I R PInnovative Resources for Payors
	
[Federal Register: May 4, 2001 (Volume 66, Number 87)]
[Proposed Rules]
[Page 22695-22744]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04my01-35]

[[pp. 22695-22744]] Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2002 Rates


[[Continued from page 22694]]

[[Page 22695]]

the beneficiary identification numbers of the Medicare patients, the
dates of admission and discharge, the charges associated with each
case, and all relevant ICD-9-CM codes associated with each case. We
would then assess the charges of identified cases involving the new
technology, accounting for the additional costs of the new technology
that might not be included in the charges if the new technology is
being provided by the manufacturer as part of the clinical trial. If
the costs of the new technology are not included in the total charges,
the requestor must submit adequate documentation upon which to
formulate an estimate of the likely costs to hospitals of the new
technology.
    A significant sample of the data should be submitted no later than
early October, approximately 6 months prior to the publication of the
proposed rule. Subsequently, a complete database must be submitted no
later than mid-December. This timetable is necessary to allow adequate
time to assess and verify the data, as well as to work with the
submitters to deal with any unique situations with respect to data
availability. It is also necessary to allow us to accurately
incorporate the data into the proposed rule, which we begin preparing
in January. We are soliciting public comments on this process.
    To illustrate the proposed use of the standard deviation
thresholds, consider DRG 8 (Peripheral and Cranial Nerve and Other
Nervous System Procedures Without CC). The average standardized charge
of cases assigned to this DRG based on discharges during FY 2000 was
$13,212, and the standard deviation was $8,978. Therefore, if a
requestor were to seek assignment of a new technology that would
otherwise be assigned to DRG 8 to a different DRG, the requestor would
be expected to provide data indicating that the average standardized
charge of cases receiving this new technology will exceed $22,190.
These data must be of a sufficient sample size to demonstrate a
significant likelihood that the true mean across all cases likely to
receive the new technology will exceed the mean for the cases in DRG 8
by one standard deviation.
    Using standard deviation as the threshold takes into account the
distribution of charges associated with different treatment modalities
around the mean charge for a particular DRG, and the extent to which
lower cost cases in the DRG should be expected to offset higher cost
cases. Using this method, new technology in a DRG with very little
variation in charges would be more likely to meet the criteria. This
would be appropriate because there are fewer opportunities within such
a DRG to recover the costs of very high cost cases from excess payments
for very low cost cases.
    We note that, although we anticipate a limited number of new
technologies will qualify under this proposed threshold, we will
continue to evaluate the appropriateness of all DRG assignments. This
applies not only to new technology but existing technologies as well.
3. Developing a Payment Mechanism
    Section 1886(d)(5)(K)(v) of the Act, as added by section 533(b) of
Public Law 106-554, provides flexibility to the Secretary in terms of
deciding exactly how the requirement for an additional payment will be
satisfied: a new-technology group, an add-on payment, a payment
adjustment, or any other similar mechanism for increasing the amount
otherwise payable. We believe the approach most consistent with the
design and incentives of the inpatient hospital prospective payment
system would be to assign new technology to the most appropriate DRG
based on the condition of the patient as described above, and adjust
payments for individual cases that involve the new technology when the
costs of those cases exceed a threshold amount. That is, we would not
pay an additional amount for every case involving the new technology,
but only where the costs of the entire case exceed the DRG payment
amount. We are concerned that the establishment of new DRGs
specifically for the purpose of recognizing costly new technology could
potentially severely disrupt the DRG classification structure. In
particular, we are concerned that some new technologies may involve
large numbers of cases across multiple DRGs. Creating new DRGs
specifically for new technology would pull cases out of existing DRGs,
possibly leading to severe distortions in the relative weights and
inadequate payments for cases remaining in the existing DRGs.
    We are proposing that Medicare provide higher payments for cases
with higher costs involving identified new technologies, while
preserving some of the incentives under the average-based payments for
all treatment modalities for a particular patient category. The payment
mechanism we are proposing would be based on the cost to hospitals for
the new technology. We are proposing under Sec. 412.88 that Medicare
would pay a marginal cost factor of 50 percent for the costs of the new
technology in excess of the full DRG payment. This would be calculated
before any outlier payments under section 1886(d)(5)(A) of the Act, if
applicable. Similarly, cases involving new technology would be eligible
for outlier payments, with the additional amounts paid for the new
technology included in the base payment amount. Costs would be
determined by applying the cost-to-charge ratio in a manner identical
to that currently used for outlier payments. If the costs of a new
technology case exceed the DRG payment by more than the estimated costs
of the new technology, Medicare payment would be limited to the DRG
payment plus 50 percent of the estimated costs of the new technology,
except if the case qualified for outlier payments. (We are proposing a
conforming change to Sec. 412.80 by adding a new paragraph (a)(3) to
provide that outlier qualifying thresholds and payments would be in
addition to standard DRG payments and additional payments for new
medical services and technology (effective October 1, 2001).)
    For example, consider a new technology estimated to cost $3,000, in
a DRG that pays $20,000. A hospital submits three claims for cases
involving this new technology. After applying the hospital's cost-to-
charge ratio, it is determined the costs of these three cases are
$19,000, $22,000, and $25,000. Under our proposal, Medicare would pay
$20,000 (the DRG payment) for the first claim. For the second claim,
Medicare would pay one half of the amount by which the costs of the
case exceed the DRG payment, up to the estimated cost of the new
technology, or $21,000 ($20,000 plus one half of $2,000). For the third
claim, Medicare would pay $21,500 ($20,000 plus one half of the total
estimated costs of the new technology).
    We believe it is appropriate to limit the additional payment to 50
percent of the additional cost to appropriately balance the incentives.
This limit would provide hospitals an incentive for continued cost-
effective behavior in relation to the overall costs of the case. In
addition, hospitals would face an incentive to balance the desirability
of using the new technology versus the old; otherwise, there would be a
large and perhaps inappropriate incentive to use the new technology.
For example, in the late 1980s, we considered whether to establish a
special payment adjustment for tissue plasminogen activator (TPA), a
thrombolytic agent used in treating blockages of coronary arteries,
reflecting the high costs of the drug. We did not establish such an
adjustment because we believed that the updates to the standardized
amounts, combined with the potential for continuing improvements in
hospital

[[Page 22696]]

productivity, would be adequate to finance appropriate care of Medicare
patients. In fact, the costs of the drug were offset by shorter
hospital stays and an overall reduction in costs per case. As clinical
experience with TPA accumulated, furthermore, it appeared that the drug
was not as widely beneficial as its original proponents expected.
Establishing an add-on payment for this drug might have actually led to
more extensive use of this drug for patients who would not have
benefited, and might have even been harmed, by its blood-thinning
characteristics.
4. Budget Neutrality
    The report language accompanying section 533 of Public Law 106-554
directs that the Secretary implement the new mechanism on a budget
neutral basis (H.R. Conf. Rep. No. 106-1033, 106th Cong., 2d Sess. at
897 (2000)). Section 1886(d)(4)(C)(iii) of the Act requires that the
adjustments to annual DRG classifications and relative weights must be
made in a manner that ensures that aggregate payments to hospitals are
not affected. Therefore, we would simulate projected payments under
this provision for new technology during the upcoming fiscal year at
the same time we estimate the payment effect of changes to the DRG
classifications and recalibration. The impact of those additional
payments would then be factored into the budget neutrality factor,
which is applied to the standardized amounts.
    Because any additional payments directed toward new technology
under this provision would be offset to ensure budget neutrality, it is
important to carefully consider the extent of this provision and ensure
that only technologies representing substantial advances are recognized
for additional payments. In that regard, we would discuss in the annual
proposed and final regulations implementing changes to the inpatient
hospital prospective payment system those technologies that were
considered under this provision; our determination as to whether a
particular new technology meets our criteria for a new technology;
whether it is determined further that cases involving the new
technology would be inadequately paid under the existing DRG payment;
and any assumptions that went into the budget neutrality calculations
related to additional payments for that new technology, including the
expected number, distribution, and costs of these cases.
    The payments made under this provision would be redistributed from
all other payments made under the inpatient prospective payment system;
DRG payments would be reduced by amounts we estimate to be necessary to
pay for the estimated aggregate new technology payments. Our
projections of the aggregate payments for new technology would involve
not only estimates of the effect of the new technology on the entire
cost per case but also estimates of the volume of cases expected to
involve the new technology during the upcoming year. Given the
uncertainty in both of these aspects of the projections, we believe it
is important to expose our estimates to public comment before
implementing them.

G. Payment for Direct Costs of Graduate Medical Education (Sec. 413.86)

1. Background
    Under section 1886(h) of the Act, Medicare pays hospitals for the
direct costs of graduate medical education (GME). The payments are
based in part on the number of residents trained by the hospital.
Section 1886(h) of the Act, as amended by section 4623 of Public Law
105-33, caps the number of residents that hospitals may count for
direct GME.
    Section 1886(h)(2) of the Act, as amended by section 9202 of the
Consolidated Omnibus Reconciliation Act (COBRA) of 1985 (Public Law 99-
272), and implemented in regulations at Sec. 413.86(e), establishes a
methodology for determining payments to hospitals for the costs of
approved GME programs. Section 1886(h)(2) of the Act, as amended by
COBRA, sets forth a payment methodology for the determination of a
hospital-specific, base-period per resident amount (PRA) that is
calculated by dividing a hospital's allowable costs of GME for a base
period by its number of residents in the base period. The base period
is, for most hospitals, the hospital's cost reporting period beginning
in FY 1984 (that is, the period of October 1, 1983 through September
30, 1984). The PRA is multiplied by the number of FTE residents working
in all areas of the hospital complex (or nonhospital sites, when
applicable), and the hospital's Medicare share of total inpatient days
to determine Medicare's direct GME payments. In addition, as specified
in section 1886(h)(2)(D)(ii) of the Act, for cost reporting periods
beginning on or after October 1, 1993, through September 30, 1995, each
hospital's PRA for the previous cost reporting period is not updated
for inflation for any FTE residents who are not either a primary care
or an obstetrics and gynecology resident. As a result, hospitals with
both primary care and obstetrics and gynecology residents and
nonprimary care residents have two separate PRAs beginning in FY 1994:
one for primary care and one for nonprimary care.
    Section 1886(h)(2) of the Act was further amended by section 311 of
Public Law 106-113 to establish a methodology for the use of a national
average PRA in computing direct GME payments for cost reporting periods
beginning on or after October 1, 2000, and on or before September 30,
2005. Generally, section 1886(h)(2) of the Act establishes a ``floor''
and a ``ceiling'' based on a locality-adjusted, updated, weighted
average PRA. Each hospital's PRA is compared to the floor and ceiling
to determine whether its PRA should be revised. PRAs that are below the
floor, that is, 70 percent of the locality-adjusted, updated, weighted
average PRA, would be revised to equal 70 percent of the locality-
adjusted, updated, weighted average PRA. PRAs that exceed the ceiling,
that is, 140 percent of the locality-adjusted, updated, weighted
average PRA, would, depending on the fiscal year, either be frozen and
not increased for inflation, or increased by a reduced inflation
factor. We implemented section 311 of Public Law 106-113 in the
hospital inpatient prospective payment system final rule published on
August 1, 2000 (65 FR 47090). In that final rule, we set forth the
methodology for calculating the weighted average PRA and outlined the
steps for determining whether a hospital's PRA would be revised.
2. Amendments Made by Section 511 of Public Law 106-554
(Sec. 413.86(e)(4)(ii)(C) and (e)(5)(iv))
    Section 511 of Public Law 106-554 amended section
1886(h)(2)(D)(iii) of the Act by increasing the floor to 85 percent of
the locality-adjusted national average PRA. In general, section 511
provides that, effective for cost reporting periods beginning on or
after October 1, 2001, and before October 1, 2002, PRAs that are below
85 percent of the respective locality-adjusted national average PRA
would be increased to equal 85 percent of that locality-adjusted
national average PRA. Accordingly, we are proposing to implement
section 511 by revising Sec. 413.86(e)(4)(ii)(C)(1) to incorporate this
change and by outlining the methodology for determining whether a
hospital's PRA(s) will be adjusted in FY 2002 relative to the increased
floor of the locality-adjusted national average PRA.
    In the August 1, 2000 final rule (65 FR 47091 and 47092), as
implemented at

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Sec. 413.86(e)(4), we determined, in accordance with section 311 of
Public Law 106-113, that the weighted average PRA for cost reporting
periods ending during FY 1997 is $68,464. We described the procedures
for updating the weighted average PRA of $68,464 for inflation to FY
2001 and for adjusting this average for the locality of each individual
hospital. We then outlined the steps for comparing each hospital's
PRA(s) to the locality-adjusted national average PRA to determine if,
for cost reporting periods beginning on or after October 1, 2000, and
before October 1, 2001, the PRAs should be revised to equal the 70-
percent floor.
    In accordance with section 511 of Public Law 106-554, in this
proposed rule, we are proposing that, for cost reporting periods
beginning during FY 2002, the FY 2002 PRAs of hospitals that are below
85 percent of the respective locality-adjusted national average PRA for
FY 2002 be increased to equal 85 percent of that locality-adjusted
national average PRA. Specifically, to determine which PRAs (primary
care and nonprimary care separately) for each hospital are below the
85-percent floor, each hospital's locality-adjusted national average
PRA for FY 2002 is multiplied by 85 percent. This resulting number is
then compared to each hospital's PRA that is updated for inflation to
FY 2002. If the hospital's PRA would be less than 85 percent of the
locality-adjusted national average PRA, the individual PRA is replaced
with 85 percent of the locality-adjusted national average PRA for that
cost reporting period, and in future years the new PRA would be updated
for inflation by the Consumer Price Index for All Urban Consumers (CPI-
U) as compiled by the Bureau of Labor Statistics.
    There may be some hospitals with both primary care and nonprimary
care PRAs that are below the floor, and both PRAs are, therefore,
replaced with 85 percent of the locality-adjusted national average PRA.
In these situations, the hospitals would receive a single PRA; a
distinction between PRAs would no longer be made for differences in
inflation (under Sec. 413.86(e)(3)(ii)). On the other hand, hospitals
may have primary care PRAs that are above the floor, and nonprimary
care PRAs that are below the floor. In these situations, only the
nonprimary care PRAs would be revised to equal 85 percent of the
locality adjusted national average PRA, and the prior year primary care
PRAs would be updated for inflation by the CPI-U.
    For example, if the FY 2002 locality-adjusted national average PRA
for Area X is $100,000, then 85 percent of that amount is $85,000. If,
in Area X, Hospital A has a primary care FY 2002 PRA of $84,000 and a
nonprimary care FY 2002 PRA of $82,000, both of Hospital A's FY 2002
PRAs are replaced by the $85,000 floor. Thus, $85,000 is the amount
that would be used to determine Hospital A's direct GME payments for
both primary care and nonprimary care FTEs in its cost reporting period
beginning in FY 2002, and the $85,000 PRA would be updated for
inflation by the CPI-U in subsequent years. However, Hospital B, also
located in Area X, has a primary care FY 2002 PRA of $86,000 and a
nonprimary care FY 2002 PRA of $84,000. Thus, for Hospital B, only the
nonprimary care PRA of $84,000 is replaced by the $85,000 floor. This
new PRA of $85,000 would be updated for inflation by the CPI-U in
subsequent years. Hospital B's primary care PRA of $86,000 and its
nonprimary care PRA of $85,000 would be used to determine its direct
GME payments in its cost reporting period beginning in FY 2002.
    We note that section 511 of Public Law 106-554 only affects
hospitals with PRAs below the 85-percent floor, and does not affect
hospitals with PRAs that are either between the floor and ceiling or
exceed the ceiling. Thus, with the exception of the change in the floor
as provided by section 511, the policy regarding the use of a national
average PRA for making direct GME payments remains as implemented in
the regulations at Sec. 413.86(e)(4).
    We are proposing to amend Sec. 413.86(e)(4)(ii)(C)(1) to add the
rules implementing section 1886(h)(2)(D)(iii) of the Act as amended by
section 511 of Public Law 106-554.
    We also are proposing to amend Sec. 413.86(e)(5) regarding the
determination of base year PRAs for new teaching hospitals for cost
reporting periods beginning during FYs 2001 through 2005. In the August
1, 2000 final rule, we made a conforming change to Sec. 413.86(e)(5) to
account for situations in which hospitals do not have a 1984 base year
PRA and establish a PRA in a cost reporting period beginning on or
after October 1, 2000. Existing Sec. 413.86(e)(5)(iv) specifies that
the new base year PRAs of such hospitals are subject to the regulations
regarding the floor and the ceiling of the locality-adjusted national
average PRA. Although the determination of new base year PRAs is
subject to the national average methodology, it is not necessary to
include this provision in the regulations. Therefore, we are proposing
to remove Sec. 413.86(e)(5)(iv).
    We would like to clarify that, for purposes of calculating a base
year PRA for a new teaching hospital, when calculating the weighted
mean value of PRAs of hospitals located in the same geographic area or
the weighted mean value of the PRAs in the hospital's census region (as
defined in Sec. 412.62(f)(1)(i)), the PRAs used in the weighted average
calculation must not be less than the floors for cost reporting periods
beginning during FY 2001 or FY 2002, or if they exceed the ceiling,
they must either be frozen for FYs 2001 and 2002 or updated with the
CPI-U minus 2 percent for FYs 2003 through 2005. In addition, existing
Sec. 413.86(e)(5) provides that the PRA for a new teaching hospital is
based on the lower of the hospital's actual costs incurred in
connection with the GME program or the weighted mean value of PRAs. For
cost reporting periods beginning during FYs 2001 and 2005, the PRA for
a new teaching hospital also would be subject to the floor and the
ceiling of the national average PRA methodology. If a hospital's actual
costs of the GME program during its cost reporting period beginning
during FY 2001 or FY 2002 are less than the floors, the hospital's PRA
would not be based on the actual costs. Instead, it would be equal to
70 percent in FY 2001, or 85 percent during FY 2002, of the locality-
adjusted national average PRA. The floor applies to hospitals with
existing PRAs in FYs 2001 and 2002, or to hospitals that are
establishing new base year PRAs in FYs 2001 and 2002. We are proposing
to clarify that if a hospital establishes a new base year PRA in a cost
reporting period beginning after FY 2002, its PRA would not be
increased to equal the floor if it is less than the floor. Similarly,
the ceiling applies to hospitals with existing PRAS in FYs 2001 through
2005, or to hospitals that are establishing new base year PRAs in FYs
2001 through 2005.
3. Determining the 3-Year Rolling Average for Direct GME Payments
(Sec. 413.86(g)(4) and (g)(5))
    Section 1886(h)(4)(G)(iii) of the Act, as added by section 4623 of
Public Law 106-33, provides that for the hospital's first cost
reporting period beginning on or after October 1, 1997, the hospital's
weighted FTE count for direct GME payment purposes equals the average
of the weighted FTE count for that cost reporting period and the
preceding cost reporting period. For cost reporting periods beginning
on or after October 1, 1998, section 1886(h)(4)(G) of the Act requires
that hospitals' direct medical education weighted FTE count for payment
purposes equal the average of the actual weighted FTE count for the
payment year cost reporting period and

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the preceding two cost reporting periods (rolling average). This
provision phases in the associated reduction in payment over a 3-year
period for hospitals that are reducing their number of residents.
    In the August 29, 1997 final rule with comment period (62 FR
46004), we revised Sec. 413.86(g)(5) accordingly, and outlined the
methodology for determining a hospital's direct GME payment. Based on
what we explained in the 1997 final rule, for cost reporting periods
beginning on or after October 1, 1997, we would determine a hospital's
direct GME payment as follows:
    Step 1. Determine the average of the weighted FTE counts for the
payment year cost reporting period and the prior two immediately
preceding cost reporting periods (with exception of the hospital's
first cost reporting period beginning on or after October 1, 1997,
which will be based on the average of the weighted average for that
cost reporting period and the immediately preceding cost reporting
period).
    Step 2. Determine the hospital's direct GME amount without regard
to the FTE cap (before determining Medicare's share). That is, take the
sum of (a) the product of the primary care PRA and the primary care
weighted FTE count in the current payment year, and (b) the product of
the nonprimary care PRA and the nonprimary care weighted FTE count in
the current payment year.
    Step 3. Divide the hospital's direct GME amount by the total number
of FTE residents (including the effect of weighting factors) for the
cost reporting period to determine the weighted average PRA (this
amount reflects the FTE weighted average of the primary and nonprimary
care PRAs) for the cost reporting period.
    Step 4. Multiply the weighted average PRA for the cost reporting
period by the 3-year average weighted count to determine the hospital's
allowable direct GME costs. This product is then multiplied by the
hospital's Medicare patient load for the cost reporting period to
determine Medicare's direct GME payment to the hospital.
    Steps 2 and 3 above describe the methodology for combining a
hospital's primary care PRA and nonprimary care PRA to determine the
hospital's single weighted average PRA for the payment year cost
reporting period. (This step accounts for hospitals that were training
residents in both primary care and nonprimary care residency programs
in FYs 1994 and 1995, when, as described in Sec. 413.86(e)(3)(ii), each
hospital's PRA for the previous cost reporting period was not adjusted
for any resident FTEs who were not either a primary care resident or an
obstetrics or a gynecology resident. As a result, such hospitals have
two PRAs for direct GME payment; one for primary care and obstetrics
and gynecology residents, and one for all other, or nonprimary care,
residents. Hospitals that train either only primary care (including
obstetrics and gynecology) residents or only nonprimary care residents
follow the methodology described above, with the exception of combining
two PRAs). Step 4 then dictates that the resulting average PRA is
multiplied by the 3-year rolling average, which, in turn, is multiplied
by the hospital's Medicare patient load in the current year to
determine Medicare's direct GME payment to the hospital for that cost
reporting period.
    In implementing this provision in the August 29, 1997 final rule
with comment period, we believed that the methodology described above
was appropriate because it was consistent with the methodology
described under section 1886(h)(3)(B) of the Act. This section
specifies that, in order to arrive at the average PRA, or ``aggregate
approved amount,'' HCFA must multiply a hospital's PRA by the
``weighted average number of [FTE] residents * * * in the hospital's
approved medical residency training programs in that period'' (emphasis
added).
    We also believed the methodology outlined above and in the August
29, 1997 rule was appropriate because it was consistent with the intent
of the statute that, after October 1, 1997, direct GME payments should
be based on a rolling average. Specifically, section 4623 of Public Law
106-33 provides that, ``For cost reporting periods beginning on or
after October 1, 1997 * * * the total number of full-time equivalent
residents for determining a hospital's graduate medical education
payment shall equal the average of the actual full-time equivalent
resident counts for the cost reporting period and the preceding two
cost reporting periods'' (emphasis added). Thus, while the statute does
not include a specific methodology for computing the direct GME
payments, it clearly indicates that the payment should be based on a 3-
year average of the weighted number of residents, not the weighted
number of residents in the current payment year cost reporting period.
    As stated above, Congress provided that the direct GME payments
should be made based on a 3-year average of the weighted number of
residents in order to phase in the associated reduction in payment over
a 3-year period for hospitals that are reducing the number of residents
they are training. However, in steps 2 and 3 above, when combining a
hospital's primary care PRA and nonprimary care PRA, we weight the
respective PRAs by current year residents. This introduces the number
of residents that a hospital is training in the current cost reporting
period into the payment formula. A payment formula that incorporates
the number of current year residents ``dilutes'' the effect of the
rolling average as related to direct GME payments. After further
consideration, we believe that, consistent with the statute, the
formula should be based on rolling average counts of residents. We are
proposing an alternative methodology in which the direct GME payment
would be the sum of (a) the product of the primary care PRA and the
primary care and obstetrics and gynecology rolling average, and (b) the
product of the nonprimary care PRA and the nonprimary care rolling
average. (This sum would then be multiplied by the Medicare patient
load.) We note that IME payments would not be affected because,
although they also are based on a 3-year rolling average, there is no
distinction between primary care and nonprimary care residents.
    The new methodology would be effective for cost reporting periods
beginning on or after October 1, 2001. The proposed methodology for
determining a hospital's direct GME payment is as follows:
    Step 1. Determine that the hospital's total unweighted FTE counts
in the payment year cost reporting period and the prior two immediately
preceding cost reporting periods for all residents in allopathic and
osteopathic medicine do not exceed the hospital's FTE cap for these
residents in accordance with Sec. 413.86(g)(4). If the hospital's total
unweighted FTE count in a cost reporting period exceeds its cap, the
hospital's weighted FTE count, for primary care and obstetrics and
gynecology residents and nonprimary care residents, respectively, will
be reduced in the same proportion that the number of these FTE
residents for that cost reporting period exceeds the unweighted FTE
count in the cap. The proportional reduction is calculated for primary
care and obstetrics and gynecology residents and nonprimary care
residents separately in the following manner:

(FTE cap/unweighted total FTEs in the cost reporting period)  x
(weighted primary care and obstetrics and gynecology FTEs in the cost
reporting period)
      plus
(FTE cap/unweighted total FTEs in the cost reporting period)  x
(weighted nonprimary care FTEs in the cost reporting period).

[[Page 22699]]

    Add the two products to determine the hospital's reduced cap.
    Step 2. Determine the 3-year average of the weighted FTE count for
primary care and obstetrics and gynecology residents in the payment
year cost reporting period and the two immediately preceding cost
reporting periods. Determine the 3-year average of the weighted FTE
count for nonprimary care residents in the payment year cost reporting
period and the two immediately preceding cost reporting periods.
    Step 3. Determine the product of the primary care PRA and the
primary care and obstetrics and gynecology 3-year average from step 2.
Determine the product of the nonprimary care PRA and the nonprimary
care 3-year average from step 2.
    Step 4. Sum the products of step 3.
    Step 5. Multiply the sum from step 4 by the hospital's Medicare
patient load for the cost reporting period to determine Medicare's
direct GME payment to the hospital.
    Existing Sec. 413.86(g)(5) specifies that residents in new programs
are excluded from the rolling average calculation for a period of years
equal to the minimum accredited length for the type of program, and are
added to the payment formula after applying the averaging rules.
Accordingly, for hospitals that qualify for an adjustment to their FTE
caps for residents training in new programs under Sec. 413.86(g)(6),
primary care and obstetrics and gynecology residents in new programs
would be added to the quotient of the primary care and obstetrics and
gynecology 3-year average, and nonprimary care residents in new
programs would be added to the quotient of the nonprimary care 3-year
average. The sums of the respective 3-year averages and new residents
would then be multiplied by the respective PRAs.
    The following example illustrates the determination of direct GME
payment under the proposed rolling average methodology for an existing
teaching hospital with no new programs:
    Example: Assume a hospital with a cost reporting period ending
September 30, 1996 (beginning October 1, 1995) had 100 unweighted FTE
residents and 90 weighted FTE residents. The hospital's FTE cap is 100
unweighted residents.
    Step 1. In its cost reporting period beginning in FY 2000, it had
100 unweighted residents and 90 weighted residents (50 primary care and
40 nonprimary care).
     The hospital had 90 unweighted residents and 85 weighted
residents (50 primary care and 35 nonprimary care) for its cost
reporting period beginning in FY 2001.
     In its cost reporting period beginning in FY 2002, the
hospital had 80 unweighted residents and 80 weighted residents (50
primary care and 30 nonprimary care).
    Step 2. The 3-year average of weighted primary care and obstetrics
and gynecology residents is (50 + 50 + 50)/3 = 50. The 3-year average
of weighted nonprimary care residents is (40 + 35 + 30)/3 = 35.
    Step 3. Primary care: $80,000 PRA  x  50 weighted primary care and
obstetrics and gynecology FTEs = $4,000,000. Nonprimary care: $78,000
x  35 weighted nonprimary care FTEs = $2,730,000.
    Step 4. $4,000,000 + $2,730,000 = $6,730,000.
    Step 5. If the hospital's Medicare patient load for the payment
cost reporting period is .20, Medicare's direct GME payment would be
$6,730,000  x  .20 = $1,346,000.
    Whether the proposed methodology results in a payment difference
for a hospital is dependent upon whether or not the number and mix
(primary care and nonprimary care) of FTEs changes in a 3-year period.
If the number and mix of FTEs does not change in a 3-year period, there
would be no difference in a direct GME payment amount derived using the
proposed methodology versus the existing methodology. For example, if a
hospital has 90 weighted FTEs (50 primary care and 40 nonprimary care)
in the current year and the 2 previous years (using the PRAs and the
Medicare patient load from the example above), the payment amounts
derived from the existing methodology and the proposed methodology
would be equal.
    If the number and mix of FTEs varies from year to year, there will
be a difference in the results of the two methodologies. In some
instances the existing methodology would result in a higher payment,
and in other instances the proposed methodology would result in a
higher payment. In the example above, the hospital has reduced its
number of weighted residents by 5 FTEs in FYs 2001 and 2002.
Calculating this hospital's direct GME payment amount using the
existing methodology (using the PRAs and the Medicare patient load from
the example) would result in a payment of $1,347,250, which is $1,250
more than $1,346,000, the amount calculated in the example using the
proposed methodology.
    In a scenario where a hospital makes larger reductions to the
number of FTEs, the proposed methodology may be more beneficial. For
example, using the PRAs and the Medicare patient load from the example
above, assume a hospital has 90 weighted FTEs (50 primary care and 40
nonprimary care) in FY 2000, 85 weighted FTEs (50 primary care and 35
nonprimary care) in FY 2001, and 70 weighted FTEs (35 primary care and
35 nonprimary care) in FY 2002. If the proposed methodology is used,
the payment amount of $1,292,050 would be calculated, which is $1,666
more than $1,290,386, the amount calculated if the existing methodology
is used.
    We are proposing to revise Sec. 413.86(g)(4) to specify that,
effective for cost reporting periods beginning on or after October 1,
2001, if the hospital's total unweighted FTE count in a cost reporting
period exceeds its cap, the hospital's weighted FTE count, for primary
care and obstetrics and gynecology residents and nonprimary care
residents, respectively, will be reduced in the same proportion that
the number of these FTE residents for that cost reporting period
exceeds the unweighted FTE count in the cap. We also are proposing to
revise Sec. 413.86(g)(5) to specify that, effective for cost reporting
periods beginning on or after October 1, 2001, the direct GME payment
will be calculated using two separate rolling averages, one for primary
care and obstetrics and gynecology residents and one for nonprimary
care residents.
4. Counting Research Time as Direct and Indirect GME Costs
(Secs. 412.105 and 413.86)
    It has come to our attention that there appears to be some
confusion in the provider community as to whether the time that
residents spend performing research is countable for the purposes of
direct and indirect GME reimbursement. Although we are not proposing to
make any policy changes in this proposed rule, we would like to
reiterate our longstanding policy regarding time that residents spend
in research and propose to incorporate this policy in the IME
regulations.
    Section 413.86(f) specifies that, for the purposes of determining
the total number of FTE residents for the direct GME payment, residents
in an approved program working in all areas of the hospital complex may
be counted. Accordingly, the time the residents spend performing
research as part of an approved program anywhere in the hospital
complex may be counted for direct GME payment purposes. If the
requirements listed at Secs. 413.86(f)(3) and (f)(4) are met, a
hospital may also count the time residents spend doing research in non-
hospital settings for direct GME payment.
    For purposes of determining the IME payment, Sec. 412.105(f)(ii)
specifies that

[[Page 22700]]

the time residents spend training in parts of the hospital that are
subject to the inpatient prospective payment system, in the outpatient
departments, or (effective on or after October 1, 1997, in accordance
with Secs. 413.86(f)(3) and (f)(4)) in nonhospital settings, may be
counted. Section 2405.3.F.2. of the Provider Reimbursement Manual (PRM)
further states that a resident must not be counted for the IME
adjustment if the resident is engaged exclusively in research. Resident
time spent ``exclusively'' in research means that the research is not
associated with the treatment or diagnosis of a particular patient of
the hospital. Therefore, although the research component may be part of
an approved program, the time that residents devote specifically to
performing research that is not related to delivering patient care,
whether it occurs in the hospital complex or in non-hospital settings,
may not be counted for IME payment purposes. ``Exclusively research''
time is not allowable for IME purposes irrespective of whether the
resident is engaged only in research or spends only part of his or her
time on research. Accordingly, time spent exclusively in research over
the course of a program year should be subtracted from the total FTE
for that year. For example, if a resident is required to spend 3 months
in a particular program year engaged in research activities unrelated
to delivering patient care, that amount of time should be subtracted
from the total FTE, whether or not the research time is fulfilled in
one block of time, or is distributed throughout the training year.
    We note that in order to count residents for both direct GME and
IME payment purposes, the residents' training must be part of an
approved program. This applies whether or not the residents are doing
work that is clinical in nature. There are situations where residents
have completed their residency program requirements but remain for an
additional period of time to continue their training (that is, to
conduct research or other activities) outside the context of a formally
organized approved program. As we explained in the September 29, 1989
final rule (54 FR 40306), these residents are not countable for direct
GME or IME reimbursement. Rather, patient care services provided by
these residents should be paid as Part B services.
    We are proposing to amend Sec. 412.105(f)(1)(iii) to add a
paragraph (B) to incorporate language that reflects this policy.
5. Temporary Adjustments to FTE Cap To Reflect Residents Affected by
Residency Program Closure
    In the July 30, 1999 hospital inpatient prospective payment system
final rule (64 FR 41522), we indicated that we would allow a temporary
adjustment to a hospital's FTE resident cap under limited circumstances
and if certain criteria are met when a hospital assumes the training of
additional residents because of another hospital's closure. We made
this change because hospitals had indicated a reluctance to accept
additional residents from a closed hospital without a temporary
adjustment to their caps. When we proposed this change 2 years ago, we
received several comments suggesting that we include lost accreditation
of a program (that is, a program's closure) in the temporary adjustment
policy. We explained in our response to these comments (64 FR 41522)
that we did not believe it was appropriate to expand our policy to
cover any acts other than a hospital's closure. We made this decision
because, unless the hospital terminates its Medicare agreement, the
hospital would retain its statutory FTE cap and could affiliate with
other hospitals to enable the residents to finish their training.
    It has come to our attention that, despite a hospital's ability to
affiliate with other hospitals when it shuts down a residency program,
some hospitals for various reasons do not affiliate before their
programs close, particularly when the program closes abruptly towards
the end of the program year (the deadline to submit Medicare
affiliation agreements is July 1 of the upcoming program year).
Therefore, we are proposing that if a hospital that closes its
residency training program agrees to temporarily reduce its FTE cap,
another hospital(s) may receive a temporary adjustment to its FTE cap
to reflect residents added because of the closure of the former
hospital's residency training program. For purposes of this proposed
policy on closed programs, we are proposing to define ``closure of a
hospital residency training program'' as when the hospital ceases to
offer training for residents in a particular approved medical residency
training program (proposed Sec. 413.86(g)(8)(i)(B)). The methodology
for adjusting the caps for the ``receiving hospital'' and the
``hospital that closed its program'' is described below.
    a. Receiving hospital. We are proposing that a hospital(s) may
receive a temporary adjustment to its (or their) FTE cap to reflect
residents added because of the closure of another hospital's residency
training program if--
     The hospital is training additional residents from the
residency training program of a hospital that closed its program; and
     No later that 60 days after the hospital begins to train
the residents, the hospital submits to its fiscal intermediary a
request for a temporary adjustment to its FTE cap, documents that the
hospital is eligible for this temporary adjustment by identifying the
residents who have come from another hospital's closed program and have
caused the hospital to exceed its cap, specifies the length of time the
adjustment is needed, and submits to its fiscal intermediary a copy of
the FTE cap reduction statement by the hospital closing the program, as
specified in paragraph (g)(8)(iii)(B)(2).
    In general, the above criteria we are proposing for the temporary
adjustment are reflective of the criteria for the temporary adjustment
for taking on the training of displaced residents from closed
hospitals. We note that we are proposing that more than one hospital
would be eligible to apply for the temporary adjustment, because
residents from one closed program may go to different hospitals, or
they may finish their training at more than one hospital. We also note
that only to the extent a hospital would exceed its FTE cap by training
displaced residents would it be eligible for the temporary adjustment.
    Finally, we note that we are proposing that hospitals that meet the
above proposed criteria would be eligible to receive temporary
adjustments (for cost reporting periods beginning on or after October
1, 2001, for direct GME and with discharges beginning on or after
October 1, 2001 for IME) for training the displaced residents from
programs that closed even before the effective date of this policy. We
mention this because hospitals may have closed programs in the recent
past and the residents from the closed programs may not have completed
their training as of the effective date of this policy. For instance,
if a 5-year residency program, such as surgery, closed on July 1, 1997,
the 5th program year residents may still be training during this
residency year (2001). We are proposing that if both the receiving
hospital(s) and the hospital that closed the program in this example
follow the criteria described in this preamble, the receiving hospital
may receive a temporary adjustment to its FTE cap for 9 months (October
1, 2001 through June 30, 2002) to accommodate the 5th year surgery
residents. However, we note that hospitals would not be

