[Federal Register: May 4, 2001 (Volume 66, Number 87)]
[Proposed Rules]
[Page 22645-22694]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04my01-34]
Table of Contents
Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2002 Rates; Proposed Rule  

  
I. Background

  
 II. Proposed Changes to DRG Classifications and Relative Weights
  
 III. Proposed Changes to the Hospital Wage Index
  
IV. Other Decisions and Proposed Changes to the Prospective Payment
System for Inpatient Operating Costs and Graduate Medical Education
Costs
  
V. Proposed Changes to the Prospective Payment System for Capital-
Related Costs
  
VI. Proposed Changes for Hospitals and Hospital Units Excluded From
the Prospective Payment System

  
VII. MedPAC Recommendations
  
VIII. Other Required Information

 Tables

  Note: For purposes of
this proposed rule, and to avoid confusion, we have retained the
designations of Tables 1 through 5 that were first used in the
September 1, 1983 initial prospective payment final rule (48 FR 39844).
Tables 1A, 1C, 1D, 2, 3A, 3B, 4A, 4B, 4C, 4F, 4G, 4H, 5, 6A, 6B, 6C,
6D, 6E, 6F, 6G, 6H, 7A, 7B, 8A, and 8B are presented below. The tables
presented below are as follows: 
 

  
Table 1A--National Adjusted Operating Standardized 
    Amounts, Labor/ Nonlabor

  
Table 1C--Adjusted Operating Standardized 
    Amounts for Puerto Rico, Labor/Nonlabor
  
Table 1D--Capital Standard Federal Payment 
    Rate
  
Table 2--Hospital Average Hourly Wage for Federal Fiscal Years 2000 (1996 Wage Data), 2001 (1997 Wage Data) and
             2002 (1998 Wage Data) Wage Indexes and 3-Year Average of Hospital Average Hourly Wages
  
Table 3A--3-Year Average Hourly Wage for Urban Areas
  
Table 3A--3-Year Average Hourly Wage for Rural Areas
  
Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas

  
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas
  
Table 4C--Wage Index and Capital Geographic 
    Adjustment Factor (GAF) for Hospitals That Are Reclassified
  
Table 4F--Puerto Rico Wage Index and Capital 
    Geographic Adjustment Factor (GAF)
  
Table 4G--Pre-Reclassified Wage Index for Urban Areas
  
Table 4H--Pre-Reclassified Wage Index for Urban Areas
  
Table 5--List of Diagnosis Related Groups 
    (DRGs), Relative Weighting Factors, Geometric and Arithmetic Mean Length of 
    Stay 

  
Table 6A--New Diagnosis Codes
  
Table 6B--New Procedure Codes
  
Table 6C--Invalid Diagnosis Codes
  
Table 6D--Invalid Procedure Codes
  
Table 6E--Revised Diagnosis Code Titles
  
Table 6F--Revised Procedure Codes
  
Table 6H--Deletions to the CC Exclusions List
  
Table 7A--Medicare Prospective Payment System, Selected Percentile Lengths of Stay [FY2000 MEDPAR update 12/00 Grouper V18.0]
  
Table 7B--Medicare Prospective Payment System, Selected Percentile Lengths of Stay [FY2000 MEDPAR update 12/00 Grouper V19.0]
  
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for Urban and Rural Hospitals (Case Weighted) March 2001
  
Table 8b.--Statewide Average Capital Cost-to-Charge 
    Ratios (Case Weighted) March 2001

Appendices 


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


[[Page 22645]]

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Part II

Department of Health and Human Services

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Health Care Financing Administration

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42 CFR Parts 405, 412, 413, etc.

Medicare Program; Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 2002 Rates; Proposed Rule

[[Page 22646]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 405, 412, 413, 485, and 486

[HCFA-1158-P]
RIN 0938-AK73


Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2002 Rates

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

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient
prospective payment systems for operating and capital costs to:
Implement applicable statutory requirements, including a number of
provisions of the Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 (Public Law 106-554); and implement changes
arising from our continuing experience with these systems. In addition,
in the Addendum to this proposed rule, we are describing proposed
changes to the amounts and factors used to determine the rates for
Medicare hospital inpatient services for operating costs and capital-
related costs. These changes would be applicable to discharges
occurring on or after October 1, 2001. We also are setting forth
proposed rate-of-increase limits as well as proposed policy changes for
hospitals and hospital units excluded from the prospective payment
systems.
    We also are proposing changes to the policies governing payments to
hospitals for the direct costs of graduate medical education and
critical access hospitals.

DATES: Comments will be considered if received at the appropriate
address, as provided below, no later than 5 p.m. on July 3, 2001.

ADDRESSES: Mail written comments (an original and three copies) to the
following address ONLY: Health Care Financing Administration,
Department of Health and Human Services, Attention: HCFA-1158-P, P.O.
Box 8010, Baltimore, MD 21244-1850.
    If you prefer, you may deliver by courier your written comments (an
original and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or

Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, MD
21244-1850.

    Comments mailed to those addresses specified as appropriate for
courier delivery may be delayed and could be considered late.
    Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-1158-P.
    For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.
    For comments that relate to information collection requirements,
mail a copy of comments to the following addresses:

Health Care Financing Administration, Office of Information Services,
Security and Standards Group, Division of HCFA Enterprise Standards,
Room N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.
Attn: John Burke, HCFA-1158-P; and

Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 3001, New Executive Office Building, Washington, DC 20503,
Attn: Allison Herron Eydt, HCFA Desk Officer.

FOR FURTHER INFORMATION CONTACT:
Steve Phillips, (410) 786-4548, Operating Prospective Payment,
Diagnosis-Related Groups (DRGs), Wage Index, Hospital Geographic
Reclassifications, and Sole Community Hospital Issues

Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, Graduate Medical Education and Critical Access Hospital
Issues

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments

    Comments received timely will be available for public inspection as
they are received, generally beginning approximately 3 weeks after
publication of a document, in Room C5-12-08 of the Health Care
Financing Administration, 7500 Security Blvd., Baltimore, MD, on Monday
through Friday of each week from 8:30 a.m. to 5 p.m. Please call (410)
786-7197 to arrange to view these comments.

Availability of Copies and Electronic Access

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I. Background

A. Summary

    Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. Section 1886(g) of the Act requires the
Secretary to pay for the capital-related costs of hospital inpatient
stays under a prospective payment system. Under these prospective
payment systems, Medicare payment for hospital inpatient operating and
capital-related costs is made at predetermined, specific rates for each
hospital discharge. Discharges are classified according to a list of
diagnosis-related groups (DRGs).
    Under section 1886(d)(1)(B) of the Act in effect without
consideration of the amendments made by the Balanced Budget Act of 1997
(Public Law 105-33), the Balanced Budget Refinement Act of 1999 (Public
Law 106-113, and the recent Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (Public Law 106-554, enacted on
December 21, 2000), certain specialty hospitals are excluded from the
hospital inpatient prospective payment system: Psychiatric hospitals
and units, rehabilitation hospitals and

[[Page 22647]]

units, children's hospitals, long-term care hospitals, and cancer
hospitals. For these hospitals and units, Medicare payment for
operating costs is based on reasonable costs subject to a hospital-
specific annual limit, until the payment provisions of Public Laws 105-
33, 106-113, and 106-554 that are applicable to three classes of these
hospitals are implemented, as discussed below.
    Various sections of Public Laws 105-33, 106-113, and 106-554
provide for the transition of rehabilitation hospitals and units,
psychiatric hospitals and units, and long-term care hospitals from
being paid on an excluded hospital basis to being paid on an individual
prospective payment system basis. These provisions are as follows:
     Rehabilitation Hospitals and Units. Section 1886(j) of the
Act, as added by section 4421 of Public Law 105-33 and amended by
section 125 of Public Law 106-113 and section 305 of Public Law 106-
554, authorizes the implementation of a prospective payment system for
inpatient hospital services furnished by rehabilitation hospitals and
units. Section 4421 of Public Law 105-33 amended the Act by adding
section 1886(j). Section 1886(j) of the Act provides for a fully
implemented prospective payment system for inpatient rehabilitation
hospitals and rehabilitation units, effective for cost reporting
periods beginning on or after October 2002, with payment provisions
during a transitional period of October 1, 2000 to October 1, 2002
based on target amounts specified in section 1886(b) of the Act.
Section 125 of Public Law 106-113 amended section 1886(j) of the Act to
require the Secretary to use a discharge as the payment unit for
inpatient rehabilitation services under the prospective payment system
and to establish classes of patient discharges by functional-related
groups. Section 305 of Public Law 106-554 further amended section
1886(j) of the Act to allow hospitals to elect to be paid the full
Federal prospective payment rather than the transitional period
payments specified in the Act. A brief discussion of the November 3,
2000 proposed rule (65 FR 66304) that we issued to propose
implementation of the prospective payment system for inpatient
rehabilitation hospitals and rehabilitation units is included under
section VI.A.4. of this preamble.
     Psychiatric Hospitals and Units. Sections 124(a) and (c)
of Public Law 106-113 provide for the development of a per diem
prospective payment system for payment for inpatient hospital services
of psychiatric hospitals and units under the Medicare program,
effective for cost reporting periods beginning on or after October 1,
2002. This system must include an adequate patient classification
system that reflects the differences in patient resource use and costs
among these hospitals and must maintain budget neutrality. We are in
the process of developing a proposed rule, to be followed by a final
rule, to implement the prospective payment system for psychiatric
hospitals and units, effective for October 1, 2002.
     Long-Term Care Hospitals. Sections 123(a) and (c) of
Public Law 106-113 provide for the development of a per discharge
prospective payment system for payment for inpatient hospital services
furnished by long-term care hospitals under the Medicare program,
effective for cost reporting periods beginning on or after October 1,
2002. Section 307(b)(1) of Public Law 106-554 provides that payments
under the long-term care prospective payment system will be made on a
prospective payment basis rather than a cost basis. The long-term care
hospital prospective payment system must include a patient
classification system that reflects the differences in patient resource
use and costs, and must maintain budget neutrality. We are planning to
develop a proposed rule, to be followed by a final rule, to implement
the prospective payment system for long-term care hospitals, effective
for October 1, 2002. Section 307 of Public Law 106-554 provides that if
the Secretary is unable to develop a prospective payment system for
long-term care hospitals that can be implemented by October 1, 2002,
the Secretary must implement a prospective payment system that bases
payment under the system using the existing acute hospital DRGs,
modified where feasible to account for resource use of long-term care
hospital patients using the most recently available hospital discharge
data for long-term care services.
    Under sections 1820 and 1834(g) of the Act, payments are made to
critical access hospitals (CAHs) (that is, rural hospitals or
facilities that meet certain statutory requirements) for inpatient and
outpatient services on a reasonable cost basis. Reasonable cost is
determined under the provisions of section 1861(v)(1)(A) of the Act and
existing regulations under Parts 413 and 415.
    Under section 1886(a)(4) of the Act, costs of approved educational
activities are excluded from the operating costs of inpatient hospital
services. Hospitals with approved graduate medical education (GME)
programs are paid for the direct costs of GME in accordance with
section 1886(h) of the Act; the amount of payment for direct GME costs
for a cost reporting period is based on the hospital's number of
residents in that period and the hospital's costs per resident in a
base year.
    The regulations governing the hospital inpatient prospective
payment system are located in 42 CFR Part 412. The regulations
governing excluded hospitals and hospital units are located in Parts
412 and 413. The regulations governing GME payments and payments to
CAHs are located in Part 413.
    On August 1, 2000, we published a final rule in the Federal
Register (65 FR 47054) that implemented both statutory requirements and
other changes to the Medicare hospital inpatient prospective payment
systems for both operating costs and capital-related costs, as well as
changes addressing payment for excluded hospitals and payments for GME
costs. Generally, these changes were effective for discharges occurring
on or after October 1, 2000. On March 2, 2001, we published correction
notices in the Federal Register (66 FR 13020) relating to the
calculation of certain wage indexes and the labeling of certain DRGs.
    Public Law 106-554 made a number of changes to the Act relating to
prospective payments to hospitals for inpatient services and payments
to excluded hospitals. This proposed rule would implement amendments
enacted by Public Law 106-554 relating to FY 2002 payments for hospital
inpatient services, new medical services and technology, GME costs, the
payment adjustment for disproportionate share hospitals (DSHs), the
indirect medical education (IME) adjustment for teaching hospitals,
sole community hospitals (SCHs), and CAHs. It would also implement
changes affecting hospitals' geographic reclassifications and wage
index. These changes are addressed in sections II., III., IV., and VI.
of this preamble.
    Other provisions of Public Law 106-554 that relate to Medicare
payments to hospitals effective prior to October 1, 2001 (that is, for
FY 2001 or for the period between April 1, 2001 and September 30,
2001), are addressed in a separate interim final rule with comment
period (HCFA-1178-IFC).

B. Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the
Medicare hospital inpatient prospective payment systems for operating
costs and for capital-related costs in FY 2002. We also are proposing
changes relating to payments for GME costs and payments to excluded
hospitals and units and CAHs. The proposed changes would be

[[Page 22648]]

effective for discharges occurring on or after October 1, 2001.
    The following is a summary of the major changes that we are
proposing to make:
1. Proposed Changes to the DRG Reclassifications and Recalibrations of
Relative Weights
    As required by section 1886(d)(4)(C) of the Act, we adjust the DRG
classifications and relative weights annually. Based on analyses of
Medicare claims data, we are proposing to establish a number of new
DRGs and make changes to the designation of diagnosis and procedure
codes under other existing DRGs. Our proposed changes for FY 2002 are
set forth in section II. of this preamble.
    We also address the provisions of section 533 of Public Law 106-544
regarding development of a mechanism for adequate payment for new
medical services and technologies and the required report to Congress
on expeditiously introducing new medical services and technology into
the DRGs.
2. Proposed Changes to the Hospital Wage Index
    In section III. of this preamble, we discuss proposed revisions to
the wage index and the annual update of the wage data. Specific issues
addressed in this section include the following:
     The FY 2002 wage index update, using FY 1998 wage data.
     The transition to excluding from the wage index Part A
physician wage costs that are teaching-related, as well as resident and
Part A certified registered nurse anesthetist (CRNA) costs.
     The costs of contracted pharmacy and laboratory services.
     The collection of occupational mix data, as required by
section 304(c) of Public Law 106-554.
     Revisions to the wage index based on hospital
redesignations and reclassifications, including changes to reflect the
provisions of sections 304(a) and (b) of Public Law 106-554 relating to
3-year wage index reclassifications by the MGCRB, the use of 3 years of
wage data for evaluating reclassification requests for FYs 2003 and
later, and the application of a statewide wage index for
reclassifications beginning in FY 2003.
     Requests for wage data corrections and modification of the
process and timetable for updating the wage index, and a proposed
revision of that timetable.
3. Other Decisions and Proposed Changes to the Prospective Payment
System for Inpatient Operating and Graduate Medical Education Costs
    In section IV. of this preamble, we discuss several provisions of
the regulations in 42 CFR Parts 412 and 413 and set forth certain
proposed changes concerning the following:
     Sole community hospitals.
     Rural referral centers.
     Changes relating to the IME adjustment as a result of
section 302 of Public Law 106-554.
     Changes relating to the DSH adjustment as a result of
section 303 of Public Law 106-554.
     The establishment of policies relating to the 3-year
application of wage index reclassifications by the MGCRB, the use of 3
years of wage data in evaluating reclassification requests to the MGCRB
for FYs 2003 and later, and the use of a statewide wage index for
reclassifications beginning in FY 2003, as required by sections 304(a)
and (b) of Public Law 106-554.
     Proposed requirements for additional payments for new
medical services and technology, as required by section 533(b) of
Public Law 106-554.
     Changes relating to payment for the direct costs of GME,
including changes as a result of section 511 of Public Law 106-554.
4. Prospective Payment System for Capital-Related Costs
    In section V. of this preamble, we specify the proposed payment
requirements for capital-related costs, including the special
exceptions payment, beginning October 1, 2002.
5. Proposed Changes for Hospitals and Hospital Units Excluded from the
Prospective Payment Systems
    In section VI. of this preamble, we discuss the following proposals
concerning excluded hospital and hospital units and CAHs:
     Limits on and adjustments to the proposed target amounts
for FY 2002.
     Revision of the methodology for wage neutralizing the
hospital-specific target amounts using preclassified wage data.
     Updated caps for new excluded hospitals and units as well
as changes in the effective date of classifications of excluded
hospitals and units.
     The prospective payment system for inpatient
rehabilitation hospitals and units.
     Payments to CAHs, including exclusion from the payment
window requirements; the availability of CRNA pass-through payments;
payment for emergency room on-call physicians; treatment of ambulance
services; the use of certain qualified practitioners for preanesthesia
and postanesthesia evaluations; and clarification of location
requirements for CAHs.
6. Determining Prospective Payment Operating and Capital Rates and
Rate-of-Increase Limits
    In the Addendum to this proposed rule, we set forth proposed
changes to the amounts and factors for determining the FY 2002
prospective payment rates for operating costs and capital-related
costs. We also establish the proposed threshold amounts for outlier
cases. In addition, we address update factors for determining the rate-
of-increase limits for cost reporting periods beginning in FY 2002 for
hospitals and hospital units excluded from the prospective payment
system.
7. Impact Analysis
    In Appendix A, we set forth an analysis of the impact that the
proposed changes described in this proposed rule would have on affected
entities.
8. Capital Acquisition Model
    Appendix B contains the technical appendix on the proposed FY 2002
capital cost model.
9. Report to Congress on the Update Factor for Hospitals Under the
Prospective Payment System and Hospitals and Units Excluded From the
Prospective Payment System
    Section 1886(e)(3) of the Act requires the Secretary to report to
Congress on our initial estimate of a recommended update factor for FY
2002 for payments to hospitals included in the prospective payment
systems, and hospitals excluded from the prospective payment systems.
This report is included as Appendix C to this proposed rule.
10. Proposed Recommendation of Update Factor for Hospital Inpatient
Operating Costs
    As required by sections 1886(e)(4) and (e)(5) of the Act, Appendix
D provides our recommendation of the appropriate percentage change for
FY 2002 for the following:
     Large urban area and other area average standardized
amounts (and hospital-specific rates applicable to sole community and
Medicare-dependent, small rural hospitals) for hospital inpatient
services paid for under the prospective payment system for operating
costs.
     Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals

[[Page 22649]]

and hospital units excluded from the prospective payment system.
11. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, the Medicare Payment Advisory
Commission (MedPAC) is required to submit a report to Congress, not
later than March 1 of each year, that reviews and makes recommendations
on Medicare payment policies. This annual report makes recommendations
concerning hospital inpatient payment policies. In section VII. of this
preamble, we discuss the MedPAC recommendations and any actions we are
proposing to take with regard to them (when an action is recommended).
For further information relating specifically to the MedPAC March 1
report or to obtain a copy of the report, contact MedPAC at (202) 653-
7220 or visit MedPAC's website at: www.medpac.gov.

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

    Under the prospective payment system, we pay for inpatient hospital
services on a rate per discharge basis that varies according to the DRG
to which a beneficiary's stay is assigned. The formula used to
calculate payment for a specific case takes an individual hospital's
payment rate per case and multiplies it by the weight of the DRG to
which the case is assigned. Each DRG weight represents the average
resources required to care for cases in that particular DRG relative to
the average resources used to treat cases in all DRGS.
    Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
at least annually. These adjustments are made to reflect changes in
treatment patterns, technology, and any other factors that may change
the relative use of hospital resources. The proposed changes to the DRG
classification system, and the proposed recalibration of the DRG
weights for discharges occurring on or after October 1, 2001, are
discussed below.

B. DRG Reclassification

1. General
    Cases are classified into DRGs for payment under the prospective
payment system based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay, as well
as age, sex, and discharge status of the patient. The diagnosis and
procedure information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM). Medicare fiscal intermediaries enter the
information into their claims processing systems and subject it to a
series of automated screens called the Medicare Code Editor (MCE).
These screens are designed to identify cases that require further
review before classification into a DRG.
    After screening through the MCE and any further development of the
claims, cases are classified into the appropriate DRG by the Medicare
GROUPER software program. The GROUPER program was developed as a means
of classifying each case into a DRG on the basis of the diagnosis and
procedure codes and demographic information (that is, sex, age, and
discharge status). It is used both to classify past cases in order to
measure relative hospital resource consumption to establish the DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights.
    In the July 30, 1999 final rule (64 FR 41500), we discussed a
process for considering non-MedPAR data in the recalibration process.
In order for the use of particular data to be feasible, we must have
sufficient time to evaluate and test the data. The time necessary to do
so depends upon the nature and quality of the data submitted.
Generally, however, a significant sample of the data should be
submitted by August 1, approximately 8 months prior to the publication
of the proposed rule, so that we can test the data and make a
preliminary assessment as to the feasibility of using the data.
Subsequently, a complete database should be submitted no later than
December 1 for consideration in conjunction with the next year's
proposed rule.
    Currently, cases are assigned to one of 503 DRGs (including one DRG
for a diagnosis that is invalid as a discharge diagnosis and one DRG
for ungroupable diagnoses) in 25 major diagnostic categories (MDCs).
Most MDCs are based on a particular organ system of the body (for
example, MDC 6 (Diseases and Disorders of the Digestive System)).
However, some MDCs are not constructed on this basis because they
involve multiple organ systems (for example, MDC 22 (Burns)).
    In general, cases are assigned to an MDC based on the principal
diagnosis, before assignment to a DRG. However, there are five DRGs to
which cases are directly assigned on the basis of procedure codes.
These are the DRGs for liver, bone marrow, and lung transplants (DRGs
480, 481, and 495, respectively) and the two DRGs for tracheostomies
(DRGs 482 and 483). Cases are assigned to these DRGs before
classification to an MDC.
    Within most MDCs, cases are then divided into surgical DRGs (based
on a surgical hierarchy that orders individual procedures or groups of
procedures by resource intensity) and medical DRGs. Medical DRGs
generally are differentiated on the basis of diagnosis and age. Some
surgical and medical DRGs are further differentiated based on the
presence or absence of complications or comorbidities (CC).
    Generally, the GROUPER does not consider other procedures; that is,
nonsurgical procedures or minor surgical procedures generally not
performed in an operating room are not listed as operating room (OR)
procedures in the GROUPER decision tables. However, there are a few
non-OR procedures that do affect DRG assignment for certain principal
diagnoses, such as extracorporeal shock wave lithotripsy for patients
with a principal diagnosis of urinary stones.
    The major changes we are proposing to make to the DRG
classification system for FY 2002 are summarized in Charts 1, 2, and 3
below, followed by detailed discussions in individual sections
according to MDC assignment. Other issues concerning DRGs are also set
forth below. Unless otherwise noted, our DRG analysis is based on data
from 100 percent of the FY 2000 MedPAR file containing hospital bills
received through May 31, 2000 for discharges in FY 2000.

[[Page 22650]]

        Chart 1.--Summary of Proposed Changes in DRG Assignments
------------------------------------------------------------------------
                                                Added  as
       Diagnosis related groups (DRGs)             new         Removed
------------------------------------------------------------------------
Pre-MDC:
    DRG 512 (Simultaneous Pancreas/Kidney               X
     Transplant)............................
    DRG 513 (Pancreas Transplants)..........            X
MDC 5 (Diseases and Disorders of the
 Circulatory System):
    DRG 112 (Percutaneous Cardiovascular                              X
     Procedures)............................
    DRG 514 (Cardiac Defibrillator Implant              X
     with Cardiac Catheterization)..........
    DRG 515 (Cardiac Defibrillator Implant              X
     without Cardiac Catheterization).......
    DRG 516 (Percutaneous Cardiovascular                X
     Procedures with Acute Myocardial
     Infarction (AMI))......................
    DRG 517 (Percutaneous Cardiovascular                X
     Procedures without AMI, with Coronary
     Artery Stent Implant...................
    DRG 518 (Percutaneous Cardiovascular                X
     Procedures without AMI, without
     Coronary Artery Stent Implant..........
MDC 8 (Diseases and Disorders of the
 Musculoskeletal System and Connective
 Tissue):
    DRG 519 (Cervical Spinal Fusion with CC)            X
    DRG 520 (Cervical Spinal Fusion without             X
     CC)....................................
MDC 20 (Alcohol/Drug Use and Alcohol/Drug-
 Induced Organic Mental Disorders):
    DRG 434 Alcohol/Drug Abuse or                                     X
     Dependency, Detoxification or Other
     Symptomatic Treatment with CC).........
    DRG 435 (Alcohol/Drug Abuse or                                    X
     Dependency, Detoxification or Other
     Symptomatic Treatment without CC)......
    DRG 436 (Alcohol/Drug Dependence with                             X
     Rehabilitation Therapy)................
    DRG 437 (Alcohol/Drug Dependence,                                 X
     Combined Rehabilitation and
     Detoxification Therapy)................
    DRG 521 (Alcohol/Drug Abuse or                      X
     Dependence with CC)....................
    DRG 522 (Alcohol/Drug Abuse or                      X
     Dependence without CC, with
     Rehabilitation Therapy)................
    DRG 523 (Alcohol/Drug Abuse or                      X
     Dependence without CC, without
     Rehabilitation Therapy)................
------------------------------------------------------------------------

    Chart 2.--Summary of Proposed Assignment or Reassignment of Diagnosis or Procedure Codes in Existing DRGs
----------------------------------------------------------------------------------------------------------------
    Diagnosis/procedure codes                 Removed from DRG                       Reassigned to DRG
----------------------------------------------------------------------------------------------------------------
MDC 5 (Diseases and Disorders of
 the Circulatory System):
    Principal Diagnosis Code:
      410.01  Acute myocardial     116...................................  516
       infarction of
       anterolateral wall,
       initial episode of care.
      410.11  Acute myocardial     116...................................  516
       infarction of other
       anterior wall, initial
       episode of care.
      410.21  Acute myocardial     116...................................  516
       infarction of
       inferolateral wall,
       initial episode of care.
      410.31  Acute myocardial     116...................................  516
       infarction of
       inferoposterior wall,
       initial episode of care.
      410.41  Acute myocardial     116...................................  516
       infarction of other
       inferior wall, initial
       episode of care.
      410.51  Acute myocardial     116...................................  516
       infarction of other
       lateral wall, initial
       episode of care.
      410.61  True posterior wall  116...................................  516
       infarction, initial
       episode of care.
      410.71  Subendocardial       116...................................  516
       infarction, initial
       episode of care.
      410.81  Acute myocardial     116...................................  516
       infarction of other
       specified sites, initial
       episode of care.
      410.91  Acute myocardial     116...................................  516
       infarction of unspecified
       site, initial episode of
       care.
    Procedure Codes:
      37.94  Implantation or       104, 105..............................  514, 515
       replacement of automatic
       cardioverter/
       defibrillation, total
       system (AICD).
      37.95  Implantation of       104, 105..............................  514, 515
       automatic cardioverter/
       defibrillator lead(s) only.
      37.96  Implantation of       104, 105..............................  514, 515
       automatic cardioverter/
       defibrillator pulse
       generator only.
      37.97  Replacement of        104, 105..............................  514, 515
       automatic cardioverter/
       defibrillator lead(s) only.
      37.98  Replacement of        104, 105..............................  514, 515
       automatic cardioverter/
       defibrillator pulse
       generator only.
    Operating Room Procedures:
      35.96  Percutaneous          116...................................  516, 517, 518
       valvuloplasty.
      36.01  Single vessel         116...................................  516, 517, 518
       percutaneous transluminal
       coronary angioplasty
       (PTCA) or coronary
       atherectomy without
       mention of thrombolytic
       agent.
      36.02  Single vessel         116...................................  516, 517, 518
       percutaneous transluminal
       coronary angioplasty
       (PTCA) or coronary
       atherectomy with mention
       of thrombolytic agent.
      36.05  Multiple vessel       116...................................  516, 517, 518
       percutaneous transluminal
       coronary angioplasty
       (PTCA) or coronary
       atherectomy performed
       during the same operation,
       with or without mention of
       thrombolytic agent.
      36.09  Other removal of      116...................................  516, 517, 518
       coronary artery
       obstruction.
      37.34  Catheter ablation of  116...................................  516, 517, 518
       lesion or tissues of heart.
      92.27  Implantation or       Non-OR in MDC-5.......................  517
       insertion of radioactive
       elements.
    Nonoperating Room Procedures:
      36.06  Insertion of          116...................................  517
       coronary artery stent(s).
      37.21  Right heart cardiac   104...................................  514
       catheterization.

[[Page 22651]]

      37.22  Left heart cardiac    104...................................  514
       catheterization.
      37.23  Right and left heart  104...................................  514
       cardiac catheterization.
      37.26  Cardiac               104, 112..............................  514, 516, 517, 518
       electrophysiologic
       stimulation and recording
       studies.
      37.27  Cardiac mapping.....  112...................................  516, 517, 518
      88.52  Angiocardiography of  104...................................  514
       right heart structures.
      88.53  Angiocardiography of  104...................................  514
       left heart structures.
      88.54  Combined right and    104...................................  514
       left heart
       angiocardiography.
      88.55  Coronary              104...................................  514
       arteriography using a
       single catheter.
      88.56  Coronary              104...................................  514
       arteriography using two
       catheters.
      88.57  Other and             104...................................  514
       unspecified coronary
       arteriography.
      88.58  Negative-contrast     104...................................  514
       cardiac roentgenography.
MDC 8 (Diseases and Disorders of
 the Musculoskeletal System and
 Connective Tissue):
    Procedure Codes:
      81.02  Other cervical        497, 498..............................  519, 520
       fusion, anterior technique.
      81.03  Other cervical        497, 498..............................  519, 520
       fusion, posterior
       technique.
MDC 15 (Newborns and Other
 Neonates with Conditions
 Originating in the Perinatal
 Period)
    Diagnosis Codes:
      773.0  Hemolytic disease     389...................................  390
       due to RH isoimmunization.
      773.1  Hemolytic disease     389...................................  390
       due to ABO isoimmunization.
    Secondary Diagnosis Codes:
      478.1  Other diseases of     390...................................  391
       nasal cavity and sinuses.
      520.6  Disturbances in       390...................................  391
       tooth eruption.
      623.8  Other specified       390...................................  391
       noninflammatory disorders
       of vagina.
      709.00  Dyschroma,           390...................................  391
       unspecified.
      709.01  Vitiglio...........  390...................................  391
      709.09  Dyschromia, Other..  390...................................  391
      744.1  Accessory Auricle...  390...................................  391
      754.61  Congenital pes       390...................................  391
       planus.
      757.33  Congenital           390...................................  391
       pigmentary anomalies of
       skin.
      757.39  Other specified      390...................................  391
       anomaly of skin.
      764.08  "Light for dates"  390...................................  391
       without mention of fetal
       malnutrition, 2,000-2,499
       grams.
      764.98  Fetal growth         390...................................  391
       retardation, unspecified,
       2,000-2,499 grams.
      772.6  Cutaneous hemorrhage  390...................................  391
      794.15  Abnormal and         390...................................  391
       auditory function studies.
      796.4  Other abnormal        390...................................  391
       clinical findings.
      V20.2  Routine infant or     390...................................  391
       child health check.
      V72.1  Examination of ears   390...................................  391
       and hearing.
----------------------------------------------------------------------------------------------------------------

               Chart 3.--Summary of Proposed Retitled DRGs
------------------------------------------------------------------------
       MDC            DRG  No.         Current name      Proposed name
------------------------------------------------------------------------
MDC 5...........  DRG 116           Other Permanent    Other Cardiac
                                     Cardiac            Pacemaker
                                     Pacemaker          Implantation.
                                     Implantation, or
                                     PTCA, with
                                     Coronary Artery
                                     Stent Implant.
MDC 8...........  DRG 497           Spinal Fusion      Spinal Fusion
                                     with CC.           except Cervical
                                                        with CC.
MDC 8...........  DRG 498           Spinal Fusion      Spinal Fusion
                                     without CC.        except Cervical
                                                        without CC.
------------------------------------------------------------------------

2. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Removal of Defibrillator Cases From DRGs 104 and 105
    DRGs 104 (Cardiac Valve & Other Major Cardiothoracic Procedures
with Cardiac Catheterization) and 105 (Cardiac Valve & Other Major
Cardiothoracic Procedures without Cardiac Catheterization) include the
replacement or open repair of one or more of the four heart valves.
These valves may be diseased or damaged, resulting in either leakage or
restriction of blood flow to the heart, compromising the ability of the
heart to pump blood. This procedure requires the use of a heart-lung
bypass machine, as the heart must be stilled and opened to repair or
replace the valve.
    Cardiac defibrillators are implanted to correct episodes of
fibrillation (very fast heart rate) caused by malfunction of the
conduction mechanism of the heart. Through implanted cardiac leads, the
defibrillator mechanism senses changes in heart rhythm. When very fast
heart rates occur, the defibrillator produces a burst of electric
current through the leads to restore the normal heart rate. An
implanted defibrillator constantly monitors heart rhythm. The
implantation of this device does not require the use of a heart-lung
bypass machine, and would be expected to be very different in terms of
resource usage, although both procedures currently group to DRGs 104
and 105.
    As part of our ongoing review of DRGs, we examined Medicare claims
data on DRG 104 and DRG 105. We reviewed 100 percent of the FY 2000
MedPAR file containing hospital bills received through May 31, 2000,
for

[[Page 22652]]

discharges in FY 2000, and found that the average charges across all
cases in DRG 104 were $84,060, while the average charges across all
cases in DRG 105 were $66,348. Carving out code 37.94 (Implantation or
replacement of automatic cardioverter/defibrillator, total system
[AICD]) from DRGs 104 and 105 increased those average charges to
$91,366 for DRG 104 and $67,323 for DRG 105. We identified 11,021
defibrillator cases in DRG 104 (out of 25,112 total cases), with
average charges of $74,719, and 2,434 defibrillator cases in DRG 105
(out of 20,094 total cases), with average charges of $59,267.
    We performed additional review on cases containing code 37.95
(Implantation of automatic cardioverter/ defibrillator lead(s) only)
with code 37.96 (Implantation of automatic cardioverter/defibrillator
pulse generator only) and on cases containing code 37.97 (Replacement
of automatic cardioverter/defibrillator lead(s) only) with code 37.98
(Replacement of automatic cardioverter/defibrillator pulse generator
only). This subgrouping contained only 56 patients. The average charges
for the 18 patients in DRG 104 were $58,847. The average charges for
the 38 patients in DRG 105 were $54,891.
    Because we believe the defibrillator cases are significantly
different from other cases in DRGs 104 and 105, we are proposing to
create two new DRGs: DRG 514 (Cardiac Defibrillator Implant with
Cardiac Catheterization) and DRG 515 (Cardiac Defibrillator Implant
without Cardiac Catheterization).
    We are proposing to remove procedure codes 37.94, 37.95 and 37.96,
and 37.97 and 37.98 from DRGs 104 and 105 to form the new DRGs 514 and
515. The proposed new DRGs 514 and 515 would include principal
diagnosis codes and procedure codes as reflected in Chart 4 below:

     Chart 4.--Composition of Proposed New DRGs 514 and 515 in MDC 5
------------------------------------------------------------------------
                                               Included in   Included in
        Diagnosis and procedure codes         proposed DRG  proposed DRG
                                                   514           515
------------------------------------------------------------------------
Principal Diagnosis Codes:
    All of the principal diagnosis codes                X             X
     assigned to MDC-5......................
Principal or Secondary Procedure Code:
    37.94  Implantation or replacement of               X             X
     automatic cardioverter/defibrillation,
     total system (AICD)....................
Combination Operating Procedure Codes:
    37.95  Implantation of automatic
     cardioverter/defibrillator lead(s)
     only; plus
    37.96  Implantation of automatic                    X             X
     cardioverter/defibrillator pulse
     generator only;........................
Or
    37.97  Replacement of automatic
     cardioverter/defibrillator lead(s)
     only; plus
    37.98  Replacement of automatic                     X             X
     cardioverter/defibrillator pulse
     generator only.........................
Plus: One of the Following Nonoperating Room
 Procedure Codes:
    37.21  Right heart cardiac                          X
     catheterization........................
    37.22  Left heart cardiac                           X
     catheterization........................
    37.23  Combined right and left heart                X
     cardiac catheterization................
    37.26  Cardiac electrophysiologic                   X
     stimulation and recording studies......
    88.52  Angiocardiography of right heart             X
     structures.............................
    88.53  Angiocardiography of left heart              X
     structures.............................
    88.54  Combined right and left heart                X
     angiocardiography......................
    88.55  Coronary arteriography using a               X
     single catheter........................
    88.56  Coronary arteriography using two             X
     catheters..............................
    88.57  Other and unspecified coronary               X
     arteriography..........................
    88.58  Negative-contrast cardiac                    X
     roentgenography........................
------------------------------------------------------------------------

b. Percutaneous Cardiovascular Procedures
    We reviewed other DRGs within MDC 5 in order to determine if there
were also logic changes that could be made to these DRGs. The data was
arrayed in a variety of ways displaying myriad permutations, resulting
in the following proposed changes. A percutaneous transluminal coronary
angioplasty (PTCA) is an acute intervention intended to minimize
cardiac damage by restarting circulation to the heart. Some patients
with an acute myocardial infarction (AMI) are now treated by performing
a PTCA during the hospitalization for the AMI. Currently, PTCAs with a
coronary stent implant are assigned to DRG 116 (Other Permanent Cardiac
Pacemaker Implantation, or PTCA with Coronary Artery Stent Implant),
along with pacemaker implants. The remaining percutaneous
cardiovascular procedures are assigned to DRG 112 (Percutaneous
Cardiovascular Procedures).
    The volume of percutaneous cardiovascular procedures has grown
dramatically, with 186,669 cases identified in the FY 2000 MedPAR file
containing hospital bills submitted through May 31, 2000. Because of
the high volume, we decided to review the DRG for percutaneous
cardiovascular procedures. As a first step in the evaluation, we
combined the percutaneous cardiovascular procedures from DRGs 112 and
116. We then subdivided the combined percutaneous cardiovascular
procedure group into two groups based on the principal diagnosis (Pdx)
of AMI.

