amounts greater than or equal to the floor and less than or equal to the ceiling. For cost reporting periods beginning on or after October 1, 2000 and on or before September 30, 2005, if a hospital's per esident amount is greater than or equal to 70 percent and less than or equal to 140 percent of the hospital's locality- adjusted national average per resident amount for each respective fiscal year, the hospital's per resident amount is updated using the methodology specified in paragraph (e)(3)(i) of this section. (5) Exceptions--(i) Base period for certain hospitals. * * * (B) The weighted mean value of per resident amounts of hospitals located in the same geographic wage area, as that term is used in the prospective payment system under part 412 of this chapter, for cost reporting periods beginning in the same fiscal years. If there are fewer than three amounts that can be used to calculate the weighted mean value, the calculation of the per resident amounts includes all hospitals in the hospital's region as that term is used in Sec. 412.62(f)(1)(i) of his chapter. * * * * * (iv) Effective October 1, 2000, the per resident amounts established under paragraphs (e)(5)(i) through (iii) of this section are subject to the provisions of paragraph (e)(4) of this section. PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS D. Part 485 is amended as follows: 1. The authority citation for part 485 continues to read as follows: Authority: Sec. 1820 of the Act (42 U.S.C. 1395i-1114), unless otherwise noted. 2. A new Sec. 485.643 is added to subpart F to read as follows: Sec. 485.643 Condition of participation: Organ, tissue, and eye procurement. The CAH must have and implement written protocols that: (a) Incorporate an agreement with an OPO designated under part 486 of this chapter, under which it must notify, in a timely manner, the OPO or a third party designated by the OPO of individuals whose death is imminent or [[Page 47111]] who have died in the CAH. The OPO determines medical suitability for organ donation and, in the absence of alternative arrangements by the CAH, the OPO determines medical suitability for tissue and eye donation, using the definition of potential tissue and eye donor and the notification protocol developed in consultation with the tissue and eye banks identified by the CAH for this purpose; (b) Incorporate an agreement with at least one tissue bank and at least one eye bank to cooperate in the retrieval, processing, preservation, storage and distribution of tissues and eyes, as may be appropriate to assure that all usable tissues and eyes are obtained from potential donors, insofar as such an agreement does not interfere with organ procurement; (c) Ensure, in collaboration with the designated OPO, that the family of each potential donor is informed of its option to either donate or not donate organs, tissues, or eyes. The individual designated by the CAH to initiate the request to the family must be a designated requestor. A designated requestor is an individual who has completed a course offered or approved by the OPO and designed in conjunction with the tissue and eye bank community in the methodology for approaching potential donor families and requesting organ or tissue donation; (d) Encourage discretion and sensitivity with respect to the circumstances, views, and beliefs of the families of potential donors; (e) Ensure that the CAH works cooperatively with the designated OPO, tissue bank and eye bank in educating staff on donation issues, reviewing death records to improve identification of potential donors, and maintaining potential donors while necessary testing and placement of potential donated organs, tissues, and eyes take place. (f) For purposes of these standards, the term "Organ" means a human kidney, liver, heart, lung, or pancreas. (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare-Hospital Insurance) Dated: July 24, 2000. Nancy Ann Min DeParle, Administrator, Health Care, Financing Administration Dated: July 24, 2000. Donna E. Shalaa, Secretary. [Editorial Note: The following Addendum and appendixes will not appear in the Code of Federal Regulations.] Addendum--Schedule of Standardized Amounts Effective with Discharges Occurring On or After October 1, 2000 and Update Factors and Rate-of- Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2000 I. Summary and Background In this Addendum, we are setting forth the amounts and factors for determining prospective payment rates for Medicare inpatient operating costs and Medicare inpatient capital-related costs. We are also setting forth rate-of-increase percentages for updating the target amounts for hospitals and hospital units excluded from the prospective payment system. For discharges occurring on or after October 1, 2000, except for sole community hospitals, Medicare-dependent, small rural hospitals, and hospitals located in Puerto Rico, each hospital's payment per discharge under the prospective payment system will be based on 100 percent of the Federal national rate. Sole community hospitals are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal national rate, the updated hospital-specific rate based on FY 1982 cost per discharge, the updated hospital-specific rate based on FY 1987 cost per discharge, or, if qualified, 25 percent of the updated hospital-specific rate based on FY 1996 cost per discharge, plus 75 percent of the updated FY 1982 or FY 1987 hospital-specific rate. Section 405 of Public Law 106-113 amended section 1886(b)(3) of the Act to allow a sole community hospital that was paid for its cost reporting period beginning during FY 1999 on the basis of either its FY 1982 or FY 1987 hospital-specific rate to elect to rebase its hospital-specific ate based on its FY 1996 cost per discharge. Section 404 of Public Law 106-113 amended section 1886(d)(5)(G) of the Act to extend the special treatment for Medicare-dependent, small rural hospitals. Medicare-dependent, small rural hospitals are paid based on the Federal national rate or, if higher, the Federal national rate plus 50 percent of the difference between the Federal national rate and the updated hospital-specific rate based on FY 1982 or FY 1987 cost per discharge, whichever is higher. For hospitals in Puerto Rico, the payment per discharge is based on the sum of 50 percent of a Puerto Rico rate and 50 percent of a Federal national rate. As discussed below in section II of this Addendum, we are making changes in the determination of the prospective payment rates for Medicare inpatient operating costs for FY 2001. The changes, to be applied prospectively, affect the calculation of the Federal rates. In section III of this Addendum, we finalize our proposal to discontinue listing updates to the payments per unit for blood clotting factor provided to hospital inpatients who have hemophilia. In section IV of this Addendum, we discuss our changes for determining the prospective payment rates for Medicare inpatient capital-related costs for FY 2001. Section V of this Addendum sets forth our changes for determining the rate-of-increase limits for hospitals excluded from the prospective payment system for FY 2001. The tables to which we refer in the preamble to this final rule are presented at the end of this Addendum in section VI. II. Changes to Prospective Payment Rates For Inpatient Operating Costs for FY 2001 The basic methodology for determining prospective payment rates for inpatient operating costs is set forth at Sec. 412.63 for hospitals located outside of Puerto Rico. The basic methodology for determining the prospective payment rates for inpatient operating costs for hospitals located in Puerto Rico is set forth at Secs. 412.210 and 412.212. Below, we discuss the factors used for determining the prospective payment rates. The Federal and Puerto Rico rate changes will be effective with discharges occurring on or after October 1, 2000. As required by section 1886(d)(4)(C) of the Act, we must also adjust the DRG classifications and weighting factors for discharges in FY 2001. In summary, the standardized amounts set forth in Tables 1A and 1C of section VI of this Addendum reflect-- Updates of 2.3 percent for all areas (that is, the market basket percentage increase of 3.4 percent minus 1.1 percentage points); An adjustment to ensure budget neutrality as provided for in sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act by applying new budget neutrality adjustment factors