[Federal Register: May 9, 2002 (Volume 67, Number 90)] [Proposed Rules] [Page 31503-31552] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr09my02-29] [[pp. 31503-31552]] Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2003 Rates [[Continued from page 31502]] [[Page 31503]] (iii) The hospital may furnish an estimate based on typical or average charges for visits to the facility, while stating that the patient's actual liability will depend upon the actual services furnished by the hospital. (iv) If the beneficiary is unconscious, under great duress, or for any other reason unable to read a written notice and understand and act on his or her own rights, the notice must be provided, before the delivery of services, to the beneficiary's authorized representative. (v) In cases where a hospital outpatient department provides examination or treatment that is required to be provided by the antidumping rules of Sec. 489.24 of this chapter, notice, as described in this paragraph (g)(7), must be given as soon as possible after the existence of an emergency has been ruled out or the emergency condition has been stabilized. * * * * * (h) Management contracts. A facility or organization that is not located on the campus of the potential main provider and otherwise meets the requirements of paragraphs (d) and (e) of this section, but is operated under management contracts, must also meet all of the following criteria: (1) The main provider (or an organization that also employs the staff of the main provider and that is not the management company) employs the staff of the facility or organization who are directly involved in the delivery of patient care, except for management staff and staff who furnish patient care services of a type that would be paid for by Medicare under a fee schedule established by regulations at Part 414 of this chapter. ``Leased'' employees (that is, personnel who are actually employed by the management company but provide services for the provider under a staff leasing or similar agreement) are not considered to be employees of the provider for purposes of this paragraph. (2) The administrative functions of the facility or organization are integrated with those of the main provider, as determined under criteria in paragraph (e)(2)(iii) of this section. (3) The main provider has significant control over the operations of the facility or organization as determined under criteria in paragraph (e)(2)(ii) of this section. (4) The management contract is held by the main provider itself, not by a parent organization that has control over both the main provider and the facility or organization. (i) Furnishing all services under arrangement. A facility or organization may not qualify for provider-based status if all patient care services furnished at the facility or organization are furnished under arrangements. (j) Inappropriate treatment of a facility or organization as provider-based. (1) Determination and review. If CMS learns that a provider has treated a facility or organization as provider-based and the provider did not request an advance determination of provider-based status from CMS under paragraph (b)(3) of this section and CMS determines that the facility or organization did not meet the requirements for provider-based status under paragraphs (d) through (i) of this section, as applicable (or, in any period before the effective date of these regulations, the provider-based requirements in effect under Medicare program regulations or instructions), CMS will-- (i) Issue notice to the provider in accordance with paragraph (j)(3) of this section, adjust the amount of future payments to the provider for services of the facility or organization in accordance with paragraph (j)(4) of this section, and continue payments to the provider for services of the facility or organization only in accordance with paragraph (j)(5) of this section; and (ii) Except as otherwise provided in paragraphs (b)(2), (b)(5), or (j)(2) of this section, recover the difference between the amount of payments that actually was made and the amount of payments that CMS estimates should have been made, in the absence of compliance with the provider-based requirements, to that provider for services at the facility or organization for all cost reporting periods subject to reopening in accordance with Secs. 405.1885 and 405.1889 of this chapter. (2) Exception for good faith effort. CMS will not recover any payments for any period before the beginning of the hospital's first cost reporting period beginning on or after January 10, 2001, if, during all of that period-- (i) The requirements regarding licensure and public awareness in paragraphs (d)(1) and (d)(4) of this section were met; (ii) All facility services were billed as if they had been furnished by a department of a provider, a remote location of a hospital, a satellite facility, or a provider-based entity of the main provider; and (iii) All professional services of physicians and other practitioners were billed with the correct site-of-service indicator, as described in paragraph (g)(2) of this section. (3) Notice to provider. CMS will issue written notice to the provider that payments for past cost reporting periods may be reviewed and recovered as described in paragraph (j)(1)(ii) of this section, and that future payments for services in or of the facility or organization will be adjusted as described in paragraph (j)(4) of this section. (4) Adjustment of payments. CMS will adjust future payments to the provider or the facility or organization, or both, to approximate as closely as possible the amounts that would be paid for the same services furnished by a freestanding facility. (5) Continuation of payment. (i) The notice of denial of provider- based status sent to the provider will ask the provider to notify CMS in writing, within 30 days of the date the notice is issued, of whether the provider intends to seek an advance determination of provider-based status for the facility or organization under paragraph (b)(3) of this section or whether the facility or organization (or, where applicable, the practitioners who staff the facility or organization) will be seeking to enroll and meet other requirements to bill for services in a freestanding facility. (ii) If the provider indicates that it will not be seeking an advance determination for the facility or organization under paragraph (b) of this section or that the facility or organization or its practitioners will not be seeking to enroll, or if CMS does not receive a response within 30 days of the date the notice was issued, all payment under this paragraph (j)(5) will end as of the 30th day after the date of notice. (iii) If the provider indicates that it will be seeking an advance determination for the facility or organization under paragraph (b) of this section or that the facility or organization or its practitioners will be seeking to meet enrollment and other requirements for billing for services in a freestanding facility, payment for services of the facility or organization will continue, at the adjusted amounts described in paragraph (j)(4) of this section, for as long as is required for all billing requirements to be met (but not longer than 6 months) if the provider or the facility or organization or its practitioners-- (A) Submits, as applicable, a complete request for an advance determination of provider-based status or a complete enrollment application and provide all other required information within 90 days after the date of notice; and (B) Furnishes all other information needed by CMS to process the request for provider-based status or the enrollment application, as applicable, [[Page 31504]] and verifies that other billing requirements are met. (v) If the necessary applications or information are not provided, CMS will terminate all payment to the provider, facility, or organization as of the date CMS issues notice that necessary applications or information have not been submitted. (k) Temporary treatment as provider-based and correction of errors. (1) If a provider submits a complete request for a provider-based determination for a facility or organization that has not previously been found by CMS to have been inappropriately treated as provider- based under paragraph (j) of this section, the provider may bill and be paid for services of the facility or organization as provider-based from the date of the application until the date that CMS determines that the facility or organization does not meet the provider-based rules. If CMS subsequently determines that the requirements for provider-based status are not met, CMS will recover the difference between the amount of payments that actually was made since the date the complete request for a provider-based determination was submitted and the amount of payments that CMS estimates should have been made in the absence of compliance with the provider-based requirements. For purposes of this paragraph (k), a complete request is one that includes all information needed to permit CMS to make an advance determination under paragraph (b)(3) of this section. (2) If CMS determines that a facility or organization that had previously been determined to be provider-based under paragraph (b) of this section no longer qualifies for provider-based status, and the failure to qualify for provider-based status resulted from a material change in the relationship between the provider and the facility or organization that the provider did report to CMS as required under paragraph (c) of this section, treatment of the facility or organization as provider-based ceases with the date that CMS determines that the facility or organization no longer qualifies for provider- based status. (3) If CMS determines that a facility or organization that had previously been determined to be provider-based under paragraph (b) of this section no longer qualifies for provider-based status, and if the failure to qualify for provider-based status resulted from a material change in the relationship between the provider and the facility or organization that the provider did not report to CMS, as required under paragraph (c) of this section, CMS will take the actions with respect to notice to the provider, adjustment of payments, and continuation of payment described in paragraphs (j)(3), (j)(4), and (j)(5) of this section, and will recover past payments to the provider to the extent described in paragraph (j)(1)(ii) of this section. * * * * * (m) FQHCs and ``look alikes''. * * * (n) Effective date of provider-based status. Provider-based status for a facility or organization is effective on the earliest date on which a request for provider-based status, as described in paragraph (b) of this section, has been made and all of the requirements of this part have been met. 3. Section 413.70 is amended by revising paragraph (b)(3)(i) to read as follows: Sec. 413.70 Payment for services of a CAH. * * * * * (b) Payment for outpatient services furnished by CAH. * * * * * (3) Election to be paid reasonable costs for facility services plus fee schedule for professional services. (i) A CAH may elect