Federal Register: August 1, 2002 (continued) | Innovative Resources for Payors

[Federal Register: August 1, 2002 (Volume 67, Number 148)]
[Rules and Regulations]
[Page 50281-50289]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au02-19]

[[pp. 50281-50289]] Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2003 Rates

[[Continued from page 50280]]

[[Page 50280]]

Less than 100 beds......................... 332 -0.2 0.4 0.1 0.1 -0.2 0.6 2.0
Urban teaching and DSH:
DSH........................................ 757 0.5 -0.1 0.0 0.0 0.0 -0.6 -0.4
Teaching and no DSH........................ 284 0.7 0.0 0.0 0.0 0.1 0.0 -0.1
No teaching and DSH........................ 890 0.3 0.0 0.1 0.1 -0.1 -0.4 1.1
No teaching and no DSH..................... 719 0.5 -0.1 0.1 0.1 0.0 -0.4 0.7
Rural Hospital Types:
Non special status hospitals............... 577 -0.1 0.4 0.1 0.1 -0.1 1.2 1.9
RRC........................................ 160 0.3 0.2 0.1 0.1 0.1 6.2 1.1
SCH........................................ 526 -0.1 0.2 0.0 0.0 0.0 0.2 2.7
Medicare-dependent hospitals (MDH)......... 241 -0.2 0.4 0.1 0.1 -0.1 0.6 2.5
SCH and RRC................................ 76 0.5 0.1 0.0 0.0 0.6 1.3 3.1
Type of Ownership:
Voluntary.................................. 2,461 0.5 0.0 0.0 0.1 0.0 0.0 0.4
Proprietary................................ 723 0.4 0.1 0.1 0 .1 0.0 -0.1 0.4
Government................................. 869 0.2 0.2 0.1 0.1 0.0 0.2 0.6
Unknown.................................... 5 177 0.4 -0.2 0.0 0.1 -0.3 -0.5
Medicare Utilization as a Percent of Inpatient
Days:
0-25....................................... 310 0.3 -0.1 0.1 0.1 -0.3 -0.3 -0.6
25-50...................................... 1,613 0.5 0.0 0.0 0.1 0.0 -0.3 0.0
50-65...................................... 1,677 0.4 0.0 0.1 0.1 0.0 0.3 1.0
Over 65.................................... 504 0.3 -0.1 0.0 0.1 -0.2 0.5 0.7
Unknown.................................... 126 0.9 0.1 0.0 0.0 0.3 -0.7 0.2
Hospitals Reclassified by the Medicare

Geographic Classification Review Board: FY
2003 Reclassifications:
All Reclassified Hospitals................. 628 0.4 0.0 0.1 0.1 0.2 4.5 1.2
Standardized Amount Only....................... 28 0.2 -0.1 0.1 0.1 -0.3 0.3 1.0
Wage Index Only................................ 521 0.4 0.1 0.1 0.1 0.2 4.7 0.8
Both........................................... 38 0.4 0.0 0.1 0.1 -0.1 5.5 0.8
Nonreclassified Hospitals...................... 3,605 0.4 0.0 0.0 0.1 0.0 -0.7 0.3
All Reclassified Urban Hospitals............... 113 0.6 -0.2 0.0 0.1 0.1 4.5 0.1
Standardized Amount Only....................... 11 0.2 -0.9 0.1 0.1 -1.2 -0.9 0.2
Wage Index Only................................ 87 0.7 -0.2 0.0 0.0 0.2 4.8 -0.2
Both........................................... 15 0.5 0.2 0.1 0.2 0.4 4.3 3.0
Urban Nonreclassified Hospitals................ 2,473 0.5 0.0 0.0 0.1 0.0 -0.7 0.1
All Reclassified Rural Hospitals............... 515 0.3 0.2 0.1 0.1 0.2 4.5 1.9
Standardized Amount Only....................... 11 0.5 0.4 0.1 0.1 0.4 3.7 3.1
Wage Index Only................................ 485 0.3 0.2 0.1 0.1 0.2 4.5 1.9
Both........................................... 19 0.3 -0.1 0.1 0.1 -0.1 5.9 1.8
Rural Nonreclassified Hospitals................ 1,094 -0.1 0.3 0.1 0.1 -0.1 -0.6 2.3
Other Reclassified Hospitals (Section 35 -0.1 -0.2 0.0 0.0 -0.9 -1.3 2.7
1886(D)(8)(B))................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the
national total. Discharge data are from FY 2001, and hospital cost report data are from reporting periods beginning in FY 1999 and FY 1998.
\2\ This column displays the payment impact of the recalibration of the DRG weights based on FY 2001 MedPAR data and the DRG reclassification changes,
in accordance with section 1886(d)(4)(C) of the Act.
\3\ This column displays the impact of updating the wage index with wage data from hospitals' FY 1999 cost reports.
\4\ This column displays the impact of an 80/20 percent blend of removing the labor costs and hours associated with graduate medical education (GME) and
for the Part A costs of certified registered nurse anesthetists (CRNAs).
\5\ This column displays the impact of completely removing the labor costs and hours associated with GME and for the Part A costs of CRNAs.
\6\ This column displays the combined impact of the reclassification and recalibration of the DRGs, the updated and revised wage data used to calculate
the wage index, the phase-out of GME and CRNA costs and hours, and the budget neutrality adjustment factor for DRG and wage index changes, in
accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act. Thus, it represents the combined impacts shown in columns 2, 3, 4 and 5, and
the FY 2003 budget neutrality factor of 0.993209.
\7\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate
the FY 2003 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 2003. Reclassification for
prior years has no bearing on the payment impacts shown here.
\8\ This column shows changes in payments from FY 2002 to FY 2003. It incorporates all of the changes displayed in columns 6 and 7 (the changes
displayed in columns 2, 3, 4, and 5 are included in column 6). It also displays the impact of the FY 2003 update, changes in hospitals'
reclassification status in FY 2003 compared to FY 2002, and the difference in outlier payments from FY 2002 to FY 2003. It also reflects the gradual
phase-in for some SCHs of the full 1996 hospital-specific rate. Finally, the impacts of the reduction in IME adjustment payments, and the increase in
the DSH adjustment are shown in this column. The sum of these impacts may be different from the percentage changes shown here due to rounding and
interactive effect.