[[Page 22701]]

eligible to receive a temporary adjustment for training the residents
until the effective date of this rule.
    b. Hospital that closed its program(s). We are proposing that a
hospital that agrees to train residents who have been displaced by the
closure of another hospital's program may receive a temporary FTE cap
adjustment only if the hospital with the closed program(s)--
     Temporarily reduces its FTE cap by the number of FTE
residents in each program year training in the program at the time of
the program's closure. The yearly reduction would be determined by
deducting the number of those residents who would have been training in
the program year during each year had the program not closed; and
     No later than 60 days after the residents who were in the
closed program begin training at another hospital, submits to its
fiscal intermediary a statement signed and dated by its representative
that specifies that it agrees to the temporary reduction in its FTE cap
to allow the hospital training the displaced residents to obtain a
temporary adjustment to its cap; identifies the residents who were
training at the time of the program's closure; identifies the hospitals
to which the residents are transferring once the program closes; and
specifies the reduction for the applicable program years.
    Unlike the closed hospital policy at Sec. 413.86(g)(8), we are
proposing under this closed program policy (which we are proposing to
amend Sec. 413.86(g)(8) to include), that in order for the receiving
hospital(s) to qualify for a temporary adjustment to its FTE cap, the
hospitals that are closing their programs would need to reduce their
FTE cap for the duration of time the displaced residents would need to
finish their training. We are proposing this change because, as
explained below, the hospital that closes the program still has the FTE
slots in its cap, even if the hospital chooses not to fill the slots
with residents. We believe it is inappropriate to allow an increase to
the receiving hospital's cap without an attendant decrease to the cap
of the hospital with the closed program, even if the increase is only
temporary. We note that even under this proposed closed program policy,
the hospital that closes its program may choose instead to affiliate
with another hospital by July 1 of the next residency year so that the
residents can more easily finish their training.
    We are proposing that the cap reduction for the hospital with the
closed program would be based on the number of FTE residents in each
program year who were in the program at the program's closure, and who
began training at another hospital, rather than the count of residents
each year at the hospital(s) receiving the temporary adjustment(s). We
believe it would be too burdensome administratively to require the
hospital closing the program to keep track of the status of the
residents when they are training at other hospitals. For instance, Joe
Smith, a resident who is a PGY 1 when Hospital X closes its pathology
residency program, may then finish his training at Hospital Y. The
resident trains for one year at Hospital Y as a PGY 2, but decides to
drop out of the program before finishing. It would be burdensome to
require Hospital X to keep track of Joe Smith's status while he is
training at Hospital Y for purposes of the reduction in Hospital X's
cap. Therefore, we are proposing to ``freeze'' the basis for the
reduction of the FTE cap of the hospital that closed the program based
on the count and status of the residents when the hospital closes the
program.
    Example: Hospital A, which has a direct GME FTE cap of 20 FTEs and
an IME FTE cap of 18 FTEs, is experiencing financial difficulties and
decides to close down its internal medicine residency training program
effective June 30, 2002. As of June 30, 2002, Hospital A is training 2
PGY 1s, 4 PGY 2s, and 6 PGY 3s in its internal medicine program.
Hospitals B, C, and D take on the training of the displaced residents.
These hospitals are eligible to receive temporary adjustments to their
FTE caps if they follow the proposed criteria stated above. In order
for Hospitals B, C, and D to receive the temporary adjustments,
however, Hospital A must agree to reduce its FTE cap. According to the
proposed criteria stated above, Hospital A's reduction would be:

July 1, 2002 through June 30, 2003

Direct GME FTE cap: 14 FTEs, (20 FTEs cap--2 PGY 2s--4 PGY 3s)
IME FTE cap: 12 FTEs (18 FTEs--2 PGY 2s--4 PGY 3s)
    We note that no downward adjustment for the 6 PGY 3s for either cap
is necessary since these residents will have completed their training
in that program by the July 1, 2000 through June 30, 2003 program year.

July 1, 2003 through June 30, 2004

Direct GME FTE cap: 18 FTEs (20 FTEs cap--2 PGY 3s)
IME FTE cap: 16 FTEs (18 FTEs cap--2 PGY 3s)

July 1, 2004 through June 30, 2005

Direct GME FTE cap: 20 FTEs
IME FTE cap: 18 FTEs
    We also are proposing to revise Sec. 412.105(f)(1)(ix) to make the
provision relating to the adjustment to FTE caps to reflect residents
affected by closure of hospitals' medical residency training programs
applicable to determining the IME payment.
6. Conforming Change to Regulations Governing Payment to Federally
Qualified Health Centers (Sec. 405.2468(f))
    We have discovered a technical error in the regulations at
Sec. 405.2468(f) regarding payment to federally qualified health
centers (FQHCs) and rural health centers (RHCs) for the costs of
graduate medical education. Specifically, Sec. 405.2468(f)(6)(ii)(D)
provides that ``The costs associated with activities described in
Sec. 413.85(d) of this chapter'' are not allowable graduate medical
education costs. We recently amended Sec. 413.85 in a final rule (66 FR
3358, January 12, 2001) regarding Medicare pass-through payment for
approved nursing and allied health education programs. However, we
inadvertently did not make a conforming change to
Sec. 405.2468(f)(6)(ii)(D). Section 405.2468(f)(6)(ii)(D) should read
``The costs associated with activities described in Sec. 413.85(h) of
this chapter.'' We are proposing to revise Sec. 405.2468(f)(6)(ii)(D)
to reflect this change.

V. Proposed Changes to the Prospective Payment System for Capital-
Related Costs

A. End of the Transition Period

    Federal fiscal year (FY) 2001 is the last year of the 10-year
transition period established to phase in the prospective payment
system for hospital capital-related costs. For the readers' benefit in
this proposed rule, we are providing a summary of the statutory basis
for the system, the development and evolution of the system, the
methodology used to determine capital-related payments to hospitals,
and the policy for providing exceptions payments during the transition
period.
    Section 1886(g) of the Act requires the Secretary to pay for the
capital-related costs of inpatient hospital services ``in accordance
with a prospective payment system established by the Secretary.'' Under
the statute, the Secretary has broad authority in establishing and
implementing the capital prospective payment system. We initially
implemented the capital prospective payment system in the August 30,
1991 final rule (56 FR 43409), in which we

[[Page 22702]]

established a 10-year transition period to change the payment
methodology for Medicare inpatient capital-related costs from a
reasonable cost-based methodology to a prospective methodology (based
fully on the Federal rate).
    The 10-year transition period established to phase in the
prospective payment system for capital-related costs is effective for
cost reporting periods beginning on or after October 1, 1991 (FY 1992)
and before October 1, 2001 (FY 2002). Beginning in FY 2001, the last
year of the 10-year transition period for the prospective payment
system for hospital capital-related costs, capital prospective payment
system payments are based solely on the Federal rate for the vast
majority of hospitals. Since FY 2001 is the final year of the capital
transition period, we will no longer determine a hospital-specific rate
for FY 2002 in section IV. of the Addendum of this proposed rule. For
cost reporting periods beginning on or after October 1, 2001, payment
for capital-related costs for all hospitals, except those defined as
new hospitals under Sec. 412.30(b), will be determined based solely on
the capital standard Federal rate.
    Generally, during the transition period, inpatient capital-related
costs are paid on a per discharge basis, and the amount of payment
depended on the relationship between the hospital-specific rate and the
Federal rate during the hospital's base year. A hospital with a base
year hospital-specific rate lower than the Federal rate is paid under
the fully prospective payment methodology during the transition period.
This method is based on a dynamic blend percentage of the hospital's
hospital-specific rate and the applicable Federal rate for each year
during the transition period. A hospital with a base period hospital-
specific rate greater than the Federal rate is paid under the hold-
harmless payment methodology during the transition period.
    During the transition period, a hospital paid under the hold-
harmless payment methodology receives the higher of (1) a blended
payment of 85 percent of reasonable cost for old capital plus an amount
for new capital based on a portion of the Federal rate; or (2) a
payment based on 100 percent of the adjusted Federal rate. The amount
recognized as old capital is generally limited to the allowable
Medicare capital-related costs that were in use for patient care as of
December 31, 1990. Under limited circumstances, capital-related costs
for assets obligated as of December 31, 1990, but put in use for
patient care after December 31, 1990, also may be recognized as old
capital if certain conditions were met. These costs are known as
obligated capital costs. New capital costs are generally defined as
allowable Medicare capital-related costs for assets put in use for
patient care after December 31, 1990.
    Hospitals that are defined as ``new'' for the purposes of capital
payments during the transition period (see Sec. 412.300(b)) will
continue to be paid according to the applicable payment methodology
outlined in Sec. 412.324. During the transition period, new hospitals
are exempt from the prospective payment system for capital-related
costs for their first 2 years of operation and are paid 85 percent of
their reasonable capital-related costs during that period. The
hospital's first 12-month cost reporting period (or combination of cost
reporting periods covering at least 12 months), beginning at least 1
year after the hospital accepts its first patient, serves as the
hospital's base period. Those base year costs qualify as old capital
and are used to establish its hospital-specific rate used to determine
its payment methodology under the capital prospective payment system.
Effective with the third year of operation, the hospital will be paid
under either the fully prospective methodology or the hold-harmless
methodology. If the fully prospective methodology is applicable, the
hospital is paid using the appropriate transition blend of its
hospital-specific rate and the Federal rate for that fiscal year until
the conclusion of the transition period, at which time the hospital
will be paid based on 100 percent of the Federal rate. If the hold-
harmless methodology is applicable, the hospital will receive hold-
harmless payment for assets in use during the base period for 8 years,
which may extend beyond the transition period.
    The basic methodology for determining capital prospective payments
based on the Federal rate is set forth in Sec. 412.312. For the purpose
of calculating payments for each discharge, the standard Federal rate
is adjusted as follows:

(Standard Federal Rate)  x  (DRG Weight)  x  (GAF)  x  (Large Urban
Add-on, if applicable)  x  (COLA Adjustment for Hospitals Located in
Alaska and Hawaii)  x  (1 + DSH Adjustment Factor + IME Adjustment
Factor)

    Hospitals may also receive outlier payments for those cases that
qualify under the thresholds established for each fiscal year. Section
412.312(c) provides for a single set of thresholds to identify outlier
cases for both inpatient operating and inpatient capital-related
payments.
    In accordance with section 1886(d)(9)(A) of the Act, under the
prospective payment system for inpatient operating costs, hospitals
located in Puerto Rico are paid for operating costs under a special
payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a
blended rate that consisted of 75 percent of the applicable
standardized amount specific to Puerto Rico hospitals and 25 percent of
the applicable national average standardized amount. However, effective
October 1, 1997, under amendments to the Act enacted by section 4406 of
Public Law 105-33, operating payments to hospitals in Puerto Rico are
based on a blend of 50 percent of the applicable standardized amount
specific to Puerto Rico hospitals and 50 percent of the applicable
national average standardized amount. In conjunction with this change
to the operating blend percentage, effective with discharges on or
after October 1, 1997, we compute capital payments to hospitals in
Puerto Rico based on a blend of 50 percent of the Puerto Rico rate and
50 percent of the Federal rate as specified in the regulations at
Sec. 412.374. For capital-related costs, we compute a separate payment
rate specific to Puerto Rico hospitals using the same methodology used
to compute the national Federal rate for capital-related costs.
    In the August 30, 1991 final rule (56 FR 43409), we established a
capital exceptions policy, which provided for exceptions payments
during the transition period (Sec. 412.348). Section 412.348 provides
that, during the transition period, a hospital may receive additional
payment under the exceptions process when its regular payments are less
than a minimum percentage, established by class of hospital, of the
hospital's reasonable capital-related costs. The amount of the
exceptions payment is the difference between the hospital's minimum
payment level and the payments the hospital would have received under
the capital prospective payment system in the absence of an exceptions
payment. The comparison is made on a cumulative basis for all cost
reporting periods during which the hospital has been subject to the
capital prospective payment transition rules. The minimum payment
percentages throughout the transition period for regular capital
exceptions payments by class of hospitals are:
     For sole community hospitals, 90 percent;
     For urban hospitals with at least 100 beds that have a
disproportionate share patient percentage of at least 20.2

[[Page 22703]]

percent or that received more than 30 percent of their net inpatient
care revenues from State or local governments for indigent care, 80
percent;
     For all other hospitals, 70 percent of the hospital's
reasonable inpatient capital-related costs.
    The provision for regular exceptions payments expires at the end of
the transition period, that is, on September 30, 2001. Capital
prospective payment system payments are no longer adjusted to reflect
regular exceptions payments at Sec. 412.348 after that date.
Accordingly, for cost reporting periods beginning on or after October
1, 2001, all hospitals other than those defined as ``new'' under
Sec. 412.300(b) will receive only the per discharge payment based on
the Federal rate for capital costs (plus any applicable DSH or IME and
outlier adjustments) unless a hospital qualifies for a special
exceptions payment under Sec. 412.348(g).

B. Special Exceptions Process

    In the August 30, 1991 final rule (56 FR 43409), we established a
capital exceptions policy at Sec. 412.348, which provided for regular
exception payments during the transition period. In the September 1,
1994 final rule (59 FR 45385), we added the special exceptions process,
describing it as ``* * * narrowly defined, focusing on a small group of
hospitals who found themselves in a disadvantaged position. The target
hospitals were those who had an immediate and imperative need to begin
major renovations or replacements just after the beginning of the
capital prospective payment system. These hospitals would not be
eligible for protection under the old capital and obligated capital
provisions, and would not have been allowed any time to accrue excess
capital prospective payments to fund these projects.''
    Under the special exceptions provisions at Sec. 412.348(g), an
additional payment may be made through the 10th year beyond the end of
the capital prospective payment system transition period for eligible
hospitals that meet (1) a project need requirement as described at
Sec. 412.348(g)(2), which, in the case of certain urban hospitals,
includes an excess capacity test; and (2) a project size requirement as
described at Sec. 412.348(g)(5). Eligible hospitals include sole
community hospitals, urban hospitals with at least 100 beds that have a
disproportionate share percentage of at least 20.2 percent, and
hospitals with a combined Medicare and Medicaid inpatient utilization
of at least 70 percent.
    When we established the special exceptions process, we selected the
hospital's cost reporting period beginning before October 1, 2001, as
the project completion date in order to limit cost-based exceptions
payments to a period of not more than 10 years beyond the end of the
transition to the fully Federal capital prospective payment system.
Therefore, hospitals are eligible to receive special exceptions
payments for the 10 years after the cost reporting year in which they
complete their project. Generally, if a project is completed in the
hospital cost reporting period ending September 29, 2002, exceptions
payments would continue through September 29, 2012. In addition, we
believe that, for projects completed after the deadline, hospitals
would have had the opportunity to reserve their prior years' capital
prospective payment system payments for financing projects. We note
that the August 1, 2000 final rule (65 FR 47095) incorrectly stated
that special exceptions payments could extend through September 30,
2011; the date should have been September 29, 2012.
    For each cost reporting period, the amount of the special
exceptions payment is determined by comparing the cumulative payments
made to the hospital under the capital payment system to the cumulative
minimum payment levels applicable to the hospital for each cost
reporting period subject to the prospective payment system. This
comparison is offset or reduced by (1) any amount by which the
hospital's cumulative payments exceed its cumulative minimum payments
under the regular exceptions process for all cost reporting periods
during which the hospital has been subject to the capital prospective
payment system; and (2) any amount by which the hospital's current year
Medicare inpatient operating and capital prospective payment system
payments (excluding 75 percent of its operating DSH payments) exceed
its Medicare inpatient operating and capital costs (or its Medicare
inpatient margin). During the capital prospective payment system
transition period, the minimum payment level under the regular
exceptions process varied by class of hospital as set forth in
Sec. 412.348(c) and described in section V.A. of this preamble. After
the transition period and for the duration of the special exceptions
provision, the minimum payment level is 70 percent as set forth in
Sec. 412.348(g)(6).
    In the July 31, 1998 final rule (63 FR 40999), we stated that a few
hospitals had expressed concern with the required completion date of
October 1, 2001, and other qualifying criteria for the special
exceptions payment. Therefore, we solicited certain information from
hospitals on major capital construction projects that might qualify for
the capital special exceptions payments so we could determine if any
changes in the special exceptions criteria or process were necessary.
In the May 7, 1999 proposed rule (64 FR 24736), we reported that four
hospitals had responded timely to our solicitation with information on
their major capital construction projects. The hospitals submitted
information about their location, the cost of the project, the date
that the certificate of need approval was received, the start date of
the project, and the anticipated completion date. Some hospitals also
suggested changing a number of the requirements of the special
exception provision.
    When we issued the May 7, 1999 proposed rule, we had no specific
proposal to revise the special exceptions process. However, we invited
comments and suggestions from hospitals and other interested parties on
the revision to the special exceptions process (64 FR 24738). We noted
that, because the capital special exceptions process is budget neutral,
any liberalization of the policy would require a commensurate reduction
in the capital rate paid to all hospitals. That is, we will continue to
make an adjustment to the capital Federal rate in a budget neutral
manner to pay for exceptions as long as an exceptions policy is in
force, just as we have for regular exceptions during the transition
period. We also stated that, based on the comments we received, we may
make changes to the special exceptions criteria in the final regulation
or propose changes in the FY 2001 proposed rule.
    In the July 30, 1999 final rule (64 FR 41526), we responded to the
six comments we received on potential changes to the special exceptions
process. In that same final rule, we also described our attempt to
obtain information on hospital projects that might qualify for special
exceptions payments in order to assess the impact of the recommended
changes to the existing policy. In conjunction with the most recent
cost report data readily available at that time (FY 1996), we attempted
to estimate which of the hospital construction projects might qualify
for special exception payments under the existing policy and how that
universe of hospitals might change as a result of the recommended
revisions to the special exceptions criteria.
    Because exception payments to a hospital for a given cost reporting
period are based on a percentage of the

[[Page 22704]]

capital costs incurred during the cost reporting period, we were unable
to determine a precise estimate of the amount of payments to hospitals
that might be eligible for special exceptions. In addition, hospitals
are not eligible for special exception payments until the assets are
put into use for patient care. Once eligibility for special exceptions
payment has been demonstrated, it is some time before completed and
settled cost reports are available to determine these payments.
    Based on our research, we determined that it is difficult to
predict whether particular hospitals will be able to meet all of the
special exceptions eligibility criteria (DSH percentage, completion
date, project size, and project need requirements) as well as qualify
to receive special exception payments after taking into account the
appropriate offsets, such as inpatient operating and capital margins.
However, we believe that any changes to the special exceptions policy
may affect a significant number of hospitals.
    Based on our belief that these changes may have an impact on a
significant number of hospitals, our evaluation of the comments, and
careful consideration of all the issues, we stated in the July 30, 1999
final rule that the more appropriate forum for addressing changes to
the capital special exceptions policy is the legislative process in
Congress rather than the regulation process (64 FR 41528).
    As we also indicated in the July 30, 1999 final rule (64 FR 41526),
we have little information about the number of hospitals that may
qualify for special exceptions payments or the projected dollar amount
of special exception payments, because no hospitals are currently being
paid under the special exceptions process. Until FY 2002, the special
exceptions provision pays either the same as the regular exceptions
process or less for high DSH and sole community hospitals. In
accordance with Sec. 412.348(g)(7), a qualifying hospital may receive
additional payments for up to 10 years from the year in which it
completes a project that meets the project need and project size
requirements of the special exception provision in Secs. 412.348(g)(2)
through (g)(5). Because a qualifying project under the special
exceptions provision at Sec. 412.348(g) must be completed (put into use
for patient care) by the end of the hospital's last cost reporting
period beginning before the end of the transition period (September 30,
2001), a hospital may receive special exception payments for 10 years
through September 30, 2012. For example, an eligible hospital that
completes a qualifying project in October 1993 (FY 1994) will be
eligible to receive special exception payments up through FY 2003
(September 30, 2003).
    In order to assist our fiscal intermediaries in determining the end
of the 10-year period in which an eligible hospital will no longer be
entitled to receive special exception payments, we are proposing to add
a new Sec. 412.348(g)(9) to require that hospitals eligible for special
exception payments under Sec. 412.348(g) submit documentation to the
intermediary indicating the completion date of their project (the date
the project was put in use for patient care) that meets the project
need and project size requirements outlined in Secs. 412.348(g)(2)
through (g)(5). We are proposing that, in order for an eligible
hospital to receive special exception payments, this documentation
would have to be submitted in writing to the intermediary by the later
of October 1, 2001, or within 3 months of the end of the hospital's
last cost reporting period beginning before October 1, 2001, during
which a qualifying project was completed. For example, if a hospital
completed a qualifying project in March 1995, it would be required to
submit documentation to the intermediary by October 1, 2001. If a
hospital with a 12-month cost reporting period beginning on July 1
completed a qualifying project in November 2001, it would be required
to submit documentation to the intermediary no later than September 30,
2002, which is 3 months after the end of its 12-month cost reporting
period that began on July 1, 2001.

C. Exceptions Minimum Payment Level

    Section 412.348(h) limits the estimated aggregate amount of
exceptions payments under both the regular exceptions and special
exceptions process to no more than 10 percent of the total estimated
capital prospective payment system payments in a given fiscal year.
Consistent with the requirements for regular exceptions at
Sec. 412.348(c), we are proposing that if we estimate that special
exception payments would exceed 10 percent of total capital prospective
payment system payments for a given fiscal year, we will adjust the
minimum payment level of 70 percent by one percentage point increments
until the estimated payments are within the 10-percent limit. For
example, we could set the minimum payment level at 69 percent to ensure
that estimated aggregate special exceptions payments do not exceed 10
percent of estimated total capital prospective payment system payments.
If the estimate of aggregate special exceptions payments were still
projected to exceed 10 percent of total capital prospective payment
system payments, we would continue reducing the minimum payment level
by one percentage point increments until the requirements in
Sec. 412.348(h) were satisfied. We are proposing to revise
Sec. 412.348(g)(6) accordingly to reflect this policy.

D. Exceptions Adjustment Factor

    Section 412.308(c)(3) requires that the standard capital Federal
rate be reduced by an adjustment factor equal to the estimated
proportion of additional payments for both regular exceptions and
special exceptions under Sec. 412.348 relative to total capital
prospective payment system payments. In estimating the proportion of
regular exceptions payments to total capital prospective payment system
payments during the transition period, we used the model originally
developed for determining budget neutrality (described in Appendix B of
this proposed rule) to determine the exception adjustment factor, which
was applied to both the Federal and hospital-specific rates. Below we
describe our proposed methodology for determining the special
exceptions adjustment used in establishing the Federal capital rate.
    Under the special exceptions provision specified at
Sec. 412.348(g)(1), eligible hospitals include SCHs, urban hospitals
with at least 100 beds that have a disproportionate share percentage of
at least 20.2 percent or qualify for DSH payments under
Sec. 412.106(c)(2), and hospitals with a combined Medicare and Medicaid
inpatient utilization of at least 70 percent. An eligible hospital may
receive special exception payments if it meets (1) a project need
requirement as described at Sec. 412.348(g)(2), which, in the case of
certain urban hospitals, includes an excess capacity test; (2) an age
of assets test as described at Sec. 412.348(g)(3); and (3) a project
size requirement as described at Sec. 412.348(g)(5).
    In order to determine the estimated proportion of special
exceptions payments to total capital payments, we attempted to identify
the universe of eligible hospitals that may potentially qualify for
special exception payments. First, we identified hospitals that met the
eligibility requirements at Sec. 412.348(g)(1). Then we determined each
hospital's average fixed asset age in the earliest available cost
report starting in FY 1992 and later. For each of those hospitals, we
calculated the average fixed asset age by dividing the

[[Page 22705]]

accumulated depreciation by the current year's depreciation. In
accordance with Sec. 412.348(g)(3), a hospital must have an average age
of buildings and fixed assets above the 75th percentile of all
hospitals in the first year of capital prospective payment system. In
the September 1, 1994 final rule (59 FR 45385), we stated that, based
on the June 1994 update of the cost report files in HCRIS, the 75th
percentile for buildings and fixed assets for FY 1992 was 16.4 years.
However, we noted that we would make a final determination of that
value on the basis of more complete cost report information at a later
date. In the August 29, 1997 final rule (62 FR 46012), based on the
December 1996 update of HCRIS and the removal of outliers, we finalized
the 75th percentile for buildings and fixed assets for FY 1992 as 15.4
years. Thus, we eliminated any hospitals from the potential universe of
hospitals that may qualify for special exception payments if its
average age of fixed assets did not exceed 15.4 years.
    For the hospitals remaining in the potential universe, we estimated
project-size by using the fixed capital acquisitions shown on Worksheet
A7 from the following HCRIS cost reports updated through December 2000.

------------------------------------------------------------------------
                                                 Cost reports periods
                  PPS year                           beginning in
------------------------------------------------------------------------
IX.........................................  FY 1992
X..........................................  FY 1993
XI.........................................  FY 1994
XII........................................  FY 1995
XIII.......................................  FY 1996
XIV........................................  FY 1997
XV.........................................  FY 1998
XVI........................................  FY 1999
------------------------------------------------------------------------

    Because the project phase-in may overlap 2 cost reporting years, we
added together the fixed acquisitions from sequential pairs of cost
reports to determine project size. Under Sec. 412.348(g)(5), the
project-size must meet the following requirements: (1) $200 million; or
(2) 100 percent of its operating cost during the first 12-month cost
reporting period beginning on or after October 1, 1991. We calculated
the operating costs from the earliest available cost report starting in
FY 1992 and later by subtracting inpatient capital costs from inpatient
costs (for all payers). We did not subtract the direct medical
education costs as those costs are not available on every update of the
HCRIS minimum data set. If the hospital met the project size
requirement, we assumed that it also met the project need requirements
at Sec. 412.348(g)(2) and the excess capacity test for urban hospitals
at Sec. 412.348(g)(4).
    Because we estimate that so few hospitals will qualify for special
exceptions, projecting costs, payments, and margins would result in
high statistical variance. Consequently, we decided to model the
effects of special exceptions using historical data based on hospitals'
actual cost experiences. If we determined that a hospital may qualify
for special exceptions, we modeled special exceptions payments from the
project start date through the last available cost report (FY 1999).
For purposes of modeling we used the cost and payment data on the cost
reports from HCRIS assuming that special exceptions would begin at the
start of the qualifying project. In other words, when modeling costs
and payment data, we ignored any regular exception payments that these
hospitals may otherwise have received as if there had not been regular
exceptions during the transition period. In projecting an eligible
hospital's special exception payments, we applied the 70-percent
minimum payment level, the cumulative comparison of current year
capital prospective payment system payments and costs, and the
cumulative operating margin offset (excluding 75 percent of operating
DSH payments).
    Because hospitals may receive regular exception payments up through
the end of their last cost reporting period beginning before October 1,
2001, hospitals with cost reporting periods beginning on a day other
than October 1 will continue to receive regular exception payments
until the end of their FY 2002 cost reporting period. Therefore, these
hospitals will only receive special exception payments for the
remainder of Federal FY year 2002. Consequently, the special exceptions
payments made in FY 2002 will be less than for subsequent years since
they are only being paid a special exception payment for a portion of
FY 2002.
    Our modeling of special exception payments produced the following
results:

----------------------------------------------------------------------------------------------------------------
                                                                                                      Special
                                                                                                   exceptions as
                                                                                                   a fraction of
                                                                                      Special         capital
                                                                     Number of     exceptions as    payments to
                                                                     hospitals     a fraction of   all hospitals
                           Cost report                             eligible for       capital       weighted by
                                                                      special       payments to    portion of FY
                                                                    exceptions     all hospitals  2002 for which
                                                                                                      special
                                                                                                  exceptions are
                                                                                                       paid
----------------------------------------------------------------------------------------------------------------
PPS IX..........................................................  ..............  ..............  ..............
PPS X...........................................................  ..............  ..............  ..............
PPS XI..........................................................               3  ..............  ..............
PPS XII.........................................................               6          0.0002          0.0001
PPS XIII........................................................               8          0.0001          0.0000
PPS XIV.........................................................              14          0.0002          0.0001
PPS XV..........................................................              18          0.0016          0.0002
PPS XVI.........................................................              22          0.0011          0.0008
----------------------------------------------------------------------------------------------------------------

    Currently, the PPS XVI cost reports in HCRIS are incomplete because
there is a 2-year lag time between the end of a hospital's cost
reporting period and the submission and processing of the cost reports
for HCRIS. In particular, hospitals whose cost reporting periods begin
July 1 are missing. We expect more hospitals to qualify for special
exceptions once data from later HCRIS updates are available. In
addition, hospitals still have two more cost reporting periods (PPS
XVII and PPS XVIII) to complete their projects in order to be eligible
for special exceptions. We estimate that about 30 additional hospitals
could qualify for special exceptions. Thus, we project

[[Page 22706]]

that special exception payments as a fraction of capital payments to
all hospitals could be approximately 0.0025. However, after weighting
this amount to account for the FY 2002 phase-in of special exception
payments, we project that this factor would be approximately 0.0012.
Because special exceptions are budget neutral, we propose to offset the
Federal capital rate by 0.12 percent for special exceptions for FY
2002. Therefore, the proposed exceptions adjustment factor would equal
0.9988 (1 minus 0.0012) to account for special exception payments in FY
2002. We will revise this projection of the special exception
adjustment factor in the final rule based on the latest available data.


