Federal Register: August 1, 2000 (Volume 65, Number 148)

[Federal Register: August 1, 2000 (Volume 65, Number 148)]
[Rules and Regulations]
[Page 47204-47211]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au00-16]

[[pp. 47204-47211]] Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2001 Rates

[[Continued from page 47203]]

[[Page 47203]]

rate change alone is to increase payments by 0.3 percent. In
addition to the increase attributable to the Federal rate change, a
3.5 percent increase is attributable to the effects of all other
changes.
Our comparison by geographic location shows an overall increase
in payments to hospitals in all areas. This comparison also shows
that urban and rural hospitals will experience slightly different
rates of increase in capital payments per case (3.6 percent and 4.6
percent, respectively). This difference is due to the lower rate of
increase for urban hospitals relative to rural hospitals (0.1
percent and 1.4 percent, respectively) from the Federal rate changes
alone. Urban hospitals are actually projected to gain slightly more
than rural hospitals (3.5 percent versus 3.2 percent, respectively)
from the effects of all other changes.
All regions are estimated to receive increases in total capital
payments per case, partly due to the increased share of payments
that are based on the Federal rate (from 90 to 100 percent). Changes
by region vary from a minimum of 2.6 percent increase (West South
Central urban region) to a maximum of 7.4 percent increase (Pacific
rural region).
By type of ownership, government hospitals are projected to have
the largest rate of increase of total payment changes (4.5 percent,
a 0.6 percent increase due to the Federal rate changes, and a 3.9
percent increase from the effects of all other changes). Payments to
voluntary hospitals will increase 3.7 percent (a 0.3 percent
increase due to Federal rate changes, and a 3.4 percent increase
from the effects of all other changes) and payments to proprietary
hospitals will increase 2.6 percent (a 0.1 percent decrease due to
Federal rate changes, and a 2.7 percent increase from the effects of
all other changes).
Section 1886(d)(10) of the Act established the MGCRB. Hospitals
may apply for reclassification for purposes of the standardized
amount, wage index, or both, and for purposes of DSH for FYs 1999
through 2001. Although the Federal capital rate is not affected, a
hospital's geographic classification for purposes of the operating
standardized amount does affect a hospital's capital payments as a
result of the large urban adjustment factor and the disproportionate
share adjustment for urban hospitals with 100 or more beds.
Reclassification for wage index purposes affects the geographic
adjustment factor, since that factor is constructed from the
hospital wage index.
To present the effects of the hospitals being reclassified for
FY 2001 compared to the effects of reclassification for FY 2000, we
show the average payment percentage increase for hospitals
reclassified in each fiscal year and in total. For FY 2001
reclassifications, we indicate those hospitals reclassified for
standardized amount purposes only, for wage index purposes only, and
for both purposes. The reclassified groups are compared to all other
nonreclassified hospitals. These categories are further identified
by urban and rural designation.
Hospitals reclassified for FY 2001 as a whole are projected to
experience a 5.2 percent increase in payments (a 2.0 percent
increase attributable to Federal rate changes and a 3.2 percent
increase attributable to the effects of all other changes). Payments
to nonreclassified hospitals will increase slightly less (3.8
percent) than reclassified hospitals (5.2 percent) overall. Payments
to nonreclassified hospitals will increase less than reclassified
hospitals due to the Federal rate changes (0.3 percent compared to
2.0 percent).

Table V.--Comparison of Total Payments per Case
[FY 2000 payments compared to FY 2001 payments]
----------------------------------------------------------------------------------------------------------------
Average FY Average FY Portion
Number of 2000 2001 attributable
hospitals payments/ payments/ All changes to federal
case case rate change
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals............................. 4,792 641 665 3.8 0.3
Large urban areas (populations over 1 1,524 745 772 3.6 0.0
million).................................
Other urban areas (populations of 1 1,149 629 653 3.7 0.4
million or fewer)........................
Rural areas............................... 2,119 429 449 4.6 1.4
Urban hospitals........................... 2,673 695 720 3.6 0.1
0-99 beds............................. 658 499 518 3.8 0.6
100-199 beds.......................... 929 610 630 3.4 0.3
200-299 beds.......................... 543 662 684 3.4 0.3
300-499 beds.......................... 400 726 754 3.8 -0.1
500 or more beds...................... 143 889 923 3.8 0.0
Rural hospitals........................... 2,119 429 449 4.6 1.4
0-49 beds............................. 1,220 358 378 5.8 2.0
50-99 beds............................ 531 409 429 4.9 1.4
100-149 beds.......................... 219 444 461 3.8 1.0
150-199 beds.......................... 81 467 489 4.7 1.8
200 or more beds...................... 68 526 547 3.9 1.0
By Region:
Urban by Region........................... 2,673 695 720 3.6 0.1
New England........................... 145 723 751 3.9 -0.1
Middle Atlantic....................... 408 769 797 3.7 -0.1
South Atlantic........................ 398 674 693 2.9 -0.2
East North Central.................... 454 660 692 4.9 0.8
East South Central.................... 154 638 660 3.4 -0.3
West North Central.................... 182 691 715 3.4 0.1
West South Central.................... 328 661 678 2.6 0.8
Mountain.............................. 124 687 723 5.3 0.3
Pacific............................... 435 780 804 3.1 -0.5
Puerto Rico........................... 45 293 311 6.1 2.3
Rural by Region........................... 2,119 429 449 4.6 1.4
New England........................... 52 525 544 3.6 0.2
Middle Atlantic....................... 78 450 469 4.1 0.8
South Atlantic........................ 276 443 462 4.4 1.8
East North Central.................... 279 432 459 6.2 1.6
East South Central.................... 265 395 411 4.2 1.5
West North Central.................... 491 420 440 4.6 1.5
West South Central.................... 334 391 404 3.4 1.0
Mountain.............................. 200 461 478 3.7 1.1

[[Page 47204]]