[[Page 50281]]

B. Impact of the Changes to the DRG Reclassifications and
Recalibration of Relative Weights (Column 2)

In column 2 of Table I, we present the combined effects of the
DRG reclassifications and recalibration, as discussed in section II.
of the preamble to this final rule. Section 1886(d)(4)(C)(i) of the
Act requires us to annually make appropriate classification changes
and to recalibrate the DRG weights in order to reflect changes in
treatment patterns, technology, and any other factors that may
change the relative use of hospital resources.
We compared aggregate payments using the FY 2002 DRG relative
weights (GROUPER version 19.0) to aggregate payments using the FY
2003 DRG relative weights (GROUPER version 20.0). We note that,
consistent with section 1886(d)(4)(C)(iii) of the Act, we have
applied a budget neutrality factor to ensure that the overall
payment impact of the DRG changes (combined with the wage index
changes) is budget neutral. This budget neutrality factor of
0.993209 is applied to payments in Column 6. Because this is a
combined DRG reclassification and recalibration and wage index
budget neutrality factor, it is not applied to payments in this
column.
The DRG changes we are making will result in 0.4 percent higher
payments to hospitals overall. This effect is largely attributable
to the anticipated higher payments after April 1, 2003 for drug-
eluting stents, as described in section II.B. of this final rule.
Specifically, we created two new DRGs (526 and 527) to be effective
April 1, 2003. The relative weights for these new DRGs are 14 and 16
percent higher, respectively, than the weights for current DRGs 516
and 517, the current DRGs for stents. Hospitals that are currently
doing these procedures benefit demonstrate positive impacts from
this change in this impact analysis.
Another change is to DRGs 14 (retitled, Intracranial Hemorrhage
and Stroke with Infarction) and 15 (retitled, Nonspecific
Cerebrovascular Accident and Precerebral Occlusion without
Infarction), and new DRG 524 (Transient Ischemia). With the new
configuration of these DRGs, over 100,000 cases that previously
would have been assigned to DRG 14 (with a FY 2003 relative weight
of 1.2943) will now be assigned to DRG 15 (with a FY 2003 relative
weight of 0.9858).
Urban hospitals with 300 or more beds, and rural hospitals with
200 or more beds benefit from these changes. Rural hospitals with
fewer than 50 beds would experience a 0.3 percent decrease due to
these changes, and rural hospitals with between 50 and 99 beds would
experience a 0.1 percent decrease. Among rural hospitals categorized
by region, the East South Central and West South Central would
experience a 0.1 percent decrease in payments. Among special rural
hospital categories, SCHs would experience a 0.1 percent decrease
and MDHs would experience a 0.2 percent decrease.

C. Impact of Wage Index Changes (Columns 3, 4, and 5)

Section 1886(d)(3)(E) of the Act requires that, beginning
October 1, 1993, we annually update the wage data used to calculate
the wage index. In accordance with this requirement, the wage index
for FY 2003 is based on data submitted for hospital cost reporting
periods beginning on or after October 1, 1998 and before October 1,
1999. As with column 2, the impact of the new data on hospital
payments is isolated in columns 3, 4 and 5 by holding the other
payment parameters constant in the three simulations. That is,
columns 3, 4, and 5 show the percentage changes in payments when
going from a model using the FY 2002 wage index (based on FY 1997
wage data before geographic reclassifications to a model using the
FY 2003 pre-reclassification wage index based on FY 1998 wage data).
The wage data collected on the FY 1999 cost reports are similar
to the data used in the calculation of the FY 2002 wage index. Also,
as described in section III.B of this preamble, the FY 2003 wage
index is calculated by removing 100 percent of hospitals' GME and
CRNA costs (and hours). The FY 2002 wage index was calculated by
blending 60 percent of hospitals' average hourly wages, excluding
GME and CRNA data, with 40 percent of average hourly wages including
these data.
Column 3 shows the impacts of updating the wage data using FY
1999 cost reports. This column maintains the same 60/40 phase-out of
GME and CRNA costs as the FY 2002 wage index, which is the baseline
for comparison. Among regions, the largest impact of updating the
wage data is seen in rural Puerto Rico (a 5.4 percent decrease).
Rural hospitals in the East South Central region experience the next
largest impact, a 0.7 percent increase. Among urban hospitals,
Puerto Rico and the Middle Atlantic regions would experience a 0.8
and 0.4 percent decreases, respectively. The Mountain region would
experience a 0.5 percent increase.
The next two columns show the impacts of removing the GME and
CRNA data from the wage index calculation. Under the 5-year phaseout
of these data, FY 2003 would have been the fourth year of the
phaseout. This would have meant that, under the phaseout, the FY
2003 wage index would be calculated with 20 percent of the GME and
CRNA data included and 80 percent with these data removed, and FY
2004 would begin the calculation with 100 percent of these data
removed. However, we are removing 100 percent of GME and CRNA costs
from the FY 2003 wage index. To demonstrate the impacts of this
provision, we first show the impacts of moving to a wage index with
80 percent of these data removed (Column 4), then show a wage index
with 100 percent of these data removed (Column 5). As expected, the
impacts in the two columns are similar, with some differences due to
rounding. Generally, no group of hospitals is impacted by more than
0.2 percent by this change. Even among the hospital group most
likely to be negatively impacted by this change, teaching hospitals
with 100 or more residents, the net effect of removing 100 percent
of GME and CRNA data is no change in payments.
We note that the wage data used for the final wage index are
based upon the data available as of July 2002 and, therefore, do not
reflect revision requests received and processed by the fiscal
intermediaries after that date.
The following chart compares the shifts in wage index values for
labor market areas for FY 2002 relative to FY 2003. This chart
demonstrates the impact of the changes for the FY 2003 wage index,
including updating to FY 1999 wage data and removing 100 percent of
GME and CRNA data. The majority of labor market areas (343)
experience less than a 5-percent change. A total of 11 labor market
areas experience an increase of more than 5 percent and less than 10
percent. Three areas experience an increase greater than 10 percent.
A total of 15 areas experience decreases of more than 5 percent and
less than 10 percent. Finally, 1 areas experience declines of 10
percent or more.

------------------------------------------------------------------------
Number of labor market
areas
Percentage change in area wage index values -------------------------
FY 2002 FY 2003
------------------------------------------------------------------------
Increase more than 10 percent................. 2 3
Increase more than 5 percent and less than 10 26 11
percent......................................
Increase or decrease less than 5 percent...... 335 343
Decrease more than 5 percent and less than 10 10 15
percent......................................
Decrease more than 10 percent................. 1 1
------------------------------------------------------------------------

Among urban hospitals, 42 would experience an increase of
between 5 and 10 percent and 9 more than 10 percent. A total of 22
rural hospitals have increases greater than 5 percent, but none have
greater than 10-percent increases. On the negative side, 55 urban
hospitals have decreases in their wage index values of at least 5
percent but less than 10 percent. Two urban hospitals have decreases
in their wage index values greater than 10 percent. There are 17
rural hospitals with decreases in their wage index values greater
than 5 percent or with increases of more than 10 percent. The
following chart

[[Page 50282]]

shows the projected impact for urban and rural hospitals.