to be paid for outpatient services in any cost reporting period under the method described in paragraphs (b)(3)(ii) and (b)(3)(iii) of this section. This election must be made in writing, made on an annual basis, and delivered to the intermediary servicing the CAH by a date determined by that intermediary, which may be no less than 14 days and no more than 60 days before the start of each affected cost reporting period. An election of this payment method, once made for a cost reporting period, remains in effect for all of that period and applies to all services furnished to outpatients during that period. * * * * * 4. Section 413.86 is amended by-- A. Adding a definition of ``Affiliation agreement'' in alphabetical order under paragraph (b). B. Revising the last sentence of the introductory text of paragraph (e)(5)(i). C. Revising paragraph (e)(5)(i)(B). D. Adding a new paragraph (e)(5)(i)(C). E. Redesignating paragraphs (g)(5)(iv), (g)(5)(v), and (g)(5)(vi) as paragraphs (g)(5)(v), (g)(5)(vi), and (g)(5)(vii), respectively. F. Republishing the introductory text of paragraph (g)(5) and adding a new paragraph (g)(5)(iv). G. Redesignating paragraphs (g)(7) through (g)(12) as paragraphs (g)(8) through (g)(13), respectively. H. Adding a new paragraph (g)(7). I. Making the following cross-reference changes: i. In redesignated paragraph (g)(5)(vii), ``paragraph (g)(8)'' is removed and ``paragraph (g)(9)'' is added in its place. ii. In paragraph (g)(6), ``paragraph (g)(12)'' is removed and ``paragraph (g)(13)'' is added in its place. iii. In redesignated paragraphs (g)(8)(iv) and (g)(8)(v), ``paragraph (g)(7)'' is removed and ``paragraph (g)(8)'' is added in its place. iv. In redesignated paragraph (g)(9)(i), ``paragraph (g)(8)'' is removed and ``paragraph (g)(9)'' is added in its place. v. In the introductory text of redesignated paragraph (g)(9)(iii), ``paragraph (g)(8)(iii)(B)'' is removed and ``paragraph (g)(9)(iii)(B)'' is added in its place; and ``paragraph (g)(8)(iii)(A)'' is removed and ``paragraph (g)(9)(iii)(A)'' is added in its place. vi. In redesignated paragraph (g)(9)(iii)(A)(2), ``paragraph (g)(8)(iii)(B)(2)'' is removed and ``paragraph (g)(9)(iii)(B)(2)'' is added in its place. vii. In the introductory text of redesignated paragraph (g)(12), ``paragraph (g)(11)(i) through (g)(11)(vi)'' is removed and ``paragraph (g)(12)(i) through (g)(12)(vi)'' is added in its place. The additions and revisions read as follows: Sec. 413.86 Direct graduate medical education payments. * * * * * (b) Definitions. * * * Affiliation agreement means a written, signed, and dated agreement by responsible representatives of each respective hospital in an affiliated group, as defined in this section, that specifies-- (1) The term of the agreement (which, at a minimum is one year), beginning on July 1 of a year; (2) Each participating hospital's direct and indirect FTE caps existing at the time of affiliation; (3) The adjustment to each hospital's FTE caps in each year that the affiliation agreement is in effect, for both direct GME and IME, that reflects a positive adjustment to one hospital's direct and indirect FTE caps that is offset by a negative adjustment to the other hospital's (or hospitals') direct and indirect FTE caps of at least the same amount; and (4) The names of the participating hospitals and their Medicare provider numbers. * * * * * (e) Determining per resident amounts for the base period. * * * (5) Exceptions--(i) Base period for certain hospitals. * * * The per [[Page 31505]] resident amount is based on the lower of the amount specified in paragraph (e)(5)(i)(A) or in paragraph (e)(5)(i)(B) of this section, subject to the provisions of paragraph (e)(5)(i)(C) of this section. * * * * * (B) Except as specified in paragraph (e)(5)(i)(C) of this section-- (1) For base periods that begin before October 1, 2002, the updated weighted mean value of per resident amounts of all hospitals located in the same geographic wage area, as that term is used in the prospective payment system under part 412 of this chapter. (2) For base periods beginning on or after October 1, 2002, the weighted mean value of per resident amounts of all hospitals located in the same geographic wage area is calculated using all per resident amounts (including primary care and obstetrics and gynecology and nonprimary care) and FTE resident counts from the most recently settled cost reports of those teaching hospitals. (C) If, under paragraph (e)(5)(i)(B)(1) or (e)(5)(i)(B)(2) of this section, there are fewer than three existing teaching hospitals with per resident amounts that can be used to calculate the weighted mean value per resident amount, for base periods beginning on or after October 1, 1997, the per resident amount equals the updated weighted mean value of per resident amounts of all hospitals located in the same census region as that term is used in Sec. 412.62(f)(1)(i) of this chapter. * * * * * (g) Determining the weighted number of FTE residents. * * * (5) For purposes of determining direct graduate medical education payment-- * * * * * (iv) Hospitals that are part of the same affiliated group (as described under paragraph (b) of this section) may elect to apply the limit on an aggregate basis as described under paragraph (g)(7) of this section. * * * * * (7) A hospital may receive a temporary adjustment to its FTE cap, which is subject to the averaging rules under paragraph (g)(5)(iii) of this section, to reflect residents added or subtracted because the hospital is participating in an affiliated group (as defined under paragraph (b) of this section). Under this provision-- (i) Each hospital in the affiliated group must submit the affiliation agreement, as defined under paragraph (b) of this section, to the CMS fiscal intermediary servicing the hospital and send a copy to CMS's Central Office no later than July 1 of the residency program year during which the affiliation agreement will be in effect. (ii) There must be a rotation of a resident(s) among the hospitals participating in the affiliated group during the term of the affiliation agreement such that more than one of the hospitals count the proportionate amount of the time spent by the resident(s) in their FTE resident counts. No resident may be counted in the aggregate as more than one FTE. (iii) The net effect of the adjustments (positive or negative) on the affiliated hospitals' aggregate FTE cap for each affiliation agreement must not exceed zero. (iv) If the affiliation agreement terminates for any reason, the FTE cap of each hospital in the affiliated group will revert to the individual hospital's pre-affiliation FTE cap that is determined under the provisions of paragraph (g)(4) of this section. * * * * * PART 482--CONDITIONS FOR PARTICIPATION FOR HOSPITALS D. Part 482 is amended as follows: 1. The authority citation for part 482 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1320 and 1395hh). 2. Section 482.12 is amended by adding a new paragraph (f)(3), to read as follows: Sec. 482.12 Condition of participation: Governing body. * * * * * (f) Standard: Emergency services. * * * (3) If emergency services are provided at the hospital but are not provided at one or more off-campus departments of the hospital, the governing body of the hospital must assure that the medical staff has written policies and procedures in effect with respect to the off- campus department(s) for appraisal of emergencies and referral when appropriate. PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS E. 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 1396hh). 2. In Sec. 485.645, the introductory text of paragraph (d) is republished and paragraph (d)(6) is revised, to read as follows. Sec. 485.645 Special requirements for CAH providers of long-term care services (``swing-beds''). * * * * * (d) SNF services. The CAH is substantially in compliance with following SNF requirements contained in subpart B of part 483 of this chapter. * * * * * (6) Comprehensive assessment, comprehensive care plan, and discharge planning (Sec. 483.20(b), (k), and (l) of this chapter, except that the CAH is not required to use the resident assessment instrument (RAI) specified by the State that is required under Sec. 483.20(b), or to comply with the requirements for frequency, scope, and number of assessments prescribed in Sec. 413.343(b) of this chapter). * * * * * PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL F. Part 489 is amended as follows: 1. The authority citation for part 489 continues to read as follows: Authority: Secs. 1102 and 1871 of the Act (42 U.S.C. 1302 and 1395hh). 2. Section 489.24 is amended by-- A. Revising paragraph (a). B. Republishing the introductory text of paragraph (b) and revising the definitions of ``Comes to the emergency department'' and ``Hospital with an emergency department''. C. Adding definitions of ``Dedicated emergency department'', ``Hospital property'', and ``Patient'' in alphabetical order under paragraph (b). D. Under the definition of ``Emergency medical condition'' under paragraph (b), redesignating paragraphs (i), (i)(A), (i)(B), (i)(C), (ii), (ii)(A), and (ii)(B) as paragraphs (1), (1)(i), (1)(ii), (1)(iii), (2), (2)(i), and (2)(ii), respectively. E. Under the definition of ``Participating hospital'' under paragraph (b), redesignating paragraphs (i) and (ii) as paragraphs (1) and (2), respectively. F. Under the definitions of ``Stabilized'' and ``To stabilize'' under paragraph (b), ``paragraph (i)'' is removed and ``paragraph (1)'' is added in its place; and ``paragraph (ii)'' is removed and ``paragraph (2)'' is added in its place. G. Removing paragraph (i); and redesignating paragraph (c) through (h) as paragraphs (d) through (i), respectively. H. Adding a new paragraph (c). I. Revising newly redesignated paragraph (d). J. Adding a new paragraph (j). [[Page 31506]] K. Making the following cross-reference changes: i. In redesignated paragraph (e)(1)(i), ``paragraph (d)(2)'' is removed and ``paragraph (e)(2)'' is added in its place. ii. In redesignated paragraph (e)(1)(ii)(C), ``paragraph (d)(1)(ii)(B)'' is removed and ``paragraph (e)(1)(ii)(B)'' is added in its place. iii. In redesignated paragraph (e)(2)(iii), ``paragraph (d)(1)(ii)'' is removed and ``paragraph (e)(1)(ii)'' is added in its place. iv. In redesignated paragraph (e)(2)(iii), ``paragraph (f)'' is removed and ``paragraph (g)'' is added in its place. v. In redesignated paragraph (e)(3), ``paragraph (d)(1)(ii)(C)'' is removed and ``paragraph (e)(1)(ii)(C) is added in its place. vi. In redesignated paragraph (g), ``paragraph (a) through (e)'' is removed and ``paragraphs (a) through (f)'' is added in its place. vii. In redesignated paragraph (h)(1), ``paragraph (g)(3)'' is removed and ``paragraph (h)(3)'' is added in its place; and ``paragraph (g)(2)(iv) and (v)'' is removed and ``paragraphs (h)(2)(iv) and (v)'' is added in its place. viii. In redesignated paragraph (h)(2) introductory text, ``paragraph (g)(1)'' is removed and ``paragraph (h)(1)'' is added in its place. ix. In redesignated paragraph (h)(2)(iii)(B), ``paragraph (g)(2)(iii)(A)'' is removed and ``paragraph (h)(2)(iii)(A)'' is added in its place. x. In redesignated paragraph (h)(2)(vi), ``paragraph (g)(2)(v)'' is removed and ``paragraph (h)(2)(v)'' is added in its place. xi. In redesignated paragraph (h)(4), ``paragraph (g)'' is removed and ``paragraph (h)'' is added in its place; and ``paragraph (g)(2)(v)'' is removed and ``paragraph (h)(2)(v)'' is added in its place. The additions and revisions read as follows: Sec. 489.24 Special responsibilities of Medicare hospitals in emergency cases. (a) Application. In the case of a hospital that has an emergency department, if an individual (whether or not eligible for Medicare benefits and regardless of ability to pay) ``comes to the emergency department'', as defined in paragraph (b) of this section, the hospital must-- (1) Provide an appropriate medical screening examination within the capability of the hospital's emergency department, including ancillary services routinely available to the emergency department, to determine whether or not an emergency medical condition exists. The examination must be conducted by an individual(s) determined qualified by hospital bylaws or rules and regulations and who meet the requirements of Sec. 482.55 of this chapter concerning emergency services personnel and direction; and (2) If an emergency medical condition is determined to exist, provide any necessary stabilizing treatment, as defined in paragraph (d) of this section, or an appropriate transfer as defined in paragraph (e) of this section. (b) Definitions. As used in this subpart-- * * * * * Comes to the emergency department means, with respect to an individual who is not a patient, the individual-- (1) Has presented at a hospital's dedicated emergency department, as defined in this section, and requests examination or treatment for a medical condition, or has such a request made on his or her behalf. In the absence of such a request by or on behalf of the individual, a request on behalf of the individual will be considered to exist if a prudent layperson observer would believe, based on the individual's appearance or behavior, that the individual needs examination or treatment for a medical condition; (2) Has presented on hospital property, as defined in this section, other than the dedicated emergency department, and requests examination or treatment for what may be an emergency medical condition, or has such a request made on his or her behalf (except for certain outpatients as specified in paragraph (d)(3) of this section). In the absence of such a request by or on behalf of the individual, a request on behalf of the individual will be considered to exist if a prudent layperson observer would believe, based on the individual's appearance or behavior, that the individual needs emergency examination or treatment; (3) Is in an ambulance owned and operated by the hospital for presentation for examination and treatment for a medical condition at a hospital's dedicated emergency department, even if the ambulance is not on hospital grounds. This provision does not apply if the ambulance is operating under communitywide EMS protocols that direct it to transport the individual to a hospital other than the hospital that owns the ambulance; for example, to the nearest hospital. In this latter case, the individual is considered to have come to the emergency department of the hospital to which the individual is transported, at the time the individual is brought onto hospital property; or (4) Is in a nonhospital-owned ambulance on hospital property for presentation for examination and treatment for a medical condition at a hospital's dedicated emergency department. An individual in a nonhospital-owned ambulance off hospital property is not considered to have come to the hospital's emergency department, even if a member of the ambulance staff contacts the hospital by telephone or telemetry communications and informs the hospital that they want to transport the individual to the hospital for examination and treatment. In the latter circumstance, the hospital may deny access if it is in ``diversionary status,'' that is, it does not have the staff or facilities to accept any additional emergency patients. If, however, the ambulance staff disregards the hospital's instructions and transports the individual onto hospital property, the individual is considered to have come to the emergency department. Dedicated emergency department means a specially equipped and staffed area of the hospital that is used a significant portion of the time for the initial evaluation and treatment of outpatients for emergency medical conditions, as defined in this section, and that is located-- (1) On the main hospital campus; or (2) Off the main hospital campus and is treated by Medicare under Sec. 413.65(b) of this chapter as a department of the hospital. * * * * * Hospital property means the entire main hospital campus as defined in Sec. 413.65(b) of this chapter, including the parking lot, sidewalk, and driveway, but excluding other areas or structures that are located within 250 yards of the hospital's main building but are not part of the hospital, such as physician offices, rural health centers, skilled nursing facilities, or other entities that participate separately under Medicare, or restaurants, shops, or other nonmedical facilities. Hospital with an emergency department means a hospital that offers services for emergency medical conditions (as defined in this paragraph (b)) within its capability to do so, including a hospital that offers these services at locations other than its main hospital campus. * * * * * Patient, for purposes of this section, means an individual who is either an outpatient as defined in Sec. 410.2 of this chapter, or is receiving inpatient hospital services as defined in Sec. 409.10(b) of this chapter. * * * * * [[Page 31507]] (c) Use of dedicated emergency department for nonemergency services. If an individual comes to a hospital's dedicated emergency department and a request is made on his or her behalf for examination or treatment for a medical condition, but the nature of the request makes it clear that the medical condition is not of an emergency nature, the hospital is required only to perform such screening as would be appropriate for any individual presenting in that manner, to determine that the individual does not have an emergency medical condition. (d) Necessary stabilizing treatment for emergency medical conditions.--(1) General. If any individual (whether or not eligible for Medicare benefits) comes to a hospital and the hospital determines that the individual has an emergency medical condition, the hospital must provide either-- (i) Within the capabilities of the staff and facilities available at the hospital, for further medical examination and treatment as required to stabilize the medical condition; or (ii) For transfer of the individual to another medical facility in accordance with paragraph (e) of this section. (2) Application to inpatients--admitted emergency patients. (i) When an individual has been screened under paragraph (a) of this section and found to have an emergency medical condition, and the individual has not been stabilized as defined in paragraph (b) of this section, the provisions of this section would apply, even if the hospital admits the patient as an inpatient. Admitting an individual whose emergency medical condition has not been stabilized does not relieve the hospital of further responsibility to the individual under this section. (ii) If a hospital admits an individual with an unstable emergency medical condition for stabilizing treatment, as an inpatient, stabilizes that individual's emergency medical condition, and this period of stability is documented by relevant clinical data in the individual's medical record, the hospital has satisfied its special responsibilities under this section with respect to that individual. If the patient is stable for a transfer of the type usually undertaken with respect to patients having the same medical conditions, the hospital's special responsibilities under this section are satisfied, even if no transfer occurs and the individual remains at the hospital as an inpatient for followup care. If, after stabilization, the individual who was admitted as an inpatient again has an apparent decline of his or her medical condition, either as a result of the injury or illness that created the emergency for which he or she initially came to the dedicated emergency department or as a result of another injury or illness, the hospital must comply with the conditions of participation for hospitals under part 482 of this chapter but has no further responsibility under this section with respect to the individual. (iii) A hospital has no responsibility under this section with respect to an inpatient who was admitted for elective (nonemergency) diagnosis or treatment. If such an inpatient has an abrupt deterioration of his or her medical condition after admission, the hospital must comply with the conditions of participation for hospitals under part 482 of this chapter and is not required to comply with the special responsibilities of this section. (3) Refusal to consent to treatment. A hospital meets the requirements of paragraph (d)(1)(i) of this section with respect to an individual if the hospital offers the individual the further medical examination and treatment described in that paragraph and informs the individual (or a person acting on the individual's behalf) of the risks and benefits to the individual of the examination and treatment, but the individual (or a person acting on the individual's behalf) refuses to consent to the examination and treatment. The medical record must contain a description of the examination, treatment, or both if applicable, that was refused by or on behalf of the individual. The hospital must take all reasonable steps to secure the individual's written informed refusal (or that of the person acting on his or her behalf). The written document should indicate that the person has been informed of the risks and benefits of the examination or treatment, or both. (4) Delay in examination or treatment. (i) A participating hospital may not delay providing an appropriate medical screening examination required under paragraph (a) of this section or further medical examination and treatment required under paragraphs (d)(1) and (d)(2) of this section in order to inquire about the individual's method of payment or insurance status. (ii) A participating hospital may not seek, or direct a patient to seek, authorization from the individual's insurance company for screening or stabilization services to an individual until after the hospital has provided the appropriate medical screening examination required under paragraph (a) of this section, and initiated any further medical examination and treatment that may be required to stabilize the emergency medical condition under paragraphs (d)(1) and (d)(2) of this section. (iii) An emergency physician is not precluded from contacting the patient's physician at any time to seek advice regarding the patient's medical history and needs that may