VI. Proposed Changes for Hospitals and Hospital Units Excluded From
the Prospective Payment System

A. Limits on and Adjustments to the Target Amounts for Excluded
Hospitals and Units (Secs. 413.40(b)(4) and (g))

1. Updated Caps for Existing Hospitals and Units
    Section 1886(b)(3) of the Act (as amended by section 4414 of Public
Law 105-33) established caps on the target amounts for certain existing
hospitals and units excluded from the prospective payment system for
cost reporting periods beginning on or after October 1, 1997 through
September 30, 2002. The caps on the target amounts apply to the
following three classes of excluded hospitals: psychiatric hospitals
and units, rehabilitation hospitals and units, and long-term care
hospitals.
    In addition, section 4416 of Public Law 105-33 limited payments for
psychiatric hospitals and units, rehabilitation hospitals and units,
and long-term care hospitals that first received payments on or after
October 1, 1997. Payment for these hospitals and units is limited to
the lesser of the hospital's operating costs per case or 110 percent of
the national median of target amounts for the same class of hospitals
for cost reporting periods ending during FY 1996, updated and adjusted
for differences in area wage levels.
    A discussion of how the caps on the target amounts and the payment
limitation were calculated can be found in the August 29, 1997 final
rule with comment period (62 FR 46018); the May 12, 1998 final rule (63
FR 26344); the July 31, 1998 final rule (63 FR 41000), and the July 30,
1999 final rule (64 FR 41529). For purposes of calculating the caps for
existing facilities, the statute required the Secretary to estimate the
national 75th percentile of the target amounts for each class of
hospital (psychiatric, rehabilitation, or long-term care) for cost
reporting periods ending during FY 1996 without adjusting for
differences in area wage levels. Under section 1886(b)(3)(H)(iii) of
the Act, the resulting amounts are updated by the market basket
percentage to the applicable fiscal year.
    Section 121 of Public Law 106-113 amended section 1886(b)(3)(H) of
the Act to also provide for an appropriate wage adjustment to the caps
on the target amounts for existing psychiatric hospitals and units,
rehabilitation hospitals and units, and long-term care hospitals,
effective for cost reporting periods beginning on or after October 1,
1999, through September 30, 2002. On August 1, 2000, we published an
interim final rule with comment period that implemented this provision
for cost reporting periods beginning on or after October 1, 1999 and
before October 1, 2000 (65 FR 47026) and a final rule that implemented
this provision for cost reporting periods beginning on or after October
1, 2000 (65 FR 47054). This proposed rule addresses the wage adjustment
to the caps and payment limitations for cost reporting periods
beginning on or after October 1, 2001.
    For purposes of calculating the caps, section 1886(b)(3)(H)(ii) of
the Act requires the Secretary to first ``estimate the 75th percentile
of the target amounts for such hospitals within such class for cost
reporting periods ending during fiscal year 1996.'' Furthermore,
section 1886(b)(3)(H)(iii), as added by Public Law 106-113, requires
the Secretary to also provide for existing hospitals ``an appropriate
adjustment to the labor-related portion of the amount determined under
such subparagraph to take into account the differences between average
wage-related costs in the area of the hospital and the national average
of such costs within the same class of hospital.''
    Consistent with the broad authority conferred on the Secretary by
section 1886(b)(3)(H)(iii) of the Act to determine the appropriate wage
adjustment, we account for differences in wage-related costs by
adjusting the caps to account for the following:
    First, we adjust each hospital's target amount to account for area
differences in wage-related costs. For each class of hospitals
(psychiatric, rehabilitation, and long-term care), we determine the
labor-related portion of each hospital's FY 1996 target amount by
multiplying its target amount by the actuarial estimate of the labor-
related portion of costs (or 0.71553). Similarly, we determine the
nonlabor-related portion of each hospital's FY 1996 target amount by
multiplying its target amount by the actuarial estimate of the
nonlabor-related portion of costs (or 0.28447).
    Next, we account for wage differences among hospitals within each
class by dividing the labor-related portion of each hospital's target
amount by the hospital's wage index under the hospital inpatient
prospective payment system. Within each class, each hospital's wage-
neutralized target amount was calculated by adding the wage-neutralized
labor-related portion of its target amount and the nonlabor-related
portion of its target amount. Then, the wage-neutralized target amounts
for hospitals within each class were arrayed in order to determine the
national 75th percentile caps on the target amounts for each class.
    Taking into account the national 75th percentile of the target
amounts for cost reporting periods ending during FY 1996 (wage-
neutralized using the FY 2000 acute care wage index), the wage
adjustment provided for under Public Law 106-113, and the applicable
update factor based on the market basket percentage increase for FY
2001, in the August 1, 2000 final rule (65 FR 47096), we established
the FY 2001 caps on the target amounts as follows:

------------------------------------------------------------------------
                                                  FY 2001      FY 2001
                                                   labor-     nonlabor-
      Class of excluded hospital or unit          related      related
                                                   share        share
------------------------------------------------------------------------
Psychiatric...................................       $8,131       $3,233
Rehabilitation................................       15,164        6,029
Long Term Care................................       29,284       11,642
------------------------------------------------------------------------

    In reviewing our methodology for wage neutralizing the hospital
specific target amounts, it appears that we incorrectly used the FY
2000 hospital inpatient prospective payment system wage index published
in Tables 4A and 4B of the July 30, 1999 final rule (64 FR 41585
through 41593), which is based on wage data after taking into account
geographic reclassification under section 1886(d)(8) of the Act. We are
proposing to revise the methodology of wage neutralizing the hospital-
specific target amounts using pre-reclassified wage data. We propose to
recalculate the limit for new excluded hospitals and units, as well as
calculate the cap for existing excluded hospitals and units, using the
pre-reclassification wage index. The pre-reclassification wage index is
the same wage index used under the prospective payment system for
skilled nursing facilities (SNFs) and was included in Table 7 of the
July 30, 1999 SNF final rule (64 FR 41690). (We note that both SNFs and
ambulatory surgical centers use the prospective payment system
inpatient wage index

[[Page 22707]]

without regard to the prospective payment system reclassification as a
proxy for variations in local costs.)
    As we stated in the August 1, 2000 final rule, long-term care
hospitals, rehabilitation hospitals and units, and psychiatric
hospitals and units that are exempt from the prospective payment system
are not subject to the prospective payment system hospital
reclassification system under section 1886(d)(10)(A) of the Act. This
section establishes the MGCRB for the purpose of evaluating
applications from short-term, acute care providers. There is no
equivalent statutory mandate for HCFA to develop an alternative board
for long-term care hospitals, psychiatric hospitals and units, and
rehabilitation hospitals and units. In addition, while it would be
feasible to allow units physically located in prospective payment
system hospitals that have been reclassified by the MGCRB to use the
wage index for the area to which that hospital has been reclassified,
at the present time there is no process in place to make
reclassification determinations for freestanding excluded providers.
There are approximately 1,000 freestanding excluded providers.
Therefore, in the interest of equity, we believe that, in determining a
hospital's wage-adjusted cap on its target amount, it is appropriate
for excluded hospitals and units to use the wage index associated with
the area in which they are physically located (MSA or rural area) and
the prospective payment system reclassification under section
1886(d)(10) of the Act is not applicable. This policy is also
consistent with the policy for SNFs and ambulatory surgical centers
that use the acute care, inpatient hospital prospective payment system
wage index and that does not allow for reclassifications since there is
no analogous determinations process to the MGCRB. The MGCRB only has
authority over the prospective payment system for acute care hospitals.
    Therefore, based on the broad authority conferred on the Secretary
by section 1886(b)(3)(H)(iii) of the Act to determine the appropriate
wage adjustment to the caps, we have determined the labor-related and
nonlabor-related portions of the proposed caps on the target amounts
for FY 2002 using the methodology outlined above.

------------------------------------------------------------------------
                                                  FY 2002      FY 2002
                                                  proposed     proposed
      Class of excluded hospital or unit           labor-     nonlabor-
                                                  related      related
                                                   share        share
------------------------------------------------------------------------
Psychiatric...................................       $8,404       $3,341
Rehabilitation................................       15,689        6,237
Long-Term Care................................       31,399       12,483
------------------------------------------------------------------------

    These labor-related and nonlabor-related portions of the proposed
caps on the target amounts for FY 2002 are based on the current
estimate of the market basket increase for excluded hospitals and units
for FY 2002 of 3.0 percent and reflect the change in applying the pre-
reclassified hospital inpatient prospective payment system wage index
as discussed above. Furthermore, in accordance with section 307(a) of
Public Law 106-554, which amended section 1886(b)(3) of the Act, the
labor-related and nonlabor-related portions of the proposed cap for
long-term care hospitals for FY 2002 are increased by 2 percent. We are
providing a further discussion of this provision in an interim final
rule with comment period that will implement provisions of Public Law
106-554 for FY 2001 and for periods in FY 2001 from April 1, 2001
through September 30, 2001 (HCFA-1178-IFC).
    Finally, to determine payments described in Sec. 413.40(c), the cap
on the hospital's target amount per discharge is determined by adding
the hospital's nonlabor-related portion of the national 75th percentile
cap to its wage-adjusted, labor-related portion of the national 75th
percentile cap. A hospital's wage-adjusted, labor-related portion of
the target amount is calculated by multiplying the labor-related
portion of the national 75th percentile cap for the hospital's class by
the hospital's applicable wage index. For FY 2002, a hospital's
applicable wage index is the pre-reclassified wage index under the
hospital inpatient prospective payment system (see Sec. 412.63). The
proposed wage index values are computed based on the same data used to
compute the proposed FY 2002 wage index values for the hospital
inpatient prospective payment system without taking into account
changes in geographic reclassification under section 1886(d)(8)(B) of
the Act for certain rural hospitals or reclassifications based on MGCRB
decisions or the Secretary's decisions under sections 1886(d)(8)
through (d)(10) of the Act. For cost reporting periods beginning on or
after October 1, 2001 and before October 1, 2002, the pre-reclassified
wage index is in Tables 4G and 4H of this proposed rule. A hospital's
applicable wage index corresponds to the area in which the hospital or
unit is physically located (MSA or rural area).
2. New Excluded Hospitals and Units
a. Updated Caps (Sec. 413.40(f))
    Section 1886(b)(7) of the Act establishes a payment methodology for
new psychiatric hospitals and units, new rehabilitation hospitals and
units, and new long-term care hospitals. Under the statutory
methodology, for a hospital that is within a class of hospitals
specified in the statute and first receives payments as a hospital or
unit excluded from the prospective payment system on or after October
1, 1997, the amount of payment will be determined as follows: For the
first two 12-month cost reporting periods, the amount of payment is the
lesser of (1) the operating costs per case; or (2) 110 percent of the
national median of target amounts for the same class of hospitals for
cost reporting periods ending during FY 1996, updated to the first cost
reporting period in which the hospital receives payments as adjusted
for differences in area wage levels.
    As discussed earlier, in reviewing our methodology for wage
neutralizing the hospital-specific target amounts, it appears we
incorrectly used the FY 2000 hospital inpatient prospective payment
system wage index published in Tables 4A and 4B of the July 30, 1999
final rule, which is based on wage data after taking into account
geographic reclassifications under section 1886(d)(8) of the Act.
Therefore, we also are proposing to revise the methodology of wage
neutralizing the hospital-specific target amounts using pre-
reclassified wage data in our calculation of the limit for new excluded
hospitals and units.
    The proposed amounts included in the following table reflect the
updated and recalculated 110 percent of the wage neutralized national
median target amounts for each class of excluded hospitals and units
for cost reporting periods beginning during FY 2002. These figures are
updated to reflect the projected market basket increase of 3.0 percent.
For a new provider, the labor-related share of the target amount is
multiplied by the appropriate geographic area wage index, without
regard to prospective payment system reclassifications, and added to
the nonlabor-related share in order to determine the per case limit on
payment under the statutory payment methodology for new providers.

------------------------------------------------------------------------
                                                  FY 2002      FY 2002
                                                  proposed     proposed
      Class of excluded hospital or unit           labor-     nonlabor-
                                                  related      related
                                                   share        share
------------------------------------------------------------------------
Psychiatric...................................       $6,795       $2,701
Rehabilitation................................       13,425        5,337

[[Page 22708]]

Long-Term Care................................       16,651        6,620
------------------------------------------------------------------------

b. Changes in Type of Hospital Classification (Secs. 412.23 and 412.25)
    Section 1886(b)(3) of the Act (as amended by section 4414 of Public
Law 105-33) establishes caps on the target amounts for existing
psychiatric hospitals and units, rehabilitation hospitals and units,
and long-term care hospitals for cost reporting periods beginning on or
after October 1, 1997 through September 30, 2002. Section 4416 of
Public Law 105-33 amended section 1886(b)(7) of the Act to provide for
a limitation on payment for new excluded psychiatric hospitals and
units, new rehabilitation hospitals and units, and new long-term care
hospitals. Since the establishment of the caps on target amounts and
the payment limitations, there has been an increase in the number of
hospitals requesting a change from one classification type to another
(for example, from rehabilitation to long-term care). Regulations at
Sec. 412.22(d) state that ``For purposes of exclusion from the
prospective payment systems under this subpart, the status of each
currently participating hospital (excluded or not excluded) is
determined at the beginning of each cost reporting period and is
effective for the entire cost reporting period. Any changes in the
status of the hospital are made only at the start of a cost reporting
period.'' Even though the existing regulations directly address only a
hospital that changes from a prospective payment system hospital to an
excluded hospital, our longstanding policy has been that a change of
any classification type can be effective only at the beginning of the
provider's cost reporting period. Although the existing regulations do
not directly address changes in a classification type of excluded
hospital, we believe that a change from one classification type of
excluded hospital to another type of excluded hospital is analogous to
a change from a prospective payment system hospital to an excluded
hospital. Therefore, we believe it would be consistent with our
longstanding policy to amend our regulations to specify that a change
from one excluded hospital classification type to another type is
allowed only at the beginning of the hospital's cost reporting period.
    The rationale underlying our present policy of requiring that these
types of changes should only be effective at the beginning of the cost
reporting period is the need to avoid any undue (and possibly
significant) administrative burden that could result from doing
otherwise (for example, cost allocation, cost reporting requirements,
certification issues). If we were to accept changes in an excluded
hospital's classification type from one type of classification to
another, other than at the beginning of the cost reporting period, the
hospital would need to file a terminating cost report with respect to
its original classification as well as file a separate cost report for
the remainder of the cost reporting period with respect to its new
classification. Filing these cost reports would involve gathering the
appropriate cost data, allocating the data, and apportioning the data
between the two hospital classes. Additionally, we would have to
validate the cost reports. To allow these types of changes in the
middle of a cost reporting period would result in a significant
administrative burden. We would point out that this burden is
applicable equally for either a change from a prospective payment
system hospital to an excluded hospital, or a change from one excluded
hospital classification type to another classification type. Therefore,
we are proposing to amend the regulations to provide that the effective
date of any of these classification changes is only at the beginning of
a provider's cost reporting period (proposed Sec. 412.23(i), for
excluded hospitals, and proposed Sec. 412.25(f), for excluded units).
3. Effective Date of Exclusion of Long-Term Care Hospitals
    Existing regulations at Sec. 412.23(e) require a newly established
long-term care hospital to operate for at least 6 months with an
average length of stay in excess of 25 days in order to qualify for
exclusion from the inpatient hospital prospective payment system as a
long-term care hospital. Other regulations at Sec. 412.22(d) allow
changes in a hospital's status from not excluded to excluded to occur
only at the start of a cost reporting period. These two regulations,
taken together, typically require a hospital to operate for at least 6
months under the prospective payment system before becoming eligible
for payment at the more favorable rate under section 1886(b)(3) of the
Act.
    These regulations were challenged in litigation by a chain
organization that operates a large number of long-term care hospitals
(Transitional Hospital Corporation of Louisiana, Inc. v. Shalala, 222
F.3d 1019 (D.C. Cir. 2000) (THC)). Although the court of appeals in
this case found that the Secretary has ample authority to adopt current
regulatory provisions, it also concluded that the Secretary has not
adequately considered other policy options. Consequently, it remanded
the case to the agency for the agency to consider whether it wanted to
continue its existing policy or adopt a policy of either ``self-
certification'' or ``retroactive adjustment.'' Generally, under a self-
certification approach, hospitals that have not yet demonstrated the
required average length of stay would be excluded from the prospective
payment system based on a commitment to maintain such a length of stay.
Under a retroactive adjustment approach, a hospital's long-term care
classification would be made effective with the beginning of the 6-
month period in which it demonstrated the required average length of
stay. Payments for that period initially would be made under the
prospective payment system and then adjusted retroactively to amounts
payable for an excluded long-term care hospital once length of stay was
successfully established.
    As directed by the court of appeals, we are reviewing the issues
raised in this case in light of the court's decision, and are
specifically considering the options of self-certification and
retroactive adjustment. Our current proposals and the alternatives we
considered before arriving at them are set forth below. To assist us in
completing the review process, we are requesting public comment on our
proposals, taking into account the following considerations.
a. Demonstrating Required Average Length of Stay
    Although we understand that we have discretion to select other
policy options, we are proposing to continue our policy of requiring
hospitals seeking long-term care hospital classification to demonstrate
the required average length of stay based on 6 months of data, instead
of permitting these hospitals to ``self-certify'' the required average
length of stay.
    We note that the statute provides the agency with broad authority
to determine the methodology by which facilities can qualify for
exclusion as long-term care hospitals (section 1886(d)(1)(B)(iv)(I) of
the Act specifies that ``a hospital which has an average inpatient
length of stay (as determined by the Secretary) of greater than 25
days'' qualifies for exclusion as a long-term care hospital). As the
court of appeals decided, the parenthetical phrase as determined by the
Secretary ``gives the Secretary considerable leeway to determine
whether to require

[[Page 22709]]

prospective, contemporaneous, or retrospective evaluation and
payment.'' (THC at 1026.)
    Although we have considered the self-certification option, we do
not believe that it is appropriate to permit long-term care hospitals
to self-certify. Long-term care hospitals ``are licensed as acute care
hospitals in the States in which they operate [and] their only
distinguishing characteristic is their long average length of stay''
(ProPAC March 1, 1997 Report and Recommendations to the Congress,
Recommendation 30). For this reason, and because average length of stay
can be difficult, if not impossible, to forecast when a new hospital
first opens its doors for service, it would not be appropriate to allow
new hospitals to self-certify that they will have an average length of
stay exceeding 25 days.
    Requiring newly participating hospitals to collect at least 6
months of length of stay data before permitting them to qualify as
long-term care hospitals is consistent with treatment of other types of
excluded hospitals in the regulations. Like long-term care hospitals,
children's hospitals, which by statute are also excluded from the
prospective payment system, also have just one distinguishing
characteristic from acute care hospitals; namely, having inpatients who
are predominantly individuals under 18 years of age (section
1886(d)(1)(B)(iii) of the Act). As with long-term care hospitals, we do
not permit children's hospitals to self-certify that they will meet
this requirement as to a future cost reporting period (Sec. 412.23(d)).
    Although we permit rehabilitation hospitals to self-certify that
they meet certain elements of the definition for such a hospital,
important differences between rehabilitation hospitals and long-term
care hospitals render such a scheme inappropriate for the latter. The
differences in the two types of excluded hospitals begin with the
statute, which excludes from the prospective payment system ``a
rehabilitation hospital (as defined by the Secretary)'' and ``a
hospital which has an average inpatient length of stay (as defined by
the Secretary) of greater than 25 days''; that is, a long-term care
hospital (sections 1886(d)(1)(B)(ii) and 1886(d)(1)(B)(iv)(I) of the
Act). Thus, Congress delegated broad authority to the Secretary to
define rehabilitation hospitals, but provided the definition of long-
term care hospitals in the statute itself (and then, as discussed
above, gave the agency broad authority to determine how to apply that
definition).
    In exercising our authority to define a rehabilitation hospital, we
promulgated regulations that contain several defining features that a
facility must possess to be considered such a hospital, as opposed to
the one statutorily mandated feature (average length of stay) that
defines long-term care hospitals (Sec. 412.23(b)). The requirements
that a rehabilitation hospital must meet include a showing that 75
percent of its patients are of a certain type, the existence of a
preadmission screening process, assurance that patients will receive
close medical supervision and that the hospital will furnish certain
types of therapy through the use of qualified personnel, the presence
of a director of rehabilitation with certain qualifications, evidence
of a plan of treatment for each inpatient that is established and
monitored by a physician, and the use of a coordinated
interdisciplinary team approach in the rehabilitation of each patient
(Sec. 412.23(b)(1) through (b)(7)). With the exception of the ``75
percent rule,'' all of these requirements are ``characteristics of the
patients and types of services that the facility furnishes'' that ``can
be assessed at a given point in time'' (ProPAC March 1, 1997 Report and
Recommendations to the Congress, Recommendation 30).
    Thus, rehabilitation hospitals are defined primarily by static and
observable features, most of which can be accurately assessed when a
new rehabilitation hospital is first certified under the Medicare
program. As a result, the regulations permit a new rehabilitation
hospital to provide written certification that it will meet the 75
percent rule, provided we find that it also meets the six other
elements of the definition of a rehabilitation facility
(Sec. 412.23(b)(8)). The hospital's demonstrated ability to meet the
six remaining requirements provides an adequate level of assurance that
the hospital will also meet the 75-percent requirement if it so
certifies. No such assurance is available, however, regarding whether a
hospital might, during a future period, meet the sole requirement for
qualification as a long-term care hospital--the average length of stay
of its patients.
b. Effective Date of Exclusion From the Prospective Payment System
    Because we propose to continue our policy of not allowing a
hospital to self-certify the required average length of stay in order
to be paid as an excluded long-term care hospital, it is necessary to
consider the effective date of excluded status for a hospital that has
demonstrated the required average length of stay. We considered making
long-term care classification effective retroactively with the
beginning of the 6-month period in which the hospital demonstrated the
required average length of stay. Doing so would mean, for example, that
a hospital that admitted its first patient on January 1, 2001, and
demonstrated that its average length of stay exceeded 25 days for the
period January 1 through June 30, and that was approved for long-term
care classification on July 15, would be paid for its discharges from
January 1, 2001 forward as an excluded long-term care hospital rather
than under the prospective payment system, as long as it continued to
demonstrate the requisite average length of stay. However, we believe
that such retroactive application of excluded status is inappropriate.
    For the reasons below, we are proposing to continue our policy that
a hospital's payment as a long-term care hospital would be effective
with the beginning of the hospital's cost reporting period that follows
the determination to classify the hospital as a long-term care
hospital. From the first rulemaking implementing the inpatient acute
hospital prospective payment system payment methodology, the agency has
generally applied decisions regarding various elements of the
prospective payment system payment methodology prospectively only, and
the courts have upheld that action. (THC at 1022 (``status'' decisions
regarding whether a hospital is subject to or excluded from the
prospective payment system); County of Los Angeles v. Shalala 192 F.3d
1005 (D.C. Cir. 1999) (decisions regarding criteria for receipt of
``outlier'' payments); Methodist Hospital of Sacramento v. Shalala, 38
F.3d 1225 (D.C. Cir. 1994) (decisions to revise ``wage index''
component of the prospective payment system payment rate); Hennepin
County v. Sullivan, 883 F.2d 85, 91 (D.C. Cir. 1989) (``there is
nothing inherently arbitrary or capricious about an agency's decision
to apply new data prospectively only''); 57 FR 39746 and 39798 (1992).)
    For the same reasons that existed in the cases cited above, we
believe that prospective implementation of the statutory exclusion for
long-term care hospitals is fully consistent with Congress' goals in
enacting the prospective payment system. It allows both the hospital
and us to know with certainty at the beginning of each cost reporting
period of the hospital whether the hospital is subject to or excluded
from the prospective payment system for that cost reporting period and
thus

[[Page 22710]]

promotes certainty and predictability of payment for both providers and
the agency. County of Los Angeles at 1019; Methodist Hospital of
Sacramento at 1232 (``because the Secretary's prospectivity policy
permits hospitals to rely with certainty on one additional element in
the PPS calculation rate * * * the Secretary could reasonably conclude
that it will promote efficient and realistic cost saving targets'').
    Moreover, retroactive application of a prospective payment system
excluded status decision would entail a significant administrative
burden as it would require reprocessing of large numbers of a
hospital's claims for hospital inpatient services. See 49 FR 234 and
271 (1984) (making retroactive changes in decisions regarding
providers' status as ``sole community hospitals'' would require us ``to
reprocess every inpatient hospital claim submitted for the hospital and
make adjustment payments at the new rate). It is reasonable to conclude
that such a burden outweighs any ``increase in accuracy that would
result'' from retroactive application of decisions regarding long-term
care hospital exclusions (Methodist Hospital of Sacramento at 1233).
    Finally, we apply our prospective-only policy evenhandedly,
regardless of whether it results in a hospital's being subject to, or
excluded from, the prospective payment system. Thus, retroactive
adjustments in hospitals' status are as likely to hurt providers that
slip below the required average length of stay during a cost reporting
period as they are to help them by furnishing reimbursement for a past
period in which they met that requirement (Methodist Hospital of
Sacramento at 1232, 1233). Any adverse effect of the prospective only
policy that might be perceived by new long-term care facilities is also
lessened by the availability of a short initial cost reporting period
and outlier payments for extraordinarily lengthy cases during the
initial period when the hospital is subject to the prospective payment
system.
    In addition to believing that it is appropriate to make payment as
a long-term care hospital effective prospectively rather than
retroactively, we believe it is also appropriate to continue our policy
of making payment effective with the beginning of the hospital's next
cost reporting period rather than as of the date of approval of long-
term care status. This policy is consistent with how we treat changes
in status (that is, from excluded to nonexcluded or from nonexcluded to
excluded) for all types of hospitals. As we explain in more detail in
section VI.A.2.b of this proposed rule, the rationale for requiring
changes in a hospital's status, or changes in a hospital's
classification (that is, from one type of excluded hospital to
another), only at the start of the hospital's cost reporting period is
to alleviate the administrative burden and potential confusion that
would result from doing otherwise.
    As noted earlier, we request public comments on the proposals
described above.
4. Development of Prospective Payment System for Inpatient
Rehabilitation Hospitals and Units
    Section 1886(j) of the Act, as added by section 4421 of Public Law
105-33, provided the phase-in of a case-mix adjusted prospective
payment system for inpatient rehabilitation services (freestanding
hospitals and units) for cost reporting periods beginning on or after
October 1, 2000 and before October 1, 2002, with a fully implemented
system for cost reporting periods beginning on or after October 1,
2002. Section 1886(j) of the Act was amended by section 125 of Public
Law 106-113 to require the Secretary to use the discharge as the
payment unit under the prospective payment system for inpatient
rehabilitation services 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.
    On November 3, 2000, we issued a notice of proposed rulemaking in
the Federal Register (65 FR 66303) on the proposed establishment of the
prospective payment system for inpatient rehabilitation facilities, to
be effective on April 1, 2001. Due to the scope and complexity of the
proposed system and requests from the public for more time to comment
on the proposed rule, we extended the public comment period for an
additional 30 days, from January 3, 2001 to February 1, 2001. As a
result of the extension of the comment period, it would have been
technically impossible to publish a final rule 60 days prior to
implementing the prospective payment system for rehabilitation
facilities by April l. We anticipate publication of a final rule in May
2001 and intend to announce our plans for implementation at that time.

B. Critical Access Hospitals (CAHs)

1. Exclusion of CAHs From Payment Window Requirements
    Section 1886 of the Act specifies the requirements governing
payment to full-service hospitals for the operating costs of inpatient
hospital services under both the inpatient hospital prospective payment
system and the limits on the target amounts for hospitals excluded from
the prospective payment system. ``Operating costs of inpatient hospital
services'' are defined in section 1886(a)(3) of the Act, which provides
in part that costs of certain services provided to a beneficiary during
the 3 days (or in the case of an excluded hospital or unit, during the
1 day) immediately preceding the patient's admission are to be included
in the payments for costs under the inpatient hospital prospective
payment system, or the target amount for excluded hospitals and units.
This part of the definition is sometimes referred to as the ``payment
window'' requirement. Regulations implementing the payment window
requirement are found at Sec. 412.2(c)(5) for hospitals subject to the
prospective payment system, and Sec. 413.40(c)(2) for hospitals
excluded from the prospective payment system.
    Payment to CAHs for inpatient services is not made under section
1886 of the Act, nor are CAHs considered to be hospitals excluded from
the inpatient hospital Prospective Payment System. Instead, payment is
made on a reasonable cost basis, as mandated by section 1814(l) of the
Act. Neither section 1814(l) nor section 1861(v) of the Act (which
defines ``reasonable cost'') requires application of the payment window
to services furnished on an outpatient basis immediately before
admission to a CAH. Therefore, we have determined that the payment
window provision does not apply to CAHs. To clarify this point and
avoid possible misapplication of the payment window, we are proposing
to amend Sec. 413.70(a)(l) to provide that the requirements of
Secs. 412.2(c)(5) and 413.40(c)(2) do not apply to CAHs.
2. Availability of CRNA Pass-Through for CAHs
    Generally, anesthesia services furnished to a hospital patient by a
certified registered nurse anesthetist (CRNA) must be billed to the
Part B carrier and payment is made under the applicable fee schedule
provisions of Sec. 414.60. However, certain rural hospitals that
furnish no more than 500 surgical procedures requiring anesthesia per
year and meet other specified requirements are exempted from the fee

[[Page 22711]]

schedule. These hospitals are paid on a reasonable cost basis for their
costs of anesthesia services furnished by qualified nonphysician
anesthetists. The exemption is provided in accordance with section
9320(k) of the Omnibus Budget Reconciliation Act of 1986 (Public Law
99-509) (as added by section 608(c)(2) of the Family Support Act of
1988 (Public Law 100-185), as amended by section 6132 of the Omnibus
Budget Reconciliation Act of 1989 (Public Law 101-239)). HCFA has
codified this exemption at Sec. 412.113(c).
    Although Sec. 412.113(c) does not specifically extend eligibility
for the pass-through payment for CRNAs to CAHs, some CAHs have pointed
out that they are similar to the rural hospitals that are eligible for
this payment, in that they also furnish low volumes of surgical
procedures requiring anesthesia and could face the same problem of
potentially inadequate payment for CRNA services if they are not
allowed to qualify for the pass-through payment. We share this concern.
    We recognize that the legislation cited above, which provides the
legal basis for the pass-through payments, refers only to
``hospitals,'' not to CAHs. Moreover, section 1861(e) of the Act states
that ``the term ``hospital'' does not include, unless the context
otherwise requires, a critical access hospital * * *.'' It is clear
from section 1861(e) of the Act that CAHs are not to be considered
hospitals under the Medicare law for most purposes. However, the
reference to ``context'' in the provision indicates that CAHs may be
classified as hospitals where, in specific contexts, it would be
consistent with the purpose of the legislation to do so.
    We believe this is the case with the statutory provisions
authorizing pass-through payments for CRNA costs. The purpose of the
pass-through legislation is to provide small rural hospitals with low
surgical volumes with relief from the difficulties they might otherwise
have in furnishing CRNA services for their patients. CAHs are by
definition limited'service facilities located in rural areas and, as
such, they serve a population much like those served by hospitals
eligible for the pass-through payments. In some cases, an institution
that now participates as a CAH may even have been eligible for the
pass-through payments when it participated as a hospital. Such an
institution would clearly be disadvantaged if it were to lose this
status. Thus, in accordance with section 1861(e) of the Act and in
light of the context of the pass-through legislation cited above, we
consider CAHs to be ``hospitals'' for purposes of extending eligibility
for the CRNA pass-through payments to them.
    Therefore, we are proposing to add a new Sec. 413.70(a)(3) and
revise Secs. 413.70(a)(2), (b)(1), and (b)(6) to permit CAHs that meet
the criteria for the pass-through payments in Sec. 412.113(c) to
qualify for pass-through payments for the costs of anesthesia services
for both inpatient and outpatient surgeries, on the same basis as full
service rural hospitals. As an unrelated technical correction, we are
proposing to revise Sec. 413.70(b)(2)(i)(C) to delete the incorrect
reference to Sec. 413.130(j)(2) and replace it with a reference to
reduction in capital costs under Sec. 413.130(j). We also are proposing
to revise Sec. 412.113(c) by changing the term ``hospital'' to
``hospital or CAH''.
3. Payment to CAHs for Emergency Room On-Call Physicians (Proposed
Sec. 413.70(b)(4))
    Under section 1834(g) of the Act, Medicare payment to a CAH for
facility services to Medicare outpatients is the reasonable costs of
the CAH in providing such services. The term ``reasonable cost'' is
defined in section 1861(v) of the Act and in regulations at 42 CFR Part
413, including, with specific reference to CAHs, Sec. 413.70.
Consistent with the general policies stated in section 2109 of the
Medicare Provider Reimbursement Manual (PRM), Part I (HCFA Publication
15-1), the reasonable cost of CAH services to outpatients may include
reasonable costs of compensating physicians who are on standby status
in the emergency room (that is, physicians who are present and ready to
treat patients if necessary). However, under existing policy, the
reasonable cost of CAH services to outpatients may not include any
costs of compensating physicians who are not present in the facility
but are on call.
    Section 204 of Public Law 106-554 further amended section 1834(g)
of the Act (as amended by section 201 of Public Law 106-554) by adding
a new paragraph (5). New section 1834(g)(5) of the Act provides that,
in determining the reasonable costs of outpatient CAH services under
sections 1834(g)(1) and 1834(g)(2)(A) of the Act, the Secretary shall
recognize as allowable costs amounts (as defined by the Secretary) for
reasonable compensation and related costs for emergency room physicians
who are on call (as defined by the Secretary) but who are not present
on the premises of the CAH involved, are not otherwise furnishing
physicians' services, and are not on call at any other provider or
facility. The provisions of section 204 of Public Law 106-554 are
effective for cost reporting periods beginning on or after October 1,
2001.
    To implement the provisions of section 1834(g)(5) of the Act, we
are proposing to add a new paragraph (4) to Sec. 413.70(b). The
proposed Sec. 413.70(b)(4) would permit the reasonable costs of CAH
outpatient services to include the reasonable compensation and related
costs of emergency room on-call physicians under the terms and
conditions specified in the statute. As directed in the statute, under
Sec. 413.70(b)(4)(ii)(A) of this proposed rule, we are defining
``amounts for reasonable compensation and related costs'' as those
allowable costs of compensating emergency room physicians for being on
call, to the extent these costs are found to be reasonable under the
rules in Sec. 413.70(b)(2).
    In addition, as specified under Sec. 413.70(b)(4)(ii)(A) of this
proposed rule, we are defining an ``emergency room physician who is on
call'' as a doctor of medicine or osteopathy with training or
experience in emergency care who is immediately available by telephone
or radio contact, and who is available on site within the timeframes
specified in our existing regulations under Sec. 485.618(d). Existing
Sec. 485.618(d) specifies that the physician must be available on site
(1) within 30 minutes, on a 24-hour a day basis, if the CAH is located
in an area other than an area described in item (2); or (2) within 60
minutes, on a 24-hour a day basis, if all of the following requirements
are met:
     The CAH is located in an area designated as a frontier
area (that is, an area with fewer than six residents per square mile
based on the latest population data published by the Bureau of the
Census) or in an area that meets criteria for a remote location adopted
by the State in its rural health care plan, and approved by HCFA, under
section 1820(b) of the Act.
     The State has determined under criteria in its rural
health care plan that allowing an emergency response time longer than
30 minutes is the only feasible method of providing emergency care to
residents of the area served by the CAH.
     The State maintains documentation showing that the
response time of up to 60 minutes at a particular CAH it designates is
justified because other available alternatives would increase the time
needed to stabilize a patient in an emergency.
    We also believe that it is essential that physicians who are paid
to be in on-call status in fact come to the facility when