Pacific............................... 139 506 543 7.4 1.4
By Payment Classification:
All hospitals............................. 4,792 641 665 3.8 0.3
Large urban areas (populations over 1 1,618 736 763 3.6 0.1
million).................................
Other urban areas (populations of 1 1,136 628 650 3.5 0.2
million or fewer)........................
Rural areas............................... 2,038 425 446 4.8 1.5
Teaching Status:
Non-teaching.......................... 3,682 530 549 3.5 0.6
Fewer than 100 Residents.............. 871 669 694 3.7 0.3
100 or more Residents................. 239 979 1,022 4.4 -0.2
Urban DSH:
100 or more beds.................. 1,379 733 759 3.6 0.1
Less than 100 beds................ 70 570 604 5.9 0.5
Rural DSH:
Sole Community (SCH/EACH)......... 149 382 399 4.5 2.1
Referral Center (RRC/EACH)........ 56 490 506 3.2 1.0
Other Rural:
100 or more beds.............. 48 383 401 4.9 2.3
Less than 100 beds............ 102 343 360 5.0 1.9
Urban teaching and DSH:
Both teaching and DSH................. 720 807 838 3.8 0.1
Teaching and no DSH................... 325 699 728 4.1 0.2
No teaching and DSH................... 729 603 621 3.1 0.2
No teaching and no DSH................ 980 570 588 3.0 0.2
Rural Hospital Types:
Non special status hospitals.......... 819 376 394 5.0 1.7
RRC/EACH.............................. 150 493 515 4.3 1.4
SCH/EACH.............................. 661 425 448 5.5 1.5
Medicare-dependent hospitals (MDH).... 351 356 377 5.7 1.9
SCH, RRC and EACH..................... 57 499 516 3.5 0.6
Hospitals Reclassified by the Medicare
Geographic Classification Review Board:
Reclassification Status During FY00
and FY01:
Reclassified During Both FY00 and 377 546 569 4.1 0.9
FY01.............................
Reclassified During FY01 Only..... 149 531 579 9.1 6.0
Reclassified During FY00 Only..... 131 553 546 -1.2 -3.1
FY01 Reclassifications:
All Reclassified Hospitals........ 526 543 571 5.2 2.0
All Nonreclassified Hospitals..... 4,268 654 679 3.8 0.3
All Urban Reclassified Hospitals.. 88 701 746 6.3 2.3
Urban Nonreclassified Hospitals... 2,559 696 720 3.5 0.0
All Reclassified Rural Hospitals.. 438 488 510 4.7 1.9
Rural Nonreclassified Hospitals... 1,681 386 404 4.6 1.0
Other Reclassified Hospitals (Section 26 463 473 2.1 0.7
1886(D)(8)(B)).......................
Type of Ownership:
Voluntary............................. 2,520 655 680 3.7 0.3
Proprietary........................... 655 626 643 2.6 -0.1
Government............................ 1,093 576 602 4.5 0.6
Medicare Utilization as a Percent of
Inpatient Days:
0-25.................................. 369 801 838 4.7 0.1
25-50................................. 1,820 736 763 3.7 0.0
50-65................................. 1,882 568 590 3.8 0.6
Over 65............................... 688 512 528 3.2 0.7
----------------------------------------------------------------------------------------------------------------

Appendix B: Technical Appendix on the Capital Cost Model and Required
Adjustments

Under section 1886(g)(1)(A) of the Act, we set capital
prospective payment rates for FY 1992 through FY 1995 so that
aggregate prospective payments for capital costs were projected to
be 10 percent lower than the amount that would have been payable on
a reasonable cost basis for capital-related costs in that year. To
implement this requirement, we developed the capital acquisition
model to determine the budget neutrality adjustment factor. Even
though the budget neutrality requirement expired effective with FY
1996, we must continue to determine the recalibration and geographic
reclassification budget neutrality adjustment factor and the
reduction in the Federal and hospital-specific rates for exceptions
payments.
To determine these factors, we must continue to project capital
costs and payments.
We used the capital acquisition model from the start of
prospective payments for capital costs through FY 1997. We now have
7 years of cost reports under the capital prospective payment
system. For FY 1998, we developed a new capital cost model to
replace the capital acquisition model. This revised model makes use
of the data from these cost reports.
The following cost reports are used in the capital cost model
for this final rule: the March 31, 2000 update of the cost reports
for

[[Page 47205]]

PPS-IX (cost reporting periods beginning in FY 1992), PPS-X (cost
reporting periods beginning in FY 1993), PPS-XI (cost reporting
periods beginning in FY 1994), PPS-XII (cost reporting periods
beginning in FY 1995), PPS-XIII (cost reporting periods beginning in
FY 1996), PPS-XIV (cost reporting periods beginning in FY 1997), and
PPS-XV (cost reporting periods beginning in FY 1998). In addition,
to model payments, we use the April 1, 2000 update of the provider-
specific file, and the March 1994 update of the intermediary audit
file.
Since hospitals under alternative payment system waivers (that
is, hospitals in Maryland) are currently excluded from the capital
prospective payment system, we excluded these hospitals from our
model.
We developed FY 1992 through FY 2000 hospital-specific rates
using the provider-specific file and the intermediary audit file.
(We used the cumulative provider-specific file, which includes all
updates to each hospital's records, and chose the latest record for
each fiscal year.) We checked the consistency between the provider-
specific file and the intermediary audit file. We ensured that
increases in the hospital-specific rates were at least as large as
the published updates (increases) for the hospital-specific rates
each year. We were able to match hospitals to the files as shown in
the following table:

------------------------------------------------------------------------
Number of
Source hospitals
------------------------------------------------------------------------
Provider-Specific File Only................................ 173
Provider-Specific and Audit File........................... 4,715
------------
Total.................................................. 4,888
------------------------------------------------------------------------

One hundred forty-three of the 4,888 hospitals had unusable or
missing data, or had no cost reports available. For 42 of the 143
hospitals, we were unable to determine a hospital-specific rate from
the available cost reports. However, there was adequate cost
information to determine that these hospitals were paid under the
hold-harmless methodology. Since the hospital-specific rate is not
used to determine payments for hospitals paid under the hold-
harmless methodology, there was sufficient cost report information
available to include these 42 hospitals in the analysis. We were
able to estimate hospital-specific amounts for five additional
hospitals from the cost reports as shown in the following table:

------------------------------------------------------------------------
Number of
Cost report hospitals
------------------------------------------------------------------------
PPS-9...................................................... 1
PPS-12..................................................... 2
PPS-14..................................................... 1
PPS-15..................................................... 1
------------
Total.................................................. 5
------------------------------------------------------------------------