to the large urban and other standardized amounts; An adjustment to ensure budget neutrality as provided for in section 1886(d)(8)(D) of the Act by removing the FY 2000 budget neutrality factor and applying a revised factor; An adjustment to apply the revised outlier offset by removing the FY 2000 outlier offsets and applying a new offset; and An adjustment in the Puerto Rico standardized amounts to reflect the application of a Puerto Rico-specific wage index. The standardized amounts set forth in table 1E of section VI of this Addendum, which apply to sole community hospitals, reflect updates of 3.4 percent (that is, the full market basket percentage increase) as provided for in section 406 of Public Law 106-113, but otherwise reflect the same adjustments as the national standardized amounts. A. Calculation of Adjusted Standardized Amounts 1. Standardization of Base-Year Costs or Target Amounts Section 1886(d)(2)(A) of the Act required the establishment of base-year cost data containing allowable operating costs per discharge of inpatient hospital services for each hospital. The preamble to the September 1, 1983 interim final rule (48 FR 39763) contains a detailed explanation of how base-year cost data were established in the initial development of standardized amounts for the prospective payment system and how they are used in computing the Federal rates. Section 1886(d)(9)(B)(i) of the Act required us to determine the Medicare target amounts [[Page 47112]] for each hospital located in Puerto Rico for its cost reporting period beginning in FY 1987. The September 1, 1987 final rule (52 FR 33043, 33066) contains a detailed explanation of how the target amounts were determined and how they are used in computing the Puerto Rico rates. The standardized amounts are based on per discharge averages of adjusted hospital costs from a base period or, for Puerto Rico, adjusted target amounts from a base period, updated and otherwise adjusted in accordance with the provisions of section 1886(d) of the Act. Sections 1886(d)(2)(B) and (d)(2)(C) of the Act required us to update base-year per discharge costs for FY 1984 and then standardize the cost data in order to remove the effects of certain sources of cost variations among hospitals. These effects include case-mix, differences in area wage levels, cost-of-living adjustments for Alaska and Hawaii, indirect medical education costs, a payments to hospitals serving a disproportionate share of low- income patients. Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, in making payments under the prospective payment system, the Secretary estimates from time to time the proportion of costs that are wages and wage-related costs. Since October 1, 1997, when the market basket was last revised, we have considered 71.1 percent of costs to be labor-related for purposes of the prospective payment system. The average labor share in Puerto Rico is 71.3 percent. We are revising the discharge-weighted national standardized amount for Puerto Rico to reflect the proportion of discharges in large urban and other areas from the FY 1999 MedPAR file. Comment: One commenter asserted that our labor share of 71.1 percent is overstated and particularly disadvantageous to small rural hospitals. The commenter questioned how we arrived at this percentage when their informal survey of 300 hospitals found none with salaries and benefits in excess of 56 percent of total operating costs. The commenter proposed that HCFA should only recognize costs that are included in the wage index survey on the cost report when recalculating the labor share. Response: We set forth the latest revision of the labor share calculation in the August 29, 1997 final rule (62 FR 45993) after considering comments in response to our proposal set forth in the June 2, 1997 proposed rule (62 FR 29920). We feel that our current methodology accurately captures, on average, the operating costs faced by hospitals that are affected by local labor markets. It should also be noted that the wage and benefit shares of the prospective payment system's market basket are determined using the wage index survey data provided in the Medicare Cost Reports. However, we will take these comments into consideration when we perform our next periodic revision of the hospital operating market basket. 2. Computing Large Urban and Other Area Averages Sections 1886(d)(2)(D) and (d)(3) of the Act require the Secretary to compute two average standardized amounts for discharges occurring in a fiscal year: one for hospitals located in large urban areas and one for hospitals located in other areas. In addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the Act, the average standardized amount per discharge must be determined for hospitals located in urban and other areas in Puerto Rico. Hospitals in Puerto Rico are paid a blend of 50 percent of the applicable Puerto Rico standardized amount and 50 percent of a national standardized payment amount. Section 1886(d)(2)(D) of the Act defines "urban area" as those areas within a Metropolitan Statistical Area (MSA). A "large urban area" is defined as an urban area with a population of more than 1 million. In addition, section 4009(i) of Public Law 100-203 provides that a New England County Metropolitan Area (NECMA) with a population of more than 970,000 is classified as a large urban area. As required by section 1886(d)(2)(D) of the Act, population size is determined by the Secretary based on the latest population data published by the Bureau of the Census. Urban areas that do not meet the definition of a "large urban area" are referred to as "other urban areas." Areas that are not included in MSAs are considered "rural areas" under section 1886(d)(2)(D) of the Act. Payment for discharges from hospitals located in large urban areas will be based on the large urban standardized amount. Payment for discharges from hospitals located in other urban and rural areas will be based on the other standardized amount. Based on 1998 population estimates published by the Bureau of the Census, 61 areas meet the criteria to be defined as large urban areas for FY 2001. These areas are identified by a footnote in Table 4A. 3. Updating the Average Standardized Amounts Under section 1886(d)(3)(A) of the Act, we update the area average standardized amounts each year. In accordance with section 1886(d)(3)(A)(iv) of the Act, we are updating the large urban areas' and the other areas' average standardized amounts for FY 2001 using the applicable percentage increases specified in section 1886(b)(3)(B)(i) of the Act. Section 1886(b)(3)(B)(i)(XVI) of the Act specifies an update factor for the standardized amounts for FY 2001 equal to the market basket percentage increase minus 1.1 percentage points for hospitals, except sole community hospitals, in all areas. The Act, as amended by section 406 of Public Law 106-113, specifies an update factor equal to the market basket percentage increase for sole community hospitals. The percentage change in the market basket reflects the average change in the price of goods and services purchased by hospitals to furnish inpatient care. The most recent forecast of the hospital market basket increase for FY 2001 is 3.4 percent. Thus, for FY 2001, the update to the average standardized amounts equals 3.4 percent for sole community hospitals and 2.3 percent for other hospitals. As in the past, we are adjusting the FY 2000 standardized amounts to remove the effects of the FY 2000 geographic reclassifications and outliner payments before applying the FY 2001 updates. That is, we are increasing the standardized amounts to restore the reductions that were made for the effects of geographic reclassification and outliners. We then apply the new offsets to the standardized amounts for outliners and geographic reclassifications for FY 2001. Although the update factors for FY 2001 are set by law, we are required by section 1886(e)(3) of the Act to report to the Congress our initial recommendation of update factors for FY2001 for both prospective payment hospitals and hospitals excluded from the prospective payment system. We have included our final recommendations in Appendix C to this final rule. 4. Other Adjustments to the Average Standardized Amounts a. Recalibration of DRG Weights and Updated Wage Index--Budget Neutrality Adjustment. Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in FY 1991, the annual DRG reclassification and recalibration of the relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. As discussed in section II of the preamble, we normalized the recalibrated DRG weights by an adjustment factor, so that the average case weight after recalibration is equal to the average case weight prior to recalibration. Section 1886(d)(3)(E) of the Act requires us to update the hospital wage index on an annual basis beginning October 1, 1993. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. To comply with the requirement of section 1886(d)(4)(C)(iii) of the Act that DRG reclassification and recalibration of the relative weights be budget neutral, and the requirement in section 1886(d)(3)(E) of the Act that the updated wage index be budget neutral, we used historical discharge data to simulate payments and compared aggregate payments using the FY 2000 relative weights and wage index to aggregate payments using the FY 2001 relative weights and wage index. The same methodology was used for the FY 2000 budget neutrality adjustment. (See the discussion in the September 1, 1992 final rule (57 FR 39832).) Based on this comparison, we computed a budget neutrality adjustment factor equal to 0.997225. We also adjusted the Puerto Rico-specific standardized amounts to adjust for the effects of DRG reclassification and recalibration. We computed a budget neutrality adjustment factor for Puerto Rico-specific standardized amounts equal to 0.999649. These budget neutrality adjustment factors are applied to the standardized amounts without removing the effects of the FY 2000 budget neutrality adjustments. We do not remove the prior budget neutrality adjustment because estimated aggregate payments after the changes in the DRG relative weights and wage index should equal estimated aggregate payments prior to the changes. If we removed the prior year adjustment, we would not satisfy this condition. In addition, we will continue to apply these same adjustment factors to the hospital-specific rates that are effective for cost [[Page 47113]] reporting periods beginning in on or after October 1, 2000. (See the discussion in the September 4, 1990 final rule (55 FR 6073).) b. Reclassified Hospitals--Budget Neutrality Adjustment. Section 1886(d)(8)(B) of the Act provides that, effective with discharges occurring on or after October 1, 1988, certain rural hospitals are deemed urban. In addition, section 1886(d)(10) of the Act provides for the reclassification of hospitals based on determinations by the Medicare Georgraphic Classification Review Board (MGCRB). Under section 1886(d)(10) of the Act, a hospital may be reclassified for purposes of the standardized amount or the wage index, or both. Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the prospective payment system after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. Section 152(b) of Public Law 106-113 requires reclassifications under that subsection to be treated as reclassifications under section 1886(d)(10) of the Act. To calculate this budget neutrality factor, we used historical discharge data to simulate payments, and compared total prospective payments (including IME and DSH payments) prior to any reclassifications to total prospective payments after reclassifications. In the May 5, 2000 proposed rule, based on these simulations, we applied an adjustment factor of 0.994270 to ensure that the effects of reclassification are budget neutral. The final budget neutrality adjustment factor is 0.993187. The adjustment factor is applied to the standardized amounts after removing the effects of the FY 2000 budget neutrality adjustment factor. We note that the proposed FY 2001 adjustment reflected wage index and standardized amount reclassifications approved by the MGCRB or the Administrator as of February 29, 2000. The effects of any additional reclassification changes that occurred as a result of appeals and reviews of MGCRB decisions for FY 2001 or hospitals' withdrawal of reclassification requests are reflected in the final budget neutrality adjustment required under section 1886(d)(8)(D) of the Act and published in this final rule. c. Outliers. Section 1886(d)(5)(A) of the Act provides for payments in addition to the basic prospective payments for "outlier" cases, cases involving extraordinarily high costs (cost outliers). Section 1886(d)(3)(B) of the Act requires the Secretary to adjust both the large urban and other area national standardized amounts by the same factor to account for the estimated proportion of total DRG payments made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act requires the Secretary to adjust the large urban and other standardized amounts applicable to hospitals in Puerto Rico to account for the estimated proportion of total DRG payments made to outlier cases. Furthermore, under section 1886(d)(5)(A)(iv) of the Act, outlier payments for any year must be projected to be not less than 5 percent nor more than 6 percent of total payments based on DRG prospective payment rates. i. FY 2001 outlier thresholds. For FY 2000, the fixed loss cost outlier threshold was equal to the prospective payment for the DRG plus $14,050 ($12,827 for hospitals that have not yet entered the prospective payment system for capital-related costs). The marginal cost factor for cost outliers (the percent of costs paid after costs for the case exceed the threshold) was 80 percent. We applied an outlier adjustment to the FY 2000 standardized amounts of 0.948859 for the large urban and other areas rates and 0.9402 for the capital Federal rate. For FY 2001, we proposed to establish a fixed loss cost outlier threshold equal to the prospective payment rate for the DRG plus the IME and DSH payments plus $17,250 ($15,763 for hospitals that have not yet entered the prospective payment system for capital-related costs). In addition, we proposed to maintain the marginal cost factor for cost outliers at 80 percent. In setting the final FY 2001 outlier thresholds, we used updated data. In this final rule, we are establishing a fixed loss cost outlier threshold equal to the prospective payment rate for the DRG plus the IME and DSH payments plus $17,550 ($16,036 for hospitals that have not yet entered the prospective payment system for capital-related costs). In addition, we are maintaining the marginal cost factor for cost outliers at 80 percent. As we have explained in the past, to calculate outlier thresholds we apply a cost inflation factor to update costs for the cases used to simulate payments. For FY 1999, we used a cost inflation factor of minus 1.724 percent (a cost per case decrease of 1.724 percent). For FY 2000, we used a cost inflation factor of zero percent. To set the proposed FY 2001 outlier thresholds, we used a cost inflation factor of 1.0 percent. We are using a cost inflation actor of 1.8 percent to set the final FY 2001 outlier thresholds. This factor reflects our analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 1999 is higher than we projected before the beginning of FY 1999, and that the percentage of actual outlier payments for FY 2000 will likely be higher than we projected before the beginning of FY 2000. The calculations of "actual" outlier payments are discussed below. ii. Other changes concerning outliers. In accordance with section 1886(d)(5)(A)(iv) of the Act, we calculated outlier thresholds so that outlier payments are projected to equal 5.1 percent of total payments based on DRG prospective payment rates. In accordance with section 1886(d)(3)(E), we reduced the FY 2001 standardized amounts by the same percentage to account for the projected proportion of payments paid to outliers. As stated in the September 1, 1993 final rule (58 FR 46348), we established outlier thresholds that are applicable to both inpatient operating costs and inpatient capital-related costs. When we modeled the combined operating and capital outlier payments, we found that using a common set of thresholds resulted in a higher percentage of outlier payments for capital-related costs than for operating costs. We project that the thresholds for FY 2001 will result in outlier payments equal to 5.1 percent of operating DRG payments and 5.9 percent of capital payments based on the Federal rate. The proposed outlier adjustment factors applied to the standardized amounts for FY 2001 were as follows: ------------------------------------------------------------------------ Operating Capital standardized federal amounts rate ------------------------------------------------------------------------ National..................................... 