[[Page 22712]]

summoned. Therefore, we are proposing to specify that costs of on-call
emergency room physicians are allowable only if the costs are incurred
under written contracts that require them to come to the CAH when their
presence is medically required.
4. Treatment of Ambulance Services Furnished by Certain Critical Access
Hospitals (Proposed Sec. 413.70(b)(5))
    Under section 1861(s)(7) of the Act, Medicare Part B covers and
pays for ambulance services, to the extent prescribed in regulations,
when the use of other methods of transportation would be
contraindicated. Various Congressional reports indicate that Congress
intended that (1) the ambulance benefit cover transportation services
only if other means of transportation are contraindicated by the
beneficiary's medical condition; and (2) only ambulance services to
local facilities be covered unless necessary services are not available
locally, in which case, transportation to the nearest facility
furnishing those services is covered. (H.R. Rept. No. 89-213, 89th
Cong., 1st Sess. at 37 (1995) and S. Rept. No. 89-404, 89th Cong., 1st
Sess., Pt. I, at 43 (1995).)
    The Medicare program currently pays for ambulance services on a
reasonable cost basis when furnished by a provider and on a reasonable
charge basis when furnished by a supplier. (The term ``provider''
includes all Medicare-participating institutional providers that submit
claims for Medicare ambulance services (hospitals, CAHs, SNFs, and home
health agencies). The term ``supplier'' means an entity that is
independent of any provider. The reasonable charge methodology that is
the basis of payment for ambulance services is determined by the lowest
of the customary, prevailing, actual, or inflation indexed charge.
    Section 4531(a)(1) of Public Law 105-33 amended section 1861(v)(1)
of the Act and imposed an additional per trip limitation on reasonable
cost payment to hospitals and CAHs for ambulance service. As amended,
the statute provides that, in determining the reasonable cost of
ambulance services furnished by a provider of services, the Secretary
shall not recognize the cost per trip in excess of the prior year's
reasonable cost per trip updated by an inflation factor. This trip
limit provision was first effective for services furnished during
Federal fiscal year 1998 (October 1, 1997 through September 30, 1998).
    Section 205 of Public Law 106-554 amended section 1834(l) of the
Act by adding a new paragraph (8) to that section. New section
1834(l)(8) provides that the Secretary is to pay the reasonable costs
incurred in furnishing ambulance services if such services are
furnished by a CAH (as defined in section 1861(mm)(1) of the Act), or
by an entity owned or operated by the CAH. This provision in effect
eliminates any trip limit that CAHs had been subject to as a result of
section 1861(v)(1) of the Act, as amended by Public Law 105-33.
However, section 205 further states that in order to receive reasonable
cost reimbursement for the furnishing of ambulance services, the CAH or
entity must be the only provider or supplier of ambulance services
located within a 35-mile drive of the CAH. Section 205 is effective for
services furnished on or after December 21, 2000, the date of enactment
of Public Law 106-554.
    To implement the provisions of section 1834(l)(8) of the Act, we
are proposing to add a new paragraph (5) to Sec. 413.70(b). Proposed
Sec. 413.70(b)(5) would permit a CAH, or an entity owned or operated by
a CAH, to be paid for furnishing ambulance services on a reasonable
cost basis if the CAH or entity is the only provider or supplier of
ambulance services within a 35-mile drive of the CAH. In determining
whether there is any other provider or supplier of ambulance services
within a 35-mile drive of a CAH or entity, we would first identify the
site where the nearest other ambulance provider or supplier garages its
vehicles, and then determine whether that site is within 35 miles,
calculated as the shortest distance in miles measured over improved
roads. An improved road for this purpose would be defined as any road
that is maintained by a local, State, or Federal government entity, and
is available for use by the general public. Consistent with the change
we are proposing in Sec. 412.92(c)(1) relating to SCH determinations
(as explained in section IV. of this preamble), we would consider
improved roads to include the paved surface up to the front entrance of
the hospital and, for purposes of Sec. 413.70(b)(5), the front entrance
of the garage.
5. Qualified Practitioners for Preanesthesia and Postanesthesia
Evaluation in CAHs
    Section 1820 of the Act sets forth the conditions for designating
certain hospitals as CAHs. Implementing regulations for section 1820 of
the Act are located in 42 CFR part 485, Subpart F. Among the conditions
of participation regulations for CAHs in subpart F is the condition for
surgical services (Sec. 485.639). Existing Sec. 485.639 specifies that
preanesthesia and postanesthesia services in a CAH can only be
performed by a doctor of medicine or an osteopathic practitioner; a
doctor of dental surgery or dental medicine; or a doctor of podiatric
medicine. This Medicare condition of participation requirement
regarding preanesthesia and postanesthesia evaluations for CAHs differs
from, and is more restrictive than, the current requirement for acute
care hospitals in general. In an acute care hospital, the CRNA is
listed among the practitioners who may perform the preanesthesia and
postanesthesia evaluations.
    Our principal consideration in regulating providers is to ensure
patient safety and high quality patient outcomes. As circumstances and
health care environments change, we reassess regulations and propose
changes accordingly.
    When the regulations for the initial Rural Primary Care Hospital
(RPCH) program (which later became the CAH program) were adopted, RPCHs
were limited to patient stays of no more than 72 hours and to bed
counts of no more than 6 acute care beds. We initially viewed RPCHs as
very limited-service facilities that would be unlikely to perform any
surgery beyond what might be done in a physician's office; therefore,
we did not have a condition of participation for surgery. Section
102(a)(1) of the Social Security Amendments of 1994, Public Law 103-
432, specifically authorized surgical care in RPCHs. In June 1995, we
proposed a surgical condition of participation that incorporated the
ambulatory surgery center (ASC) standards. We expected that the types
of procedures done in a RPCH would most likely be those that could be
done in ASCs. At the time, we received no comments in response to the
proposed standards and therefore adopted them in the final RPCH
conditions of participation that were published on September 1, 1995
(60 FR 45851).
    In 1997, the RPCH (now CAH) program was expanded through a
statutory change to include all States and to allow for an increase in
bed size and length of stay (August 29, 1997 final rule, 62 FR 46035).
Since that time, the program's original conditions of participation
have been revised to remove possible barriers to access to care. One
example of this effort is the final rule to eliminate the Federal
requirement for physician supervision of CRNAs in CAHs as well as acute
care hospitals and ASCs that was published in the Federal Register on
January 18, 2001 (66 FR 96570).
    Recently, provider and medical groups have suggested that CAHs may

[[Page 22713]]

be at risk of losing the ability to provide access to appropriate
surgical services without the full support of available CRNAs. They
indicated that the existing regulations place the responsibility of the
preanesthesia and postanesthesia evaluations on the operating
practitioner, thereby creating a higher standard for CAHs than for
other hospitals.
    In an effort to eliminate or minimize potential access issues in
rural areas and to recognize the CAH's program expansion, we are
proposing to revise Sec. 485.639(b) to allow CRNAs to perform
preanesthesia and postanesthesia evaluations in a CAH. As with any
licensed independent health care provider, the proposed change would
not permit CRNAs to practice beyond his or her licensed scope of
practice or the approved policies and procedures of the CAH.
6. Clarification of Location Requirements for CAHs
    Under section 1820(c)(2)(B)(i) of the Act, a facility seeking
designation by the State as a CAH must meet two distinct types of
location requirements. First, the facility must either be actually
located in a county or equivalent unit of local government in a rural
area, as defined in section 1886(d)(2)(D) of the Act, or it must be
located in an urban area as defined in section 1886(d)(2)(D) of the
Act, but be treated as being located in a rural area under section
1886(d)(8)(E) of the Act. Second, the facility must also be located
more than a 35-mile drive (or, in the case of mountainous terrain or in
areas with only secondary roads available, a 15-mile drive) from a
hospital or similar facility described in section 1820(c) of the Act,
or it must be certified by the State as being a necessary provider of
health care services to residents in the area. Implementing regulations
for these provisions were published in an interim final rule with
comment period in the Federal Register on August 1, 2000 (65 FR 47026)
and are set forth at Sec. 485.610(b).
    Recently, concern has been expressed that Sec. 485.610(b) does not
accurately reflect the fact that a facility may satisfy the ``rural
location'' requirement either by actually being located in a rural area
or by being located in an urban area but qualifying for treatment as
rural under section 1886(d)(8)(E) of the Act. In addition, we have
received questions as to whether a potential CAH must meet both the
rural location requirement and the requirement for location relative to
other facilities (or certification by the State as a ``necessary
provider'').
    To avoid any further confusion, and ensure that our regulations
reflect the provisions of the law accurately, we are proposing to
revise Sec. 485.610(b) to clarify that a potential CAH must either be
actually located in a rural area, or be treated as being rural under
section 1886(d)(8)(E) of the Act. In addition, we are proposing to
place the provisions of the existing Sec. 485.610(b)(5) in a newly
created paragraph (c) entitled, ``Location relative to other facilities
or necessary provider certification''. We are proposing to relocate
this provision in order to clarify that these criteria are separate
from the rural location criteria. These proposed changes do not reflect
any change in policy; they are merely an attempt to improve the clarity
of the regulations.

VII. MedPAC Recommendations

    We have reviewed the March 1, 2001 report submitted by MedPAC to
Congress and have given it careful consideration in conjunction with
the proposals set forth in this document. Recommendation 5A concerning
the update factor for inpatient hospital operating costs and for
hospitals and hospital distinct-part units excluded from the
prospective payment system are discussed in Appendix D to this proposed
rule. Other MedPAC recommendations and our responses are set forth
below.

A. Accounting for New Technology in Hospital Prospective Payment
Systems (Recommendations 3D and 3E)

    Recommendation 3D: For the inpatient payment system, the Secretary
should develop formalized procedures for expeditiously assigning codes,
updating relative weights, and investigating the need for patient
classification changes to recognize the costs of new and substantially
improved technologies.
    Response: 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. The
discussion relating to new medical services and technologies is found
in section II.D. of this proposed rule and addresses MedPAC's concern
regarding the process of assigning new codes. In addition, MedPAC
acknowledges, and we agree, that the process of updating the relative
weights has an established track record.
    MedPAC states that a more formal system for assigning codes and
investigating the need for DRG changes would have enabled the current
system to more adequately respond to new technology. Although we
believe the current process for assigning new codes has the advantage
of being well-understood, the proposed new process we described in
section II. of this proposed rule should improve the ability of the
system to respond to the introduction of new technology.
    Recommendation 3E: Additional payments in the inpatient payment
system should be limited to new or substantially improved technologies
that add significantly to the cost of care in a diagnosis related group
and should be made on a budget-neutral basis.
    Response: Section 533 of Public Law 106-554 directed the Secretary
to establish a mechanism to make these payments beginning with
discharges on or after October 1, 2001, and we are proposing
implementation of this provision under section IV.F. of this proposed
rule.

B. Occupational-Mix Adjusted Wage Index for FY 2005 (Recommendation 4)

    Recommendation: To implement an occupation-mix adjusted wage index
in FY 2005, the Secretary should collect data on wage rates by
occupation in the fiscal year 2002 Medicare cost reports. Hospital-
specific wage rates for each occupation should be supplemented by data
on the mix of occupations for each provider type. The Secretary also
should continue to improve the accuracy of the wage index by
investigating differences in wages across areas for each type of
provider and in the substitution of one occupation for another.
    Response: We are proposing to collect occupational mix data from
hospitals through a supplemental survey to the cost report for cost
reporting periods beginning during FY 2001. A more complete discussion
of our proposed methodology can be found in section III. of this
proposed rule.

C. Financial Performance and Inpatient Payment Issues (Recommendations
5B, 5C, and 5D)

    Recommendation 5B: In collecting sample patient-level data, HCFA
should seek to balance the goals of minimizing payment errors and
furthering understanding of the effects of coding on case-mix change.
    Response: The sample data referred to by MedPAC is the Payment
Error Prevention Program (PEPP) Surveillance Sample. These data are
collected to monitor the payment error rate for Medicare inpatient
prospective payment system services and provide outcome data to measure
PROs' performance in

[[Page 22714]]

reducing payment errors in their respective States. This information
can be appropriately weighted to reflect the true distribution of DRGs
nationally. The sample data supplant the DRG validation sample that
MedPAC used in its original 1996 through 1998 estimates. The current
PEPP Surveillance Sample doubles the size of the earlier DRG validation
sample. It is comprised of approximately 60,000 cases per year. We
believe this is a sufficient number of cases to both monitor case-mix
index changes and PRO performance on payment error reduction.
    Recommendation 5C: Although the Benefits Improvement and Protection
Act of 2000 improved the equity of the hospital disproportionate share
adjustment, Congress still needs to reform this adjustment by:
     Including the costs of all poor patients in calculating
low-income shares used to distribute disproportionate share payments;
and
     Using the same formula to distribute payments to all
hospitals covered by prospective payment.
    Response: HCFA is participating a Medicare Technical Advisory Group
workgroup concerning technical issues related to the collection of
uncompensated care data relative to the Medicare disproportionate share
formula. A worksheet and instructions to collect these data will be
sent out for prior consultation this summer for revisions to the cost
reports applicable for cost reporting periods beginning on or after
October 1, 2001.
    Recommendation 5E: The Congress should protect urban hospitals from
the adverse effect of nearby hospitals being reclassified to areas with
higher wage indexes by computing each area's wage index as if none of
the hospitals located in the area had been reassigned.
    Response: With this rule, HCFA has proposed to include the wage
data for a reclassified hospital in both the area to which it is
reclassified and the area where the hospital is physically located. We
agree with MedPAC and believe that this will provide consistency and
predictability in hospital reclassification and wage indices.

D. Specialties With Training Beyond the Initial Residency Period
(Recommendation 10)

    Recommendation: The Congress should eliminate the weighting factors
that currently determine Medicare's direct graduate medical education
payments and count all residencies equally through completion of
residents' first specialty or combined program and subspecialty if one
is pursued. Residents training longer than the minimum number of years
required for board eligibility in a specialty, combined program, or
subspecialty should not be included in hospitals' direct graduate
medical education resident counts. These policy changes should be
implemented in a budget-neutral manner through adjustments to the per
resident payment amounts.
    Response: Currently, Medicare payments to hospitals for direct GME
is dependent, in part, on the initial residency period of the
residents. Generally, the initial residency period is defined at
Sec. 413.86(g)(1) as the minimum number of years required for board
eligibility, not to exceed 5 years. For purposes of determining the
direct GME payment, residents are weighted at 1.0 FTE within the
initial residency period, and at .5 FTE beyond the initial residency
period. The limitation on the initial residency period was designed by
Congress to limit full Medicare direct GME payment to the time required
to train in a single specialty.
    MedPAC states that Medicare's current direct GME payment policy of
limiting full funding to the first specialty in which a resident trains
provides a disincentive for hospitals to offer training in
subspecialties or combined programs, and therefore, may influence
hospitals' decisions on the types of residents that they train. MedPAC
believes that Medicare should not influence workforce policy and
recommends that the disincentive be removed to make Medicare payments
policies neutral with regard to programs with prerequisites,
subspecialties, and combined programs. Accordingly, MedPAC recommends
that Congress eliminate the weighting factors associated with direct
GME payment so that all residents would be counted for full direct GME
payment through the completion of their first specialty, combined
program, or subspecialty. Residents training beyond the minimum number
of years required for board eligibility in a specialty, combined
program, or subspecialty should not be counted for purposes of the
direct GME payment.
    MedPAC also believes that eliminating the weighting factors could
potentially increase Medicare's direct GME payments by approximately 5
to 8 percent. Therefore, MedPAC recommends that hospitals' per resident
amounts (PRAs), which are used to calculate the direct GME payment, be
reduced so that this change can be implemented, to the extent possible,
in a budget-neutral manner. MedPAC explains that, although further
research is needed, it appears that hospitals with substantial
subspecialty training (that is, at least 15 percent of the resident
mix) would likely see a small net increase in payments, despite the
reduction to the PRAs, while hospitals that do not have subspecialty
training would likely see a small decrease in payments.
    In response to MedPAC's recommendation, we question MedPAC's
estimate that eliminating the weighting factors could increase Medicare
direct GME payments by only 5 to 8 percent. We believe that
subspecialty training constitutes a significant portion of all GME
programs, and, consequently, the elimination of the weighting factors
could potentially increase payments by far more than 8 percent. If
budget neutrality is to be maintained, this could mean that the
attendant reductions to the PRAs could be much greater than MedPAC
might assume. For those teaching hospitals that have substantial
subspecialty training, there is no guarantee that the decreases in the
PRAs will be offset by the increases in the direct GME payments due to
the elimination of the weighting factors.
    While the recommendation would remove the existing disincentive for
training in subspecialties, we believe the reductions to the PRAs,
whether they are minimal or more significant, will be far more
detrimental to the smaller teaching hospitals that have little or no
subspecialty training. Many of these hospitals provide care to
beneficiaries in rural, underserved areas and in nonhospital settings.
We believe these conditions may discourage the expansion of residency
training in these areas. It may be inappropriate to limit the direct
GME funding to such hospitals, considering Congress' initiatives to
encourage residency training in rural, underserved areas and in
nonhospital settings. We also are unclear as to how MedPAC would
implement the proposed reduction to the PRAs. MedPAC did not explain in
its recommendation how it would propose to do this.

VIII. Other Required Information

A. Requests for Data From the Public

    In order to respond promptly to public requests for data related to
the prospective payment system, we have established a process under
which commenters can gain access to raw data on an expedited basis.
Generally, the data are available in computer tape or cartridge format;
however, some files are available on diskette as well as on the
Internet at http://www.hcfa.gov/stats/pubfiles.html. Data files, and
the cost for each, are listed below. Anyone wishing to purchase data
tapes, cartridges, or

[[Page 22715]]

diskettes should submit a written request along with a company check or
money order (payable to HCFA-PUF) to cover the cost to the following
address: Health Care Financing Administration, Public Use Files,
Accounting Division, P.O. Box 7520, Baltimore, Maryland 21207-0520,
(410) 786-3691. Files on the Internet may be downloaded without charge.
1. Expanded Modified MedPAR-Hospital (National)
    The Medicare Provider Analysis and Review (MedPAR) file contains
records for 100 percent of Medicare beneficiaries using hospital
inpatient services in the United States. (The file is a Federal fiscal
year file, that is, discharges occurring October 1 through September 30
of the requested year.) The records are stripped of most data elements
that would permit identification of beneficiaries. The hospital is
identified by the 6-position Medicare billing number. The file is
available to persons qualifying under the terms of the Notice of
Proposed New Routine Uses for an Existing System of Records published
in the Federal Register on December 24, 1984 (49 FR 49941), and amended
by the July 2, 1985 notice (50 FR 27361). The national file consists of
approximately 11 million records. Under the requirements of these
notices, an agreement for use of HCFA Beneficiary Encrypted Files must
be signed by the purchaser before release of these data. For all files
requiring a signed agreement, please write or call to obtain a blank
agreement form before placing an order. Two versions of this file are
created each year. They support the following:
     Notice of Proposed Rulemaking (NPRM) published in the
Federal Register. This file, scheduled to be available by the end of
April, is derived from the MedPAR file with a cutoff of 3 months after
the end of the fiscal year (December file).
     Final Rule published in the Federal Register. The FY 2000
MedPAR file used for the FY 2002 final rule will be cut off 6 months
after the end of the fiscal year (March file) and is scheduled to be
available by the end of April.

Media: Tape/Cartridge
File Cost: $3,655.00 per fiscal year
Periods Available: FY 1988 through FY 2000
2. Expanded Modified MedPAR-Hospital (State)
    The State MedPAR file contains records for 100 percent of Medicare
beneficiaries using hospital inpatient services in a particular State.
The records are stripped of most data elements that will permit
identification of beneficiaries. The hospital is identified by the 6-
position Medicare billing number. The file is available to persons
qualifying under the terms of the Notice of Proposed New Routine Uses
for an Existing System of Records published in the December 24, 1984
Federal Register notice, and amended by the July 2, 1985 notice. This
file is a subset of the Expanded Modified MedPAR-Hospital (National) as
described above. Under the requirements of these notices, an agreement
for use of HCFA Beneficiary Encrypted Files must be signed by the
purchaser before release of these data. Two versions of this file are
created each year. They support the following:
     NPRM published in the Federal Register. This file,
scheduled to be available by the end of April, is derived from the
MedPAR file with a cutoff of 3 months after the end of the fiscal year
(December file).
     Final Rule published in the Federal Register. The FY 2000
MedPAR file used for the FY 2002 final rule will be cut off 6 months
after the end of the fiscal year (March file) and is scheduled to be
available by the end of April.

Media: Tape/Cartridge
File Cost: $1,130.00 per State per year
Periods Available: FY 1988 through FY 2000
3. HCFA Wage Data
    This file contains the hospital hours and salaries for FY 1998 used
to create the proposed FY 2002 prospective payment system wage index.
The file will be available by the beginning of February for the NPRM
and the beginning of May for the final rule.

------------------------------------------------------------------------
                                                 Wage data    PPS fiscal
                Processing year                     year         year
------------------------------------------------------------------------
2001..........................................         1998         2002
2000..........................................         1997         2001
1999..........................................         1996         2000
1998..........................................         1995         1999
1997..........................................         1994         1998
1996..........................................         1993         1997
1995..........................................         1992         1996
1994..........................................         1991         1995

1993..........................................         1990         1994
1992..........................................         1989         1993
1991..........................................         1988         1992
------------------------------------------------------------------------

    These files support the following:
     NPRM published in the Federal Register.
     Final Rule published in the Federal Register.

Media: Diskette/most recent year on the Internet
File Cost: $165.00 per year
Periods Available: FY 2002 PPS Update
4. HCFA Hospital Wages Indices (Formerly: Urban and Rural Wage Index
Values Only)
    This file contains a history of all wage indices since October 1,
1983.

Media: Diskette/most recent year on the Internet
File Cost: $165.00 per year
Periods Available: FY 2002 PPS Update
5. PPS SSA/FIPS MSA State and County Crosswalk
    This file contains a crosswalk of State and county codes used by
the Social Security Administration (SSA) and the Federal Information
Processing Standards (FIPS), county name, and a historical list of
Metropolitan Statistical Area (MSA).

Media: Diskette/Internet
File Cost: $165.00 per year
Periods Available: FY 2002 PPS Update
6. Reclassified Hospitals New Wage Index (Formerly: Reclassified
Hospitals by Provider Only)
    This file contains a list of hospitals that were reclassified for
the purpose of assigning a new wage index. Two versions of these files
are created each year. They support the following:
     NPRM published in the Federal Register.
     Final Rule published in the Federal Register.

Media: Diskette/Internet
File Cost: $165.00 per year
Periods Available: FY 2002 PPS Update
7. PPS-IV to PPS-XII Minimum Data Set
    The Minimum Data Set contains cost, statistical, financial, and
other information from Medicare hospital cost reports. The data set
includes only the most current cost report (as submitted, final
settled, or reopened) submitted for a Medicare participating hospital
by the Medicare fiscal intermediary to HCFA. This data set is updated
at the end of each calendar quarter and is available on the last day of
the following month.

Media: Tape/Cartridge
File Cost: $770.00 per year

------------------------------------------------------------------------
                                                  Periods
                                                 beginning    And before
                                                on or after
------------------------------------------------------------------------
PPS-IV........................................     10/01/86     10/01/87
PPS-V.........................................     10/01/87     10/01/88
PPS-VI........................................     10/01/88     10/01/89
PPS-VII.......................................     10/01/89     10/01/90
PPS-VIII......................................     10/01/90     10/01/91
PPS-IX........................................     10/01/91     10/01/92
PPS-X.........................................     10/01/92     10/01/93
PPS-XI........................................     10/01/93     10/01/94
PPS-XII.......................................     10/01/94     10/01/95
------------------------------------------------------------------------

[[Page 22716]]

    Note: The PPS-XIII, PPS-XIV, PPS-XV, and PPS-XVI Minimum Data
Sets are part of the PPS-XIII, PPS-XIV, PPS-XV, and PPS XVI Hospital
Data Set Files.

8. PPS-IX to PPS-XII Capital Data Set
    The Capital Data Set contains selected data for capital-related
costs, interest expense and related information and complete balance
sheet data from the Medicare hospital cost report. The data set
includes only the most current cost report (as submitted, final settled
or reopened) submitted for a Medicare certified hospital by the
Medicare fiscal intermediary to HCFA. This data set is updated at the
end of each calendar quarter and is available on the last day of the
following month.

Media: Tape/Cartridge
File Cost: $770.00 per year

------------------------------------------------------------------------
                                                  Periods
                                                 beginning    And before
                                                on or after
------------------------------------------------------------------------
PPS-IX........................................     10/01/91     10/01/92
PPS-X.........................................     10/01/92     10/01/93
PPS-XI........................................     10/01/93     10/01/94
PPS-XII.......................................     10/01/94     10/01/95
------------------------------------------------------------------------

    Note: The PPS-XIII, PPS-XIV, PPS-XV, and PPS-XVI Capital Data
Sets are part of the PPS-XIII, PPS-XIV, PPS-XV, and PPS-XVI Hospital
Data Set Files.

9. PPS-XIII to PPS-XVI Hospital Data Set
    The file contains cost, statistical, financial, and other data from
the Medicare Hospital Cost Report. The data set includes only the most
current cost report (as submitted, final settled, or reopened)
submitted for a Medicare-certified hospital by the Medicare fiscal
intermediary to HCFA. The data set are updated at the end of each
calendar quarter and is available on the last day of the following
month.

Media: Diskette/Internet
File Cost: $2,500.00

------------------------------------------------------------------------
                                                  Periods
                                                 beginning    And before
                                                on or after
------------------------------------------------------------------------
PPS-XIII......................................     10/01/95     10/01/96
PPS-XIV.......................................     10/01/96     10/01/97
PPS-XV........................................     10/01/97     10/01/98
PPS-XVI.......................................     10/01/98     10/01/99
------------------------------------------------------------------------

10. Provider-Specific File
    This file is a component of the PRICER program used in the fiscal
intermediary's system to compute DRG payments for individual bills. The
file contains records for all prospective payment system eligible
hospitals, including hospitals in waiver States, and data elements used
in the prospective payment system recalibration processes and related
activities. Beginning with December 1988, the individual records were
enlarged to include pass-through per diems and other elements.

Media: Diskette/Internet
File Cost: $265.00
Periods Available: FY 2002 PPS Update
11. HCFA Medicare Case-Mix Index File
    This file contains the Medicare case-mix index by provider number
as published in each year's update of the Medicare hospital inpatient
prospective payment system. The case-mix index is a measure of the
costliness of cases treated by a hospital relative to the cost of the
national average of all Medicare hospital cases, using DRG weights as a
measure of relative costliness of cases. Two versions of this file are
created each year. They support the following:
     NPRM published in the Federal Register.
     Final rule published in the Federal Register.

Media: Diskette/most recent year on Internet
Price: $165.00 per year/per file
Periods Available: FY 1985 through FY 2000
12. DRG Relative Weights (Formerly Table 5 DRG)
    This file contains a listing of DRGs, DRG narrative description,
relative weights, and geometric and arithmetic mean lengths of stay as
published in the Federal Register. The hard copy image has been copied
to diskette. There are two versions of this file as published in the
Federal Register:
     NPRM.
     Final rule.

Media: Diskette/Internet
File Cost: $165.00
Periods Available: FY 2002 PPS Update
13. PPS Payment Impact File
    This file contains data used to estimate payments under Medicare's
hospital inpatient prospective payment systems for operating and
capital-related costs. The data are taken from various sources,
including the Provider-Specific File, Minimum Data Sets, and prior
impact files. The data set is abstracted from an internal file used for
the impact analysis of the changes to the prospective payment systems
published in the Federal Register. This file is available for release 1
month after the proposed and final rules are published in the Federal
Register.

Media: Diskette/Internet
File Cost: $165.00
Periods Available: FY 2002 PPS Update
14. AOR/BOR Tables
    This file contains data used to develop the DRG relative weights.
It contains mean, maximum, minimum, standard deviation, and coefficient
of variation statistics by DRG for length of stay and standardized
charges. The BOR tables are ``Before Outliers Removed'' and the AOR is
``After Outliers Removed.'' (Outliers refers to statistical outliers,
not payment outliers.) Two versions of this file are created each year.
They support the following:
     NPRM published in the Federal Register.
     Final rule published in the Federal Register.

Media: Diskette/Internet
File Cost: $165.00
Periods Available: FY 2002 PPS Update

    For further information concerning these data tapes, contact the
HCFA Public Use Files Hotline at (410) 786-3691.
    Commenters interested in obtaining or discussing any other data
used in constructing this rule should contact Stephen Phillips at (410)
786-4531.

B. Information Collection Requirements

    Under the Paperwork Reduction Act of 1995, we are required to
provide 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection
burden.
     The quality, utility, and clarity of the information to be
collected.
     Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
    We are soliciting public comments on each of these issues for the
sections that contain information collection requirements.

[[Page 22717]]

Proposed New Sec. 412.230(e)(2)(ii)  Criteria for an Individual
Hospital Seeking Redesignation to Another Rural Area or an Urban Area;
Proposed New Sec. 412.232(d)(2)(ii)  Criteria for All Hospitals in a
Rural County Seeking Urban Redesignation; Proposed New Sec. 412.235
Criteria for All Hospitals in a State Seeking a Statewide Wage Index;
and Proposed Revised Sec. 412.273  Withdrawing an Application or
Terminating an Approved 3-Year Reclassification

    Proposed Secs. 412.230(e)(2)(ii) and 412.232(d)(2)(ii) specify
that, for hospital-specific data for wage index changes for
redesignations effective beginning FY 2003, 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 other data, the hospital must provide
a weighted 3-year average of the average hourly wage in the area in
which the hospital is located and a weighted 3-year average of the
average hourly wage in the area to which the hospital seeks
reclassification. Proposed new Sec. 412.235 specifies that in order for
all prospective payment system hospitals in a State to use a statewide
wage index, the hospitals as a group must submit an application to the
MGCRB for a decision for reclassifications for wage index purposes. The
proposed changes to Sec. 412.273 would incorporate proposed revised
procedures for hospitals that request withdraw of their wage index
application or termination of their wage index reclassification. These
proposed changes, discussed in detail in section IV.E. of this proposed
rule, implement sections 304(a) and (b) of Public Law 106-554.
    The information collection requirements associated with a
hospital's application to the MGCRB for geographic reclassifications,
including reclassifications for wage index purposes and the required
submittal of wage data, that are codified in Part 412 are currently
approved by OMB under OMB Approval Number 0938-0573, with an expiration
date of September 30, 2002.

Proposed Sec. 412.348(g)(9)  Exception Payments

    As discussed in section V. of this proposed rule, Medicare makes
special exceptions payments for capital-related costs through the 10th
year beyond the end of the capital prospective payment system
transition period for eligible hospitals that complete a project that
meets certain requirements specified in Sec. 412.348. In order to
assist our fiscal intermediaries in determining the end of the 10-year
period in which an eligible hospital will no longer be entitled to
receive special exception payments, we are proposing to add a new
Sec. 412.348(g)(9) to require that hospitals eligible for special
exception payments under Sec. 412.348(g) submit documentation to the
intermediary indicating the completion date of their project (the date
the project was put in use for patient care) that meets the project
need and project size requirements outlined in Secs. 412.348(g)(2)
through (g)(5). We are proposing that, in order for an eligible
hospital to receive special exception payments, this documentation
would have to be submitted in writing to the intermediary by the later
of October 1, 2001, or within 3 months of the end of the hospital's
last cost reporting period beginning before October 1, 2001, during
which a qualifying project was completed.
    We estimate that the information collection requirement of
preparing and submitting the documentation on a hospital's capital
project would impose a burden of approximately 1 hour for approximately
30 hospitals.
    If you comment on these information collection and recordkeeping
requirements, please mail copies directly 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.

    These new information collection and recordkeeping requirements
have been submitted to the Office of Management and Budget (OMB) for
review under the authority of PRA. We have submitted a copy of the
proposed rule to OMB for its review of the information collection
requirements. These requirements will not be effective until they have
been approved by OMB.

C. Public Comments

    Because of the large number of items of correspondence we normally
receive on a proposed rule, we are not able to acknowledge or respond
to them individually. However, in preparing the final rule, we will
consider all comments concerning the provisions of this proposed rule
that we receive by the date and time specified in the DATES section of
this preamble and respond to those comments in the preamble to that
rule. We emphasize that section 1886(e)(5) of the Act requires the
final rule for FY 2002 to be published by August 1, 2001, and we will
consider only those comments that deal specifically with the matters
discussed in this proposed rule.

List of Subjects

42 CFR Part 405

    Administrative practice and procedure, Health facilities, Health
professions, Kidney diseases, Medicare, Reporting and recordkeeping
requirements, Rural areas, X-rays.

42 CFR Part 412

    Administrative practice and procedure, Health facilities, Medicare,
Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico,
Reporting and recordkeeping requirements.

42 CFR Part 485

    Grant programs-health, Health facilities, Medicaid, Medicare,
Reporting and recordkeeping requirements.

42 CFR Part 486

    Health professions, Medicare, Organ procurement, X-rays.

    42 CFR Chapter IV is proposed to be amended as set forth below:

PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED

    A. Part 405 is amended as set forth below:
    1. The authority citation for Part 405 continues to read as
follows:

    Authority: Secs. 1102, 1861, 1862(a), 1871, 1874, 1881, and
1886(k) of the Social Security Act (42 U.S.C. 1302, 1395x, 1395y(a),
1395hh, 1395kk, 1395rr, and 1395ww(k), and sec. 353 of the Public
Health Service Act (42 U.S.C. 263a).

    2. In Sec. 405.2468, paragraph (f)(6)(ii) is republished and
paragraph (f)(6)(ii)(D) is revised to read as follows.

Sec. 405.2468  Allowable costs.

* * * * *
    (f) Graduate medical education. * * *
    (6) * * *

[[Page 22718]]

    (ii) The following costs are not allowable graduate medical
education costs:
* * * * *
    (D) The costs associated with activities described in
Sec. 413.85(h) of this chapter.
* * * * *

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

    B. Part 412 is amended as follows:
    1. The authority citation for Part 412 continues to read as
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

    2. Section 412.2 is amended as follows:
    a. The introductory text of paragraph (e) is republished.
    b. Paragraph (e)(4) is revised.
    c. The introductory text of paragraph (f) is republished.
    d. A new paragraph (f)(9) is added.

Sec. 412.2  Basis of payment.

* * * * *
    (e) Excluded costs. The following inpatient hospital costs are
excluded from the prospective payment amounts and are paid on a
reasonable cost basis:
* * * * *
    (4) The acquisition costs of hearts, kidneys, livers, lungs,
pancreas, and intestines (or multivisceral organs) incurred by approved
transplantation centers.
* * * * *
    (f) Additional payments to hospitals. In addition to payments based
on the prospective payment system rates for inpatient operating and
inpatient capital-related costs, hospitals receive payments for the
following:
* * * * *
    (9) Special additional payment for certain new technology as
specified in Sec. 412.87 and 412.88 of Subpart F.
    3. Section 412.23 is amended by adding a new paragraph (i) to read
as follows:

Sec. 412.23  Excluded hospitals: Classifications.

* * * * *
    (i) Changes in classification of hospitals. For purposes of
exclusions from the prospective payment system, the classification of a
hospital is effective for the hospital's entire cost reporting period.
Any changes in the classification of a hospital are made only at the
start of a cost reporting period.
    4. Section 412.25 is amended by adding a new paragraph (f) to read
as follows:

Sec. 412.25  Excluded hospital units: Common requirements.

* * * * *
    (f) Changes in classification of hospital units. For purposes of
exclusions from the prospective payment system under this section, the
classification of a hospital unit is effective for the unit's entire
cost reporting period. Any changes in the classification of a hospital
unit is made only at the start of a cost reporting period.
    5. Section 412.63 is amended by revising paragraphs (t) and (u) to
read as follows:

Sec. 412.63  Federal rates for inpatient operating costs for fiscal
years after Federal fiscal year 1984.