------------------------------------------------------------------------
                                                               Average
                     Group                         Count        charge
------------------------------------------------------------------------
With Pdx of AMI...............................       50,442      $31,722
Without Pdx of AMI............................      136,227       23,989
------------------------------------------------------------------------

    Each of these groups was further evaluated by subdividing them
based on whether a coronary stent was implanted. The vast majority of
patients with an AMI had a coronary stent implanted. Patients without
an AMI were subdivided into two groups based on whether a coronary
stent was implanted.

------------------------------------------------------------------------
                                                               Average
                     Group                         Count        charge
------------------------------------------------------------------------
Without Pdx of AMI with stent.................      111,441      $24,745

[[Page 22653]]

Without Pdx of AMI without stent..............       24,786       20,589
------------------------------------------------------------------------

    Based on this analysis, we are proposing to remove the PTCAs with
coronary artery stent from DRG 116, thus limiting DRG 116 to permanent
cardiac pacemaker implantation. This removal will leave approximately
68,000 non-PTCA cases in DRG 116.
    In conjunction with this evaluation, we considered a new
technology, intravascular brachytherapy, that is being used to treat
coronary in-stent stenosis. A gamma-radiation-impregnated tape is
threaded through the affected vessel for a specified amount of dwell
time, and then the tape is removed. Intravascular brachytherapy was
approved by the Food and Drug Administration in November 2000.
    Intravascular brachytherapy is assigned to procedure code 92.27
(Implantation or insert of radioactive elements). With the use of
angioplasty, these cases are currently assigned to DRG 112
(Percutaneous Cardiovascular Procedures). Therefore, cases involving
this new technology will be implicated by these proposed changes.
    We are proposing to retitle DRG 116 "Other Cardiac Pacemaker
Implantation," remove DRG 112, and create three new DRGs: DRG 516
(Percutaneous Cardiovascular Procedures with Acute Myocardial
Infarction (AMI)); DRG 517 (Percutaneous Cardiovascular Procedures
without AMI, with Coronary Artery Stent Implant; and DRG 518
(Percutaneous Cardiovascular Procedures without AMI, without Coronary
Artery Stent Implant). The principal diagnosis codes and operating room
and nonoperating room procedure codes that are proposed to be included
in the new DRGs 516, 517, and 518 are reflected in Chart 5.
    In order to be assigned to new DRG 516, cases must contain one of
the principal diagnoses plus the operating room procedures listed in
Chart 5. Because DRG 516 contains acute myocardial infarction, which is
hierarchically ordered before DRGs 517 and 518, any AMI cases also
containing codes 92.27 or 36.06 would automatically be assigned to DRG
516. We are proposing to assign patients with a percutaneous
cardiovascular procedure and intravascular radiation treatment to new
DRG 517. As more data become available, we will reassess the assignment
of intravascular radiation treatment to DRG 517. Proposed new DRG 518
would contain the same operating room and nonoperating room procedures
as new proposed DRG 517, with the exception of codes 92.27 and 36.06.

   Chart 5.--Composition of Proposed New DRGs 516, 517, and 518 in MDC 5
------------------------------------------------------------------------
                                 Included in   Included in   Included in
 Diagnosis and procedure codes  Proposed DRG  Proposed DRG  Proposed DRG
                                     516           517           518
------------------------------------------------------------------------
Principal Diagnosis Codes:
    410.01  Acute myocardial              X
     infarction of
     anterolateral wall,
     initial episode of care..
    410.11  Acute myocardial              X
     infarction of other
     anterior wall, initial
     episode of care..........
    410.21  Acute myocardial              X
     infarction of
     inferolateral wall,
     initial episode of care..
    410.31  Acute myocardial              X
     infarction of
     inferoposterior wall,
     initial episode of care..
    410.41  Acute myocardial              X
     infarction of other
     inferior wall, initial
     episode of care..........
    410.51  Acute myocardial              X
     infarction of other
     lateral wall, initial
     episode of care..........
    410.61  True posterior                X
     wall infarction, initial
     episode of care..........
    410.71  Subendocardial                X
     infarction, initial
     episode of care..........
    410.81  Acute myocardial              X
     infarction of other
     specified sites, initial
     episode of care..........
    410.91  Acute myocardial              X
     infarction of unspecified
     site, initial episode of
     care.....................
plus: Operating Room
 Procedures:
    35.96  Percutaneous                   X             X             X
     valvuloplasty............
      and
    36.01  Single vessel                  X             X             X
     percutaneous transluminal
     coronary angioplasty
     (PTCA) or coronary
     atherectomy without
     mention of thromolytic
     agent....................
      or
    36.02  Single vessel                  X             X             X
     percutaneous transluminal
     coronary angioplasty
     (PTCA) or coronary
     atherectomy with mention
     of thrombolytic agent....
      or
    36.05  Multiple vessel                X             X             X
     percutaneous transluminal
     coronary angioplasty
     (PTCA) or coronary
     atherectomy performed
     during the same
     operation, with or
     without mention of
     thrombolytic agent.......
      and
    36.09  Other removal of               X             X             X
     coronary artery
     obstruction..............
      and
    37.34  Catheter ablation              X             X             X
     of lesion or tissues of
     heart....................
    92.27  Implantation or                              X
     insertion of radioactive
     elements.................
OR: Nonoperating Room
 Procedures:
    36.06  Insertion of                                 X
     coronary artery stent(s).
    37.26  Cardiac                        X             X             X
     electrophysiologic
     stimulation and recording
     studies..................
    37.27  Cardiac mapping....            X             X             X
------------------------------------------------------------------------

    DRG 121 (Circulatory Disorders with AMI and Major Complication,
Discharged Alive), DRG 122 (Circulatory Disorders with AMI without
Major Complication, Discharged Alive), and DRG 123 (Circulatory
Disorders with AMI, Expired) are not affected by these changes.
c. Removal of Heart Assist Systems
    The ICD-9-CM Coordination and Maintenance Committee considered the
nonoperative removal of heart assist systems at its November 17, 2000
meeting. A device called the intra-aortic balloon pump (IABP) is one of
the most common types of ventricular assist systems. A balloon catheter
is placed

[[Page 22654]]

into the patient's descending thoracic aorta, and inflates and deflates
with each heartbeat. This device is timed with the patient's own heart
rhythm, and inflates and circulates blood to the heart and other
organs. This allows the heart to rest and recover. The IABP may be used
preoperatively, intraoperatively, or postoperatively. It supports the
patient from a few hours to several days.
    Code 37.64 (Removal of heart assist system) already exists, and it
is considered by the GROUPER to be an operative procedure. However, the
nonoperative removal of a heart assist system can be done at the
patient's bedside, is noninvasive, and requires no anesthesia.
Therefore, the Committee created code 97.44 (Nonoperative removal of
heart assist system) for use with discharges beginning on or after
October 1, 2001.
    In the past, we have assigned new ICD-9-CM codes to the same DRG to
which the predecessor code was assigned. If this practice were to be
followed, we would have proposed that code 97.44 be assigned to MDC 5,
DRGs 478 (Other Vascular Procedures with CC) and 479 (Other Vascular
Procedures without CC). After hospital charge data became available, we
would have considered moving it to other DRGs. However, in accordance
with section 533(a) of Public Law 106-554, which requires a more
expeditious technique of recognizing new medical services or technology
for the hospital inpatient prospective payment system, we will
reconsider this longstanding practice when possible. Therefore, as code
97.44 was designed to capture heart assist system removal that is
clearly nonoperative, we are not proposing to designate 97.44 as a code
which the GROUPER recognizes as a procedure. This assignment can be
found in Table 6B, New Procedure Codes in the addendum to this proposed
rule. Therefore, these cases will be assigned by the GROUPER to a
medical DRG based on the principal diagnosis, or to a surgical DRG if a
surgical procedure recognized by the GROUPER is performed.
3. MDC 8 (Diseases and Disorders of the Musculoskeletal System and
Connective Tissue)
a. Refusions
    We have received questions from correspondents regarding the
appropriateness of the spinal fusion DRGs: DRG 496 (Combined Anterior/
Posterior Spinal Fusion); DRG 497 (Spinal Fusion with CC); and DRG 498
(Spinal Fusion without CC). Several correspondents expressed concern
about the inclusion of all refusions of the spine into one procedure
code, 81.09 (Refusion of spine, any level or technique). The
correspondents pointed out that because all refusions using any
technique or level are in this one code, all of these cases are
assigned to DRG 497 and DRG 498. They also pointed out that fusion
cases involving both an anterior and posterior technique are assigned
to DRG 496. Although cases with the refusion code that involve anterior
and posterior techniques would appear to be more appropriately assigned
to DRG 496, this is not the case.
    We recognized this limitation in the refusion codes and further
acknowledged that this limitation in the ICD-9-CM coding system creates
DRG problems by preventing the assignment to DRG 496 even when both
anterior and posterior techniques are used for refusion cases.
Therefore, we referred the issue to the ICD-9-CM Coordination and
Maintenance Committee and requested the Committee to consider code
revisions for the refusions of the spine during its year 2000 public
meetings.
    After its deliberations, the Committee approved a series of new
procedure codes for refusion of the spine that could lead to
improvements within DRGs 497 and 498. These new codes, listed below, go
into effect on October 1, 2001.

81.30  Refusion of spine, not otherwise specified
81.31  Refusion of atlas-axis spine
81.32  Refusion of other cervical spine, anterior technique
81.33  Refusion of other cervical spine, posterior technique
81.34  Refusion of dorsal and dorsolumbar spine, anterior technique
81.35  Refusion of dorsal and dorsolumbar spine, posterior technique
81.36  Refusion of lumbar and lumbosacral spine, anterior technique
81.37  Refusion of lumbar and lumbosacral spine, lateral transverse
process technique
81.38  Refusion of lumbar and lumbosacral spine, posterior technique
81.39  Refusion of spine, not elsewhere classified

    As previously stated, all refusions of the spine and corrections of
the pseudarthrosis of the spine are assigned to code 81.09. Code 81.09,
which is always assigned to DRG 497 or DRG 498, includes refusions at
any level of the spine using any technique. With the creation of the
new procedure codes listed above, it will be possible to determine the
level of the spine at which the refusion is performed, as well as the
technique used, and assign the case to a more appropriate DRG.
    These new procedure codes should greatly improve our ability to
determine the level and technique used in the refusion.
    In the past, we have assigned new ICD-9-CM codes to the same DRG to
which the predecessor code was assigned. If this practice were
followed, these new codes would have been assigned to DRG 497 and 498
as they are currently. After data became available, we would have
considered moving them to other DRGs. However, in accordance with
section 533(a) of Public Law 106-554, which requires more expeditious
methods of recognizing new medical services or technology under the
inpatient hospital prospective payment system, we will reconsider this
longstanding practice when possible. Since the new codes clearly allow
us to identify cases where the technique was either anterior or
posterior and these cases are clinically similar and, therefore, should
be handled in the same fashion, we are proposing to immediately assign
these cases on the same basis as the fusion codes (81.00 through
81.09). We would not wait for actual claims data before making this
change. These proposed assignments are reflected in Chart 6 and also
can be found in Table 6B, in section V. of the Addendum to this
proposed rule.
b. Fusion of Cervical Spine
    We have received an additional inquiry concerning the spinal DRGs
that focused on fusions of the cervical spine. The inquirer stated that
there was a significant difference between inpatients who undergo
anterior cervical spinal fusion and other types of spinal fusion in
regard to treatment, recovery time, costs, and risk of complications.
Anterior cervical spinal fusions are assigned to procedure code 81.02,
Other cervical fusion, anterior technique. The inquirer pointed out
that anterior cervical fusions differ significantly from anterior
techniques at other levels since the anatomic approach is far less
invasive. Thoracic anterior techniques require working around the
cardiac and respiratory systems in the chest cavity, while lumbar
anterior working around bowel and digestive system and the abdominal
muscles. The inquirer recommended that code 81.02 be removed from DRGs
497 and 498 and grouped separately.
    We analyzed claims data from 100 percent of the FY 2000 MedPAR file
containing hospital bills received through May 31, 2000, and confirmed

[[Page 22655]]

that charges are lower for fusions of the cervical spine than fusions
of the thoracic and lumbar spine. This was true for both anterior and
posterior cervical fusions of the spine. Our medical consultants agree
that the data and their clinical analysis support the creation of new
DRGs for cervical fusions of the spine. Therefore, we are proposing to
remove procedure codes 81.02 and 81.03 from the spinal fusion DRGs
(currently, DRGs 497 and 498) and assign them to new DRGs for cervical
spinal fusion with and without CC. We are proposing to make four
groupings for fusion DRGs. We believe that the net effect of this
proposal would be an increase in the weights for DRGs 497 and 498,
since the lower charges for the cervical fusions would be removed. The
average standardized charge for all spinal fusions with CCs was
$26,957. For all spinal fusions without CCs, the average charge was
$16,492. The table below also shows average standardized charges for
these types of cases before and after the proposed revisions.

------------------------------------------------------------------------
                                                  Average
                                                   charge      Average
      Proposed revised spinal fusion DRGs          before       charge
                                                  proposed      after
                                                 revisions    revisions
------------------------------------------------------------------------
DRG 497 Spinal Fusion Except Cervical with CC.      $26,957      $36,821
DRG 498 Spinal Fusion Except Cervical without        17,492       26,297
 CC...........................................
DRG 519 Cervical Spinal Fusion with CC........  ...........       26,957
DRG 520 Cervical Spinal Fusion without CC.....  ...........       16,492
------------------------------------------------------------------------

    Based on the proposed groupings, we would create two new DRGs: DRG
519 (Cervical Spinal Fusion with CC); and DRG 520 (Cervical Spinal
Fusion without CC). The procedure codes that would be included in the
proposed DRGs 519 and 520 are reflected in Chart 6 below.
    We are also proposing to add the new ICD-9-CM procedure codes for
refusion of the cervical spine (81.32 and 81.33) to the new cervical
spine fusion DRGs because they are clinically similar.
    We are proposing to retitle DRG 497 "Spinal Fusion Except Cervical
with CC" and DRG 498 "Spinal Fusion Except Cervical without CC." The
retitled DRGs 497 and 498 would retain fusion codes 81.00, 81.01, and
81.04 through 81.08 and include the proposed new refusion codes 81.30,
81.31, and 81.34 through 81.39, as reflected in Chart 6 below.
c. Posterior Spinal Fusion
    We received other correspondence regarding the current DRG
assignment for code 81.07, Lumbar and lumbosacral fusion, lateral
transverse process technique. The correspondent stated that physicians
consider code 81.07 to be a posterior procedure. The patient is placed
prone on the operating table and the spine is exposed through a
vertical midline incision. The correspondent pointed out that code
81.07 is not classified as a posterior procedure within DRG 496
(Combined Anterior/Posterior Spinal Fusion). Therefore, when 81.07 is
reported with one of the anterior techniques fusion codes, it is not
assigned to DRG 496. The correspondent recommended that code 81.07 be
added to the list of posterior spinal fusion codes for use in
determining assignment to DRG 496.
    We have consulted with our clinical advisors and they agree that
this addition should be made. Since we are proposing to handle the new
refusion codes in the same manner as the fusion codes, we also are
proposing to assign DRG 496 when 81.37 is used with one of the anterior
technique fusion or refusion codes. This would be similar to the manner
in which code 81.07 is classified. For assignment to DRG 496, we would
consider codes 81.01, 81.04, 81.06, 81.32, 81.34, and 81.36 to be
anterior techniques and codes 81.03, 81.05, 81.07, 81.08, 81.33, 81.35,
and 81.38 to be posterior techniques.

  Chart 6.--Proposed Revised Composition of DRGS 496, 497, and 498 and Proposed Composition of Proposed DRG 519
                                                and 520 in MDC 8
----------------------------------------------------------------------------------------------------------------
                                   Existing DRG 496
                             ----------------------------  Proposed to   Proposed to
   Diagnosis and procedure     Proposed to   Proposed to   be retained   be retained   Included in   Included in
            codes              be assigned   be assigned   in or added   in or added  proposed DRG  proposed DRG
                               as anterior  as posterior   to existing   to existing       519           520
                               techniques    techniques      DRG 497       DRG 498
----------------------------------------------------------------------------------------------------------------
Principal or Secondary
 Procedure Codes:
    81.00  Spinal fusion,                                           X             X
     not otherwise specified
    81.01  Atlas-axis fusion                                        X             X
    81.02  Other cervical               X                                                       X             X
     fusion, anterior
     technique..............
    81.03  Other cervical                             X                                         X             X
     fusion, posterior
     technique..............
    81.04  Lumbar and                   X                           X             X
     lumbosacral fusion,
     anterior technique.....
    81.05  Lumbar and                                 X             X             X
     lumbosacral fusion,
     posterior technique....
    81.06  Lumbar and                   X                           X             X
     lumbosacral fusion,
     anterior technique.....
    81.07  Lumbar and                                 X             X             X
     lumbosacral fusion,
     lateral transverse
     process technique......
    81.08  Lumbar and                                 X             X             X
     lumbosacral fusion,
     posterior technique....
    81.30  Refusion of                                              X             X
     spine, not otherwise
     specified..............
    81.31  Refusion of atlas-                                       X             X
     axis spine.............
    81.32  Refusion of other            X                                                       X             X
     cervical spine,
     anterior technique.....

[[Page 22656]]

    81.33  Refusion of other                          X                                         X             X
     cervical spine,
     posterior technique....
    81.34  Refusion of                  X                           X             X
     dorsal and dorsolumbar
     spine, anterior
     technique..............
    81.35  Refusion of                                X             X             X
     dorsal and dorsolumbar
     spine, posterior
     technique..............
    81.36  Refusion of                  X                           X             X
     lumbar and lumbosacral
     spine, anterior
     technique..............
    81.37  Refusion of                                X             X             X
     lumbar and lumbosacral
     spine, posterior
     technique..............
    81.38  Refusion of                                X             X             X
     lumbar and lumbosacral
     spine, posterior
     technique..............
    81.39  Refusion of                                              X             X
     spine, not elsewhere
     classified.............
----------------------------------------------------------------------------------------------------------------

d. Spinal Surgery
    The California Division of Workers' Compensation notified us of a
possible problem with the following spinal DRGs:

DRG 496  (Combined Anterior/Posterior Spinal Fusion)
DRG 497  (Spinal Fusion with CC)
DRG 498  (Spinal Fusion without CC)
DRG 499  (Back & Neck Procedures except Spinal Fusion with CC)
DRG 500  (Back & Neck Procedures except Spinal Fusion without CC)

    The Division of Workers' Compensation uses the DRG categories
developed by HCFA to classify types of hospital care. However, instead
of using HCFA's weights for determining reimbursement for inpatient
services, the Division sets a global fee for all inpatient medical
services not otherwise exempted. This fee is established by multiplying
the product of the DRG weight (or revised DRG weight for a small number
of categories) and the health facility's composite factor by 1.20 to
get the maximum amount for worker compensation admissions.
    The Division of Workers' Compensation has received reports that the
formula it uses for reimbursing cases may be providing inadequate
reimbursement. California hospitals and orthopedists have reported that
certain spinal surgery DRGs (DRGs 496 through 500) may involve
different types of care and/or technologies than those in use at the
time these groups were formulated. Health care providers in California
report "recent increased use of the new implantation devices,
hardware, and instrumentation, coupled with requirements for intensive
hospital services accompanying use of new procedures, has led to
inadequate reimbursement in these DRGs." As a short-term response to
these concerns, the California Division of Workers' Compensation is
exempting the costs of hardware and instrumentation from the global fee
of the fee schedule for DRGS 496 through 500. The Division also
requested that HCFA examine these DRGs for any potential problem under
the Medicare reimbursement system.
    The ICD-9-CM coding system does not capture specific types of
implantation devices, hardware, and instrumentation. Therefore, we were
not able to verify the claim that these new devices have led to
increased costs in specific cases. As discussed in section II.D. of
this preamble, we believe that the adoption of a more detailed coding
system, such as ICD-10-PCS, would supply greater amounts of detail on
these items. However, in the short term, it is not possible to identify
a specific problem that involves implantation devices, hardware, and
instrumentation.
4. MDC 12 (Diseases and Disorders of the Male Reproductive System)
    At its May 11, 2000 public meeting, the ICD-9-CM Coordination and
Maintenance Committee considered a request from a manufacturer to
create a unique code for the procedure, Penile plethysmography with
nerve stimulation, in DRG 334 (Major Male Pelvic Procedures with CC).
The penile plethysmography is a test that can be performed during a
radical prostatectomy procedure. During the course of the procedure,
the physician places a probe within an area where the prostatic nerves
are thought to be located and is able to detect minor changes in penile
tumescence or detumescence. This reaction tells the physician that the
nerve bundles have been located, which may aid the physician in
performing a nerve-sparing radical prostatectomy procedure with
precision. The nerve bundles can also be restimulated at the conclusion
of the procedure, providing immediate feedback as to whether erectile
function will be restored after surgery.
    After a presentation on the nerve identifying procedure and review
of existing ICD-9-CM codes, the ICD-9-CM Coordination and Maintenance
Committee determined that the existing code 89.58 (Plethysmogram)
adequately describes this test.
    Radical prostatectomies for patients with cancer of the prostate
are grouped in either DRG 334 (Major Male Pelvic Procedures with CC) or
DRG 335 (Major Male Pelvic Procedures without CC). We have received a
request from a manufacturer of a nerve-identifying device to assign
cases containing code 89.58 into DRG 334 only, not into DRG 335,
resulting in higher payments to hospitals. During FY 2001, DRG 334 had
a relative weight of 1.5591, and DRG 335 had a relative weight of
1.1697. The manufacturer requested that we designate code 89.58 as an
operating room procedure code that would be recognized by the GROUPER
software, and make that code applicable only to DRG 334. The
manufacturer believed that this would serve to take any cases of nerve
sparing out of the lower paying DRG 335, and would make the technology
more attractive to hospitals. As paired DRGs 334 and 335 are currently
structured, they differ only in whether or not a secondary diagnosis
identified as a CC is recorded.
    Using 100 percent of the FY 2000 MedPAR file which contains
hospital

[[Page 22657]]

bills for FY 2000 through May 31, 2000, we examined those cases in DRG
334 to which the procedure code for prostatectomy was assigned. Of the
total 7,241 cases in DRG 334 identified, 5,611 of these cases contained
procedure code 60.5 (Radical prostatectomy). Only three of the
prostatectomy cases included code 89.58. There is not a sufficient
number of cases on which to base an assessment of the payment for this
procedure. Therefore, we are not proposing to modify the assignment of
code 89.58.
5. MDC 15 (Newborns and Other Neonates With Conditions Originating in
the Perinatal Period)
    DRG 390 (Neonate with Other Significant Problems) contains newborn
or neonate cases with other significant problems, not assigned to DRGs
385 through 389, DRG 391, or DRG 469. To be assigned to DRG 389 (Full
Term Neonate with Major Problems), the neonate must have one of the
principal or secondary diagnosis listed under this DRG. A neonate is
assigned to DRG 390 when the neonate has a principal or secondary
diagnosis of newborn or neonate with other significant problems that
are not assigned to DRG 385 through 389, 391, or 469.
    We have received correspondence suggesting a number of changes to
be made to DRGs 398 and 391. These changes involve removing two codes
from DRG 389 and adding 17 codes to DRG 391, as described below.
a. DRG 389 (Full Term Neonate With Major Problems)
    The correspondent suggested removing the following codes from DRG
389 and assigning them to DRG 390:

773.0  Hemolytic disease due to RH isoimmunization
773.1  Hemolytic disease due to ABO isoimmunization

    The correspondent stated that hemolytic disease due to RH
isoimmunization or due to ABO isoimmunization should not be considered
a major problem. The correspondent recommended that these two
conditions be classified as significant problems instead and thus
assigned to DRG 390.
    Our medical consultants sought additional advice from the National
Association of Children's Hospitals and Related Institutions (NACHRI).
(HCFA contracts with the 3M Health Information Systems to maintain the
DRG system. The medical experts at 3M evaluate proposed DRG changes
from a clinical perspective. These medical consultants assist HCFA in
evaluating alternative proposals.) NACHRI and our medical consultants
agree that it is appropriate to remove codes 773.0 and 773.1 from DRG
389. Therefore, we are proposing to remove 773.0 and 773.1 from DRG 389
so that neonates with these conditions are assigned to DRG 390.
b. DRG 391 (Normal Newborn)
    We also have received correspondence with recommendations for
changes to DRG 391. The correspondent pointed out that the following
secondary codes currently lead to the assignment of the neonate to DRG
390 (Neonate with Other Significant Problems). The correspondent
believed that the conditions described by these codes should not cause
the neonate to be classified under DRG 390 when reported as a secondary
diagnosis. The correspondent recommended that these conditions be
listed under DRG 391 (Normal Newborn).

478.1  Other diseases of nasal cavity and sinuses
520.6  Disturbances in tooth eruption
623.8  Other specified noninflammatory disorders of vagina
709.00  Dyschroma, unspecified
709.01  Vitiglio
709.09  Dyschromia, Other
744.1  Accesory auricle
754.61  Congenital pes planus
757.33  Congenital pigmentary anomalies of skin
757.39  Other specified anomaly of skin, Other
764.08  "Light for dates" without mention of fetal malnutrition,
2,000-2,499 grams
764.98  Fetal growth retardation, unspecified, 2,000-2,499 grams
772.6  Cutaneous hemorrhage
794.15  Abnormal and auditory function studies
796.4  Other abnormal clinical findings
V20.2  Routine infant or child health check
V72.1  Examination of ears and hearing

    Our medical consultants also sought the advice of NACHRI on this
recommendation. NACHRI reviewed the list of codes and agreed that none
of these conditions should be considered to be a significant problem
for a neonate. NACHRI concurred that neonates with these secondary
diagnoses should be classified as normal newborns. Therefore, we are
proposing to add the codes listed above to DRG 391 and not classify
them to DRG 390 when reported as a secondary diagnosis.
c. Medicare Code Editor Changes
    The Medicare Code Editor (MCE) is a front-end software program that
detects and reports errors in the coding of claims data. The age
conflict edit detects inconsistencies between a patient's age and any
diagnosis on the patient's record. A subset of diagnoses is considered
valid only for patients over the age of 14 years. These diagnoses are
identified as "adult" diagnoses and range in age from 15 through 124
years. Therefore, any codes included on the Newborn Diagnoses edit are
valid only for patients under age 14.
    It has come to our attention that cases including the ICD-9-CM code
770.7, Chronic respiratory disease arising in the perinatal period, are
being rejected. However, a condition such as bronchopulmonary dysplasia
always originates in the perinatal period, so regardless of the
patient's age, this condition is always coded as 770.7. The age at
which the diagnosis was established or the age at continuing treatment
does not affect the assignment of code 770.7.
    Because correct coding is causing these claims to be rejected, we
are proposing to remove code 770.7 from the Newborn Diagnoses edit in
the MCE, as well as remove it from DRG 387 (Prematurity with Major
Problems) and DRG 389 (Full Term Neonate with Major Problems). Clinical
conditions in code 770.7, such as pulmonary fibrosis, would group to
DRG 92 (Interstitial Lung Disease with CC) and DRG 93 (Interstitial
Lung Disease without CC). Therefore, we are proposing the addition of
code 770.7 to DRGs 92 and 93, as they are most similar clinically. We
will monitor these cases in upcoming MedPAR data to ascertain that the
cases consume similar resources.
6. MDC 20 (Alcohol/Drug Use and Alcohol/Drug-Induced Organic Mental
Disorders)
    DRG 434 (Alcohol/Drug Abuse or Dependency, Detoxification or Other
Symptomatic Treatment with CC is assigned when the patient has a
principal diagnosis of alcohol or drug abuse or dependence along with a
secondary diagnosis classified as a CC. If these patients do not have a
CC, they are assigned to DRG 435 (Alcohol/Drug Abuse or Dependency,
detoxification or Other Symptomatic Treatment without CC). When the
patients receive rehabilitation and detoxification therapy during the
stay, they are assigned to DRG 437 (Alcohol/Drug Dependence, Combined
Rehabilitation and Detoxification Therapy). If the patients receive
only rehabilitation therapy, they are assigned to DRG 436 (Alcohol/Drug
Dependence with Rehabilitation Therapy).

[[Page 22658]]

    We have received inquiries as to why the relative weight for DRG
437, which includes both rehabilitation and detoxification (for FY
2001, the relative weight is .6606, with a geometric mean length of
stay of 7.5) is lower than the FY 2001 relative weight for DRG 434,
which includes only detoxification (.7256, with a geometric mean length
of stay of 3.9). Likewise, the FY 2001 relative weight for DRG 436,
which includes only rehabilitation (.7433), is higher than the FY 2001
relative weight for DRG 437, which includes combined rehabilitation and
detoxification therapy (.6606). The inquirers indicated that those
patients receiving the combination therapy would be expected to have a
longer length of stay, require more services, and, therefore, be more
costly to treat.
    We analyzed data from 100 percent of the FY 2000 MedPAR file which
contains hospital bills received through May 31, 2000, and did not find
support for the inquirers' assertion that combination therapy is more
costly to treat. The relative weights indicate that the presence of a
CC in DRG 434 leads to a significantly higher weight than is found in
DRG 435, which does not have a CC. Therefore, we analyzed the alcohol/
drug DRGs and focused on eliminating the distinction between
rehabilitation and rehabilitation with detoxification and assessing the
impact of CCs. We combined data on DRGs 436 and 437 and then subdivided
the data based on the presence or absence of a CC. The following table
contains the results of the analysis.

                                  Average Charges for Cases--With and Without CCs
----------------------------------------------------------------------------------------------------------------
                                                   With CC                               Without CC
                                   -----------------------------------------------------------------------------
               DRGs                                            Length of                              Length of
                                       Count        Charge        stay        Count        Charge        stay
----------------------------------------------------------------------------------------------------------------
Detoxification Cases--DRG 434 and         3,298       $8,548          5.0        9,689       $5,111          4.1
 DRG 435..........................
All Rehabilitation Cases--DRG 436         3,298        8,117         10.1        4,473        7,407          9.6
 and DRG 437......................
----------------------------------------------------------------------------------------------------------------

    We found that, for both the detoxification and rehabilitation DRGs,
the with-CC group has higher charges than the without-CC group.
However, the with-CC groups still contain the anomaly that the
detoxification DRG 434 has a slightly higher average charge than the
combined rehabilitation DRGs 436 and 437. It appears that any
significant medical problems as indicated by the presence of a CC
dominate the cost incurred by hospitals for treating alcohol and drug
abuse patients. For the without-CC groups, the detoxification DRG 435
has substantially lower average charges than the combined
rehabilitation DRGs 436 and 437. Because the average charges of the
with-CC for both the detoxification DRG 434 and combined rehabilitation
DRGs 436 and 437 have similar average charges, we are proposing to
combine these two groups.
    Based on the results of our analysis, we are proposing to
restructure MDC 20 as follows. We first identified those cases with a
principal diagnosis within MDC 20 where the patient left against
medical advice. These cases are found in DRG 433 (Alcohol/Drug Abuse or
Dependence, Left Against Medical Advice (AMA)). We next identified all
remaining cases with a principal diagnosis within MDC 20 where there
was a CC. We assigned these cases to a proposed new DRG, Alcohol/Drug
Abuse or Dependence with CC). The remaining cases (without CC and did
not leave against medical advice) were then divided into two proposed
new DRGs based on whether or not the patient received rehabilitation
(Alcohol/Drug Abuse or Dependence without CC, with Rehabilitation
Therapy; and Alcohol/Drug Abuse or Dependence without CC, without
Rehabilitation Therapy).
    The following table illustrates the number of patients and average
charges for each of the four proposed DRGs.