Hence we were able to use 47 of the 143 hospitals. We used 4,792
hospitals for the analysis. Ninety-six hospitals could not be used
in the analysis because of insufficient information. These hospitals
account for less than 0.5 percent of admissions. Therefore, any
effects from the elimination of their cost report data should be
minimal.
We analyzed changes in capital-related costs (depreciation,
interest, rent, leases, insurance, and taxes) reported in the cost
reports. We found a wide variance among hospitals in the growth of
these costs. For hospitals with more than 100 beds, the distribution
and mean of these cost increases were different for large changes in
bed-size (greater than 20 percent). We also analyzed
changes in the growth in old capital and new capital for cost
reports that provided this information. For old capital, we limited
the analysis to decreases in old capital. We did this since the
opportunity for most hospitals to treat "obligated" capital put
into service as old capital has expired. Old capital costs should
decrease as assets become fully depreciated and as interest costs
decrease as the loan is amortized.
The new capital cost model separates the hospitals into three
mutually exclusive groups. Hold-harmless hospitals with data on old
capital were placed in the first group. Of the remaining hospitals,
those hospitals with fewer than 100 beds comprise the second group.
The third group consists of all hospitals that did not fit into
either of the first two groups. Each of these groups displayed
unique patterns of growth in capital costs. We found that the gamma
distribution is useful in explaining and describing the patterns of
increase in capital costs. A gamma distribution is a statistical
distribution that can be used to describe patterns of growth rates,
with the greatest proportion of rates being at the low end. We use
the gamma distribution to estimate individual hospital rates of
increase as follows:
(1) For hold-harmless hospitals, old capital cost changes were
fitted to a truncated gamma distribution, that is, a gamma
distribution covering only the distribution of cost decreases. New
capital costs changes were fitted to the entire gamma distribution,
allowing for both decreases and increases.
(2) For hospitals with fewer than 100 beds (small), total
capital cost changes were fitted to the gamma distribution, allowing
for both decreases and increases.
(3) Other (large) hospitals were further separated into three
groups:
Bed-size decreases over 20 percent (decrease).
Bed-size increases over 20 percent (increase).
Other (no change).
Capital cost changes for large hospitals were fitted to gamma
distributions for each bed-size change group, allowing for both
decreases and increases in capital costs. We analyzed the
probability distribution of increases and decreases in bed size for
large hospitals. We found the probability somewhat dependent on the
prior year change in bed size and factored this dependence into the
analysis. Probabilities of bed-size change were determined. Separate
sets of probability factors were calculated to reflect the
dependence on prior year change in bed size (increase, decrease, and
no change).
The gamma distributions were fitted to changes in aggregate
capital costs for the entire hospital. We checked the relationship
between aggregate costs and Medicare per discharge costs. For large
hospitals, there was a small variance, but the variance was larger
for small hospitals. Since costs are used only for the hold-harmless
methodology and to determine exceptions, we decided to use the gamma
distributions fitted to aggregate cost increases for estimating
distributions of cost per discharge increases.
Capital costs per discharge calculated from the cost reports
were increased by random numbers drawn from the gamma distribution
to project costs in future years. Old and new capital were projected
separately for hold-harmless hospitals. Aggregate capital per
discharge costs were projected for all other hospitals. Because the
distribution of increases in capital costs varies with changes in
bed size for large hospitals, we first projected changes in bed size
for large hospitals before drawing random numbers from the gamma
distribution. Bed-size changes were drawn from the uniform
distribution with the probabilities dependent on the previous year
bed-size change. The gamma distribution has a shape parameter and a
scaling parameter. (We used different parameters for each hospital
group, and for old and new capital.)
We used discharge counts from the cost reports to calculate
capital cost per discharge. To estimate total capital costs for FY
1999 (the MedPAR data year) and later, we use the number of
discharges from the MedPAR data. Some hospitals had considerably
more discharges in FY 1999 than in the years for which we calculated
cost per discharge from the cost report data. Consequently, a
hospital with few cost report discharges would have a high capital
cost per discharge, since fixed costs would be allocated over only a
few discharges. If discharges increase substantially, the cost per
discharge would decrease because fixed costs would be allocated over
more discharges. If the projection of capital cost per discharge is
not adjusted for increases in discharges, the projection of
exceptions would be overstated. We address this situation by
recalculating the cost per discharge with the MedPAR discharges if
the MedPAR discharges exceed the cost report discharges by more than
20 percent. We do not adjust for increases of less than 20 percent
because we have not received all of the FY 1999 discharges, and we
have removed some discharges from the analysis because they are
statistical outliers. This adjustment reduces our estimate of
exceptions payments, and consequently, the reduction to the Federal
rate for exceptions is smaller. We will continue to monitor our
modeling of exceptions payments and make adjustments as needed.
The average national capital cost per discharge generated by
this model is the combined average of many randomly generated
increases. This average must equal the projected average national
capital cost per discharge, which we projected separately (outside
this model). We adjusted the shape parameter of the gamma
distributions so that the modeled average capital cost per discharge
matches our projected capital cost per discharge. The shape
parameter for old capital was not adjusted since we are

[[Page 47206]]