be relevant to the medical treatment and screening of the patient, as long as this consultation does not inappropriately delay services required under paragraph (a) or paragraphs (d)(1) and (d)(2) of this section. (5) Refusal to consent to transfer. A hospital meets the requirements of paragraph (d)(1)(ii) of this section with respect to an individual if the hospital offers to transfer the individual to another medical facility in accordance with paragraph (e) of this section and informs the individual (or a person acting on his or her behalf) of the risks and benefits to the individual of the transfer, but the individual (or a person acting on the individual's behalf) refuses to consent to the transfer. The hospital must take all reasonable steps to secure the individual's written informed refusal (or that of a person acting on his or her behalf). The written document must indicate the person has been informed of the risks and benefits of the transfer and state the reasons for the individual's refusal. The medical record must contain a description of the proposed transfer that was refused by or on behalf of the individual. (6) Hospital responsibility for communication with Medicare+Choice organizations after stabilization of an emergency medical condition. When an enrollee of a Medicare+Choice organization who is treated for an emergency medical condition is stabilized and needs further hospital care, the hospital must promptly contact the Medicare+Choice organization to obtain preapproval of the further hospital care, consistent with the provisions of Sec. 422.113 of this chapter. * * * * * (j) Availability of on-call physicians. Each hospital must maintain an on-call list of physicians on its medical staff in a manner that best meets the needs of the hospital's patients. Physicians, including specialists and subspecialists, are not required to be on call at all times. The hospital must have written policies and procedures in place to respond to situations in which a particular specialty is not available or the on-call physician cannot respond because of circumstances beyond the physician's control. (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare--Hospital Insurance) [[Page 31508]] Dated: April 24, 2002. Thomas A. Scully, Administrator, Centers for Medicare & Medicaid Services. Dated: April 26, 2002. 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, 2002 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2002 I. Summary and Background In this Addendum, we are setting forth the proposed amounts and factors for determining prospective payment rates for Medicare hospital inpatient operating costs and Medicare hospital 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 acute care hospital inpatient prospective payment system. For discharges occurring on or after October 1, 2002, except for SCHs, MDHs, and hospitals located in Puerto Rico, each hospital's payment per discharge under the acute care hospital inpatient 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 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or 75 percent of the updated hospital-specific rate based on FY 1996 costs per discharge, plus the greater of 25 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 costs 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 costs 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 2003. The changes, to be applied prospectively effective with discharges occurring on or after October 1, 2002, would affect the calculation of the Federal rates. In section III. of this Addendum, we discuss our proposed changes for determining the prospective payment rates for Medicare inpatient capital-related costs for FY 2003. 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 2003. The tables to which we refer in the preamble to this final rule are presented at the end of this Addendum in section V. II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2003 The basic methodology for determining prospective payment rates for hospital inpatient operating costs is set forth at Sec. 412.63. The basic methodology for determining the prospective payment rates for hospital inpatient operating costs for hospitals located in Puerto Rico is set forth at Secs. 412.210 and 412.212. Below, we discuss the factors used for determining the prospective payment rates. In summary, the proposed standardized amounts set forth in Tables 1A and 1C of section V. of this Addendum reflect--Updates of 2.75 percent for all areas (that is, the market basket percentage increase of 3.3 percent minus 0.55 percentage points); An adjustment to ensure the proposed DRG recalibration and wage index update and changes are budget neutral, 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 the effects of geographic reclassification are budget neutral, as provided for in section 1886(d)(8)(D) of the Act, by removing the FY 2002 budget neutrality factor and applying a revised factor; An adjustment to apply the new outlier offset by removing the FY 2002 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) contained a detailed explanation of how base-year cost data were established in the initial development of standardized amounts for the acute care hospital inpatient prospective payment system. 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 require 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 costs 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 acute care hospital inpatient 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 acute care hospital inpatient prospective payment system. As discussed in section IV. of the preamble to this proposed rule, we are proposing to revise the labor share of the standardized amount (the proportion adjusted by the wage index) to be 72.5 percent. 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 2001 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 [[Page 31509]] 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 the latest available population estimates published by the Bureau of the Census, 63 areas meet the criteria to be defined as large urban areas for FY 2003. 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 2003 using the applicable percentage increases specified in section 1886(b)(3)(B)(i) of the Act. Section 1886(b)(3)(B)(i)(XVIII) of the Act specifies that the update factor for the standardized amounts for FY 2003 is equal to the market basket percentage increase minus 0.55 percentage points for hospitals in all areas. The percentage change in the market basket reflects the average change in the price of goods and services purchased by hospitals to furnish inpatient care. The most recent forecast of the hospital market basket increase for FY 2003 is 3.3 percent. Thus, for FY 2003, the update to the average standardized amounts equals 2.75 percent for hospitals in all areas. As in the past, we are adjusting the FY 2002 standardized amounts to remove the effects of the FY 2002 geographic reclassifications and outlier payments before applying the FY 2003 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 2003. Although the update factors for FY 2003 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 2003 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 B 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 C 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. However, equating the average case weight after recalibration to the average case weight before recalibration does not necessarily achieve budget neutrality with respect to aggregate payments to hospitals because payments to hospitals are affected by factors other than average case weight. Therefore, as we have done in past years, we are proposing to make a budget neutrality adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met. 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. We note, however, that section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is not located in a rural area may not be less than the area wage index applicable to hospitals located in rural areas in that State. This provision is required by section 4410(b) of Public Law 105-33 to be budget neutral. 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 2001 discharge data to simulate payments and compared aggregate payments using the FY 2002 relative weights and wage index to aggregate payments using the proposed FY 2003 relative weights and wage index. The same methodology was used for the FY 2002 budget neutrality adjustment. Based on this comparison, we computed a proposed budget neutrality adjustment factor equal to 1.001026. 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 1.002689. These budget neutrality adjustment factors are applied to the standardized amounts without removing the effects of the FY 2002 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, 2002. (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 acute care hospital inpatient 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 2001 discharge data to simulate payments, and compared total prospective payments (including IME and DSH payments) prior to any reclassifications to total prospective payments after reclassifications. Based on these simulations, we are applying a proposed adjustment factor of 0.990536 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 2002 budget neutrality adjustment factor. We note that the proposed FY 2003 adjustment reflects wage index and standardized amount reclassifications approved by the MGCRB or the Administrator as of February 28, 2002, 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 that occur as a result of appeals and reviews of the MGCRB decisions for FY 2003 or from a hospital's request for the withdrawal of a reclassification request for FY 2003 will be reflected in the final budget neutrality adjustment required under section 1886(d)(8)(D) of the Act and published in the final rule for FY 2003. 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). To qualify for outlier payments, a case must have costs above a threshold amount. To determine whether the costs of a case exceed the threshold, a hospital's cost-to-charge ratio is applied to the total covered charges for the case to convert the charges to costs. Payments for eligible cases are then made based on a marginal cost factor, which is a percentage of the costs above the threshold. 