[Federal Register: August 30, 2002 (Volume 67, Number 169)]
[Rules and Regulations]               
[Page 56003-56052]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30au02-22]                         
 
[[pp. 56003-56052]] Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Implementation and FY 2003 Rates

[[Continued from page 56002]]

[[Page 56003]]

for inappropriate discharges and readmittance exist for satellite LTCHs 
that are located within acute care hospitals, described in 
Sec. 412.22(h), as well as for distinct part SNFs co-located with 
LTCHs. (We address the particular issues of onsite discharges and 
readmittances in section X.G. (Sec. 412.532(d)) in this final rule.)
    We proposed that whether or not a LTCH patient who is discharged to 
an inpatient acute care hospital, an IRF, or a SNF and then returns to 
the same LTCH is treated as an interrupted stay (with one LTC-DRG 
payment) or as a new admission (with two separate LTC-DRG payments) 
depended on the patient's length of stay at the acute care hospital, 
IRF, or SNF compared to the arithmetic average length of stay and the 
standard deviation for the acute care hospital inpatient prospective 
payment system DRG, the IRF combination of the CMG and the comorbidity 
tier, or 45 days for all Medicare SNF cases. In the proposed rule, we 
specified in tables the arithmetic average length of stay and one 
standard deviation for each acute care hospital DRG and each IRF 
combination of the CMG and the comorbidity tier. (As noted above, this 
was not necessary for SNFs, as we used a set number of days for SNF 
stays in the proposed rule.)
    While the proposed interrupted stay policy under Sec. 412.531 was 
based in part on clinical considerations, we realized that it may be 
somewhat administratively burdensome for the LTCH to determine the DRG 
for the acute care hospital stay or the combination of the CMG and the 
comorbidity tier for the IRF stay, in order to determine whether or not 
a beneficiary who is discharged to an acute care hospital or an IRF and 
then returns to the LTCH would be an interrupted stay (with a single 
LTCH prospective payment system payment) or a new admission (with two 
separate LTCH prospective payment system payments). Therefore, we 
discussed in the proposed rule our intent to further analyze Medicare 