modeling the aging of "existing" assets. This model provides a
distribution of capital costs among hospitals that is consistent
with our aggregate capital projections.
Once each hospital's capital-related costs are generated, the
model projects capital payments. We use the actual payment
parameters (for example, the case-mix index and the geographic
adjustment factor) that are applicable to the specific hospital.
To project capital payments, the model first assigns the
applicable payment methodology (fully prospective or hold-harmless)
to the hospital as determined from the provider-specific file and
the cost reports. The model simulates Federal rate payments using
the assigned payment parameters and hospital-specific estimated
outlier payments. The case-mix index for a hospital is derived from
the FY 1999 MedPAR file using the FY 2001 DRG relative weights
included in section VI. of the Addendum to this final rule. The
case-mix index is increased each year after FY 1999 based on
analysis of past experiences in case-mix increases. Based on
analysis of recent case-mix increases, we estimate that case-mix
will increase 0.0 percent in FY 2000. We project that case-mix will
increase 0.0 percent in FY 2001. (Since we are using FY 1999 cases
for our analysis, the FY 1999 increase in case-mix has no effect on
projected capital payments.)
Changes in geographic classification and revisions to the
hospital wage data used to establish the hospital wage index affect
the geographic adjustment factor. Changes in the DRG classification
system and the relative weights affect the case-mix index.
Section 412.308(c)(4)(ii) requires that the estimated aggregate
payments for the fiscal year, based on the Federal rate after any
changes resulting from DRG reclassifications and recalibration and
the geographic adjustment factor, equal the estimated aggregate
payments based on the Federal rate that would have been made without
such changes. For FY 2000, the budget neutrality adjustment factors
were 1.00142 for the national rate and 1.00134 for the Puerto Rico
rate.
Since we implemented a separate geographic adjustment factor for
Puerto Rico, we applied separate budget neutrality adjustments for
the national geographic adjustment factor and the Puerto Rico
geographic adjustment factor. We applied the same budget neutrality
factor for DRG reclassifications and recalibration nationally and
for Puerto Rico. Separate adjustments were unnecessary for FY 1998
and earlier since the geographic adjustment factor for Puerto Rico
was implemented in FY 1998.
To determine the factors for FY 2001, we first determined the
portions of the Federal national and Puerto Rico rates that would be
paid for each hospital in FY 2001 based on its applicable payment
methodology. Using our model, we then compared, separately for the
national rate and the Puerto Rico rate, estimated aggregate Federal
rate payments based on the FY 2000 DRG relative weights and the FY
2000 geographic adjustment factor to estimated aggregate Federal
rate payments based on the FY 2000 relative weights and the FY 2001
geographic adjustment factor. In making the comparison, we held the
FY 2001 Federal rate portion constant and set the other budget
neutrality adjustment factor and the exceptions reduction factor to
1.00. To achieve budget neutrality for the changes in the national
geographic adjustment factor, we applied an incremental budget
neutrality adjustment of 0.99782 for FY 2001 to the previous
cumulative FY 2000 adjustment of 1.00142, yielding a cumulative
adjustment of 0.99924 through FY 2001. For the Puerto Rico
geographic adjustment factor, we applied an incremental budget
neutrality adjustment of 1.00365 for FY 2001 to the previous
cumulative FY 2000 adjustment of 1.00134, yielding a cumulative
adjustment of 1.00499 through FY 2001. We then compared estimated
aggregate Federal rate payments based on the FY 2000 DRG relative
weights and the FY 2001 geographic adjustment factors to estimated
aggregate Federal rate payments based on the FY 2001 DRG relative
weights and the FY 2001 geographic adjustment factors. The
incremental adjustment for DRG classifications and changes in
relative weights would be 1.00009 nationally and for Puerto Rico.
The cumulative adjustments for DRG classifications and changes in
relative weights and for changes in the geographic adjustment
factors through FY 2001 would be 0.99933 nationally and 1.00508 for
Puerto Rico. The following table summarizes the adjustment factors
for each fiscal year:

Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Puerto Rico
-------------------------------------------------------------------------------------------------------------------
Incremental adjustment Incremental adjustment
Fiscal year --------------------------------------------- ---------------------------------------------
Geographic DRG Cumulative Geographic DRG Cumulative
adjustment reclassifications Combined adjustment reclassifications Combined
factor and recalibration factor and recalibration
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992................................ ........... ................. ........... 1.00000 ........... ................. ........... ...........
1993................................ ........... ................. 0.99800 0.99800 ........... ................. ........... ...........
1994................................ ........... ................. 1.00531 1.00330 ........... ................. ........... ...........
1995................................ ........... ................. 0.99980 1.00310 ........... ................. ........... ...........
1996................................ ........... ................. 0.99940 1.00250 ........... ................. ........... ...........
1997................................ ........... ................. 0.99873 1.00123 ........... ................. ........... ...........
1998................................ ........... ................. 0.99892 1.00015 ........... ................. ........... 1.00000
1999................................ 0.99944 1.00335 1.00279 1.00294 0.99898 1.00335 1.00233 1.00233
2000................................ 0.99857 0.99991 0.99848 1.00142 0.99910 0.99991 0.99901 1.00134
2001................................ 0.99782 1.00009 0.99791 0.99933 1.00365 1.00009 1.00374 1.00508
--------------------------------------------------------------------------------------------------------------------------------------------------------

The methodology used to determine the recalibration and
geographic (DRG/GAF) budget neutrality adjustment factor is similar
to that used in establishing budget neutrality adjustments under the
prospective payment system for operating costs. One difference is
that, under the operating prospective payment system, the budget
neutrality adjustments for the effect of geographic
reclassifications are determined separately from the effects of
other changes in the hospital wage index and the DRG relative
weights. Under the capital prospective payment system, there is a
single DRG/GAF budget neutrality adjustment factor (the national
rate and the Puerto Rico rate are determined separately) for changes
in the geographic adjustment factor (including geographic
reclassification) and the DRG relative weights. In addition, there
is no adjustment for the effects that geographic reclassification
has on the other payment parameters, such as the payments for
serving low-income patients or the large urban add-on payments.
In addition to computing the DRG/GAF budget neutrality
adjustment factor, we used the model to simulate total payments
under the prospective payment system.
Additional payments under the exceptions process are accounted
for through a reduction in the Federal and hospital-specific rates.
Therefore, we used the model to calculate the exceptions reduction
factor. This exceptions reduction factor ensures that aggregate
payments under the capital prospective payment system, including
exceptions payments, are projected to equal the aggregate payments
that would have been made under the capital prospective payment
system without an exceptions process. Since changes in the level of
the payment rates change the level of payments under the exceptions
process, the exceptions reduction factor must be determined through
iteration.
In the August 30, 1991 final rule (56 FR 43517), we indicated
that we would publish each year the estimated payment factors

[[Page 47207]]

generated by the model to determine payments for the next 5 years.
The table below provides the actual factors for FYs 1992 through
2000, the final factors for FY 2001, and the estimated factors that
would be applicable through FY 2005. We caution that these are
estimates for FYs 2002 and later, and are subject to revisions
resulting from continued methodological refinements, receipt of
additional data, and changes in payment policy. We note that in
making these projections, we have assumed that the cumulative
national DRG/GAF budget neutrality adjustment factor will remain at
0.99933 (1.00508 for Puerto Rico) for FY 2001 and later because we
do not have sufficient information to estimate the change that will
occur in the factor for years after FY 2001.
The projections are as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal
Update Exceptions Budget DRG/GAF Outlier Federal rate (after
Fiscal year factor reduction neutrality adjustment adjustment rate outlier
factor factor factor \1\ factor adjustment reduction)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992......................................................... N/A 0.9813 0.9602 ........... .9497 ........... 415.59
1993......................................................... 6.07 .9756 .9162 .9980 .9496 ........... 417.29
1994......................................................... 3.04 .9485 .8947 1.0053 .9454 \2\ .9260 378.34
1995......................................................... 3.44 .9734 .8432 .9998 .9414 ........... 376.83
1996......................................................... 1.20 .9849 N/A .9994 .9536 \3\ .9972 461.96
1997......................................................... 0.70 .9358 N/A .9987 .9481 ........... 438.92
1998......................................................... 0.90 .9659 N/A .9989 .9382 \4\ .8222 371.51
1999......................................................... 0.10 .9783 N/A 1.0028 .9392 ........... 378.10
2000......................................................... 0.30 .9730 N/A .9985 .9402 ........... 377.03
2001......................................................... 0.90 .9785 N/A .9979 .9409 ........... 382.03
2002......................................................... 0.90 \6\ 1.0000 N/A \5\ 1.0000 \5\ .9409 ........... 393.94
2003......................................................... 0.90 \6\ 1.0000 N/A 1.0000 .9409 \4\ 1.0255 407.64
2004......................................................... 0.80 \6\ 1.0000 N/A 1.0000 .9409 ........... 410.90
2005......................................................... 0.90 \6\ 1.0000 N/A 1.0000 .9409 ........... 414.60
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Note: The incremental change over the previous year.
\2\ Note: OBRA 1993 adjustment.
\3\ Note: Adjustment for change in the transfer policy.
\4\ Note: Balanced Budget Act of 1997 adjustment.
\5\ Note: Future adjustments are, for purposes of this projection, assumed to remain at the same level.
\6\ Note: We are unable to estimate exceptions payments for the year under the special exceptions provision (Sec. 412.348(g) of the regulations)
because the regular exceptions provision (Sec. 412.348(e)) expires.