------------------------------------------------------------------------
Number of hospitals
Percentage change in area wage index values -------------------------
Urban Rural
------------------------------------------------------------------------
Increase more than 10 percent................. 9 0
Increase more than 5 percent and less than 10 42 22
percent......................................
Increase or decrease less than 5 percent...... 2553 1975
Decrease more than 5 percent and less than 10 55 17
percent......................................
Decrease more than 10 percent................. 2 0
------------------------------------------------------------------------

D. Combined Impact of DRG and Wage Index Changes--Including Budget
Neutrality Adjustment (Column 6)

The impact of DRG reclassifications and recalibration on
aggregate payments is required by section 1886(d)(4)(C)(iii) of the
Act to be budget neutral. In addition, section 1886(d)(3)(E) of the
Act specifies that any updates or adjustments to the wage index are
to be budget neutral. As noted in the Addendum to this final rule,
we compared simulated aggregate payments using the FY 2002 DRG
relative weights and wage index to simulated aggregate payments
using the FY 2003 DRG relative weights and blended wage index. In
addition, we are required to ensure that any add-on payments for new
technology under section 1886(d)(5)(K) of the Act are budget
neutral. As discussed in section II.D. of this final rule, we are
approving one new technology for add-on payments in FY 2003. We
estimate the total add-on payments for this new technology will be
$74.8 million.
We computed a wage and recalibration budget neutrality factor of
0.993209. In Table I, the combined overall impacts of the effects of
both the DRG reclassifications and recalibration and the updated
wage index are shown in column 6. The 0.0 percent impact for all
hospitals demonstrates that these changes, in combination with the
budget neutrality factor, are budget neutral.
In addition, 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 to be
budget neutral. The impact of this provision, which is to increase
overall payments by 0.1 percent, is not shown in columns 2, 3, 4,
and 5. It is included in the impacts shown in column 6.
The changes in this column are the sum of the changes in columns
2, 3, 4, and 5, combined with the budget neutrality factor and the
wage index floor for urban areas. There also may be some variation
of plus or minus 0.1 percentage point due to rounding.

E. Impact of MGCRB Reclassifications (Column 7)

Our impact analysis to this point has assumed hospitals are paid
on the basis of their actual geographic location (with the exception
of ongoing policies that provide that certain hospitals receive
payments on bases other than where they are geographically located,
such as hospitals in rural counties that are deemed urban under
section 1886(d)(8)(B) of the Act). The changes in column 6 reflect
the per case payment impact of moving from this baseline to a
simulation incorporating the MGCRB decisions for FY 2003. These
decisions affect hospitals' standardized amount and wage index area
assignments.
By February 28 of each year, the MGCRB makes reclassification
determinations that will be effective for the next fiscal year,
which begins on October 1. The MGCRB may approve a hospital's
reclassification request for the purpose of using another area's
standardized amount, wage index value, or both. The final FY 2003
wage index values incorporate all of the MGCRB's reclassification
decisions for FY 2003. The wage index values also reflect any
decisions made by the CMS Administrator through the appeals and
review process.
The overall effect of geographic reclassification is required by
section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, we
applied an adjustment of 0.990672 to ensure that the effects of
reclassification are budget neutral. (See section II.A.4.b. of the
Addendum to this final rule.)
As a group, rural hospitals benefit from geographic
reclassification. Their payments rise 2.4 percent in column 7.
Payments to urban hospitals decline 0.4 percent. Hospitals in other
urban areas see a decrease in payments of 0.4 percent, while large
urban hospitals lose 0.5 percent. Among urban hospital groups (that
is, bed size, census division, and special payment status), payments
generally decline.
A positive impact is evident among most of the rural hospital
groups. The smallest increases among the rural census divisions are
1.1 and 1.6 percent for Mountain and West North Central regions,
respectively. The largest increases are in rural South Atlantic and
West South Central regions. These regions receive increases of 2.9
and 3.2 percent, respectively.
Among all the hospitals that were reclassified for FY 2003
(including hospitals that received wage index reclassifications in
FY 2001 or FY 2002 that extend for 3-years), the MGCRB changes are
estimated to provide a 4.5 percent increase in payments. Urban
hospitals reclassified for FY 2003 are expected to receive an
increase of 4.5 percent, while rural reclassified hospitals are
expected to benefit from the MGCRB changes with a 4.5 percent
increase in payments. Overall, among hospitals that were
reclassified for purposes of the standardized amount only, a payment
increase of 0.3 percent is expected, while those reclassified for
purposes of the wage index only show a 4.7 percent increase in
payments. Payments to urban and rural hospitals that did not
reclassify are expected to decrease slightly due to the MGCRB
changes, decreasing by 0.7 for urban hospitals and 0.6 for rural
hospitals. Those hospitals located in rural counties but deemed to
be urban under section 1886(d)(8)(B) of the Act are expected to
receive a decrease in payments of 1.3 percent.

F. All Changes (Column 8)

Column 8 compares our estimate of payments per case,
incorporating all changes reflected in this proposed rule for FY
2003 (including statutory changes), to our estimate of payments per
case in FY 2002. This column includes all of the policy changes to
date. Because the reclassifications shown in column 7 do not reflect
FY 2002 reclassifications, the impacts of FY 2003 reclassifications
only affect the impacts from FY 2002 to FY 2003 if the
reclassification impacts for any group of hospitals are different in
FY 2003 compared to FY 2002.
It includes the effects of the 2.95 percent update to the
standardized amounts and the hospital-specific rates for MDHs and
SCHs. It also reflects the 2.1 percentage point difference between
the projected outlier payments in FY 2002 (5.1 percent of total DRG
payments) and the current estimate of the percentage of actual
outlier payments in FY 2002 (7.2 percent), as described in the
introduction to this Appendix and the Addendum to this final rule.
Section 213 of Public Law 106-554 provided that all SCHs may
receive payment on the basis of their costs per case during their
cost reporting period that began during 1996. For FY 2003, eligible
SCHs that rebase receive a hospital-specific rate comprised of 25
percent of the higher of their FY 1982 or FY 1987 hospital-specific
rate or their Federal rate, and 75 percent of their 1996 hospital-
specific rate. The impact of this provision is modeled in column 8
as well.
Under section 1886(d)(5)(B)(ii) of the Act, the formula for IME
is reduced beginning in FY 2003. The reduction is from approximately
a 6.5 percent increase for every 10 percent increase in the
resident-to-bed ratio during FY 2002 to approximately a 5.5 percent
increase. We estimate the impact of this change to be a 0.9 percent
reduction in hospitals' overall FY 2003 payments. The impact upon
teaching hospitals would be larger.
Finally, the DSH adjustment increases in FY 2003 compared with
FY 2002. In accordance with section 1886(d)(5)(F)(ix) of