claims data to determine if we should consider treating all patients 
who are discharged to either an acute care hospital or an IRF and 
admitted back to the LTCH within a fixed number of days (as we had 
proposed for SNFs), regardless of the DRG of the patient in the acute 
care hospital or the combination of the CMG and the comorbidity tier of 
the patient in the IRF, as an interrupted stay. We indicated that 9 
days for acute care hospitals and 27 days for IRFs might be appropriate 
thresholds to identify interrupted stay cases because, in both cases, 
the thresholds are one standard deviation from the average length of 
stay of all patients in those respective settings. We were aware that, 
under such a policy, less clinically complex brief acute care hospital 
and IRF stays would be included and would become an interrupted stay if 
the beneficiary returns to a LTCH. However, those types of cases would 
be offset by other stays that require more intensive and lengthy care.
    For this final rule, we have decided to treat all patients who are 
discharged to either an acute care hospital or an IRF and admitted back 
to the LTCH within a fixed period of time (as we did in the proposed 
rule for discharges to SNFs), regardless of the DRG or the combination 
CMG and comorbidity tier, as an interrupted stay. This decision will 
relieve the administrative burden on providers and eliminate the need 
to make claims billing system changes, as discussed in our responses to 
the first two public comments in this section. We believe that 9 days 
for acute care hospital stays and 27 days for IRF stays are appropriate 
thresholds to identify interrupted stay cases because, in both cases, 
the thresholds are one standard deviation from the average length of 
stay of all patients in those respective settings. We are retaining as 
final the proposed 45-day threshold for SNFs.
    Comment: Over half of the commenters objected to our proposed 
policy for determining the LTC-DRG payment for an interrupted stay 
(with a single LTCH prospective payment system payment) based on a 
number-of-day threshold that equals one standard deviation from the 
average length of stay for the DRG for the acute care hospital or the 
IRF combination of CMG and comorbidity tier for the IRF stay. The same 
commenters did not object to the proposed policy for SNFs, because it 
used a specified number of days (45) for all stays in a SNF for 
computing the period of interruption.
    The commenters believed that (1) the proposed methodology for acute 
care hospitals and IRF stays would be an extreme administrative burden 
on providers; (2) it would be difficult for LTCHs to determine assigned 
DRGs and CMGs and comorbidity tiers and length of stays (discharge and 
readmittance dates) during the interruption for these cases; and (3) 
the proposed policy would be too costly for both providers and 
intermediaries to implement within the Medicare claims billing and data 
systems. Some commenters believed there might be an issue of possible 
compromise of the Privacy Rule relating to disclosure of certain 
individually identifiable patient health information to certain 
entities under the provisions of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA).
    Response: In the proposed rule, we acknowledged that it might be 
somewhat administratively burdensome to determine the DRG for the acute 
care hospital stay or the combination of the CMG and the comorbidity 
tier for the IRF stay in order to determine whether or not a 
beneficiary who is discharged to an acute care hospital or an IRF and 
then returns to the LTCH will be considered an interrupted stay (with a 
single LTCH prospective payment system payment) or a new admission 
(with two separate LTCH prospective payment system payments). For that 
reason, we solicited specific comments on an alternative methodology.
    We have further evaluated our proposal and agree that LTCHs might 
be unnecessarily burdened if they were required to determine the other 
facility's assigned DRGs and CMG and comordibity tiers for the 
interruption and that numerous changes would have to be made to the 
Medicare billing and data systems to implement the policy. As a result, 
we agree with the commenters that it is more feasible to implement the 
proposed alternative methodology for determining the LTC-DRG payment 
for interrupted stays based on a fixed day threshold for each provider 
level of care, as discussed in our response to the next comment. This 
policy change should relieve most of the administrative burden that the 
commenters were concerned with and eliminate the need to determine the 
DRGs and CMGs and comorbidity tiers assigned to the patient at the 
other facility. In response to the commenters' concern regarding HIPPA, 
even under the proposed rule, we do not believe privacy implications 
under HIPPA would have been implicated.
    Comment: In response to our request for alternatives to the 
proposed methodology for determining the interruption of stay 
threshold, commenters recommended several methodologies for assigning a 
fixed number of days of absences at each provider level for determining 
an interrupted stay. Specifically, some commenters agreed with our 
proposed alternatives of a 9-day threshold for acute care hospital 
stays, a 27-day threshold for IRF stays, and retention of the 45-day 
threshold for SNF stays. One commenter believed that the 45-day 
threshold for SNFs is too long. Other commenters recommended one of the 
following for all sites: (1) A 9-day threshold, regardless of the 
service codes or discharge setting; (2) a threshold range of 10 to 12 
days or 11 days or less; or (3) a fixed threshold that

[[Page 56004]]