Appendix C: Recommendation of Update Factors for Operating Cost Rates
of Payment for Inpatient Hospital Services

I. Background

Several provisions of the Act address the setting of update
factors for inpatient services furnished in FY 2001 by hospitals
subject to the prospective payment system and by hospitals or units
excluded from the prospective payment system. Section
1886(b)(3)(B)(i)(XVI) of the Act sets the FY 2001 percentage
increase in the operating cost standardized amounts equal to the
rate of increase in the hospital market basket minus 1.1 percent for
prospective payment hospitals in all areas. Section
1886(b)(3)(B)(iv) of the Act sets the FY 2001 percentage increase in
the hospital-specific rates applicable to sole community and
Medicare-dependent, small rural hospitals equal to the rate set
forth in section 1886(b)(3)(B)(i) of the Act. For Medicare-
dependent, small rural hospitals, the percentage increase is the
same update factor as all other hospitals subject to the prospective
payment system, or the rate of increase in the market basket minus
1.1 percentage points. Section 406 of Public Law 106-113 amended
section 1886(b)(3)(B)(i) of the Act to provide that, for sole
community hospitals, the rate of increase for FY 2001 is equal to
the market basket percentage increase.
Under section 1886(b)(3)(B)(ii) of the Act, the FY 2001
percentage increase in the rate-of-increase limits for hospitals and
units excluded from the prospective payment system ranges from the
percentage increase in the excluded hospital market basket less a
percentage between 0 and 2.5 percentage points, depending on the
hospital's or unit's costs in relation to its limit for the most
recent cost reporting period for which information is available, or
0 percentage point if costs do not exceed two-thirds of the limit.
In accordance with section 1886(d)(3)(A) of the Act, we are
updating the standardized amounts, the hospital-specific rates, and
the rate-of-increase limits for hospitals and units excluded from
the prospective payment system as provided in section 1886(b)(3)(B)
of the Act. Based on the second quarter 2000 forecast of the FY 2001
market basket increase of 3.4 percent for hospitals and units
subject to the prospective payment system, the update to the
standardized amounts is 2.3 percent (that is, the market basket rate
of increase minus 1.1 percent percentage points) for hospitals in
both large urban and other areas. The update to the hospital-
specific rate applicable to Medicare-dependent, small rural
hospitals is also 2.3 percent. The update to the hospital-specific
rate applicable to sole community hospitals is 3.4 percent. The
update for hospitals and units excluded from the prospective payment
system can range from the percentage increase in the excluded
hospital market basket (currently estimated at 3.4 percent) minus a
percentage between 0 and 2.5 percentage points, or 0 percentage
point, resulting in an increase in the rate-of-increase limit
between 0.9 and 3.4 percent, or zero percent (see section V of the
Addendum of this final rule).
Section 1886(e)(4) of the Act requires that the Secretary,
taking into consideration the recommendations of the Medicare
Payment Advisory Commission (MedPAC), recommend update factors for
each fiscal year that take into account the amounts necessary for
the efficient and effective delivery of medically appropriate and
necessary care of high quality. Under section 1886(e)(5) of the Act,
we are required to publish the update factors recommended under
section 1886(e)(4) of the Act. Accordingly, we published the FY 2001
update factors recommended by the Secretary in Appendix D of the May
5, 2000 proposed rule (65 FR 26434). In its March 1, 2000 report,
MedPAC did not make a specific update recommendation for FY 2001
payments for Medicare acute inpatient hospitals. However, in its
June 1, 2000 report, which was issued after the May 5, 2000 proposed
rule, MedPAC recommended a combined operating and capital update for
hospital inpatient prospective payment system payments for FY 2001.
We describe the basis of our FY 2001 update recommendation in
Appendix D of the May 5, 2000 proposed rule at 65 FR 26434. Our
responses to the MedPAC recommendations concerning the update
factors for FY 2001 are discussed below in section II of this
Appendix.

II. Secretary's Recommendations

Under section 1886(e)(4) of the Act, in the May 5, 2000 proposed
rule, we recommended that an appropriate update factor for the
standardized amounts was 2.0 percentage points for hospitals located
in large urban and other areas. We also recommended an update of 2.0
percentage points to the hospital-specific rate for Medicare-
dependent, small rural hospitals. In addition, we recommended an
update of 3.1 percentage points to the hospital-specific rate for
sole community hospitals. We believed these recommended update
factors would ensure that Medicare acts as a prudent purchaser and
provide incentives to hospitals for increased efficiency, thereby
contributing to the solvency of the Medicare Part A Trust Fund.
Also in the proposed rule, we recommended that hospitals
excluded from the prospective payment system receive an update of
between 0.6 and 3.1 percentage

[[Page 47208]]

points, or zero percentage points. The update for excluded hospitals
and units is equal to the increase in the excluded hospital
operating market basket less a percentage between 0 and 2.5
percentage points, or 0 percentage points, depending on the
hospital's or unit's costs in relation to its rate-of-increase limit
for the most recent cost reporting period for which information is
available. For the proposed rule, the market basket rate of increase
for excluded hospitals and units was forecast at 3.1 percent.