[[Page 50283]]

the Act, during FY 2002, DSH payments that the hospital would
otherwise receive were reduced by 3 percent. This reduction is no
longer applicable beginning with FY 2003. The estimated impact of
this change is to increase overall hospital payments by 0.2 percent.
There might also be interactive effects among the various
factors comprising the payment system that we are not able to
isolate. For these reasons, the values in column 8 may not equal the
sum of the changes in columns 6 and 7, plus the other impacts that
we are able to identify.
The overall change in payments per case for hospitals in FY 2003
increases by 0.4 percent. Hospitals in urban areas experience a 0.1
percent increase in payments per case compared to FY 2002. Hospitals
in rural areas, meanwhile, experience a 2.1 percent payment
increase. Hospitals in large urban areas experience a 0.2 percent
decline in payments, largely due to the reduction in IME payments.
The impact of the reduction in IME payments is most evident among
teaching hospitals with 100 or more residents, who would experience
a decrease in payments per case of 1.4 percent.
Among urban census divisions, the largest payment increase was
1.7 percent in the Mountain region. Hospitals in urban Middle
Atlantic would experience an overall decrease of 1.4 percent and
hospitals in the New England region would experience a decrease of
0.3 percent. This is primarily due to the combination of the
negative impact on these hospitals of reducing IME and the lower
outlier payments during FY 2003. The only hospital category
experiencing overall payment decreases is Puerto Rico, where
payments decrease by 2.7 percent, largely due to the updated wage
data. In the East North Central region, payments appear to increase
by 2.6 percent. Mountain and West North Central regions also
benefited, both with 2.5 percent increases.
Among special categories of rural hospitals, those hospitals
receiving payment under the hospital-specific methodology (SCHs,
MDHs, and SCH/RRCs) experience payment increases of 2.7 percent, 2.5
percent, and 3.1 percent, respectively. This outcome is primarily
related to the fact that, for hospitals receiving payments under the
hospital-specific methodology, there are no outlier payments.
Therefore, these hospitals do not experience negative payment
impacts from the decline in outlier payments from FY 2002 to FY 2003
as do hospitals paid based on the national standardized amounts.
Hospitals that were reclassified for FY 2003 are estimated to
receive a 1.2 percent increase in payments. Urban hospitals
reclassified for FY 2003 are anticipated to receive an increase of
0.1 percent, while rural reclassified hospitals are expected to
benefit from reclassification with a 1.9 percent increase in
payments. Overall, among hospitals reclassified for purposes of the
standardized amount, a payment increase of 1.0 percent is expected,
while those hospitals reclassified for purposes of the wage index
only show an expected 0.8 percent increase in payments. Those
hospitals located in rural counties but deemed to be urban under
section 1886(d)(8)(B) of the Act are expected to receive an increase
in payments of 2.7 percent.

Table II.--Impact Analysis of Changes for FY 2003 Operating Prospective Payment System
[Payments per case]
----------------------------------------------------------------------------------------------------------------
Average FY 2002 Average FY 2003
Num. of hosps. payment per payment per All FY 2003
case\1\ case\1\ changes
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals....................... 4,230 7,218 7247.2 0.4
Urban hospitals..................... 2,620 7,718 7727.8 0.1
Large urban areas (populations over 1,519 8,269 8249.2 -0.2
1 million).........................
Other urban areas (populations of 1 1,101 7,002 7050.4 0.7
million of fewer)..................
Rural hospitals..................... 1,610 5,168 5275.0 2.1
Bed Size (Urban):
0-99 beds........................... 645 5,309 5376.3 1.3
100-199 beds........................ 909 6,424 6474.8 0.8
200-299 beds........................ 523 7,394 7422.6 0.4
300-499 beds........................ 398 8,345 8332.6 -0.1
500 or more beds.................... 145 10,007 9943.6 -0.6
Bed Size (Rural):
0-49 beds........................... 747 4,260 4362.7 2.4
50-99 beds.......................... 501 4,776 4887.0 2.3
100-149 beds........................ 215 5,106 5211.2 2.1
150-199 beds........................ 78 5,515 5617.2 1.8
200 or more beds.................... 69 6,750 6860.1 1.6
Urban by Region:
New England......................... 135 8,224 8203.0 -0.3
Middle Atlantic..................... 404 8,789 8667.9 -1.4
South Atlantic...................... 384 7,311 7360.5 0.7
East North Central.................. 429 7,293 7311.6 0.2
East South Central.................. 159 6,956 7000.5 0.6
West North Central.................. 178 7,358 7404.2 0.6
West South Central.................. 335 7,103 7172.5 1.0
Mountain............................ 132 7,417 7546.6 1.7
Pacific............................. 417 9,386 9385.9 0.0
Puerto Rico......................... 47 3,319 3338.5 0.6
Rural by Region:
New England......................... 40 6,405 6475.6 1.1
Middle Atlantic..................... 67 5,267 5338.0 1.3
South Atlantic...................... 232 5,245 5330.7 1.6
East North Central.................. 215 5,139 5275.2 2.6
East South Central.................. 239 4,746 4843.1 2.0
West North Central.................. 279 5,223 5354.7 2.5
West South Central.................. 285 4,536 4626.7 2.0
Mountain............................ 145 5,789 5933.2 2.5
Pacific............................. 103 6,652 6803.3 2.3

[[Page 50284]]

Puerto Rico......................... 5 2,753 2677.6 -2.7
By Payment Classification:
Urban hospitals..................... 2,650 7,703 7713.5 0.1
Large urban areas (populations over 1,576 8,196 8180.0 -0.2
1 million).........................
Other urban areas (populations of 1 1,074 7,027 7075.0 0.7
million of fewer)..................
Rural areas......................... 1,580 5,155 5261.6 2.1
Teaching Status:
Non-teaching........................ 3,119 5,890 5965.9 1.3
Fewer than 100 Residents............ 870 7,475 7511.1 0.5
100 or more Residents............... 241 11,352 11196.8 -1.4
Urban DSH:
Non-DSH............................. 1,549 6,567 6604.7 0.6
100 or more beds.................... 1,361 8,296 8299.2 0.0
Less than 100 beds.................. 286 5,168 5232.1 1.2
Rural DSH:
Sole Community (SCH)................ 470 4,942 5067.0 2.5
Referral Center (RRC)............... 156 5,974 6067.9 1.6
Other Rural:
100 or more beds.................... 76 4,517 4589.9 1.6
Less than 100 beds.................. 332 4,089 4172.8 2.0
Urban teaching and DSH:
Both teaching and DSH............... 757 9,177 9140.8 -0.4
Teaching and no DSH................. 284 7,773 7763.4 -0.1
No teaching and DSH................. 890 6,535 6608.4 1.1
No teaching and no DSH.............. 719 6,041 6086.3 0.7
Rural Hospital Types:
Non special status hospitals........ 577 4,261 4341.7 1.9
RRC................................. 160 5,677 5737.5 1.1
SCH................................. 526 5,280 5420.1 2.7
Medicare-dependent hospitals (MDH).. 241 4,048 4150.6 2.5
SCH and RRC......................... 76 6,626 6829.3 3.1
Type of Ownership:
Voluntary........................... 2,461 7,342 7369.6 0.4
Proprietary......................... 723 6,945 6969.7 0.4
Government.......................... 869 6,809 6851.5 0.6
Unknown............................. 177 7,302 7318.9 0.2