reflects the average length of stay of hospitalizations for all DRGs. 
Two commenters recommended not including any interrupted stay policies 
in the final rule. One commenter suggested that any positive or 
negative effects of the 9-day, 27-day, and 45-day thresholds on budget 
neutrality as set forth in the proposed rule be adjusted through the 
standard Federal payment amount.
    Response: After consideration of the public comments and our 
further analysis of MedPAR data, we are revising the proposed 
thresholds under our interrupted stay policy, as it relates to 
discharges to acute care hospitals and IRFs, to incorporate a fixed 
period of time. For this final rule, we have decided to treat all 
patients who are discharged to either an acute care hospital or an IRF 
and admitted back to the LTCH within a fixed period of time (as we did 
in the proposed rule for discharges to SNFs), regardless of the DRG or 
the combination CMG and comorbidity tier, as an interrupted stay. We 
believe that 9 days for acute care hospital stays and 27 days for IRF 
stays are appropriate thresholds to identify interrupted stay cases 
because, in both cases, the thresholds are set at one standard 
deviation from the average length of stay of all patients in those 
respective settings. We are retaining in the final rule the proposed 
45-day threshold for SNFs. We do not agree with the commenter who 
stated that the 45-day threshold for SNFs is too long. A length of stay 
of 45 days is the average number of days plus one standard deviation 
for all SNF Medicare patients. In addition, we are not adopting the 
commenters' suggestion that we dispense with the interrupted stay 
policy because we believe this policy is an essential component of the 
LTCH prospective payment system, as explained elsewhere in this 
section.
    In response to the comment about the impact that any revised 
interrupted stay policy will have on the budget neutrality 
calculations, we wish to assure the commenter that the interrupted stay 
policy in this final rule is one of several policies that have been 
revised based on public comments and taken into consideration in 
developing the final standard Federal prospective payment rates for FY 
2003. The recalibration of the prospective payment rates in this final 
rule based on those revisions will continue to satisfy the statutory 
requirement for budget neutrality.
    Comment: Some commenters believed the payment system should not 
penalize those providers who make clinically appropriate transfers. 
Four commenters indicated that, based on experience, the number of 
readmissions to LTCHs are minimal, especially from IRFs and SNFs, and 
questioned CMS data on interruptions of stays at LTCHs. These 
commenters objected to the proposed interrupted stay policy because 
they believed it would impose a significant burden solely to prevent 
certain questionable transfers that rightfully should be reviewed on an 
individual basis for appropriateness.
    Response: We proposed making one payment under the LTCH prospective 
payment system for an interrupted stay to preserve the integrity of the 
per discharge LTCH prospective payment system. We are not attempting to 
restrict a LTCH from pursuing necessary clinical care from another 
facility. However, we do not believe it is appropriate for the LTCH to 
receive a second payment for a patient if the patient returns to the 
LTCH to complete treatment already begun in the LTCH at the time of the 
earlier admission. Nowhere in the interrupted stay policy are we 
suggesting that the treatment at the secondary site would be 
unnecessary or clinically inadvisable. In addition, we believe that 
LTCHs, certified as acute care hospitals, should generally be able to 
handle nonsurgical urgent care needs. Therefore, the need to transfer 
should not arise as frequently as it might from a different provider. 
While we did not base this policy on specific data, and at this point 
we cannot quantify the number of readmissions to LTCHs, the interrupted 
stay policy is intended, in part, to reduce the incentives inherent in 
a discharge-based prospective payment system of ``shifting'' patients 
between Medicare-covered sites of care in order to maximize Medicare 
payments. We believe that payment under this policy is fair and is 
particularly appropriate for LTCHs since, by definition, the hospital 
treats patients with an average length of stay of greater than 25 days, 
and while payments are determined based on average lengths of stay, 
there may be an incentive for the LTCH to discharge the patient for 
part of that stay to another hospital. We believe we have eliminated 
the significant burden that the commenters were concerned with by 
revising the threshold criteria, as discussed earlier.
    Comment: A few commenters suggested that cases that are readmitted 
to the LTCH from another facility in less than the specified timeframe 
should be treated as separate cases under the LTCH prospective payment 
system if the second admission to the LTCH is unrelated to the primary 
reason for the initial admission.
    Response: As noted above, under the interrupted stay policy that we 
are adopting in this final rule, if the patient's length of stay away 
from the LTCH does not exceed the fixed day thresholds, the return to 
the LTCH is considered part of the first admission and will be paid as 
one admission. The situation the commenters describe is, and will 
continue to be, viewed as one stay. In section VIII. of this preamble, 
we provide details on patient classifications by DRG and highlight the 
fact that the principal diagnosis and secondary diagnoses form the 
basis upon which a LTC-DRG will be assigned for the entire stay. On the 
other hand, if the patient exceeds the total fixed day threshold 
outside of the LTCH at another facility before being readmitted, two 
separate LTC-DRG payments would be made, one based on the principal 
diagnosis for the first admittance and the other based on the principal 
diagnosis for the second admittance. If the principal diagnoses are the 
same for both admissions, the hospital could receive two similar 
payments.
    If the LTCH stay were not interrupted, the patient still could have 
developed other indications or complicating factors while in the LTCH. 
In this situation, grouping for the LTC-DRG would be based 
predominantly on the principal diagnosis, along with data from 
complicating secondary or additional diagnoses, any procedures, and 
age, gender, and discharge status as is done under the acute care 
hospital inpatient prospective payment DRG system. However, secondary 
diagnoses that have no bearing on the LTCH stay may be discarded by the 
GROUPER software when classifying cases for the purposes of determining 
payment. The presence of additional diagnoses does not automatically 
generate a comorbid or complicating condition for all DRGs, as 
explained in section IX.E. of this preamble relating to the ICD-9-CM 
coding system. In a situation of an interrupted stay or a stay that is 
not considered an interrupted stay, comorbidity could develop and the 
principal diagnosis would still be the factor most significantly 
affecting the DRG assignment.
    The acute care hospital inpatient prospective payment system, upon 
which we based the LTCH prospective payment system, treats one stay at 
an acute care facility similarly, where cases are classified into DRGs 
for payment based on the patient's principal diagnosis. Additional or 
secondary diagnoses may be recorded and may slightly influence DRG 
assignment for a case. However, the principal diagnosis,