               Frequencies and Average Charges for New DRGs
------------------------------------------------------------------------
                                                 Number of     Average
          DRG                 Group title          cases       charges
------------------------------------------------------------------------
433....................  Alcohol/Drug Abuse or        3,509       $3,855
                          Dependence, Left
                          Against Medical
                          Advice.
521....................  Alcohol/Drug Abuse or       18,235        8,470
                          Dependence with CC.
522....................  Alcohol/Drug Abuse or        4,473        7,407
                          Dependence without
                          CC, with
                          Rehabilitation
                          Therapy.
523....................  Alcohol/Drug Abuse or        9,689        5,111
                          Dependence without
                          CC, without
                          Rehabilitation
                          Therapy.
------------------------------------------------------------------------

    This table illustrates that groups based first on the presence of
CC and then on whether or not the patient receives rehabilitation
therapy provide a much better explanation of differences in charges.
Therefore, we are proposing to retain DRG 433, make DRGs 434 through
437 invalid, and create new DRGs 521, 522, and 523 to include the
diagnosis and procedure codes reflected in Chart 7 below.

                                     Chart 7.--Proposed Restructure of MDC 20
                      [Alcohol/drug use and alcohol/drug-induced organic mental disorders]
----------------------------------------------------------------------------------------------------------------
                                                           Included in   Included in   Included in   Included in
              Diagnosis and procedure code                existing DRG  proposed DRG  proposed DRG  proposed DRG
                                                               433           521           522           523
----------------------------------------------------------------------------------------------------------------
Principal diagnosis:
    All principal diagnosis within existing MDC 20                  X
     involving cases in which patients left against
     medical advice (AMA)...............................

[[Page 22659]]

    All principal diagnoses within existing MDC 20 where                          X
     there is a CC and where patient did not leave
     against medical advice (AMA).......................
    All principal diagnoses within existing MDC 20                                              X
     without CC and where patient did not leave against
     medical advice (AMA)...............................
    All principal diagnoses in existing MDC 20 involving                                                      X
     cases where patients did not leave against medical
     advice (AMA).......................................
Procedure Codes:
    94.61  Alcohol rehabilitation.......................                                        X
    94.63  Alcohol rehabilitation and detoxification....                                        X
    94.64  Drug rehabilitation..........................                                        X
    94.66  Drug rehabilitation and detoxification.......                                        X
    94.67  Combined alcohol and drug rehabilitation.....                                        X
    94.69  Combined alcohol and drug rehabilitation and                                         X
     detoxification.....................................
----------------------------------------------------------------------------------------------------------------

7. MDC 25 (Human Immunodeficiency Virus Infections)
    Effective October 1, 2000, ICD-9-CM diagnosis codes 783.2 (Abnormal
loss of weight) and 783.4 (Lack of expected normal physiological
development) were made invalid (65 FR 47171). These two old diagnosis
codes were expanded to five digits and the following new diagnosis
codes were created:

783.21  Loss of weight
783.22  Underweight
783.40  Unspecified lack of normal physiological development
783.41  Failure to thrive
783.42  Delayed milestones
783.43  Short stature

    These six revised codes were created in response to an industry
request. Specifically, code 783.2 did not differentiate between whether
the patient had lost weight recently or whether the patient was
underweight. Code 783.4 was expanded to capture concepts such as
failure to thrive, delayed milestones, and short stature. None of these
concepts were captured in the old codes.
    We listed these new codes in the August 1, 2000 final rule on the
hospital inpatient prospective payment system in Table 6A--New
Diagnosis Codes (65 FR 47169). At the time the final rule was
published, all of these codes were assigned to DRGs 296 through 298.
After the final rule was published, we received an inquiry as to why
these new diagnosis codes were not included in MDC 25 as human
immunodeficiency virus (HIV)-related conditions. The inquirer pointed
out that the predecessor codes (783.2 and 783.4) were included in MDC
25 as HIV-related conditions and suggested that the new codes be added
to MDC 25. These cases will be assigned to other MDCs if the patient
does not have HIV.
    We agree that the expanded codes should have been placed in the MDC
25 as HIV-related conditions. The omission was an oversight. Therefore,
we are proposing to add diagnosis codes 783.21, 783.22, 783.40, 783.41,
783.42, and 783.43 as HIV-related conditions within MDC 25. When these
six revised codes are reported with code 042 HIV, the patient will be
classified within MDC 25.
8. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. Therefore, it is necessary to have a decision rule by which
these cases are assigned to a single DRG. The surgical hierarchy, an
ordering of surgical classes from resource intensive most least,
performs that function. Its application ensures that cases involving
multiple surgical procedures are assigned to the DRG associated with
the most resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibration, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications, to determine if the ordering of classes coincided
with the intensity of resource utilization, as measured by the same
billing data used to compute the DRG relative weights.
    A surgical class can be composed of one or more DRGs. For example,
in MDC 11, the surgical class "kidney transplant" consists of a
single DRG (DRG 302) and the class "kidney, ureter and major bladder
procedures" consists of three DRGs (DRGs 303, 304, and 305).
Consequently, in many cases, the surgical hierarchy has an impact on
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting each DRG for frequency to
determine the average resources for each surgical class. For example,
assume surgical class A includes DRGs 1 and 2 and surgical class B
includes DRGs 3, 4, and 5. Assume also that the average charge of DRG 1
is higher than that of DRG 3, but the average charges of DRGs 4 and 5
are higher than the average charge of DRG 2. To determine whether
surgical class A should be higher or lower than surgical class B in the
surgical hierarchy, we would weight the average charge of each DRG by
frequency (that is, by the number of cases in the DRG) to determine
average resource consumption for the surgical class. The surgical
classes would then be ordered from the class with the highest average
resource utilization to that with the lowest, with the exception of
"other OR procedures" as discussed below.
    This methodology may occasionally result in a case involving
multiple procedures being assigned to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER searches for the procedure in the
most resource-intensive surgical class, this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average relative
weight is ordered above a surgical class with a higher average relative
weight. For example, the "other OR procedures" surgical class is
uniformly ordered last in the surgical hierarchy of each MDC in which
it occurs, regardless of the fact that the relative weight for the DRG
or

[[Page 22660]]

DRGs in that surgical class may be higher than that for other surgical
classes in the MDC. The "other OR procedures" class is a group of
procedures that are least likely to be related to the diagnoses in the
MDC but are occasionally performed on patients with these diagnoses.
Therefore, these procedures should only be considered if no other
procedure more closely related to the diagnoses in the MDC has been
performed.
    A second example occurs when the difference between the average
weights for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
since, by virtue of the hierarchy change, the relative weights are
likely to shift such that the higher-ordered surgical class has a lower
average weight than the class ordered below it.
    Based on the preliminary recalibration of the DRGs, we are
proposing to modify the surgical hierarchy as set forth below. As we
stated in the September 1, 1989 final rule (54 FR 36457), we are unable
to test the effects of proposed revisions to the surgical hierarchy and
to reflect these changes in the proposed relative weights due to the
unavailability of the revised GROUPER software at the time the proposed
rule is prepared. Rather, we simulate most major classification changes
to approximate the placement of cases under the proposed
reclassification and then determine the average charge for each DRG.
These average charges then serve as our best estimate of relative
resource use for each surgical class. We test the proposed surgical
hierarchy changes after the revised GROUPER is received and reflect the
final changes in the DRG relative weights in the final rule. Further,
as discussed in section II.C. of this preamble, we anticipate that the
final recalibrated weights will be somewhat different from those
proposed, because they will be based on more complete data.
Consequently, further revision of the hierarchy, using the above
principles, may be necessary in the final rule.
    At this time, we are proposing to revise the surgical hierarchy for
the pre-MDC DRGs, MDC 5 (Diseases and Disorders of the Circulatory
System), MDC 8 (Diseases and Disorders of the Musculoskeletal System &
Connective Tissue) and MDC 20 (Alcohol/Drug Use & Alcohol/Drug Induced
Organic Mental Disorders), as these are proposed to be revised under
sections II.B.2., II.B.3., and II.B.6. of this preamble, as follows:
     In the pre-MDC DRGs, we are proposing to reorder Lung
Transplant (DRG 495) above Bone Marrow Transplant (DRG 481). We are
also proposing to reorder Simultaneous Pancreas/Kidney Transplant (DRG
512) and Pancreas Transplant (DRG 513) above Lung Transplant (DRG 495).
     In MDC 5, we are proposing to reorder Cardiac
Defibrillator Implants (DRGs 514 and 515) above Other Cardiothoracic
Procedures (DRG 108). We are also proposing to reorder Percutaneous
Cardiovascular Procedures (DRGs 516, 517, and 518) above Other Vascular
Procedures (DRGs 478 and 479).
     In MDC 8, we are proposing to reorder Cervical Spinal
Fusion (DRGs 519 and 520) above Back & Neck Procedures Except Spinal
Fusion (DRGs 499 and 500).
     In MDC 20, we are proposing to order as follows: Alcohol/
Drug Abuse or Dependence, Left AMA (DRG 433) above Alcohol/Drug Abuse
or Dependence With CC (DRG 521); Alcohol/Drug Abuse or Dependence With
CC (DRG 521) above Alcohol/Drug Abuse or Dependence With Rehabilitation
Therapy Without CC (DRG 522); and Alcohol/Drug Abuse or Dependence With
Rehabilitation Therapy Without CC (DRG 522) above Alcohol/Drug Abuse or
Dependence Without Rehabilitation Therapy Without CC (DRG 523).
9. Refinement of Complications and Comorbidities (CC) List
    In the September 1, 1987 final notice (52 FR 33143) concerning
changes to the DRG classification system, we modified the GROUPER logic
so that certain diagnoses included on the standard list of CCs would
not be considered a valid CC in combination with a particular principal
diagnosis. Thus, we created the CC Exclusions List. We made these
changes for the following reasons: (1) To preclude coding of CCs for
closely related conditions; (2) to preclude duplicative coding or
inconsistent coding from being treated as CCs; and (3) to ensure that
cases are appropriately classified between the complicated and
uncomplicated DRGs in a pair. We developed this standard list of
diagnoses using physician panels to include those diagnoses that, when
present as a secondary condition, would be considered a substantial
complication or comorbidity. In previous years, we have made changes to
the standard list of CCs, either by adding new CCs or deleting CCs
already on the list. At this time, we do not propose to delete any of
the diagnosis codes on the CC list.
    In the May 19, 1987 proposed notice (52 FR 18877) concerning
changes to the DRG classification system, we explained that the
excluded secondary diagnoses were established using the following five
principles:
      Chronic and acute manifestations of the same condition
should not be considered CCs for one another (as subsequently corrected
in the September 1, 1987 final notice (52 FR 33154)).
     Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for a condition should not be considered CCs for
one another.
     Conditions that may not coexist, such as partial/total,
unilateral/bilateral, obstructed/unobstructed, and benign/malignant,
should not be considered CCs for one another.
     The same condition in anatomically proximal sites should
not be considered CCs for one another.
     Closely related conditions should not be considered CCs
for one another.
    The creation of the CC Exclusions List was a major project
involving hundreds of codes. The FY 1988 revisions were intended only
as a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered complications or comorbidities of another diagnosis. For
that reason, and in light of comments and questions on the CC list, we
have continued to review the remaining CCs to identify additional
exclusions and to remove diagnoses from the master list that have been
shown not to meet the definition of a CC. (See the September 30, 1988
final rule (53 FR 38485) for the revision made for the discharges
occurring in FY 1989; the September 1, 1989 final rule (54 FR 36552)
for the FY 1990 revision; the September 4, 1990 final rule (55 FR
36126) for the FY 1991 revision; the August 30, 1991 final rule (56 FR
43209) for the FY 1992 revision; the September 1, 1992 final rule (57
FR 39753) for the FY 1993 revision; the September 1, 1993 final rule
(58 FR 46278) for the FY 1994 revisions; the September 1, 1994 final
rule (59 FR 45334) for the FY 1995 revisions; the September 1, 1995
final rule (60 FR 45782) for the FY 1996 revisions; the August 30, 1996
final rule (61 FR 46171) for the FY 1997 revisions; the August 29, 1997
final rule (62 FR 45966) for the FY 1998 revisions; the July 31, 1998
final rule (63 FR 40954) for the FY 1999 revisions, and the August 1,
2000 final rule (65 FR 47064) for the FY 2001 revisions. In the July
30, 1999 final rule (64 FR 41490) we did not modify the CC Exclusions
List for FY 2000 because we

[[Page 22661]]

did not make any changes to the ICD-9-CM codes for FY 2000.
    We are proposing a limited revision of the CC Exclusions List to
take into account the changes that will be made in the ICD-9-CM
diagnosis coding system effective October 1, 2001. (See section
II.B.11. below, for a discussion of ICD-9-CM changes.) These proposed
changes are being made in accordance with the principles established
when we created the CC Exclusions List in 1987.
    Tables 6F and 6G in section V. of the Addendum to this proposed
rule contain the proposed revisions to the CC Exclusions List that
would be effective for discharges occurring on or after October 1,
2001. Each table shows the principal diagnoses with proposed changes to
the excluded CCs. Each of these principal diagnoses is shown with an
asterisk, and the additions or deletions to the CC Exclusions List are
provided in an indented column immediately following the affected
principal diagnosis.
    CCs that are added to the list are in Table 6G--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 2001,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6H--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 2001, the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $133.00
plus shipping and handling. A request for the FY 1988 CC Exclusions
List (which should include the identification accession number (PB) 88-
133970) should be made to the following address: National Technical
Information Service, United States Department of Commerce, 5285 Port
Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.
    Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, 1998, and 1999) and those in Tables 6F and 6G of this document
must be incorporated into the list purchased from NTIS in order to
obtain the CC Exclusions List applicable for discharges occurring on or
after October 1, 2001. (Note: There was no CC Exclusions List in FY
2000 because we did not make changes to the ICD-9-CM codes for FY
2000.)
    Alternatively, the complete documentation of the GROUPER logic,
including the current CC Exclusions List, is available from 3M/Health
Information Systems (HIS), which, under contract with HCFA, is
responsible for updating and maintaining the GROUPER program. The
current DRG Definitions Manual, Version 18.0, is available for $225.00,
which includes $15.00 for shipping and handling. Version 19.0 of this
manual, which includes the final FY 2002 DRG changes, will be available
in October 2001 for $225.00. These manuals may be obtained by writing
3M/HIS at the following address: 100 Barnes Road, Wallingford, CT
06492; or by calling (203) 949-0303. Please specify the revision or
revisions requested.
10. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
OR Procedure Unrelated to Principal Diagnosis) to determine whether it
would be appropriate to change the procedures assigned among these
DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none
of the OR procedures performed is related to the principal diagnosis.
These DRGs are intended to capture atypical cases, that is, those cases
not occurring with sufficient frequency to represent a distinct,
recognizable clinical group. DRG 476 is assigned to those discharges in
which one or more of the following prostatic procedures are performed
and are unrelated to the principal diagnosis:

60.0  Incision of prostate
60.12  Open biopsy of prostate
60.15  Biopsy of periprostatic tissue
60.18  Other diagnostic procedures on prostate and periprostatic tissue
60.21  Transurethral prostatectomy
60.29  Other transurethral prostatectomy
60.61  Local excision of lesion of prostate
60.69  Prostatectomy NEC
60.81  Incision of periprostatic tissue
60.82  Excision of periprostatic tissue
60.93  Repair of prostate
60.94  Control of (postoperative) hemorrhage of prostate
60.95  Transurethral balloon dilation of the prostatic urethra
60.99  Other operations on prostate

    All remaining OR procedures are assigned to DRGs 468 and 477, with
DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. The original list of the ICD-9-CM procedure codes
for the procedures we consider nonextensive procedures, if performed
with an unrelated principal diagnosis, was published in Table 6C in
section IV. of the Addendum to the September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990 (55
FR 36135), August 30, 1991 (56 FR 43212), September 1, 1992 (57 FR
23625), September 1, 1993 (58 FR 46279), September 1, 1994 (59 FR
45336), September 1, 1995 (60 FR 45783), August 30, 1996 (61 FR 46173),
and August 29, 1997 (62 FR 45981), we moved several other procedures
from DRG 468 to 477, and some procedures from DRG 477 to 468. No
procedures were moved in FY 1999, as noted in the July 31, 1998 final
rule (63 FR 40962); in FY 2000, as noted in the July 30, 1999 final
rule (64 FR 41496); or in FY 2001, as noted in the August 1, 2000 final
rule (65 FR 47064).
a. Moving Procedure Codes From DRGs 468 or 477 to MDCs
    We annually conduct a review of procedures producing assignment to
DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it
would be appropriate to move procedure codes out of these DRGs into one
of the surgical DRGs for the MDC into which the principal diagnosis
falls. The data are arrayed two ways for comparison purposes. We look
at a frequency count of each major operative procedure code. We also
compare procedures across MDCs by volume of procedure codes within each
MDC.
    Using 100 percent of the FY 2000 MedPAR file containing bills
submitted through May 31, 2000 for discharges in FY 2000, we determined
that the quantity of cases in DRG 477 totaled 17,153. There were 106
instances where the major operative procedure appeared only once (6.4
percent of the time), resulting in assignment to DRG 477.
    Using the same 100 percent sample of the FY 2000 MedPAR file, we
reviewed DRG 468. There were a total of 40,429 cases, with one major
operative code causing the DRG assignment 311 times (or 8 percent) and
230 instances where the major operative procedure appeared only once
(or 6 percent of the time).
    Our medical consultants then identified those procedures occurring
in conjunction with certain principal diagnoses with sufficient
frequency to justify adding them to one of the surgical DRGs for the
MDC in which the

[[Page 22662]]

diagnosis falls. Based on this year's review, we did not identify any
necessary changes in procedures under DRG 477 and, therefore, are not
proposing to move any procedures from DRG 477 to one of the surgical
DRGs. However, our medical consultants have identified a number of
procedure codes that should be removed from DRG 468 and put into more
clinically coherent DRGs. The movement of these codes are specified in
the charts below:

                 Movement of Procedure Codes From DRG 468
------------------------------------------------------------------------
                                       Included in
   Procedure code       Description        DRG           Description
------------------------------------------------------------------------
           MDC 1--Diseases and Disorders of the Nervous System
------------------------------------------------------------------------
5495................  Peritoneal                 7  Peripheral and
                       Incision.                     Cranial Nerve and
                                                     Other Nervous
                                                     System Procedures
                                                     with CC
5495................  Peritoneal                 8  Peripheral and
                       Incision.                     Cranial Nerve and
                                                     Other Incision
                                                     Nervous System
                                                     Procedures without
                                                     CC
------------------------------------------------------------------------
                MDC 3--Diseases and Disorders of the Ear
------------------------------------------------------------------------
3821................  Blood Vessel              63  Other Ear, Nose,
                       Biopsy.                       Mouth and Throat OR
                                                     Procedure
------------------------------------------------------------------------
         MDC 4--Diseases and Disorders of the Respiratory System
------------------------------------------------------------------------
3821................  Blood Vessel              76  Other Respiratory
                       Biopsy.                       System OR
                                                     Procedures with CC
3821................  Blood Vessel              77  Other Respiratory
                       Biopsy.                       System OR
                                                     Procedures without
                                                     CC
3929................  Vascular Shunt            76  Other Respiratory
                       & Bypass NEC.                 System OR
                                                     Procedures with CC
3929................  Vascular Shunt            77  Other Respiratory
                       & Bypass NEC.                 System OR
                                                     Procedures without
                                                     CC
3931................  Suture of                 76  Other Respiratory
                       Artery.                       System OR
                                                     Procedures with CC
3931................  Suture of                 77  Other Respiratory
                       Artery.                       System OR
                                                     Procedures without
                                                     CC
5411................  Exploratory               76  Other Respiratory
                       Laparotomy.                   System OR
                                                     Procedures with CC
5411................  Exploratory               77  Other Respiratory
                       Laparotomy.                   System OR
                                                     Procedures without
                                                     CC
7749................  Bone Biopsy NEC           76  Other Respiratory
                                                     System OR
                                                     Procedures with CC
7749................  Bone Biopsy NEC           77  Other Respiratory
                                                     System OR
                                                     Procedures without
                                                     CC
8669................  Free Skin Graft           76  Other Respiratory
                       NEC.                          System OR
                                                     Procedures with CC
8669................  Free Skin Graft           77  Other Respiratory
                       NEC.                          System OR
                                                     Procedures without
                                                     CC
------------------------------------------------------------------------
         MDC 5--Diseases and Disorders of the Circulatory System
------------------------------------------------------------------------
3402................  Exploratory              120  Other Circulatory
                       Thoracotomy.                  System OR

                                                     Procedures
3403................  Reopen                   120  Other Circulatory
                       Thoracotomy                   System OR
                       Site.                         Procedures
3421................  Transpleura              120  Other Circulatory
                       Thoracoscopy.                 System OR
                                                     Procedures
3422................  Mediastinoscoy           120  Other Circulatory
                       Circulatory.                  System OR
                                                     Procedures
3426................  Open                     120  Other Circulatory
                       Mediastinal                   System OR
                       Biopsy.                       Procedures
436.................  Distal                   120  Other Circulatory
                       Gastrectomy.                  System OR
                                                     Procedures
437.................  Partial                  120  Other Circulatory
                       Gastrectomy                   System OR
                       with Jejunal                  Procedures
                       Anastamosis.
4389................  Partial                  120  Other Circulatory
                       Gastrectomy.                  System OR
                                                     Procedures
4399................  Total                    120  Other Circulatory
                       Gastrectomy.                  System OR
                                                     Procedures
14561...............  Multiple                 120  Other Circulatory
                       Segment Small                 System OR
                       Bowel Excision.               Procedures
4562................  Partial Small            120  Other Circulatory
                       Bowel                         System OR
                       Resectomy NEC.                Procedures
4572................  Cecectomy......          120  Other Circulatory
                                                     System OR
                                                     Procedures
4573................  Right                    120  Other Circulatory
                       Hemicolectomy.                System OR
                                                     Procedures
4574................  Transverse               120  Other Circulatory
                       Colon                         System OR
                       Resectomy.                    Procedures
4575................  Left                     120  Other Circulatory
                       Hemicolectomy.                System OR
                                                     Procedures
4579................  Partial Large            120  Other Circulatory
                       Bowel Excision                System OR
                       NEC.                          Procedures
458.................  Total Intra-             120  Other Circulatory
                       Abdominal                     System OR
                       Colectomy.                    Procedures
4593................  Small-to-Large           120  Other Circulatory
                       Bowel NEC.                    System OR
                                                     Procedures
4603................  Large Bowel              120  Other Circulatory
                       Exteriorizatio                System OR
                       n.                            Procedures
4613................  Permanent                120  Other Circulatory
                       Colostomy.                    System OR
                                                     Procedures
4709................  Other                    120  Other Circulatory
                       Appendectomy.                 System OR
                                                     Procedures
4862................  Anterior Rectal          120  Other Circulatory
                       Resction With                 System OR
                       Colostomy.                    Procedures
4863................  Anterior Rectal          120  Other Circulatory
                       Resection NEC.                System OR
                                                     Procedures
4869................  Rectal                   120  Other Circulatory
                       Resection.                    System OR
                                                     Procedures
5012................  Open Liver               120  Other Circulatory
                       Biopsy.                       System OR
                                                     Procedures
540.................  Abdominal Wall           120  Other Circulatory
                       Incision.                     System OR
                                                     Procedures
------------------------------------------------------------------------
          MDC 6--Diseases and Disorders of the Digestive System
------------------------------------------------------------------------
5122................  Cholecystectomy          170  Other Digestive
                                                     System OR
                                                     Procedures with CC
5122................  Cholecystectomy          171  Other Digestive
                                                     System OR
                                                     Procedures without
                                                     CC
5123................  Laparoscopic             170  Other Digestive
                       Cholecystectom                System OR
                       y.                            Procedures with CC
5132................  GB-To-Intestine          170  Other Digestive
                       Anastomy.                     System OR
                                                     Procedures with CC
5136................  Choledochoenter          170  Other Digestive
                       ostomy.                       System OR
                                                     Procedures with CC

[[Page 22663]]

5136................  Choledochoenter          171  Other Digestive
                       ostomy.                       System OR
                                                     Procedures without
                                                     CC
5137................  Hepatic Duct-GI          170  Other Digestive
                       Anastomy.                     System OR
                                                     Procedures with
                                                     Anastomy CC
5137................  Hepatic Duct-GI          171  Other Digestive
                       Anastomy.                     System OR
                                                     Procedures without
                                                     CC
5159................  Bile Duct                170  Other Digestive
                       Incision NEC.                 System OR
                                                     Procedures with CC
5159................  Bile Duct                171  Other Digestive
                       Incision NEC.                 System OR
                                                     Procedures without
                                                     CC
------------------------------------------------------------------------
 MDC 7--Diseases and Disorders of the Hepatobiliary System and Pancreas
------------------------------------------------------------------------
540.................  Abdominal Wall           201  Other Hepatobiliary
                       Incision.                     and Pancreas
                                                     Procedure
------------------------------------------------------------------------
     MDC 8--Diseases and Disorders of the Musculoskeletal System and
                            Connective Tissue
------------------------------------------------------------------------
3479................  Other Chest              233  Other
                       Wall Repair.                  Musculoskeletal
                                                     System & Connective
                                                     Tissue OR Procedure
                                                     with CC
3479................  Other Chest              234  Other
                       Wall Repair.                  Musculoskeletal
                                                     System & Connective
                                                     Tissue OR Procedure
                                                     without CC
------------------------------------------------------------------------
     MDC 11--Diseases and Disorders of the Kidney and Urinary Tract
------------------------------------------------------------------------
540.................  Abdominal Wall           315  Other Kidney &
                       Incision.                     Urinary Tract OR
                                                     Procedure
5451................  Laparoscopic             315  Other Kidney &
                       Periton                       Urinary Tract OR
                       Adhesiolysis.                 Procedure
5459................  Other Periton            315  Other Kidney &
                       Adhesiolysis.                 Urinary Tract OR
                                                     Procedure
------------------------------------------------------------------------

b. Reassignment of Procedures Among DRGs 468, 476, and 477
    We also annually review the list of ICD-9-CM procedures that, when
in combination with their principal diagnosis code, result in
assignment to DRGs 468, 476, and 477, to ascertain if any of those
procedures should be moved from one of these DRGs to another of these
DRGs based on average charges and length of stay. We look at the data
for trends such as shifts in treatment practice or reporting practice
that would make the resulting DRG assignment illogical. If our medical
consultants were to find these shifts, we would propose moving cases to
keep the DRGs clinically similar or to provide payment for the cases in
a similar manner. Generally, we move only those procedures for which we
have an adequate number of discharges to analyze the data. Based on our
review this year, we are not proposing to move any procedures from DRG
468 to DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG
477 to DRGs 468 or 476.
c. Adding Diagnosis Codes to MDCs
    Based on our review this year, we are not proposing to add any
diagnosis codes to MDCs.
11. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of this preamble, the ICD-9-CM is a
coding system that is used for the reporting of diagnoses and
procedures performed on a patient. In September 1985, the ICD-9-CM
Coordination and Maintenance Committee was formed. This is a Federal
interdepartmental committee, co-chaired by the National Center for
Health Statistics (NCHS) and HCFA, charged with maintaining and
updating the ICD-9-CM system. The Committee is jointly responsible for
approving coding changes, and developing errata, addenda, and other
modifications to the ICD-9-CM to reflect newly developed procedures and
technologies and newly identified diseases. The Committee is also
responsible for promoting the use of Federal and non-Federal
educational programs and other communication techniques with a view
toward standardizing coding applications and upgrading the quality of
the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes
included in the Tabular List and Alphabetic Index for Diseases, while
HCFA has lead responsibility for the ICD-9-CM procedure codes included
in the Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by
health-related organizations. In this regard, the Committee holds
public meetings for discussion of educational issues and proposed
coding changes. These meetings provide an opportunity for
representatives of recognized organizations in the coding field, such
as the American Health Information Management Association (AHIMA)
(formerly American Medical Record Association (AMRA)), the American
Hospital Association (AHA), and various physician specialty groups as
well as physicians, medical record administrators, health information
management professionals, and other members of the public to contribute
ideas on coding matters. After considering the opinions expressed at
the public meetings and in writing, the Committee formulates
recommendations, which then must be approved by the agencies.
    The Committee presented proposals for coding changes for
implementation in FY 2002 at public meetings held on May 11, 2000 and
November 17, 2000, and finalized the coding changes after consideration
of comments received at the meetings and in writing by January 8, 2001.
    Copies of the Coordination and Maintenance Committee minutes of the
2000 meetings can be obtained from the HCFA home page at: http://
www.hcfa.gov/medicare/icd9cm.htm. Paper copies of these minutes are no
longer available and the mailing list has been discontinued. We
encourage commenters to address suggestions on coding issues involving
diagnosis codes to: Donna Pickett, Co-Chairperson; ICD-9-CM
Coordination and Maintenance Committee; NCHS; Room 1100; 6525 Belcrest
Road; Hyattsville, MD 20782. Comments may be sent by E-mail to:
dfp4@cdc.gov.
    Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination
and Maintenance Committee; HCFA, Center for Health Plans and Providers,
Purchasing Policy Group, Division of Acute Care; C4-07-07; 7500
Security

[[Page 22664]]

Boulevard; Baltimore, MD 21244-1850. Comments may be sent by E-mail to:
pbrooks@hcfa.gov.
    The ICD-9-CM code changes that have been approved will become
effective October 1, 2001. The new ICD-9-CM codes are listed, along
with their proposed DRG classifications, in Tables 6A and 6B (New
Diagnosis Codes and New Procedure Codes, respectively) in section V. of
the Addendum to this proposed rule. As we stated above, the code
numbers and their titles were presented for public comment at the ICD-
9-CM Coordination and Maintenance Committee meetings. Both oral and
written comments were considered before the codes were approved.
Therefore, we are soliciting comments only on the proposed DRG
classification of these new codes.
    Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment.
Diagnosis codes that have been replaced by expanded codes or other
codes or have been deleted are in Table 6C (Invalid Diagnosis Codes).
These invalid diagnosis codes will not be recognized by the GROUPER
beginning with discharges occurring on or after October 1, 2001. For
codes that have been replaced by new or expanded codes, the
corresponding new or expanded diagnosis codes are included in Table 6A
(New Diagnosis Codes). There were no procedure codes that were replaced
by expanded codes or other codes, or were deleted. Revisions to
diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles),
which also include the proposed DRG assignments for these revised
codes. Revisions to procedure code titles are in Table 6F (Revised
Procedure Codes Titles).
    In September 2000, the Department implemented a policy of paying
for inpatient hospital stays for Medicare beneficiaries participating
in clinical trials (HCFA Program Memorandum AB 00-89, September 19,
2000). Hospitals were encouraged to identify the patients involved by
reporting an ICD-9-CM code. This would allow the examination of data on
the patients involved in clinical trials. However, there was no clear
ICD-9-CM diagnosis code for patients who took part in a clinical trial.
There was a code for patients receiving an examination as part of the
control group for clinical trials. This control group code was V70.7
(Examination for normal comparison or control in clinical research).
Hospitals were instructed to use V70.5 (Health examination of defined
subpopulations), for patients participating in a clinical trial.
    This coding directive has created some confusion because of the
title and description of the two codes. Hospitals also have requested
that all clinical patients be captured under one code. They indicated
that the use of one code would be especially useful because patients
frequently do not know if they are part of the control group or are
receiving new therapy.
    To help alleviate the confusion, the ICD-9-CM Coordination and
Maintenance Committee revised code V70.7. Effective October 1, 2001,
the new title of code V70.7 is "Examination of patient in clinical
trial." This revision will make it easier to capture data on Medicare
beneficiaries who are participating in a clinical trial.
12. Other Issues
a. Pancreas Transplant
    Effective July 1, 1999, Medicare covers whole organ pancreas
transplantation if the transplantation is performed simultaneously with
or after a kidney transplant (procedure codes 55.69 (Other kidney
transplantation), or diagnosis code V42.0 (Organ or tissue replaced by
transplant, Kidney), along with 52.80 (Pancreatic transplant, not
otherwise specified), or 52.82 (Homotransplant of pancreas)). A
discussion of the history of these coverage decisions and codes can be
found in the August 1, 2000 final rule on the prospective payment
system for FY 2001 (65 FR 47067).
    We discussed the appropriate DRG classification for these cases in
both the July 30, 1999 final rule (64 FR 41497) and the August 1, 2000
final rule (65 FR 47067). Currently, cases can be assigned to one of
two major DRGs depending on principal diagnosis. If a kidney transplant
and a pancreas transplant are performed simultaneously on a patient
with chronic renal failure secondary to diabetes with renal
manifestations (diagnosis codes 250.40 through 250.43), the cases will
be assigned to DRG 302 (Kidney Transplant). If a pancreas transplant is
performed following a kidney transplant (during a different hospital
admission) on a patient with chronic renal failure secondary to
diabetes with renal manifestations, the case is assigned to DRG 468
(Extensive OR Procedure Unrelated to Principal Diagnosis). This is
because pancreas transplant is not assigned to MDC 11 (Diseases and
Disorders of the Kidney and Urinary Tract), the MDC to which a
principal diagnosis of chronic renal failure secondary to diabetes is
assigned.
    In the August 1, 2000 final rule, we noted that we would continue
to monitor these transplant cases to determine the appropriateness of
establishing a new DRG. For this proposed rule, using 100 percent of
the data in the FY 2000 MedPAR file (which contains hospital bills
received for FY 2000 through May 31, 2000), we analyzed the cases for
which procedure codes 52.80 and 52.82 were reported. (Our data showed
that 15 of the cases were coded using 52.83 (Heterotransplant of
pancreas), which is not a covered procedure under any circumstances.)
We identified a total of 221 cases for this time period. The United
Network for Organ Sharing (UNOS) reported it had identified 270 cases
through September 2000.
    These 221 MedPAR cases were distributed over 6 DRGs, with the
majority (158 cases or 72 percent) assigned to DRG 302, and 23 cases
(10 percent) assigned to DRG 468. The remaining 40 cases were
distributed between 4 other DRGs, with the majority (25 cases) being
assigned to DRG 292 (Other Endocrine, Nutritional and Metabolic OR
Procedures with CC). Four cases were assigned to DRG 483 (Tracheostomy
with Principal Diagnosis except Face, Mouth and Neck Diagnoses) in the
Pre-MDC grouping, which took precedence over any other DRG assignment.
    We arrayed the data based on the presence or absence of kidney
transplant; that is, pancreas transplant codes with or without 55.69.
The majority of cases (166 or 75 percent) had the combined kidney-
pancreas transplant in one operative episode, with 55 (25 percent) of
the cases having pancreas transplant subsequent to the kidney
transplant. Differences in hospital charges were significantly higher
for a pancreas transplant plus a kidney transplant ($138,809) than a
pancreas transplant alone ($85,972), and both were higher than average
standardized charges in DRG 302 ($64,760) or DRG 468 ($39,707),
although it must be noted that these figures do reflect the resource
intensive patients assigned to DRG 483. Those patients in DRG 483 had
average standardized charges of $377,934.
    Because these categories of patients do not fit into existing DRGs
from either a clinical or resource perspective, we are proposing to
create two new DRGs that would reflect these patients' unique clinical
profiles: DRG 512 (Simultaneous Pancreas/Kidney Transplant) and DRG 513
(Pancreas Transplants). Cases grouped to either proposed DRGs 512 or
513 must have a principal or secondary diagnosis code and procedure
code or combination of