III. MedPAC Recommendations for Updating the Prospective Payment System
Operating Standardized Amounts

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 operating and capital market basket
plus 0.6 percentage points and the increase in the combined
operating and capital market basket plus 1.1 percentage points).
MedPAC also notes that while the number of hospitals with negative
inpatient hospital margins have increased in FY 1998 (most likely as
the result of the implementation of Public Law 105-33), overall high
inpatient Medicare margins generally offset hospital losses on other
lines of Medicare services. MedPAC continues to project positive
(greater than 11 percentage points) Medicare inpatient hospital
margins through FY 2002.
MedPAC's FY 2001 combined operating and capital update framework
uses a weighted average of HCFA's forecasts of the operating
(prospective payment system input price index) and capital (CIPI)
market baskets. This combined market basket was used to develop an
estimate of the change in overall operating and capital prices.
MedPAC calculated a combined market basket forecast by weighting the
operating market basket forecast by 0.92 and the capital market
basket forecast by 0.08, since operating costs are estimated to
represent 92 percent of total hospital costs (capital costs are
estimated to represent the remaining 8 percent of total hospital
costs). MedPAC's combined market basket for FY 2001 is estimated to
increase by 2.9 percent, based on HCFA's March 2000 forecasted
operating market basket increase of 3.1 percent and HCFA's March
2000 forecasted capital market basket increase of 0.9 percent.
Response: As we stated in the May 5, 2000 proposed rule (65 FR
26317), we responded to a similar comment in the July 30, 1999 final
rule (64 FR 41552), the July 31, 1998 final rule (63 FR 41013), and
the September 1, 1995 final rule (60 FR 45816). In those rules, we
stated that our long-term goal was to develop a single update
framework for operating and capital prospective payments. However,
we have not yet developed such a single framework as the actual
operating system update has been determined by Congress through FY
2002. In the meantime, we intend to maintain as much consistency as
possible with the current operating framework in order to facilitate
the eventual development of a unified framework. We maintain our
goal of combining the update frameworks at the end of the 10-year
capital transition period (the end of FY 2001) and may examine
combining the payment systems post-transition. Because of the
similarity of the update frameworks, we believe that they could be
combined with little difficulty.
The update framework analysis is a largely empirical process
carried out by HCFA that quantifies changes in the hospital
productivity, scientific and technological advances, practice
pattern changes, hospital case mix, the effects of reclassification
on recalibration, and forecast error correction. The update
framework suggests an update for the prospective payment system
operating standardized amounts ranging from of 2.4 percent (market
basket minus 1 percent) to 2.9 percent (market basket minus 0.5
percent) is supported by the analyses outlined below.

A. Productivity

Service level productivity is defined as the ratio of total
service output to full-time equivalent employees (FTEs). While we
recognize that productivity is a function of many variables (for
example, labor, nonlabor material, and capital inputs), we use a
labor productivity measure since this update framework applies to
operating payment. To recognize that we are apportioning the short-
run output changes to the labor input and not considering the
nonlabor inputs, we weight our productivity measure for operating
costs by the share of direct labor services in the market basket to
determine the expected effect on cost per case.
Our recommendation for the service productivity component is
based on historical trends in productivity and total output for both
the hospital industry and the general economy, and projected levels
of future hospital service output. MedPAC's predecessor, the
Prospective Payment Assessment Commission (ProPAC), estimated
cumulative service productivity growth to be 4.9 percent from 1985
through 1989, or 1.2 percent annually. At the same time, ProPAC
estimated total output growth at 3.4 percent annually, implying a
ratio of service productivity growth to output growth of 0.35.
As stated in the proposed rule, since it was not possible at
that time to develop a productivity measure specific to Medicare
patients, we examined productivity (output per hour) and output
(gross domestic product) for the economy. Depending on the exact
time period, annual changes in productivity range from 0.3 to 0.35
percent of the change in output (that is, a 1.0 percent increase in
output would be correlated with a 0.3 to 0.35 percent change in
output per hour).
Under our framework, the recommended update is based in part on
expected productivity--that is, projected service output during the
year, multiplied by the historical ratio of service productivity to
total service output, multiplied by the share of labor in total
operating inputs, as calculated in the hospital market basket. This
method estimates an expected labor productivity improvement in the
same proportion to expected total service growth that has occurred
in the past and assumes that, at a minimum, growth in FTEs changes
proportionally to the growth in total service output. Thus, the
recommendation allows for unit productivity to be smaller than the
historical averages in years that output growth is relatively low
and larger in years that output growth is higher than the historical
averages. Based on the above estimates from both the hospital
industry and the economy, we have chosen to employ the range of
ratios of productivity change to output change of 0.30 to 0.35.
The expected change in total hospital service output is the
product of projected growth in total admissions (adjusted for
outpatient usage), projected real case-mix growth, expected quality-
enhancing intensity growth, and net of expected decline in intensity
due to reduction of cost-ineffective practice. Case-mix growth and
intensity numbers for Medicare are used as proxies for those of the
total hospital, since case-mix increases (used in the intensity
measure as well) are unavailable for non-Medicare patients. Thus,
expected output growth is simply the sum of the expected change in
intensity (0.0 percent), projected admissions change (1.6 percent
for FY 2001), and projected real case-mix growth (0.5 percent), or
2.1 percent. The share of direct labor services in the market basket
(consisting of wages, salaries, and employee benefits) is 61.4
percent.
Multiplying the expected change in total hospital service output
(2.1 percent) by the ratio of historical service productivity change
to total service growth of 0.30 to 0.35 and by the direct labor
share percentage 61.4, provides our productivity standard of -0.5 to
-0.4 percent. In past years, MedPAC made an adjustment for
productivity improvement to reflect the level of improvement in the
production of health care services, without affecting the quality of
those services. Typically, MedPAC made a downward adjustment in
their framework to reflect expected improvements in hospital
productivity. In their FY 2001 combined update framework, MedPAC did
not make an adjustment for productivity. Instead, MedPAC believes
that the costs associated with scientific and technological advances
should be financed partially through improvements in hospital
productivity. As a result, MedPAC offset its adjustment for
scientific and technological advances by a fixed standard of
expected productivity

[[Page 47209]]

growth of 0.5 percent for FY 2001. Our productivity adjustment of -
0.5 to -0.4 percent is within the range of MedPAC's fixed standard
of expected productivity growth of 0.5 percent used to offset its
scientific and technological advances adjustment for FY 2001.