Medicare Utilization as a Percent of
Inpatient Days:
0-25................................ 310 9,845 9786.3 -0.6
25-50............................... 1,613 8,267 8268.6 0.0
50-65............................... 1,677 6,257 6318.9 1.0
Over 65............................. 504 5,647 5684.7 0.7
Unknown............................. 126 8,992 9011.1 0.2
Hospitals Reclassified by the Medicare
Geographic Classification Review Board:
FY 2002 Reclassifications:
All Reclassified Hospitals.......... 628 6,530 6609.5 1.2
Standardized Amount Only............ 28 5,971 6029.0 1.0
Wage Index Only..................... 521 6,749 6805.1 0.8
Both................................ 38 5,901 5947.1 0.8
All Nonreclassified Hospitals....... 3,605 7,327 7351.4 0.3
All Urban Reclassified Hospitals.... 113 8,610 8615.0 0.1
Urban Nonreclassified Hospitals..... 11 5,794 5804.7 0.2
Standardized Amount Only............ 87 9,211 9195.4 -0.2
Wage Index Only..................... 15 5,870 6047.1 3.0
Both................................ 2,473 7,690 7699.1 0.1
All Reclassified Rural Hospitals.... 515 5,721 5829.0 1.9
Standardized Amount Only............ 11 4,848 5000.7 3.1
Wage Index Only..................... 485 5,728 5835.5 1.9
Both................................ 19 5,875 5981.2 1.8
Rural Nonreclassified Hospitals..... 1,094 4,516 4621.1 2.3
Other Reclassified Hospitals 35 4,894 5026.9 2.7
(Section 1886(D)(8)(B))............
----------------------------------------------------------------------------------------------------------------
\1\ These payment amounts per case do not reflect any estimates of annual case-mix increase.

[[Page 50285]]

Table II presents the projected impact of the changes for FY
2003 for urban and rural hospitals and for the different categories
of hospitals shown in Table I. It compares the estimated payments
per case for FY 2002 with the average estimated per case payments
for FY 2003, as calculated under our models. Thus, this table
presents, in terms of the average dollar amounts paid per discharge,
the combined effects of the changes presented in Table I. The
percentage changes shown in the last column of Table II equal the
percentage changes in average payments from column 8 of Table I.

VII. Impact of Specific Policy Changes

A. Impact of Changes Relating to Payment for the Clinical Training
Portion of Clinical Psychology Training Programs

In section V.I.5. of the preamble to this final rule, we have
revised our policy on Medicare payment for approved nursing and
allied health education programs to permit payment for the costs
incurred by a provider for the clinical training portion of clinical
psychology training programs.
Our actuarial estimates indicate that there will be a fiscal
impact of $40 million the first year after payments begin, growing
to $50 million by the 5th year ($220 million over 5 years). Costs
are expected to increase because we believe that Medicare's support
through its education regulations will encourage hospitals to report
more costs for clinical psychology training programs than are
reported today. This estimate is based on assumptions as to how much

Medicare could pay for additional educational programs and how
quickly other providers with clinical training portions would begin
seeking those payments.
The following chart shows projected costs to the Medicare
program for the next 5 years:

------------------------------------------------------------------------
Medicare
program
Fiscal year costs (in
millions)
------------------------------------------------------------------------
2003....................................................... $40
2004....................................................... 40
2005....................................................... 40
2006....................................................... 50
2007....................................................... 50
------------------------------------------------------------------------

B. Impact of Changes Relating to EMTALA Provisions

We are addressing proposed changes related to the EMTALA
provisions in a separate final rule to be published at a later date.

C. Impact of Policy Changes Relating to Provider-Based Entity

In section V.K. of the preamble of this proposed rule, we
discuss our proposed Medicare payment policy changes relating to
determinations of provider-based status for entities of main
providers. These changes are intended to focus mainly on issues
raised by the hospital industry surrounding the provider-based
regulations and to allow for a orderly and uniform implementation
strategy once the grandfathering provision for these entities
expires on September 30, 2002.
Because we believed it would be difficult to quantify the impact
of these changes, in the May 9, 2002 proposed rule, we solicited
comments on these issues. However, we received no comments that
would assist us in developing a quantitative analysis of impact.
Therefore, we are not able to prepare such an analysis.

VIII. Impact of Policies Affecting Rural Hospitals

A. Raising the Threshold To Qualify for the CRNA Pass-Through
Payments

In section V. of the preamble of this final rule, we are raising
the maximum number of surgical procedures (including inpatient and
outpatient procedures) requiring anesthesia services that a rural
hospital may perform to qualify for pass-through payments for the
costs of CRNAs to 800 from 500. Currently, we have identified 622
hospitals that qualify under this provision.
To measure the impact of this provision, we determined that
approximately half of the hospitals that would appear to be eligible
based on the current number of procedures appear to receive this
adjustment. In order to be eligible, hospitals must employ the CRNA
and the CRNA must agree not to bill for services under Part B. We
estimate approximately 90 rural hospitals would qualify under the
increased maximum volume threshold. If one-half of these hospitals
then met the other criteria, 45 additional hospitals would be
eligible for these pass-through payments under this change.

B. Removal of Requirement for CAHs To Use State Resident Assessment
Instrument

In section VII. of the preamble of this final rule, we are
eliminating the requirement that CAHs use the State resident
assessment instrument (RAI) to conduct patient assessments. There
are approximately 600 CAHs. The overwhelming majority of CAHs, 95
percent, or approximately 270 CAHs, provide SNF level care. The
elimination of the requirement to use the State RAI will greatly
reduce the burden on CAHs because facilities will no longer be
required to complete an RAI document for each SNF patient (which
would involve approximately 12,000 admissions based on the most
recent claims data). Facilities would have the flexibility to
document the assessment data in the medical record in a manner
appropriate for their facility. The elimination of the requirement
for use of the State RAI will reduce the amount of time required to
perform patient assessments and allow more time for direct patient
care.