[[Page 22665]]

procedure codes as indicated in the chart below:

                 Composition of Proposed DRGs 512 and 513
------------------------------------------------------------------------
                                               Included in   Included in
        Diagnosis and procedure codes         proposed DRG  proposed DRG
                                                   512           513
------------------------------------------------------------------------
Principal or Secondary ICD-9-CM Diabetes
 Mellitus Code:
    250.00  Diabetes mellitus without                   X             X
     mention of complication, Type II or
     unspecified type, not stated as
     uncontrolled...........................
    250.01  Diabetes mellitus without                   X             X
     mention of complication, Type I, not
     stated as uncontrolled.................
    250.02  Diabetes mellitus without                   X             X
     mention of complication, Type I,.......
    250.03  Diabetes mellitus without                   X             X
     mention of complication, Type I,
     uncontrolled...........................
    250.10  Diabetes with ketoacidosis, Type            X             X
     II or Unspecified type, not stated as
     uncontrolled...........................
    250.11  Diabetes with ketoacidosis, Type            X             X
     I, not stated as uncontrolled..........
    250.12  Diabetes with ketoacidosis, Type            X             X
     II or unspecified type, uncontrolled...
    250.13  Diabetes with ketoacidosis, Type            X             X
     I, controlled..........................
    250.20  Diabetes with hyperosmolarity,              X             X
     Type II or unspecified type, not stated
     as uncontrolled........................
    250.21  Diabetes with hyperosmolarity,              X             X
     Type I, not stated as uncontrolled.....
    250.22  Diabetes with hyperosmolarity,              X             X
     Type II or unspecified type,
     uncontrolled...........................
    250.23  Diabetes with hyperosmolarity,              X             X
     Type I, uncontrolled...................
    250.30  Diabetes with other coma, Type
     II or unspecified type, not stated as
     uncontrolled...........................
    250.31  Diabetes with other coma, Type              X             X
     I, not stated as uncontrolled..........
    250.32  Diabetes with other coma, Type              X             X
     II or unspecified type, uncontrolled...
    250.33  Diabetes with other coma, Type              X             X
     I, uncontrolled........................
    250.40  Diabetes with renal                         X             X
     manifestations, Type II or unspecified
     type, not stated as uncontrolled.......
    250.41  Diabetes with renal                         X             X
     manifestations, Type I, not stated as
     uncontrolled...........................
    250.42  Diabetes with renal                         X             X
     manifestations, Type II unspecified
     type, uncontrolled.....................
    250.43  Diabetes with renal                         X             X
     manifestations, Type I, uncontrolled...
    250.50  Diabetes with ophthalmic                    X             X
     manifestations, Type II or unspecified
     type, not stated as uncontrolled.......
    250.51  Diabetes with ophthalmic                    X             X
     manifestations, Type I, not stated as
     uncontrolled...........................
    250.52  Diabetes with ophthalmic                    X             X
     manifestations, Type II or unspecified
     type, uncontrolled.....................
    250.53  Diabetes with ophthalmic                    X             X
     manifestations, Type I, uncontrolled...
    250.60  Diabetes with neurological                  X             X
     manifestations, Type II or unspecified
     type, not stated as uncontrolled.......
    250.61  Diabetes with neurological                  X             X
     manifestations, Type I, not stated as
     uncontrolled...........................
    250.62  Diabetes with neurological                  X             X
     manifestations, Type II or unspecified
     type, uncontrolled.....................
    250.63  Diabetes with neurological                  X             X
     manifestations, Type I uncontrolled....
    250.70  Diabetes with peripheral                    X             X
     circulatory disorders, Type II or
     unspecified type, not stated as
     uncontrolled...........................
    250.71  Diabetes with peripheral                    X             X
     circulatory disorders, Type I, not
     stated as uncontrolled.................
    250.72  Diabetes with peripheral                    X             X
     circulatory disorders, Type II or
     unspecified type, uncontrolled.........
    250.73  Diabetes with peripheral                    X             X
     circulatory disorders, Type I,
     uncontrolled...........................
    250.80  Diabetes with other specified               X             X
     manifestations, Type II or unspecified
     type, not stated as uncontrolled.......
    250.81  Diabetes with other specified               X             X
     manifestations, Type I, not stated as
     uncontrolled...........................
    250.82  Diabetes with other specified               X             X
     manifestations, Type II or unspecified
     type, uncontrolled.....................
    250.83  Diabetes with other specified               X             X
     manifestations, Type I, uncontrolled...
    250.90  Diabetes with unspecified                   X             X
     complication, Type II or unspecified
     type, not stated as uncontrolled.......
    250.91  Diabetes with unspecified                   X             X
     complication, Type I, not stated as
     uncontrolled...........................
    250.92  Diabetes with unspecified                   X             X
     complication, Type II or unspecified
     type, uncontrolled.....................
    250.93  Diabetes with unspecified                   X             X
     complication, Type I, uncontrolled.....
Principal or Secondary Diagnosis Code:
    585  Chronic renal failure..............            X             X
    403.01  Hypertensive renal disease,                 X             X
     malignant, with renal failure..........
    403.11  Hypertensive renal disease,                 X             X
     benign, with renal failure.............
    403.91  Hypertensive renal disease,                 X             X
     unspecified, with renal failure........
    404.02  Hypertensive heart & renal                  X             X
     disease, malignant, with renal failure.
    404.03  Hypertensive heart & renal                  X             X
     disease, malignant, with congestive
     heart failure and renal disease........
    404.12  Hypertensive heart & renal                  X             X
     disease, benign, with renal failure....
    404.13  Hypertensive heart & renal                  X             X
     disease, benign, with congestive heart
     failure and renal disease..............
    404.92  Hypertensive heart & renal                  X             X
     disease, unspecified, with renal
     failure................................
    404.93  Hypertensive heart & renal                  X             X
     disease, unspecified, with congestive
     heart failure and renal failure........
    V42.0  Organ or tissue replaced by                  X             X
     transplant, kidney.....................
    V43.89  Organ or tissue replaced by                 X             X
     other means, other (Kidney)............
Procedure Code:
    52.80  Pancreatic transplant, not                                 X
     otherwise specified....................
    52.82  Homotransplant of pancreas.......                          X
Combination Procedure Codes:
    52.80  Pancreatic transplant, not
     otherwise specified, plus
    55.69  Other kidney transplantation.....            X
    or
    52.82  Homotransplant of pancreas plus
    55.69  Other kidney transplantation.....            X
------------------------------------------------------------------------

[[Page 22666]]

    The logic for the proposed DRG 512 accepts the pair of diagnosis
codes in any position (principal/secondary or secondary/secondary). The
pair of procedure codes must be present along with the two diagnosis
codes. This DRG would be placed in the Pre-MDC GROUPER logic
immediately following DRG 480 (Liver Transplant).
    The logic for DRG 513 accepts the pair of diagnosis codes in any
position (principal/secondary or secondary/secondary). Only one
procedure code must be used along with the two diagnosis codes. This
DRG would be placed in the Pre-MDC GROUPER logic immediately following
proposed new DRG 512 (Simultaneous Pancreas/Kidney Transplant).
b. Intestinal Transplantation
    Effective April 1, 2001, Medicare covers intestinal transplantation
for the purpose of restoring intestinal function in patients with
irreversible intestinal failure (Medicare Program Memorandum
Transmittal No. AB-00-130, December 22, 2000). This procedure is
covered only when performed for patients who have failed total
parenteral nutrition (TPN) and only when performed in centers that meet
approval criteria.
    Intestinal failure is defined as the loss of absorptive capacity of
the small bowel secondary to severe primary gastrointestinal disease or
surgically induced short bowel syndrome. Intestinal failure prevents
oral nutrition and may be associated with both mortality and profound
morbidity.
    If an intestinal transplantation alone is performed on a patient
with an intestinal principal diagnosis, the case would be assigned to
either DRG 148 (Major Small & Large Bowel Procedures With CC) or DRG
149 (Major Small & Large Bowel Procedures Without CC). If an intestinal
transplantation and a liver transplantation are performed
simultaneously, the case would be assigned to DRG 480 (Liver
Transplant).
    If an intestinal transplantation and a pancreas transplantation are
performed simultaneously, currently the case would be assigned to
either DRG 148 or DRG 149. As we have proposed in section II.B.12.A. of
this proposed rule, effective October 1, 2001, the case would be
assigned to DRG 513 (Pancreas Transplant). We are proposing to make a
conforming change to the regulations at Sec. 412.2(e)(4) and
Sec. 486.302 to include intestines (and multivisceral organs) in the
list of organs for which Medicare pays for the acquisition costs on a
reasonable cost basis.
    Effective October 1, 2000, procedure code 46.97 (Transplant of
intestine) was created. We have examined our Medicare claims data to
determine whether it is appropriate to propose a new intestinal
transplant DRG. We examined 100 percent of the data in the FY 2000
MedPAR file containing bills submitted through May 31, 2000. Therefore,
we focused our examination on the previous code assignment for
intestinal transplant, code 46.99 (Other operations on intestines), and
facilities that are currently performing intestinal transplantation. We
were able to identify only one case, with an average charge of
approximately $10,738 as compared to the average standardized charges
for DRGs 148 and 149, which are approximately $37,961, and $16,965,
respectively. We will continue to monitor these cases to determine
whether it may be appropriate in the future to establish a new DRG.

C. Recalibration of DRG Weights

    We are proposing to use the same basic methodology for the FY 2002
recalibration as we did for FY 2001 (August 1, 2000 final rule (65 FR
47069)). That is, we would recalibrate the weights based on charge data
for Medicare discharges. However, we propose to use the most current
charge information available, the FY 2000 MedPAR file. (For the FY 2001
recalibration, we used the FY 1999 MedPAR file.) The MedPAR file is
based on fully coded diagnostic and procedure data for all Medicare
inpatient hospital bills.
    The proposed recalibrate DRG relative weights are constructed from
FY 2000 MedPAR data (discharges occurring between October 1, 1999 and
September 30, 2000), based on bills received by HCFA through December
31, 2000, from all hospitals subject to the prospective payment system
and short-term acute care hospitals in waiver States. The FY 2000
MedPAR file includes data for approximately 11,008,302 Medicare
discharges.
    The methodology used to calculate the proposed DRG relative weights
from the FY 2000 MedPAR file is as follows:
     To the extent possible, all the claims were regrouped
using the proposed DRG classification revisions discussed in section
II.B. of this preamble. As noted in section II.B.8., due to the
unavailability of the revised GROUPER software, we simulated most major
classification changes to approximate the placement of cases under the
proposed reclassification. However, there are some changes that cannot
be modeled.
     Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education and
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
     The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG.
     We then eliminated statistical outliers, using the same
criteria used in computing the current weights. That is, all cases that
are outside of 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG are eliminated.
     The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
A transfer case is counted as a fraction of a case based on the ratio
of its transfer payment under the per diem payment methodology to the
full DRG payment for nontransfer cases. That is, transfer cases paid
under the transfer methodology equal to half of what the case would
receive as a nontransfer would be counted as 0.5 of a total case.
     We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner
consistent with the methodology for all other DRGs except that the
transplant cases that were used to establish the weights were limited
to those Medicare-approved heart, heart-lung, liver, and lung
transplant centers that have cases in the FY 1999 MedPAR file.
(Medicare coverage for heart, heart-lung, liver, and lung transplants
is limited to those facilities that have received approval from HCFA as
transplant centers.)
     Acquisition costs for kidney, heart, heart-lung, liver,
lung, and pancreas transplants continue to be paid on a reasonable cost
basis. Unlike other excluded costs, the acquisition costs are
concentrated in specific DRGs (DRG 302 (Kidney Transplant); DRG 103
(Heart Transplant); DRG 480 (Liver Transplant); DRG 495 (Lung
Transplant); and proposed new DRGs 512 (Simultaneous Pancreas/Kidney
Transplant) and 513 (Pancreas Transplant). Because these costs are paid
separately from the prospective payment rate, it is necessary to make
an adjustment to prevent the relative weights for these DRGs from
including the acquisition costs. Therefore, we subtracted the
acquisition charges from the total charges on each transplant bill that
showed acquisition charges before computing the average charge for the
DRG and before eliminating statistical outliers.

[[Page 22667]]

    When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We propose to use that same case threshold
in recalibrating the DRG weights for FY 2002. Using the FY 2000 MedPAR
data set, there are 39 DRGs that contain fewer than 10 cases. We
computed the weights for these 39 low-volume DRGs by adjusting the FY
2001 weights of these DRGs by the percentage change in the average
weight of the cases in the other DRGs.
    The new weights are normalized by an adjustment factor (1.44813) so
that the average case weight after recalibration is equal to the
average case weight before recalibration. This adjustment is intended
to ensure that recalibration by itself neither increases nor decreases
total payments under the prospective payment system, and accounts for
the gradual shift in cases toward higher-weighted DRGs over time.
    Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payment to hospitals is affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.b. of the Addendum to this proposed rule, we are
proposing to make a budget neutrality adjustment to ensure that the
requirement of section 1886(d)(4)(C)(iii) of the Act is met.

D. Incorporating New Medical Services and Technologies in the Inpatient
Hospital Prospective Payment System

    Much attention recently has focused on how well Medicare
incorporates the cost of new medical services and technologies into its
payment systems. Of particular concern is the adequacy of Medicare's
payment systems in facilitating access to new technologies for Medicare
beneficiaries. Section 533 of Public Law 106-554 directs the Secretary
to develop a mechanism for ensuring adequate payment under the hospital
inpatient prospective payment system for new medical services and
technologies, and to report to Congress on ways to more expeditiously
incorporate new services and technologies into that system. This
discussion addresses the requirements of section 533 of Public Law 106-
554.
1. Overview
    Medicare payment for an inpatient hospital discharge under the
inpatient prospective payment system is determined by multiplying the
relative weight associated with a particular DRG by the national
average standardized amount (adjusted for other hospital
characteristics such as a geographic wage index, teaching status, and
treating a high percentage of low-income patients). Cases are
classified into DRGs for payment under the prospective payment system
based on the principal diagnosis, up to eight additional diagnoses, and
up to six procedures performed during the stay, as well as age, sex,
and discharge status of the patient. The diagnosis and procedure
information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM). The DRG relative weights are recalculated each
year to reflect the average resources expended across all hospitals to
treat patients within a particular DRG.
    In general, the inpatient prospective payment system makes payments
for new medical services and technologies as soon as these items are
payable. New items or services generally fit within existing DRGs, and
hospitals using these items and services will be paid at established
payment rates for the applicable DRGs. Payment rates may subsequently
be adjusted through the annual process of evaluating the assignment of
cases within DRGs and recalculating the relative weights associated
with each DRG based on average charges. These annual changes are made
to reflect changes in treatment patterns, technology, and any other
factors that may change the relative use of hospital resources.
    Since the prospective payment system was first implemented in
October 1983, the pace of innovation in medical technology has been
rapid. Generally speaking, the system appears to have accommodated
these innovations without occasioning significant concerns regarding
access to new technologies. In its March 2001 report to the Congress,
the Medicare Payment Advisory Commission stated "the design of the
inpatient PPS (prospective payment system) makes it easier to ensure an
appropriate distribution of payments while accommodating technological
advances" (page 44).
2. Current Practice--Coding and Payment
    A number of issues arise relating to present methods of
incorporation of new technologies in the inpatient hospital prospective
payment system. One issue is the appropriate ICD-9-CM code to be
assigned to the new technology. This issue is discussed in detail
below. Assuming the new technology is or can be covered by Medicare, a
determination must be made concerning to which DRG should the new
technology be assigned. The DRG (and the value of the relative weight
associated with that DRG) to which the new technology is assigned
determines the payment rate for the new technology. Under the DRG
system, the condition of the patient is the primary consideration in
the decision to assign a new technology to a DRG. Therefore, a new
technology generally will be assigned to the same DRG as the DRG's
predecessor technologies and treatment modalities. In this way,
hospitals can receive payment for new technology under the inpatient
hospital prospective payment system quickly. As use of the new
technology diffuses among hospitals, HCFA will gradually and largely
automatically recalibrate DRG payment rates based on hospital claims
data to reflect increasing or decreasing costs of cases assigned to the
DRG. Generally, it takes 2 years for claims data to be reflected in
recalibrated DRG weights. Considering the actual costs as reflected in
the claims data, HCFA may also reassign new technologies to different
DRGs. However, because a new technology is often more costly initially
than the predecessor technologies, the adequacy of the initial payment
rate occasionally becomes an issue.
    At present, if payment is to be made other than by routine
assignment of the new technology to an existing DRG, it is necessary to
establish a new ICD-9-CM code. The lag between application for a new
code and its being made effective for payment is at least a year.
Because we use actual charge data from hospitals, additional costs or
savings from the new technology are not reflected in the DRG weight for
2 years after a new code is effective. For example, the costs or
savings attributable to any new technologies that were assigned new
ICD-9-CM codes effective October 1, 1999, will be reflected in the DRG
relative weights effective for discharges on or after October 1, 2001.
    The lag before new technology affected payment has been viewed by
some observers as a useful check on payment changes, helping to ensure
that

[[Page 22668]]

these changes reflect the benefit of a new technology. Hospitals would
adopt and utilize the new technology, it was reasoned, with a speed and
to a degree commensurate with its medical advantages. Any differences
in the resource requirements between the new and existing technologies
would then be reflected over time in claims data and in changes in the
DRG weights. To the extent particular new technologies may have been
initially given relatively low payment, the design of the system
provided incentives to compensate by achieving efficiencies elsewhere.
Conversely, if a particular new technology reduced costs compared to
existing technologies, hospitals would reap the payment benefits until
such time as the DRG weights began to reflect the lower costs.
3. Current Practice--Data
    Recently, HCFA provided an explicit avenue to permit more rapid
payment adjustment through use of additional data. The Conference
Report that accompanied the Balanced Budget Act of 1997 (Public Law
105-33) stated that "in order to ensure that Medicare beneficiaries
have access to innovative new drug therapies, the conferees believe
that HCFA should consider, to the extent feasible, reliable, validated
data other than Medicare Provider Analysis and Review (MedPAR) data in
annually recalibrating and reclassifying the DRGs" (H.R. Conf. Rep.
No. 105-217, 105th Cong., 1st Sess., at 734 (1997)). The MedPAR
contains records for all Medicare hospital discharges and is the source
data used for DRG recalibration. Although we had never precluded the
use of non-MedPAR data, we established an explicit process for the
submission of such data in a manner consistent with the annual
recalibration of the DRG weights. We stated in the July 30, 1999
Federal Register that, in the case of external data, a significant
sample of the data should be submitted by August 1, approximately 8
months prior to the publication of the proposed rule. This would allow
us to verify and test the data and make a preliminary assessment as to
the feasibility of the data's use (64 FR 41499). Subsequently, a
complete database must be submitted no later than December 1,
approximately 4 months prior to the publication of the proposed rule.
On the issue of the use of sample data, we stated in the Federal
Register that we were not establishing specific criteria regarding
sample sizes or data collection methodologies prior to gaining
experience that would enable us to realistically reflect the
availability of external data based on actual experience. We also
encouraged anyone interested in submitting such data in the future to
contact us to discuss the specific data they wish to submit and whether
the data may be adequate.
4. New Legislation
    Section 533 of Public Law 106-554 addresses the issue of how new
technologies are introduced into the DRGs, and how DRG payment rates
must be adapted to accommodate them. Specifically, the provision
requires that the Secretary:
     Not later than April 1, 2001, submit a report to Congress
on methods of expeditiously incorporating new medical services and
technologies into the clinical coding system.
     Not later than October 1, 2001, implement the preferred
methods described in the report.
     Effective October 1, 2001, establish a mechanism to
recognize the costs of new medical services and technologies after
notice and opportunity for public comment.
     Establish criteria to identify new medical services or
technologies after notice and an opportunity for public comment.
5. DRG Assignment Issues
    As background for discussion of how the DRGs should be changed to
better accommodate new technology, this section will discuss the
rationale for basing the initial DRG assignment on patient condition.
The underlying assumption of the prospective payment system is that
because hospitals are responsible for the delivery of care they can
respond to the incentives to control costs inherent in the system. The
success of any payment system that is predicated on providing
incentives for cost control is almost totally dependent on the
effectiveness with which the incentives are communicated. The DRGs were
designed to be a management tool that is used also as the basis for
prospective payments. The key distinction between a management tool and
payment method is the ability of the hospital to use the information to
take action in response to the incentives in the system. Thus, a
management tool communicates information in a form and at a level of
detail that can lead to specific actions. The effectiveness of any
incentive-based payment system is enhanced if the payment method is
simultaneously a management tool.
    Because the DRGs were developed to group clinically similar
patients, an extremely important means of communication between the
clinical and financial aspects of care was created. DRGs provided
administrators and physicians with a meaningful basis for evaluating
both the process of providing care and the associated financial
impacts. Development of care pathways by DRG and profit-and-loss
reports by DRG product lines became commonplace. With the adoption of
these new management methods, length of stay and the use of ancillary
services dropped dramatically.
    The DRGs not only provided a communications tool for hospital
management, but they also provided an effective means for hospitals and
Medicare to communicate. Instead of accountants and lawyers arguing the
fine points of cost accounting, the focus of payment deliberations
became the determination of a fair payment rate for patients with
specific clinical problems. The vast majority of modifications to the
DRGs since the inception of the Medicare inpatient hospital prospective
payment system have resulted from recommendations from hospitals. The
recommendations have almost always been the result of clinicians
identifying specific types of patients with unique needs. A recent
example of such a clinical dialogue relates to the DRGs for burns. The
FY 1999 update to the DRGs included a major restructuring of the burn
DRGs. This restructuring was the direct result of detailed and specific
clinical recommendations provided to HCFA by burn specialists.
    Central to the success of the Medicare inpatient hospital
prospective payment system is that DRGs have remained a clinical
description of why the patient required hospitalization. We believe it
would be undesirable to transform DRGs into detailed descriptions of
the technology and processes used by the hospital to treat the patient.
If such a transformation were to happen, the DRGs would become largely
a repackaging of fee-for-service without the management and
communication benefits. A fundamental assumption underlying DRGs is
that the hospital has the responsibility for deciding what technology
and process to employ in treating a particular type of patient. As
hospitals in the aggregate make treatment decisions, these decisions
are reflected in the DRG payment weights. The separation of the
clinical and payment weight methodologies allows a stable clinical
methodology to be maintained while the payment weights evolve in
response to changing practice patterns. The packaging of all services
associated with the care of a particular type of patient into a single
payment amount provides the incentive for efficiency inherent in a DRG-
based prospective payment system. Substantial disaggregation of the
DRGs

[[Page 22669]]

into smaller units of payment, or a substantial number of cases
receiving extra payments, would undermine the incentives and
communication value in the DRG system.
6. Coding Issues
    To permit us to identify use of a new technology on hospital claims
and hence to make different payments than would otherwise be
applicable, we would require a code that can be used to specify when
that technology is used.
a. Process for Establishing New Codes
    The ICD-9-CM Coordination and Maintenance Committee is responsible
for discussing potential changes to ICD-9-CM. This is a Federal
interdepartmental committee, co-chaired by the National Center for
Health Statistics (NCHS) and HCFA. The NCHS has lead responsibility for
the ICD-9-CM diagnosis codes, while HCFA has lead responsibility for
the ICD-9-CM procedure codes. The committee holds meetings twice a
year, usually in May and November. Agendas for the discussions about
procedure codes are published on HCFA's Internet website a month before
the meeting. A Federal Register notice is also published listing topics
to be discussed. The meetings are open to the public and are held
usually in Baltimore, Maryland. Shortly afterwards, an extensive
summary of the meeting is published on HCFA's website and the public is
given an additional opportunity to comment. Final comments are due by
early January. A complete, current timeline is included in the Summary
Report of the Committee at: www.hcfa.gov/medicare/icd9cm.htm.
    For a topic to be discussed at one of the two yearly meetings of
the committee, the committee must receive a request 2 months prior to
the meeting. This timeframe allows HCFA to publish the agendas in the
Federal Register notices and allows individuals and organizations to
review the agenda and to determine if they wish to attend the public
meetings. The timeframe is also necessary to allow the committee to
research the topic and prepare a draft solution in time for the
meeting. During the meetings, the committee provides a brief
description of the topic (such as a new technology that may not be
adequately identified by the current code) and then describes the
technology or procedure through a formal presentation. Frequently,
medical experts who perform the procedure make a presentation to
describe the procedure and how it might be different from other
procedures in the current code. Proposals are made to either continue
capturing the procedure in the existing code, revise existing codes, or
create a new code. The public then discusses the merits of the
proposals and offers any alternate suggestions.
    The ICD-9-CM is updated once a year, effective October 1. This date
coincides with the annual updates to the DRGs within the inpatient
hospital prospective payment system. Each spring HCFA publishes a
proposed rule that includes proposed changes to the inpatient hospital
prospective payment system. This notice also includes final decisions
on changes to ICD-9-CM codes. By August 1, HCFA publishes the new codes
in the Addendum to the final rule, which is a technical presentation of
actual changes to be made in both the index and tabular sections of the
ICD-9-CM coding books. The Addendum is available on HCFA's website and
is also sent to organizations such as the American Hospital Association
(AHA) and the American Health Information Management Association
(AHIMA) to distribute to their members. By October 1 of each year, the
Department of Health and Human Services also produces a CD-ROM version
of the ICD-9-CM, which may be purchased at the Government Printing
Office. Since the ICD-9-CM is not a copyrighted system, many publishers
and organizations distribute and sell books or other publications that
include the changes to ICD-9-CM.
    Although the committee's process for discussing proposed changes to
the ICD-9-CM fully involves and informs the public, the deliberative
nature of the process does require some time. Topics discussed at the
May and November 2000 meetings of the Committee are for changes to ICD-
9-CM in October 2001. Therefore, depending on whether a request is
considered at the May or November meeting, resulting changes may not be
effective for approximately a year to a year-and-a-half later.
b. Options To Expedite the Implementation of Coding Changes
    Several constraints upon the system would complicate implementing
extensive changes. One significant complication is the interaction
between the DRG system and the ICD-9-CM diagnosis and procedure codes
(in the case of new services and technologies, the discussion focuses
on procedure rather than diagnosis codes). When a new procedure code is
created, a decision must be made as to whether the new code affects DRG
assignment (for example, resulting in a case being assigned to a
surgical rather than a medical DRG). Currently, new technology is
generally assigned to the same DRG as its predecessor codes. Even if
new codes do not affect DRG assignment, the GROUPER software (used to
assign cases to DRGs) must be reprogrammed to recognize and classify
all the new codes. This is necessary to allow Medicare's claims
processing systems to process the claim.
    In addition to the changes to the GROUPER software, implementing
changes to ICD-9-CM codes is a detailed and far-reaching process
involving modifications to code books and software coding systems, as
well as changes to hospitals' claims processing systems. As described
above, the current process is organized around the annual publication
of coding changes in the Federal Register as part of the updates and
changes to the inpatient hospital prospective payment system. The
changes are made available during the summer, and communicated via
multiple channels to hospitals. This process allows for the necessary
processing changes to be thoroughly tested prior to implementation,
both by HCFA and by the hospitals. This testing procedure is essential
given the volume (generally 11 million claims annually) and dollar
impact (approximately $75 billion during FY 2001) of Medicare inpatient
discharges.
    Another important issue when considering expediting the process of
making coding changes is that 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 (section
1886(d)(4)(C)(iii) of the Act). If ICD-9-CM changes were made at
multiple times during the year, the budget neutrality requirement would
mean the standardized amounts, and potentially the cost outlier
thresholds, would change as well. These changes would compromise the
prospective nature of the payment system, whereby hospitals are able to
project their revenues for the year and plan accordingly. Because we do
not believe the requirement in section 533 of Public Law 106-554 to
explore ways to expedite coding changes was intended to disrupt the
prospective nature of the payment system, we did not consider options
that would require revising the DRG weights and the standardized
amounts more than once a year.
    With these considerations in mind, we explored the potential for
shortening the current process.
    First, we are proposing to move the November meeting of the
Coordination and Maintenance Committee to December without significant
disruption. To move it further would

[[Page 22670]]

disrupt the process for production of the annual inpatient prospective
payment system regulation. This step would shorten the code assignment
process by a month and permit coding changes resulting in payment
changes to be implemented in a year.
    Second, we are proposing to expedite the process by issuing new
coding decisions resulting from the spring meeting of the Committee
(currently in May) that would be effective the following October 1. It
may be necessary to move the May meeting to April to accommodate this
procedure. Because the timing of this process would not allow the
coding changes to be incorporated into the proposed rule published in
the spring, cases with the new codes would have to be assigned to the
same DRG to which they would have been assigned without the new code
and no other payment adjustments would be possible. These coding
changes would thus not affect the DRG weights or the budget neutrality
calculations. However, more rapid introduction of new codes would
permit reflection of the codes in claims data more quickly, and thus
would permit eventual adjustment of payment rates sooner than otherwise
possible. This capability could be of particular use where otherwise
available data were not sufficient to support an immediate payment
change, because hospital claims data permitting identification of use
of the new technology would be available more quickly.
    This change would reduce the time between discussion of a proposed
code and its implementation from a minimum of 11 months to 6 months. It
would allow for the collection of MedPAR data a full year earlier than
under the current process, providing the possibility that DRG revisions
based on new codes could be expedited by up to 1 year.
    There would be significant challenges to making this proposed
process work. Because the changes would not be published in the
proposed rule, the public would be given less opportunity to consider
the merits of the proposals, and it would have to either attend the
spring meeting of the Committee or respond to the summary report within
a few weeks. The decisions from the spring meeting must be finalized by
the middle of June in order for us to include the changes in the
Addendum of the final rule and in order to make changes in the GROUPER
software to be effective October 1; it may be necessary to schedule the
spring meeting earlier to meet this deadline. The opportunity to
solicit additional input from industry groups and experts would be
curtailed because of the short time lines. There would be an increased
risk of errors related to revisions in the procedure code index (a
manual process performed by HCFA), as there would be less time
available to review and revise the procedure index to ensure that all
changes are accurately reflected.
    For example, we are creating a new procedure code to capture
percutaneous gastrojejunostomy (code 44.32). All coding instructions
(indexing, inclusion terms, and exclusion terms) must be verified so
that the procedure is appropriately indexed. If one of the many index
entries for gastrojejunostomy is not correctly updated, percutaneous
gastrojejunostomy would be assigned to another gastroenterostomy (code
44.39), which is an operating room procedure. This can have a
significant impact on national health care data. Coders at different
hospitals may follow different entries and arrive at different codes.
To limit the potential for confusion in the hospital and coding
communities resulting from two separate schedules for implementing code
changes, we would limit these changes to those that meet our definition
of new technology eligible for special treatment as proposed below. It
would not be necessary, however, to demonstrate that the cases
involving the new technology would be inadequately paid, since there
would be no payment impacts of these changes.
    The changes would be included in the Addendum of the proposed rule
for the inpatient hospital prospective payment system, and placed on
the website for use by the industry in updating books and software
systems. They also would be published in the final rule, and included
in the CD-ROM version of ICD-9-CM that is distributed by the Government
Printing Office. We are requesting public comments on this proposal.
c. Limitations of ICD-9-CM
    While the updating process currently in use may not lend itself to
expeditiously incorporating new medical services and technologies into
the ICD-9-CM coding system, another important factor is the dated and
limited structure of the ICD-9-CM system. The ICD-9-CM system was
developed in the 1970s and implemented in 1979. Dramatic advances have
occurred in medicine since that time. Although the ICD-9-CM
Coordination and Maintenance Committee has attempted to make coding
modifications to capture new technology, it has sometimes been
difficult to achieve a reasonable result.
    The ICD-9-CM procedure codes are made up of four digits: two
numerical characters followed by a decimal, and then two additional
numerical characters. The first two digits indicate a category, such as
36--Operations on the vessels of the heart. The third digit provides
additional breakdown, such as 36.0--Removal of coronary artery
obstruction and insertion of stents. When the fourth digit is added,
the code is fully described. There are only 10 codes available within
each category (fourth digits 0-9). Once a category is full, we must
either combine types of similar procedures under one code, or find a
place in another section of the codebook for a new code. The benefit of
such a system is that we can collapse the codes into categories when
analyzing claims data to capture a wide range of similar procedures.
However, if similar codes are placed in separate sections of the code
book, coders may not easily find them. Errors may occur when trying to
identify particular types of cases when codes are not carefully placed
within a system such as the current ICD-9-CM.
    ICD-9-CM is 22 years old and the premises on which the coding
system was established are dated. A number of approaches and techniques
used for procedures such as lasers and the use of scopes were not
anticipated when the structure of ICD-9-CM was developed. Consequently,
the basic categories were established on technology that is now
outdated. Making needed coding changes each year has been quite
difficult and involves making compromises that effect the precision of
the coding.
 d. Short-Term Solutions Within the ICD-9-CM Structure
    To consider how we might better respond to requests for new codes
in the short term, we examined ICD-9-CM to attempt to identify an open
series of codes that could be used for new procedures and technologies.
There are currently 16 chapters of procedure codes. However, codes
17.00 through 17.99 are not in use. These codes are found between
Chapter 3, "Operations on the Eye," and Chapter 4, "Operations on
the Ear." This series of 100 codes could be used to provide codes for
new procedures and technology. To fully utilize this new series of
codes, we would assign new procedures to the next available code.
    A limitation of this approach would be that this new chapter would
capture a diverse group of procedures potentially affecting all body
systems. Assigning procedure codes to this new chapter would
undoubtedly create

[[Page 22671]]

considerable confusion for coders. Currently, procedures are grouped by
body system, and similar procedures are placed in categories. This
arrangement assists the coder in choosing the most appropriate code
because he or she can quickly review closely related codes that are
together. Using Chapter 17 for new technology codes, on the other hand,
would mean that closely related codes would be widely separated.
    Use of Chapter 17 would also require a major revision of coding
rules since coders are taught to identify codes within a group of
similar procedures. They are not accustomed to looking for a list of
unrelated procedures in a separate section of the coding book.
    To supplement the Chapter 17 codes, the Coordination and
Maintenance Committee may be able to assign vacant codes in other
chapters. However, large numbers of sequences are already fully or
nearly fully occupied, and this strategy would only provide limited
availability of new codes.
e. Alternative Short-Term Approaches
    Some observers have expressed concern that the additional codes
available within the ICD-9-CM code set may not be adequate to
accommodate both routine changes in coding and the new technologies
under consideration here, particularly if a long-term change, such as
adoption of ICD-10-PCS, is significantly delayed. We have examined
several alternative short-term options in the event the additional
available codes are used before a long-term solution is reached. In
evaluating these alternatives, one must consider the changes each
entails to hospitals' and HCFA's coding and claims processing systems,
and the time necessary to implement such changes (balanced against the
timeframe for adopting a long-term coding solution).
    Expanding ICD-9-CM procedure codes by making them alphanumeric or
adding a fifth digit would make available a substantial number of new
codes for new technology but would require substantial system changes
and create standards issues. This approach was extensively discussed in
meetings of the ICD-9-CM Coordination and Maintenance Committee prior
to the development of ICD-10-PCS. Input from the public indicated that
such a significant modification to a limited and dated system would
only make the system worse. The time it would take to make this system
work well would be longer than that required to build a new system and
the resources needed for system changes would be significant. Such a
modification of the ICD-9-CM standard code set would require the formal
standards setting process prescribed by the regulations implementing
the Health Insurance Portability and Accountability Act of 1996 (Public
Law 104-191). We solicit comments from the public about the
desirability of pursuing expansion and modification of the ICD-9-CM
standards for this purpose.
    Using the V-code section of ICD-9-CM diagnosis codes to report new
technology would not require any systems changes or create any
standards issues and would create a moderate number of codes for new
technology. We have discussed this recommendation with NCHS. NCHS
opposed this option as an inappropriate use of diagnosis codes. While
"V" codes are used for the classification of factors influencing
health status and contact with health services, they are not a
substitute for procedure coding. By adding procedure coding concepts to
the diagnosis coding system, confusion could easily lead to increased
errors. Furthermore, the V-code section has only a limited number of
available spots.
    We also considered using HCFA Common Procedure Coding System
(HCPCS) codes to report use of new technology for inpatient cases.
However, using HCPCS would require a moderate amount of systems change
and may require the formal standards setting process prescribed by
Public Law 104-191, since the HCPCS code set is not the standard for
inpatient services. However, it would make a substantial number of
codes available for new technology. Alphanumeric HCPCS codes are
currently used in outpatient departments and physician offices for
reporting services, and they are used on a limited basis by hospitals
in reporting specific inpatient services. For instance, alphanumeric
HCPCS codes are used for reporting the use of hemophilia clotting
factors used during an inpatient stay.
    Use of HCPCS codes would require that a new service or technology
either be assigned a code through otherwise applicable processes for
HCPCS coding or that HCFA assign a specific, temporary code for use in
connection with new technology payments for inpatient hospital
services. Specifically assigned codes could be assigned relatively
quickly. However, use of such codes would run the risk of confusion if
other codes were assigned to the same service or items when used in
other settings. More generally, HCPCS coding would duplicate
information found in the ICD-9-CM procedure codes. Careful attention to
integration of coding across the two systems would be necessary, and
dissemination of information about correct coding to hospital coders
would present challenges. Even with excellent integration and
dissemination, the risk of confusion by hospital coders would be high.
    The use of HCPCS codes would also raise questions on how the
accuracy of claims data will be assessed. HCFA contracts with Peer
Review Organizations (PROs) to validate the accuracy of coded data.
Consideration would need to be given to how the accuracy of these data
could be verified. If two separate coding systems with overlapping
information are used, considerable variations in reporting practices
might arise.
    Similar to the option of using alphanumeric ICD-9-CM procedure
codes, changes in systems and in hospital coding procedures that would
be associated with this approach would take time and resources to
implement for hospitals, HCFA, and potentially other payers such as
Medicare secondary insurers.
    In recognition of these considerations, we do not propose to
proceed with use of HCPCS codes for this purpose at the present. We
believe this possibility should be revisited later if the ICD-9-CM
codes in fact prove inadequate and if a longer term solution is not yet
available. However, we are encouraging public comments on the concept
of using HCPCS codes to identify specific new technologies on inpatient
hospital claims.
f. Development of ICD-10-PCS; A Possible Long-Term Solution
    While acknowledging the limitations of the ICD-9-CM system, the
Secretary designated the ICD-9-CM system as the national standard in a
final rule in the Federal Register on August 17, 2000 (65 FR 50311)
following notice and comment rulemaking in accordance with Public Law
104-191. In that same final rule, the public was advised that there
would be a need in the near future to replace this dated coding system
with a system that could better capture today's health care
information. At that time, work was proceeding on an updated variant of
the ICD system, ICD-10, that could replace ICD-9-CM, but this system
was not yet completed. The World Health Organization developed ICD-10
as an international diagnosis coding system. NCHS has been modifying
ICD-10 to replace the diagnosis section of ICD-9-CM. This system is
being referred to as ICD-10-CM. At the same time, HCFA has been
developing the ICD-10-Procedure Coding System (ICD-10-PCS) as a
possible replacement for the ICD-9-CM procedure codes.