0.948865 0.9416 Puerto Rico.................................. 0.975408 0.9709 ------------------------------------------------------------------------ The final outlier adjustment factors applied to the standardized amounts for FY 2001 are as follows: ------------------------------------------------------------------------ Operating Capital standardized federal amounts rate ------------------------------------------------------------------------ National..................................... 0.948908 0.9409 Puerto Rico.................................. 0.974791 0.9699 ------------------------------------------------------------------------ As in the proposed rule, we apply the outlier adjustment factors after removing the effects of the FY 2000 outlier adjustment factors on the standardized amounts. Table 8A in section VI of this Addendum contains the updated Statewide average operating cost-to-charge ratios for urban hospitals and for rural hospitals to be used in calculating cost outlier payments for those hospitals for which the fiscal intermediary is unable to compute a reasonable hospital-specific cost-to-charge ratio. These Statewide average ratios replace the ratios published in the July 30, 1999 final rule (64 FR 41620). Table 8B contains comparable Statewide average capital cost-to-charge ratios. These average ratios will be used to calculate cost outlier payments for those hospitals for which the fiscal intermediary computes operating cost-to-charge ratios lower than 0.200265 or greater than 1.298686 and capital cost-to-charge ratios lower than 0.01262 greater than 0.16792. This range represents 3.0 standard deviations (plus or minus) from the mean of the log distribution of cost-to-charge ratios for all hospitals. We note that the cost-to-charge ratios in Tables 8A and 8B will be used during FY 2001 when hospital-specific cost-to-charge ratios based on the latest settled cost report are either not available or outside the three standard deviations range. iii. FY 1999 and FY 2000 outlier payments. In the July 30, 1999 final rule (64 FR 41547), we stated that, based on available data, we estimated that actual [[Page 47114]] FY 1999 outlier payments would be approximately 6.3 percent of actual total DRG payments. This was computed by simulating payments using the March 1998 bill data available at the time. That is, the estimate of actual outlier payments did not reflect actual FY 1999 bills but instead reflected the application of FY 1999 rates and policies to available FY 1998 bills. Our current estimate, using available FY 1999 bills, indicates that actual outlier payments for FY 1999 were approximately 7.6 percent of actual total DRG payments. We note that the MedPAR file for FY 1999 discharges continues to be updated. Thus, the data indicate that, for FY 1999, the percentage of actual outlier payments relative to actual total payments is higher than we projected before FY 1999 (and thus exceeds the percentage by which we reduced the standardized amounts for FY 1999). In fact, the data indicate that the proportion of actual outlier payments for FY 1999 exceeds 6 percent. Nevertheless, consistent with the policy and statutory interpretation we have maintained since the inception of the prospective payment system, we do not plan to recoup money and make retroactive adjustments to outlier payments for FY 1999. We currently estimate that actual outlier payments for FY 2000 will be approximately 6.2 percent of actual total DRG payments, higher than the 5.1 percent we projected in setting outlier policies for FY 2000. This estimate is based on simulations using the March 2000 update of the provider-specific file and the March 2000 update of the FY 1999 MedPAR file (discharge data for FY 1999 bills). We used these data to calculate an estimate of the actual outlier percentage for FY 2000 by applying FY 2000 rates and policies to available FY 1999 bills. Comment: Several commenters opposed the proposed change in the cost outlier fixed loss amount from $14,050 to $17,250. The commenters stated that our rationale for this change is that outlier payments were approximately 7.5 percent of total actual DRG payments in FY 1999 and are anticipated to be 6.1 percent in FY 2000. The commenters observed that no additional payments were made in previous years when outlier payments fell below 5.1 percent. The commenters stated that cost outlier thresholds were adjusted as a result of changes made by Public Law 105-33 and that the reason current payments exceed the 5.1 percent target was due to these changes. The commenters also noted that the majority of hospitals did not reap windfall profits on outlier cases, merely mitigated their losses. The commenters characterized these losses as particularly devastating as they come at a time when MedPAC's analyses show that hospitals' financial performance is deteriorating. One commenter suggested that the Secretary consider acting independently of Congress by lowering the FY 2001 outlier threshold without further reducing the standardized payment amount. Response: We believe the commenters misunderstood the methodology for calculating the FY 2001 outlier fixed loss amount. Under section 1886(d)(5)(A)(iv) of the Act, we are required to set the outlier threshold at a level such that outlier payments are projected to be not less than 5 percent nor more than 6 percent of total payments based on DRG prospective payment rates. That FY 2000 outlier payments are now anticipated to exceed 5.1 percent of total payments is an indication that costs are rising faster than we predicted when setting the outlier fixed loss amount prior to the beginning of FY 2000. This was one of several factors taken into consideration when we estimated FY 2001 costs to model projected outlier payments for FY 2001. The outlier fixed loss amount is set to meet the aforementioned statutory requirement. Each year we set the outlier thresholds for the upcoming fiscal year by making projections based on the best available data; we do not make the thresholds more stringent simply because current data indicate that, in a previous year, actual outlier payments turned out to be more than we projected when we set the outlier thresholds for that year. Thus, the change in the outlier fixed loss amount from $14,050 (for FY 2000) to $17,250 (proposed FY 2001) reflects estimates and projections about costs in FY 2001. We did not increase the outlier fixed loss amount simply because we now expect that actual outlier payments exceed 5.1 percent of actual total DRG payments for FY 1999 and FY 2000 respectively. We do not concur with the commenters' assertion that changes to the outlier methodology made by Public Law 105-33 caused current outlier payments to exceed 5.1 percent. Public Law 105-33 did not change the statutory requirement that projected outlier payments be between 5 percent and 6 percent of projected total payments based on DRG prospective payment rates. Again, we believe that current outlier payments are greater than expected in part because actual hospital costs may be higher than reflected in the methodology used to set the outlier threshold. Finally, we believe in the concept of outlier payments as a protection against the financial effects of treating extraordinarily high-cost cases through an offsetting adjustment to the standardized amounts according to the statutory requirements set forth as required in sections 1886(d)(5)(A)(iv) and 1886(d)(3)(E) of the Act. These sections of the Act require that outlier thresholds be calculated so that outlier payments are projected to equal between 5 and 6 percent of total payments based on DRG prospective payment rates and the standardized amounts are to be reduced by the same percentage to account for the projected proportion of payments paid to outliers. 5. FY 2001 Standardized Amounts The adjusted standardized amounts are divided into labor and nonlabor portions. Table 1A (Table 1E for sole community hospitals) contains the two national standardized amounts that are applicable to all hospitals, except hospitals in Puerto Rico. Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto Rico payment rate is based on the discharge-weighted average of the national large urban standardized amount and the national other standardized amount (as set forth in Table 1A). The labor and nonlabor portions of the national average standardized amounts for Puerto Rico hospitals are set forth in Table 1C. This table also includes the Puerto Rico standardized amounts. B. Adjustments for Area Wage Levels and Cost of Living Tables 1A, 1C and 1E, as set forth in this Addendum, contain the labor-related and nonlabor-related shares used to calculate the prospective payment rates for hospitals located in the 50 States, the District of Columbia, and Puerto Rico. This section addresses two types of adjustments to the standardized amounts that are made in determining the prospective payment rates as described in this Addendum. 1. Adjustment for Area Wage Levels Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an adjustment to the labor-related portion of the prospective payment rates to account for area differences in hospital wage levels. This adjustment is made by multiplying the labor-related portion of the adjusted standardized amounts by the appropriate wage index for the area in which the hospital is located. In section III of this preamble, we discuss the data and methodology for the FY 2001 wage index. The wage index is set forth in [[Page 47115]] Tables 4A through 4F of this Addendum. 2. Adjustment for Cost-of-Living in Alaska and Hawaii Section 1886(d)(5)(H) of the Act authorizes an adjustment to take into account the unique circumstances of hospitals in Alaska and Hawaii. Higher labor-related costs for these two States are taken into account in the adjustment for area wages described above. For FY 2001, we are adjusting the payments for hospitals in Alaska and Hawaii by multiplying the nonlabor portion of the standardized amounts by the appropriate adjustment factor contained in the table below. Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals ------------------------------------------------------------------------ ------------------------------------------------------------------------ Alaska: All areas.................................................. 1.25 Hawaii: County of Honolulu......................................... 1.25 County of Hawaii........................................... 1.15 County of Kauai............................................ 1.225 County of Maui............................................. .1.225 County of Kalawao.......................................... 1.225 ------------------------------------------------------------------------ The above factors are based on data obtained from the U.S. Office of Personnel Management. C. DRG Relative Weights As discussed in section II of the preamble, we have developed a classification system for all hospital discharges, assigning them into DRGs, and have developed relative weights for each DRG that reflect the resource utilization of cases in each DRG relative to Medicare cases in other DRGs. Table 5 of section VI of this Addendum contains the relative weights that we will use for discharges occurring in FY 2001. These factors have been recalibrated as explained in section II of the preamble. D. Calculation of Prospective Payment Rates for FY 2001 General Formula for Calculation of Prospective Payment Rates for FY 2001 The prospective payment rate for all hospitals located outside of Puerto Rico except sole community hospitals and Medicare-dependent, small rural hospitals = Federal rate. The prospective payment rate for sole community hospitals = whichever of the following rates yields the greatest aggregate payment: The Federal national rate, the updated hospital-specific rate based on FY 1982 cost per discharge, the updated hospital-specific rate based on FY 1987 cost per discharge, or, if the sole community hospital was paid for its cost reporting period beginning during FY 1999 on the basis of either its FY 1982 or FY 1987 hospital-specific rate and elects rebasing, 25 percent of its updated hospital-specific rate based on FY 1996 cost per discharge plus 75 percent of its updated FY 1982 or FY 1987 hospital-specific rate. Prospective payment rate for Medicare-dependent, small rural hospitals = 100 percent of the Federal rate, or, if the greater of the updated FY 1982 hospital-specific rate or the updated FY 1987 hospital- specific rate is higher than the Federal rate, 100 percent of the Federal rate plus 50 percent of the difference between the applicable hospital-specific rate and the Federal rate. Prospective payment rate for Puerto Rico = 50 percent of the Puerto Rico rate + 50 percent of a discharge-weighted average of the national large urban standardized amount and the Federal national other standardized amount. 1. Federal Rate For discharges occurring on or after October 1, 2000 and before October 1, 2001, except for sole community hospitals, Medicare- dependent, small rural hospitals and hospitals in Puerto Rico, the hospital's payment is based exclusively on the Federal national rate. The payment amount is determined as follows: Step 1--Select the appropriate national standardized amount considering the type of hospital and designation of the hospital as large urban or other (see Table 1A or 1E1 in section VI of this Addendum). Step 2--Multiply the labor-related portion of the standardized amount by the applicable wage index for the geographic area in which the hospital is located (see Tables 4A, 4B, and 4C of section VI of this Addendum). Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor- related portion of the standardized amount by the appropriate cost-of- living adjustment factor. Step 4--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount (adjusted, if appropriate, under Step 3). Step 5--Multiply the final amount from Step 4 by the relative weight corresponding to the appropriate DRG (see Table 5 of section VI of this Addendum). 2. Hospital-Specific Rate (Applicable Only to Sole Community Hospitals and Medicare-Dependent, Small Rural Hospitals) Section 1886(b)(3)(C) of the Act, as amended by section 405 of Public Law 106-113, provides that sole community hospitals are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal national rate, the updated hospital-specific rate based on FY 1982 cost per discharge, the updated hospital-specific rate based on FY 1987 cost per discharge, or, if the sole community hospital was paid for its cost reporting period beginning during FY 1999 on the basis of either its FY 1982 or FY 1987 hospital-specific rate and elects rebasing, 25 percent of its updated hospital-specific rate based on FY 1996 cost per discharge plus 75 percent of the updated FY 1982 or FY 1987 hospital-specific rate. Section 1886(d)(5)(G) of the Act, as amended by section 404 of Public Law 106-113, provides that Medicare-dependent, small rural hospitals are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal rate or the Federal rate plus 50 percent of the difference between the Federal rate and the greater of the updated hospital-specific rate based on FY 1982 and FY 1987 cost per discharge. Hospital-specific rates have been determined for each of these hospitals based on either the FY 1982 cost per discharge, the FY 1987 cost per discharge or, for qualifying sole community hospitals, the FY 1996 cost per discharge. For a more detailed discussion of the calculation of the hospital-specific rates, we refer the reader to the September 1, 1983 interim final rule (48 FR 39772); the April 20, 1990 final rule with comment (55 FR 15150); and the September 4, 1990 final rule (55 FR 35994). a. Updating the FY 1982 and FY 1987 Hospital-Specific Rates for FY 2001. We are increasing the hospital-specific rates by 3.4 percent (the hospital market basket rate of increase) for sole community hospitals and by 2.3 percent (the hospital market basket percentage increase minus 1.1 percentage points) for Medicare-dependent, small rural hospitals for FY 2001. Section 1886(b)(3)(C)(iv) of the Act provides that the update factor applicable to the hospital-specific rates for sole community hospitals equal the update factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for sole community hospitals in FY 2001, is the market basket rate of increase. Section 1886(b)(3)(D) of the Act provides that the update factor applicable to the hospital- specific rates for Medicare-dependent, small rural hospitals equal the update factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2001, is the [[Page 47116]] market basket rate of increase minus 1.1 percentage points. b. Calculation of Hospital-Specific Rate. For sole community hospitals, the applicable FY 2001 hospital-specific rate is the greater of the following: the hospital-specific rate for the preceding fiscal year, increased by the applicable update factor (3.4 percent); or, if the hospital qualifies to rebase its hospital-specific rate based on cost per case in FY 1996 and elects rebasing, 75 percent of the hospital-specific rate for the preceding fiscal year, increased by the applicable update factor, plus 25 percent of its rebased FY 1996 hospital-specific rate updated through FY 2001. For Medicare-dependent, small rural hospitals, the applicable FY 2001 hospital-specific rate is calculated by increasing the hospital's hospital-specific rate for the preceding fiscal year by the applicable update factor (2.3 percent), which is the same as the update for all prospective payment hospitals, except sole community hospitals. In addition, the hospital-specific rate is adjusted by the budget neutrality adjustment factor (that is, 0.997225) as discussed in section II.A.4.a. of this Addendum. The resulting rate is used in determining under which rate a sole community hospital or Medicare-dependent, small rural hospital is paid for its discharges beginning on or after October 1, 2000, based on the formula set forth above. 