* * * * *
    (t) Applicable percentage change for fiscal years 2002 and 2003.
The applicable percentage change for fiscal years 2002 and 2003 is the
percentage increase in the market basket index for prospective payment
hospitals (as defined in Sec. 413.40(a) of this subchapter) minus 0.55
percentage points for hospitals in all areas.
    (u) Applicable percentage change for fiscal year 2004 and for
subsequent fiscal years. The applicable percentage change for fiscal
year 2004 and for subsequent years is the percentage increase in the
market basket index for prospective payment hospitals (as defined in
Sec. 413.40(a) of this subchapter) for hospitals in all areas.
* * * * *
    6. The title of Subpart F is revised to read as follows:

Subpart F--Payment for Outlier Cases and Special Treatment Payment
for New Technology

    7. A new undesignated center heading is added after the Subpart F
heading and before Sec. 412.80; the section heading of Sec. 412.80 is
revised; and a new paragraph (a)(3) is added to read as follows:

Payment for Outlier Cases

Sec. 412.80  Outlier cases: General provisions.

    (a) Basic rule.
* * * * *
    (3) Discharges occurring on or after October 1, 2001. For
discharges occurring on or after October 1, 2001, except as provided in
paragraph (b) of this section concerning transfers, HCFA provides for
additional payment, beyond standard DRG payments and beyond additional
payments for new medical services or technology specified in
Secs. 412.87 and 412.88, to a hospital for covered inpatient hospital
services furnished to a Medicare beneficiary if the hospital's charges
for covered services, adjusted to operating costs and capital costs by
applying cost-to-charge ratios as described in Sec. 412.84(h), exceed
the DRG payment for the case (plus payments for indirect costs of
graduate medical education (Sec. 412.105), payments for serving a
disproportionate share of low-income patients (Sec. 412.106), and
additional payments for new medical services or technologies) plus a
fixed dollar amount (adjusted for geographic variation in costs) as
specified by HCFA.
* * * * *
    8. A new undesignated center heading and Secs. 412.87 and 412.88
are added immediately following Sec. 412.86, to read as follows:

Additional Special Payment for Certain New Technology

Sec. 412.87  Additional payment for new medical services and
technologies: General provisions.

    (a) Basis. Sections 412.87 and 412.88 implement sections
1886(d)(5)(K) and 1886(d)(5)(L) of the Act, which authorizes the
Secretary to establish a mechanism to recognize the costs of new
medical services and technologies under the hospital inpatient
prospective payment system.
    (b) Eligibility criteria. For discharges occurring on or after
October 1, 2001, HCFA provides for additional payments (as specified in
Sec. 412.88) beyond the standard DRG payments and outlier payments to a
hospital for discharges involving covered inpatient hospital services
that are new medical services and technologies, if the following
conditions are met:
    (1) A new medical service or technology represents an advance that
substantially improves, relative to technologies previously available,
the diagnosis or treatment of Medicare beneficiaries. HCFA will
determine whether a new medical service or technology meets this
criterion and announce the results of its determinations in the Federal
Register as a part of its annual updates and changes to the hospital
inpatient prospective payment system.
    (2) A medical service or technology may be considered new within 2
or 3 years after it becomes available on the market (depending on when
a new code is assigned and data on the new service or technology become
available for DRG recalibration). After HCFA has recalibrated the DRGs,
based on

[[Page 22719]]

available data, to reflect the costs of an otherwise new medical
service or technology, the medical service or technology will no longer
be considered ``new'' under the criterion of this section.
    (3) The DRG prospective payment rate otherwise applicable to
discharges involving the medical service or technology is determined to
be inadequate, based on application of a threshold amount to estimated
costs incurred with respect to such discharges. To determine whether
the payment would be adequate, HCFA will determine whether the costs of
the cases involving a new medical service or technology will exceed a
threshold amount set at one standard deviation beyond the mean
standardized charge for all cases in the DRG to which the new medical
service or technology is assigned (or the case-weighted average of all
relevant DRGs if the new medical service or technology occurs in many
different DRGs). Standardized charges reflect the actual charges of a
case adjusted by the prospective payment system payment factors
applicable to an individual hospital, such as the wage index, the
indirect medical education adjustment factor, and the disproportionate
share adjustment factor.

Sec. 412.88  Additional payment for new medical service or technology.

    (a) For discharges involving new medical services or technologies
that meet the criteria specified in Sec. 412.87, Medicare payment will
be:
    (1) The standard DRG payment; plus
    (2) If the costs of the discharge (determined by applying cost-to-
charge ratios as described in Sec. 412.84(h)) exceed the standard DRG
payment, an additional amount equal to the lesser of--
    (i) 50 percent of the costs of the new medical service or
technology; or
    (ii) 50 percent of the amount by which the costs of the case exceed
the standard DRG payment.
    (b) Unless a discharge case qualifies for outlier payment under
Sec. 412.84, Medicare will not pay any additional amount beyond the DRG
payment plus 50 percent of the estimated costs of the new medical
service or technology.
    9. Section 412.92 is amended as follows:
    a. Paragraph (b)(1)(iii)(A) is amended by revising the phrase ``50
mile radius'' to read ``35 mile radius.''
    b. Paragraph (c)(1) is revised.

Sec. 412.92  Special treatment: Sole community hospitals.

* * * * *
    (c) Terminology. * * *
    (1) The term miles means the shortest distance in miles measured
over improved roads. An improved road for this purpose is any road that
is maintained by a local, State, or Federal government entity and is
available for use by the general public. An improved road includes the
paved surface up to the front entrance of the hospital.
* * * * *
    10. Section 412.105 is amended as follows:
    a. The introductory text of paragraph (a) is republished.
    b. Paragraph (a)(1) is revised.
    c. Paragraph (d)(3)(vi) is revised.
    d. A new paragraph (d)(3)(vii) is added.
    e. Paragraph (f)(1)(ii)(C) is revised.
    f. Paragraph (f)(1)(iii) is revised.
    g. Paragraph (f)(1)(v) is amended by adding four sentences at the
end.
    h. Paragraph (f)(1)(ix) is revised.

Sec. 412.105  Special treatment: Hospitals that incur indirect costs
for graduate medical education programs.

* * * * *
    (a) Basic data. HCFA determines the following for each hospital:
    (1) The hospital's ratio of full-time equivalent residents, except
as limited under paragraph (f) of this section, to the number of beds
(as determined under paragraph (b) of this section). Except 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 after accounting for the cap on the
number of full-time equivalent residents as described in paragraph
(f)(1)(iv) of this section. The exception for new programs described in
paragraph (f)(1)(vii) of this section applies for the period of years
equal to the minimum accredited length for that type of program.
* * * * *
    (d) Determination of education adjustment factor.
* * * * *
    (3) * * *
    (vi) For discharges occurring during fiscal year 2002, 1.6.
    (vii) For discharges occurring on or after October 1, 2002, 1.35.
* * * * *
    (f) Determining the total number of full-time equivalent residents
for cost reporting periods beginning on or after July 1, 1991.
    (1) * * *
    (ii) * * *
    (C) Effective for discharges occurring on or after October 1, 1997,
the time spent by a resident in a non-hospital setting in patient care
activities under an approved medical residency training program is
counted towards the determination of full-time equivalency if the
criteria set forth in Sec. 413.86(f)(3) or Sec. 413.86 (f)(4), as
applicable, are met.
    (iii) (A) Full-time equivalent status is based on the total time
necessary to fill a residency slot. No individual may be counted as
more than one full-time equivalent. If a resident is assigned to more
than one hospital, the resident counts as a partial full-time
equivalent based on the proportion of time worked in any of the areas
of the hospital listed in paragraph (f)(1)(ii) of this section, to the
total time worked by the resident. A part-time resident or one working
in an area of the hospital other than those listed under paragraph
(f)(1)(ii) of this section (such as a freestanding family practice
center or an excluded hospital unit) would be counted as a partial
full-time equivalent based on the proportion of time assigned to an
area of the hospital listed in paragraph (f)(1)(ii) of this section,
compared to the total time necessary to fill a full-time residency
slot.
    (B) The time spent by a resident in research that is not associated
with the treatment or diagnosis of a particular patient of the hospital
is not countable.
* * * * *
    (v) * * * If a hospital qualified for an adjustment to the limit
established under paragraph (f)(1)(iv) of this section for new medical
residency programs created under paragraph (f)(1)(vii) of this section,
the count of residents participating in new medical residency training
programs above the number included in the hospital's FTE count for the
cost reporting period ending during calendar year 1996 is added after
applying the averaging rules in this paragraph for a period of years.
Residents participating in new medical residency training programs are
included in the hospital's FTE count before applying the averaging
rules after the period of years has expired. For purposes of this
paragraph, the period of years equals the minimum accredited length for
the type of program. The period of years begins when the first resident
begins training.
* * * * *
    (ix) A hospital may receive a temporary adjustment to its full-time
equivalent cap to reflect residents added because of another hospital's
closure if the hospital meets the criteria specified in
Secs. 413.86(g)(8)(i) and (g)(8)(ii) of this

[[Page 22720]]

subchapter. If a hospital that closes its residency training program
agrees to temporarily reduce its FTE cap according to the criteria
specified in Secs. 413.86(g)(8)(i) and (g)(8)(iii)(B) of this
subchapter, another hospital(s) may receive a temporary adjustment to
its FTE cap to reflect residents added because of the closure of the
residency training program if the criteria specified in
Secs. 413.86(g)(8)(i) and (g)(8)(iii)(A) of this subchapter are met.
* * * * *
    11. Section 412.106 is amended by revising the heading of paragraph
(e) and paragraph (e)(5) to read as follows:

Sec. 412.106  Special treatment: Hospitals that serve a
disproportionate share of low-income patients.

* * * * *
    (e) Reduction in payments beginning FY 1998. * * *
    (5) For FY 2002, 3 percent.
* * * * *

Sec. 412.113  [Amended]

    12. In Sec. 412.113(c), including the heading for paragraph (c),
the term ``hospital'', wherever it appears, is revised to read
``hospital or CAH'' (16 times).
    13. Section 412.230 is amended by revising paragraph (e)(2) to read
as follows:

Sec. 412.230  Criteria for an individual hospital seeking redesignation
to another rural area or an urban area.

* * * * *
    (e) Use of urban or other rural area's wage index.
* * * * *
    (2) Appropriate wage data. For a wage index change, the hospital
must submit appropriate wage data as follows:
    (i) For redesignations effective through FY 2002:
    (A) For hospital-specific data, the hospital must provide data from
the HCFA hospital wage survey used to construct the wage index in
effect for prospective payment purposes during the fiscal year prior to
the fiscal year for which the hospital requests reclassification.
    (B) For data for other hospitals, the hospital must provide data
concerning the average hourly wage in the area in which the hospital is
located and the average hourly wage in the area to which the hospital
seeks reclassification. The wage data are taken from the HCFA hospital
wage survey used to construct the wage index in effect for prospective
payment purposes during the fiscal year prior to the fiscal year for
which the hospital requests reclassification.
    (C) If the hospital is requesting reclassification under paragraph
(e)(1)(iv)(B) of this section, the hospital must provide occupational-
mix data to demonstrate the average occupational mix for each
employment category in the area to which it seeks reclassification.
Occupational-mix data can be obtained from surveys conducted by the
American Hospital Association.
    (ii) For redesignations effective beginning FY 2003:
    (A) For hospital-specific data, the hospital must provide a
weighted 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.
    (B) For data for other hospitals, the hospital must provide a
weighted 3-year average of the average hourly wage in the area in which
the hospital is located and a weighted 3-year average of the average
hourly wage in the area to which the hospital seeks reclassification.
The wage data are taken from the HCFA hospital wage survey used to
construct the wage index in effect for prospective payment purposes.
* * * * *
    14. Section 412.232 is amended by revising paragraph (d)(2) to read
as follows:

Sec. 412.232  Criteria for all hospitals in a rural county seeking
urban redesignation.

* * * * *
    (d) Appropriate data.
* * * * *
    (2) Appropriate wage data. The hospitals must submit appropriate
data as follows:
    (i) For redesignations effective through FY 2002:
    (A) For hospital-specific data, the hospitals must provide data
from the HCFA wage survey used to construct the wage index in effect
for prospective payment purposes during the fiscal year prior to the
fiscal year for which the hospitals request reclassification.
    (B) For data for other hospitals, the hospitals must provide the
following:
    (1) The average hourly wage in the adjacent area, which is taken
from the HCFA hospital wage survey used to construct the wage index in
effect for prospective payment purposes during the fiscal year prior to
the fiscal year for which the hospitals request reclassification.
    (2) Occupational-mix data to demonstrate the average occupational
mix for each employment category in the adjacent area. Occupational-mix
data can be obtained from surveys conducted by the American Hospital
Association.
    (ii) For redesignations effective beginning FY 2003:
    (A) For hospital-specific data, the hospital must provide a
weighted 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.
    (B) For data for other hospitals, the hospital must provide a
weighted 3-year average of the average hourly wage in the area in which
the hospital is located and a weighted 3-year average of the average
hourly wage in the area to which the hospital seeks reclassification.
The wage data are taken from the HCFA hospital wage survey used to
construct the wage index in effect for prospective payment purposes.
    15. Section 412.235 is added to read as follows:

Sec. 412.235  Criteria for all hospitals in a State seeking a statewide
wage index redesignation.

    (a) General criteria. For all prospective payment system hospitals
in a State to be redesignated to a statewide wage index, the following
conditions must be met:
    (1) All prospective payment system hospitals in the State must
apply as a group for reclassification to a statewide wage index through
a signed single application.
    (2) All prospective payment system hospitals in the State must
agree to the reclassification to a statewide wage index through a
signed affidavit on the application.
    (3) All prospective payment system hospitals in the State must
agree, through an affidavit, to withdrawal of an application or to
termination of an approved statewide wage index reclassification.
    (4) All hospitals in the State must waive their rights to any wage
index classification that they would otherwise receive absent the
statewide wage index classification, including a wage index that any of
the hospitals might have received through individual geographic
reclassification.
    (5) New hospitals that open within the State prior to the deadline
for submitting an application for a statewide wage index
reclassification (September 1), regardless of whether a group
application has already been filed, must agree to the use of the
statewide wage index as part of the group application. New hospitals
that open within the State after the deadline for submitting a
statewide wage index reclassification application or during the
approved reclassification period will be considered a party to the
statewide

[[Page 22721]]

wage index application and reclassification.
    (b) Effect on payments. (1) 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 otherwise
redesignated wage index.
    (2) Any new prospective payment system hospital that opens in the
State during the effective period of an approved statewide wage index
reclassification will be designated to receive the statewide wage index
for the duration of that period.
    (3) A hospital located in an area outside a State in which all
participating hospitals have received an approved statewide wage index
reclassification may apply to be reclassified into the statewide wage
index area. In that case, such a hospital that is reclassified into a
statewide wage index area will receive a wage index calculated based on
the statewide wage index reclassification.
    (c) Terms of the decision. (1) A decision by the MGCRB on an
application for a statewide wage index reclassification will 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 filed a complete application.
    (2) The procedures and timeframes specified in Sec. 412.273 apply
to withdrawals of applications for redesignation to a statewide wage
index and terminations of approved statewide wage index
reclassifications, including the requirement that, to withdraw an
application or terminate an approved reclassification, the request must
be made in writing by all hospitals that are party to the application,
except hospitals reclassified into the State for purposes of receiving
the statewide wage index.
    16. Section 412.273 is amended as follows:
    a. The title of the section is revised.
    b. Paragraphs (b) and (c) are redesignated as paragraphs (c) and
(d), respectively.
    c. A new paragraph (b) is added.
    d. Redesignated paragraph (c) is revised.

Sec. 412.273  Withdrawing an application or terminating an approved 3-
year reclassification.

* * * * *
    (b) Request for termination of approved 3-year wage index
reclassifications.
    (1) A hospital, or a group of hospitals, that has been issued a
decision on its application for a 3-year reclassification for wage
index purposes only or for redesignation to a statewide wage index and
has not withdrawn that application under the procedures specified in
paragraph (a) of this section may request termination of its approved
3-year wage index reclassification under the following conditions:
    (i) The request to terminate must be received by the MGCRB within
45 days of the publication of the 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
termination is to apply.
    (ii) A request to terminate a 3-year reclassification will be
effective only for the full fiscal year(s) remaining in the 3-year
period at the time the request is received. Requests for terminations
for part of a fiscal year will not be considered.
    (2) Reapplication within the approved 3-year period.
    (i) If a hospital elects to withdraw its wage index application
after the MGCRB has issued its decision, it may terminate its
withdrawal in a subsequent fiscal year and request the MGCRB to
reinstate its wage index reclassification for the remaining fiscal
year(s) of the 3-year period.
    (ii) A hospital may apply for reclassification for purposes of the
wage index to a different area (that is, an area different from the one
to which it was originally reclassified for the 3-year period). If the
application is approved, the reclassification will be effective for 3
years.
    (c) Written request only. A request to withdraw an application or
terminate an approved reclassification must be made in writing to the
MGCRB by all hospitals that are party to the application or
reclassification.
* * * * *
    17. Section 412.274 is amended by revising paragraph (b) to read as
follows:

Sec. 412.274  Scope and effect of an MGCRB decision.

* * * * *
    (b) Effective date and term of the decision. (1) A standardized
amount classification change is effective for one year beginning with
discharges occurring on the first day (October 1) of the second Federal
fiscal year following the Federal fiscal year in which the complete
application is filed and ending effective at the end of that Federal
fiscal year (the end of the next September 30).
    (2) A wage index classification change is effective for 3 years
beginning with discharges occurring on the first day (October 1) of the
second Federal fiscal year in which the complete application is filed.
* * * * *
    18. Section 412.348 is amended by revising paragraph (g)(6) and
adding a new paragraph (g)(9) to read as follows:

Sec. 412.348  Exception payments.

* * * * *
    (g) Special exceptions process. * * *
    (6) Minimum payment level.
    (i) The minimum payment level for qualifying hospitals will be 70
percent.
    (ii) HCFA will adjust the minimum payment level in one percentage
point increments as necessary to satisfy the requirement specified in
paragraph (h) of this section that total estimated payments under the
exceptions process not exceed 10 percent of the total estimated capital
prospective payment system payments for the same fiscal year.
* * * * *
    (9) Notification requirement. Eligible hospitals must submit
documentation to the intermediary indicating the completion date of a
project that meets the project need requirement under paragraph (g)(2)
of this section, the project size requirement under paragraph (g)(5) of
this section, and, in the case of certain urban hospitals, an excess
capacity test under paragraph (g)(4) of this section, by the later of
October 1, 2001 or within 3 months of the end of the hospital's last
cost reporting period beginning before October 1, 2001, during which a
qualifying project was completed.
* * * * *

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED
PAYMENT RATES FOR SKILLED NURSING FACILITIES

    C. Part 413 is amended as follows:
    1. The authority citation for Part 413 is revised to read as
follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and
(n), 1871, 1881, 1883, and 1886 of the Social Security Act (42
U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n),
1395hh, 1395rr, 1395tt, and 1395ww).

    2. Section 413.70 is amended as follows:
    a. Paragraph (a)(1) introductory text is republished.
    b. A new paragraph (a)(1)(iv) is added.
    c. Paragraph (a)(2) is revised.
    d. A new paragraph (a)(3) is added.
    e. Paragraph (b)(1) is revised.

[[Page 22722]]

    f. Paragraph (b)(2)(i)(C) is revised.
    g. New paragraphs (b)(4), (b)(5) and (b)(6) are added.

Sec. 413.70  Payment for services of a CAH.

    (a) Payment for inpatient services furnished by a CAH.
    (1) Payment for inpatient services of a CAH is the reasonable costs
of the CAH in providing CAH services to its inpatients, as determined
in accordance with section 1861(v)(1)(A) of the Act and the applicable
principles of cost reimbursement in this part and in Part 415 of this
chapter, except that the following payment principles are excluded when
determining payment for CAH inpatient services:
* * * * *
    (iv) The payment window provisions for preadmission services,
specified in Sec. 412.2(c)(5) of this subchapter and Sec. 413.40(c)(2).
    (2) Except as specified in paragraph (a)(3) of this section,
payment to a CAH for inpatient services does not include any costs of
physician services or other professional services to CAH inpatients,
and is subject to the Part A hospital deductible and coinsurance, as
determined under subpart G of part 409 of this chapter.
    (3) If a CAH meets the criteria in Sec. 412.113(c) of this
subchapter for pass-through of costs of anesthesia services furnished
by qualified nonphysician anesthetists employed by the CAH or obtained
under arrangements, payment to the CAH for the costs of those services
is made in accordance with Sec. 412.113(c).
    (b) Payment for outpatient services furnished by CAH.--(1) General.
(i) Unless the CAH elects to be paid for services to its outpatients
under the method specified in paragraph (b)(3) of this section, the
amount of payment for outpatient services of a CAH is the amount
determined under paragraph (b)(2) of this section.
    (ii) Except as specified in paragraph (b)(6) of this section,
payment to a CAH for outpatient services does not include any costs of
physician services or other professional services to CAH outpatients.
* * * * *
    (2) Reasonable costs for facility services.
    (i) * * *
    (C) Any type of reduction to operating or capital costs under
Sec. 413.124 or Sec. 413.130(j).
* * * * *
    (4) Costs of emergency room on-call physicians. (i) Effective for
cost reporting periods beginning on or after October 1, 2001, the
reasonable costs of outpatient CAH services under paragraph (b) of this
section may include amounts for reasonable compensation and related
costs for an emergency room physician who is on call but who is not
present on the premises of the CAH involved, is not otherwise
furnishing physicians' services, and is not on call at any other
provider or facility.
    (ii) For purposes of this paragraph (b)(4)--
    (A) ``Amounts for reasonable compensation and related costs'' means
all allowable costs of compensating emergency room physicians who are
on call to the extent the costs are found to be reasonable under the
rules specified in paragraph (b)(2) of this section and the applicable
sections of Part 413. Costs of compensating emergency room physicians
are allowable only if the costs are incurred under written contracts
that require the physician to come to the CAH when the physician's
presence is medically required.
    (B) An ``emergency room physician who is on call' means a doctor of
medicine or osteopathy with training or experience in emergency care
who is immediately available by telephone or radio contact, and is
available on site within the timeframes specified in Sec. 485.618(d) of
this chapter.
    (5) Costs of ambulance services. (i) Effective for services
furnished on or after December 21, 2000, payment for ambulance services
furnished by a CAH or an entity that is owned and operated by a CAH is
the reasonable costs of the CAH or the entity in furnishing those
services, but only if the CAH or the entity is the only provider or
supplier of ambulance services located within a 35-mile drive of the
CAH or the entity.
    (ii) For purposes of paragraph (b)(5) of this section, the distance
between the CAH or the entity and the other provider or supplier of
ambulance services will be determined as the shortest distance in miles
measured over improved roads between the CAH or the entity and the site
at which the vehicles of the closest provider or supplier of ambulance
services are garaged. An improved road for this purpose is any road
that is maintained by a local, State, or Federal government entity and
is available for use by the general public. An improved road will be
considered to include the paved surface up to the front entrance of the
hospital and the front entrance of the garage.
    (6) If a CAH meets the criteria in Sec. 412.113(c) of this
subchapter for pass-through of costs of anesthesia services furnished
by nonphysician anesthetists employed by the CAH or obtained under
arrangement, payment to the CAH for the costs of those services is made
in accordance with Sec. 412.113(c).
* * * * *
    3. Section 413.86 is amended as follows:
    a. Paragraph (e)(4)(ii)(C)(1) is revised.
    b. Paragraph (e)(5)(iv) is removed.
    c. Paragraph (g)(4) is revised.
    d. Paragraph (g)(5) is revised.
    e. Paragraph (g)(8) is revised.

Sec. 413.86  Direct graduate medical education payments.

* * * * *
    (e) Determining per residents amounts for the base period. * * *
    (4) * * *
    (ii) * * *
    (C) Determining necessary revisions to the per resident amount. * *
*
    (1) Floor. (i) For cost reporting periods beginning on or after
October 1, 2000, and before October 1, 2001, if the hospital's per
resident amount would otherwise be less than 70 percent of the
locality-adjusted national average per resident amount for FY 2001 (as
determined under paragraph (e)(4)(ii)(B) of this section), the per
resident amount is equal to 70 percent of the locality-adjusted
national average per resident amount for FY 2001.
    (ii) For cost reporting periods beginning on or after October 1,
2001, and before October 1, 2002, if the hospital's per resident amount
would otherwise be less than 85 percent of the locality-adjusted
national average per resident amount for FY 2002 (as determined under
paragraph (e)(4)(ii)(B) of this section), the per resident amount is
equal to 85 percent of the locality-adjusted national average per
resident amount for FY 2002.
    (iii) For subsequent cost reporting periods beginning on or after
October 1, 2002, the hospital's per resident amount is updated using
the methodology specified under paragraph (e)(3)(i) of this section.
* * * * *
    (g) Determining the weighted number of FTE residents.  * * *
    (4) For purposes of determining direct graduate medical education
payments--
    (i) For cost reporting periods beginning on or after October 1,
1997, a hospital's unweighted FTE count for residents in allopathic and
osteopathic medicine may not exceed the hospital's unweighted FTE count
(or, effective for cost reporting periods beginning on or after April
1, 2000, 130 percent of the unweighted FTE count for a hospital located
in a rural area) for these residents for the most recent cost reporting
period ending on or before December 31, 1996.

[[Page 22723]]

    (ii) If a hospital's number of FTE residents in a cost reporting
period beginning on or after October 1, 1997, and before October 1,
2001, exceeds the limit described in this paragraph (g), the hospital's
total weighted FTE count (before application of the limit) will be
reduced in the same proportion that the number of FTE residents for
that cost reporting period exceeds the number of FTE residents for the
most recent cost reporting period ending on or before December 31,
1996.
    (iii) If the hospital's number of FTE residents in a cost reporting
period beginning on or after October 1, 2001 exceeds the limit
described in this paragraph (g), the hospital's weighted FTE count
(before application of the limit), for primary care and obstetrics and
gynecology residents and nonprimary care residents, respectively, will
be reduced in the same proportion that the number of FTE residents for
that cost reporting period exceeds the number of FTE residents for the
most recent cost reporting period ending on or before December 31,
1996.
    (iv) Hospitals that are part of the same affiliated group may elect
to apply the limit on an aggregate basis.
    (v) The fiscal intermediary may make appropriate modifications to
apply the provisions of this paragraph (g)(4) based on the equivalent
of a 12-month cost reporting period.
    (5) For purposes of determining direct graduate medical education
payment--
    (i) For the hospital's first cost reporting period beginning on or
after October 1, 1997, the hospital's weighted FTE count is equal to
the average of the weighted FTE count for the payment year cost
reporting period and the preceding cost reporting period.
    (ii) For cost reporting periods beginning on or after October 1,
1998, and before October 1, 2001, the hospital's weighted FTE count is
equal to the average of the weighted FTE count for the payment year
cost reporting period and the preceding two cost reporting periods.
    (iii) For cost reporting periods beginning on or after October 1,
2001, the hospital's weighted FTE count for primary care and obstetrics
and gynecology residents is equal to the average of the weighted
primary care and obstetrics and gynecology counts for the payment year
cost reporting period and the preceding two cost reporting periods, and
the hospital's weighted FTE count for nonprimary care residents is
equal to the average of the weighted nonprimary care FTE counts for the
payment year cost reporting period and the preceding two cost reporting
periods.
    (iv) The fiscal intermediary may make appropriate modifications to
apply the provisions of this paragraph (g)(5) based on the equivalent
of 12-month cost reporting periods.
    (v) If a hospital qualifies for an adjustment to the limit
established under paragraph (g)(4) of this section for new medical
residency programs created under paragraph (g)(6) of this section, the
count of the residents participating in new medical residency training
programs above the number included in the hospital's FTE count for the
cost reporting period ending during calendar year 1996 is added after
applying the averaging rules in this paragraph (g)(5) for a period of
years. Residents participating in new medical residency training
programs are included in the hospital's FTE count before applying the
averaging rules after the period of years has expired. For purposes of
this paragraph (g)(5), the period of years equals the minimum
accredited length for the type of program. The period of years begins
when the first resident begins training.
* * * * *
    (8) Closure of hospital or hospital residency program.
    (i) Definitions. For purposes of this paragraph (g)(8)--
    (A) ``Closure of a hospital'' means the hospital terminates its
Medicare agreement under the provisions of Sec. 489.52 of this chapter.
    (B) ``Closure of a hospital residency training program'' means the
hospital ceases to offer training for residents in a particular
approved medical residency training program.
    (ii) Closure of a hospital. A hospital may receive a temporary
adjustment to its FTE cap to reflect residents added because of another
hospital's closure if the hospital meets the following criteria:
    (A) The hospital is training additional residents from a hospital
that closed on or after July 1, 1996.
    (B) No later than 60 days after the hospital begins to train the
residents, the hospital submits a request to its fiscal intermediary
for a temporary adjustment to its FTE cap, documents that the hospital
is eligible for this temporary adjustment by identifying the residents
who have come from the closed hospital and have caused the hospital to
exceed its cap, and specifies the length of time the adjustment is
needed.
    (iii) Closure of a hospital's residency training program. If a
hospital that closes its residency training program voluntarily agrees
to temporarily reduce its FTE cap according to the criteria specified
in paragraph (g)(8)(iii)(B) of this section, another hospital(s) may
receive a temporary adjustment to its FTE cap to reflect residents
added because of the closure of the residency training program if the
criteria specified in paragraph (g)(8)(iii)(A) of this section are met.
    (A) Receiving hospital(s). A hospital may receive a temporary
adjustment to its FTE cap to reflect residents added because of the
closure of another hospital's residency training program if--
    (1) The hospital is training additional residents from the
residency training program of a hospital that closed a program; and
    (2) No later than 60 days after the hospital begins to train the
residents, the hospital submits to its fiscal intermediary a request
for a temporary adjustment to its FTE cap, documents that it is
eligible for this temporary adjustment by identifying the residents who
have come from another hospital's closed program and have caused the
hospital to exceed its cap, specifies the length of time the adjustment
is needed, and submits to its fiscal intermediary a copy of the FTE
reduction statement by the hospital that closed its program, as
specified in paragraph (g)(8)(iii)(B)(2) of this section.
    (B) Hospital that closed its program(s). A hospital that agrees to
train residents who have been displaced by the closure of another
hospital's program may receive a temporary FTE cap adjustment only if
the hospital with the closed program--
    (1) Temporarily reduces its FTE cap based on the FTE residents in
each program year training in the program at the time of the program's
closure. This yearly reduction in the FTE cap will be determined based
on the number of those residents who would have been training in the
program during that year had the program not closed; and
    (2) No later than 60 days after the residents who were in the
closed program begin training at another hospital, submit to its fiscal
intermediary a statement signed and dated by its representative that
specifies that it agrees to the temporary reduction in its FTE cap to
allow the hospital training the displaced residents to obtain a
temporary adjustment to its cap; identifies the residents who were in
training at the time of the program's closure; identifies the hospitals
to which the residents are transferring once the program closes; and
specifies the reduction for the applicable program years.
* * * * *

[[Page 22724]]

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

    D. Part 485 is amended as follows:
    1. The authority citation for part 485 continues to read as
follows:

    Authority: Secs. 1102 and 1871 of the Act (42 U.S.C. 1302 and
1395hh).

    2. Section 485.610 is amended by revising paragraph (b) and adding
a new paragraph (c) to read as follows:

Sec. 485.610  Condition of participation: Status and location.

* * * * *
    (b) Standard: Location in a rural area or treatment as rural. The
CAH meets the requirements of either paragraph (b)(1) or (b)(2) of this
section.
    (1) The CAH meets the following requirements:
    (i) The CAH is located outside any area that is a Metropolitan
Statistical Area, as defined by the Office of Management and Budget, or
that has been recognized as urban under Sec. 412.62(f) of this chapter;
    (ii) The CAH is not deemed to be located in an urban area under
Sec. 412.63(b) of this chapter; and
    (iii) The CAH has not been classified as an urban hospital for
purposes of the standardized payment amount by HCFA or the Medicare
Geographic Classification Review Board under Sec. 412.230(e) of this
chapter, and is not among a group of hospitals that have been
redesignated to an adjacent urban area under Sec. 412.232 of this
chapter.
    (2) The CAH is located within a Metropolitan Statistical Area, as
defined by the Office of Management and Budget, but is being treated as
being located in a rural area in accordance with Sec. 412.103 of this
chapter.
    (c) Standard: Location relative to other facilities or necessary
provider certification. The CAH is located more than a 35-mile drive
(or, in the case of mountainous terrain or in areas with only secondary
roads available, a 15-mile drive) from a hospital or another CAH, or
the CAH is certified by the State as being a necessary provider of
health care services to residents in the area.
    3. Section 485.639 is amended by revising paragraph (b) to read as
follows:

Sec. 485.639  Condition of participation: Surgical services.

* * * * *
    (b) Anesthetic risk and evaluation. (1) A qualified practitioner,
as specified in paragraph (a) of this section, must examine the patient
immediately before surgery to evaluate the risk of the procedure to be
performed.
    (2) A qualified practitioner, as specified in paragraph (c) of this
section, must examine each patient before surgery to evaluate the risk
of anesthesia.
    (3) Before discharge from the CAH, each patient must be evaluated
for proper anesthesia recovery by a qualified practitioner, as
specified in paragraph (c) of this section.
* * * * *
    4. Section 485.643 is amended by revising paragraph (f) to read as
follows:

Sec. 485.643  Condition of participation: Organ, tissue, and eye
procurement.

* * * * *
    (f) For purposes of these standards, the term ``organ'' means a
human kidney, liver, heart, lung, pancreas, or intestines (or
multivisceral organs).

PART 486--CONDITIONS FOR COVERAGE OF SPECIALIZED SERVICES FURNISHED
BY SUPPLIERS

    F. Part 486 is amended as follows:
    1. The authority citation for Part 486 continues to read as
follows:

    Authority: Sections 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

    2. Section 486.302 is amended by revising the definition of
``organ'' to read as follows:

Sec. 486.302  Definitions.

* * * * *
    ``Organ'' means a human kidney, liver, heart, lung, pancreas, or
intestines (or multivisceral organs).
* * * * *

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

    Dated: March 15, 2001.
Michael McMullan,
Acting Deputy Administrator, Health Care Financing Administration.
    Dated: April 3, 2001.
Tommy G. Thompson,
Secretary.

    Editorial Note: The following Addendum and appendixes will not
appear in the Code of Federal Regulations.