[[Page 22672]]

    Criteria for the development of a new procedure coding system were
established by the National Committee on Vital and Health Statistics
(NCVHS). The criteria included the following:
     Completeness--all substantially different procedures have
a unique code.
     Expandability--the structure of the system allows
incorporation of new procedures and technologies as unique codes.
     Standardized terminology--the coding system includes
definitions of the terminology used. While the meaning of the specific
words can vary in common usage, the coding scheme does not include
multiple meanings for the same term. Each term is assigned a specific
meaning.
     Multiaxial--the system has a multiaxial structure with
each code character having the same meaning within the specific
procedure section and across procedure sections to the extent possible.
     Diagnostic information is not included in the procedure
description.
    The ICD-10-PCS was developed using these criteria by HCFA through a
contract with 3M Health Information Systems. The ICD-10-PCS system
provides much greater code capacity because all substantially different
procedures have a unique code. While the ICD-9-CM procedure coding
system is limited to a maximum of 10,000 codes, the current draft of
ICD-10-PCS contains 197,769 codes and the number could be expanded
further.
g. Public Meeting on Implementing ICD-10-PCS
    The Department of Health and Human Services is starting the process
of soliciting public comments on whether it should proceed to adopt
ICD-10-PCS as the national standard for coding inpatient hospital
services to replace ICD-9-CM procedures. A public meeting on this issue
has been scheduled for May 17, 2001, in the HCFA Auditorium in
Baltimore, Maryland. Information on this meeting can be found in the
Summary Report of the November 2000 meeting of the ICD-9-CM
Coordination and Maintenance Committee at: www.hcfa.gov/medicare/
icd9cm.htm. The public is encouraged to attend and participate in the
discussion on whether ICD-10-PCS should become a national standard.
Organizations and groups will be given the opportunity to make a brief
presentation on their members' behalf. Groups wishing to be scheduled
to present should contact Pat Brooks, HCFA, at (410) 786-5318. This
meeting will begin the process of evaluating ICD-10-PCS as a future
national standard.
h. Proposed Methods of Expeditiously Incorporating New Medical Services
and Technologies Into the Coding System
    In summary, we are proposing a two-part strategy for expeditiously
incorporating new medical services and technologies into the clinical
coding system used with respect to payment for inpatient hospital
services. First, we are proposing to shorten the timeframe for
implementing new codes by processing changes that do not have payment
implications without first publishing them in the proposed rule in the
spring. This means new codes approved at the spring meeting of the ICD-
9-CM Coordination and Maintenance Committee could be implemented by
October of the same year. We also are proposing to move the November
meeting to December. These proposed changes would reduce the time it
currently takes to implement new codes, as well as reduce the time
required to collect data through the MedPAR by up to a year in many
cases.
    Second, to make more codes available to identify new technology, we
will immediately begin to work with the public to use Chapter 17 of
ICD-9-CM procedures. This will provide room for 100 additional
procedure codes. We also will continue the current process of adding
and revising codes within the current chapters as room and structure
allow. Our long-range strategy is to consider the implementation of
ICD-10-PCS as a replacement system for ICD-9-CM. However, because of
the need to address any such change through notice and public
rulemaking procedures (a proposed and final rule), in addition to the
need to revise both our payment systems and those of hospitals, this
could occur no earlier than October 2003.
7. New Requirements Relative to New Services and Technologies
    Section 533 of Public Law 106-554 addresses the process by which
new technologies and services are introduced into the DRGs and how DRG
payment rates are to be adapted to accommodate them. Section 533(b)
added new section 1886(d)(5)(K) to the Act, which specifies that the
Secretary must establish criteria to use to identify a new technology
after notice and an opportunity for public comment. Under new section
1886(d)(5)(K)(ii)(I) of the Act, effective for discharges occurring on
or after October 1, 2001, the Secretary is required to apply a
mechanism to recognize the costs of new technologies if, "based on the
estimated costs incurred with respect to discharges involving such
service or technology, the DRG prospective payment rate otherwise
applicable to such discharges under this subsection is inadequate."
Further, new section 1886(d)(5)(K)(v) stipulates that the requirement
for an additional payment for a new medical service or technology may
be satisfied by means of "an add-on payment, a payment adjustment, or
any other similar mechanism for increasing the amount otherwise payable
with respect to a discharge under this subsection." Section 533(b)
also added a new section 1886(d)(5)(L) to the Act which states that the
requirement for an additional payment for a new medical service or
technology may also be met through establishing "new-technology groups
into which a new medical service or technology will be classified."
    In section IV.F. of this preamble, we are setting forth, for public
comment, our policy proposals to implement section 1886(d)(5)(K) of the
Act, as added by section 533(b) of Public Law 106-554. In summary, the
proposed policies include--
     Proposed criteria for identifying new medical services and
technologies for additional payments beyond the DRG prospective payment
system payment.
     The proposed methodology for determining the adequacy of
current payments for new services and technology.
     The proposed methodology for determining the amount of the
additional payment and for payment mechanism for new medical services
and technologies.


III. Proposed Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts "for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level." In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New
England County Metropolitan Areas (NECMAs) issued by the Office of
Management and Budget

[[Page 22673]]

(OMB). The OMB also designates Consolidated MSAs (CMSAs). A CMSA is a
metropolitan area with a population of one million or more, comprising
two or more PMSAs (identified by their separate economic and social
character). For purposes of the hospital wage index, we use the PMSAs
rather than CMSAs since they allow a more precise breakdown of labor
costs. If a metropolitan area is not designated as part of a PMSA, we
use the applicable MSA. Rural areas are areas outside a designated MSA,
PMSA, or NECMA. For purposes of the wage index, we combine all of the
rural counties in a State to calculate a rural wage index for that
State.
    We note that, effective April 1, 1990, the term Metropolitan Area
(MA) replaced the term MSA (which had been used since June 30, 1983) to
describe the set of metropolitan areas consisting of MSAs, PMSAs, and
CMSAs. The terminology was changed by OMB in the March 30, 1990 Federal
Register to distinguish between the individual metropolitan areas known
as MSAs and the set of all metropolitan areas (MSAs, PMSAs, and CMSAs)
(55 FR 12154). For purposes of the prospective payment system, we will
continue to refer to these areas as MSAs.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act
requires that we update the wage index annually. Furthermore, this
section provides that the Secretary base the update on a survey of
wages and wage-related costs of short-term, acute care hospitals. The
survey should measure, to the extent feasible, the earnings and paid
hours of employment by occupational category, and must exclude the
wages and wage-related costs incurred in furnishing skilled nursing
services. As discussed below in section III.F. of this preamble, we
also take into account the geographic reclassification of hospitals in
accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when
calculating the wage index.

B. FY 2002 Wage Index Update

    The proposed FY 2002 wage index values in section V of the Addendum
to this proposed rule (effective for hospital discharges occurring on
or after October 1, 2001 and before October 1, 2002) are based on the
data collected from the Medicare cost reports submitted by hospitals
for cost reporting periods beginning in FY 1998 (the FY 2001 wage index
was based on FY 1997 wage data).
    The proposed FY 2002 wage index includes the following categories
of data associated with costs paid under the hospital inpatient
prospective payment system (as well as outpatient costs), which were
also included in the FY 2001 wage index:
     Salaries and hours from short-term, acute care hospitals.
     Home office costs and hours.
     Certain contract labor costs and hours.
     Wage-related costs.
    Consistent with the wage index methodology for FY 2001, the
proposed wage index for FY 2002 also continues to exclude the direct
and overhead salaries and hours for services not paid through the
inpatient prospective payment system such as skilled nursing facility
(SNF) services, home health services, or other subprovider components
that are not subject to the prospective payment system.
    We calculate a separate Puerto Rico-specific wage index and apply
it to the Puerto Rico standardized amount. (See 62 FR 45984 and 46041.)
This wage index is based solely on Puerto Rico's data. Finally, section
4410 of Public Law 105-33 provides that, for discharges on or after
October 1, 1997, the area wage index applicable to any hospital that is
not located in a rural area may not be less than the area wage index
applicable to hospitals located in rural areas in that State.

C. FY 2002 Wage Index Proposal

    Because it is used to adjust payments to hospitals under the
prospective payment system, the hospital wage index should, to the
extent possible, reflect the wage costs associated with the areas of
the hospital included under the hospital inpatient prospective payment
system. In response to concerns within the hospital community related
to the removal, from the wage index calculation, of costs related to
graduate medical education (GME) (teaching physicians and residents)
and certified registered nurse anesthetists (CRNAs), which are paid by
Medicare separately from the prospective payment system, the American
Hospital Association (AHA) convened a workgroup to develop a consensus
recommendation on this issue. The workgroup recommended that costs
related to GME and CRNAs be phased out of the wage index calculation
over a 5-year period. Based upon our analysis of hospitals' FY 1996
wage data, and consistent with the AHA workgroup's recommendation, we
specified in the July 30, 1999 final rule (64 FR 41505) that we would
phase-out these costs from the calculation of the wage index over a 5-
year period, beginning in FY 2000. In keeping with the decision to
phase-out costs related to GME and CRNAs, the proposed FY 2002 wage
index is based on a blend of 40 percent of an average hourly wage
including these costs, and 60 percent of an average hourly wage
excluding these costs.
    Beginning with the FY 1998 cost reports, we revised the Worksheet
S-3, Part II so that hospitals can separately report teaching physician
Part A costs on lines 4.01, 10.01, 12.01, and 18.01. Therefore, it is
no longer necessary for us to conduct the special survey we used for
the FY 2000 and FY 2001 wage indexes (64 FR 41505 and 65 FR 47071).
1. Health Insurance and Health-Related Costs
    In the August 1, 2000 final rule, we clarified our definition of
"purchased health insurance costs" and "self-insurance" for
hospitals that provide health insurance to employees (65 FR 47073). For
purposes of the wage index, purchased or self-funded health insurance
plan costs include the hospitals' insurance premium costs, external
administration costs, and the share of costs for services delivered to
employees.
    In response to a comment received concerning this issue, we stated
that, for self-funded health insurance costs, personnel costs
associated with hospital staff that deliver the services to the
employees must continue to be excluded from wage-related costs if the
costs are already included in the wage data as salaries on Worksheet S-
3, Part II, Line 1. However, after further consideration of this
policy, particularly with respect to concerns expressed by our fiscal
intermediaries about the level of effort required during the wage index
desk review process to ensure hospitals are appropriately identifying
and excluding these costs, we are proposing a revision. Effective with
the calculation of the FY 2003 wage index, for either purchased or
self-funded health insurance, we would allow health insurance personnel
costs, associated with hospital staff that deliver services to
employees, to be included as part of the wage-related costs. We believe
this proposed revised policy will ensure that health insurance costs
are consistently reported by hospitals. Health insurance costs would
continue to be developed using generally accepted accounting
principles.
    In the August 1, 2000 final rule (65 FR 47073), we further
clarified that health-related costs (including employee physical
examinations, flu shots, and clinic visits, and other services that are
not covered by employees' health insurance plans but are provided at no
cost or at discounted rates to employees of the hospital) may be
included as "other" wage-related costs if, among

[[Page 22674]]

other criteria, the combined cost of all such health-related costs is
greater than one percent of the hospital's total salaries (less
excluded area salaries).
    For purposes of calculating the FY 2003 wage index (which will be
based on data for cost reporting periods beginning in FY 1999), we are
proposing to revise this policy to allow hospitals to include health-
related costs as allowable core wage-related costs.
2. Costs of Contracted Pharmacy and Laboratory Services
    Our policy concerning inclusion of contract labor costs for
purposes of calculating the wage index has evolved over the years. We
recognize the role of contract labor in meeting special personnel needs
of many hospitals. In addition, improvements in the wage data have
allowed us to more accurately identify contract labor costs and hours.
As a result, effective with the FY 1994 wage index, we included the
costs of direct patient care contract services in the wage index
calculation. The FY 1999 wage index included the costs and hours of
certain management contract services, and the FY 2000 wage index
included the costs for contract physician Part A services. (The 1996
proposed rule (61 FR 27456) provided an in-depth background to the
issues related to the inclusion of contract labor costs in the wage
index calculation.)
    We revised the 1998 cost report to collect the data associated with
contract pharmacy, Worksheet S-3, Part II, Line 9.01, and contract
laboratory, Worksheet S-3, Part II, Line 9.02. The cost reporting
instructions for these line numbers followed that for all contract
labor lines; that is, to include the amount paid for services furnished
under contract for direct patient care, and not include cost for
equipment, supplies, travel expenses, and other miscellaneous or
overhead items (Medicare Provider Reimbursement Manual, Part 2, Cost
Reporting Forms and Instructions, Chapter 36, Transmittal 6, page 36-
32). Effective with the FY 2002 wage index, which uses FY 1998 wage
data, we are proposing to include the costs and hours of contract
pharmacy and laboratory.
3. Collection of Occupational Mix Data
    Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E)
of the Act to require that the Secretary must provide for the
collection of data every 3 years on the occupational mix of employees
for each short-term, acute care hospital participating in the Medicare
program, in order to construct an occupational mix adjustment to the
wage index. The initial collection of these data must be completed by
September 30, 2003, for application beginning October 1, 2004.
    Currently, the wage data collected by HCFA on the cost report
reflect the sum of wages, hours, and wage-related costs for all
hospital employees. There is no separate collection by occupational
categories of employees, such as registered nurses or physical
therapists. Total salaries and hours reflect management decisions made
by hospitals in terms of how many employees within a certain occupation
to employ to treat different types of patients. For example, a large
academic medical center may tend to hire more high-cost specialized
employees to treat its more acutely ill patient population. The
argument is that the higher labor costs incurred to treat this patient
population are reflected in the higher case mix of these hospitals, and
therefore, reflecting these costs in the wage index is essentially
counting them twice.
    An occupational mix adjustment can be used to account for hospital
management decisions about how many employees to hire in each
occupational category. Occupational mix data measure the price the
hospital must pay for employees within each category. A wage index that
reflected only these market prices would remove the impact of
management decisions about the mix of employees needed and, therefore,
better capture geographic variations in the labor market.
    We have examined this issue previously. In the May 27, 1994 Federal
Register (59 FR 27724), we discussed the outcome of consideration of
this issue by a hospital workgroup. At that time, the workgroup's
consensus was that the data required to implement an occupational mix
adjustment were not available and the likelihood of obtaining such data
would be minimal. There seemed to be little support among hospital
industry representatives for developing a system that would create
additional reporting burdens with an unproven or minimal impact on the
distribution of payments. Also, in the August 30, 1991 Federal Register
(56 FR 43219), we stated our belief that the collection of these data
would be costly and difficult.
    In considering the format to collect occupational mix data, we
looked to data currently being collected by the Bureau of Labor
Statistics (BLS), which conducts an annual mail survey to produce
estimates of employment and wages for specific occupations. This
program, Occupational Employment Statistics (OES), collects data on
wage and salary workers in nonfarm establishments in order to produce
employment and wage estimates for over 700 occupations.
    The OES survey collects wage data in 12 hourly rate intervals.
Employers report the number of employees in an occupation per each wage
range. To illustrate, the wage intervals used for the 1999 survey are
as follows:

----------------------------------------------------------------------------------------------------------------
              Interval                            Hourly wages                          Annual wages
----------------------------------------------------------------------------------------------------------------
Range A.............................  Under $6.75.........................  Under $14,040
Range B.............................  6.75 to 8.49........................  14,040 to 17,659
Range C.............................  8.50 to 10.74.......................  17,660 to 22,359
Range D.............................  10.75 to 13.49......................  22,360 to 28,079
Range E.............................  13.50 to 16.99......................  28,080 to 35,359
Range F.............................  17.00 to 21.49......................  35,360 to 44,719
Range G.............................  21.50 to 27.24......................  44,720 to 56,679
Range H.............................  27.25 to 34.49......................  56,680 to 71,759
Range I.............................  34.50 to 43.74......................  71,760 to 90,999
Range J.............................  43.75 to 55.49......................  91,000 to 115,439
Range K.............................  55.50 to 69.99......................  115,440 to 145,599
Range L.............................  70,000 and over.....................  145,600 and over
----------------------------------------------------------------------------------------------------------------

    It should be noted that this table is for illustrative purposes,
and we may update the data ranges in our actual collection instrument.
    Although we initially considered using the OES data, section 304(c)
of Public Law 106-554 requires us to

[[Page 22675]]

collect data from every short-term, acute care hospital. The OES data
are a sample survey and, therefore, as currently conducted, are not
consistent with the statutory requirement to include data from every
hospital. Another issue with using OES data is that, for purposes of
the Medicare wage index, the hospitals' data must be reviewed and
verified by the fiscal intermediaries. The OES survey is a voluntary
survey.
    Although we decided to pursue a separate data collection effort
than OES, we propose to model our format after the one used by OES. In
this way, hospitals participating in the OES survey, should have no
additional recordkeeping and reporting requirements beyond those of the
OES survey.
    The OES survey of the hospital industry is designed to capture all
occupational categories within the industry. For purposes of adjusting
the wage index for occupational mix, we do not believe it is necessary
to collect data from such a comprehensive scope of categories.
Furthermore, because the data must be audited, a comprehensive list of
categories would be excessively burdensome.
    In deciding which job categories to include, we reviewed the
occupational categories collected by OES and identified those with at
least 35,000 hospital employees. Our goal is to collect data from a
sample of job categories that provides a valid measure of wage rates
within a geographical area. Using this threshold of at least 35,000
employees within a category nationally, we are proposing to collect the
number of employees by wage range as illustrated in the above table,
for the occupational categories listed below. The following data are
based on the 1999 OES survey:

----------------------------------------------------------------------------------------------------------------
                                                                                    Percent of
               OES code                         Category             Employees    total hospital    Mean hourly
                                                                                     employees         wage
----------------------------------------------------------------------------------------------------------------
15008.................................  Medicine and Health               93,680            1.9           $27.38
                                         Services Managers.
27302.................................  Social Workers, Medial            53,360            1.1            16.33
                                         and Psychiatric.
32102.................................  Physicians and Surgeons.         125,640            2.6            43.76
32308.................................  Physical Therapists.....          39,840            0.8            26.14
32502.................................  Registered Nurses.......       1,231,980           25.0            21.12
32505.................................  Licensed Practical               206,360            4.2            13.39
                                         Nurses.
32517.................................  Pharmacists.............          46,860            1.0            28.62
32911, 32928, 32931...................  Clinical Technologists           122,380            2.50           11.69
                                         and Technicians.
51002, 55105, 55108, 55305............  First-Line Supervisors           445,730            9.5            11.39
                                         and Clerical Workers.
55332, 55347
65038, 67002, 67005...................  Food Preparation Workers         218,440            4.5             8.17
                                         and Housekeeping.
66008.................................  Nursing Aides,                   301,240            6.2             8.67
                                         Orderlies, and
                                         Attendants.
----------------------------------------------------------------------------------------------------------------

    We believe this list of occupational categories provides a good
representation of the employee mix at most hospitals. Definitions for
each occupational category are available on the BLS website at http://
stats.bls.gov/oes/1999/oes_alph.htm.
    We have yet to settle on the methodology on how to use the
occupational mix index. One option would be to weight each hospital's
wage index by its occupational mix index. This requires calculating a
national occupational mix index and then breaking it down by MSA and by
hospital, similar to how the wage index is broken down. In this way,
the wage index would capture geographic differences in wage rates. The
decision about how to apply the occupational mix index to the wage
index depends on the quality of the data collected, since this effort
will be the first time wage and hour data by occupation are collected
in this audited manner.
    Section 304(c) directs the Secretary to provide for the collection
of these data by September 30, 2003, and to apply them in the wage
index by October 1, 2004. Therefore, the data are to be incorporated in
the FY 2005 wage index. Under our current timetable, the FY 2005 wage
index will be based on wage data collected from hospitals' cost
reporting periods beginning during FY 2001. In order to facilitate the
fiscal intermediaries' review of these data, we believe the
occupational mix data should coincide with the data otherwise used to
calculate the cost report. Therefore, we will conduct a special survey
of all short-term acute-care hospitals that are required to report wage
data to collect these data coinciding with hospitals' FY 2001 cost
reports. More specific procedural information regarding this survey
will be included in the FY 2002 final rule scheduled to be published by
August 1, 2001.

D. Verification of Wage Data From the Medicare Cost Report

    The data for the proposed FY 2002 wage index were obtained from
Worksheet S-3, Parts II and III of the FY 1998 Medicare cost reports.
The data file used to construct the proposed wage index includes FY
1998 data submitted to HCFA as of mid-February 2001. As in past years,
we performed an intensive review of the wage data, mostly through the
use of edits designed to identify aberrant data.
    We asked our fiscal intermediaries to revise or verify data
elements that resulted in specific edit failures. Some unresolved data
elements are included in the calculation of the proposed FY 2002 wage
index pending their resolution before calculation of the final FY 2002
wage index. We have instructed the intermediaries to complete their
verification of questionable data elements and to transmit any changes
to the wage data no later than April 9, 2001. We expect that all
unresolved data elements will be resolved by that date. The revised
data will be reflected in the final rule.
    Also, as part of our editing process, we removed data for 47
hospitals that failed edits. For 23 of these hospitals, we were unable
to obtain sufficient documentation to verify or revise the data because
the hospitals are no longer participating in the Medicare program or
are in bankruptcy status. Twenty-four hospitals had incomplete or
inaccurate data resulting in zero or negative average hourly wages.
Therefore, they were removed from the calculation. The data for these
hospitals will be included in the final wage index if we receive
corrected data that pass our edits. As a result, the proposed FY 2002
wage index is calculated based on FY 1998 wage data for 4,868
hospitals.

[[Page 22676]]

E. Computation of the Proposed FY 2002 Wage Index

    We note a proposed technical change to the FY 2002 calculation. For
the FY 2001 wage index calculation, we initially proposed to subtract
Line 13 of Worksheet S-3, Part III from total hours when determining
the excluded hours ratio used to estimate the amount of overhead
attributed to excluded areas (65 FR 26299). However, the formula
resulted in large and inappropriate increases in the average hourly
wages for some hospitals (65 FR 47074), particularly hospitals that
have large overhead and excluded area costs. Therefore, for the final
FY 2001 wage index calculation, we reverted to the FY 2000 excluded
hours ratio formula, which did not subtract Line 13.
    We, and others in the hospital community, continued to believe that
subtracting Part III, Line 13 from total hours is the correct formula
for determining the excluded hours ratio. We analyzed how the
application of this formula resulted in overstated average hourly wages
for some hospitals and how we could improve the overall accuracy of the
overhead allocation methodology. We became aware that the problem was
not in the excluded hours ratio formula. Rather, our wage index
calculation did not also remove the overhead wage-related costs
associated with excluded areas, an amount that must be estimated before
it can be subtracted from the calculation. The combined effect of
applying the excluded hours ratio formula, which appropriately removes
salaries of lower-wage, overhead employees, and not subtracting
overhead wage-related costs associated with excluded areas, resulted in
overstated salary costs and average hourly wages.
    For the FY 2002 wage index calculation, we are proposing to apply
the excluded hours ratio formula that subtracts Part III, Line 13 from
total hours. Additionally, for the first time in the wage index
calculation, we estimated and subtracted overhead wage-related costs
allocated to excluded areas.
    After we applied this new calculation, there were still a few
hospitals that experienced large increases in their average hourly
wages. The intermediaries verified that the hospitals' wage data were
accurate, so we kept the data in the wage index calculation. These
hospitals primarily function as SNFs, psychiatric hospitals, or
rehabilitation hospitals that have few acute care beds. The hospitals'
higher average hourly wages reflect the costs of the higher salaried
employees that remain in the wage index calculation after we subtract
the costs of excluded area and associated overhead employees.
    The method used to compute the proposed FY 2002 wage index follows.
    Step 1--As noted above, we are proposing to base the FY 2002 wage
index on wage data reported on the FY 1998 Medicare cost reports. We
gathered data from each of the non-Federal, short-term, acute care
hospitals for which data were reported on the Worksheet S-3, Parts II
and III of the Medicare cost report for the hospital's cost reporting
period beginning on or after October 1, 1997 and before October 1,
1998. In addition, we included data from any hospital that had cost
reporting periods beginning before October 1997 and reported a cost
reporting period covering all of FY 1998. These data were included
because no other data from these hospitals would be available for the
cost reporting period described above, and because particular labor
market areas might be affected due to the omission of these hospitals.
However, we generally describe these wage data as FY 1998 data. We note
that, if a hospital had more than one cost reporting period beginning
during FY 1998 (for example, a hospital had two short cost reporting
periods beginning on or after October 1, 1997 and before October 1,
1998), we included wage data from only one of the cost reporting
periods, the longest, in the wage index calculation. If there was more
than one cost reporting period and the periods were equal in length, we
included the wage data from the latest period in the wage index
calculation.
    Step 2--Salaries--The method used to compute a hospital's average
hourly wage is a blend of 40 percent of the hospital's average hourly
wage including all GME and CRNA costs, and 60 percent of the hospital's
average hourly wage after eliminating all GME and CRNA costs.
    In calculating a hospital's average salaries plus wage-related
costs, including all GME and CRNA costs, we subtracted from Line 1
(total salaries) the Part B salaries reported on Lines 3 and 5, home
office salaries reported on Line 7, and excluded salaries reported on
Lines 8 and 8.01 (that is, direct salaries attributable to skilled
nursing facility services, home health services, and other subprovider
components not subject to the prospective payment system). We also
subtracted from Line 1 the salaries for which no hours were reported on
Lines 2, 4, and 6. To determine total salaries plus wage-related costs,
we added to the net hospital salaries the costs of contract labor for
direct patient care, certain top management, pharmacy, laboratory, and
physician Part A services (Lines 9, 9.01, 9.02, 10, and 10.01), home
office salaries and wage-related costs reported by the hospital on
Lines 11, 12, and 12.01, and nonexcluded area wage-related costs (Lines
13, 14, 16, 18, 18.01, and 20).
    We note that contract labor and home office salaries for which no
corresponding hours are reported were not included. In addition, wage-
related costs for specific categories of employees (Lines 16, 18,
18.01, and 20) are excluded if no corresponding salaries are reported
for those employees (Lines 2, 4, 4.01, and 6, respectively).
    We then calculated a hospital's salaries plus wage-related costs by
subtracting from total salaries the salaries plus wage-related costs
for teaching physicians, Lines (4.01, 10.01, 12.01, and 18.01), Part A
CRNAs (Lines 2 and 16), and residents (Lines 6 and 20).
    Step 3--Hours--With the exception of wage-related costs, for which
there are no associated hours, we computed total hours using the same
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries
and total overhead hours greater than zero, we then allocated overhead
costs to areas of the hospital excluded from the wage index
calculation. First, we determined the ratio of excluded area hours (sum
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours
(Line 1 minus the sum of Part II, Lines 3, 5, 7, and Part III, Line 13
of Worksheet S-3). We then computed the amounts of overhead salaries
and hours to be allocated to excluded areas by multiplying the above
ratio by the total overhead salaries and hours reported on Line 13 of
Worksheet S-3, Part III. Next, we computed the amounts of overhead
wage-related costs to be allocated to excluded areas using three steps:
(1) We determined the ratio of overhead hours (Part III, Line 13) to
revised hours (Line 1 minus the sum of Lines 3, 5, and 7); (2) we
computed overhead wage-related costs by multiplying the overhead hours
ratio by wage-related costs reported on Part II, Lines 13, 14, 16, 18,
18.01, and 20; and (3) we multiplied the computed overhead wage-related
costs by the above excluded area hours ratio. Finally, we subtracted
the computed overhead salaries, wage-related costs, and hours
associated with excluded areas from the total salaries (plus wage-
related costs) and hours derived in Steps 2 and 3. Using the above
method for computing overhead salaries, wage-related costs, and hours
to allocate to

[[Page 22677]]

excluded areas, we also computed these costs excluding all costs
associated with GME and CRNAs (Lines 2, 4.01, 6, 10.01, 12.01, and
18.01).
    Step 5--For each hospital, we adjusted the total salaries plus
wage-related costs to a common period to determine total adjusted
salaries plus wage-related costs. To make the wage adjustment, we
estimated the percentage change in the employment cost index (ECI) for
compensation for each 30-day increment from October 14, 1997 through
April 15, 1999 for private industry hospital workers from the Bureau of
Labor Statistics' Compensation and Working Conditions. We use the ECI
because it reflects the price increase associated with total
compensation (salaries plus fringes) rather than just the increase in
salaries. In addition, the ECI includes managers as well as other
hospital workers. This methodology to compute the monthly update
factors uses actual quarterly ECI data and assures that the update
factors match the actual quarterly and annual percent changes. The
factors used to adjust the hospital's data were based on the midpoint
of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor
------------------------------------------------------------------------
12/14/97......................................     01/15/98      1.03292
01/14/98......................................     02/15/98      1.03048
02/14/98......................................     03/15/98      1.02828
03/14/98......................................     04/15/98      1.02621
04/14/98......................................     05/15/98      1.02411
05/14/98......................................     06/15/98      1.02200
06/14/98......................................     07/15/98      1.01973
07/14/98......................................     08/15/98      1.01714
08/14/98......................................     09/15/98      1.01424
09/14/98......................................     10/15/98      1.01137
10/14/98......................................     11/15/98      1.00885
11/14/98......................................     12/15/98      1.00669
12/14/98......................................     01/15/99      1.00462
01/14/99......................................     02/15/99      1.00239
02/14/99......................................     03/15/99      1.00000
03/14/99......................................     04/15/99      0.99746
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning
January 1, 1998 and ending December 31, 1998 is June 30, 1998. An
adjustment factor of 1.01973 would be applied to the wages of a
hospital with such a cost reporting period. In addition, for the data
for any cost reporting period that began in FY 1998 and covered a
period of less than 360 days or more than 370 days, we annualized the
data to reflect a 1-year cost report. Annualization is accomplished by
dividing the data by the number of days in the cost report and then
multiplying the results by 365.
    Step 6--Each hospital was assigned to its appropriate urban or
rural labor market area before any reclassifications under section
1886(d)(8)(B) or section 1886(d)(10) of the Act. Within each urban or
rural labor market area, we added the total adjusted salaries plus
wage-related costs obtained in Step 5 (with and without GME and CRNA
costs) for all hospitals in that area to determine the total adjusted
salaries plus wage-related costs for the labor market area.
    Step 7--We divided the total adjusted salaries plus wage-related
costs obtained under both methods in Step 6 by the sum of the
corresponding total hours (from Step 4) for all hospitals in each labor
market area to determine an average hourly wage for the area.
    Because the proposed FY 2002 wage index is based on a blend of
average hourly wages, we then added 40 percent of the average hourly
wage calculated without removing GME and CRNA costs, and 60 percent of
the average hourly wage calculated with these costs excluded.
    Step 8--We added the total adjusted salaries plus wage-related
costs obtained in Step 5 for all hospitals in the nation and then
divided the sum by the national sum of total hours from Step 4 to
arrive at a national average hourly wage (using the same blending
methodology described in Step 7). Using the data as described above,
the national average hourly wage is $22.0545.
    Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8.
    Step 10--Following the process set forth above, we developed a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. (The national Puerto Rico
standardized amount is adjusted by a wage index calculated for all
Puerto Rico labor market areas based on the national average hourly
wage as described above.) We added the total adjusted salaries plus
wage-related costs (as calculated in Step 5) for all hospitals in
Puerto Rico and divided the sum by the total hours for Puerto Rico (as
calculated in Step 4) to arrive at an overall average hourly wage of
$10.8100 for Puerto Rico. For each labor market area in Puerto Rico, we
calculated the Puerto Rico-specific wage index value by dividing the
area average hourly wage (as calculated in Step 7) by the overall
Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for
discharges on or after October 1, 1997, the area wage index applicable
to any hospital that is located in an urban area may not be less than
the area wage index applicable to hospitals located in rural areas in
that State. Furthermore, this wage index floor is to be implemented in
such a manner as to ensure that aggregate prospective payment system
payments are not greater or less than those that would have been made
in the year if this section did not apply. For FY 2002, this change
affects 240 hospitals in 41 MSAs. The MSAs affected by this provision
are identified in Table 4A by a footnote.