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with which the patient originally entered the acute care facility, is 
the dominant indicator for the DRG assignment.
    In addition, the typical LTCH patient has multiple, complex medical 
problems represented by several ICD-9-CM codes that will be listed on 
any one patient's claim. If we were to allow a new LTC-DRG assignment 
after an interrupted stay based solely upon whether one of these other 
conditions had increased in severity, it would not be difficult for the 
LTCH to select a different principal diagnosis following the patient's 
return to the LTCH. Medicare would then make two payments for what was, 
in reality, one single episode of treatment for the type of patient who 
is ideally suited for hospitalization in a LTCH, a very sick patient 
with multiple comorbidities.
    A DRG-based prospective payment system is designed to set payment 
at an average of hospital charges for all admittances of a particular 
type of diagnosis. This average should reflect more complex and costly 
cases along with cases that require less care. As cases are paid based 
on an average, some less resource intensive cases of the same diagnosis 
will receive the same payment as more resource intensive cases. 
Overall, under prospective payment systems, hospitals that are 
efficient will receive fair compensation. We believe that this payment 
system ultimately results in more equitable payments for LTCHs.
    Comment: One commenter questioned why there is not an interrupted 
stay policy for discharge and readmittance between one LTCH and another 
LTCH.
    Response: In our data, we did not find that transfers between LTCHs 
occurred frequently enough to require a separate policy. However, we 
will be monitoring LTCH behavior and if, in the future, we become aware 
of data that indicate that this activity is occurring, we would revisit 
this issue.
    Comment: One commenter questioned whether the following scenario 
would be considered an interrupted stay: a LTCH patient is discharged 
to an acute care hospital for 3 days, the acute care hospital then 
discharges the patient to a SNF for 43 days, and then the patient is 
readmitted to the LTCH.
    Response: In this final rule, the interrupted stay policy only 
encompasses situations where a patient is discharged from a LTCH to 
another facility and then readmitted directly from that one facility to 
the same LTCH. It does not address situations where the patient is 
admitted to more than one facility or goes home between LTCH stays. Our 
data did not show this situation to be a significant problem. 
Therefore, at this time we are not extending the interrupted stay 
policy to this situation. Currently, a patient admitted to a LTCH who 
is subsequently discharged to home or to at least two other facilities 
before readmission at the LTCH will be paid for as two admissions, and 
not be subject to the interrupted stay policy. However, we will 
continue to monitor LTCH readmissions and should the above example, 
where the LTCH patient has multiple short stays in several facilities 
before readmission, prove to be significant, we will consider proposing 
a change in policy.
    Comment: One commenter asked whether, for hospitals paid under the 
5-year transition, an interrupted stay under the LTCH prospective 
payment system would still qualify as two discharges for TEFRA payment 
purposes.
    Response: As explained earlier in section VIII. of this preamble, 
we are implementing a 5-year transition period from reasonable cost-
based reimbursement to fully Federal prospective payment for LTCHs. 
During this period, two payment percentages will be used to determine a 
LTCH's total payment. The blend percentages can be found in sections 
II.D. and X.N. of this final rule. The interrupted stay policy will 
apply to the portion of the blended percentage that represents the 
prospective payment Federal rate percentage.
    TEFRA policy on readmissions will apply to the portion of the 
blended percentage that represents the reasonable cost-based 
reimbursement percentage. Under TEFRA policy, each admission and 
discharge is counted separately as two discharges with no consideration 
given to the length of stay at another facility before readmission. 
However, there is one scenario when, even under the TEFRA payment 
policy, two discharges from a LTCH will be counted as one stay for 
payment purposes. There are specific TEFRA regulations governing 
readmission to excluded hospitals, such as LTCHs, with regard to 
hospitals-within-hospitals at Sec. 413.40(a)(3) (July 30, 1999, Federal 
Register, 64 FR 41535). During a cost reporting period, if the 
hospital-within-a-hospital discharges more than 5 percent of its 
inpatients to another co-located hospital, and those patients are 
directly readmitted to the excluded hospital, Medicare considers each 
patient's entire stay as one discharge for purposes of calculating the 
cost per discharge of the excluded hospital. This policy is still in 
effect for the TEFRA portion of the payment blend for long-term care 
hospitals-within-hospitals. (For more information on how a hospital-
within-a-hospital would be paid under the LTCH prospective payment 
system, see section X.G. of this preamble, which outlines onsite 
discharge and readmission policy.) Therefore, other than this 
particular scenario for LTCHs that are hospitals-within-hospitals, for 
an episode of patient care that, under the LTCH prospective payment 
system, would be paid as an interrupted stay, the portion of payments 
under TEFRA paid to LTCHs during the transition period will continue to 
count separately for each discharge from the LTCH.
    Accordingly, based on the public comments received and our further 
analysis of Medicare claims data, in this final rule we are adopting 
the proposed interrupted stay policy as final with the following 
changes. We are revising the interrupted day threshold so that patients 
who are discharged from a LTCH to an acute care hospital and readmitted 
to the LTCH within a 9-day period of time will be considered as an 
interrupted stay and only a single LTCH prospective payment system 
payment will be made. To be considered an interrupted stay for patients 
who are discharged from the LTCH to an IRF and readmitted to the LTCH, 
the fixed day threshold is 27 days. We are retaining as final the 
proposed 45-day threshold for discharges from a LTCH to a SNF and 
readmission to the LTCH. Any readmissions to a LTCH from these three 
provider levels of care that are subsequently discharged from the LTCH 
that involve interruptions that are longer than these thresholds will 
be treated as new admissions and two separate LTCH prospective payments 
will be made.
    We wish to point out that an interrupted stay could occur during a 
regular inlier case (length of stay greater than five-sixths of the 
geometric average length of stay for the LTC-DRG), as described in 
section X.A. of this final rule. A short-stay outlier (as explained in 
section X.C. of this preamble) could also become an interrupted stay if 
the beneficiary is discharged to an acute care hospital, an IRF, or a 
SNF. Whether or not the beneficiary's stay would remain in this 
category depends on the total length of stay in the LTCH. Upon the 
initial discharge to the acute care hospital, the IRF, or the SNF, the 
LTCH ``day count'' would stop. For an interrupted stay case, this count 
is resumed upon readmission to the LTCH until the beneficiary's final 
discharge (home, another site of care, or death). Thus, the period of 
absence (number of days) that the beneficiary is a patient in