Addendum--Proposed Schedule of Standardized Amounts Effective With
Discharges Occurring On or After October 1, 2001 and Update Factors
and Rate-of-Increase Percentages Effective With Cost Reporting
Periods Beginning On or After October 1, 2001

I. Summary and Background

    In this Addendum, we are setting forth the proposed amounts and
factors for determining prospective payment rates for Medicare
inpatient operating costs and Medicare inpatient capital-related costs.
We are also setting forth proposed rate-of-increase percentages for
updating the target amounts for hospitals and hospital units excluded
from the prospective payment system.
    For discharges occurring on or after October 1, 2001, except for
SCHs, MDHs, and hospitals located in Puerto Rico, each hospital's
payment per discharge under the prospective payment system will be
based on 100 percent of the Federal national rate.
    SCHs are paid based on whichever of the following rates yields the
greatest aggregate payment: the Federal national rate, the updated
hospital-specific rate based on FY 1982 cost per discharge, the updated
hospital-specific rate based on FY 1987 cost per discharge, or, if
qualified, 50 percent of the updated hospital-specific rate based on FY
1996 cost per discharge, plus the greater of 50 percent of the updated
FY 1982 or FY 1987 hospital-specific rate or 50 percent of the Federal
DRG payment rate. Section 213 of Public Law 106-554 amended section
1886(b)(3) of the Act to allow all SCHs to rebase their hospital-
specific rate based on their FY 1996 cost per discharge.
    Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the
Federal national rate or, if higher, the Federal national rate plus 50
percent of the difference between the Federal national rate and the
updated hospital-specific rate based on FY 1982 or FY 1987 cost per
discharge, whichever is higher.
    For hospitals in Puerto Rico, the payment per discharge is based on
the sum of 50 percent of a Puerto Rico rate and 50 percent of a Federal
national rate. (See section II.D.3. of this Addendum for a complete
description.)
    As discussed below in section II. of this Addendum, we are
proposing to make changes in the determination of the prospective
payment rates for Medicare inpatient operating costs for FY 2002. The
changes, to be applied prospectively, would affect the calculation of
the Federal rates. In section III. of this Addendum, we discuss our
proposed changes for

[[Page 22725]]

determining the prospective payment rates for Medicare inpatient
capital-related costs for FY 2002. Section IV. of this Addendum sets
forth our proposed changes for determining the rate-of-increase limits
for hospitals excluded from the prospective payment system for FY 2002.
The tables to which we refer in the preamble to this proposed rule are
presented at the end of this Addendum in section V.

II. Proposed Changes to Prospective Payment Rates for Inpatient
Operating Costs for FY 2002

    The basic methodology for determining prospective payment rates for
inpatient operating costs is set forth at Sec. 412.63. The basic
methodology for determining the prospective payment rates for inpatient
operating costs for hospitals located in Puerto Rico is set forth at
Secs. 412.210 and 412.212. Below, we discuss the proposed factors used
for determining the prospective payment rates. The Federal and Puerto
Rico rate changes, once issued as final, will be effective with
discharges occurring on or after October 1, 2001.
    In summary, the proposed standardized amounts set forth in Tables
1A and 1C of section V. of this Addendum reflect--
     Updates of 2.55 percent for all areas (that is, the market
basket percentage increase of 3.1 percent minus 0.55 percentage
points);
     An adjustment to ensure budget neutrality of hospital
geographic reclassification, as provided for under sections
1886(d)(4)(C)(iii) and (d)(3)(E) of the Act, by applying new budget
neutrality adjustment factors to the large urban and other standardized
amounts;
     An adjustment to ensure budget neutrality as provided for
in section 1886(d)(8)(D) of the Act by removing the FY 2001 budget
neutrality factor and applying a revised factor;
     An adjustment to apply the revised outlier offset by
removing the FY 2001 outlier offsets and applying a new offset; and
     An adjustment in the Puerto Rico standardized amounts to
reflect the application of a Puerto Rico-specific wage index.

A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
    Section 1886(d)(2)(A) of the Act required the establishment of
base-year cost data containing allowable operating costs per discharge
of inpatient hospital services for each hospital. The preamble to the
September 1, 1983 interim final rule (48 FR 39763) contains a detailed
explanation of how base-year cost data were established in the initial
development of standardized amounts for the prospective payment system
and how they are used in computing the Federal rates.
    Section 1886(d)(9)(B)(i) of the Act required us to determine the
Medicare target amounts for each hospital located in Puerto Rico for
its cost reporting period beginning in FY 1987. The September 1, 1987
final rule (52 FR 33043, 33066) contains a detailed explanation of how
the target amounts were determined and how they are used in computing
the Puerto Rico rates.
    The standardized amounts are based on per discharge averages of
adjusted hospital costs from a base period or, for Puerto Rico,
adjusted target amounts from a base period, updated and otherwise
adjusted in accordance with the provisions of section 1886(d) of the
Act. Sections 1886(d)(2)(B) and (d)(2)(C) of the Act required us to
update base-year per discharge costs for FY 1984 and then standardize
the cost data in order to remove the effects of certain sources of cost
variations among hospitals. These effects include case-mix, differences
in area wage levels, cost-of-living adjustments for Alaska and Hawaii,
indirect medical education costs, and payments to hospitals serving a
disproportionate share of low-income patients.
    Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, in making
payments under the prospective payment system, the Secretary estimates
from time to time the proportion of costs that are wages and wage-
related costs. Since October 1, 1997, when the market basket was last
revised, we have considered 71.1 percent of costs to be labor-related
for purposes of the prospective payment system. The average labor share
in Puerto Rico is 71.3 percent. We are proposing to revise the
discharge-weighted national standardized amount for Puerto Rico to
reflect the proportion of discharges in large urban and other areas
from the FY 2000 MedPAR file.
2. Computing Large Urban and Other Area Averages
    Sections 1886(d)(2)(D) and (d)(3) of the Act require the Secretary
to compute two average standardized amounts for discharges occurring in
a fiscal year: one for hospitals located in large urban areas and one
for hospitals located in other areas. In addition, under sections
1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the Act, the average
standardized amount per discharge must be determined for hospitals
located in large urban and other areas in Puerto Rico. Hospitals in
Puerto Rico are paid a blend of 50 percent of the applicable Puerto
Rico standardized amount and 50 percent of a national standardized
payment amount.
    Section 1886(d)(2)(D) of the Act defines ``urban area'' as those
areas within a Metropolitan Statistical Area (MSA). A ``large urban
area'' is defined as an urban area with a population of more than 1
million. In addition, section 4009(i) of Public Law 100-203 provides
that a New England County Metropolitan Area (NECMA) with a population
of more than 970,000 is classified as a large urban area. As required
by section 1886(d)(2)(D) of the Act, population size is determined by
the Secretary based on the latest population data published by the
Bureau of the Census. Urban areas that do not meet the definition of a
``large urban area'' are referred to as ``other urban areas.'' Areas
that are not included in MSAs are considered ``rural areas'' under
section 1886(d)(2)(D) of the Act. Payment for discharges from hospitals
located in large urban areas will be based on the large urban
standardized amount. Payment for discharges from hospitals located in
other urban and rural areas will be based on the other standardized
amount.
    Based on 1999 population estimates published by the Bureau of the
Census, 63 areas meet the criteria to be defined as large urban areas
for FY 2002. These areas are identified in Table 4A.
3. Updating the Average Standardized Amounts
    Under section 1886(d)(3)(A) of the Act, we update the average
standardized amounts each year. In accordance with section
1886(d)(3)(A)(iv) of the Act, we are proposing to update the large
urban areas' and the other areas' average standardized amounts for FY
2002 using the applicable percentage increases specified in section
1886(b)(3)(B)(i) of the Act. Section 1886(b)(3)(B)(i)(XVII) of the Act
as amended by section 301 of Public Law 106-554 specifies that the
update factor for the standardized amounts for FY 2002 is equal to the
market basket percentage increase minus 0.55 percentage points for
hospitals in all areas. Section 301 also established that the update
factor for FY 2003 is equal to the market basket percentage increase
minus 0.55 percentage points. We are proposing to revise Sec. 412.63 to
reflect these changes.
    The percentage change in the market basket reflects the average
change in the price of goods and services purchased by hospitals to
furnish inpatient care. The most recent forecast of the hospital

[[Page 22726]]

market basket increase for FY 2002 is 3.1 percent. Thus, for FY 2002,
the proposed update to the average standardized amounts equals 2.55
percent for hospitals in all areas.
    As in the past, we are adjusting the FY 2001 standardized amounts
to remove the effects of the FY 2001 geographic reclassifications and
outlier payments before applying the FY 2002 updates. That is, we are
increasing the standardized amounts to restore the reductions that were
made for the effects of geographic reclassification and outliers. We
then apply the new offsets to the standardized amounts for outliers and
geographic reclassifications for FY 2002.
    Although the update factors for FY 2002 are set by law, we are
required by section 1886(e)(3) of the Act to report to the Congress our
initial recommendation of update factors for FY 2002 for both
prospective payment hospitals and hospitals excluded from the
prospective payment system. For general information purposes, we have
included the report to Congress as Appendix C to this proposed rule.
Our proposed recommendation on the update factors (which is required by
sections 1886(e)(4)(A) and (e)(5)(A) of the Act) is set forth as
Appendix D to this proposed rule.
4. Other Adjustments to the Average Standardized Amounts
    a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment. Section 1886(d)(4)(C)(iii) of the Act specifies
that, beginning in FY 1991, the annual DRG reclassification and
recalibration of the relative weights must be made in a manner that
ensures that aggregate payments to hospitals are not affected. As
discussed in section II. of the preamble, we normalized the
recalibrated DRG weights by an adjustment factor, so that the average
case weight after recalibration is equal to the average case weight
prior to recalibration.
    Section 1886(d)(3)(E) of the Act requires us to update the hospital
wage index on an annual basis beginning October 1, 1993. This provision
also requires us to make any updates or adjustments to the wage index
in a manner that ensures that aggregate payments to hospitals are not
affected by the change in the wage index.
    To comply with the requirement of section 1886(d)(4)(C)(iii) of the
Act that DRG reclassification and recalibration of the relative weights
be budget neutral, and the requirement in section 1886(d)(3)(E) of the
Act that the updated wage index be budget neutral, we used FY 2000
discharge data to simulate payments and compared aggregate payments
using the FY 2001 relative weights and wage index to aggregate payments
using the proposed FY 2002 relative weights and wage index. The same
methodology was used for the FY 2001 budget neutrality adjustment. (See
the discussion in the September 1, 1992 final rule (57 FR 39832).)
Based on this comparison, we computed a budget neutrality adjustment
factor equal to 0.992493. We also adjust the Puerto Rico-specific
standardized amounts for the effect of DRG reclassification and
recalibration. We computed a budget neutrality adjustment factor for
Puerto Rico-specific standardized amounts equal to 0.994677. These
budget neutrality adjustment factors are applied to the standardized
amounts without removing the effects of the FY 2001 budget neutrality
adjustments. We do not remove the prior budget neutrality adjustment
because estimated aggregate payments after the changes in the DRG
relative weights and wage index should equal estimated aggregate
payments prior to the changes. If we removed the prior year adjustment,
we would not satisfy this condition.
    In addition, we are proposing to apply these same adjustment
factors to the hospital-specific rates that are effective for cost
reporting periods beginning on or after October 1, 2001. (See the
discussion in the September 4, 1990 final rule (55 FR 36073).)
    b. Reclassified Hospitals--Budget Neutrality Adjustment. Section
1886(d)(8)(B) of the Act provides that, effective with discharges
occurring on or after October 1, 1988, certain rural hospitals are
deemed urban. In addition, section 1886(d)(10) of the Act provides for
the reclassification of hospitals based on determinations by the
Medicare Geographic Classification Review Board (MGCRB). Under section
1886(d)(10) of the Act, a hospital may be reclassified for purposes of
the standardized amount or the wage index, or both.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required
to adjust the standardized amounts so as to ensure that aggregate
payments under the prospective payment system after implementation of
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the
Act are equal to the aggregate prospective payments that would have
been made absent these provisions. To calculate this budget neutrality
factor, we used FY 2000 discharge data to simulate payments, and
compared total prospective payments (including indirect medical
education and disproportionate share hospital payments) prior to any
reclassifications to total prospective payments after
reclassifications. Based on these simulations, we are applying an
adjustment factor of 0.991054 to ensure that the effects of
reclassification are budget neutral.
    The adjustment factor is applied to the standardized amounts after
removing the effects of the FY 2001 budget neutrality adjustment
factor. We note that the proposed FY 2002 adjustment reflects wage
index and standardized amount reclassifications approved by the MGCRB
or the Administrator as of February 28, 2001, and the effects of
section 304 of Public Law 106-554 to extend wage index
reclassifications for 3 years. The effects of any additional
reclassification changes resulting from appeals and reviews of the
MGCRB decisions for FY 2002 or from a hospital's request for the
withdrawal of a reclassification request will be reflected in the final
budget neutrality adjustment published in the final rule for FY 2002.
    c. Outliers. Section 1886(d)(5)(A) of the Act provides for payments
in addition to the basic prospective payments for ``outlier'' cases,
cases involving extraordinarily high costs (cost outliers). Section
1886(d)(3)(B) of the Act requires the Secretary to adjust both the
large urban and other area national standardized amounts by the same
factor to account for the estimated proportion of total DRG payments
made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act
requires the Secretary to adjust the large urban and other standardized
amounts applicable to hospitals in Puerto Rico to account for the
estimated proportion of total DRG payments made to outlier cases.
Furthermore, under section 1886(d)(5)(A)(iv) of the Act, outlier
payments for any year must be projected to be not less than 5 percent
nor more than 6 percent of total payments based on DRG prospective
payment rates.
    i. FY 2002 outlier thresholds. For FY 2001, the fixed loss cost
outlier threshold was equal to the prospective payment rate for the DRG
plus the IME and DSH payments plus $17,550 (16,036 for hospitals that
have not yet entered the prospective payment system for capital-related
costs). The marginal cost factor for cost outliers (the percent of
costs paid after costs for the case exceed the threshold) was 80
percent. We applied an outlier adjustment to the FY 2001 standardized
amounts of 0.948908 for the large urban and other areas rates and
0.9409 for the capital Federal rate.
    For FY 2002, we propose to establish a fixed loss cost outlier
threshold equal to the prospective payment rate for the

[[Page 22727]]

DRG plus the IME and DSH payments plus $21,000. The capital prospective
payment system is fully phased in, effective FY 2002. Therefore, we no
longer are establishing a separate threshold for hospitals that have
not yet entered the prospective payment system for capital-related
costs. We propose to maintain the marginal cost factor for cost
outliers at 80 percent.
    To calculate FY 2002 outlier thresholds, we simulated payments by
applying FY 2002 rates and policies to the December 2000 update of the
FY 2000 MedPAR file and the December 2000 update of the provider-
specific file. As we have explained in the past, to calculate outlier
thresholds, we apply a cost inflation factor to update costs for the
cases used to simulate payments. For FY 2000, we used a cost inflation
factor of zero percent. For FY 2001, we used a cost inflation factor
(or cost adjustment factor) of 1.8 percent. To set the proposed FY 2002
outlier thresholds, we are using a 2-year cost inflation factor of 5.5
percent (to inflate FY 2000 charges to FY 2002). This factor reflects
our analysis of the best available cost report data as well as
calculations (using the best available data) indicating that the
percentage of actual outlier payments for FY 2000 is higher than we
projected before the beginning of FY 2000, and that the percentage of
actual outlier payments for FY 2001 will likely be higher than we
projected before the beginning of FY 2001. The calculations of
``actual'' outlier payments are discussed further below.
    ii. Other changes concerning outliers. In accordance with section
1886(d)(5)(A)(iv) of the Act, we calculated proposed outlier thresholds
so that outlier payments are projected to equal 5.1 percent of total
payments based on DRG prospective payment rates. In accordance with
section 1886(d)(3)(E), we reduced the proposed FY 2002 standardized
amounts by the same percentage to account for the projected proportion
of payments paid to outliers.
    As stated in the September 1, 1993 final rule (58 FR 46348), we
establish outlier thresholds that are applicable to both inpatient
operating costs and inpatient capital-related costs. When we modeled
the combined operating and capital outlier payments, we found that
using a common set of thresholds resulted in a higher percentage of
outlier payments for capital-related costs than for operating costs. We
project that the proposed thresholds for FY 2002 will result in outlier
payments equal to 5.1 percent of operating DRG payments and 5.7 percent
of capital payments based on the Federal rate.
    The proposed outlier adjustment factors to be applied to the
standardized amounts for FY 2002 are as follows:

------------------------------------------------------------------------
                                                 Operating     Capital
                                               standardized    federal
                                                  amounts        rate
------------------------------------------------------------------------
National.....................................      0.948910     0.974711
Puerto Rico..................................      0.942593     0.970336
------------------------------------------------------------------------

    We apply the proposed outlier adjustment factors after removing the
effects of the FY 2001 outlier adjustment factors on the standardized
amounts.
    Table 8A in section V. of this Addendum contains the updated
Statewide average operating cost-to-charge ratios for urban hospitals
and for rural hospitals to be used in calculating cost outlier payments
for those hospitals for which the fiscal intermediary is unable to
compute a reasonable hospital-specific cost-to-charge ratio. These
Statewide average ratios would replace the ratios published in the
August 1, 2000 final rule (65 FR 47054). Table 8B contains comparable
statewide average capital cost-to-charge ratios. These average ratios
would be used to calculate cost outlier payments for those hospitals
for which the fiscal intermediary computes operating cost-to-charge
ratios lower than 0.1908357 or greater than 1.3133937 and capital cost-
to-charge ratios lower than 0.0120498 or greater than 0.1668928. This
range represents 3.0 standard deviations (plus or minus) from the mean
of the log distribution of cost-to-charge ratios for all hospitals. We
note that the cost-to-charge ratios in Tables 8A and 8B would be used
during FY 2002 when hospital-specific cost-to-charge ratios based on
the latest settled cost report are either not available or outside the
three standard deviations range.
    iii. FY 2000 and FY 2001 outlier payments. In the August 1, 2000
final rule (65 FR 47054), we stated that, based on available data, we
estimated that actual FY 2000 outlier payments would be approximately
6.2 percent of actual total DRG payments. This was computed by
simulating payments using the March 2000 update of the FY 1999 bill
data available at the time. That is, the estimate of actual outlier
payments did not reflect actual FY 2000 bills but instead reflected the
application of FY 2000 rates and policies to available FY 1999 bills.
Our current estimate, using available FY 2000 bills, is that actual
outlier payments for FY 2000 were approximately 7.4 percent of actual
total DRG payments. We note that the MedPAR file for FY 2000 discharges
continues to be updated. Thus, the data indicate that, for FY 2000, the
percentage of actual outlier payments relative to actual total payments
is higher than we projected before FY 2000 (and thus exceeds the
percentage by which we reduced the standardized amounts for FY 2000).
In fact, the data indicate that the proportion of actual outlier
payments for FY 2000 exceeds 6.0 percent. Nevertheless, consistent with
the policy and statutory interpretation we have maintained since the
inception of the prospective payment system, we do not plan to recoup
money and make retroactive adjustments to outlier payments for FY 2000.
    We currently estimate that actual outlier payments for FY 2001 will
be approximately 5.9 percent of actual total DRG payments, 0.8 percent
higher than the 5.1 percent we projected in setting outlier policies
for FY 2001. This estimate is based on simulations using the December
2000 update of the provider-specific file and the December 2000 update
of the FY 2000 MedPAR file (discharge data for FY 2000 bills). We used
these data to calculate an estimate of the actual outlier percentage
for FY 2001 by applying FY 2001 rates and policies to available FY 2000
bills.
5. FY 2002 Standardized Amounts
    The adjusted standardized amounts are divided into labor and
nonlabor portions. Table 1A contains the two national standardized
amounts that we are proposing to be applicable to all hospitals, except
hospitals in Puerto Rico. Under section 1886(d)(9)(A)(ii) of the Act,
the Federal portion of the Puerto Rico payment rate is based on the
discharge-weighted average of the national large urban standardized
amount and the national other standardized amount (as set forth in
Table 1A). The labor and nonlabor portions of the national average
standardized amounts for Puerto Rico hospitals are set forth in Table
1C. This table also includes the Puerto Rico standardized amounts.

B. Adjustments for Area Wage Levels and Cost of Living

    Tables 1A and 1C, as set forth in this Addendum, contain the
proposed labor-related and nonlabor-related shares that would be used
to calculate the prospective payment rates for hospitals located in the
50 States, the District of Columbia, and Puerto Rico. This section
addresses two types of adjustments to the standardized amounts that are
made in determining the prospective payment rates as described in this
Addendum.

[[Page 22728]]

1. Adjustment for Area Wage Levels
    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require
that we make an adjustment to the labor-related portion of the
prospective payment rates to account for area differences in hospital
wage levels. This adjustment is made by multiplying the labor-related
portion of the adjusted standardized amounts by the appropriate wage
index for the area in which the hospital is located. In section III. of
this preamble, we discuss the data and methodology for the proposed FY
2002 wage index. The proposed wage index is set forth in Tables 4A, 4B,
4C, and 4F of this Addendum.
2. Adjustment for Cost-of-Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take
into account the unique circumstances of hospitals in Alaska and
Hawaii. Higher labor-related costs for these two States are taken into
account in the adjustment for area wages described above. For FY 2002,
we propose to adjust the payments for hospitals in Alaska and Hawaii by
multiplying the nonlabor portion of the standardized amounts by the
appropriate adjustment factor contained in the table below. If the
Office of Personnel Management releases revised cost-of-living
adjustment factors before July 1, 2001, we will publish them in the
final rule and use them in determining FY 2002 payments.

 Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals
------------------------------------------------------------------------

------------------------------------------------------------------------
Alaska--All areas..........................................         1.25
Hawaii:
  County of Honolulu.......................................       1.1650
  County of Hawaii.........................................       1.2325
  County of Kauai..........................................       1.2325
  County of Maui...........................................       1.2375
  County of Kalawao........................................      1.2375
------------------------------------------------------------------------
(The above factors are based on data obtained from the U.S. Office of
  Personnel Management.)

C. DRG Relative Weights

    As discussed in section II. of the preamble, we have developed a
classification system for all hospital discharges, assigning them into
DRGs, and have developed relative weights for each DRG that reflect the
resource utilization of cases in each DRG relative to Medicare cases in
other DRGs. Table 5 of section V. of this Addendum contains the
relative weights that we are proposing to use for discharges occurring
in FY 2002. These factors have been recalibrated as explained in
section II. of the preamble.

D. Calculation of Prospective Payment Rates for FY 2002

General Formula for Calculation of Prospective Payment Rates for FY
2002

    The prospective payment rate for all hospitals located outside of
Puerto Rico, except SCHs and MDHs, equals the Federal rate.
    The prospective payment rate for SCHs equals whichever of the
following rates yields the greatest aggregate payment: the Federal
national rate, the updated hospital-specific rate based on FY 1982 cost
per discharge, the updated hospital-specific rate based on FY 1987 cost
per discharge, or, if qualified, 50 percent of the updated hospital-
specific rate based on FY 1996 cost per discharge, plus the greater of
50 percent of the updated FY 1982 or FY 1987 hospital-specific rate or
50 percent of the Federal DRG payment rate. Section 213 of Public Law
106-554 amended section 1886(b)(3) of the Act to allow all SCHs to
rebase their hospital-specific rate based on their FY 1996 cost per
discharge.
    The prospective payment rate for MDHs equals 100 percent of the
Federal rate, or, if the greater of the updated FY 1982 hospital-
specific rate or the updated FY 1987 hospital-specific rate is higher
than the Federal rate, 100 percent of the Federal rate plus 50 percent
of the difference between the applicable hospital-specific rate and the
Federal rate.
    The prospective payment rate for Puerto Rico equals 50 percent of
the Puerto Rico rate plus 50 percent of a discharge-weighted average of
the national large urban standardized amount and the Federal national
other standardized amount.
1. Federal Rate
    For discharges occurring on or after October 1, 2001 and before
October 1, 2002, except for SCHs, MDHs, and hospitals in Puerto Rico,
the hospital's payment is based exclusively on the Federal national
rate.
    The payment amount is determined as follows:
    Step 1--Select the appropriate national standardized amount
considering the type of hospital and designation of the hospital as
large urban or other (see Table 1A in section V. of this Addendum).
    Step 2--Multiply the labor-related portion of the standardized
amount by the applicable wage index for the geographic area in which
the hospital is located (see Tables 4A, 4B, and 4C of section V. of
this Addendum).
    Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount (adjusted, if appropriate, under Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative
weight corresponding to the appropriate DRG (see Table 5 of section V.
of this Addendum).
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
    Section 1886(b)(3)(C) of the Act provides that SCHs are paid based
on whichever of the following rates yields the greatest aggregate
payment: the Federal national rate, the updated hospital-specific rate
based on FY 1982 cost per discharge, the updated hospital-specific rate
based on FY 1987 cost per discharge, or, if qualified, 50 percent of
the updated hospital-specific rate based on FY 1996 cost per discharge,
plus the greater of 50 percent of the updated FY 1982 or FY 1987
hospital-specific rate or 50 percent of the Federal DRG payment rate.
    Section 1886(d)(5)(G) of the Act provides that MDHs are paid based
on whichever of the following rates yields the greatest aggregate
payment: the Federal rate or the Federal rate plus 50 percent of the
difference between the Federal rate and the greater of the updated
hospital-specific rate based on FY 1982 and FY 1987 cost per discharge.
    Hospital-specific rates have been determined for each of these
hospitals based on either the FY 1982 cost per discharge, the FY 1987
cost per discharge or, for qualifying SCHs, the FY 1996 cost per
discharge. For a more detailed discussion of the calculation of the
hospital-specific rates, we refer the reader to the September 1, 1983
interim final rule (48 FR 39772); the April 20, 1990 final rule with
comment (55 FR 15150); the September 4, 1990 final rule (55 FR 35994);
and the August 1, 2000 final rule (65 FR 47082).
    a. Updating the FY 1982, FY 1987, and FY 1996 Hospital-Specific
Rates for FY 2002. We are proposing to increase the hospital-specific
rates by 2.55 percent (the hospital market basket percentage increase
minus 0.55 percentage points) for SCHs and MDHs for FY 2002. Section
1886(b)(3)(C)(iv) of the Act provides that the update factor applicable
to the hospital-specific rates for SCHs equal the update factor
provided under section 1886(b)(3)(B)(iv) of the Act, which, for SCHs in
FY 2002,

[[Page 22729]]

is the market basket rate of increase minus 0.55 percentage points.
Section 1886(b)(3)(D) of the Act provides that the update factor
applicable to the hospital-specific rates for MDHs equals the update
factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for
FY 2002, is the market basket rate of increase minus 0.55 percentage
points.
    b. Calculation of Hospital-Specific Rate. For SCHs, the applicable
FY 2002 hospital-specific rate would be based on the following: the
hospital-specific rate calculated using the greater of the FY 1982 or
FY 1987 costs, increased by the applicable update factor of 2.55
percent; or, if the hospital-specific rate based on cost per case in FY
1996 is greater than the hospital-specific rate using either the FY
1982 or the FY 1987 costs, the greater of 50 percent of the hospital-
specific rate based on the FY 1982 or FY 1987 costs, increased by the
applicable update factor, or 50 percent of the Federal rate plus 50
percent of its rebased FY 1996 hospital-specific rate updated through
FY 2002. For MDHs, the applicable FY 2002 hospital-specific rate would
be calculated by increasing the hospital's hospital-specific rate for
the preceding fiscal year by the applicable update factor of 2.55
percent, which is the same as the update for all prospective payment
hospitals. In addition, for both SCHs and MDHs, the hospital-specific
rate would be adjusted by the budget neutrality adjustment factor (that
is, by 0.992493) as discussed in section II.A.4.a. of this Addendum.
The resulting rate is used in determining the payment under which rate
an SCH or a MDH is paid for its discharges beginning on or after
October 1, 2001.
3. General Formula for Calculation of Prospective Payment Rates for
Hospitals Located in Puerto Rico Beginning On or After October 1, 2001
and Before October 1, 2002
    a. Puerto Rico Rate. The Puerto Rico prospective payment rate is
determined as follows:
    Step 1--Select the appropriate adjusted average standardized amount
considering the large urban or other designation of the hospital (see
Table 1C of section V. of the Addendum).
    Step 2--Multiply the labor-related portion of the standardized
amount by the appropriate Puerto Rico-specific wage index (see Table 4F
of section V. of the Addendum).
    Step 3--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount.
    Step 4--Multiply the result in Step 3 by 50 percent.
    Step 5--Multiply the amount from Step 4 by the appropriate DRG
relative weight (see Table 5 of section V. of the Addendum).
    b. National Rate. The national prospective payment rate is
determined as follows:
    Step 1--Multiply the labor-related portion of the national average
standardized amount (see Table 1C of section V. of the Addendum) by the
appropriate national wage index (see Tables 4A and 4B of section V. of
the Addendum).
    Step 2--Add the amount from Step 1 and the nonlabor-related portion
of the national average standardized amount.
    Step 3--Multiply the result in Step 2 by 50 percent.
    Step 4--Multiply the amount from Step 3 by the appropriate DRG
relative weight (see Table 5 of section V. of the Addendum).
    The sum of the Puerto Rico rate and the national rate computed
above equals the prospective payment for a given discharge for a
hospital located in Puerto Rico.

III. Proposed Changes to Payment Rates for Inpatient Capital-
Related Costs for FY 2002

    The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on
or after October 1, 1991. Effective with that cost reporting period and
during a 10-year transition period extending through FY 2001, hospital
inpatient capital-related costs are paid on the basis of an increasing
proportion of the capital prospective payment system Federal rate and a
decreasing proportion of a hospital's historical costs for capital.
    The basic methodology for determining Federal capital prospective
rates is set forth at Secs. 412.308 through 412.352. Below we discuss
the factors that we used to determine the proposed Federal for FY 2002.
The rates, which will be effective for discharges occurring on or after
October 1, 2001. As we stated in section V of the preamble of this
proposed rule, we are no longer determining an update to the capital
hospital-specific rate, since FY 2001 is the last year of the 10-year
transition period, and beginning in FY 2002 all hospitals (except those
defined as ``new'' under Sec. 412.300) will be paid based on 100
percent of the capital Federal rate.
    For FY 1992, we computed the standard Federal payment rate for
capital-related costs under the prospective payment system by updating
the FY 1989 Medicare inpatient capital cost per case by an actuarial
estimate of the increase in Medicare inpatient capital costs per case.
Each year after FY 1992, we update the standard Federal rate, as
provided in Sec. 412.308(c)(1), to account for capital input price
increases and other factors. Also, Sec. 412.308(c)(2) provides that the
Federal rate is adjusted annually by a factor equal to the estimated
proportion of outlier payments under the Federal rate to total capital
payments under the Federal rate. In addition, Sec. 412.308(c)(3)
requires that the Federal rate be reduced by an adjustment factor equal
to the estimated proportion of payments for (regular and special)
exceptions under Sec. 412.348. Furthermore, Sec. 412.308(c)(4)(ii)
requires that the Federal rate be adjusted so that the annual DRG
reclassification and the recalibration of DRG weights and changes in
the geographic adjustment factor are budget neutral. For FYs 1992
through 1995, Sec. 412.352 required that the Federal rate also be
adjusted by a budget neutrality factor so that aggregate payments for
inpatient hospital capital costs were projected to equal 90 percent of
the payments that would have been made for capital-related costs on a
reasonable cost basis during the fiscal year. That provision expired in
FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to
the rate that was made in FY 1994, and Sec. 412.308(b)(3) describes the
0.28 percent reduction to the rate made in FY 1996 as a result of the
revised policy of paying for transfers. In the FY 1998 final rule with
comment period (62 FR 45966), we implemented section 4402 of Public Law
105-33, which requires that for discharges occurring on or after
October 1, 1997, and before October 1, 2002, the unadjusted standard
Federal rate is reduced by 17.78 percent. A small part of that
reduction will be restored effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor
and the regular exceptions payment adjustment, we developed a dynamic
model of Medicare inpatient capital-related costs, that is, a model
that projects changes in Medicare inpatient capital-related costs over
time. With the expiration of the budget neutrality provision, the model
is still used to estimate the regular exceptions payment adjustment and
other factors. The model and its application are described in greater
detail in Appendix B of this proposed rule.
    In accordance with section 1886(d)(9)(A) of the Act, under the
prospective payment system for inpatient operating costs, hospitals
located in Puerto Rico are paid for operating costs under a special
payment

[[Page 22730]]

formula. Prior to FY 1998, hospitals in Puerto Rico were paid a blended
rate that consisted of 75 percent of the applicable standardized amount
specific to Puerto Rico hospitals and 25 percent of the applicable
national average standardized amount. However, effective October 1,
1997, as a result of section 4406 of Public Law 105-33, operating
payments to hospitals in Puerto Rico are based on a blend of 50 percent
of the applicable standardized amount specific to Puerto Rico hospitals
and 50 percent of the applicable national average standardized amount.
In conjunction with this change to the operating blend percentage,
effective with discharges on or after October 1, 1997, we compute
capital payments to hospitals in Puerto Rico based on a blend of 50
percent of the Puerto Rico rate and 50 percent of the Federal rate.
    Section 412.374 provides for the use of this blended payment system
for payments to Puerto Rico hospitals under the prospective payment
system for inpatient capital-related costs. Accordingly, for capital-
related costs, we compute a separate payment rate specific to Puerto
Rico hospitals using the same methodology used to compute the national
Federal rate for capital.