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 operating DRG payments plus outlier payments. Section 1886(d)(3)(B) of the Act requires the Secretary to reduce 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 [[Page 31510]] 1886(d)(9)(B)(iv) of the Act requires the Secretary to reduce 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. i. FY 2003 outlier thresholds. For FY 2002, the threshold was equal to the prospective payment rate for the DRG plus any IME and DSH payments plus $21,025. The marginal cost factor for cost outliers (the percent of costs paid after costs for the case exceed the threshold) was 80 percent. For FY 2003, we are proposing to establish a fixed loss cost outlier threshold equal to the prospective payment rate for the DRG plus any IME and DSH payments, and any add-on payments for new technology, plus $33,450. This single threshold would be applicable to qualify for both operating and capital outlier payments. We are proposing to maintain the marginal cost factor for cost outliers at 80 percent. To calculate the proposed FY 2003 outlier thresholds, we simulated payments by applying proposed FY 2003 rates and policies to the December 2001 update of the FY 2001 MedPAR file and the December 2001 update of the Provider-Specific File. Therefore, it is necessary to inflate the charges on the MedPAR claims by 2 years. Previously, inflation factors have been calculated by measuring the percent change in costs using the two most recent available cost report files. For example, the FY 2002 threshold was determined using the rate of cost increase measured using costs from hospitals' FY 1998 and FY 1999 cost reports. However, at the time of this proposed rule, the FY 2000 cost reports are not available to produce an updated cost inflation factor due to processing delays associated with implementing the hospital outpatient prospective payment system. Rather than use the rate of cost increase from hospitals' FY 1998 and FY 1999 cost reports to project the rate of increase from FY 2001 to FY 2003, we are proposing to use a 3-year moving average of the rate of change in prior years to estimate the annual rates of increase from FY 2001 to FY 2003. The calculation is shown in the table below. For example, the rate of change in cost per case from 1998 to 1999 was 1.0242 percent. This rate of change is then subtracted by the rate of change from 1997 to 1998 (1.0237) to calculate a difference in change of 0.005. A 3-year average of the annual rates of change was then computed based on the difference in the percent changes from the 3 most recent prior years. The difference in change for 1997 to 1998 is then averaged with the differences for 1996 to 1997, and for 1995 to 1996, to calculate a 3-year average of 0.0180. To project percent changes in costs for FY 2000 through FY 2003, the average of the differences in the percent changes for the 3 most recent years (0.0180) was added to the percent change in cost per case for the previous year (1.0242) to estimate the percent change in costs between fiscal years. This proposed methodology resulted in an estimated change of 1.066 (6.6 percent increase) for FY 2001 to FY 2002 and 1.079 (7.9 percent increase) for FY 2002 to FY 2003. ---------------------------------------------------------------------------------------------------------------- 3-year Rate of moving Cost reports begin in FY Cost/case change in Difference average of cost per in change differences case in change ---------------------------------------------------------------------------------------------------------------- 1995........................................................ 5818.50 ........... ........... ........... 1996........................................................ 5644.52 0.9701 ........... ........... 1997........................................................ 5666.03 1.0038 0.0337 ........... 1998........................................................ 5800.34 1.0237 0.0199 ........... 1999........................................................ 5940.85 1.0242 0.0005 ........... 2000........................................................ ........... 1.0423 0.0180 0.0180 2001........................................................ ........... 1.0551 0.0128 0.0128 2002........................................................ ........... 1.0655 0.0105 0.0105 2003........................................................ ........... 1.0793 0.0138 0.0138 ---------------------------------------------------------------------------------------------------------------- Based on this proposed methodology, we are proposing a 2-year cost inflation factor of 15.0 percent to inflate FY 2001 charges to FY 2003, determined by multiplying the annual projected inflation factors for FYs 2002 and 2003 of 1.0655 and 1.0793. Using FY 2001 cases now available, our analysis indicates that this 3-year moving average methodology would have resulted in FY 2002 outlier payments very close to 5.1 percent of total operating DRG payments and outlier payments (the current projection of FY 2002 outlier payments is 6.8 percent of total DRG and outlier payments-- see discussion below). We intend to update our analysis of FY 2002 outlier payments using actual FY 2002 claims available through March 2002 prior to publishing the final rule by August 1. We want to emphasize that we are making this proposal due to the unavailability of the FY 2000 cost reports. If the proposed methodology is ultimately adopted in the final rule for FY 2003, this would not necessarily mean that we would apply the same methodology in future fiscal years when updated cost report information becomes available. ii. Other changes concerning outliers. In accordance with section 1886(d)(5)(A)(iv) of the Act, we calculated outlier thresholds so that outlier payments are projected to equal 5.1 percent of total operating DRG payments plus outlier payments. In accordance with section 1886(d)(3)(B), we reduced the proposed FY 2003 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 hospital inpatient operating costs and hospital 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 2003 would result in outlier payments equal to 5.1 percent of operating DRG payments and 5.4 percent of capital payments based on the Federal rate. The proposed outlier adjustment factors to be applied to the standardized amounts for FY 2003 are as follows: ------------------------------------------------------------------------ Operating standardized Capital amounts Federal rate ------------------------------------------------------------------------ National................................ 0.949004 0.945957 Puerto Rico............................. 0.982910 0.980994 ------------------------------------------------------------------------ We apply the outlier adjustment factors after removing the effects of the FY 2002 outlier adjustment factors on the standardized amounts. To determine whether a case qualifies for outlier payments, we apply hospital-specific cost-to-charge ratios to the total covered charges for the case. Operating and capital costs for the case are calculated separately by applying separate operating and capital cost-to-charge ratios, then these costs are combined to compare with the fixed-loss outlier threshold. For those hospitals for which the fiscal intermediary computes operating cost-to-charge ratios lower than 0.200 or greater than 1.262, or capital cost-to-charge ratios lower than 0.012 or greater than 0.167, statewide average ratios would be used to calculate costs to determine whether a hospital qualifies for outlier payments.\1\ Table 8A in section V. of this Addendum contains the proposed statewide average operating cost-to-charge ratios for urban hospitals and for rural hospitals for which the fiscal intermediary is unable to compute a hospital-specific cost-to-charge ratio within the above range. These statewide average ratios would replace the [[Page 31511]] ratios published in the August 1, 2001 final rule (66 FR 40083). Table 8B contains comparable statewide average capital cost-to- charge ratios. We note that the cost-to-charge ratios in Tables 8A and 8B would be used during FY 2003 when hospital-specific cost-to- charge ratios based on the latest settled cost report are either not available or are outside the three standard deviations range. --------------------------------------------------------------------------- \1\ 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. --------------------------------------------------------------------------- iii. FY 2001 and FY 2002 outlier payments. In the August 1, 2001 final rule (66 FR 39942), we stated that, based on available data, we estimated that actual FY 2001 outlier payments would be approximately 6.2 percent of actual total DRG payments. This was computed based on simulations using the March 2001 update of the Provider-Specific File and the March 2001 update of the FY 2000 MedPAR file (discharge data for FY 2000 bills). That is, the estimate of actual outlier payments did not reflect actual FY 2001 bills but instead reflected the application of FY 2001 rates and policies to available FY 2000 bills. Our current estimate, using available FY 2001 bills, is that actual outlier payments for FY 2001 were approximately 7.6 percent of actual total DRG payments. Thus, the data indicate that, for FY 2001, the percentage of actual outlier payments relative to actual total payments is higher than we projected before FY 2001 (and thus exceeds the percentage by which we reduced the standardized amounts for FY 2001). Nevertheless, consistent with the policy and statutory interpretation we have maintained since the inception of the acute care hospital inpatient prospective payment system, we do not plan to recoup money and make retroactive adjustments to outlier payments for FY 2001. We note that the MedPAR file for FY 2001 discharges continues to be updated, and we will update our estimate of actual FY 2001 outlier payments as a percentage of total payments in the final rule. We currently estimate that actual outlier payments for FY 2002 will be approximately 6.8 percent of actual total DRG payments, 1.7 percentage points higher than the 5.1 percent we projected in setting outlier policies for FY 2002. This estimate is based on simulations using the December 2001 update of the Provider-Specific File and the December 2001 update of the FY 2001 MedPAR file (discharge data for FY 2001 bills). We used these data to calculate an estimate of the actual outlier percentage for FY 2002 by applying FY 2002 rates and policies to available FY 2001 bills. 5. FY 2003 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. As described in section II.A.1. of this Addendum, we are proposing to revise the labor share of the national standardized amount from 71.1 percent to 72.5 percent. 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. The labor share applied to the Puerto Rico standardized amount is 71.3 percent. B. Adjustments for Area Wage Levels and Cost of Living Tables 1A and 1C, as set forth in this Addendum, contain the labor-related and nonlabor-related shares that are proposed to 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 proposed prospective payment rates as described in this Addendum. 1. Adjustment for Area Wage Levels Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an adjustment to the labor-related portion of the national and Puerto Rico prospective payment rates, respectively, 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 2003 wage index. The proposed wage index is set forth in Tables 4A, 4B, 4C, and 4F of this Addendum. In section IV. of this preamble we discuss our proposed revised estimate of the labor-related portion of the standardized amounts. 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 2003, we are proposing 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, 2002, we will publish them in the final rule and use them in determining FY 2003 payments. Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals ------------------------------------------------------------------------ ------------------------------------------------------------------------ Alaska--All areas........................................... 1.25 Hawaii: County of Honolulu...................................... 1.25 County of Hawaii........................................ 1.165 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 2003. These factors have been recalibrated as explained in section II. of the preamble. D. Calculation of Prospective Payment Rates for FY 2003 General Formula for Calculation of Prospective Payment Rates for FY 2003 The operating prospective payment rate for all hospitals paid under the acute-care, short-term inpatient prospective payment system located outside of Puerto Rico, except SCHs and MDHs, equals the Federal rate based on the amounts in Table 1A. For FY 2003, the prospective payment rate for SCHs equals whichever of the following rates yields the greatest aggregate payment: the Federal 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, 75 percent of the updated hospital-specific rate based on FY 1996 cost per discharge, plus the greater of 25 percent of the updated FY 1982 or FY 1987 hospital-specific rate, or 25 percent of the Federal rate. Section 1886(b)(3) of the Act, as amended, allows 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 proposed prospective payment rate for Puerto Rico equals 50 percent of the Puerto Rico rate plus 50 percent of the national rate from Table 1C. 1. Federal Rate For discharges occurring on or after October 1, 2002 and before October 1, 2003, except for SCHs, MDHs, and hospitals in Puerto Rico, payment under the acute-care inpatient prospective payment system 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 location of the hospital (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 or the area to which the hospital is reclassified (see Tables 4A, 4B, and 4C of section V. of this Addendum). Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-related [[Page 31512]] 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) a. Calculation of Hospital-Specific Rate 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 rate, the updated hospital-specific rate based on FY 1982 costs per discharge, the updated hospital- specific rate based on FY 1987 costs per discharge, or, for FY 2003, 75 percent of the updated hospital-specific rate based on FY 1996 costs per discharge, plus the greater of 25 percent of the updated FY 1982 or FY 1987 hospital-specific rate or 25 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 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). In addition, for both SCHs and MDHs, the hospital-specific rate is adjusted by the budget neutrality adjustment factor (that is, by 1.001026) as discussed in section II.A.4.a. of this Addendum. The resulting rate is used in determining the payment rate an SCH or MDH would be paid for its discharges beginning on or after October 1, 2002. b. Updating the FY 1982, FY 1987, and FY 1996 Hospital-Specific Rates for FY 2003 We are proposing to increase the hospital-specific rates by 2.75 percent (the hospital market basket percentage increase minus 0.55 percentage points) for SCHs and MDHs for FY 2003. 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 2003, 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 2003, is the market basket rate of increase minus 0.55 percentage points. 3. General Formula for Calculation of Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2002 and Before October 1, 2003 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 VI. of the Addendum). Step 3--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount. Step 4--Multiply the result in Step 3 by 50 percent. Step 5--Multiply the amount from Step 4 by the appropriate DRG relative weight (see Table 5 of section 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 VI. of the Addendum). Step 2--Add the amount from Step 1 and the nonlabor-related portion of the national average standardized amount. Step 3--Multiply the result in Step 2 by 50 percent. Step 4--Multiply the amount from Step 3 by the appropriate DRG relative weight (see Table 5 of section 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 Acute Care Hospital Inpatient Capital-Related Costs for FY 2003 The prospective payment system for acute care 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, acute care hospital inpatient capital-related costs were 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 in regulations at Secs. 412.308 through 412.352. Below we discuss the factors that we are proposing to use to determine the capital Federal rate for FY 2003, which will be effective for discharges occurring on or after October 1, 2002. The 10-year transition period ended with hospital cost reporting periods beginning on or after October 1, 2001 (FY 2002). Therefore, for cost reporting periods beginning in FY 2002, all hospitals (except ``new'' hospitals under Sec. 412.324(b) and under proposed Sec. 412.304(c)(2)) are 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. As we explained in section VI.D. of the preamble of this proposed rule, 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 during the 10-year transition period, we developed a dynamic model of Medicare inpatient capital-related costs, that is, a model that projected changes in Medicare inpatient capital-related costs over time. With the expiration of the budget neutrality provision, the capital cost model was only used to estimate the regular exceptions payment adjustment and other factors. As we explained in the August 1, 2001 final rule (66 FR 39911), beginning in FY 2003 an adjustment for regular exceptions is no longer necessary because regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991, and before October 1, 2001 (see Sec. 412.348(b)). Since payments are no longer being made under the regular exceptions policy in FY 2003, we are no longer using the capital cost model. The capital cost model and its application during the transition [[Page 31513]] period are described in Appendix B of the August 1, 2001 final rule (66 FR 40099). In accordance with section 1886(d)(9)(A) of the Act, under the prospective payment system for acute care hospital inpatient operating costs, hospitals located in Puerto Rico are paid for operating costs under a special payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a blended rate that consisted of 75 percent of the applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the applicable national average standardized amount. However, effective October 1, 1997, as a result of section 4406 of Public Law 105-33, operating payments to hospitals in Puerto Rico are based on a blend of 50 percent of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of the applicable national average standardized amount. In conjunction with this change to the operating blend percentage, effective with discharges on or after October 1, 1997, we compute capital payments to hospitals in Puerto Rico based on a blend of 50 percent of the Puerto Rico rate and 50 percent of the 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 acute care hospital 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 Hospital Inpatient Capital-Related Prospective Payment Rate Update In the August 1, 2001 final rule (66 FR 39947), we established a Federal rate of $390.74 for FY 2002. As a result of the changes we are proposing to the factors used to establish the Federal rate in this addendum, the proposed FY 2003 Federal rate is $408.90. In the discussion that follows, we explain the factors that were used to determine the proposed FY 2003 Federal rate. In particular, we explain why the FY 2003 Federal rate has increased 4.6 percent compared to the FY 2002 Federal rate (published in the August 1, 2001 final rule (66 FR 39947)). We also estimate aggregate capital payments will increase by 5.72 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 slightly more than last year (4.27 percent) mostly due to the restoration of the 2.1 percent reduction to the capital Federal rate (see section VI.D. of the preamble of this proposed rule). 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 system are estimated to increase in FY 2003 compared to FY 2002. 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 (CIPI) and other factors. The update framework consists of a 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 2003 under that framework is 1.1 percent. This update factor is based on a projected 0.7 percent increase in the CIPI, a 1.0 percent adjustment for intensity, a 0.0 percent adjustment for case-mix, a --0.3 percent adjustment for the FY 2001 DRG reclassification and recalibration, and a forecast error correction of -0.3 percent. We explain the basis for the FY 2003 CIPI projection in section III.C. 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 acute care hospital inpatient prospective payment system. Because the DRG weight determines the prospective payment for each case, any percentage increase in the case-mix index corresponds to an equal percentage increase in hospital payments. The case-mix index can change for any of several reasons: The average resource use of Medicare patients changes (``real'' case-mix change); Changes in hospital coding of patient records result in higher weight DRG assignments (``coding effects''); and The annual DRG reclassification and recalibration changes may not be budget neutral (``reclassification effect''). We define real case-mix change as actual changes in the mix (and resource requirements) of Medicare patients as opposed to changes in coding behavior that result in assignment of cases to higher weighted DRGs but do not reflect higher resource requirements. In the update framework for the prospective payment system for operating costs, we adjust the update upwards to allow for real case-mix change, but remove the effects of coding changes on the case-mix index. We also remove the effect on total payments of prior changes to the DRG classifications and relative weights, in order to retain budget neutrality for all case-mix index-related changes other than patient severity. (For example, we adjusted for the effects of the FY 2001 DRG reclassification and recalibration as part of our FY 2003 update recommendation.) We have adopted this case-mix index adjustment in the capital update framework as well. For FY 2003, we are projecting a 1.0 percent total increase in the case-mix index. We estimate that real case-mix increase will equal 1.0 percent in FY 2003. Therefore, the net adjustment for case-mix change in FY 2003 is 0.0 percentage points. We estimate that FY 2001 DRG reclassification and recalibration will result in a 0.3 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 -0.3 percent adjustment for DRG reclassification and recalibration in the update recommendation for FY 2003. The capital update framework contains an adjustment for forecast error. The input price index forecast is based on historical trends and relationships ascertainable at the time the update factor is established for the upcoming year. In any given year, there may be unanticipated price fluctuations that may result in differences between the actual increase in prices and the forecast used in calculating the update factors. In setting a prospective payment rate under the framework, we make an adjustment for forecast error only if our estimate of the change in the capital input price index for any year is off by 0.25 percentage points or more. There is a 2- year lag between the forecast and the measurement of the forecast error. A forecast error of -0.3 percentage points was calculated for the FY 2001 update. That is, current historical data indicate that the forecasted FY 2001 CIPI used in calculating the FY 2001 update factor (0.9 percent) overstated the actual realized price increases (0.6 percent) by 0.3 percentage points. This over-prediction was due to prices from municipal bond yields declining faster than originally expected. Therefore, we are making a -0.3 percent adjustment for forecast error in the update for FY 2003. 