IX. Impact of Changes in the Capital Prospective Payment System

A. General Considerations

Fiscal year 2001 was the last year of the 10-year transition
period established to phase in the prospective payment system for
hospital capital-related costs. During the transition period,
hospitals were paid under one of two payment methodologies: fully
prospective or hold harmless. Under the fully prospective
methodology, hospitals were paid a blend of the Federal rate and
their hospital-specific rate (see Sec. 412.340). Under the hold-
harmless methodology, unless a hospital elected payment based on 100
percent of the Federal rate, hospitals were paid 85 percent of
reasonable costs for old capital costs (100 percent for SCHs) plus
an amount for new capital costs based on a proportion of the Federal
rate (see Sec. 412.344). As we state in section VI.A. of the
preamble of this final rule, the end of the 10-year transition
period ending with hospital cost reporting periods beginning on or
after October 1, 2001 (FY 2002), capital prospective payment system
payments for most hospitals are based solely on the Federal rate in
FY 2003. Therefore, we no longer include information on obligated
capital costs or projections of old capital costs and new capital
costs, which were factors needed to calculate payments during the
transition period, for our impact analysis.
In accordance with Sec. 412.312, the basic methodology for
determining a capital prospective payment system payment is:
(Standard Federal Rate) x (DRG weight) x (Geographic Adjustment
Factor(GAF)) x (Large Urban Add-on, if applicable) x (COLA
adjustment for hospitals located in Alaska and Hawaii) x (1 +
Disproportionate Share (DSH) Adjustment Factor + Indirect Medical
Education (IME) Adjustment Factor, if applicable).
In addition, hospitals may also receive outlier payments for
those cases that qualify under the threshold established for each
fiscal year.
The data used in developing the impact analysis presented below
are taken from the March 2002 update of the FY 2001 MedPAR file and
the March 2002 update of the Provider Specific File that is used for
payment purposes. Although the analyses of the changes to the
capital prospective payment system do not incorporate cost data, we
used the June 2002 update of the most recently available hospital
cost report data (FY 1999) to categorize hospitals. Our analysis has
several qualifications. First, we do not make adjustments for
behavioral changes that hospitals may adopt in response to policy
changes. Second, due to the interdependent nature of the prospective
payment system, it is very difficult to precisely quantify the
impact associated with each change. Third, we draw upon various
sources for the data used to categorize hospitals in the tables. In
some cases (for instance, the number of beds), there is a fair
degree of variation in the data from different sources. We have
attempted to construct these variables with the best available
sources overall. However, for individual hospitals, some
miscategorizations are possible.
Using cases from the March 2002 update of the FY 2001 MedPAR
file, we simulated payments under the capital prospective payment
system for FY 2002 and FY 2003 for a comparison of total payments
per case. Any short-term, acute care hospitals not paid under the
general hospital inpatient prospective payment systems (Indian
Health Service Hospitals and hospitals in Maryland) are excluded
from the simulations.
As we explain in section III.A.4. of the Addendum of this final
rule, payments will no longer be made under the regular

[[Page 50286]]

exceptions provision under Secs. 412.348(b) through (e). Therefore,
we are no longer using the actuarial capital cost model (described
in Appendix B of August 1, 2001 final rule (66 FR 40099)). We
modeled payments for each hospital by multiplying the Federal rate
by the GAF and the hospital's case-mix. We then added estimated
payments for indirect medical education, disproportionate share,
large urban add-on, and outliers, if applicable. For purposes of
this impact analysis, the model includes the following assumptions:
We estimate that the Medicare case-mix index will
increase by 0.99800 percent in FY 2002 and will increase by 1.01505
percent in FY 2003.
We estimate that the Medicare discharges will be
13,398,000 in FY 2002 and 13,658,000 in FY 2003 for a 1.9 percent
increase from FY 2002 to FY 2003.
The Federal capital rate was updated beginning in FY
1996 by an analytical framework that considers changes in the prices
associated with capital-related costs and adjustments to account for
forecast error, changes in the case-mix index, allowable changes in
intensity, and other factors. The FY 2003 update is 1.1 percent (see
section III.A.1.a. of the Addendum to this final rule).
In addition to the FY 2003 update factor, the FY 2003
Federal rate was calculated based on a GAF/DRG budget neutrality
factor of 0.9957, an outlier adjustment factor of 0.9469, an
exceptions adjustment factor of 0.9970, and a special adjustment for
FY 2003 of 1.0255 (see section III.A. of the Addendum of this final
rule).

2. Results

In the past, in this impact section we presented the
redistributive effects that were expected to occur between ``hold-
harmless'' hospitals and ``fully prospective'' hospitals and a
cross-sectional summary of hospital groupings by the capital
prospective payment system transition period payment methodology. We
are no longer including this information since all hospitals (except
new hospitals under Sec. 412.324(b) and under Sec. 412.32(c)(2)) are
paid 100 percent of the Federal rate in FY 2003.
We used the actuarial model described above to estimate the
potential impact of our changes for FY 2003 on total capital
payments per case, using a universe of 4,230 hospitals. As described
above, the individual hospital payment parameters are taken from the
best available data, including the March 2002 update of the FY 2001
MedPAR file, the March 2002 update to the Provider-Specific File,
and the most recent cost report data from the June 2002 update of
HCRIS. In Table III, we present a comparison of total payments per
case for FY 2002 compared to FY 2003 based on FY 2003 payment
policies. Column 3 shows estimates of payments per case under our
model for FY 2002. Column 4 shows estimates of payments per case
under our model for FY 2003. Column 5 shows the total percentage
change in payments from FY 2002 to FY 2003. The change represented
in Column 5 includes the 1.1 percent update to the Federal rate, a
1.01505 percent increase in case-mix, changes in the adjustments to
the Federal rate (for example, the effect of the new hospital wage
index on the geographic adjustment factor), and reclassifications by
the MGCRB, as well as changes in special exception payments. The
comparisons are provided by: (1) geographic location; (2) region;
and (3) payment classification.
The simulation results show that, on average, capital payments
per case can be expected to increase 3.8 percent in FY 2003. Our
comparison by geographic location shows an overall increase in
payments to hospitals in all areas. This comparison also shows that
urban and rural hospitals will experience slightly different rates
of increase in capital payments per case (3.6 percent and 4.8
percent, respectively). This difference is due to a projection that
urban hospitals will experience a larger decrease in outlier
payments from FY 2002 to FY 2003 compared to rural hospitals.
All regions are estimated to receive an increase in total
capital payments per case, partly due to the elimination of the 2.1
percent reduction to the Federal rate for FY 2003 (see section VI.D.
of the preamble of this final rule). Changes by region vary from a
minimum increase of 2.7 percent (Pacific urban region) to a maximum
increase of 5.3 percent (East North Central rural region). Hospitals
located in Puerto Rico are expected to experience an increase in
total capital payments per case of 4.4 percent.
By type of ownership, government hospitals are projected to have
the largest rate of increase of total payment changes (4.2 percent).
Similarly, payments to voluntary hospitals will increase 4.1
percent, while payments to proprietary hospitals will increase 2.1
percent.
Section 1886(d)(10) of the Act established the MGCRB. Hospitals
may apply for reclassification for purposes of the standardized
amount, wage index, or both. Although the Federal capital rate is
not affected, a hospital's geographic classification for purposes of
the operating standardized amount does affect a hospital's capital
payments as a result of the large urban adjustment factor and the
disproportionate share adjustment for urban hospitals with 100 or
more beds. Reclassification for wage index purposes also affects the
geographic adjustment factor, since that factor is constructed from
the hospital wage index.
To present the effects of the hospitals being reclassified for
FY 2003 compared to the effects of reclassification for FY 2002, we
show the average payment percentage increase for hospitals
reclassified in each fiscal year and in total. For FY 2003
reclassifications, we indicate those hospitals reclassified for
standardized amount purposes only, for wage index purposes only, and
for both purposes. The reclassified groups are compared to all other
nonreclassified hospitals. These categories are further identified
by urban and rural designation.
Hospitals reclassified for FY 2003 as a whole are projected to
experience a 4.5 percent increase in payments. Payments to
nonreclassified hospitals will increase slightly less (3.7 percent)
than reclassified hospitals, overall. Hospitals reclassified during
both FY 2002 and FY 2003 are projected to receive an increase in
payments of 4.1 percent. Hospitals reclassified during FY 2003 only
are projected to receive an increase in payments of 8.6 percent.
This increase is primarily due to changes in the GAF (wage index).