F. Revisions to the Wage Index Based on Hospital Redesignation

    Under section 1886(d)(8)(B) of the Act, hospitals in certain rural
counties adjacent to one or more MSAs are considered to be located in
one of the adjacent MSAs if certain standards are met. Under section
1886(d)(10) of the Act, the MGCRB considers applications by hospitals
for geographic reclassification for purposes of payment under the
prospective payment system.
1. Provisions of Public Law 106-554
    Section 304 of Public Law 106-554 made changes to several
provisions of section 1886(d)(10) of the Act relating to hospital
reclassifications and the wage index:
     Section 304(a) amended section 1886(d)(10)(D) of the Act
by adding a clause (v) to provide that, beginning with FY 2001, an
MGCRB decision on a hospital reclassification for purposes of the wage
index is effective for 3 years, unless the hospital elects to terminate
the reclassification. Section 304(a) also provides that the MGCRB must
use the 3 most recent years' average hourly wage data in evaluating a
hospital's reclassification application for FY 2003 and any succeeding
fiscal year (section 1886(d)(10)(D)(vi) of the Act).
     Section 304(b) provides that, by October 1, 2001, the
Secretary must establish a mechanism under which a statewide entity may
apply to have all of the geographic areas in the State treated as a
single geographic area for purposes of computing and applying a single
wage index, for reclassifications beginning in FY 2003. Section 304(b)
further requires that, if the Secretary applies a statewide wage index
to an area, an application by an individual hospital in that area would
not be considered.
    We address our policy proposals relating to implementation of these
three provisions of sections 304(a) and (b) of Public Law 106-554 in
section IV. of this proposed rule. The following

[[Page 22678]]

discussion of the proposed revisions to the wage index based on
hospital redesignations reflects these proposed policies.
2. Effects of Reclassification
    The methodology for determining the wage index values for
redesignated hospitals is applied jointly to the hospitals located in
those rural counties that were deemed urban under section 1886(d)(8)(B)
of the Act and those hospitals that were reclassified as a result of
the MGCRB decisions under section 1886(d)(10) of the Act. Section
1886(d)(8)(C) of the Act provides that the application of the wage
index to redesignated hospitals is dependent on the hypothetical impact
that the wage data from these hospitals would have on the wage index
value for the area to which they have been redesignated. Therefore, as
provided in section 1886(d)(8)(C) of the Act, the wage index values
were determined by considering the following:
     If including the wage data for the redesignated hospitals
would reduce the wage index value for the area to which the hospitals
are redesignated by 1 percentage point or less, the area wage index
value determined exclusive of the wage data for the redesignated
hospitals applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals
reduces the wage index value for the area to which the hospitals are
redesignated by more than 1 percentage point, the area wage index
determined inclusive of the wage data for the redesignated hospitals
(the combined wage index value) applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals
increases the wage index value for the area to which the hospitals are
redesignated, both the area and the redesignated hospitals receive the
combined wage index value.
     The wage index value for a redesignated urban or rural
hospital cannot be reduced below the wage index value for the rural
areas of the State in which the hospital is located.
     Rural areas whose wage index values would be reduced by
excluding the wage data for hospitals that have been redesignated to
another area continue to have their wage index values calculated as if
no redesignation had occurred.
     Rural areas whose wage index values increase as a result
of excluding the wage data for the hospitals that have been
redesignated to another area have their wage index values calculated
exclusive of the wage data of the redesignated hospitals.
     Currently, the wage index value for an urban area is
calculated exclusive of the wage data for hospitals that have been
reclassified to another area.
    For the FY 2002 wage index, we are proposing to include the wage
data for a reclassified urban hospital in both the area to which it is
reclassified and the MSA where the hospital is physically located. We
believe this will improve consistency and predictability in hospital
reclassification and wage indices, as well as alleviate the
fluctuations in the wage indexes due to reclassifications. For example,
hospitals applying to reclassify into another area will know which
hospitals' data will be included in calculating the wage index, because
even if some hospitals in the area are reclassified, their data will be
included in the calculation of the wage index of the area where they
are geographically located. Also, in some cases, excluding the data of
hospitals reclassified to another MSA could have a large downward
impact on the wage index of the MSA in which the hospital is physically
located. The negative impact of removing the data of the reclassified
hospitals from the wage index calculation could lead to large wage
disparities between the reclassified hospitals and other hospitals in
the MSA, as the remaining hospitals would receive reduced payments due
to a lower wage index. Our proposed approach would promote consistency,
and simplify our rules, with respect to how we construct the wage
indexes of rural and urban areas. As noted above, in the case of rural
hospitals redesignated to another area, the wage index of the rural
area where the hospitals are geographically located is calculated by
including the wage data of the redesignated hospitals (unless doing so
would result in a lower wage index).
    Finally, we note that the Medicare Payment Advisory Commission
(MedPAC), in its March 2001 "Report to the Congress: Medicare Payment
Policy," recommended this policy (p. 82). (Section VII. of this
preamble includes a discussion of MedPAC's recommendations and our
responses.) To illustrate the potential negative impact on hospitals in
an area where reclassifications of some hospitals to another area
results in a decline in the wage index after the reclassified hospitals
are excluded from the wage index calculation, MedPAC points out that
hospitals in several MSAs have organized to pay qualifying hospitals
not to reclassify. Our proposed policy change would remove this
distorted incentive.
    The proposed wage index values for FY 2002 are shown in Tables 4A,
4B, 4C, and 4F in the Addendum to this proposed rule. Hospitals that
are redesignated should use the wage index values shown in Table 4C.
Areas in Table 4C may have more than one wage index value because the
wage index value for a redesignated urban or rural hospital cannot be
reduced below the wage index value for the rural areas of the State in
which the hospital is located. When the wage index value of the area to
which a hospital is redesignated is lower than the wage index value for
the rural areas of the State in which the hospital is located, the
redesignated hospital receives the higher wage index value; that is,
the wage index value for the rural areas of the State in which it is
located, rather than the wage index value otherwise applicable to the
redesignated hospitals.
    As mentioned earlier, section 304(a) of Public Law 106-554 amended
section 1886(d)(10)(D) of the Act by adding a new clause (v) to provide
that a reclassification of a hospital by the MGCRB for purposes of the
wage index is effective for 3 years (instead of 1 year) unless, under
procedures established by the Secretary, the hospital elects to
terminate the reclassification before the end of the 3-year period.
Section 304(a) of Public Law 106-554 also amended section
1886(d)(10)(D) of the Act to specify that, for applications for
reclassification for the wage index for FYs 2003 and later, the MGCRB
must base any comparison of the average hourly wage of the hospital
with the average hourly wage for hospitals in the area in which it is
located and the area to which it seeks reclassification, using data
from the most recently published hospital wage survey (as of the date
of the hospital's application), as well as data from each of the two
immediately preceding surveys. (Our policy proposals to incorporate the
provisions of section 304(a) of Public Law 106-554 in the regulations
are addressed in section IV.E. of this proposed rule).
    Consistent with the section 304(a) amendment, Tables 3A and 3B list
the 3-year average hourly wage for each labor market area before the
redesignation of hospitals, based on FY 1996, 1997, and 1998 wage data.
In addition, Table 2 in the Addendum to this proposed rule includes the
adjusted average hourly wage for each hospital from the FY 1996 and FY
1997 cost reporting periods, as well as the FY 1998 period. Table 2
also shows the 3-year average (as well as hospitals' average hourly
wages for each of the 3 years) that the MGCRB will use (as published in
the final rule following

[[Page 22679]]

this proposed rule) to evaluate a hospital's application for
reclassification for FY 2003 (unless that average hourly wage is later
revised in accordance with Sec. 412.63(w)(2)). The 3-year averages are
calculated by dividing the sum of the dollars (adjusted to a common
reporting period using the method described previously in this section)
across all 3 years, by the sum of the hours. If a hospital is missing
data for any of the previous years, its average hourly wage for the 3-
year period is calculated based on the data available during that
period.
    Applications for FY 2003 reclassifications are due to the MGCRB by
September 1, 2001. (We note that the new location and mailing address
of the MGCRB and the Provider Reimbursement Review Board (PRRB) is:
2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670. The MGCRB
and PRRB will be functioning at this new location as of May 21, 2001.
Also, please specify whether the mail is intended for the MGCRB or the
PRRB.)
    At the time this proposed wage index was constructed, the MGCRB had
completed its review of FY 2002 reclassification requests. The proposed
FY 2002 wage index values incorporate all 643 hospitals redesignated
for purposes of the wage index (hospitals redesignated under section
1886(d)(8)(B) or section 1886(d)(10) of the Act for FY 2002. The final
number of reclassifications may vary because some MGCRB decisions are
still under review by the Administrator and because some hospitals may
withdraw their requests for reclassification.
    Any changes to the wage index that result from withdrawals of
requests for reclassification, wage index corrections, appeals, and the
Administrator's review process will be incorporated into the wage index
values published in the final rule following this proposed rule. The
changes may affect not only the wage index value for specific
geographic areas, but also the wage index value redesignated hospitals
receive; that is, whether they receive the wage index value for the
area to which they are redesignated, or a wage index value that
includes the data for both the hospitals already in the area and the
redesignated hospitals. Further, the wage index value for the area from
which the hospitals are redesignated may be affected.
    Under Sec. 412.273, hospitals that have been reclassified by the
MGCRB are permitted to withdraw their applications within 45 days of
the publication of this proposed rule in the Federal Register. The
request for withdrawal of an application for reclassification that
would be effective in FY 2002 must be received by the MGCRB by June 18,
2001. A hospital that requests to withdraw its application may not
later request that the MGCRB decision be reinstated.
    In addition, because the 3-year effect of the amendment made by
section 304(a) of Public Law 106-554 is applicable to reclassifications
for FY 2001 (which had already taken place prior to the date of
enactment of Public Law 106-554) and because the application process
for reclassification for FY 2002 had already been completed by the date
of enactment, we are deeming hospitals that are reclassified for
purposes of the wage index to one area for FY 2001 and are reclassified
for purposes of the wage index or the standardized amount to another
area for FY 2002 to be reclassified to the area for which they applied
for FY 2002, unless they elect to receive the wage index
reclassification they were granted for FY 2001. Consistent with our
application withdrawal procedures under Sec. 412.273, we are allowing
hospitals that wish to receive, for FY 2002, the reclassification they
were granted for FY 2001, to withdraw their applications within 45 days
of the publication of this proposed rule (that is, by June 18, 2001.
(These procedures are discussed in detail under section IV.E.1. of this
preamble.)
3. Statewide Wage Index
    As stated earlier, section 304(b) of Public Law 106-554 requires
the Secretary to establish, by October 1, 2001, a process (based on the
voluntary process utilized by the Secretary under section 1848 of the
Act) under which an appropriate statewide entity may apply to have all
the geographic areas in the State treated as a single geographic area
for purposes of computing and applying a single wage index, for
reclassification beginning in FY 2003. Section 304(b) further requires
that, if the Secretary applies a statewide wage index to an area, an
application by an individual hospital in that area would not be
considered. We believe the reference to the voluntary process utilized
by the Secretary under section 1848 of the Act refers to the process
whereby we allow a State containing multiple physician fee schedule
payment areas (and thus multiple geographic adjustment factors) to
voluntarily convert to a single statewide payment area with a single
geographic adjustment factor (see Sec. 414.4(b), as discussed in the
June 24, 1994 Federal Register (59 FR 32759).
    Section IV.E. of this proposed rule contains our policy proposal
for implementing the provisions of section 304(b) in regulations. We
are proposing that hospitals that seek a statewide geographic
reclassification under the amendments made by section 304(b) of Public
Law 106-554 apply to the MGCRB with the same deadlines as other
hospitals. An approved application by the MGCRB would mean that the
data of all the hospitals in the State would be used in computing and
applying the wage index for that State. We are proposing that the
statewide wage index would be applicable for 3 years from the date of
approval or until all of the participating hospitals terminate their
approved statewide wage index reclassification (effective with the next
full fiscal year after their termination request), whichever occurs
first.
4. Section 402 of Public Law 106-113
    Beginning October 1, 1988, section 1886(d)(8)(B) of the Act
required us to treat a hospital located in a rural county adjacent to
one or more urban areas as being located in the MSA to which the
greatest number of workers in the county commute, if the rural county
would otherwise be considered part of an urban area under the standards
published in the Federal Register on January 3, 1980 (45 FR 956) for
designating MSAs (and for designating NECMAs), and if the commuting
rates used in determining outlying counties (or, for New England,
similar recognized areas) were determined on the basis of the aggregate
number of resident workers who commute to (and, if applicable under the
standards, from) the central county or counties of all contiguous MSAs
(or NECMAs). Hospitals that met the criteria using the January 3, 1980
version of these OMB standards were deemed urban for purposes of the
standardized amounts and for purposes of assigning the wage data index.
    During FY 1994, we incorporated the revised MSA definitions based
on 1990 census population data. As a result, some counties that
previously were treated as an adjacent county under section
1886(d)(8)(B) of the Act officially became part of certain MSAs.
However, as specified in the Act, we continued to utilize the January
3, 1980 standards. For FY 2000, there were 27 hospitals in 22 counties
affected by this provision.
    On March 30, 1990, OMB issued revised 1990 standards (55 FR 12154).
There has been an increasing amount of interest by the hospital
industry in using the 1990 standards as opposed to the 1980 standards
to determine which hospitals qualify under the provisions set forth in
section 1886(d)(8)(B) of the Act. Section 402 of Public Law 106-113
provides that, with respect to FYs 2001

[[Page 22680]]

and 2002, a hospital may elect to have the 1990 standards applied to it
for purposes of section 1886(d)(8)(B) and that, beginning with FY 2003,
hospitals will be required to use the standards published in the
Federal Register by the Director of OMB based on the most recent
decennial census.
    We worked with staff of the Population Distribution Branch within
the Population Division of the United States Census Bureau to compile a
list of hospitals that meet the March 30, 1990 standards using 1990
census population data and information prepared for the Metropolitan
Area Standards Review Project. The conditions that must be met for a
hospital located in a rural county adjacent to one or more urban areas
to be treated as being located in the urban area to which the greatest
number of workers in the rural county commute are as follows:
     The rural county would otherwise be considered part of an
MSA but for the fact that the rural county does not meet the standard
established by OMB relating to the commuting rate of workers between
the county and the central county or counties of any adjacent MSA.
     The county would meet the commuting standard if commuting
to (and where applicable, from) the central county or central counties
of all adjacent MSAs or NECMAs (rather than to just one) were
considered.
    A county meeting the above commuting standards must also meet the
other standards established by OMB for inclusion in an MSA as an
outlying county. In order to meet these requirements, the rural county
must have a degree of "metropolitan character." "Metropolitan
character" is established by meeting one of the following OMB
standards, which were published in the Federal Register on March 30,
1990:
    a. At least 50 percent of the employed workers residing in the
county commute to the central county/counties, and either--
     The population density of the county is at least 25
persons per square mile; or
     At least 10 percent of the population, or at least 5,000
persons, lives in the qualifier urbanized area(s).
    b. From 40 to 50 percent of the employed workers commute to the
central county/counties, and either--
     The population density is at least 35 persons per square
mile; or
     At least 10 percent of the population, or at least 5,000
persons, lives in the qualifier urbanized area(s).
    c. From 25 to 40 percent of the employed workers commute to the
central county/counties and either the population density of the county
is at least 50 persons per square mile, or any two of the following
conditions exist:
     Population density is at least 35 persons per square mile.
     At least 35 percent of the population is urban.
     At least 10 percent of the population, or at least 5,000
persons, lives in the qualifier urbanized area(s).
    d. From 15 to 25 percent of the employed workers commute to the
central county/counties, the population density of the county is at
least 50 persons per square mile, and any two of the following
conditions also exist:
     Population density is at least 60 persons per square mile.
     At least 35 percent of the population is urban.
     Population growth between the last two decennial censuses
is at least 20 percent.
     At least 10 percent of the population, or at least 5,000
persons, lives in the qualifier urbanized area(s).
    Also accepted as meeting this commuting requirement under item d.
are:
     The number of persons working in the county who live in
the central county/counties is equal to at least 15 percent of the
number of employed workers living in the county; or
     The sum of the number of workers commuting to and from the
central county/counties is equal to at least 20 percent of the number
of employed workers living in the county.
    e. From 15 to 25 percent of the employed workers commute to the
central county/counties, the population density of the county is less
than 50 persons per square mile, and any two of the following
conditions also exist:
     At least 35 percent of the population is urban.
     Population growth between the last two decennial censuses
is at least 20 percent.
     At least 10 percent of the population, or at least 5,000
persons, lives in the qualifier urbanized area(s).
    f. At least 2,500 of the population lives in a central city of the
MSA located in the qualifier urbanized area(s).
    When we apply the 1990 standards as opposed to 1980 standards, the
number of qualifying counties increases from 22 to 31. On the basis of
the evaluation of these data, effective for discharges occurring on or
after October 1, 2001, hospitals located in the first column of the
following table are proposed to be considered, for purposes of
assigning the inpatient standardized amount and the wage index, to be
located in the corresponding urban area in the second column:

------------------------------------------------------------------------
               Rural County                              MSA
------------------------------------------------------------------------
Chilton, AL...............................  Birmingham, AL.
Marshall, AL..............................  Huntsville, AL.
Talladega, AL.............................  Anniston, AL.
Bradford, FL..............................  Jacksonville, FL.
Hendry, FL................................  West Palm Beach-Boca Raton,
                                             FL.
Putnam, FL................................  Gainesville, FL.
Jackson, GA...............................  Athens, GA.
Christian, IL.............................  Springfield, IL.
Macoupin, IL..............................  St. Louis, MO-IL.
Piatt, IL.................................  Champaign-Urbana, IL.
Brown, IN.................................  Indianapolis, IN.
Carroll, IN...............................  Lafayette, IN.
Henry, IN.................................  Indianapolis, IN.
Jefferson, KS.............................  Topeka, KS.
Barry, MI.................................  Kalamazoo-Battle Creek, MI.
Cass, MI..................................  Benton Harbor, MI.
Ionia, MI.................................  Grand Rapids-Muskegon-
                                             Holland, MI.
Shiawassee, MI............................  Flint, MI.
Tuscola, MI...............................  Saginaw-Bay City-Midland, MI
Caswell, NC...............................  Greensboro-Winston Salem-
                                             High Point, NC.
Greene, NC................................  Greenville, NC.
Harnett, NC...............................  Raleigh-Durham-Chapel Hill,

                                             NC.
Wilson, NC................................  Rocky Mount, NC.
Preble, OH................................  Dayton-Springfield, OH.
Van Wert, OH..............................  Lima, OH.
Adams, PA.................................  York, PA.
Lawrence, PA..............................  Pittsburgh, PA.
Monroe, PA................................  Newark, NJ.
Schuylkill, PA............................  Reading, PA.
Jefferson, WI.............................  Milwaukee-Waukesha, WI.
Walworth, WI..............................  Milwaukee-Waukesha, WI.
------------------------------------------------------------------------

    There are 14 counties that meet the qualifying criteria using 1990
standards that did not meet the criteria using the 1980 standards.
These 14 counties are:

Chilton, AL
Talladega, AL
Bradford, FL
Hendry, FL
Putnam, FL
Jackson, GA
Piatt, IL
Brown, IN
Carroll, IN
Greene, NC
Wilson, NC
Adams, PA
Monroe, PA
Schuylkill, PA

    In addition, when we apply the 1980 standards for three of the
counties, the MSA assigned is different from the MSA that would be
assigned using the 1990 standards. These counties are as follows:

[[Page 22681]]

------------------------------------------------------------------------
                                     1980 MSA
         Rural county              designation      1990 MSA designation
------------------------------------------------------------------------
Ionia, MI.....................  Lansing-East       Grand Rapids-Muskegon-
                                 Lansing, MI.       Hollan, MI.
Caswell, NC...................  Danville, VA.....  Greensboro-Winston
                                                    Salem-High Point,
                                                    NC.
Harnett, NC...................  Fayetteville, NC.  Raleigh-Durham-Chapel
                                                    Hill, NC.
------------------------------------------------------------------------

    Section 402 of Public Law 106-113 states that hospitals may elect
to use either the January 3, 1980 standards or the March 30, 1990
standards for payments during FY 2001 and FY 2002. We are assuming
hospitals will elect to go to the MSA resulting in the highest payment
amount accounting for the applicable wage indexes and standardized
amounts. Based on our analysis, we believe all hospitals in the
designated rural counties would benefit by being included in the
respective MSAs shown above. Therefore, we are proposing to assign the
FY 2002 standardized amount and wage index of each respective MSA to
the affected hospitals. Hospitals electing not to use the 1990
standards would be required to notify their fiscal intermediary in
writing of such election prior to September 1, 2001, in order to allow
sufficient time to reflect this change in our payment systems. (For FY
2001, we are providing further information related to this election,
including recalculated wage indexes, through separate instruction.)
    We note that five rural counties no longer meet the qualifying
criteria when we apply the revised OMB standards. These rural counties
are as follows: Indian River, FL; Mason, IL; Owen, IN; Morrow, OH; and
Lincoln, WV. For FY 2002, we propose to continue to treat these
hospitals as attached to an MSA on the basis of the 1980 standards.
Beginning FY 2003, they must meet the 1990 standards to continue to be
treated as such.
    We stated in the August 1, 2000 final rule that implemented changes
to the prospective payment system for FY 2001 that we were in the
process of working with OMB to identify the hospitals that would be
affected by section 402 of Public Law 106-113 (65 FR 47076). We further
indicated we would revise payments to hospitals in the affected
counties as soon as data were available. Now that the affected counties
have been identified, hospitals in the 14 counties identified above
will be offered the opportunity to elect this designation, as
previously described. (For FY 2001, we are providing further
information related to this election, including recalculated wage
indexes, through separate instructions.)
    Finally, three hospitals located in counties affected by the
revised OMB standards also have been reclassified by the MGCRB. The
affected hospitals are listed below. If the hospitals do not wish to be
reclassified for FY 2002 based on their new designation as described
above, they must follow the procedures described above for requesting
that their reclassification be withdrawn.

------------------------------------------------------------------------
                                                           FY 2002
       Provider Number        1990 MSA designation    reclassification,
                                                             MSA
------------------------------------------------------------------------
34-0071.....................  Raleigh-Durham-       Fayetteville, NC.
                               Chapel Hill, NC.
34-0124.....................  Raleigh-Durham-       Fayetteville, NC.
                               Chapel Hill, NC.
34-0126.....................  Rocky Mount, NC.....  Raleigh-Durham-
                                                     Chapel Hill, NC
                                                     (wage index only.)
------------------------------------------------------------------------

G. Requests for Wage Data Corrections

    As stated in section II.D. of this preamble, the data file used to
construct the proposed wage index includes FY 1998 data submitted to
HCFA as of mid-February 2001. In a memorandum dated February 5, 2001,
we instructed all Medicare intermediaries to inform the prospective
payment hospitals they service of the availability of the wage data
file and the process and timeframe for requesting revisions. The wage
data file was made available on February 13, 2001 through the Internet
at HCFA's home page (http://www.hcfa.gov). We also instructed the
intermediaries to advise hospitals of the availability of these data
either through their representative hospital organizations or directly
from HCFA. Additional details on ordering this data file are discussed
in section IX.A of this preamble, "Requests for Data from the
Public."
    In addition, Table 2 in the Addendum to this proposed rule contains
each hospital's adjusted average hourly wage used to construct the
proposed wage index values for the past 3 years, including the FY 1998
data used to construct the proposed FY 2002 wage index. It should be
noted that the hospital average hourly wages shown in Table 2 do not
reflect any changes made to a hospital's data after mid-February 2001.
Changes approved by a hospital's fiscal intermediary and forwarded to
HCFA by April 9, 2001, will be reflected on the final public use wage
data file scheduled to be made available on or about May 4, 2001.
    We believe hospitals have sufficient time to ensure the accuracy of
their FY 1998 wage data. Moreover, the ultimate responsibility for
accurately completing the cost report rests with the hospital, which
must attest to the accuracy of the data at the time the cost report is
filed. Hospitals should know what wage data were submitted on their
cost reports. Additionally, they are notified of any changes to their
data as a result of their intermediary's review. However, if a hospital
believed that its FY 1998 wage data were incorrectly reported, the
hospital was to submit corrections along with complete, detailed
supporting documentation to its intermediary by March 9, 2001.
Hospitals were notified of this deadline, and of all other possible
deadlines and requirements, through written communications from their
fiscal intermediaries in early February 2001.
    After reviewing requested changes submitted by hospitals,
intermediaries transmitted any revised cost reports to HCFA and
forwarded a copy of the revised Worksheet S-3, Parts II and III to the
hospitals. In addition, fiscal intermediaries were to notify hospitals
of the changes or the reasons that changes were not accepted. This
procedure ensures that hospitals have every opportunity to verify the
data that will be used to construct their wage index values. We believe
that fiscal intermediaries are generally in the best position to make
evaluations regarding the appropriateness of a particular cost and
whether it should be included in the wage index data. However, if a
hospital disagrees with the intermediary's resolution of a requested
change, the hospital may contact HCFA in an effort to resolve policy
disputes. We note that the April 9, 2001 deadline also applies to these
requested changes. We will not consider factual determinations at this
time, as these

[[Page 22682]]

should have been resolved earlier in the process.
    Any wage data corrections to be reflected in the final wage index
must have been reviewed and verified by the intermediary and
transmitted to HCFA on or before April 9, 2001. (The deadline for
hospitals to request changes from their fiscal intermediaries was March
9, 2001.) These deadlines are necessary to allow sufficient time to
review and process the data so that the final wage index calculation
can be completed for development of the final prospective payment rates
to be published by August 1, 2001.
    We have created the process described above to resolve all
substantive wage data correction disputes before we finalize the wage
data for the FY 2002 payment rates. Accordingly, hospitals that do not
meet the procedural deadlines set forth above will not be afforded a
later opportunity to submit wage data corrections or to dispute the
intermediary's decision with respect to requested changes.
Specifically, our policy is that hospitals that do not meet the
procedural deadlines set forth above will not be permitted to later
challenge, before the Provider Reimbursement Review Board, HCFA's
failure to make a requested data revision (See W. A. Foote Memorial
Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001)).
    The final wage data public use file will be released by May 4,
2001. Hospitals should examine both Table 2 of this proposed rule and
the May 4 final public use wage data file (which reflects revisions to
the data used to calculate the values in Table 2) to verify the data
HCFA is using to calculate the wage index. Hospitals will have until
June 4, 2001, to submit requests to correct errors in the final wage
data due to data entry or tabulation errors by the intermediary or
HCFA. The correction requests that will be considered at that time will
be limited to errors in the entry or tabulation of the final wage data
that the hospital could not have known about before the release of the
final wage data public use file.
    As with the file made available in February 2001, HCFA will make
the final wage data file released in May 2001 available to hospital
associations and the public on the Internet. However, the May 2001 file
will be made available solely for the limited purpose of identifying
any potential errors made by HCFA or the intermediary in the entry of
the final wage data that result from the correction process described
above (with the March 9 deadline). Hospitals are encouraged to review
their hospital wage data promptly after the release of the final file.
Data presented at this time cannot be used by hospitals to initiate new
wage data correction requests.
    If, after reviewing the final file, a hospital believes that its
wage data are incorrect due to a fiscal intermediary or HCFA error in
the entry or tabulation of the final wage data, it should send a letter
to both its fiscal intermediary and HCFA. The letters should outline
why the hospital believes an error exists and provide all supporting
information, including dates. These requests must be received by HCFA
and the intermediaries no later than June 4, 2001. Requests mailed to
HCFA should be sent to: Health Care Financing Administration; Center
for Health Plans and Providers; Attention: Wage Index Team, Division of
Acute Care; C4-07-07; 7500 Security Boulevard; Baltimore, MD 21244-
1850. Each request must also be sent to the hospital's fiscal
intermediary. The intermediary will review requests upon receipt and
contact HCFA immediately to discuss its findings.
    At this point in the process, that is, between release of the May
2001 wage index file and June 4, 2001, changes to the hospital wage
data will only be made in those very limited situations involving an
error by the intermediary or HCFA that the hospital could not have
known about before its review of the final wage data file.
Specifically, neither the intermediary nor HCFA will accept the
following types of requests at this stage of the process:
     Requests for wage data corrections that were submitted too
late to be included in the data transmitted to HCFA on or before April
9, 2001.
     Requests for correction of errors that were not, but could
have been, identified during the hospital's review of the February 2001
wage data file.
     Requests to revisit factual determinations or policy
interpretations made by the intermediary or HCFA during the wage data
correction process.
    Verified corrections to the wage index received timely (that is, by
June 4, 2001) will be incorporated into the final wage index to be
published by August 1, 2001 and effective October 1, 2001.
    Again, we believe the wage data correction process described above
provides hospitals with sufficient opportunity to bring errors in their
wage data to the intermediary's attention. Moreover, because hospitals
will have access to the final wage data by early May 2001, they will
have the opportunity to detect any data entry or tabulation errors made
by the intermediary or HCFA before the development and publication of
the FY 2002 wage index by August 1, 2001 and the implementation of the
FY 2002 wage index on October 1, 2001. If hospitals avail themselves of
this opportunity, the wage index implemented on October 1 should be
accurate. Nevertheless, in the event that errors are identified after
that date, we retain the right to make midyear changes to the wage
index under very limited circumstances.
    Specifically, in accordance with Sec. 412.63(w)(2), we may make
midyear corrections to the wage index only in those limited
circumstances in which a hospital can show (1) That the intermediary or
HCFA made an error in tabulating its data; and (2) that the hospital
could not have known about the error, or did not have an opportunity to
correct the error, before the beginning of FY 2002 (that is, by the
June 4, 2001 deadline). As indicated earlier, since a hospital will
have the opportunity to verify its data, and the intermediary will
notify the hospital of any changes, we do not foresee any specific
circumstances under which midyear corrections would be necessary.
However, should a midyear correction be necessary, the wage index-
change for the affected area will be effective prospectively from the
date the correction is made.

H. Modification of the Process and Timetable for Updating the Wage
Index

    Although the wage data correction process described above has
proven successful in the past for ensuring that the wage data used each
year to calculate the wage indexes are generally reliable and accurate,
we are concerned about the growing volume of wage data revisions
initiated by hospitals during February and the first week of March. We
first discussed this issue in the FY 1998 proposed rule (62 FR 29918).
At that time, we noted that, in developing the FY 1997 wage index, the
wage data were revised between the proposed and final rules for more
than 13 percent of the hospitals (approximately 700 of 5,200). Last
year, in developing the FY 2001 wage index, the wage data were revised
between the proposed and final rules for more than 32 percent of the
hospitals (1,605 of 4,950).
    Since hospitals are expected to submit complete and accurate cost
report data, and intermediaries review and request hospitals to correct
problematic wage data before the data are submitted to HCFA in mid-
November, we believe there should be limited revisions at this stage of
the process. We remind the hospital community that the primary purpose
of this file is to allow hospitals to verify that we have their correct
data on file. However, according to information received from the

[[Page 22683]]

intermediaries, these late revisions are frequently due to hospitals'
lack of responsiveness in providing sufficient information to the
intermediaries during the desk reviews (that is, during the
intermediary's review of the hospital's cost report).
    We are proposing two changes to the wage index development process
and timetable beginning with the FY 2003 wage index. We believe these
changes will encourage earlier submissions of wage data revisions by
hospitals and will allow intermediaries more time to address the heavy
volume of revisions requested after the intermediaries have completed
their desk reviews of these data. First, we are proposing to release
the preliminary wage data file by early January rather than early
February. As with the current preliminary file, the January file would
include desk reviewed wage data that intermediaries submitted to HCFA
by November of the previous year and any timely revisions HCFA received
from intermediaries prior to release of the January file. Hospitals
would be allowed until early February to submit requests for wage data
revisions to their intermediaries. Second, intermediaries would be
allowed approximately 8 weeks from the hospitals' deadline for
submitting revision requests (that is, until early March) to review and
transmit revised wage data to HCFA.
    We believe this proposed revised schedule will improve the quality
of the wage index by allowing intermediaries more time to sufficiently
review wage data revisions before the data are submitted to HCFA.
Further, we believe the proposed revised process will encourage
hospitals to submit revisions earlier, so the proposed wage index, from
which hospitals base geographic reclassification decisions, is more
accurate.