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 [[Page 31514]] increase in intensity to allow for within-DRG severity increases and the adoption of quality-enhancing technology. For FY 2003, we have developed a Medicare-specific intensity measure based on a 5-year average, using FY 1997 through 2001 data. In determining case-mix constant intensity, we found that observed case-mix increase was 0.3 percent in FY 1997, -0.4 percent in FY 1998, -0.3 percent in FY 1999, -0.7 in FY 2000, and -0.3 percent in FY 2001. Past studies of case-mix change by the RAND Corporation (``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)) suggest 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 1997 through FY 2001. Since we did not find an increase in case-mix outside of the range of 1.0 to 1.4 percent, we believe that all of the observed case-mix increase for FYs 1997 through 2001 is real. Therefore, there was no need to employ the upper bound of 1.0 and 1.4 supported by the RAND study as we have done in the past since we did not find an increase in case-mix that 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. We estimate that case-mix constant intensity increased by an average of 1.0 percent during FYs 1997 through 2001, for a cumulative increase of 5.2 percent, given estimates of real case-mix of 0.3 percent for FY 1997, -0.4 percent for FY 1998, -0.3 percent for FY 1998, -0.7 percent for FY 2000, and -0.3 percent for FY 2001. Since we estimate that intensity has increased during that period, we are recommending a 1.0 percent intensity adjustment for FY 2003. Above we described the basis of the components used to develop the proposed 1.1 percent capital update factor for FY 2003 as shown in Table 1 below. Table 1.--CMS's Proposed FY 2003 Update Factor to the Capital Federal Rate-- ------------------------------------------------------------------------ ------------------------------------------------------------------------ Capital Input Price Index....................................... 0.7 Intensity: 1.0 Case-Mix Adjustment Factors: Projected Case-Mix Change..................................... -1.0 Real Across DRG Change........................................ 1.0 ------- Subtotal.................................................... 0.0 ======= Effect of FY 2001 Reclassification and Recalibration............ -0.3 Forecast Error Correction....................................... -0.3 ------- Total Proposed Update......................................... 1.1 ------------------------------------------------------------------------ b. Comparison of CMS and MedPAC Update Recommendations In the past, MedPAC has included an update recommendation for capital prospective payment system payments in a Report to Congress. In its March 2001 report, MedPAC presented a combined operating and capital update for hospital inpatient prospective payment systems for FY 2002. Currently, section 1886(b)(3)(B)(i)(XVIII) of the Act sets forth the FY 2003 percentage increase in 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). In its March 2002 Report to Congress, MedPAC did not make an update recommendation for capital prospective payment system payments. MedPAC states that, with the two updates (operating and capital) remaining separate, it focused on the operating update since it involves more money (92 percent of hospital's Medicare costs) and it commands the most attention in Congress (page 65). 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 prospective payment system 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, 2001 final rule, we estimated that outlier payments for capital in FY 2002 would equal 5.76 percent of inpatient capital-related payments based on the Federal rate (66 FR 39948). Accordingly, we applied an outlier adjustment factor of 0.9424 to the Federal rate. Based on the thresholds as set forth in section II.A.4.c. of this Addendum, we estimate that outlier payments for capital will equal 5.40 percent of inpatient capital- related payments based on the Federal rate in FY 2003. Therefore, we are proposing an outlier adjustment factor of 0.9460 to the Federal rate. Thus, the projected percentage of capital outlier payments to total capital standard payments for FY 2003 is lower than the percentage for FY 2002. The outlier reduction factors are not built permanently into the rates; that is, they are not applied cumulatively in determining the Federal rate. Therefore, the net proposed change in the outlier adjustment to the Federal rate for FY 2003 is 1.0038 (0.9460/ 0.9424). The outlier adjustment increases the proposed FY 2003 Federal rate by 0.38 percent compared with the FY 2002 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. Since we implemented a separate geographic adjustment factor for Puerto Rico, we apply separate budget neutrality adjustments for the national geographic adjustment factor and the Puerto Rico geographic adjustment factor. We apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico. Separate adjustments were unnecessary for FY 1998 and earlier since the geographic adjustment factor for Puerto Rico was implemented in FY 1998. In the past, we used the actuarial capital cost model (described in Appendix B of the August 1, 2001 final rule (66 FR 40099)) to estimate the aggregate payments that would have been made on the basis of the Federal rate with and without changes in the DRG classifications and weights and in the GAF to compute the adjustment required to maintain budget neutrality for changes in DRG weights and in the GAF. During the transition period, the capital cost model was also used to estimate the regular exceptions payment adjustment factor. As we explain below in section III.A.4. of this Addendum, beginning in FY 2003 an adjustment for regular exceptions is no longer necessary. Therefore, we are no longer using the capital cost model. Instead, we are using historical data based on hospitals' actual cost experiences to determine the exceptions adjustment factor for special exception payments. To determine the proposed factors for FY 2003, we compared (separately for the national rate and the Puerto Rico rate) estimated aggregate Federal rate payments based on the FY 2002 DRG relative weights and the FY 2002 GAF to estimated aggregate Federal rate payments based on the FY 2003 relative weights and the FY 2003 GAF. For FY 2002, the budget neutrality adjustment factors were 0.9927 for the national rate and 0.9916 for the Puerto Rico rate (see the August 1, 2001 final rule (66 FR 40101)). In making the comparison, we set the regular and special exceptions reduction factors to 1.00. To achieve budget neutrality for the changes in the national GAF, we propose to apply an incremental budget neutrality adjustment of 0.9990 for FY 2003 to the previous cumulative FY 2002 adjustment of (0.9927), yielding a proposed cumulative adjustment of 0.9917 through FY 2003. For the Puerto Rico GAF, we propose to apply an incremental budget neutrality adjustment of 1.0080 for FY 2003 to the previous cumulative FY 2002 adjustment (0.9916), yielding a proposed cumulative adjustment of 0.9996 through FY 2003. We then compared estimated aggregate Federal rate payments based on the FY 2002 DRG relative weights and the FY 2002 GAF to estimated aggregate Federal rate payments based on the proposed FY 2003 DRG relative weights and the FY 2003 GAF. The proposed incremental adjustment for DRG [[Page 31515]] classifications and changes in relative weights is 1.0034 nationally and for Puerto Rico. The proposed cumulative adjustments for DRG classifications and changes in relative weights and for changes in the GAF through FY 2003 are 0.9951 nationally and 1.0030 for Puerto Rico. The following table summarizes the adjustment factors for each fiscal year: Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors -------------------------------------------------------------------------------------------------------------------------------------------------------- National Puerto Rico -------------------------------------------------------------------------------------------------------------------- Incremental adjustment Incremental adjustment --------------------------------------------- --------------------------------------------------------- Fiscal year DRG DRG Geographic reclassifications Cumulative Geographic reclassifications adjustment and Combined adjustment and Combined Cumulative factor recalibration factor recalibration -------------------------------------------------------------------------------------------------------------------------------------------------------- 1992............................... ........... ................. ........... 1.00000 ........... ................. ........... ........... 1993............................... ........... ................. 0.99800 0.99800 ........... ................. ........... ........... 1994............................... ........... ................. 1.00531 1.00330 ........... ................. ........... ........... 1995............................... ........... ................. 0.99980 1.00310 ........... ................. ........... ........... 1996............................... ........... ................. 0.99940 1.00250 ........... ................. ........... ........... 1997............................... ........... ................. 0.99873 1.00123 ........... ................. ........... ........... 1998............................... ........... ................. 0.99892 1.00015 ........... ................. ........... 1.00000 1999............................... 0.99944 1.00335 1.00279 1.00294 0.99898 1.00335 1.00233 1.00233 2000............................... 0.99857 0.99991 0.99848 1.00142 0.99910 0.99991 0.99901 1.00134 2001 \1\........................... 