3. General Formula for Calculation of Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning on or After October 1, 2000 and Before October 1, 2001 a. Puerto Rico Rate. The Puerto Rico prospective payment rate is determined as follows: Step 1--Select the appropriate adjusted average standardized amount considering the large urban or other designation of the hospital (see Table 1C of section VI of the Addendum). Step 2--Multiply the labor-related portion of the standardized amount by the appropriate Puerto Rico-specific wage index (see Table 4F of section VI of the Addendum). Step 3--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount. Step 4--Multiply the result in Step 3 by 50 percent. Step 5--Multiply the amount from Step 4 by the appropriate DRG relative weight (see Table 5 of section VI of the Addendum). b. National Rate. The national prospective payment rate is determined as follows: Step 1--Multiply the labor-related portion of the national average standardized amount (see Table 1C of section VI of the Addendum) by the appropriate national wage index (see Tables 4A and 4B of section VI of the Addendum). Step 2--Add the amount from Step 1 and the nonlabor-related portion of the national average standardized amount. Step 3--Multiply the result in Step 2 by 50 percent. Step 4--Multiply the amount from Step 3 by the appropriate DRG relative weight (see Table 5 of section VI of the Addendum). The sum of the Puerto Rico rate and the national rate computed above equals the prospective payment for a given discharge for a hospital located in Puerto Rico. III. Changes to the Payment Rates for Blood Clotting Factor for Hemophilia Inpatients For the past 2 years in the Federal Register (63 FR 41010 and 64 FR 41549), we have discussed section 4452 of Public Law 105-33, which amended section 6011(d) of Public Law 101-239 to reinstate the add-on payment for the costs of administering blood clotting factor to Medicare beneficiaries who have hemophilia and who are hospital inpatients for discharges occurring on or after October 1, 1997. In these prior rules, we have described the payment policy that the payment amount for clotting factors covered by this inpatient benefit is equal to 85 percent of the AWP, subject to the Part A deductible and coinsurance requirements, and specifically listed the updated add-on payment amounts for each clotting factor, as described by HCFA's Common Procedure Coding System (HCPCS). Because we are not changing the policy established 2 years ago, we are discontinuing the practice of listing these amounts in the annual proposed and final rules. Instead, the program manuals will instruct fiscal intermediaries to follow this policy and obtain the average wholesale price (AWP) for each relevant HCPCS from either their corresponding local carrier or the Medicare durable medical equipment regional carrier (DMERC) that has jurisdiction in their area. Carriers already calculate the AWP based on the median AWP of the several products available in each category of factor. The payment amounts will be determined using the most recent AWP data available to the carrier at the time the intermediary performs these annual update calculations. These amounts are updated annually and are effective for discharges beginning on or after October 1 of the current year through September 30 of the following year. Payment will be made for blood clotting factor only if there is an ICD-9-CM diagnosis code for hemophilia included on the bill. Comment: One commenter disagreed with our proposal to have individual Medicare contractors determine the payment allowance for the pass-through amount payable for clotting factors for inpatients with hemophilia. The commenter stated that individual Medicare contractors would not maintain a uniform payment amount and this inconsistency would result in wide disparities in reimbursement. The commenter recommended that HCFA continue to set a standard national rate that would be the same for everyone. The commenter also expressed concern that updates in payment allowances for clotting factors would vary widely among contractors. Response: We continue to believe that our carriers are the most appropriate entities to obtain the AWP for these factors, and are therefore proceeding with our proposed change. While we do not anticipate inconsistency in the payment allowances for these products around the country, we do not want to jeopardize access to these essential biologicals for Medicare beneficiaries who are hemophiliacs. Therefore, we have determined that a more appropriate approximation for the cost of clotting factor furnished on an inpatient basis is 95 percent of the AWP, consistent with the Part B benefit for the same factors. This increase from 85 percent to 95 percent of the AWP will assure access despite possible Medicare contractor variations in the applicable AWP. IV. Changes to Payment Rates for Inpatient Capital-Related Costs for FY 2001 The prospective payment system for hospital inpatient capital- related costs was implemented for cost reporting periods beginning on or after October 1, 1991. Effective with that cost reporting period and during a 10-year transition period extending through FY 2001, hospital inpatient capital-related costs are paid on the basis of an increasing proportion of the capital prospective payment system Federal rate and a decreasing proportion of a hospital's historical costs for capital. The basic methodology for determining capital Federal prospective rates is set forth at Secs. 412.308 through 412.352. Below we discuss the factors that we used to determine the capital [[Page 47117]] Federal rate and the hospital-specific rates and the hospital-specific rates for FY 2001. The rates will be effective for discharges occurring on or after October 1, 2000. For FY 1992, we computed the standard Federal payment rate for capital-related costs under the prospective payment system by updating the FY 1989 Medicare inpatient capital cost per case by an actuarial estimate of the increase in Medicare inpatient capital costs per case. Each year after FY 1992, we update the standard capital Federal rate, as provided in Sec. 412.308(c)(1), to account for capital input price increases and other factors. Also, Sec. 412.308(c)(2) provides that the capital Federal rate is adjusted annually by a factor equal to the estimated proportion of outlier payments under the capital Federal rate to total capital payments under the capital Federal rate. In addition, Sec. 412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of payments for exceptions under Sec. 412.348. Furthermore, Sec. 412.308(c)(4)(ii) requires that the capital Federal rate be adjusted so that the annual DRG reclassification and the recalibration of DRG weights and changes in the geographic adjustment factor are budget neutral. For FYs 1992 through 1995, Sec. 412.352 required that the capital Federal rate also be adjusted by a budget neutrality factor so that aggregate payments for inpatient hospital capital costs were projected to equal 90 percent of the payments that would have been made for capital-related costs on a reasonable cost basis during the fiscal year. That provision expired in FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to