A. Determination of Federal Inpatient Capital-Related Prospective
Payment Rate Update

    In the August 1, 2000 final rule (65 FR 47122), we established a
Federal rate of $382.03 for FY 2001. In a separate interim final rule
with comment, as a result of implementing section 301(a) of Public Law
106-554 we are establishing a Federal rate of $380.85 for discharges
occurring on or after April 1, 2001 and before October 1, 2001. In
accordance with section 547 of Public Law 106-554, the special
increases and adjustments provided by Public Law 106-554 effective
between April and October 2001 do not apply for discharges occurring
after FY 2001 and should not be included in determining the payment
rates in subsequent years. Thus, the adjustments and rates published in
the August 1, 2000 final rule were used in determining the proposed FY
2002 rates. As a result of the changes we are proposing to the factors
used to establish the Federal rate in this addendum, the proposed FY
20021 Federal rate is $389.09.
    In the discussion that follows, we explain the factors that were
used to determine the proposed FY 2002 Federal rate. In particular, we
explain why the proposed FY 2002 Federal rate has increased 1.85
percent compared to the FY 2001 Federal rate (published in the August
1, 2000 final rule (65 FR 47122)). We also estimate aggregate capital
payments will increase by 3.80 percent during this same period. This
increase is primarily due to the increase in the number of hospital
admissions and the increase in case-mix. This increase in capital
payments is less than last year (5.48 percent) because with the end of
the transition period the remaining hold harmless hospitals receiving
``cost-based'' payments will begin being paid based on 100 percent of
the Federal rate.
    Total payments to hospitals under the prospective payment system
are relatively unaffected by changes in the capital prospective
payments. Since capital payments constitute about 10 percent of
hospital payments, a 1 percent change in the capital Federal rate
yields only about 0.1 percent change in actual payments to hospitals.
Aggregate payments under the capital prospective payment transition
system are estimated to increase in FY 2002 compared to FY 2001.
1. Standard Federal Rate Update
    a. Description of the Update Framework. Under Sec. 412.308(c)(1),
the standard Federal rate is updated on the basis of an analytical
framework that takes into account changes in a capital input price
index and other factors. The update framework consists of a capital
input price index (CIPI) and several policy adjustment factors.
Specifically, we have adjusted the projected CIPI rate of increase as
appropriate each year for case-mix index-related changes, for
intensity, and for errors in previous CIPI forecasts. The proposed
update factor for FY 2002 under that framework is 1.1 percent. This
proposal is based on a projected 0.5 percent increase in the CIPI, a
0.3 percent adjustment for intensity, a 0.0 percent adjustment for
case-mix, a 0.0 percent adjustment for the FY 2000 DRG reclassification
and recalibration, and a forecast error correction of 0.3 percent. We
explain the basis for the FY 2002 CIPI projection in section II.D. of
this Addendum. Below we describe the policy adjustments that have been
applied.
    The case-mix index is the measure of the average DRG weight for
cases paid under the prospective payment system. Because the DRG weight
determines the prospective payment for each case, any percentage
increase in the case-mix index corresponds to an equal percentage
increase in hospital payments.
    The case-mix index can change for any of several reasons:
     The average resource use of Medicare patients changes
(``real'' case-mix change);
     Changes in hospital coding of patient records result in
higher weight DRG assignments (``coding effects''); and
     The annual DRG reclassification and recalibration changes
may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and
resource requirements) of Medicare patients as opposed to changes in
coding behavior that result in assignment of cases to higher weighted
DRGs but do not reflect higher resource requirements. In the update
framework for the prospective payment system for operating costs, we
adjust the update upwards to allow for real case-mix change, but remove
the effects of coding changes on the case-mix index. We also remove the
effect on total payments of prior changes to the DRG classifications
and relative weights, in order to retain budget neutrality for all
case-mix index-related changes other than patient severity. (For
example, we are adjustinged for the effects of the FY 2000 DRG
reclassification and recalibration as part of our FY 2002 update
recommendation.) We have adopted this case-mix index adjustment in the
capital update framework as well.
    For FY 2002, we are projecting a 1.0 percent increase in the case-
mix index. We estimate that real case-mix increase will equal 1.0
percent in FY 2002. Therefore, the proposed net adjustment for case-mix
change in FY 2002 is 0.0 percentage points.
    We estimate that FY 2000 DRG reclassification and recalibration
will result in a 0.0 percent change in the case-mix when compared with
the case-mix index that would have resulted if we had not made the
reclassification and recalibration changes to the DRGs. Therefore, we
are making a 0.0 percent adjustment for DRG reclassification and
recalibration in the update recommendation for FY 2002.
    The capital update framework contains an adjustment for forecast
error. The input price index forecast is based on historical trends and
relationships ascertainable at the time the update factor is
established for the upcoming year. In any given year there may be
unanticipated price fluctuations that may result in differences between
the actual increase in prices and the forecast used in calculating the
update factors. In setting a prospective payment rate under the
framework, we make an adjustment for forecast error only if our
estimate of the change in the capital input price index for any year is
off by 0.25 percentage points or more. There is a 2-year lag between
the forecast and the measurement of the forecast error. A

[[Page 22731]]

forecast error of 0.3 percentage points was calculated for the FY 2000
update. That is, current historical data indicate that the FY 2000 CIPI
used in calculating the forecasted FY 2000 update factor (0.6 percent)
understated the actual realized price increases (0.9 percent) by 0.3
percent. This under-prediction was due to prices from municipal bond
yields declining slower than expected. Therefore, we are making a 0.3
percent adjustment for forecast error in the update for FY 2002.
    Under the capital prospective payment system framework, we also
make an adjustment for changes in intensity. We calculate this
adjustment using the same methodology and data as in the framework for
the operating prospective payment system. The intensity factor for the
operating update framework reflects how hospital services are utilized
to produce the final product, that is, the discharge. This component
accounts for changes in the use of quality-enhancing services, changes
in within-DRG severity, and expected modification of practice patterns
to remove cost-ineffective services.
    We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI for
hospital and related services), and changes in real case-mix. The use
of total charges in the calculation of the proposed intensity factor
makes it a total intensity factor, that is, charges for capital
services are already built into the calculation of the factor.
Therefore, we have incorporated the intensity adjustment from the
operating update framework into the capital update framework. Without
reliable estimates of the proportions of the overall annual intensity
increases that are due, respectively, to ineffective practice patterns
and to the combination of quality-enhancing new technologies and
within-DRG complexity, we assume, as in the revised operating update
framework, that one-half of the annual increase is due to each of these
factors. The capital update framework thus provides an add-on to the
input price index rate of increase of one-half of the estimated annual
increase in intensity to allow for within-DRG severity increases and
the adoption of quality-enhancing technology.
    For FY 2002, we have developed a Medicare-specific intensity
measure based on a 5-year average using FY 1996 through 2000 data. In
determining case-mix constant intensity, we found that observed case-
mix increase was 1.6 percent in FY 1996, 0.3 percent in FY 1997, -0.4
percent in FY 1998, and -0.3 in FY 1999, and -0.7 percent in FY 2000.
Since we found an increase in case-mix of 1.6 for FY 1996, which was
outside of the range of 1.0 to 1.4 percent, we estimate that real case-
mix increase was 1.0 to 1.4 percent for that year. The estimate of 1.0
to 1.4 percent is supported by past studies of case-mix change by the
RAND Corporation. The most recent study was ``Has DRG Creep Crept Up?
Decomposing the Case Mix Index Change Between 1987 and 1988'' by G. M.
Carter, J. P. Newhouse, and D. A. Relles, R-4098-HCFA/ProPAC (1991).
The study suggested that real case-mix change was not dependent on
total change, but was usually a fairly steady 1.0 to 1.4 percent per
year. We use 1.4 percent as the upper bound because the RAND study did
not take into account that hospitals may have induced doctors to
document medical records more completely in order to improve payment.
Following that study, we consider up to 1.4 percent of observed case-
mix change as real for FY 1996 through FY 2000. Based on this analysis,
we believe that all of the observed case-mix increase for FY 1997, FY
1998, and FY 1999, and FY 2000 is real. The increases for FY 1996 was
in excess of our estimate of real case-mix increase.
    We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI for
hospital and related services), and changes in real case-mix. Based
upon an upper limit of 1.0 percent real case-mix increase, we estimate
that case-mix constant intensity increased by an average 0.3 percent
during FYs 1996 through 2000, for a cumulative increase of 1.4 percent
given estimates of real case-mix of 1.0 percent for FY 1996, 0.3
percent for FY 1997, -0.4 for FY 1998, and -0.3 for FY 1999, and -0.7
percent for FY 2000. Based upon an upper limit of 1.4 percent real
case-mix increase, we estimate that case-mix constant intensity
increase by an average 0.2 percent during FYs 1996 through 2000, for a
cumulative increase of 1.2 percent, given that real case-mix increase
was 1.4 percent for FY 1996, 0.3 percent for FY 1997, -0.4 for FY 1998,
-0.3 for FY 1999, and -0.7 percent for FY 2000. Since we estimate that
intensity has increased during that period, we are recommending a 0.3
percent intensity adjustment for FY 2002.
    b. Comparison of HCFA and MedPAC Update Recommendations. In its
March 2001 Report to Congress, MedPAC presented a combined operating
and capital update for hospital inpatient prospective payment system
payments for FY 2002. Currently, section 1886(b)(3)(B)(i)(XVII) of the
Act sets forth the FY 2002 percentage increase in the prospective
payment system operating cost standardized amounts. The prospective
payment system capital update is set at the discretion of the Secretary
under the framework outlined in Sec. 412.308(c)(1).
    For FY 2002, MedPAC's update framework supports a combined
operating and capital update for hospital inpatient prospective payment
system payments of 1.5 percent to 3.0 percent (or between the increase
in the combined operating and capital market basket minus 1.3
percentage points and the increase in the combined operating and
capital market basket plus 0.2 percentage points). MedPAC also notes
that while the number of hospitals with negative inpatient hospital
margins have increased in FY 1999 (from 33.7 percent in FY 1998 to 36.7
percent in FY 1999 (page 71)), overall high inpatient Medicare margins
generally offset hospital losses on other lines of Medicare services.
MedPAC continues to project substantially improved hospital total
margins for FY 2000 based on performance in the first half of the
fiscal year (page 72).
    MedPAC's FY 2002 combined operating and capital update framework
uses a weighted average of HCFA's forecasts of the operating (PPS Input
Price Index) and capital (CIPI) market baskets. This combined market
basket is used to develop an estimate of the change in overall
operating and capital prices. MedPAC calculated a combined market
basket forecast by weighting the operating market basket forecast by
0.92 and the capital market basket forecast by 0.08, since operating
costs are estimated to represent 92 percent of total hospital costs
(capital costs are estimated to represent the remaining 8 percent of
total hospital costs). MedPAC's combined market basket for FY 2002 is
estimated to increase by 2.8 percent, based on HCFA's December 2000
forecasted operating market basket increase of 3.0 percent and HCFA's
December 2000 forecasted capital market basket increase of 0.8 percent.
    Response: As we stated in the August 1, 2000 final rule (65 FR
47119), our long-term goal is to develop a single update framework for
operating and capital prospective payments and that we would begin
development of a unified framework. However, we have not yet developed
such a single framework as the actual operating system update has been
determined by Congress through FY 2003 (as amended by Public Law 106-
554). In the meantime, we intend to maintain as much consistency as
possible with the current operating framework in order to

[[Page 22732]]

facilitate the eventual development of a unified framework.
    Our recommendation for updating the prospective payment system
capital Federal rate is supported by the following analyses that
measure changes in scientific and technological advances, practice
pattern changes, changes in case-mix, the effect of reclassification
and recalibration, and forecast error correction. MedPAC recommends a
1.5 to 3.0 percent combined operating and capital update for hospital
inpatient prospective payments. Under our existing capital update
framework, we are recommending a 1.1 percent update to the capital
Federal rate. For purposes of comparing HCFA's capital update
recommendation and MedPAC's update recommendation for FY 2002, we have
isolated the capital component of MedPAC's combined market basket
forecast, which was based on HCFA's December 2000 CIPI forecast of 0.8
percent. As a result, MedPAC's update recommendation for FY 2002 for
capital payments is between -0.9 percent and 0.6 percent (see Table 1).
    There are some differences between HCFA's and MedPAC's update
frameworks, which account for the difference in the respective update
recommendations. In its combined FY 2002 update recommendation, MedPAC
uses HCFA's capital input price index (the CIPI) as the starting point
for estimating the change in prices since the previous year. HCFA's
CIPI includes price measures for interest expense, which are an
indicator of the interest rates facing hospitals during their capital
purchasing decisions. Previously, MedPAC's capital market basket did
not include interest expense; instead it included a financing policy
adjustment when necessary to account for the prolonged changes in
interest rates. HCFA's CIPI is vintage-weighted, meaning that it takes
into account price changes from past purchases of capital when
determining the current period update. In the past, MedPAC's capital
market basket was not vintage-weighted, and only accounted for the
current year price changes. Beginning last year, both HCFA's and
MedPAC's FY 2002 update frameworks use HCFA's CIPI. MedPAC used HCFA's
December 2000 CIPI in preparing its FY 2002 recommendation, which was
forecast at 0.8 percent. Currently, the CIPI is forecast at 0.5 percent
(March 2001).
    MedPAC and HCFA also differ in the adjustments they make to their
price indices. (See Table 1 for a comparison of HCFA and MedPAC's
update recommendations.) MedPAC makes an adjustment for scientific and
technological advances, which is offset by a fixed standard for
productivity growth and one-time factors. HCFA has not adopted a
separate adjustment for capital science and technology or productivity
and efficiency.
    In addition, MedPAC includes, when appropriate, an adjustment for
one-time factors expected to affect costs in FY 2002 and the removal of
the adjustment for FY 2002 one-time factors in its science and
technology adjustment. MedPAC concluded that a one-time adjustment of
0.5 percent for the Health Insurance Portability and Accountability Act
of 1996 (HIPAA) regulatory requirements be reflected in its FY 2002
payment update. Additionally, since MedPAC believes that the costs
associated with one-time factors should not be built permanently into
the rates, it recommended that the FY 2002 payment rates be reduced by
0.5 percent to offset the increase it recommended in the FY 2000 update
for the costs associated with year 2000 (Y2K) computer improvements.
Thus, MedPAC's combined FY 2002 adjustment for science and
technological advances is 0.0 percent to 0.5 percent.
    Instead, we have identified a total intensity factor, which
reflects scientific and technological advances, but we have not
identified an adequate total productivity measure. MedPAC also includes
a site-of-care substitution adjustment (unbundling of the payment unit)
to account for the decline in the average length of Medicare acute
inpatient stays. This adjustment is designed to shift funding along
with associated costs when Medicare patients are discharged to
postacute settings that replace acute impatient days. Other factors,
such as technological advances that allow for a decreased need in
follow-up care and BBA mandated policy on payment for transfer cases
that limits payments within certain DRGs, are reflected in the site-of-
care substitution adjustment as well. We agree with MedPAC that the
site-of-care substitution effect is real and believe that it is
factored into our intensity recommendation.
    For FY 2002, MedPAC recommends a -2.0 to -1.0 percent combined
adjustment for site-of-care substitutions. MedPAC recommends a 0.0 to a
0.5 percent combined adjustment for scientific and technological
advances, which was offset by a fixed productivity standard of 0.5
percent and a 0.0 percent adjustment for one-time factors for FY 2002.
We recommend a 0.3 intensity adjustment.
    Additionally, MedPAC includes an adjustment for Medicare policy
changes affecting financial status in its section of factors affecting
current level of payments in its FY 2002 update recommendation. While
MedPAC's update framework has not considered such costs in the past,
MedPAC believes that it is appropriate to account for significant costs
incurred as a result of new Medicare policy. For FY 2002, MedPAC
believes that legislated updates will match cost growth and that the
overall net affects of legislative changes (from Public Law 105-33,
Public Law 106-113, and Public Law 106-554) will be small. Thus, it did
not recommend any additional allowance for these costs for FY 2002.
Accordingly, MedPAC recommended a 0.0 percent adjustment for Medicare
policy changes.
    MedPAC makes a two-part adjustment for case-mix changes, which
takes into account changes in case-mix in the past year. It recommends
a 0.0 percent combined adjustment for DRG coding change and a 0.0
percent combined adjustment for within-DRG complexity change. This
results in a combined total case-mix adjustment of 0.0 percent. We
recommend a 0.0 adjustment for case-mix, since we are projecting a 1.0
percent increase in case-mix index and we estimate that real case-mix
increase will equal 1.0 percent in FY 2002.
    We recommend a 0.3 percent adjustment for forecast error
correction. MedPAC's combined FY 2002 update recommendation includes a
0.7 percent adjustment for forecast error correction. However, it noted
that this forecast error adjustment is a result of the difference
between the forecasted FY 2000 operating market basket of 2.9 percent
and the actual FY 2000 operating market basket increase of 3.6 percent.
The FY 2000 capital market basket was forecast at 0.6 percent, while
the actual observed increase equaled 0.9 percent for capital costs.
Therefore, we have included 0.3 percent adjustment for FY 2000 forecast
error correction in the comparison of MedPAC's and HCFA's update
recommendations for FY 2002 shown below in Table 1.
    We applied MedPAC's ratio of hospital capital costs to total
hospital costs (8 percent) to the adjustment factors in its update
framework for comparison with HCFA's capital update framework. The net
result of these adjustments is that MedPAC has recommended a -0.9 to
0.6 percent update to the capital Federal rate for FY 2002. MedPAC
believes that the annual updates to the capital and operating payments
under the prospective payment system should not differ substantially,
even though they are determined separately, since they correspond to
costs generated by providing the same inpatient hospital

[[Page 22733]]

services to the same Medicare patients. We describe the basis for our
1.1 percent total capital update for FY 2002 in the preceding section.
Our recommendation of 1.1 percent is 0.5 percent higher than the upper
limit of the range recommended by MedPAC due to MedPAC's -2.0 to -1.0
percent combined (operating and capital) adjustment for unbundling of
the payment unit for FY 2002. If we had applied only the portion of
that adjustment attributable to capital-related services, our proposed
update recommendation would most likely have fallen with in the range
of MedPAC's update recommendation for capital for FY 2002. While in
previous years, our update recommendation has fallen within the range
recommended by MedPAC, since MedPAC has developed its combined
operating and capital update recommendation beginning in FY 2001, we
have only been outside of that range by 0.5 percent. For FY 2001, our
update recommendation of 0.9 percent was only 0.5 percentage points
below MedPAC's lower limit of its FY 2002 recommendation.

   Table 1.--HCFA's FY 2002 Update Factor and MedPAC's Recommendation
------------------------------------------------------------------------
                                  HCFA's update
                                     factor      MedPAC's recommendation
------------------------------------------------------------------------
Capital Input Price Index......             0.5  0.8\1\
Policy Adjustment Factors:
    Intensity..................             0.3  (\2\)
        Science and Technology.  ..............  0.0 to 0.5.
        Real within DRG Change.  ..............  (\3\)
        Site-of-Care             ..............  -2.0 to -1.0.
         Substitution.
        One-Time Factors.......           (\4\)  0.0
                                ----------------------------------------
        Subtotal...............             0.3  -2.0 to -0.5.
                                ----------------------------------------
    Medicare Policy Change;....  ..............  0.0
Case-Mix Adjustment Factors:
    Projected Case-Mix Change..            -1.0  .......................
    Real Across DRG Change.....             1.0  .......................
    Coding Change..............  ..............  0.0
    Real within DRG Change.....           (\4\)  0.0
                                ----------------------------------------
        Subtotal...............             0.0  0.0
Effect of FY 2000                           0.0  .......................
 Reclassification and
 Recalibration.
Forecast Error Correction......             0.3  0.3
                                ========================================
        Total Update...........             1.1  -0.9 to 0.6.
------------------------------------------------------------------------
\1\ Used HCFA's December 2000 capital marker basket forecast in its
  combined update recommendation.
\2\ Included in MedPAC's productivity offset in its science and
  technology adjustment.
\3\ Included in MedPAC's case-mix adjustment.
\4\ Included in HCFA's intensity factor.

2. Outlier Payment Adjustment Factor
    Section 412.312(c) establishes a unified outlier methodology for
inpatient operating and inpatient capital-related costs. A single set
of thresholds is used to identify outlier cases for both inpatient
operating and inpatient capital-related payments. Section 412.308(c)(2)
provides that the standard Federal rate for inpatient capital-related
costs be reduced by an adjustment factor equal to the estimated
proportion of capital-related outlier payments to total inpatient
capital-related PPS payments. The outlier thresholds are set so that
operating outlier payments are projected to be 5.1 percent of total
operating DRG payments.
    In the August 1, 2000 final rule, we estimated that outlier
payments for capital in FY 2001 would equal 5.91 percent of inpatient
capital-related payments based on the Federal rate (65 FR 47121).
Accordingly, we applied an outlier adjustment factor of 0.9409 to the
Federal rate. Based on the thresholds as set forth in section II.A.4.d.
of this Addendum, we estimate that outlier payments for capital will
equal 5.74 percent of inpatient capital-related payments based on the
Federal rate in FY 2002. Therefore, we are proposing an outlier
adjustment factor of 0.9426 to the Federal rate. Thus, the projected
percentage of capital outlier payments to total capital standard
payments for FY 2002 is lower than the percentage for FY 2001.
    The outlier reduction factors are not built permanently into the
rates; that is, they are not applied cumulatively in determining the
Federal rate. As explained previously, in accordance with section 547
of Public Law 106-554, the proposed FY 2002 rates are based on the FY
2001 adjustments and rates published in the August 1, 2000 final rule
(65 FR 47122). Therefore, the proposed net change in the outlier
adjustment to the Federal rate for FY 2002 is 1.0018 (0.9426/0.9409).
The outlier adjustment increases the FY 2002 Federal rate by 0.18
percent compared with the FY 2001 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the Geographic Adjustment Factor
    Section 412.308(c)(4)(ii) requires that the Federal rate be
adjusted so that aggregate payments for the fiscal year based on the
Federal rate after any changes resulting from the annual DRG
reclassification and recalibration and changes in the geographic
adjustment factor (GAF) are projected to equal aggregate payments that
would have been made on the basis of the Federal rate without such
changes. We use the actuarial model, described in Appendix B of this
proposed rule, to estimate the aggregate payments that would have been
made on the basis of the Federal rate without changes in the DRG
classifications and weights and in the GAF. We also use the model to
estimate aggregate payments that would be made on the basis of the
Federal rate as a result of those changes. We then use

[[Page 22734]]

these figures to compute the adjustment required to maintain budget
neutrality for changes in DRG weights and in the GAF.
    For FY 2001, we calculated a GAF/DRG budget neutrality factor of
0.9979. For FY 2002, we are proposing a GAF/DRG budget neutrality
factor of 0.9913. The GAF/DRG budget neutrality factors are built
permanently into the rates; that is, they are applied cumulatively in
determining the Federal rate. This follows from the requirement that
estimated aggregate payments each year be no more than they would have
been in the absence of the annual DRG reclassification and
recalibration and changes in the GAF. As explained previously, in
accordance with section 547 of Public Law 106-554, the proposed FY 2002
adjustments and rates are based on the FY 2001 adjustment and rates
published in the August 1, 2000 final rule (65 FR 47122). The proposed
incremental change in the adjustment from FY 2001 to FY 2002 is 0.9913.
The proposed cumulative change in the rate due to this adjustment is
0.9906 (the product of the incremental factors for FY 1993, FY 1994, FY
1995, FY 1996, FY 1997, FY 1998, FY 1999, FY 2000, FY 2001 and the
proposed incremental factor for FY 2002: 0.9980  x  1.0053  x  0.9998
x  0.9994  x  0.9987  x  0.9989  x  1.0028  x  0.9985  x  0.9979  x
0.9913 = 0.9906).
    This proposed factor accounts for DRG reclassifications and
recalibration and for changes in the GAF. It also incorporates the
effects on the GAF of FY 2002 geographic reclassification decisions
made by the MGCRB compared to FY 2001 decisions. However, it does not
account for changes in payments due to changes in the DSH and IME
adjustment factors or in the large urban add-on.
4. Exceptions Payment Adjustment Factor
    Section 412.308(c)(3) requires that the standard Federal rate for
inpatient capital-related costs be reduced by an adjustment factor
equal to the estimated proportion of additional payments for exceptions
under Sec. 412.348 relative to total capital payments payments under
the hospital-specific rate and Federal rate. We use the model
originally developed for determining the budget neutrality adjustment
factor to determine the regular exceptions payment adjustment factor.
We describe that model in Appendix B to this proposed rule. An
adjustment for regular exceptions is necessary for determining the FY
2002 rates because we will continue to pay regular exceptions for cost
reporting periods beginning before October 1, 2001 but ending in FY
2002 in accordance with Sec. 412.312(c)(3). In FY 2003 and later, no
payments will be made under the regular exceptions provision, hence we
will only compute a budget neutrality adjustment under Sec. 412.348(d)
for special exceptions. We describe the proposed methodology to
determine to special exceptions adjustment in section V.D. of this
proposed rule. For FY 2002, the exceptions adjustment is a combination
of the adjustment that would be made under the regular exceptions
provision and under the special exceptions provision under
Sec. 412.348(g).
    For FY 2001, we estimated that exceptions payments would equal 2.15
percent of aggregate payments based on the Federal rate and the
hospital-specific rate. Therefore, we applied an exceptions reduction
factor of 0.9785 (1-0.0215) in determining the Federal rate. For this
proposed rule, we estimate that regular exceptions payments for FY 2002
will equal 0.63 percent of aggregate payments based on the Federal rate
we estimate that special exceptions payments for FY 2002 will equal
0.12 percent of aggregate payments based on the Federal rate.
Therefore, we estimate that total exceptions payments for FY 2002 will
equal 0.75 percent (0.63 + 0.12 = 0.75) of aggregate payments based on
the Federal rate and we are proposing an exceptions payment reduction
factor of 0.9925 (1 - 0.0075) to the Federal rate for FY 2002. The
proposed exceptions reduction factor for FY 2002 is 1.43 percent higher
than the factor for FY 2001 published in the August 1, 2000 final rule.
This increase is primarily due to the expiration of the regular
exceptions provision and the narrowly defined nature of the special
exceptions policy.
    The exceptions reduction factors are not built permanently into the
rates; that is, the factors are not applied cumulatively in determining
the Federal rate. As explained previously, in accordance with section
547 of Public Law 106-554, the proposed FY 2002 adjustments and rates
are based on the FY 2001 adjustments and rates published in the August
1, 2000 final rule (65 FR 47122). Therefore, the proposed net
adjustment to the FY 2002 Federal rate is 0.9925/0.9785, or 1.0143.
5. Standard Capital Federal Rate for FY 2002
    For FY 2001, the capital Federal rate was $383.06 for discharges
occurring between October 1, 2000 and April 1, 2001. As a result of
implementing section 301(a) of Public Law 106-554, for discharges
occurring from April to October 2001, the capital Federal rate was
$380.85. However, as explained previously, in accordance with section
547 of Public Law 106-554, the proposed FY 2002 adjustments and rates
are based on the FY 2001 adjustments and rates published in the August
1, 2000 final rule (65 FR 47122). As a result of changes we are
proposing to the factors used to establish the Federal rate, the
proposed FY 2002 Federal rate is $389.09. The proposed Federal rate for
FY 2002 was calculated as follows:
     The proposed FY 2002 update factor is 1.0110; that is, the
proposed update is 1.10 percent.
     The proposed FY 2002 budget neutrality adjustment factor
that is applied to the standard Federal payment rate for changes in the
DRG relative weights and in the GAF is 0.9913.
     The proposed FY 2002 outlier adjustment factor is 0.9426.
     The proposed FY 2002 (regular and special) exceptions
payments adjustment factor is 0.9925.
    Since the Federal rate has already been adjusted for differences in
case-mix, wages, cost-of-living, indirect medical education costs, and
payments to hospitals serving a disproportionate share of low-income
patients, we propose to make no additional adjustments in the standard
Federal rate for these factors other than the budget neutrality factor
for changes in the DRG relative weights and the GAF.
    We are providing a chart that shows how each of the factors and
adjustments for FY 2002 affected the computation of the proposed FY
2002 Federal rate in comparison to the FY 2001 Federal rate. The
proposed FY 2002 update factor has the effect of increasing the Federal
rate by 1.10 percent compared to the FY 2001 rate published in the
August 1, 2000 final rule, while the proposed geographic and DRG budget
neutrality factor has the effect of decreasing the Federal rate by 0.87
percent. The proposed FY 2002 outlier adjustment factor has the effect
of increasing the Federal rate by 0.18 percent compared to the FY 2001
rate published in the August 1, 2000 final rule. The proposed FY 2002
(regular and special) exceptions reduction factor has the effect of
increasing the Federal rate by 1.43 percent compared to the exceptions
reduction for FY 2001. The combined effect of all the proposed changes
is to increase the proposed Federal rate by 1.85 percent compared to
the Federal rate for FY 2001.

[[Page 22735]]

          Comparison of Factors and Adjustments: FY 2001 Federal Rate and Proposed FY 2002 Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                                    Proposed FY
                                                      FY 2001          2002           Change      Percent change
----------------------------------------------------------------------------------------------------------------
Update factor \1\...............................          1.0090          1.0110          1.0110            1.10
GAF/DRG Adjustment Factor \1\...................          0.9979          0.9913          0.9913           -0.87
Outlier Adjustment Factor \2\...................          0.9409          0.9426          1.0018            0.18
Exceptions Adjustment Factor \2\................          0.9785          0.9925          1.0143            1.43
Federal Rate....................................       $382.03          $38.09             1.018           1.85
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the rates. Thus, for
  example, the incremental change from FY 2000 to FY 2001 resulting from the application of the 0.9913 GAF/DRG
  budget neutrality factor for FY 2001 is 0.9913.
\2\ The outlier reduction factor and the exceptions reduction factor are not built permanently into the rates;
  that is, these factors are not applied cumulatively in determining the rates. Thus, for example, the net
  change resulting from the application of the FY 2001 outlier reduction factor is 0.9426/0.9409, or 1.0018.

6. Special Rate for Puerto Rico Hospitals
    As explained at the beginning of section IV of this Addendum,
hospitals in Puerto Rico are paid based on 50 percent of the Puerto
Rico rate and 50 percent of the Federal rate. The Puerto Rico rate is
derived from the costs of Puerto Rico hospitals only, while the Federal
rate is derived from the costs of all acute care hospitals
participating in the prospective payment system (including Puerto
Rico). To adjust hospitals' capital payments for geographic variations
in capital costs, we apply a GAF to both portions of the blended rate.
The GAF is calculated using the operating prospective payment system
wage index and varies depending on the MSA or rural area in which the
hospital is located. We use the Puerto Rico wage index to determine the
GAF for the Puerto Rico part of the capital-blended rate and the
national wage index to determine the GAF for the national part of the
blended rate.
    Because we implemented a separate GAF for Puerto Rico in FY 1998,
we also apply separate budget neutrality adjustments for the national
GAF and for the Puerto Rico GAF. However, we apply the same budget
neutrality factor for DRG reclassifications and recalibration
nationally and for Puerto Rico. The Puerto Rico GAF budget neutrality
factor is 0.99941, while the DRG adjustment is 0.9943, for a combined
cumulative adjustment of 0.9937.
    In computing the payment for a particular Puerto Rico hospital, the
Puerto Rico portion of the rate (50 percent) is multiplied by the
Puerto Rico-specific GAF for the MSA in which the hospital is located,
and the national portion of the rate (50 percent) is multiplied by the
national GAF for the MSA in which the hospital is located (which is
computed from national data for all hospitals in the United States and
Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to
the Puerto Rico rate as a result of Public Law 105-33.
    For FY 2001, before application of the GAF, the special rate for
Puerto Rico hospitals was $185.06. As explained previously, in
accordance with section 547 of Public Law 106-554, the proposed FY 2002
adjustments and rates are based on the FY 2001 rates published in the
August 1, 2000 final rule. With the changes we are proposing to the
factors used to determine the rate, the proposed FY 2002 special rate
for Puerto Rico is $188.67.

B. Calculation of Inpatient Capital-Related Prospective Payments for FY
2002

    With the end of the capital prospective payment system transition
period, all hospitals (except those defined as ``new'' under
Sec. 412.300(b)) will be paid based on 100 percent of the Federal rate
in FY 2002. The applicable Federal rate was determined by making
adjustments as follows:
     For outliers, by dividing the standard Federal rate by the
outlier reduction factor for that fiscal year; and
      For the payment adjustments applicable to the hospital,
by multiplying the hospital's GAF, disproportionate share adjustment
factor, and IME adjustment factor, when appropriate.
    For purposes of calculating payments for each discharge during FY
2002, the standard Federal rate is adjusted as follows:

(Standard Federal Rate)  x  (DRG weight)  x  (GAF)  x  (Large Urban
Add-on, if applicable)  x  (COLA adjustment for hospitals located in
Alaska and Hawaii)  x  (1 + Disproportionate Share Adjustment Factor
+ IME Adjustment Factor, if applicable).

    The result is the adjusted Federal rate.
    Hospitals also may receive outlier payments for those cases that
qualify under the thresholds established for each fiscal year. Section
412.312(c) provides for a single set of thresholds to identify outlier
cases for both inpatient operating and inpatient capital-related
payments. The proposed outlier thresholds for FY 2002 are in section
II.A.4.c. of this Addendum. For FY 2002, a case qualifies as a cost
outlier if the cost for the case (after standardization for the
indirect teaching adjustment and disproportionate share adjustment) is
greater than the prospective payment rate for the DRG plus $20,900.
    During the capital prospective payment system transition period, a
hospital also may receive an additional payment under the regular an
exceptions process through its cost reporting period beginning before
October 1, 2001 but ending in FY 2002 if its total inpatient capital-
related payments are less than a minimum percentage of its allowable
Medicare inpatient capital-related costs. The minimum payment level is
established by class of hospital under Sec. 412.348(c). Under
Sec. 412.348(d), the amount of a regular exceptions payment is
determined by comparing the cumulative payments made to the hospital
under the capital prospective payment system to the cumulative minimum
payment levels applicable to the hospital for each cost reporting
period subject to that system. Any amount by which the hospital's
cumulative payments exceed its cumulative minimum payment is deducted
from the additional payment that would otherwise be payable for a cost
reporting period.
    An eligible hospital may qualify for a special exception payment
under Sec. 412.348(g) through the 10th year beyond the end of the
capital transition period if meets (1) a project need requirement
described at Sec. 412.348(g)(2), which in the case of certain urban
hospitals includes an excess capacity test; and (2) a project size
requirement as described at Sec. 412.348(g)(5). Eligible hospitals
include sole community hospitals, urban hospitals with at lest 100 beds
that have a DSH percentage of at least

[[Page 22736]]

20.2 percent, and hospitals that have a combined Medicare and Medicaid
inpatient utilization of at least 70 percent. Under Sec. 412.348(g)(8),
the amount of a special exceptions payment is determined by comparing
the cumulative payments made to the hospital under the capital
prospective payment system to the cumulative minimum payment level.
This amount is offset by (1) any amount by which a hospital's
cumulative capital payments exceed its cumulative minimum payment
levels applicable under the regular exceptions process for cost
reporting periods beginning during which the hospital has been subject
to capital PPS; and (2) any amount by which a hospital's current year
operating and capital payments (excluding 75 percent of operating DSH
payments) exceed its operating and capital costs. The minimum payment
level is 70 percent for all eligible hospitals under Sec. 412.348(g).
    New hospitals as defined under Sec. 412.300 are exempted from the
capital prospective payment system for their first 2 years of operation
and are paid 85 percent of their reasonable costs during that period. A
new hospital's old capital costs are its allowable costs for capital
assets that were put in use for patient care on or before the later of
December 31, 1990, or the last day of the hospital's base year cost
reporting period, and are subject to the rules pertaining to old
capital and obligated capital as of the applicable date. Effective with
the third year of operation, we will pay the hospital under either the
fully prospective methodology, using the appropriate transition blend
in that Federal fiscal year, or the hold-harmless methodology. If the
hold-harmless methodology is applicable, the hold-harmless payment for
assets in use during the base period would extend for 8 years, even if
the hold-harmless payments extend beyond the normal transition period.