B. Intensity

We base our intensity standard on the combined effect of three
separate factors: changes in the use of quality enhancing services,
changes in the use of services due to shifts in within-DRG severity,
and changes in the use of services due to reductions of cost-
ineffective practices. For FY 2001, we recommended an adjustment of
0.0 percent. The basis of this recommendation is discussed below. We
have no empirical evidence that accurately gauges the level of
quality-enhancing technology changes. A study published in the
Winter 1992 issue of the Health Care Financing Review,
"Contributions of case mix and intensity change to hospital cost
increases" (pp. 151-163), suggests that one-third of the intensity
change is attributable to high-cost technology. The balance was
unexplained but the authors speculated that it is attributable to
fixed costs in service delivery.
Typically, a specific new technology increases cost in some uses
and decreases cost in others. Concurrently, health status is
improved in some situations while in other situations it may be
unaffected or even worsened using the same technology. It is
difficult to separate out the relative significance of each of the
cost-increasing effects for individual technologies and new
technologies.
Other things being equal, per-discharge fixed costs tend to
fluctuate in inverse proportion to changes in volume. Fixed costs
exist whether patients are treated or not. If volume is declining,
per-discharge fixed costs will rise, but the reverse is true if
volume is increasing.
Following methods developed by HCFA's Office of the Actuary for
deriving hospital output estimates from total hospital charges, we
have developed Medicare-specific intensity measures based on a 5-
year average using FYs 1995 through 1999 MedPAR billing data. Case-
mix constant intensity is calculated as the change in total Medicare
charges per discharge adjusted for changes in the average charge per
unit of service as measured by the CPI for hospital and related
services and changes in real case-mix. Thus, in order to measure
changes in intensity, one must measure changes in real case-mix.
For FYs 1995 through 1999, observed case-mix index change ranged
from a low of -0.3 percent to a high of 1.7 percent, with a 5-year
average change of 0.6 percent. Based on evidence from past studies
of case-mix change, we estimate that real case-mix change fluctuates
between 1.0 and 1.4 percent and the observed values generally fall
in this range, although some years the figures fall outside this
range. The average percentage change in charge per discharge was 3.6
percent and the average annual change in the CPI for hospital and
related services was 4.1 percent. Dividing the change in charge per
discharge by the quantity of the real case-mix index change and the
CPI for hospital and related services yields an average annual
change in intensity of -1.9 percent. Assuming the technology/fixed
cost ratio still holds (.33), technology would account for a -0.6
percent annual decline while fixed costs would account for a -1.3
percent annual decline. The decline in fixed costs per discharge
makes intuitive sense as volume, measured by total discharges, has
increased during the period. In the past, we have not recommended a
negative intensity adjustment. Although we did not recommend a
negative adjustment for FY 2001, we reflected the possible range
that such a negative adjustment could span, based on our analysis.
Accordingly, for FY 2001, we recommended an intensity adjustment
between 0 percent and -0.6 percent.
MedPAC does not make an adjustment for intensity per se, but its
combined update recommendation for FY 2001 includes two categories
that we consider to be comparable with our intensity recommendation.
MedPAC is recommending a 0.0 to 0.5 percent update for scientific
and technological advances to account for anticipated uses of
emerging technologies that enhance the quality of hospital services,
but increase costs of hospital care. The Commission recognized an
allowance for science and technological advances of 0.5 percent to
1.0 percent. However, with their productivity offset of 0.5 percent,
MedPAC's combined FY 2001 adjustment for science and technological
advances is 0.0 percent to 0.5 percent.
MedPAC's recommendation also takes into account the increasingly
apparent trend of some acute care providers to shift care to a post
acute care facility. While this can occur for many reasons and the
shifting of costs may maintain or improve quality of care for
Medicare beneficiaries, it leads to a redistribution of payments and
reduces the resources available for acute care providers to pay for
services to other Medicare beneficiaries. In the past two years,
MedPAC recommended a negative adjustment for site-of-care
substitution or unbundling of the payment unit. However, in light of
the financial pressures in the hospital industry during FYs 1998-
1999 since the implementation of Public Law 105-33, MedPAC
recommends a 0.0 percent adjustment for site-of-care substitution
for FY 2001. We agree with MedPAC that the site-of-care substitution
effect is real and that it is accounted for by our intensity
recommendation.

C. Change in Case-Mix

Our analysis takes into account projected changes in case-mix,
adjusted for changes attributable to improved coding practices. For
our FY 2001 update recommendation, we projected a 0.5 percent
increase in the case-mix index. We defined real case-mix as actual
changes in the mix (and resource requirements) of Medicare patients
as opposed to changes in coding behavior that results in assignment
of cases to higher weighted DRGs, but do not reflect greater
resource requirements. Unlike in past years, where we differentiated
between "real" case-mix increase and increases attributable to
changes in coding behavior, we do not feel changes in coding
behavior will impact the overall case-mix in FY 2001. As such, for
FY 2001, we estimate that real case-mix is equal to projected change
in case-mix. Thus, we recommended a 0.0 adjustment for case-mix.
MedPAC's analysis indicates that coding change has reduced case-
mix index growth. In the past, MedPAC has recommended a negative
adjustment when DRG coding changes has led to case-mix index growth.
However, MedPAC now believes that it is appropriate to include a
positive adjustment for DRG coding change in the FY 2001 update and
recommends a combined adjustment of 0.5 percent.
MedPAC also makes an adjustment for within DRG severity. In past
years, MedPAC has included an adjustment for increased case
complexity not captured by the DRG classification system. The
Commission recognizes that as the DRG system adjusts, it should
account for more of the variation in costs by DRG assignment,
leaving less within-DRG variation in case complexity and costliness.
Therefore, MedPAC recommended a combined adjustment of 0.0 for FY
2001. As a result, for FY 2001, MedPAC recommends a total combined
case-mix adjustment of 0.5 percent.

D. Effect of FY 1999 DRG Reclassification and Recalibration

We estimate that DRG reclassification and recalibration for FY
1999 resulted in a 0.0 percent change in the case-mix index when
compared with the case-mix index that would have resulted if we had
not made the reclassification and recalibration changes to the
GROUPER.

E. Forecast Error Correction

We make a forecast error correction if the actual market basket
changes differ from the forecasted market basket by 0.25 percentage
points or more. There is a 2-year lag between the forecast and the
measurement of forecast error. Our proposed update framework for FY
2001 did not reflect a forecast error correction because, for FY
1999, there was less than a 0.25 percentage point difference between
the actual market basket and the forecasted market basket.
MedPAC also made a recommendation in its FY 2001 combined update
framework to adjust for any error in the market basket forecasts
used to set FY 1999 payment rates.
MedPAC recommended a combined adjustment for FY 1999 forecast
error correction of 0.1 percent. However, they noted that this
forecast error adjustment is a result of the difference between the
forecasted FY 1999 operating market basket of 2.4 percent and the
actual FY 1999 operating market basket increase of 2.5 percent. The
FY 1999 capital market basket forecast was equal to the actual
observed increase of 0.7 percent for capital costs. Therefore, we
have included MedPAC's entire 0.1 percent adjustment for FY 1999
forecast error correction in the comparison of MedPAC and HCFA's
update recommendations for FY 2001 shown below in Table 1.