0.99846 1.00019 0.99865 0.99933 1.00365 1.00009 1.00374 1.00508 2001 \2\........................... \3\ 0.99771 \3\ 1.00009 \3\ 0.99780 0.99922 \3\ 1.00365 \3\ 1.00009 \3\ 1.00374 1.00508 2002............................... \4\ 0.99666 \4\ 0.99668 \4\ 0.99335 0.99268 \4\ 0.98991 \4\ 0.99668 \4\ 0.99662 0.99164 2003............................... \5\ 0.99902 \5\ 1.00342 \5\ 1.00244 \5\ 0.99510 \5\ 1.00804 \5\ 1.00342 \5\ 1.01149 \5\ 1.00303 -------------------------------------------------------------------------------------------------------------------------------------------------------- \1\ Factors effective for the first half of FY 2001 (October 2000 through March 2001). \2\ Factors effective for the second half of FY 2001 (April 2001 through September 2001). \3\ Incremental factors are applied to FY 2000 cumulative factors. \4\ Incremental factors are applied to the cumulative factors for the first half of FY 2001. \5\ Proposed factors for FY 2003. The methodology used to determine the proposed recalibration and geographic (DRG/GAF) budget neutrality adjustment factor for FY 2003 is similar to that used in establishing budget neutrality adjustments under the prospective payment system for operating costs. One difference is that, under the operating prospective payment system, the budget neutrality adjustments for the effect of geographic reclassifications are determined separately from the effects of other changes in the hospital wage index and the DRG relative weights. Under the capital prospective payment system, there is a single DRG/GAF budget neutrality adjustment factor (the national rate and the Puerto Rico rate are determined separately) for changes in the GAF (including geographic reclassification) and the DRG relative weights. In addition, there is no adjustment for the effects that geographic reclassification has on the other payment parameters, such as the payments for serving low-income patients, indirect medical education payments, or the large urban add-on payments. For FY 2002, we calculated a GAF/DRG budget neutrality factor of 0.9934. For FY 2003, we are proposing a GAF/DRG budget neutrality factor of 1.0024. 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 or less than they would have been in the absence of the annual DRG reclassification and recalibration and changes in the GAF. The proposed incremental change in the adjustment from FY 2002 to FY 2003 is 1.0024. The proposed cumulative change in the rate due to this adjustment is 0.9951 (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, FY 2002, and the proposed incremental factor for FY 2003: 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 0.9934 x 1.0024 = 0.9951). 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 2003 geographic reclassification decisions made by the MGCRB compared to FY 2002 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 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 actuarial capital cost model originally developed for determining budget neutrality (described in Appendix B of the August 1, 2001 final rule (66 FR 40099)) to determine the exception adjustment factor, which was applied to both the Federal and hospital-specific rates. An adjustment for regular exceptions is no longer necessary in determining the proposed FY 2003 capital Federal rate because, in accordance with Sec. 412.348(b), regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991 and before October 1, 2001. Accordingly, as we explained in the August 1, 2001 final rule (66 FR 39949), in FY 2003 and later, no payments will be made under the regular exceptions provision. However, in accordance with Sec. 412.308(c), we still need to compute a budget neutrality adjustment for special exception payments under Sec. 412.348(g). We describe our methodology for determining the special exceptions adjustment used in establishing the FY 2003 proposed capital Federal rate below. 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 as described at Sec. 412.348(g)(4); (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). As we explained in the August 1, 2001 final rule (66 FR 39912 through 39914), 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 [[Page 31516]] 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 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 the 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 2001. ------------------------------------------------------------------------ Cost reports periods beginning PPS year 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 hospital's project cost must be at least $200 million or 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 payment, 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). Our modeling of special exception payments for FY 2003 produced the following results: ------------------------------------------------------------------------ Special Number of exceptions as hospitals a fraction of Cost report eligible for capital special payments to exceptions all hospitals ------------------------------------------------------------------------ PPS IX.................................. .............. .............. PPS X................................... .............. .............. PPS XI.................................. 2 .............. PPS XII................................. 6 0.0002 PPS XIII................................ 8 0.0001 PPS XIV................................. 16 0.0003 PPS XV.................................. 20 0.0011 PPS XVI................................. 28 0.0019 ------------------------------------------------------------------------ We note that 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, and therefore, we estimate that about 30 additional hospitals could qualify for special exceptions. Thus, we project that special exception payments as a fraction of capital payments to all hospitals could be approximately 0.0040. Because special exceptions are budget neutral, we propose to offset the proposed Federal capital rate by 0.40 percent for special exceptions for FY 2003. Therefore, the proposed exceptions adjustment factor for special exception payments would equal 0.9960 (1 - 0.0040) to account for special exception payments in FY 2003. We will revise this projection of the special exception adjustment factor in the final rule based on the latest available data. For FY 2002, we estimated that total (regular and special) exceptions payments would equal 0.71 percent of aggregate payments based on the Federal rate. Therefore, we applied an exceptions reduction factor of 0.9929 (1-0.0071) in determining the Federal rate. As we stated above, we estimate that exceptions payments for FY 2003 will equal 0.40 percent of aggregate payments based on the Federal rate. Therefore, we are proposing an exceptions payment reduction factor of 0.9960 (1-0.0040) to the Federal rate for FY 2003. The proposed exceptions reduction factor for FY 2003 is 0.31 percent higher than the factor for FY 2002 published in the August 1, 2001 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. Therefore, the proposed net change in the exceptions adjustment to the FY 2003 Federal rate is 0.9960/ 0.9929, or 1.0031. 5. Special Adjustment To Restore the 2.1 Percent Reduction to the Standard Federal Capital Prospective Payment System Payment Rate As we explained in section VI.D. of the preamble of this proposed rule, section 1886(g)(1)(A) of the Act, as amended by section 4402 of Public Law 105-33, requires the Secretary to reduce the unadjusted standard Federal capital prospective payment system payment rate by 2.1 percent for discharges on or after October 1, 1997, and through September 30, 2002. Therefore, under the statute the additional 2.1 percent reduction no longer applies to discharges occurring after September 30, 2002. Accordingly, we are proposing to revise Sec. 412.308(b) to restore the 2.1 percent reduction to the unadjusted standard Federal capital prospective payment system payment rate for discharges occurring on or after October 1, 2002 to the level that it would have been without the reduction. As we state in section VI.D. of the preamble of this proposed rule and in the August 29, 1997 final rule (62 FR 46012), we applied a factor of 0.8222 in FY 1998 to account for both the reduction equal to the FY 1995 budget neutrality factor (0.1568) and the 2.1 percent reduction (0.021) provided for under section 4402 of Public Law 105-33. In order to determine the adjustment factor needed to restore the 2.1 percent reduction, we would divide the amount of the adjustment without the 2.1 percent reduction (1- 0.1568 = 0.8432) by the amount of the adjustment with the 2.1 percent reduction (0.8222). Therefore, we are proposing to apply a factor of 1.02554 (0.8432/0.8222) to the unadjusted FY 2002 standard Federal capital prospective payment system payment rate to restore the 2.1 percent reduction for discharges occurring on or after October 1, 2002. 6. Standard Capital Federal Rate for FY 2003 For FY 2002, the capital Federal rate was $390.74. For FY 2003, we are proposing a capital Federal rate of $408.90. The proposed Federal rate for FY 2003 was calculated as follows: The proposed FY 2003 update factor is 1.0110; that is, the update is 1.10 percent. The proposed FY 2003 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 1.0024. The proposed FY 2003 outlier adjustment factor is 0.9460. The proposed FY 2003 exceptions payments adjustment factor is 0.9960. The proposed special adjustment factor for FY 2003 to restore the 2.1 percent reduction to the standard Federal rate is 1.0255. [[Page 31517]] 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 are proposing 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 proposed factors and adjustments for FY 2003 affected the computation of the proposed FY 2003 Federal rate in comparison to the FY 2002 Federal rate. The proposed FY 2003 update factor has the effect of increasing the Federal rate by 1.10 percent compared to the FY 2002 Federal rate, while the proposed geographic and DRG budget neutrality factor has the effect of increasing the Federal rate by 0.24 percent. The proposed FY 2003 outlier adjustment factor has the effect of increasing the Federal rate by 0.38 percent compared to the FY 2002 Federal rate. The proposed FY 2003 exceptions reduction factor has the effect of increasing the Federal rate by 0.31 percent compared to the exceptions reduction for FY 2002. The proposed special adjustment factor for FY 2003 to restore the 2.1 percent reduction to the standard Federal rate has the effect of increasing the Federal rate by 2.55 percent compared to the FY 2002 Federal rate. The combined effect of all the proposed changes is to increase the Federal rate by 4.65 percent compared to the FY 2002 Federal rate. Comparison of Factors and Adjustments: FY 2002 Federal Rate and Proposed FY 2003 Federal Rate ---------------------------------------------------------------------------------------------------------------- Proposed FY Percent FY 2002 2003 Change change ---------------------------------------------------------------------------------------------------------------- Update factor \1\........................................... 1.0130 1.0110 1.0110 1.10 GAF/DRG Adjustment Factor \1\............................... 0.9934 1.0024 1.0024 0.24 Outlier Adjustment Factor \2\............................... 0.9424 0.9460 1.0038 0.3