the rate that was made in FY 1994, and Sec. 412.308(b)(3) describes the 0.28 percent reduction to the rate made in FY 1996 as a result of the revised policy of paying for transfers. In the FY 1998 final rule with comment period (62 FR 45966), we implemented section 4402 of Public Law 105-33, which requires that for discharges occurring on or after October 1, 1997, and before October 1, 2002, the unadjusted standard capital Federal rate is reduced by 17.78 percent. A small part of that reduction will be restored effective October 1, 2002. For each hospital, the hospital-specific rate was calculated by dividing the hospital's Medicare inpatient capital-related costs for a specified base year by its Medicare discharges (adjusted for transfers), and dividing the result by the hospital's case mix index (also adjusted for transfers). The resulting case-mix adjusted average cost per discharge was then updated to FY 1992 based on the national average increase in Medicare's inpatient capital cost per discharge and adjusted by the exceptions payment adjustment factor and the budget neutrality adjustment factor to yield the FY 1992 hospital-specific rate. Since FY 1992, the hospital-specific rate has been updated annually for inflation and for changes in the exceptions payment adjustment factor. For FYs 1992 through 1995, the hospital-specific rate was also adjusted by a budget neutrality adjustment factor. Section 4402 of Public Law 105-33 also requires that fFor discharges occurring on or after October 1, 1997, and before October 1, 2002, the unadjusted hospital-specific rate is reduced by 17.78 percent. A small part of this reduction will be restored effective October 1, 2002. To determine the appropriate budget neutrality adjustment factor and the exceptions payment adjustment factor, we developed a dynamic model of Medicare inpatient capital-related costs, that is, a model that projects changes in Medicare inpatient capital-related costs over time. With the expiration of the budget neutrality provision, the model is still used to estimate the exceptions payment adjustment and other factors. The model and its application are described in greater detail in Appendix B of this final rule. In accordance with section 1886(d)(9)(A) of the Act, under the prospective payment system for inpatient operating costs, hospitals located in Puerto Rico are paid for operating costs under a special payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a blended rate that consisted of 75 percent of the applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the applicable national average standardized amount. However, effective October 1, 1997, as a result of section 4406 of Public Law 105-33, operating payments to hospitals in Puerto Rico are based on a blend of 50 percent of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of the applicable national average standardized amount. In conjunction with this change to the operating blend percentage, effective with discharges on or after October 1, 1997, we compute capital payments to hospitals in Puerto Rico based on a blend of 50 percent of the Puerto Rico rate and 50 percent of the capital Federal rate. Section 412.374 provides for the use of this blended payment system for payments to Puerto Rico hospitals under the prospective payment system for inpatient capital-related costs. Accordingly, for capital- related costs, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital. A. Determination of Federal Inpatient Capital-Related Prospective Payment Rate Update In the July 30, 1999 final rule (64 FR 41551), we established a capital Federal rate of $377.03 for FY 2000. In the proposed rule, we stated that, as a result of the changes we proposed to the factors used to establish the capital Federal rate, the proposed FY 2001 capital Federal rate was $383.06. In this final rule, we are establishing a FY 2001 capital Federal rate of $382.03. In the discussion that follows, we explain the factors that were used to determine the FY 2001 capital Federal rate. In particular, we explain why the FY 2001 capital Federal rate has increased 1.33 percent compared to the FY 2000 capital Federal rate. We also estimate aggregate capital payments will increase by 5.48 percent during this same period. This increase is primarily due to the increase in the number of hospital admissions, the increase in case-mix, and the increase in the Federal blend percentage from 90 to 100 percent for fully prospective payment hospitals. Total payments to hospitals under the prospective payment system are relatively unaffected by changes in the capital prospective payments. Since capital payments constitute about 10 percent of hospital payments, a 1 percent change in the capital Federal rate yields only about 0.1 percent change in actual payments to hospitals. Aggregate payments under the capital prospective payment transition system are estimated to increase in FY 2001 compared to FY 2000. 1. Standard Capital Federal Rate Update a. Description of the Update Framework. Under Sec. 412.308(c)(1), the standard capital Federal rate is updated on the basis of an analytical framework that takes into account changes in a capital input price index and other factors. The update framework consists of a capital input price index (CIPI) and several policy adjustment factors. Specifically, we have adjusted the projected CIPI rate of increase as appropriate each year for case-mix index-related changes, for intensity, and for errors in previous CIPI forecasts. The proposed rule reflected an update factor for FY 2001 under that framework of 0.9 percent, based on data available at that [[Page 47118]] time. Under the update framework, the final update factor for FY 2001 is 0.9 percent. This update factor is based on a projected 0.9 percent increase in the CIPI, a 0.0 percent adjustment for intensity, a 0.0 percent adjustment for case-mix, a 0.0 percent adjustment for the FY 1999 DRG reclassification and recalibration, and a forecast error correction of 0.0 percent. We explain the basis for the FY 2001 CIPI projection in section II.D of this Addendum. In this section IV of the Addendum, we describe the policy adjustments that have been applied. The case-mix index is the measure of the average DRG weight for cases paid under the prospective payment system. Because the DRG weight determines the prospective payment for each case, any percentage increase in the case-mix index corresponds to an equal percentage increase in hospital payments. The case-mix index can change for any of several reasons: The average resource use of Medicare patients changes ("real" case-mix change); Changes in hospital coding of patient records result in higher weight DRG assignments ("coding effects"); and The annual DRG reclassification and recalibration changes may not be budget neutral ("reclassification effect"). We define real case-mix change as actual changes in the mix (and resource requirements) of Medicare patients as opposed to changes in coding behavior that result in assignment of cases to higher weighted DRGs but do not reflect higher resource requirements. In the update framework for the prospective payment system for operating costs, we adjust the update upwards to allow for real case-mix change, but remove the effects of coding changes on the case-mix index. We also remove the effect on total payments of prior changes to the DRG classifications and relative weights, in order to retain budget neutrality for all case-mix index-related changes other than patient severity. (For example, we adjusted for the effects of the FY 1999 DRG reclassification and recalibration as part of our FY 2001 update recommendation.) We have adopted this case-mix index adjustment in the capital update framework as well. For FY 2001, we are projecting a 0.5 percent increase in the case- mix index. We estimate that real case-mix increase will equal 0.5 percent in FY 2001. Therefore, the net adjustment for case-mix change in FY 2001 is 0.0 percentage points. Comment: One commenter stated that the magnitude of the upward adjustment of 0.5 percent for real case-mix change and the downward adjustment of 0.5 percent for projected case-mix change (a net case-mix adjustment of 0.0 percent) for FY 2001 appears inconsistent with past numbers published by HCFA. They recommend that we review our adjustment for case-mix and provide a basis for these adjustment amounts. Response: HCFA's Office of the