IV. Other Decisions and Proposed Changes to the Prospective Payment
System for Inpatient Operating Costs and Graduate Medical Education
Costs

A. Sole Community Hospitals (SCHs) (Secs. 412.63, 412.71, 412.72,
412.73, 412.75, 412.77, and 412.92)

    For the benefit of the reader, in this proposed rule, we are
discussing and seeking to clarify many of the rules and policies
governing SCHs because of the legislative changes that have occurred in
recent years. It has been several years since the SCH criteria have
been published in one location. Rather than continue to refer to
various Federal Register documents and sections of the Code of Federal
Regulations, we are publishing a detailed discussion of these policies,
proposing to make further changes to incorporate the provisions of
sections 213, 302, 303, 304, and 311 of Public Law 106-554, and
proposing to clarify other related policies.
    Under the hospital inpatient prospective payment system, special
payment protections are provided to an SCH. Section 1886(d)(5)(D)(iii)
of the Act defines an SCH as a hospital that, by reason of factors such
as isolated location, weather conditions, travel conditions, absence of
other like hospitals (as determined by the Secretary), or historical
designation by the Secretary as an Essential Access Community Hospital
(EACH), is the sole source of inpatient hospital services reasonably
available to Medicare beneficiaries. The regulations that set forth the
criteria that a hospital must meet to be classified as an SCH are at
Sec. 412.92. To be classified as an SCH, a hospital must either have
been designated as an SCH prior to the beginning of the prospective
payment system on October 1, 1983, and must be located more than 35
miles from other like hospitals, or the hospital must be located in a
rural area and meet one of the following requirements:
     It is located more than 35 miles from other like
hospitals.
     It is located between 25 and 35 miles from other like
hospitals, and it--
--Serves at least 75 percent of all inpatients, or 75 percent of
Medicare beneficiary inpatients, within a 35-mile radius or, if larger,
within its service area; or
--Has fewer than 50 beds and would qualify on the basis of serving 75
percent of its area's inpatients except that some patients seek
specialized care unavailable at the hospital.

     It is located between 15 and 25 miles from other like
hospitals, and because of local topography or extreme weather
conditions, the other like hospitals are inaccessible for at least 30
days in each of 2 out of 3 years.
     The travel time between the hospital and the nearest like
hospital is at least 45 minutes because of distance, posted speed
limits, and predictable weather conditions.
     Effective with hospital cost reporting periods beginning
on or after April 1, 1990, section 1886(d)(5)(D)(i) of the Act, as
amended by section 6003(e) of Public Law 101-239, provides that SCHs
are paid based on whichever of the following rates yields the greatest
aggregate payment:
     The Federal rate applicable to the hospital.
     The updated hospital-specific rate based on FY 1982 costs
per discharge.
     The updated hospital-specific rate based on FY 1987 costs
per discharge.
    Effective with hospital cost reporting periods beginning on or
after October 1, 2000, section 1886(b)(3)(I)(i) of the Act, as added by
section 405 of Public Law 106-113 and amended by section 213 of Public
Law 106-554, provides for other options, in addition to the three
bulleted options in the above paragraph, for determining which rate
would yield the greatest aggregate payment. For discharges for FY 2001
through FY 2003, these additional optional rates are--
     A phase-in blended rate of the updated hospital-specific
rate based on FY 1982 costs per discharge and an FY 1996 hospital-
specific rate; or
     A phase-in blended rate of the updated hospital-specific
rate based on FY 1987 costs per discharge and an FY 1996 hospital-
specific rate.
    For discharges beginning in FY 2004, the additional optional rate
would be 100 percent of the FY 1996 hospital-specific rate.
    For each cost reporting period, the fiscal intermediary determines
which of the payment options will yield the highest rate of payment.
Payments are automatically made at the highest rate using the best data
available at the time the fiscal intermediary makes the determination.
However, it may not be possible for the fiscal intermediary to
determine in advance precisely which of the rates will yield the
highest payment by year's end. In many instances, it is not possible to
forecast the update factor for the Federal rates, outlier payments, the
amount of the DSH adjustment, or the IME adjustment, all of which are
applicable only to payments based on the Federal rate. The fiscal
intermediary makes a final adjustment at the close of the cost
reporting period to determine precisely which of the payment rates
would yield the highest payment to the hospital.
    If a hospital disagrees with the fiscal intermediary's
determination regarding the final amount of program payment to which it
is entitled, it has the right to appeal the fiscal intermediary's
decision in accordance with the procedures set forth in Subpart R of
Part 405, which concern provider payment determinations and appeals.
    In calculating a hospital-specific rate for an SCH based on its FY
1996 cost reporting period, we will, to the extent possible, use the
same methodology that we used to calculate the hospital-specific rate
based on either the FY 1982 or FY 1987 cost reporting period. That

[[Page 22684]]

methodology is set forth in Secs. 412.71, 412.72, 412.73, 412.75 and
412.77.
     If a hospital has a cost reporting period ending in FY
1982, it will be paid a hospital-specific rate based on its FY 1982
costs; or a hospital-specific rate based on its FY 1987 costs; or a

hospital-specific rate based on its FY 1996 costs (which, until FY
2004, would be a blend of the greater of the FY 1982 or FY 1987 costs
and the FY 1996 costs); or it will be paid based on the Federal rate.
     If a hospital has no cost reporting period ending in FY
1982, it will be paid a hospital-specific rate based on its FY 1987
costs; or a hospital-specific rate based on its FY 1996 costs (which,
until FY 2004, would be a blend of its FY 1987 costs and FY 1996
costs); or it will be paid based on the Federal rate.
     If a hospital has no cost reporting period ending in
either FY 1982 or FY 1987, it will be paid based on its FY 1996 costs;
or it will be paid based on the Federal rate.
     If a hospital has no cost reporting period ending in FY
1982, FY 1987, or FY 1996, it cannot be paid based on a hospital-
specific rate; it will be paid based on the Federal rate.
     If a hospital was operating during any or all of FY 1982,
FY 1987, or FY 1996, but, for some reason, the cost report records are
no longer available, the hospital will be treated as if it had no cost
report for the applicable period. The hospital will not be allowed to
substitute any other base period for the FY 1982, FY 1987, or FY 1996
base period.
    For each SCH, the fiscal intermediary will calculate a hospital-
specific rate based on the hospital's FY 1982, FY 1987, or FY 1996 cost
report as follows:
     Determine the hospital's total allowable Medicare
inpatient operating cost, as stated on the cost report.
     Divide the total Medicare operating cost by the number of
Medicare discharges (without adjusting for transfers) in the cost
reporting period to determine the base period cost per case.
     In order to take into consideration the hospital's
individual case-mix, the base year cost per case is divided by the
hospital's case-mix index applicable to the cost reporting period. This
step is necessary to adjust the hospital's base period cost for case
mix. This is done to remove the effects of case mix from the base
period costs per case. Payments using these base period costs are then
adjusted to reflect the actual case mix during the payment year. A
hospital's case mix is computed based on its Medicare patient
discharges subject to DRG-based payment.
    The fiscal intermediary will inform each SCH of its hospital-
specific rate based on its applicable cost reporting period within 180
days after the start of its cost reporting period.
    An SCH is also eligible for a payment adjustment if, for reasons
beyond its control, it experiences a decline in volume of greater than
5 percent compared to its preceding cost reporting period. This
adjustment is also available to hospitals that could qualify as SCHs
but choose not to be paid as SCHs; that is, hospitals that qualify and
successfully apply to be designated as SCHs but continue to receive
payments based on the Federal rate. In addition, section 6003(c)(1) of
Public Law 101-239 deleted the sunset date on the 5-percent volume
decline adjustment, thus allowing SCHs to receive the adjustment
indefinitely. The sunset provision was included under section
1886(d)(5)(C)(ii) of the Act. (Section 6003(c)(1) of Public Law 101-239
amended that provision and redesignated it as section 1886(d)(5)(D) of
the Act.)
    In the September 1, 1983, issue of the Federal Register (48 FR
39781), we stated that any hospital designated as an SCH would retain
that status until it experienced a change in circumstances. Section
6003(e)(3) of Public Law 101-239 specifically stated that any hospital
classified as an SCH as of the date of enactment of Public Law 101-239
(December 19, 1989), will retain its SCH status even if the hospital
did not meet the criteria established under section 6003(e)(1) of that
law. These hospitals are the "grandfathered" SCH hospitals.
Therefore, we have continued to allow hospitals designated as SCHs
prior to December 19, 1989, to be "grandfathered" under current
criteria.
    In the June 4, 1991, Federal Register, we stated that a hospital's
special status as an SCH would not be retained in light of the
hospital's geographic reclassification for purposes of the standardized
amount. In the event the hospital's reclassification ceases, it must
reapply for special status and must meet all of the applicable
qualifying criteria in effect at the time it seeks requalification (56
FR 25482). However, in the event a "grandfathered" SCH was
successfully reclassified, it would be reinstated as an SCH if its
reclassification ceased.
    Section 401(a) of Public Law 106-113 established that any
subsection (d) hospital (section 1886(d) of the Act) located in an
urban area may be redesignated as being located in a rural area if the
hospital meets one of several criteria established by the legislation.
One of these criteria is that the hospital could qualify as an SCH if
the hospital were located in a rural area. Under this provision, an
urban hospital that may have been "grandfathered" as an SCH could now
qualify and receive payment as an SCH if it met the criteria of a rural
SCH. Given this extension of SCH eligibility, we no longer believe it
is necessary to extend special protection to "grandfathered" SCHs
that successfully apply for geographic reclassification through the
MGCRB for the standardized amount after their MGCRB reclassification
ends. This circumstance falls under the provisions of
Secs. 412.92(b)(3) and (b)(5), which state that an approved
classification as an SCH remains in effect without need for reapproval
unless there is a change in the circumstances under which the
classification was approved. We believe that a successful
reclassification by the MGCRB fits the definition of a change in
circumstances.
    Because some hospitals may not have understood the effect
reclassification would have on their special status, under existing
Sec. 412.273(a) we are permitting affected hospitals the option to
withdraw their applications for reclassification for FY 2002, even if
the MGCRB has issued a decision, by submitting a withdrawal request to
the MGCRB within 45 days of publication of this proposed rule. Finally,
just as a competing hospital that closes leaves an opportunity for an
existing hospital to qualify as an SCH, a new hospital that opens in an
area with an existing hospital designated as an SCH endangers the SCH
status of the existing hospital.
    As of October 1, 1997, no designations of hospitals as EACHs can be
made. The EACHs designated by HCFA before October 1, 1997, will
continue to be paid as SCHs for as long as they comply with the terms,
conditions, and limitations under which they were designated as EACHs.
    Under Sec. 412.92(b)(2), we define the effective dates for several
situations in which a hospital gains or gives up SCH status. First, SCH
status and the associated payment adjustment is effective 30 days after
HCFA's written notification to the SCH. Thus, 30 days after the
issuance of HCFA's notice of approval, the hospital is considered to be
an SCH and the payment adjustment is applied to discharges occurring on
or after that date.
    Second, Sec. 412.92(b)(4)(ii) defines the effective date when a
hospital chooses to give up its SCH status. Our policy has always been
that an SCH can elect to give up its SCH status at any time by
submitting a written request to the appropriate HCFA regional office

[[Page 22685]]

through its fiscal intermediary. The change to fully national rates
becomes effective no later than 30 days after the hospital submits its
request. We believe that the "no later than 30 days" policy for the
effective date for cancelling SCH status is in keeping with the
prospective nature of the prospective payment system. In addition, the
30-day timeframe to give up SCH status provides the fiscal
intermediaries with enough time to alter their automated payment
systems prospectively, thus avoiding expensive and time-consuming
reprocessing of claims. The variable timeframe of "no later than 30
days from the date of the hospital's request" also permits the
regional office, the fiscal intermediary, and the hospital to select a
mutually agreeable date, for example, at the end of a month, to
facilitate the change in SCH status. We expect that hospitals will
anticipate when they wish to give up SCH status and to submit their
requests in sufficient time to permit the 30-day period for making the
change.
    In addition, Sec. 412.92(b)(2)(ii) defines the effective date of
SCH status in the situation where a final and nonappealable
administrative or judicial decision reverses HCFA's denial of SCH
status to a hospital. In this situation, if the hospital's application
was submitted on or after October 1, 1983, the effective date will be
30 days after the date of HCFA's original written notification of
denial.
    Under Sec. 412.92(b)(2)(iii), we define retroactive approval of SCH
status. If a hospital is granted retroactive approval of SCH status by
a final and nonappealable court order or an administrative decision
under subpart R of Part 405 of the regulations, and it wishes its SCH
status terminated prior to the current date (that is, it wishes to be
paid as an SCH for a time-limited period, all of which is in the past),
it must submit written notice to the HCFA regional office through its
fiscal intermediary within 90 days of the court order or the
administrative decision. This written notice must clearly state that,
although SCH status was granted retroactively by the court order or by
the administrative decision, the hospital wants this status terminated
as of a specific date. If written notice is not received within 90 days
of the court order or the administrative decision, SCH status will
continue. Written requests to terminate SCH status that are received
subsequent to the 90-day period will be effective no later than 30 days
after the request is submitted, as discussed above.
    Under Sec. 412.92(c)(1), we define mileage. We believe that mileage
should continue to be measured by the shortest route over improved
roads maintained by any local, State, or Federal Government entity for
public use. We consider improved roads to include the paved surface up
to the front entrance of the hospital because this portion of the
distance is utilized by the public to access the hospital. This
definition provides consistency with the interpretation of the MGCRB
when considering hospital reclassification applications. The MGCRB
measures the distance between the hospital and the county line of the
area to which it seeks reclassification beginning with the paved area
outside the front entrance of the hospital. This provides a consistent,
national definition that is easily recognizable for each hospital.
Finally, rounding of mileage is not permissible. this is also
consistent with the MGCRB definition of mileage (56 FR 25483). We are
proposing to revise the definition of "miles" under Sec. 412.92(c)(1)
to state that an improved road includes the paved surface up to the
front entrance of the hospital.
    Under Sec. 412.92(c)(2), we define "like" hospital. We consider
like hospitals to be those hospitals furnishing short-term acute care.
That is, a hospital may not qualify for an SCH classification on the
grounds that neighboring hospitals offer specialty services, thereby
seeking to exclude close-by competitors as like hospitals, in order to
meet the mileage criteria by measuring to a like hospital that is
located further away. For example, we believe that competing hospitals
within a given area may each have their own specialty services, while
all the facilities continue to be considered short-term acute care
hospitals. We note that under Sec. 412.92(a)(1)(ii), a hospital with
fewer than 50 beds may qualify for SCH status under a special provision
if patients that it would normally serve are seeking care elsewhere due
to the unavailability of specialty services. This means that, if a
hospital can prove that the patients from its service area are seeking
specialty services elsewhere (such as, among others, heart surgery,
transplants, and burn care), rather than routine care, and, because of
that fact, that it otherwise would have met the criteria of section
Sec. 412.92(a)(1)(i), it can qualify as an SCH.
    We note that Sec. 412.92(b)(1)(iii)(A) retains an outdated
reference to "hospitals located within a 50 mile radius of the
hospital." With the issuance of the September 1, 1989 Federal Register
(54 FR 36481, 36482), the 50 mile radius was determined to be
unreasonable and all references should have been changed to 35 miles in
accordance with Sec. 412.92(a)(1)(i). We are proposing to revise the
reference to "a 50 mile radius" in Sec. 412.92(b)(1)(iii)(A) to read
"a 35 mile radius".
    We note that the travel time and weather conditions criteria set
forth in Sec. 412.92(a)(3) were discussed in detail in the September 4,
1990 Federal Register (55 FR 36050 through 36055 and 36162 through
36163).
    Under Sec. 412.92(a)(1)(i) and (b)(1)(ii), we define the market
area analysis criteria used to determine SCH status. There are several
points concerning these requests for SCH status that we would like to
clarify in this proposed rule. First, a hospital seeking an SCH
designation based on these criteria must make its initial request to
the fiscal intermediary with all the appropriate documents as will be
discussed below (Sec. 412.92(b)(1)(i)). The fiscal intermediary will
make a recommendation on the request, based on receipt of all the
appropriate documentation and its own investigation and analysis, and
that recommendation will be forwarded to the HCFA regional office for
another level of review and final approval or disapproval. The fiscal
intermediary would forward its recommendation to the HCFA regional
office located in the hospital's area as opposed to the fiscal
intermediary's area, if there is a difference in these areas. As
discussed above, an approval of the request for SCH status will be
effective 30 days after HCFA issues the approval letter. If a
determination on the request requires the use of data that are
available at HCFA central office only, upon receipt of the fiscal
intermediary's recommendation, the HCFA regional office will forward
the request and the fiscal intermediary's recommendation to the
appropriate contact at HCFA central office where the determination will
be made.
    Second, a hospital must provide patient origin data (the number of
patients from each zip code from which the hospital draws inpatients)
for all inpatient discharges to document the boundaries of its service
area (Sec. 412.92(b)(1)(ii)(A)). Or, the hospital can request that HCFA
develop patient origin data to define its service area based on the
number of patients from each zip code from which the hospital draws
Medicare Part A inpatients (Sec. 412.92(b)(1)(iii)). Then, the lowest
number of zip codes in descending percentage order of Medicare
inpatients that meets the 75-percent threshold will be used to
represent the hospital's service area. We note that hospitals cannot
substitute zip codes elsewhere

[[Page 22686]]

on the list in order to manipulate the service area. See (Howard Young
Medical Center, Inc. v. Shalala, 207 F.3d 437 (7th Cir. 2000).)
    Third, the hospital must provide patient origin data from all other
hospitals located within a 35-mile radius of it or, if larger, within
its service area, to document that no more than 25 percent of either
all of the population or the Medicare beneficiaries residing in the
hospital's service area and hospitalized for inpatient care were
admitted to other like hospitals for care (Sec. 412.92(b)(1)(ii)(B)).
Again, HCFA central office can develop patient origin data for other
hospitals within the requesting hospital's service area if the hospital
is requesting SCH status based on an examination of Medicare Part A
inpatient utilization. In either case, the requesting hospital is
required to submit a comprehensive list of hospitals located within a
35-mile radius or, if larger, within its service area. This list will
be checked by both the fiscal intermediary and HCFA. Again, a
requesting hospital cannot argue that a competing hospital should be
excluded from the service area based on the existence of specialty
services at that hospital if both hospitals are short-term acute care
facilities. Distances between all reported hospitals will be checked by
both the fiscal intermediary and HCFA, through electronic geographic
mapping services (such as Yahoo or Mapquest) or by physically driving
the distance involved.
    In addition, data will be analyzed based on the year for which the
hospital requests SCH status. Subsequent hospital mergers or
terminations will not be taken into consideration in processing the
request. For example, if a hospital requests SCH status using data for
FY 1999, and that data show that there is a competing hospital in
existence that subsequently closed its doors in FY 2000, the data will
be analyzed with the terminated hospital in existence, unless the
hospital seeking SCH status applies using later data, such as FY 2001.
This principle is consistent with how we analyze wage index data. If a
terminated hospital has a viable cost report for the year of wage data
that is being analyzed to produce the wage index, its data are included
as part of the computation.

B. Rural Referral Centers (Sec. 412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the
regulations at Sec. 412.96 set forth the criteria a hospital must meet
in order to receive special treatment under the prospective payment
system as a rural referral center. For discharges occurring before
October 1, 1994, rural referral centers received the benefit of payment
based on the other urban amount rather than the rural standardized
amount. Although the other urban and rural standardized amounts were
the same for discharges beginning with that date, rural referral
centers would continue to receive special treatment under both the
disproportionate share hospital (DSH) payment adjustment and the
criteria for geographic reclassification.
    Section 401 of Public Law 106-113 amended section 1886(d)(8) of the
Act by adding subparagraph (E), which creates a mechanism, separate and
apart from the MGCRB, permitting an urban hospital to apply to the
Secretary to be treated as being located in the rural area of the State
in which the hospital is located. The statute directs the Secretary to
treat a qualifying hospital as being located in the rural area for
purposes of provisions under section 1886(d) of the Act. Congress
clearly intended hospitals that become rural under section
1886(d)(8)(E) of the Act to receive some benefit as a result. In
addition, one of the criteria under section 1886(d)(8)(E) of the Act is
that the hospital would qualify as an SCH or a rural referral center if
it were located in a rural area. An SCH would be eligible to be paid on
the basis of the higher of its hospital-specific rate or the Federal
rate. On the other hand, the only benefit under section 1886(d) of the
Act for an urban hospital to become a rural referral center would be
waiver of the proximity requirements that are otherwise applicable
under the MGCRB process, as set forth in Sec. 412.230(a)(3)(i).
    When we implemented section 401 of Public Law 106-113 in the August
1, 2000 final rule (65 FR 47089), we stated that we believed Congress
contemplated that hospitals might seek to be reclassified as rural
under section 1886(d)(8)(E) of the Act in order to become rural
referral centers so that the hospitals would be exempt from the MGCRB
proximity requirement and could be reclassified by the MGCRB to another
urban area. Therefore, in that final rule we sought a policy approach
that would appropriately address our concern that these urban to rural
redesignations not be utilized inappropriately, and that would benefit
hospitals seeking to reclassify under the MGCRB process by achieving
rural referral center status. (We became aware of several specific
hospitals that were rural referral centers for FY 1991, but
subsequently lost their status when the county in which they were
located became urban, and had expressed their wish to be redesignated
as a rural referral center in order to be eligible to reclassify.)
Accordingly, in light of section 1886(d)(8)(E) of the Act and the
language in the accompanying Conference Report, effective as of October
1, 2000, hospitals located in what is now an urban area, if they were
ever a rural referral center, were reinstated to rural referral center
status.
    In addition, as discussed in 62 FR 45999 and 63 FR 26317, under
section 4202 of Public Law 105-33, a hospital that was classified as a
rural referral center for FY 1991 is to be classified as a rural
referral center for FY 1998 and later years so long as that hospital
continued to be located in a rural area and did not voluntarily
terminate its rural referral center status. Otherwise, a hospital
seeking rural referral center status must satisfy applicable criteria.
One of the criteria under which a hospital may qualify as a rural
referral center is to have 275 or more beds available for use. A rural
hospital that does not meet the bed size requirement can qualify as a
rural referral center if the hospital meets two mandatory prerequisites
(specifying a minimum case-mix index and a minimum number of
discharges) and at least one of three optional criteria (relating to
specialty composition of medical staff, source of inpatients, or
referral volume). With respect to the two mandatory prerequisites, a
hospital may be classified as a rural referral center if its--
     Case-mix index is at least equal to the lower of the
median case-mix index for urban hospitals in its census region,
excluding hospitals with approved teaching programs, or the median
case-mix index for all urban hospitals nationally; and
     Number of discharges is at least 5,000 per year, or if
fewer, the median number of discharges for urban hospitals in the
census region in which the hospital is located. (The number of
discharges criterion for an osteopathic hospital is at least 3,000
discharges per year.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that HCFA will establish updated
national and regional case-mix index values in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. The methodology we use to determine the
proposed national and regional case-mix index values is set forth in
regulations at Sec. 412.96(c)(1)(ii). The proposed national case-mix
index value includes all urban hospitals nationwide, and the proposed
regional values are the median values of urban hospitals within each
census region, excluding those

[[Page 22687]]

with approved teaching programs (that is, those hospitals receiving
indirect medical education payments as provided in Sec. 412.105). These
values are based on discharges occurring during FY 1999 (October 1,
1998 through September 30, 1999) and include bills posted to HCFA's
records through December 1999.
    We are proposing that, in addition to meeting other criteria,
hospitals with fewer than 275 beds, if they are to qualify for initial
rural referral center status for cost reporting periods beginning on or
after October 1, 2001, must have a case-mix index value for FY 2000
that is at least--
     1.3286; or
     The median case-mix index value for urban hospitals
(excluding hospitals with approved teaching programs as identified in
Sec. 412.105) calculated by HCFA for the census region in which the
hospital is located.
    The median case-mix values by region are set forth in the following
table:

------------------------------------------------------------------------
                                                          Case-mix index
                         Region                                value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................          1.2377
2. Middle Atlantic (PA, NJ, NY).........................          1.2305
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          1.3055
4. East North Central (IL, IN, MI, OH, WI)..............          1.2613
5. East South Central (AL, KY, MS, TN)..................          1.2537
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......          1.1653
7. West South Central (AR, LA, OK, TX)..................          1.2484
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............          1.3286
9. Pacific (AK, CA, HI, OR, WA).........................          1.2693
------------------------------------------------------------------------

    The preceding numbers will be revised in the final rule to the
extent required to reflect the updated FY 2000 MedPAR file, which will
contain data from additional bills received through March 31, 2001.
    Hospitals seeking to qualify as rural referral centers or those
wishing to know how their case-mix index value compares to the criteria
should obtain hospital-specific case-mix values from their fiscal
intermediaries. Data are available on the Provider Statistical and
Reimbursement (PS&R) System. In keeping with our policy on discharges,
these case-mix index values are computed based on all Medicare patient
discharges subject to DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that HCFA will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. We are
proposing to update the regional standards based on discharges for
urban hospitals' cost reporting periods that began during FY 1999 (that
is, October 1, 1998 through September 30, 1999). That is the latest
year for which we have complete discharge data available.
    Therefore, we are proposing that, in addition to meeting other
criteria, a hospital, if it is to qualify for initial rural referral
center status for cost reporting periods beginning on or after October
1, 2001, must have as the number of discharges for its cost reporting
period that began during FY 1999 a figure that is at least--
     5,000; or
     The median number of discharges for urban hospitals in the
census region in which the hospital is located, as indicated in the
following table:

------------------------------------------------------------------------
                                                             Number of
                         Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................            7083
2. Middle Atlantic (PA, NJ, NY).........................            8371
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..            8202
4. East North Central (IL, IN, MI, OH, WI)..............            7430
5. East South Central (AL, KY, MS, TN)..................            6505
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......            4708
7. West South Central (AR, LA, OK, TX)..................            4911
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............            8287
9. Pacific (AK, CA, HI, OR, WA).........................            7001
------------------------------------------------------------------------

    These numbers will be revised in the final rule based on the latest
FY 1999 cost report data.
    We reiterate that an osteopathic hospital, if it is to qualify for
rural referral center status for cost reporting periods beginning on or
after October 1, 2001, must have at least 3,000 discharges for its cost
reporting period that began during FY 2000.

C. Indirect Medical Education (IME) Adjustment (Sec. 412.105)

1. IME Adjustment Factor Formula Multiplier (Section 302 of Public Law
106-554 and Sec. 412.105(d)(3))
    Section 1886(d)(5)(B) of the Act provides that prospective payment
hospitals that have residents in an approved graduate medical education
(GME) program receive an additional payment to reflect the higher
indirect operating costs associated with GME. The regulations regarding
the calculation of this additional payment, known as the indirect
medical education (IME) adjustment, are located at Sec. 412.105. The
additional payment is based in part on the applicable IME adjustment
factor. The IME adjustment factor is calculated using a hospital's
ratio of residents to beds, which is represented as r, and a
multiplier, which is represented as c, in the following equation: c  x
[(1 + r)\.405\ - 1]. The formula is traditionally described in terms of
a certain percentage increase in

[[Page 22688]]

payment for every 10-percent increase in the resident-to-bed ratio.
    Section 302 of Public Law 106-554 amended section 1886(d)(5)(B) of
the Act to modify the transition for the IME formula multiplier, or c,
that was first established by Public Law 105-33 and revised by Public
Law 106-113.
    Section 302(a) of Public Law 106-554 provides that, for discharges
occurring during FY 2002, the formula multiplier is 1.6. For discharges
occurring during FY 2003 and thereafter, the formula multiplier is
1.35. (Section 302(b) of Public Law 106-554 provides for a special
payment rule which states that, for discharges occurring on or after
April 1, 2001 and before October 1, 2001, IME payments are to be made
if "c" equalled 1.66 rather than 1.54. We are issuing a separate
interim final rule with comment period (HCFA-1178-IFC) to include this
change for payments in FY 2001.) The multiplier of 1.6 for FY 2002
represents a 6.5-percent increase for every 10-percent increase in the
resident-to-bed ratio. The multiplier for FY 2003 and thereafter (1.35)
represents a 5.5-percent increase for every 10-percent increase in the
resident-to-bed ratio.
    We are proposing to revise Sec. 412.105(d)(3)(vi) to reflect the
change in the formula multiplier for FY 2002 to 1.6 as made by section
302(a) of Public Law 106-554 for discharges occurring during FY 2002.
We also are proposing to add Sec. 412.105(d)(3)(vii) to incorporate the
formula multiplier of 1.35 for discharges occurring on or after October
1, 2002.
2. Resident-to-Bed Ratio Cap (Sec. 412.105(a)(1))
    It has come to our attention that there is some misunderstanding
about Sec. 412.105(a)(1) regarding the determination of the resident-
to-bed ratio that is used in calculating the IME adjustment. Section
4621(b)(1) of Public Law 105-33 amended section 1886(d)(5)(B) of the
Act by adding a new clause (vi) to provide that, effective for cost
reporting periods beginning on or after October 1, 1997, the resident-
to-bed ratio may not exceed the ratio calculated during the prior cost
reporting period (after accounting for the cap on the hospital's number
of full-time equivalent (FTE) residents). We implemented this policy in
the August 29, 1997 final rule (62 FR 46003) and the May 12, 1998 final
rule (63 FR 26323) under regulations at Sec. 412.105(a)(1). Existing
Sec. 412.105(a)(1) specifies that "[e]xcept for the special
circumstances for affiliated groups and new programs described in
paragraphs (f)(1)(vi) and (f)(1)(vii) of this section, for a hospital's
cost reporting periods beginning on or after October 1, 1997, this
ratio may not exceed the ratio for the hospital's most recent prior
cost reporting period." We are proposing to clarify Sec. 412.105(a)(1)
to add a provision that this ratio may not exceed the ratio for the
hospital's most recent prior cost reporting period after accounting for
the cap on the number of FTE residents.
    In general, the resident-to-bed ratio from the prior cost reporting
period, which is to be used as the cap on the resident-to-bed ratio for
the current payment cost reporting period, should only include an FTE
count that is subject to the FTE cap on the number of allopathic and
osteopathic residents, but is not subject to the rolling average. (An
explanation of rolling average appears in section IV.G.3. of this
preamble.)
    The following illustrates the steps for determining the resident-
to-bed ratio for the current payment year cost reporting period and the
cap on the resident-to-bed ratio:
    Current payment year cost reporting period resident-to-bed ratio:
    Step 1. Determine the hospital's number of FTE residents in the
current payment year cost reporting period.
    Step 2. Compare the number of FTEs from step 1 to the hospital's
FTE cap (Sec. 412.105(f)(1)(iv)). If the number of FTEs from step 1
exceeds the FTE cap, replace it with the number of FTEs in the FTE cap.
    Step 3. Determine the 3-year rolling average of the FTE residents
using the FTEs from the current payment year cost reporting period and
the prior two cost reporting periods (subject to the FTE cap in each
cost reporting period). (Include podiatry and dental residents, and
exclude residents in new programs in accordance with
Sec. 412.105(f)(1)(iv) and proposed revised (f)(1)(v). Residents in new
programs are added to the quotient of the rolling average.)
    Step 4. Determine the hospital's number of beds (see
Sec. 412.105(b)) in the current payment year cost reporting period.
    Step 5. Determine the ratio of the number of FTEs from step 3 to
the number of beds from step 4. The lower of this resident-to-bed ratio
or the resident-to-bed ratio cap (calculated below) from the
immediately preceding cost reporting period is used to calculate the
hospital's IME adjustment factor for the current payment year cost
reporting period.
    Resident-to-bed ratio cap:
    Step 1. Determine the hospital's number of FTE residents in its
cost reporting period that immediately precedes the current payment
year cost reporting period.
    Step 2. Compare the number of FTEs from step 1 to the hospital's
FTE cap. If the number of FTEs from step 1 exceeds the FTE cap, replace
it with the number of FTEs in the FTE cap. (If there is an increase in
the number of FTEs in the current payment year cost reporting period
due to a new program or an affiliation agreement, these FTEs are added
to FTEs in the preceding cost reporting period after comparison to the
FTE cap.)
    Step 3. Determine the hospital's number of beds (Sec. 412.105(b))
in its cost reporting period that immediately precedes the current
payment year cost reporting period.
    Step 4. Determine the ratio of the number of FTEs in step 2 to the
number of beds in step 3. This ratio is the resident-to-bed ratio cap
for the current payment year cost reporting period.
    Step 5. Compare the resident-to-bed ratio cap in step 4 to the
resident-to-bed ratio in the current payment year cost reporting
period. The lower of the resident-to-bed ratio from the current payment
year cost reporting period or the resident-to-bed ratio cap from the
immediately preceding cost reporting period is used to calculate the
hospital's IME adjustment factor for the current payment year cost
reporting period.
    We note that the resident-to-bed ratio cap is a cap on the
resident-to-bed ratio calculated for all residents, including
allopathic, osteopathic, dental, and podiatry residents (63 FR 26324,
May 12, 1998). However, as described in existing Sec. 412.105(a)(1),
the resident-to-bed ratio cap may be adjusted to reflect an increase in
the current cost reporting period's resident-to-bed ratio due to
residents in a new GME program or an affiliation agreement. While this
exception does not apply if the resident-to-bed ratio increases because
of an increase in the number of podiatry or dentistry residents or
because of a change in the number of beds, the ratio could increase
after a one-year delay. An increase in the current cost reporting
period's ratio (while subject to the cap on the overall number of
allopathic and osteopathic residents) thereby establishes a higher cap
for the following cost reporting period.
    The following is an example of the application of the cap on the
resident-to-bed ratio:
    Example--Part 1:
     Assume Hospital A has 50 FTEs in its cost reporting period
ending September 30, 1996, thereby establishing an IME FTE resident cap
of 50 FTEs.