C. Capital Input Price Index

1. Background
    Like the operating input price index, the capital input price index
(CIPI) is a fixed-weight price index that measures the price changes
associated with costs during a given year. The CIPI differs from the
operating input price index in one important aspect--the CIPI reflects
the vintage nature of capital, which is the acquisition and use of
capital over time. Capital expenses in any given year are determined by
the stock of capital in that year (that is, capital that remains on
hand from all current and prior capital acquisitions). An index
measuring capital price changes needs to reflect this vintage nature of
capital. Therefore, the CIPI was developed to capture the vintage
nature of capital by using a weighted-average of past capital purchase
prices up to and including the current year.
    Using Medicare cost reports, American Hospital Association (AHA)
data, and Securities Data Company data, a vintage-weighted price index
was developed to measure price increases associated with capital
expenses. We periodically update the base year for the operating and
capital input prices to reflect the changing composition of inputs for
operating and capital expenses. Currently, the CIPI is based to FY 1992
and was last rebased in 1997. The most recent discussion of the cost
category weights in the CIPI was in the final rule with comment period
for FY 1998 published on August 29, 1997 (62 FR 46050).
2. Forecast of the CIPI for Federal Fiscal Year 2001
    We are forecasting the CIPI to increase 0.9 percent for FY 2002.
This reflects a projected 1.5 percent increase in vintage-weighted
depreciation prices (building and fixed equipment, and movable
equipment) and a 3.5 percent increase in other capital expense prices
in FY 2002, partially offset by a 1.3 percent decline in vintage-
weighted interest rates in FY 2002. The weighted average of these three
factors produces the 0.9 percent increase for the CIPI as a whole.

IV. Proposed Changes to Payment Rates for Excluded Hospitals and
Hospital Units: Rate-of-Increase Percentages

    The inpatient operating costs of hospitals and hospital units
excluded from the prospective payment system are subject to rate-of-
increase limits established under the authority of section 1886(b) of
the Act, which is implemented in regulations at Sec. 413.40. Under
these limits, a hospital-specific target amount (expressed in terms of
the inpatient operating cost per discharge) is set for each hospital,
based on the hospital's own historical cost experience trended forward
by the applicable rate-of-increase percentages (update factors). In the
case of a psychiatric hospital or hospital unit, a rehabilitation
hospital or hospital unit, or a long-term care hospital, the target
amount may not exceed the updated figure for the 75th percentile of
target amounts adjusted to take into account differences between
average wage-related costs in the area of the hospital and the national
average of such costs within the same class of hospital for hospitals
and units in the same class (psychiatric, rehabilitation, and long-term
care) for cost reporting periods ending during FY 1996. The target
amount is multiplied by the number of Medicare discharges in a
hospital's cost reporting period, yielding the ceiling on aggregate
Medicare inpatient operating costs for the cost reporting period.
    Each hospital-specific target amount is adjusted annually, at the
beginning of each hospital's cost reporting period, by an applicable
update factor.
    Section 1886(b)(3)(B) of the Act, which is implemented in
regulations at Sec. 413.40(c)(3)(vii), provides that for cost reporting
periods beginning on or after October 1, 1998 and before October 1,
2002, the update factor for a hospital or unit depends on the
hospital's or hospital unit's costs in relation to the ceiling for the
most recent cost reporting period for which information is available.
For hospitals with costs exceeding the ceiling by 10 percent or more,
the update factor is the market basket increase. For hospitals with
costs exceeding the ceiling by less than 10 percent, the update factor
is the market basket minus .25 percent for each percentage point by
which costs are less than 10 percent over the ceiling. For hospitals
with costs equal to or less than the ceiling but greater than 66.7
percent of the ceiling, the update factor is the greater of 0 percent
or the market basket minus 2.5 percent. For hospitals with costs that
do not exceed 66.7 percent of the ceiling, the update factor is 0.
    The most recent forecast of the market basket increase for FY 2002
for hospitals and hospital units excluded from the prospective payment
system is 3.0 percent. Therefore, the update to a hospital's target
amount for its cost reporting period beginning in FY 2002 would be
between 0.5 and 3.0 percent, or 0 percent, depending on the hospital's
or unit's costs in relation to its rate-of-increase limit.
    In addition, Sec. 413.40(c)(4)(iii) requires that for cost
reporting periods beginning on or after October 1, 1998 and before
October 1, 2002, the target amount for each psychiatric hospital or
hospital unit, rehabilitation hospital or hospital unit, and long-term
care hospital cannot exceed a cap on the target amounts for hospitals
in the same class.
    Section 1886(b)(3)(H) of the Act, as amended by section 121 of
Public Law 106-113, provides for an appropriate wage adjustment to the
caps on the target amounts for psychiatric hospitals and units,
rehabilitation hospitals and units, and long-term care hospitals,
effective for cost reporting periods beginning on or after October 1,
1999, through September 30, 2002. On August

[[Page 22737]]

1, 2000, we published an interim final rule with comment period that
implemented this provision for cost reporting periods beginning on or
after October 1, 1999 and before October 1, 2000 (65 FR 47026) and a
final rule that implemented the provision for cost reporting periods
beginning on or after October 1, 2000 and before October 1, 2001 (65 FR
47054). This proposed rule addresses the wage adjustment to the caps
for cost reporting periods beginning on or after October 1, 2001.
    As discussed in section VI. of the preamble of this proposed rule,
the cap on the target amount per discharge is determined by adding the
hospital's nonlabor-related portion of the national 75th percentile cap
to its wage-adjusted, labor-related portion of the national 75th
percentile cap (the labor-related portion of costs equals 0.71553 and
the nonlabor-related portion of costs equals 0.28447). A hospital's
wage-adjusted, labor-related portion of the target amount is calculated
by multiplying the labor-related portion of the national 75th
percentile cap for the hospital's class by the wage index under the
hospital inpatient prospective payment system (see Sec. 412.63),
without taking into account reclassifications under sections
1886(d)(8)(B) and (d)(10) of the Act.
    As discussed in section VI. of the preamble of this proposed rule,
we are proposing to make an adjustment to the caps on target amounts
for new and existing excluded hospitals and units. In calculating the
wage-adjusted caps on target amounts for new and existing excluded and
units for FY 2001, we inadvertently made an error. In wage neutralizing
FY 1996 target amounts, we used the FY 2000 hospital inpatient
prospective payment system wage index published in Tables 4A and 4B of
the July 30, 1999 final rule (64 FR 41585 through 41593), which is
based on wage data after taking into account geographic
reclassifications under section 1886(d)(8) of the Act. We are proposing
to use pre-reclassified wage data in our recalculation of the caps for
FY 2002. We propose to recalculate the limits for new excluded
hospitals and units, as well as calculate the cap for existing excluded
hospitals and units using the same wage index used under the
prospective payment system for skilled nursing facilities (SNF) as
shown in Table 7 of the July 30, 1999 SNF final rule (64 FR 41690). We
do not anticipate a significant impact on overall payments to these
hospitals and units.
    Section 307(a) of Public Law 106-554 amended section 1886(b)(3) of
the Act to provide for a 2-percent increase to the wage-adjusted 75th
percentile cap on the target amount for long-term care hospitals,
effective for cost reporting periods beginning during FY 2001. This
provision is applicable to long-term care hospitals that were subject
to the cap for existing excluded hospitals and units, as specified in
Sec. 413.40(c).
    In addition to the increase to the cap on target amounts for long-
term care hospitals, section 307(a) of Public Law 106-554 amended
section 1886(b)(3)(A) of the Act to make the section applicable to all
long-term care hospitals, effective for cost reporting periods
beginning during FY 2001. This provision requires a revision to the
determination of each long-term care hospital's FY 2001 target amount
as specified in Sec. 413.40(c)(4). For cost reporting periods beginning
during FY 2001, the hospital-specific target amount otherwise
determined for a long-term care hospital as specified under
Sec. 413.40(c)(4)(ii) is multiplied by 1.25 (that is, increased by 25
percent). However, the revised FY 2001 target amount for a long-term
care hospital cannot exceed its wage-adjusted national cap as required
by section 1886(b)(3) of the Act, as amended by section 307(a) of
Public Law 106-554.
    For cost reporting periods beginning in FY 2002, the proposed caps
are as follows:

------------------------------------------------------------------------
                                                   Labor-     Nonlabor-
      Class of excluded hospital or unit          related      related
                                                   share        share
------------------------------------------------------------------------
Psychiatric...................................       $8,404       $3,341
Rehabilitation................................       15,689        6,237
Long-Term Care................................       31,399       12,483
------------------------------------------------------------------------

    Regulations at Sec. 413.40(d) specify the formulas for determining
bonus and relief payments for excluded hospitals and specify
established criteria for an additional bonus payment for continuous
improvement. Regulations at Sec. 413.40(f)(2)(ii) specify the payment
methodology for new hospitals and hospital units (psychiatric,
rehabilitation, and long-term care) effective October 1, 1997.

V. Tables

    This section contains the tables referred to throughout the
preamble to this proposed rule and in this Addendum. 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 3B--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 Rural 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 Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions to the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 2000 MedPAR Update 12/00 GROUPER V18.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 2000 MedPAR Update 12/00 GROUPER V20.0
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

[[Page 22738]]

   Table 1A.--National Adjusted Operating Standardized Amounts, Labor/
                                Nonlabor
------------------------------------------------------------------------
          Large urban areas                       Other areas
------------------------------------------------------------------------
  Labor-related     Nonlabor-related    Labor-related   Nonlabor-related
------------------------------------------------------------------------
      $2,940.89          $1,195.38          $2,894.33         $1,176.46
------------------------------------------------------------------------

               Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
                                                         Large urban areas                  Other areas
                                                 ---------------------------------------------------------------
                                                       Labor         Nonlabor          Labor         Nonlabor
----------------------------------------------------------------------------------------------------------------
National........................................       $2,915.45       $1,185.04       $2,915.45       $1,185.04
Puerto Rico.....................................        1,414.18          569.25        1,391.79          560.23
----------------------------------------------------------------------------------------------------------------

            Table 1D.--Capital Standard Federal Payment Rate
------------------------------------------------------------------------
                                                               Rate
------------------------------------------------------------------------
National................................................         $389.09
Puerto Rico.............................................          188.67
------------------------------------------------------------------------

    --------------------
* Wage data not available for the provider that year.

** For Federal Fiscal Year 2002 only, the average hourly wage is based
upon data on file as of February 15, 2001. It does not reflect changes
processed after that date.

*** The 3-year average hourly wage is weighted by salaries and hours.



[[Page 22738]]

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
----------------------------------------------------------------------------------------------------------------
                                                      Average         Average        Average**      Average***
                  Provider No.                      hourly wage     hourly wage     hourly wage     hourly wage
                                                     FFY 2000        FFY 2001        FFY 2002        (3 years)
----------------------------------------------------------------------------------------------------------------
010001..........................................         15.8484         16.4088         17.1352         16.4665
010004..........................................         15.0194         17.9732         19.0010         17.1863
010005..........................................         16.2615         17.5985         18.6554         17.4986
010006..........................................         17.3081         16.7480         17.3537         17.1306
010007..........................................         14.8048         15.4798         15.6788         15.3288
010008..........................................         17.6549         14.7443         17.4728         16.6080
010009..........................................         17.5328         18.7731         18.4390         18.2439
010010..........................................         15.9090         16.4468         16.4664         16.2848
010011..........................................         20.6261         20.7972         21.9311         21.1001
010012..........................................         19.2992         17.7171         15.8686         17.5430
010015..........................................         18.3461         15.4510         18.7062         17.3913
010016..........................................         16.1311         17.2473         18.6772         17.4112
010018..........................................         18.9617         17.6449         18.9388         18.5180
010019..........................................         15.4910         16.3493         17.0672         16.3245
010021..........................................         14.6297         16.2919         15.1241         15.3000
010022..........................................         20.5050         18.5879         17.6435         18.8422
010023..........................................         16.2581         16.1025         16.3209         16.2283
010024..........................................         16.0263         16.2900         16.2974         16.2091
010025..........................................         14.5311         15.1356         15.1548         14.9441
010027..........................................         14.9278         11.7900         16.8595         14.1053
010029..........................................         16.4103         17.6461         18.3605         17.4403
010031..........................................         18.0194         18.7835         18.5180         18.4445
010032..........................................         12.6540         12.5995         15.3590         13.6017
010033..........................................         19.6797         20.3923         21.1818         20.4188
010034..........................................         14.7342         15.0959         15.3639         15.0606
010035..........................................         17.4788         20.1853         16.0377         17.7343
010036..........................................         17.2880         17.8140         17.0366         17.3872
010038..........................................         18.3309         18.2671         19.6098         18.7632
010039..........................................         18.8080         20.1045         20.3406         19.7778
010040..........................................         19.1030         18.9376         19.9152         19.2851
010043..........................................         16.2022         30.7489         18.6640         19.9982
010044..........................................         17.0229         22.0091         24.0265         20.8906
010045..........................................         15.0065         15.2200         17.0417         15.7248
010046..........................................         17.1822         17.3970         18.9737         17.8750
010047..........................................         16.3803         13.3521         15.4332         15.2044
010049..........................................         14.4823         14.7590         15.5246         14.9487
010050..........................................         15.4159         18.5163         17.3895         17.0820

[[Page 22739]]

010051..........................................          9.9390         11.9275         11.8108         11.1940
010052..........................................         13.8649         16.5486         18.0653         16.1248
010053..........................................         13.1778         14.6267         15.5649         14.5406
010054..........................................         17.1246         18.5103         19.5148         18.4901
010055..........................................         18.1930         18.9526         18.8590         18.6711
010058..........................................         12.7809         16.1702         16.9715         15.1274
010059..........................................         18.1886         19.1286         18.8020         18.7124
010061..........................................         15.9215         14.9547         14.5003         15.1112
010062..........................................         13.5690         14.7732         12.3259         13.5151
010064..........................................         20.8966         20.4139         19.5256         20.2712
010065..........................................         15.6357         16.4049         16.8752         16.3279
010066..........................................         12.0681         15.4317         13.1559         13.4757
010068..........................................         18.7367         12.0525         12.9616         14.2644
010069..........................................         13.5684         13.8636         14.7211         14.0429
010072..........................................         14.3481         14.9526         16.2339         15.1957
010073..........................................         12.8328         13.8601         14.1273         13.6015
010078..........................................         17.7110         17.9202         18.1028         17.9134
010079..........................................         16.8701         16.4421         14.5611         15.8427
010080..........................................         13.8473               *               *         13.8473
010081..........................................         16.9823         18.9474         17.2996         17.7081
010083..........................................         16.2146         16.8933         18.0312         17.0916
010084..........................................         18.7794         18.4965         18.7769         18.6812
010085..........................................         18.8696         18.4744         19.6888         19.0044
010086..........................................         14.9255         16.6694         16.5711         16.0968
010087..........................................         18.3889         19.0033         17.3321         18.3237
010089..........................................         16.6090         16.8042         17.7800         17.0521
010090..........................................         18.1121         18.3866         18.9445         18.4882
010091..........................................         16.3620         13.9405         17.0799         15.6820
010092..........................................         16.4980         16.9900         17.8144         17.1322
010094..........................................         18.5603               *               *         18.5603
010095..........................................         11.8993         12.4525         12.2597         12.2090
010097..........................................         12.8955         13.0413         12.7286         12.8889
010098..........................................         14.2787         15.9165         14.0300         14.6833
010099..........................................         15.9309         15.9874         15.5619         15.8073
010100..........................................         15.4826         17.2011         17.7237         16.8503
010101..........................................         15.4173         15.3859         14.4460         15.0721
010102..........................................         12.7251         13.7933         13.8136         13.4259
010103..........................................         19.3115         17.9358         16.6514         17.9628
010104..........................................         18.0997         17.7126         15.9964         17.2534
010108..........................................         20.7914         17.9017         19.4617         19.3047
010109..........................................         14.0870         15.3107         14.6834         14.6934
010110..........................................         15.9066         15.6317         15.8283         15.7917
010112..........................................         15.1056         15.1401         16.8271         15.6716
010113..........................................         17.2440         16.9683         13.9413         15.9844
010114..........................................         17.2612         15.2454         17.0136         16.4485
010115..........................................         13.7524         14.6268         14.9632         14.4787
010118..........................................         16.6889         18.8477         17.0834         17.5145
010119..........................................         18.1707         18.8024         20.7741         19.7059
010120..........................................         17.0332         17.2336         18.2567         17.5146
010121..........................................         15.1806         14.6444         14.5262         14.8160
010123..........................................         18.1604         16.7344         19.2140         17.9949
010124..........................................         16.2666         16.2846         16.7465         16.4273
010125..........................................         14.4153         15.5304         16.0136         15.3557
010126..........................................         17.6405         19.5710         19.1065         18.7347
010127..........................................         19.6095         19.5190         18.2786         19.1726
010128..........................................         12.5747         14.5056         14.4322         13.6385
010129..........................................         14.4267         14.7286         16.1733         15.1385
010130..........................................         16.3465         16.6809         18.1314         16.9797
010131..........................................         17.9076         17.8260         20.1883         18.6602
010134..........................................         10.7817         18.8835         19.9856         15.8677
010137..........................................         15.9348         12.1217         20.4561         15.8609
010138..........................................         12.1295         12.8675         14.5254         13.1763
010139..........................................         19.9487         19.0001         20.6815         19.8355

[[Page 22740]]

010143..........................................         15.7144         16.7911         17.6212         16.7651
010144..........................................         17.1211         17.1320         17.7580         17.3377
010145..........................................         20.7460         20.8434         20.5895         20.7209
010146..........................................         18.8561         18.5198         19.1415         18.8309
010148..........................................         14.6443         12.2214         15.8349         13.9784
010149..........................................         17.0836         18.6333         18.0156         17.9216
010150..........................................         16.9749         17.8951         18.8977         17.9203
010152..........................................         17.3835         17.8306         18.2173         17.8172
010155..........................................         16.7028          9.0300         15.0689         12.5183
010158..........................................               *         17.3227         18.3957         17.8637
020001..........................................         27.9690         28.1747         27.4110         27.8426
020002..........................................         26.9145         24.5815         25.1987         25.5092
020004..........................................         26.3979         30.5667         25.4679         27.5927
020005..........................................         29.0068         30.2920         29.2378         29.5337
020006..........................................         26.7706         31.2404         28.1417         28.8630
020007..........................................         24.9555         27.8319         32.3852         28.0097
020008..........................................         30.4712         29.4146         30.8691         30.2487
020009..........................................         23.1801         20.1930         18.4660         20.3801
020010..........................................         18.6417         23.6727         22.7559         21.4818
020011..........................................         29.4697         30.4727         28.0658         29.3006
020012..........................................         23.9259         24.8543         25.5320         24.7635
020013..........................................         26.8172         23.8847         28.1557         26.0576
020014..........................................         24.0932         27.3823         24.9201         25.4246
020017..........................................         24.9714         26.8319         27.6501         26.5037
020024..........................................         22.7263         24.0872         25.3205         24.0621
020025..........................................         27.1529         21.7557         20.2583         22.6334
030001..........................................         19.8695         20.3673         21.7869         20.6506
030002..........................................         21.6263         21.5977         21.8375         21.6886
030003..........................................         23.6722         23.4833         22.6804         23.3063
030004..........................................         17.7333         14.0711         15.5478         15.4308
030006..........................................         17.6409         18.2668         19.7289         18.5307
030007..........................................         18.5602         19.6708         21.5169         19.9379
030008..........................................               *         22.2758         22.2190         22.2524
030009..........................................         17.9343         18.1794         18.7557         18.2786
030010..........................................         18.7997         19.0907         19.5123         19.1422
030011..........................................         20.0784         19.2973         19.4310         19.5785
030012..........................................         19.4245         18.9918         20.6585         19.6997
030013..........................................         21.0182         20.7458         19.6369         20.4298
030014..........................................         19.4697         19.9315         19.7966         19.7342
030016..........................................         20.5606         19.3967         19.4785         19.8559
030017..........................................         20.4185         22.8765         21.7938         21.6805
030018..........................................         18.9115         20.2032         20.8980         20.0193
030019..........................................         19.9211         21.7005         21.2540         20.9846
030022..........................................         15.7886         19.2966         17.3485         17.0947
030023..........................................         22.4365         23.6697         24.1678         23.4686
030024..........................................         21.6692         22.2541         22.6199         22.1974
030025..........................................         17.6759         12.7254         11.9894         13.7385
030027..........................................         17.5796         15.7554         17.6555         16.9563
030030..........................................         21.6249         20.8303         21.6932         21.3795
030033..........................................         16.8396         20.0044         20.2820         18.9069
030034..........................................         19.0868         16.8241         20.8689         18.8279
030035..........................................         19.7153         19.2781         20.0226         19.6580
030036..........................................         18.9449         20.7567         21.6371         20.4743
030037..........................................         21.4376         22.8266         23.7615         22.6712
030038..........................................         22.0777         22.6776         22.9822         22.5885
030040..........................................         17.9722         18.5456         19.7636         18.7537
030041..........................................         17.4389         15.8921         18.8717         17.2718
030043..........................................         20.7721         20.9341         20.5598         20.7468
030044..........................................         16.4654         16.8649         17.6575         17.0214
030047..........................................         19.6916         22.6401         21.4412         21.2271
030049..........................................         19.0896         19.0881         19.3580         19.1639
030054..........................................         14.4861         15.3338         15.0657         14.9801
030055..........................................         18.2751         16.3613         20.2991         18.2684

[[Page 22741]]

030059..........................................         21.7100         24.0465         22.6279         22.7570
030060..........................................         16.7661         19.2461         18.6313         18.2043
030061..........................................         17.3470         18.9063         19.9047         18.7238
030062..........................................         17.4825         17.6738         18.0603         17.7568
030064..........................................         18.5391         19.5673         19.9437         19.3687
030065..........................................         19.9277         20.5130         20.7838         20.4254
030067..........................................         15.6207         14.4446         17.2778         15.7364
030068..........................................         17.3482         17.3614         17.7208         17.4823
030069..........................................         19.0013         19.0961         21.0936         19.7255
030080..........................................         19.9865         20.5144         20.6581         20.3684
030083..........................................         23.6433         23.3355         23.5229         23.4991
030085..........................................         17.8402         21.0954         20.8611         19.9420
030086..........................................         18.5030         19.5436               *         19.0352
030087..........................................         20.0469         21.4084         21.9465         21.1838
030088..........................................         19.5772         19.8682         20.4978         20.0029
030089..........................................         19.9018         20.4019         20.9516         20.4404
030092..........................................         21.5628         20.6986         21.8308         21.3646
030093..........................................         19.4688         19.7262         20.4314         19.9052
030094..........................................         19.4773         21.6218         22.8123         21.4086
030095..........................................         14.2499         13.7293         13.7664         13.9087
030099..........................................         18.0747         16.1541         18.2263         17.4781
030100..........................................               *               *         23.7609         23.7609
030101..........................................               *               *         19.2547         19.2547
030102..........................................               *               *         18.2413         18.2413
040001..........................................         15.5735         15.1624         16.9178         15.8741
040002..........................................         14.0865         13.0592         15.1107         14.0333
040003..........................................         14.0027         14.2089         15.5740         14.5731
040004..........................................         17.2926         17.8476         17.9034         17.6718
040005..........................................         12.8825         13.2597         11.1318         12.3937
040007..........................................         19.5299         21.9583         18.6998         19.9568
040008..........................................         12.6974         15.3040         14.7985         14.3087
040010..........................................         17.6231         18.6023         19.4913         18.6031
040011..........................................         12.2654         14.5319         16.0995         14.1756
040014..........................................         15.3853         17.6340         18.1434         17.0051
040015..........................................         14.6045         16.5891         15.5207         15.5649
040016..........................................         17.5431         19.0295         20.2321         18.9152
040017..........................................         14.9533         13.5098         15.4686         14.6576
040018..........................................         17.5602         17.6027         18.7463         17.9749
040019..........................................         25.7080         22.6769         23.4163         23.8479
040020..........................................         14.8059         16.4827         18.9844         16.6335
040021..........................................         16.4628         17.6398         19.6835         17.8176
040022..........................................         16.0006         17.0397         14.8398         15.8797
040024..........................................         15.7282         14.4541         17.6523         15.9585
040025..........................................         10.9496         11.5079         13.4705         11.8847
040026..........................................         18.2398         19.5563         19.7924         19.1863
040027..........................................         14.5406         16.0975         17.4431         16.0716
040028..........................................         12.8409         14.6584         13.9946         13.7921
040029..........................................         17.7777         17.8787         21.1370         18.9480
040030..........................................         14.1541         13.5428         11.2402         12.7784
040032..........................................         13.3280         13.7030         13.2872         13.4471
040035..........................................         11.2123         12.8300         10.9569         11.6408
040036..........................................         17.9080         18.9757         20.0835         18.9954
040037..........................................         13.4815         14.6559         14.0941         14.0704
040039..........................................         13.8386         14.3576         14.7177         14.3115
040040..........................................         17.4283         18.0895         19.1984         18.2668
040041..........................................         13.3613         15.9896         16.4624         15.2103
040042..........................................         14.6641         15.2142         15.2057         15.0333
040044..........................................         11.4422         12.6275         13.3501         12.5381
040045..........................................         18.7724         14.9429         16.2469         16.4870
040047..........................................         16.3948         16.8654         17.5336         16.9538
040048..........................................         15.8203               *               *         15.8203
040050..........................................         11.7934         13.3818         14.0036         13.0341
040051..........................................         16.2803         15.8627         16.6039         16.2390

[[Page 22742]]

040053..........................................         15.8193         16.3610         15.0219         15.7502
040054..........................................         15.0412         15.3219         14.2577         14.8844
040055..........................................         16.1029         17.1269         17.7214         16.9813
040058..........................................         15.6706         17.6766         16.4278         16.6344
040060..........................................         11.4686         12.8148         17.9805         13.6105
040062..........................................         17.2757         18.2048         17.8902         17.8204
040064..........................................         12.4007         10.7255         11.5029         11.4801
040066..........................................         17.6429         18.3377         17.8338         17.9377
040067..........................................         13.4930         14.6014         14.4741         14.1956
040069..........................................         16.1147         17.5052         17.0026         16.8681
040070..........................................         15.4757         16.9027         16.9700         16.4358
040071..........................................         16.3022         16.9610         17.2834         16.8497
040072..........................................         15.8425         16.0895         17.4822         16.4893
040074..........................................         17.3819         18.3224         18.7542         18.1968
040075..........................................         12.7496         13.3623         14.0975         13.3977
040076..........................................         18.5512         19.0732         20.5840         19.3801
040077..........................................         12.4625         12.9211         13.9114         13.0965
040078..........................................         17.8573         18.7600         18.5821         18.4100
040080..........................................         15.7397         19.2461         19.3707         18.0636
040081..........................................         10.6791         11.3169         11.1332         11.0311
040082..........................................         16.5127         16.2152         15.1331         15.9302
040084..........................................         17.2469         17.2613         17.7295         17.4070
040085..........................................         15.7765         16.8957         16.5216         16.3838
040088..........................................         15.6710         17.9636         17.1624         16.9372
040090..........................................         17.5503         17.8282         19.0824         18.0989
040091..........................................         17.0444         19.8700         20.1378         18.8893
040093..........................................         12.9010         12.3537         13.9741         13.0114
040100..........................................         14.9688         14.7587         15.6833         15.1704
040105..........................................         14.2409         15.3319         14.3896         14.6616
040106..........................................         15.4000         15.6545         18.1341         16.4515
040107..........................................         19.6184         18.8120         17.8628         18.6841
040109..........................................         13.9807         14.6266         16.6278         15.0815
040114..........................................         18.3133         18.8743         21.1110         19.3778
040116..........................................         19.5695         20.2716               *         19.9151
040118..........................................         17.4300         19.3720         18.2123         18.3407
040119..........................................         15.3847         15.5338         16.7730         15.9002
040124..........................................         17.2547         19.1349         19.2889         18.5723
040126..........................................         11.6845         12.5368         11.6517         11.9404
040132..........................................         13.1760         17.5179         10.3875         13.4483
040134..........................................               *         18.0787         19.0185         18.5701
040135..........................................               *         22.6761         23.0084         22.8797
050002..........................................         27.6006         37.8295         36.9630         33.5586
050006..........................................         19.5272         19.5594         18.2061         19.0382
050007..........................................         29.5398         30.7126         30.8676         30.4910
050008..........................................         25.8570         26.2458         26.3682         26.1654
050009..........................................         26.2506         26.8159         28.0701         27.0878
050013..........................................         24.8541         23.2201         28.0569         25.1985
050014..........................................         24.5302         22.8478         23.6745         23.6450
050015..........................................         25.3838         26.2481         27.7731         26.4938
050016..........................................         20.1542         20.5566         21.2045         20.6377
050017..........................................         23.6639         23.9625         24.4598         24.0349
050018..........................................         14.6622         15.4721         15.2903         15.1444
050021..........................................         28.5003         25.8966               *         27.2682
050022..........................................         22.9583         24.0318         24.5254         23.8802
050024..........................................         20.3427         21.3989         22.4274         21.4070
050025..........................................         21.9952         23.3896         23.9879         23.0936
050026..........................................         28.6850         27.8736         27.0130         27.8531
050028..........................................         16.4531         16.4671         17.6138         16.8496
050029..........................................         23.2911         25.1259         24.6839         24.3441
050030..........................................         21.0096         20.9812         21.5621         21.1955
050032..........................................         22.5868         25.2010         24.3598         24.0616
050033..........................................         24.5609         24.9328         31.7747         27.1293
050036..........................................         20.4703         21.2420         20.1678         20.6131

[[Page 22743]]

050038..........................................         27.8274         28.6528         29.9698         28.8293
050039..........................................         22.2524         22.7117         22.5974         22.5195
050040..........................................         30.6664         32.1287         30.4110         31.0613
050042..........................................         22.2343         24.8067         24.5260         23.8317
050043..........................................         33.2286         32.9958         33.8255         33.3456
050045..........................................         20.7307         19.8831         21.1474         20.5973
050046..........................................         31.3831         25.3185         25.2005         27.4555
050047..........................................         29.4412         29.9255         29.9580         29.7840
050051..........................................         17.8401         17.8945         18.7809         18.1179
050054..........................................         19.3686         20.7212         22.0982         20.7075
050055..........................................         29.0872         29.3984         29.2730         29.2593
050056..........................................         23.8507         27.4321         23.8058         24.9609
050057..........................................         21.7581         21.1554         20.7050         21.1842
050058..........................................         25.7261         23.1641         23.3009         23.9601
050060..........................................         20.9219         20.7747         20.5450         20.7207
050061..........................................         23.7443         23.5454         24.5488         23.9503
050063..........................................         23.0724         24.8851         25.7593         24.5061
050065..........................................         21.1848         24.0420         24.3835         23.0762
050066..........................................         21.4187         16.5725         16.1649         17.6784
050067..........................................         21.3029         23.1966         25.8857         23.3989
050068..........................................         28.4804         20.6851         19.3615         22.4409
050069..........................................         29.2980         25.9420         24.6153         26.4351
050070..........................................         32.5964         32.5166         33.0195         32.7172
050071..........................................         33.1379         33.1850         33.3740         33.2367
050072..........................................         32.9660         33.2858         38.5136         34.8941
050073..........................................         34.6111         33.3922         31.4874         33.0669
050075..........................................         33.5246         33.9095         32.6142         33.3899
050076..........................................         33.8835         27.7797         32.7847         31.3195
050077..........................................         23.2986         24.1019         24.2083         23.8775
050078..........................................         22.8023         23.0736         24.3150         23.3638
050079..........................................         34.4253         33.2432         30.0167         32.3461
050082..........................................         21.7004         22.1009         23.7617         22.5498
050084..........................................         23.0966         23.5866         25.4517         24.0054
050088..........................................         24.0634         20.8406         24.9641         23.1779
050089..........................................         20.0194         20.9117         21.9331         20.9434
050090..........................................         23.8969         23.4097         23.9183         23.7390
050091..........................................         22.2220         25.2792         23.7713         23.6457
050092..........................................         15.3841         16.7969         17.1211         16.4241
050093..........................................         24.0837         25.2130         25.6647         24.9860
050095..........................................         33.3761         33.6718         32.5552         33.2492
050096..........................................         21.6752         20.0487         22.7394         21.3870
050097..........................................         22.6147         16.7054         22.5991         20.1968
050099..........................................         24.2921         24.8091         23.5693         24.1958
050100..........................................         30.0552         29.8758         25.0335         28.0584
050101..........................................         30.0132         31.0264         31.8957         30.9871
050102..........................................         21.2947         22.2937         24.0014         22.4745
050103..........................................         25.3384         24.7932         25.4133         25.1832
050104..........................................         25.4407         25.5797         26.8367         25.9399
050107..........................................         21.7649         21.2690         22.2019         21.7497
050108..........................................         25.2116         23.5564         25.1307         24.5504
050109..........................................         26.4768               *               *         26.4768
050110..........................................         20.1769         20.1870         19.9589         20.1175
050111..........................................         21.7397         21.5487         20.7897         21.3840
050112..........................................         26.2922         25.3015         26.8182         26.1335
050113..........................................         27.7805         28.8420         28.5224         28.4025
050114..........................................         25.9073         24.7286         26.6757         25.7599
050115..........................................         21.0499         21.3291         23.0182         21.8124
050116..........................................         25.5919         25.2130         24.9196         25.2412
050117..........................................         20.4379         23.3612         22.2123         21.9903
050118..........................................         23.9976         23.7698         23.7129         23.8243
050121..........................................         18.8818         19.5252         18.4827         18.9563
050122..........................................               *         26.3172         26.9546         26.6358
050124..........................................         23.0193         22.7736         24.5069         23.3667

[[Continued on page 22745]]
	
		
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