Table III.--Comparison of Total Payments per Case
[FY 2002 Payments Compared to FY 2003 Payments]
----------------------------------------------------------------------------------------------------------------
Average FY Average FY
Number of 2002 2003
hospitals payments/ payments/ Change
case case
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals....................................... 4,230 668 693 3.8
Large urban areas (populations over 1 million)...... 1,519 772 798 3.4
Other urban areas (populations of 1 million or 1,101 653 679 4.0
fewer).............................................
Rural areas......................................... 1,610 451 472 4.8
Urban hospitals..................................... 2,620 720 746 3.6
0-99 beds....................................... 645 511 532 4.2
100-199 beds.................................... 909 607 630 3.7
200-299 beds.................................... 523 692 718 3.7
300-499 beds.................................... 398 767 794 3.6
500 or more beds................................ 145 933 964 3.4
Rural hospitals..................................... 1,610 451 472 4.8
0-49 beds....................................... 747 371 392 5.5
50-99 beds...................................... 501 412 434 5.3
100-149 beds.................................... 215 456 478 4.8

[[Page 50287]]

150-199 beds.................................... 78 494 517 4.7
200 or more beds................................ 69 569 591 3.8
By Region:
Urban by Region..................................... 2,620 720 746 3.6
New England..................................... 135 771 805 4.4
Middle Atlantic................................. 404 807 829 2.8
South Atlantic.................................. 384 692 717 3.6
East North Central.............................. 429 688 720 4.6
East South Central.............................. 159 654 677 3.6
West North Central.............................. 178 706 736 4.3
West South Central.............................. 335 671 693 3.4
Mountain........................................ 132 694 728 4.8
Pacific......................................... 417 840 862 2.7
Puerto Rico..................................... 47 306 320 4.4
Rural by Region..................................... 1,610 451 472 4.8
New England..................................... 40 549 574 4.6
Middle Atlantic................................. 67 473 496 4.9
South Atlantic.................................. 232 469 490 4.3
East North Central.............................. 215 457 482 5.3
East South Central.............................. 239 415 434 4.8
West North Central.............................. 279 443 466 5.2
West South Central.............................. 285 405 424 4.7
Mountain........................................ 145 467 490 5.0
Pacific......................................... 103 531 556 4.7
By Payment Classification:
All hospitals....................................... 4,230 668 693 3.8
Large urban areas (populations over 1 million)...... 1,576 765 792 3.4
Other urban areas (populations of 1 million or 1,074 655 681 4.0
fewer).............................................
Rural areas......................................... 1,580 449 470 4.8
Teaching Status:
Non-teaching.................................... 3,119 546 568 4.0
Fewer than 100 Residents........................ 870 698 725 3.8
100 or more Residents........................... 241 1,030 1,064 3.3
Urban DSH:
100 or more beds............................ 1,361 758 784 3.4
Less than 100 beds.......................... 286 482 502 4.2
Rural DSH:
Sole Community (SCH/EACH)................... 470 394 414 5.1
Referral Center (RRC/EACH).................. 156 516 537 4.1
Other Rural:
100 or more beds........................ 76 419 438 4.6
Less than 100 beds...................... 332 379 399 5.2
Urban teaching and DSH:
Both teaching and DSH........................... 757 836 864 3.4
Teaching and no DSH............................. 284 750 781 4.2
No teaching and DSH............................. 890 602 624 3.6
No teaching and no DSH.......................... 719 596 619 3.8
Rural Hospital Types:
Non special status hospitals.................... 577 399 419 5.0
RRC/EACH........................................ 160 528 549 4.0
SCH/EACH........................................ 526 417 438 5.1
Medicare-dependent hospitals (MDH).............. 241 372 394 5.9
SCH, RRC and EACH............................... 76 507 532 5.0
Hospitals Reclassified by the Medicare Geographic
Classification Review Board:
Reclassification Status During FY2002 and FY2003:
Reclassified During Both FY2002 and FY2003...... 573 585 610 4.1
Reclassified During FY2003 Only............. 54 525 570 8.6
Reclassified During FY2002 Only............. 77 764 758 -0.7
FY2003 Reclassifications:
All Reclassified Hospitals.................. 628 581 606 4.5
All Nonreclassified Hospitals............... 3,567 684 709 3.7
All Urban Reclassified Hospitals............ 113 780 814 4.4
Urban Nonreclassified Hospitals............. 2,473 719 745 3.6
All Reclassified Rural Hospitals............ 515 503 525 4.5
Rural Nonreclassified Hospitals............. 1,094 389 409 5.2
Other Reclassified Hospitals (Section 35 455 483 6.2
1886(D)(8)(B)).................................
Type of Ownership:
Voluntary....................................... 2,461 680 708 4.0
Proprietary..................................... 723 659 673 2.1