Actuary estimates the projection of total case-mix changes used in the capital and operating update frameworks. The estimate of case-mix change for FY 2001 is the same as the estimate of case-mix change for FY 2000 published in the July 30, 1999 final rule (64 FR 41551). This estimate of case-mix change for FY 2001 is also very close to what has been used for the past 5 years. Past estimates of case-mix change have always assumed that most of the case-mix change will be real, and therefore the net adjustments for case-mix change have always been small or zero. Again this year, our estimate assumes the same kind of relationship. Therefore, we believe that our projection of a 0.5 percent increase in the case-mix index and our estimate that real case-mix increase will equal 0.5 percent (for a net case-mix adjustment of 0.0 percent) in FY 2001 is consistent with past case-mix change update recommendations. As more experience develops we may be able to develop a better estimate of the real part of the case-mix increase. We estimate that FY 1999 DRG reclassification and recalibration will result in a 0.0 percent change in the case-mix when compared with the case-mix index that would have resulted if we had not made the reclassification and recalibration changes to the DRGs. Therefore, we are making a 0.0 percent adjustment for DRG reclassification and recalibration in the update recommendation for FY 2001. The capital update framework contains an adjustment for forecast error. The input price index forecast is based on historical trends and relationships ascertainable at the time the update factor is established for the upcoming year. In any given year there may be unanticipated price fluctuations that may result in differences between the actual increase in prices and the forecast used in calculating the update factors. In setting a prospective payment rate under the framework, we make an adjustment for forecast error only if our estimate of the change in the capital input price index for any year is off by 0.25 percentage points or more. There is a 2-year lag between the forecast and the measurement of the forecast error. A forecast error of 0.0 percentage points was calculated for the FY 1999 update. That is, current historical data indicate that the FY 1999 CIPI used in calculating the forecasted FY 1999 update factor did not overstate or understate realized price increases. We therefore are making a 0.0 percent adjustment for forecast error in the update for FY 2001. Under the capital prospective payment system framework, we also make an adjustment for changes in intensity. We calculate this adjustment using the same methodology and data as in the framework for the operating prospective payment system. The intensity factor for the operating update framework reflects how hospital services are utilized to produce the final product, that is, the discharge. This component accounts for changes in the use of quality-enhancing services, changes in within-DRG severity, and expected modification of practice patterns to remove cost-ineffective services. We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services), and changes in real case-mix. The use of total charges in the calculation of the proposed intensity factor makes it a total intensity factor, that is, charges for capital services are already built into the calculation of the factor. Therefore, we have incorporated the intensity adjustment from the operating update framework into the capital update framework. Without reliable estimates of the proportions of the overall annual intensity increases that are due, respectively, to ineffective practice patterns and to the combination of quality-enhancing new technologies and within-DRG complexity, we assume, as in the revised operating update framework, that one-half of the annual increase is due to each of these factors. The capital update framework thus provides an add-on to the input price index rate of increase of one-half of the estimated annual increase in intensity to allow for within-DRG severity increases and the adoption of quality-enhancing technology. For FY 2001, we have developed a Medicare-specific intensity measure based on a 5-year average using FY 1995 through 1999 data. In determining case-mix constant intensity, we found that observed case- mix increase was 1.7 percent in FY 1995, 1.6 percent in FY 1996, 0.3 percent in FY 1997, -0.4 percent in FY 1998, and -0.3 percent in FY 1999. For FY 1995 and FY 1996, we estimate that real case-mix increase was 1.0 to 1.4 percent each year. The estimate for those years is supported by [[Page 47119]] past studies of case-mix change by the RAND Corporation. The most recent study was "Has DRG Creep Crept Up? Decomposing the Case Mix Index Change Between 1987 and 1988" by G. M. Carter, J. P. Newhouse, and D. A. Relles, R-4098-HCFA/ProPAC (1991). The study suggested that real case-mix change was not dependent on total change, but was usually a fairly steady 1.0 to 1.5 percent per year. We use 1.4 percent as the upper bound because the RAND study did not take into account that hospitals may have induced doctors to document medical records more completely in order to improve payment. Following that study, we consider up to 1.4 percent of observed case-mix change as real for FY 1995 through FY 1999. Based on this analysis, we believe that all of the observed case-mix increase for FY 1997, FY 1998, and FY 1999 is real. The increases for FY 1995 and FY 1996 were in excess of our estimate of real case-mix increase. We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services), and changes in real case-mix. Given estimates of real case-mix of 1.0 percent for FY 1995, 1.0 percent for FY 1996, 0.3 percent for FY 1997, -0.4 percent for FY 1998, and -0.3 percent for FY 1999, we estimate that case-mix constant intensity declined by an average 0.7 percent during FYs 1995 through 1999, for a cumulative decrease of 3.6 percent. If we assume that real case-mix increase was 1.4 percent for FY 1995, 1.4 percent for FY 1996, 0.3 percent for FY 1997, -0.4 percent for FY 1998, and -0.3 percent for FY 1999, we estimate that case-mix constant intensity declined by an average 0.9 percent during FYs 1995 through 1999, for a cumulative decrease of 4.5 percent. Since we estimate that intensity has declined during that period, we are recommending a 0.0 percent intensity adjustment for FY 2001. We note that the operating recommendation addressed in Appendix C of this final rule reflects the possible range that a negative adjustment could span (-0.6 percent to 0.0 percent adjustment) based on our analyses that intensity has declined during that 5-year period. While the calculation of the adjustment for intensity is identical in both the capital and the operating update frameworks, consistent with past capital update recommendations and the FY 2001 operating recommendation, we did not make a negative adjustment for intensity in the FY 2001 capital update. b. Comparison of HCFA and MedPAC Update Recommendations. MedPAC's FY 2001 update recommendation for capital prospective payments was not included in its March 2000 Report to Congress. In the May 5, 2000 proposed rule, we stated that we would address the comparison of HCFA's update recommendation and MedPAC's update recommendation in this final rule, once we have had the opportunity to review the data analyses that substantiate MedPAC's recommendation. In its June 2000 Report to Congress, MedPAC presented a combined operating and capital update for hospital inpatient prospective payment system payments for FY 2001, and recommended that Congress implement a single combined (operating and capital) prospective payment system rate. With the end of the transition to fully prospective capital payments ending with FY 2001, both operating and capital prospective system payments will be made using standard Federal rates adjusted by hospital specific payment variables. Currently, section 1886(b)(3)(B)(i)(XVI) of the Act sets forth the FY 2001 percentage increase in the prospective payment system operating cost standardized amounts. The prospective payment system capital update is set under the framework established by the Secretary outlined in Sec. 412.308(c)(1). For FY 2001, MedPAC's update framework supports a combined operating and capital update for hospital inpatient prospective payment system payments of 3.5 percent to 4.0 percent (or between the increase in the combined ope