F. One Time Factors

MedPAC includes an adjustment for one-time factors in its update
framework to

[[Page 47210]]

account for significant costs incurred by hospitals for unusual
nonrecurring events. While MedPAC's update framework has not
explicitly considered such costs in the past, the Commission
believes Medicare should aid hospitals when incurring systematic and
substantial one-time costs will improve care for Medicare
beneficiaries. For its FY 2001 update recommendation, MedPAC
considered the costs of year 2000 improvements and the costs of
major new regulatory requirements. The Commission did not recommend
any additional allowance for these costs for FY 2001. Accordingly,
MedPAC recommended a 0.0 percent combined adjustment for one-time
factors in their update framework for FY 2001.
HCFA's update framework does not include an adjustment for one-
time factors. As we mentioned in last year's proposed rule, higher
input prices that hospitals incur to convert computer systems to be
compliant on January 1, 2000, were accounted for through the market
basket percentage increase.

Table 1.--Comparison of FY 2001 Update Recommendations
----------------------------------------------------------------------------------------------------------------
HCFA MedPAC
----------------------------------------------------------------------------------------------------------------
Market basket......................... MB MB\1\
----------------------------------------------------------------------------------------------------------------
Policy Adjustment Factors
----------------------------------------------------------------------------------------------------------------
Productivity.......................... -0.5 to -0.4 (\2\)
Site-Of-Service Substitution.......... (\3\) 0.0
Intensity............................. 0.0 to -0.6 ...................................
Science & Technology.................. ................................... 0.0 to 0.5
Practice Patterns..................... ................................... (\4\)
Real Within DRG Change................ ................................... (\5\)
-------------------------------------------------------------------------
Subtotal...................... -0.5 to -1.0 0.0 to 0.5
----------------------------------------------------------------------------------------------------------------
Case-Mix Adjustment Factors
----------------------------------------------------------------------------------------------------------------
Projected Case-Mix Change............. -0.5 ...................................
Real Across DRG Change................ 0.5 0.5
Real Within DRG Change................ (\3\) 0.0
-------------------------------------------------------------------------
Subtotal...................... 0.0 0.5
=========================================================================
Effect of FY 1999 Reclassification and 0.0 ...................................
Recalibration.
Forecast Error Correction............. 0.0 0.1
-------------------------------------------------------------------------
Total Recommendation Update....... MB -0.5 to MB -1.0 MB\1\ ⁺ 0.6 to MB\1\ +1.1
----------------------------------------------------------------------------------------------------------------
\1\ Used HCFA's March 2000 operating market basket forecast in its combined update recommendation.
\2\ Included in MedPAC's Science and Technology Adjustment.
\3\ Included in HHS' Intensity Factor.
\4\ Included in MedPAC's Productivity Measure in its Science and Technology Adjustment.
\5\ Included in MedPAC's Case-Mix Adjustment.

MedPAC's combined update recommendation of between 3.5 percent
and 4.0 percent for FY 2001 operating and capital payments is higher
than the current law amount as set forth by Public Law 105-33 and
the amount in the proposed rule. While the above analysis would
support a recommendation that the update be between than the
operating market basket minus 0.5 percentage points and the
operating market basket minus 1.0 percentage points, consistent with
current law we recommended an update of market basket increase minus
1.1 percentage points (or 2.3 percent). We note that this
approximates the lower bound of the range suggested by our framework
when accounting for a negative intensity change.

IV. Secretary's Final Recommendations for Updating the Prospective
Payment System Standardized Amounts

In recommending an update, the Secretary takes into account the
factors in the update framework, as well as other factors such as
the recommendations of MedPAC, the long-term solvency of the
Medicare Trust Funds, and the capacity of the hospital industry to
continually provide access to high-quality care to Medicare
beneficiaries through adequate reimbursement to health care
providers.
To ensure that beneficiaries continue to have access to high-
quality care and to allow more time to assess the full impact of
Public Law 105-33 and Public Law 106-113, the Secretary recommends
an update of 3.4 percent (full market basket) for FY 2001. We note
that this recommendation requires a change in law. The FY 2001
President's Budget Mid-Session Review, released on June 26, 2000,
included a proposal to provide for the full market basket update for
FY 2001. We will continue to evaluate our current framework to
ensure that the recommended update appropriately reflects current
trends in health care delivery and that Medicare acts as a prudent
purchaser providing incentives to hospitals for increased
efficiency, thereby contributing to the solvency of the Medicare
Part A Trust Fund.
We received one comment concerning our proposed update
recommendation.
Comment: One commenter stated that the continual update and
routine replacement of procedures with more sophisticated, higher
cost procedures is not picked up within the HCFA pricing system,
particularly the use of pharmaceuticals and other scientific and
technological advances. The commenter argued that the market basket
minus 1.1 percent update for FY 2001 does not recognize the true
impact of these factors on hospital-based payments, noting that from
FYs 1998 through 2000 the cumulative market basket rose
significantly higher than the Medicare operating prospective payment
system updates, which were mandated by Public Law 105-33.
Response: By design, the market basket captures only the pure
price change of inputs such as labor, materials, and capital that
are used to produce a constant quantity and quality of care. This is
done using price proxies that reflect the prices of the major inputs
hospitals utilize in providing care. For pharmaceuticals, the price
proxy used is the Producer Price Index (PPI) for pharmaceutical
preparations produced by Bureau of Labor Statistics. This price
proxy captures the price change of `new' pharmaceuticals after they
are introduced and the price changes between new drugs that replace
existing drugs or generic drugs that replace brand-name drugs.
The market basket appropriately does not recognize the
introduction or the increased

[[Page 47211]]

utilization of `new' scientific and technological advances. Instead,
these factors, including the increased use of `new' pharmaceutical
drugs, would be reflected in the intensity adjustment of the update
framework. Our intensity standard is partly based on changes in the
use of quality enhancing services or technology changes (along with
changes in case-mix). HCFA's update recommendation uses this
adjustment to account for the additional costs of adopting and
utilizing new advances that an efficient provider would face in
providing a high quality of patient care.

[FR Doc. 00-19108 Filed 7-31-00; 8:45 am]
BILLING CODE 4120-01-P

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