[[Page 50288]]

Government...................................... 869 604 629 4.2
Medicare Utilization as a Percent of Inpatient Days:
0-25............................................ 310 864 892 3.3
25-50........................................... 1,613 766 792 3.5
50-65........................................... 1,677 583 607 4.1
Over 65......................................... 504 523 546 4.3
----------------------------------------------------------------------------------------------------------------

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

I. Background

Consistent with section 1886(e)(5)(B) of the Act, in this final
rule we are publishing our final recommendations for updating
hospital payments for FY 2003. In accordance with section
1886(d)(3)(A) and section 1886(b)(3)(B)(i)(XVIII) of the Act, we are
updating the standardized amounts for FY 2003 equal to the rate of
increase in the hospital market basket minus 0.55 percentage points
for acute inpatient prospective payments to hospitals in all areas.
Section 1886(b)(3)(B)(iv) of the Act sets the FY 2003 percentage
increase in the hospital-specific rates applicable to SCHs and MDHs
equal to the rate of increase in the market basket minus 0.55
percentage points.
Based on the revised and rebased second quarter 2002 forecast of
the FY 2003 market basket increase of 3.5 percent, the update to the
standardized amounts for hospitals subject to the acute inpatient
prospective payment system is 2.95 percent (that is, the market
basket rate of increase minus 0.55 percentage points) for hospitals
in both large urban and other areas. The update to the hospital-
specific rate applicable to SCHs and MDHs is also 2.95 percent. In
the proposed rule, the market basket was 3.3 percent, for proposed
update factors of 2.75 percent.
Under section 1886(b)(3)(B)(ii)(VIII) of the Act, the FY 2003
percentage increase in the rate-of-increase limits for hospitals and
hospital units excluded from the acute inpatient prospective payment
system is equal to the market basket percentage increase. Facilities
excluded from the acute inpatient prospective payment system include
psychiatric hospitals and units, rehabilitation hospitals and units,
long-term care hospitals, cancer hospitals, and children's
hospitals.
In the past, hospitals and hospital units excluded from the
acute inpatient prospective payment system have been paid based on
their reasonable costs subject to limits as established by the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA). Hospitals that
continue to be paid based on their reasonable costs are subject to
TEFRA limits for FY 2003. For these hospitals, the update is the
percentage increase in the excluded hospital market basket
(currently estimated at 3.5 percent).
Inpatient rehabilitation facilities (IRFs) are paid under the
IRF prospective payment system for cost reporting periods beginning
on or after January 1, 2002. For cost reporting periods beginning
during FY 2003, the Federal prospective payment for IRFs is based on
100 percent of the adjusted Federal IRF prospective payment amount,
updated annually (see the August 7, 2001 final rule (66 FR 41316)).
Effective for cost reporting periods beginning during FY 2003,
we have proposed that long-term care hospitals would be paid under a
prospective payment system based on a 5-year transition period (see
the March 22, 2002 proposed rule (67 FR 13416)). We also proposed
that a long-term care hospital may elect to be paid on 100 percent
of the Federal prospective payment rate at the beginning of any of
its cost reporting periods during the 5-year transition period. For
purposes of the update factor, the portion of the proposed
prospective payment system transition blend payment based on
reasonable costs for inpatient operating services would be
determined by updating the long-term care hospital's TEFRA limit by
the current estimate of the excluded hospital market basket (or 3.5
percent).
Section 1886(e)(4) of the Act requires that the Secretary,
taking into consideration the recommendations of the Medicare
Payment Advisory Commission (MedPAC), recommend update factors for
inpatient hospital services for each fiscal year that take into
account the amounts necessary for the efficient and effective
delivery of medically appropriate and necessary care of high
quality. Under section 1886(e)(5) of the Act, we are required to
publish the update factors recommended under section 1886(e)(4) of
the Act. Accordingly, we published the FY 2003 update factors
recommended by the Secretary as Appendix C in the May 9, 2002
proposed rule (67 FR 31685). In that appendix, we discussed the
recommendations of appropriate update factors and the analysis
underlying our recommendations. We also responded to MedPAC's
recommendations concerning the update factors.

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

In recommending an update, the Secretary takes into account the
factors in the update framework, as well as other factors such as
the recommendations of MedPAC, the long-term solvency of the
Medicare Trust Funds, and the capacity of the hospital industry to
continually provide access to high quality care to Medicare
beneficiaries through adequate reimbursement to health care
providers.
Comment: Numerous commenters pointed out the negative impact of
reducing the market basket estimate by 0.55 percentage points.
However, the commenters acknowledged that the statute requires an
update to payments for FY 2002 of the market basket percentage
increase minus 0.55 percentage points. One commenter stated that
another year of ``market basket minus'' update was unsustainable.
Response: The commenters are correct that the 0.55 percentage
point reduction from the market basket in calculating the update
factor is required by statute.
Our final recommendation of the update is market basket minus
0.55 percentage points, which is consistent with current law, and
does not differ from the proposed recommendation. However, the
second quarter forecast of the market basket percentage increase is
3.5 for prospective payment hospitals (up from 3.3 percent estimated
in the proposed rule). Thus, the Secretary's final recommendation is
that the update to the prospective payment system standardized
amounts for both large urban and other urban areas is 2.95
percentage points. The update to the hospital-specific rate
applicable to SCHs and MDHs is also 2.95 percent (or consistent with
current law, market basket percentage increase minus 0.55 percentage
points).

III. Secretary's Final Recommendation for Updating the Rate-of-Increase
Limits for Excluded Hospitals and Hospital Units

We received no comments concerning our proposed recommendation
for updating the rate-of-increase for excluded hospitals and
hospital units. Our final recommendation does not differ from the
proposed recommendation. However, the second quarter forecast of the
market basket percentage increase is 3.5 for excluded hospitals and
hospital units (up from 3.4 percent estimated in the proposed rule).
For cost reporting periods beginning on or after October 1,
2002, the IRF prospective payment is based on 100 percent of the
adjusted Federal IRF prospective payment system amount updated
annually.
For purposes of the proposed long-term care hospital prospective
payment system update factor, the portion of the transition blend
payment based on reasonable costs for inpatient operating services
for FY 2003 would be determined by updating the TEFRA target amount
for long-term care hospitals by

[[Page 50289]]

the most recent available estimate of the increase in the excluded
hospital operating market basket (or 3.5 percent).
Thus, the Secretary's final recommendation is that the update
for the remaining hospitals and hospital units excluded from the
acute inpatient prospective payment system is 3.5 percent.

[FR Doc. 02-19292 Filed 7-31-02; 8:45 am]
BILLING CODE 4120-01-P

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