[[Page 22689]]

     In its cost reporting period of October 1, 1996 to
September 30, 1997 (the prior year), it has 50 FTEs and 200 beds, so
that its resident-to-bed ratio for this period is 50/200 = .25.
     In the (current year) cost reporting period of October 1,
1997 to September 30, 1998 (the first cost reporting period in which
the FTE resident cap, the resident-to-bed ratio cap, and the rolling
average apply), Hospital A has 50 FTEs and 200 beds.
     Hospital A s FTEs do not exceed its FTE cap, so its
current number of FTEs (50) is used to calculate the 2-year rolling
average: (50 + 50)/2 = 50.
     The result of the rolling average is used as the numerator
of the resident-to-bed ratio. Thus, the resident-to-bed ratio is 50/200
= .25.
     .25 is compared to the resident-to-bed ratio from the
prior period of October 1, 1996 to September 30, 1997. Because the FTE
resident cap and the rolling average were not yet effective in the
period of October 1, 1996 to September 30, 1997, that period's
resident-to-bed ratio does not have to be recalculated to account for
the FTE resident cap. Accordingly, the resident-to-bed ratio cap for
October 1, 1997 to September 30, 1998 is .25.
     Because the resident-to-bed ratio does not exceed the
prior year ratio, Hospital A would use the resident-to-bed ratio of .25
to determine the IME adjustment in its cost reporting period of October
1, 1997 to September 30, 1998.
    Example--Part 2:
     In the (current year) cost reporting period of October 1,
1998 to September 30, 1999, Hospital A adds 1 podiatric and 1 dental
resident, so that it has a total of 52 FTEs and 200 beds. Since the FTE
resident cap only includes allopathic and osteopathic residents,
Hospital A has not exceeded its FTE resident cap with the addition of a
podiatric and a dental resident.
     Accordingly, the (now) 3-year rolling average would be (52
+ 50 + 50)/3 = 50.67.
     50.67 is used in the numerator of the current payment
year's resident-to-bed ratio, so that the resident-to-bed ratio is
50.67/200 = .253.
     .253 is compared to the resident-to-bed ratio from the
prior year's cost reporting period of October 1, 1997 to September 30,
1998 that is recalculated to account for the FTE resident cap. Because
Hospital A did not exceed its FTE resident cap of 50 FTEs in this
period of October 1, 1997 to September 30, 1998, the recalculated
resident-to-bed ratio would be 50/200 = .25.
     Compare the current year resident-to-bed ratio (.253) to
the resident-to-bed ratio cap (.25); .253 does exceed .25.
     Therefore, the resident-to-bed ratio in the period of
October 1, 1998 to September 30, 1999 is capped at .25, which is to be
used in calculating Hospital A's IME adjustment for October 1, 1998 to
September 30, 1999.
    Example--Part 3:
     In the cost reporting period of October 1, 1999 to
September 30, 2000, Hospital A adds 2 internal medicine residents so
that it has a total of 54 FTEs and 200 beds. While podiatric and dental
residents are not included in the FTE resident cap, internal medicine
residents are included. Hospital A has exceeded its IME FTE resident
cap of 50 by 2 FTEs. Thus, 2 FTEs are excluded from the FTE count.
     Accordingly, the rolling average would be (52 + 52 + 50)/3
= 51.33.
     51.33 is used in the numerator of the resident-to-bed
ratio, so that the resident-to-bed ratio is 51.33/200 = .257.
     .257 is compared to the resident-to-bed ratio from October
1, 1998 to September 30, 1999 that is recalculated to only account for
the FTE resident cap. The recalculated resident-to-bed ratio would be
50 allopathic or osteopathic FTEs plus 1 podiatric and 1 dental
resident, which is 52/200 = .26.
     .26 is the resident-to-bed ratio cap for October 1, 1999
to September 30, 2000. .257 does not exceed .26.
     Therefore, the resident-to-bed ratio in the period of
October 1, 1998 to September 30, 1999 is .257, which is to be used in
calculating this period s IME adjustment.
    If a hospital starts a new GME program, the adjustment to the
resident-to-bed ratio cap applies for the period of years equal to the
minimum accredited length for that type of program. (For example, for a
new internal medicine program, the period of years equals 3; for a new
surgery program, the period of years equals 5.) Within these program
years, the number of new FTE residents in the current cost reporting
period is added to the FTE resident count used in the numerator of the
resident-to-bed ratio from the previous cost reporting period. The
lower of the resident-to-bed ratio from the current cost reporting
period or the adjusted resident-to-bed ratio from the preceding cost
reporting period is used to calculate the hospital's IME adjustment for
the current cost reporting period. If a hospital continues to expand
its program after the period of years, the numerator of the resident-
to-bed ratio from the preceding cost reporting period would not be
adjusted to reflect these additional residents. However, an increase in
the ratio of the current cost reporting period would establish a higher
cap for the following cost reporting period. We also are proposing to
add a provision that the exception for new programs described in
Sec. 412.105(f)(1)(vii) applies for the period of years equal to the
minimum accredited length for that type of program.
    Similarly, if a hospital increases the number of FTE residents in
the current cost reporting period because of an affiliation agreement,
the number of additional FTEs is added to the FTE resident count used
in the numerator of the resident-to-bed ratio from the previous cost
reporting period. The lower of the resident-to-bed ratio from the
current cost reporting period or the adjusted resident-to-bed ratio
from the preceding cost reporting period is used to calculate the
hospital's IME adjustment for the current cost reporting period.
3. Conforming Changes (Sec. 412.105(f)(1)(ii)(C) and (f)(1)(v))
    In the August 29, 1997 final rule with comment period (62 FR
46003), the May 12, 1998 final rule (63 FR 26323), and the July 31,
1998 final rule (63 FR 40986), to implement the provisions of Public
Law 105-33, we set forth certain policies that affected payment for
both direct and indirect GME. Some of these policies related to the FTE
cap on allopathic and osteopathic residents, the rolling average, and
payment for residents training in nonhospital settings. When we amended
the regulations under Sec. 413.86 for direct GME, we inadvertently did
not make certain conforming changes in Sec. 412.105 for IME. We are
proposing to make the following conforming changes:
     To revise Sec. 412.105(f)(1)(ii)(C) to specify that,
effective for discharges occurring on or after October 1, 1997, the
time residents spend training in a nonhospital setting in patient care
activities under an approved medical residency training program may be
counted towards the determination of full-time equivalency if the
criteria set forth at Sec. 413.86(f)(3) or Sec. 413.86(f)(4), as
applicable, are met.
     To revise Sec. 412.105(f)(1)(v) to specify that residents
in new residency programs are not included in the rolling average for a
period of years equal to the minimum accredited length for the type of
program.
    In addition, we are proposing to revise Sec. 412.105(f)(1)(ix) to
specify, for IME purposes, a temporary adjustment to a hospital's FTE
cap to reflect residents added because of another hospital's closure of
its medical residency program (to conform to the

[[Page 22690]]

proposed change for GME discussed in section IV.G.5. of this preamble).

D. Payments to Disproportionate Share Hospitals (Sec. 412.106)

    Effective for discharges beginning on or after May 1, 1986,
hospitals that serve a significantly disproportionate number of low-
income patients (as defined in section 1886(d)(5)(F) of the Act)
receive additional payments through the DSH adjustment.
    Section 1886(d)(5)(F)(ix) of the Act, as amended by section 112 of
Public Law 106-113, specifies a percentage reduction in the payments a
hospital would otherwise receive under the disproportionate share
formula. Prior to enactment of section 303 of Public Law 106-554, the
reduction percentages were as follows: 3 percent for FY 2001, 4 percent
for FY 2002, and 0 percent for FY 2003 and each subsequent fiscal year.
    Section 303 of Public Law 106-554 revised the amount of the percent
reductions to 2 percent for discharges occurring in FY 2001, and to 3
percent for discharges occurring in FY 2002. The reduction continues to
be 0 percent for FY 2003 and each subsequent fiscal year. Section 303
of Public Law 106-554 contains a special rule for FY 2001: For
discharges occurring on or after October 1, 2000 and before April 1,
2001, the reduction is to be 3 percent, and for discharges occurring on
or after April 1, 2001 and before October 1, 2001, the reduction is to
be 1 percent. Changes made by section 303 with respect to FY 2001
discharges are being implemented in a separate interim final rule with
comment period (HCFA-1178-IFC).
    We are proposing to revise Sec. 412.106(e) to reflect the change in
the percentage for FY 2002 made by section 303 of Public Law 106-554.
We also are proposing to make a technical change in the heading of
paragraph (e).

E. Medicare Geographic Classification Review Board (Proposed New
Sec. 412.235 and Existing Secs. 412.256, 412.273, 412.274(b), and
412.276)

    With the creation of the Medicare Geographic Classification Review
Board (MGCRB), beginning in FY 1991, under section 1886(d)(10) of the
Act, hospitals could request reclassification from one geographic
location to another for the purpose of using the other area's
standardized amount for inpatient operating costs or the wage index
value, or both (September 6, 1990 interim final rule with comment
period (55 FR 36754), June 4, 1991 final rule with comment period (56
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing
regulations in Subpart L of Part 412 (Secs. 412.230 et seq.) set forth
criteria and conditions for redesignations from rural to urban, rural
to rural, or from an urban area to another urban area with special
rules for SCHs and RRCs.
    Section 304 of Public Law 106-554 contained several provisions
related to the wage index and reclassification decisions made by the
MGCRB. In summary, section 304 first establishes that hospital
reclassification decisions by the MGCRB for wage index purposes are
effective for 3 years, beginning with reclassifications for FY 2001.
Second, it provides that the MGCRB must use the 3 most recent years of
average hourly wage data in evaluating a hospital's reclassification
application for FY 2003 and subsequent years. Third, it provides that
an appropriate statewide entity may apply to have all of the geographic
areas in a State treated as a single geographic area for purposes of
computing and applying the wage index, for reclassifications beginning
in FY 2003. A discussion of how we are proposing to implement these
three provisions follows. (Section III.F. of this preamble discusses
the application of these proposed policy changes to the development of
the proposed FY 2002 and later wage indexes based on hospital
reclassification under the provisions of section 304 of Public Law 106-
554.)
1. Three-Year Reclassifications for Wage Index Purposes
    Section 304(a) of Public Law 106-554 amended section 1886(d)(10)(D)
of the Act by adding clause (v), which provides that, if a hospital is
approved for reclassification by the MGCRB for purposes of the wage
index, the reclassification is effective for 3 years. The amendment
made by section 304(a) is effective for reclassifications for FY 2001
and subsequent years. In addition, the legislation specifies that the
Secretary must establish a mechanism under which a hospital may elect
to terminate such reclassification during the 3-year period.
    Consistent with new section 1886(d)(10)(D)(v) of the Act, we are
proposing to revise Sec. 412.274(b) to provide under new paragraph
(b)(2) that any hospital that is reclassified for a particular fiscal
year for purposes of receiving the wage index value of another area
would receive that reclassification for 3 years beginning with
discharges occurring on the first day (October 1) of the second Federal
fiscal year in which a hospital files a complete application. This 3-
year reclassification would remain in effect unless the hospital
terminates the reclassification under proposed revised procedures that
we are establishing under new proposed Sec. 412.273(b). The proposed
provision would apply to hospitals that are reclassified for purposes
of the wage index only, as well as those that are reclassified for both
the wage index and the standardized amount. However, in the latter
case, only the wage index reclassification would be extended for 2
additional years beyond the 1 year provided for in the existing
regulations (3 years total). Hospitals seeking reclassification for
purposes of the standardized amount must continue to reapply to the
MGCRB on an annual basis.
a. Special Rule for a Hospital That Was Reclassified for FY 2001 and FY
2002 to Different Areas
    Because the 3-year effect of the amendment made by section 304(a)
of Public Law 106-554 is applicable to reclassifications for FY 2001
(which had already taken place prior to the date of enactment of
section 304(a) (December 21, 2000), and because the application process
for reclassifications for FY 2002 had already been completed by the
date of enactment, we are establishing special procedures for hospitals
that are reclassified for purposes of the wage index to one area for FY
2001, and are reclassified for purposes of the wage index or the
standardized amount to another area for FY 2002. We are deeming such a
hospital to be reclassified to the area for which it applied for FY
2002, unless the hospital elects to receive the wage index
reclassification it was granted for FY 2001. Consistent with our
procedures for withdrawing an application for reclassification
(Sec. 412.273), we are allowing a hospital that wishes to receive the
reclassification it was granted for FY 2001 to withdraw its FY 2002
application by making a written request to the MGCRB within 45 days of
the publication date of this proposed rule (that is, by June 18, 2001).
Again, only the wage index reclassification is extended for 2
additional years (3 years total). Hospitals seeking reclassification
for purposes of the standardized amount must continue to reapply to the
MGCRB on an annual basis.

    (We note that the new location and mailing address of the MGCRB and
the Provider Reimbursement Review Board (PRRB) is: 2520 Lord Baltimore
Drive, Suite L, Baltimore, MD 21244-2670. The MGCRB and PRRB will be
functioning at this new location as of May 21, 2001. Also, please
specify whether the mail is intended for the MGCRB or the PRRB.)

[[Page 22691]]

b. Overlapping Reclassifications Are Not Permitted
    Under the broad authority delegated to the Secretary by section
1886(d)(10) of the Act, we are proposing that a hospital that is
reclassified to an area for purposes of the wage index may not extend
the 3-year effect of the reclassification under section 304(a) of
Public Law 106-554 by subsequently applying for reclassification to the
same area for purposes of the wage index for a fiscal year that would
be within the 3-year period. For example, if a hospital is reclassified
for purposes of the wage index to Area A for FY 2002, is approved to
receive Area A's wage index for 3 years (FYs 2002, 2003, and 2004), and
reapplies to be reclassified to Area A for FYs 2003, 2004, and 2005 (3
years) for purposes of the wage index, the hospital would not be
permitted to receive Area A's wage index for FY 2005 as a result of the
reapplication. Instead, we are proposing that if the hospital wishes to
extend the FY 2002 3-year reclassification for fiscal years beyond FY
2004, it would have to apply for reclassification for FY 2005.
    We believe new section 1886(d)(10)(D)(v) of the Act replaces the
current annual reclassification cycle with a 3-year reclassification
cycle. We believe this policy was intended to provide consistency and
predictability in hospital reclassification and wage index data, as
well as to alleviate the year-to-year fluctuations in the ability of
some hospitals to qualify for reclassification. We do not believe it
was intended to be used to extend reclassifications for which hospitals
otherwise would not be eligible (by reapplying during the second year
of a 3-year reclassification because a hospital fears it may not be
eligible for reclassification after its current 3-year reclassification
expires).
c. Withdrawals of Applications and Terminations of Approved
Reclassifications
(1) General
    Under Sec. 412.273(a), a hospital, or group of hospitals, may
withdraw its application for reclassification at any time before the
MGCRB issues its decision or, if after the MGCRB issues its decision,
within 45 days of publication of our annual notice of proposed
rulemaking concerning changes to the inpatient hospital prospective
payment system and proposed payment rates for the fiscal year for which
the application was filed. We are proposing that the withdrawal
procedures and the applicable timeframes in the existing regulations
would apply to hospitals that would receive 3-year reclassification for
wage index purposes. For example, if a hospital applied for
reclassification to Area A for purposes of the wage index for FY 2002,
but wished or wishes to withdraw its application, it must have done so
prior to the MGCRB issuing a decision on its application or, if the
MGCRB issued such a decision, within 45 days of the publication date of
this proposed rule. Such a withdrawal, if effective, means that the
hospital would not be reclassified to Area A for purposes of the wage
index for FY 2002 (and would not receive continued reclassification for
FYs 2003 and 2004). In other words, a withdrawal, if accepted, prevents
a reclassification from ever becoming effective.
    On the other hand, a reclassification decision that is terminated
upon the request of the hospital has partial effect. Section
1886(d)(10)(D)(v) of the Act, as added by section 304(a) of Public Law
106-554, provides that a reclassification for purposes of the wage
index is effective for 3 years "except that the Secretary shall
establish procedures under which a * * * hospital may elect to
terminate such reclassification before the end of such period."
Consistent with section 1886(d)(10)(D)(v) of the Act, we are proposing
to allow a hospital to terminate its approved 3-year reclassification
for 1 or 2 years of the 3-year effective period (proposed
Sec. 412.273(b)). For example, a hospital that has been reclassified
for purposes of the wage index for FY 2001 is also reclassified for FYs
2002 and 2003 (3 years). Such a hospital could terminate its approved
reclassification so that the reclassification is effective only for FY
2001, or only for FYs 2001 and 2002. Consistent with the prospective
nature of reclassifications, we would not permit a hospital to
terminate its approved 3-year reclassification for part of a fiscal
year. A termination would be effective for the next fiscal year. In
order to terminate an approved 3-year reclassification, we would
require the hospital to notify the MGCRB in writing within 45 days of
the publication date of the annual proposed rule for changes to the
inpatient hospital prospective payment system. A termination request,
once accepted, is effective for the balance of the 3-year period (as
discussed below under reapplying within original 3-year period,
following a termination).
    We are establishing a special procedural rule for handling FY 2001
reclassifications. As noted above, the amendments made by section
304(a) of Public Law 106-554 are effective for reclassifications for
FYs 2001 and beyond, and reclassification applications for FY 2001 had
already been submitted prior to the date of enactment of section
304(a). We are deeming those hospitals that were reclassified for FY
2001 to be reclassified for FYs 2002 and 2003. Therefore, if a deemed
hospital that was reclassified for purposes of the wage index for FY
2001 does not wish to continue its reclassification for FY 2002 and FY
2003, the hospital must notify the MGCRB in writing within 45 days
after the publication of this proposed rule (that is, by June 18,
2001).
(2) Reinstatement After a Withdrawal of Application or a Termination of
an Approved Reclassification
    We are proposing that if a hospital elects to withdraw its 3-year
reclassification application after the MGCRB has issued its decision,
it may cancel its withdrawal in a subsequent fiscal year and request
the MGCRB to reinstate its reclassification for the remaining fiscal
years of the 3-year reclassification period. (This proposal is
consistent with our proposal that 3-year reclassification periods may
not overlap, as discussed in section IV.E.1.b. of this preamble.)
Alternatively, a hospital may apply for reclassification to a different
area (that is, an area different from the one to which it was
originally reclassified), and if successful, the reclassification
effect would be for 3 years.

    Example 1: Hospital A files an application and the MGCRB issues
a decision to reclassify it to Area A for purposes of wage index for
FY 2002 through FY 2004 (3 years). Within 45 days after the
publication of this proposed rule, Hospital A withdraws its
application. Within the time for applying for a FY 2003
reclassification, Hospital A cancels its withdrawal for
classification to Area A. Its reclassification to Area A is
reinstated, but only for FYs 2003 and 2004.
    Example 2: Hospital B files an application for reclassification
for wage index purposes for FY 2002 through FY 2004 and the MGCRB
issues a decision for reclassification to Area B. Within 45 days
after publication of this proposed rule, Hospital B withdraws its
application. Hospital B does not cancel its withdrawal of the
application. Hospital B timely applies and is reclassified to Area B
for 3 years, beginning with FY 2003. In this case, the
reclassification to Area B would be for FYs 2003 through 2005.
    Similarly, and for the same reasons, we are proposing that if a
hospital elects to terminate its accepted 3-year reclassification,
it may cancel that termination and have its original
reclassification reinstated for the duration of the original 3-year
period. Alternatively, a hospital could apply for reclassification
to a different area and receive a new 3-year period of
reclassification.
    Example 3: Hospital C is reclassified to Area A for purposes of
the wage index for FY

[[Page 22692]]

2002, and terminates its 3-year reclassification effective for FYs
2003 and 2004. Within the timeframe for applying for FY 2004
reclassification, Hospital C cancels its termination. Its
reclassification to Area A would be reinstated for FY 2004 only.
    Example 4: Hospital D has the same circumstances as Hospital C
in Example 3, except that instead of canceling its termination,
Hospital D applies and is reclassified to Area B for FY 2004. In
this case, the reclassification would be for FYs 2004 through 2006.
d. Special Rules for Group Reclassifications
    Section 412.232 discusses situations where all hospitals in a rural
county are seeking urban redesignation, and Sec. 412.234 discusses
criteria where all hospitals in an urban county are seeking
redesignation to another urban county. In these cases, hospitals submit
an application as a group, and all hospitals in the county must be a
party to the application. The reclassification is effective both for
purposes of the wage index and the standardized amount of the area to
which the hospitals are reclassified.
    Section 304(a) of Public Law 106-554 does not specifically address
the group reclassification situations under Secs. 412.232 and 412.234.
However, we believe that, in the case of hospitals reclassified under
these group reclassification procedures, it would be appropriate to
extend the 3-year reclassification provision to these situations for
the wage index only. In order to be reclassified for the standardized
amount during the second and third years of a 3-year reclassification
for the wage index, the hospitals located in these counties would have
to reapply on an annual basis to the MGCRB either as a group or as
individual hospitals and meet the criteria outlined in Secs. 412.232(a)
and 412.234(a).
    Hospitals that are part of a group reclassification would be able
to withdraw or terminate their 3-year wage index reclassifications in
the same manner as described above. If one hospital within the group
elects to withdraw or terminate its reclassification, the
reclassification of other hospitals in the group would be unaffected.
    Under section 152(b) of Public Law 106-113, hospitals in certain
counties were deemed to be located in specified areas for purposes of
payment under the hospital inpatient prospective payment system, for
discharges occurring on or after October 1, 2000. For payment purposes,
these hospitals are to be treated as though they were reclassified for
purposes of both the standardized amount and the wage index. Section
152(b) also requires that these reclassifications be treated for FY
2001 as though they are reclassification decisions by the MGCRB. For
purposes of applying the 3-year extension of wage index
reclassifications, we are proposing to extend section 1886(d)(10)(D)(v)
to hospitals reclassified under section 152(b) of Public Law 106-113.
These hospitals also would have to apply for the standardized amount on
an annual basis to the MGCRB.
e. Administrator Authority To Cancel Inappropriate Reclassification
Decisions
    Under the provisions of Sec. 412.278(g), the Administrator has the
authority to review an inappropriate reclassification decision made by
the MGCRB, as discovered by either the hospital or HCFA, including 3-
year reclassifications in the second and third year, and to determine
whether or not to cancel that decision as a result of the review of the
facts. Hospitals that are concerned that they have been inappropriately
reclassified should follow the procedures outlined in Sec. 412.278.
2. Three-Year Average Hourly Wages
    Section 304(a) of Public Law 106-554 amended section 1886(d)(10)(D)
of the Act by adding clause (vi) which provides that the MGCRB must use
the average of the 3 most recent years of hourly wage data for the
hospital when evaluating a hospital's request for reclassification.
Specifically, the MGCRB must base its evaluation on an average of the
average hourly wage for the most recent years for the hospital seeking
reclassification and the area to which the hospital seeks to
reclassify. This provision is effective for reclassifications for FY
2003 and subsequent years. (Section III.F. of this preamble discusses
the development and application of the proposed 3-year average hourly
wage data (Table 2 in the Addendum to this proposed rule) that the
MGCRB would use to evaluate hospitals' applications for
reclassifications for FY 2003; and the 3-year average hourly wage data
(Tables 3A and 3B in the Addendum to this proposed rule) for hospital
reclassification applications for FY 2001.)
    We are proposing to revise Secs. 412.230(e)(2) and 412.232(d)(2) to
incorporate the provisions of section 1886(d)(10)(D)(vi) of the Act as
added by section 304(a) of Public Law 106-554. Specifically, we are
providing that, for redesignations effective beginning FY 2003, for
hospital-specific data, the hospital must provide a 3-year average of
its average hourly wages using data from the HCFA hospital wage survey
used to construct the wage index in effect for prospective payment
purposes. For data for other hospitals, we are proposing to require
hospitals to provide a 3-year average of the average hourly wage in the
area in which the hospital is located and a 3-year average of the
average hourly wage in the area to which the hospital seeks
reclassification. The wage data would be taken from the HCFA hospital
wage survey used to construct the wage index for prospective payment
purposes. The 3-year averages are calculated by dividing the sum of the
dollars (adjusted to a common reporting period using the method
described in section III. of the proposed rule) across all 3 years, by
the sum of the hours.
3. Statewide Wage Index
    As stated earlier, section 304(b) of Public Law 106-554 provides
for a process under which an appropriate statewide entity may apply to
have all the geographic areas in the State treated as a single
geographic area for purposes of computing and applying the area wage
index for reclassifications beginning in FY 2003.
    Section 304 does not indicate the duration of the application of
these statewide wage indexes. However, it should be noted that the
statutory language does refer to these applications as
reclassifications. We are proposing that these statewide wage index
applications be processed similar to MGCRB applications, with the same
effective dates of the decisions and the withdrawal process. Therefore,
similar to wage index reclassification decisions under section
1886(d)(10)(D)(v) of the Act as added by section 304(a) of Public Law
106-554, the statewide wage index reclassification would be effective
for a total of 3 years. The same deadlines and timetable applicable to
MGCRB reclassification applications would apply for statewide wage
index applications.
    We are proposing to establish a new Sec. 412.235 to include the
requirements for statewide wage indexes. We are proposing to apply the
following criteria to determine whether hospitals would be approved for
a statewide geographic wage index reclassification (proposed
Sec. 412.235(a)):
     There must be unanimous support for a statewide wage index
among hospitals in the State in which the statewide wage index would be
applied. We would require a signed affidavit on behalf of all the
hospitals in the State of this support as part of the application for
reclassification.

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     All hospitals in the State must apply through a signed
single application for the statewide wage index in order for the
application to be considered by the MGCRB. We believe this is necessary
to ensure that every hospital in the State is included in the
application, since the payment of every hospital would be affected by
the statewide wage index.
     There must be unanimous support for the termination or
withdrawal of a statewide wage index among hospitals in the State in
which the statewide index would be applied. We would require a signed
affidavit for this agreement.
     All hospitals in the State waive their rights to any wage
index that they would otherwise receive absent the statewide wage
index, including a wage index that any of the hospitals might have
received through individual or group geographic reclassification under
Sec. 412.273(a).
    An individual hospital within the State may receive a wage index
that could be higher or lower under the statewide wage index
reclassification in comparison to its wage index otherwise (proposed
Sec. 412.235(b)). Specifically, hospitals must be aware that there may
be a reduction in the wage index as a result of participation on a
statewide basis.
    We are proposing to consider statewide wage index applications
under the same process we use for hospital reclassification
applications, including the effective dates of the MGCRB decision and
the withdrawal process (proposed Sec. 412.235(c)). We are proposing
that applications for the statewide wage index would be effective for 3
years beginning with discharges occurring on the first day (October 1)
of the second Federal fiscal year following the Federal fiscal year in
which the hospitals file a complete application unless all of the
participating hospitals terminate their approved statewide wage index
classification earlier, as discussed below. Once approved by the MGCRB,
an application for a statewide wage index can only be withdrawn or
terminated as a result of a signed affidavit on behalf of all the
hospitals in the State indicating their request that the statewide
reclassification be withdrawn or terminated. A request for withdrawal
or termination must be submitted within 45 days of the publication of
the annual proposed rule for the inpatient hospital prospective payment
system announcing the reclassification. New hospitals that open prior
to the deadline for submitting an application for a statewide wage
index, but after a group application has been submitted, would be
required to agree to the statewide wage index in order for the group
application to remain viable. New hospitals that open after the
deadline for submitting an application would receive the statewide wage
index. The agreement of new hospitals would also be required in order
to withdraw or terminate a statewide wage index reclassification. The
proposed rules discussed under section IV.E.1.c. of this preamble for
withdrawals of applications and terminations of approved 3-year wage
index reclassification decisions would apply to decisions regarding
statewide wage index reclassifications.
    We also are proposing to allow hospitals outside a State in which
hospitals have received approval of a statewide wage index
classification to seek reclassification for the statewide wage index
into that State. In that case, an outside hospital(s) that is
reclassified into the statewide wage index area would receive a wage
index calculated based on the statewide wage index reclassification.
However, the support of such an outside hospital(s) would not be needed
in the case of withdrawal or termination of a statewide wage index
reclassification.

F. New Medical Services and Technology: Additional Payments Under the
Inpatient Hospital Prospective Payment System (Proposed New
Secs. 412.87 and 412.88)

    Section 533(b) of Public Law 106-554 amended section 1886(d)(5) of
the Act to add new subparagraphs (K) and (L) to address a process of
identifying and ensuring adequate payment for new medical services and
technologies under Medicare. Under new section 1886(d)(5)(K)(i) of the
Act, effective for discharges beginning on or after October 1, 2001,
the Secretary is required to establish (after notice and opportunity
for public comment) a mechanism to recognize the costs of new services
and technologies under the inpatient hospital prospective payment
system. New section 1886(d)(5)(K)(ii)(I) of the Act specifies that the
mechanism must apply to a new medical service or technology if, "based
on the estimated costs incurred with respect to discharges involving
such service or technology, the DRG prospective payment rate otherwise
applicable to such discharges * * * is inadequate." New section
1886(d)(5)(K)(vi) of the Act specifies that a medical service or
technology will be considered "new" if it meets criteria established
by the Secretary (after notice and opportunity for public comment).
    New sections 1886(d)(5)(K)(ii) through (vi) of the Act further
provide--
     For an additional payment for new medical services and
technology in an amount beyond the DRG prospective payment system
payment rate that adequately reflects the estimated average cost of the
service or technology.
     That the requirement for an additional payment for a new
service or technology may be satisfied by means of a new-technology
group (described in new section 1886(d)(5)(L) of the Act), an add-on
payment, a payment adjustment, or any other similar mechanism for
increasing the amount otherwise payable with respect to a discharge.
     For the collection of data relating to the cost of new
medical service, or technology for not less than 2 years and no more
than 3 years after an appropriate inpatient hospital services code is
issued. The statute further provides that discharges involving new
services or technology that occur after the collection of these data
will be classified within a new or existing DRG group with a weighting
factor derived from cost data collected for discharges occurring during
such period.
    A discussion of how we are proposing to implement the provisions of
section 533(b) of Public Law 106-554 follows. Section II.D. of this
preamble discusses the Report to Congress required by section 533(a) of
Public Law 106-553 relating to methods of expeditiously incorporating
new medical services and technologies into the clinical coding system
used for payments for inpatient hospital services and our preferred
method of achieving this purpose.
1. Criteria for Identifying New Medical Services and Technology
    New section 1886(d)(5)(K)(vi) of the Act specifies that a medical
service or technology will be considered "new" if it meets criteria
established by the Secretary (after notice and opportunity for public
comment). (For convenience, hereafter we refer to "new medical
services and technology" as "new technology.") We are proposing that
a new technology would be an appropriate candidate for an additional
payment when, in the judgment of the Secretary, it represents an
advance in medical technology that substantially improves, relative to
technologies previously available, the diagnosis or treatment of
Medicare beneficiaries (proposed Sec. 412.87(b)(1)). This criterion is
to ensure that new technology can be demonstrated to provide a
substantial clinical improvement based on verifiable evidence. Because
any additional payments made under this

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provision will be financed by reducing the payments made for all other
services (in order to maintain budget neutrality as discussed under
section IV.F.4. of this preamble), we believe that these payments
should be focused on those technologies that afford clear improvements
over use of previously available technologies. As explained below, we
are proposing that new technologies meeting this clinical definition
also must be demonstrated to be inadequately paid otherwise under the
DRG system to receive special payment treatment (proposed
Sec. 412.87(b)(3)). Hospitals adopting other new technologies that do
not meet these standards would be paid for these technologies through
other applicable DRG payments. These payments would be recalibrated
over time to reflect actual use of the new technology.
    We expect to implement this criterion by considering the clinical
benefits for beneficiaries. We are aware that some technologies may
offer substantial clinical improvements for small subsets of
beneficiaries, such as those who have not responded to other
treatments, and we expect to recognize such substantial advantages in
these instances.
    In addition to the clinical and cost criteria, we are proposing
that, in order to qualify for the special payment treatment provided
under new section 1886(d)(5)(K)(ii)(I) of the Act, a specific
technology must be new (proposed Sec. 412.87(b)(2)). We believe the new
provision contemplates the special payment treatment for new
technologies until such time as data are available to reflect the cost
of the technology in the DRG weights through recalibration (generally 2
years). Specifically, new section 1886(d)(5)(K)(ii)(II) of the Act
states that the Secretary must "provide for the collection of data
with respect to the costs of a new medical service or technology * * *
for a period of not less than two years and not more than three years
beginning on the date on which an inpatient hospital code is issued
with respect to the service or technology." In addition, new section
1886(d)(5)(K)(ii)(III) states that the Secretary must "provide for
additional payment to be made * * * with respect to discharges
involving a new medical service or technology described in subclause
(I) that occur during the period described in subclause (II) in an
amount that adequately reflects the estimated average costs of such
service or technology."
    We are proposing to make determinations regarding which
technologies meet this criterion using a panel of Federal clinical and
other experts, supplemented as appropriate with outside expertise. The
results of all such determinations would be announced in the Federal
Register as part of the annual updates and changes to the inpatient
hospital prospective payment system (proposed Sec. 412.87(b)(1)). We
note that this determination is separate and distinct from the coverage
decision process. In the case of new technologies that have gone
through the national coverage determination process, we would expect
that the evidence reviewed in that process would, in general, be
sufficient for making these determinations as well.
    Requests to recognize new technology for special payment treatment
under new section 1886(d)(5)(K)(ii)(I) of the Act would be evaluated
against this proposed criterion based on evidence submitted by the
requestor. These requests should be submitted in conjunction with the
initial submission of data on the costs of the new technology. In
general, we encourage interested parties to initiate this process by
August of the year preceding the year in which a new code identifying
the new technology would become effective. This will allow maximum time
to review the requestor's data and clinical material. In particular, it
affords an opportunity to work with the requestor to resolve any
problems or questions that may arise. At a minimum, requests should be
submitted by early October of that year. It should be noted that
submitting requests as late as October may not afford the opportunity
for HCFA to work with the requestor to resolve problems or questions.
Requests must be submitted by early October to allow adequate time to
consider all aspects of a request prior to making a determination to be
included in the proposed rule. Work begins on preparing the DRG changes
for the following fiscal year by the middle of December, and any
decisions to recognize particular new technologies should be taken into
account at that time.
    We are soliciting comments on these proposals. In particular, given
that this process is the result of new legislation with possibly major
implications for the hospital inpatient prospective payment system, we
invite public comment on: our definition of new medical services and
technologies; the use of Federal clinical and other experts to make
determinations regarding which criteria meet our definition of a new
service or technology; the information necessary to determine whether
payment would be inadequate; and our payment mechanism (see following
discussions for these latter two issues).
2. Determining Adequacy of Current Payments for New Services and
Technology
    Because the inpatient hospital prospective payment system includes
costs associated with all aspects of a patient's stay in the hospital,
it is not enough to simply identify a technology as "new" and pay an
additional amount. A single DRG may encompass many different treatment
approaches for a particular illness, with an array of costs associated
with those approaches. Clinicians are expected to select the
appropriate approach based on the needs of the patient, with the
payments averaging out over time to approximate the level of resources
needed to treat the average patient in the DRG.
    Section 1886(d)(b)(K)(ii) of the Act, as added by section 533(b) of
Public Law 106-554, requires that the Secretary make a determination
whether the payment otherwise applicable under the existing DRG is
inadequate compared to the estimated costs incurred with respect to new
technology (as defined previously). We believe that, in order to
evaluate whether the DRG payment inadequately reflects the costs of new
technology, we must be able to assess the costs of cases involving the
new technology against other cases in the DRG. In other words, the
criteria for identifying new technology that will receive special
payment treatment should reflect whether the new technology is so
expensive that hospitals are unlikely to offset the higher costs with
other less costly cases within the DRG. We are proposing that this
threshold be set at one standard deviation beyond the mean standardized
charge for all cases in the DRG to which the new technology is assigned
(or the case-weighted average of all relevant DRGs, if the new
technology occurs in many different DRGs) (proposed Sec. 412.87(b)(3)).
(Standardization adjusts the actual charges of a case by the payment
factors such as the wage index, the indirect medical education
adjustment factor, and the disproportionate share adjustment factor.)
    This comparison would preferably be done using Medicare cases
identifiable in our MedPAR database, although data from a clinical
trial (including Food and Drug Administration clinical trials) where no
bills were submitted for payment may be considered. To the extent
possible, HCFA intends to rely on existing information in making these
determinations. In most instances, the information would include the
Medicare provider number of the hospital where each case was treated,

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