[[Page 56006]]

the acute care hospital, the IRF, or the SNF during a LTCH interrupted 
stay is not included in determining the length of stay of the LTCH 
stay.
    If the total number of days at the LTCH, from the initial admission 
to the final discharge, still falls into the short-stay outlier payment 
category, the LTCH receives payment according to the short-stay outlier 
policy described in section X.C. of this preamble. If, on the other 
hand, the total number of days in the LTCH exceeds five-sixths of the 
geometric average length of stay of the LTC-DRG (the short-stay outlier 
criteria), one full LTC-DRG payment is made for the case. Moreover, all 
applicable payment policies, including outliers and transfers for the 
acute care hospital inpatient prospective payment system and the IRF 
prospective payment system still apply under this policy.
    The following are examples of possible ways in which these policies 
would interact:
    Example 1: A beneficiary stays in the LTCH for 5 days and is 
discharged to an inpatient acute care hospital and the length of 
stay at the acute care hospital is greater than 9 days before being 
discharged and readmitted back to the LTCH. Medicare hospital 
payments for this beneficiary are as follows:
     One short-stay outlier LTCH prospective payment system 
payment to the LTCH for the first (5-day length of stay) LTCH 
discharge.
     Payment to the acute care hospital under the acute care 
hospital inpatient prospective payment system for the acute care 
stay.
     A separate LTCH prospective payment system payment 
either as a short-stay outlier (see Sec. 412.529) or regular inlier 
case (as described in section X.A.2. of this preamble), depending on 
the second LTCH length of stay.
    This case would not be an interrupted stay because the acute 
care hospital stay was greater than 9 days, which represents more 
days than one standard deviation from the average length of stay 
under the acute care hospital inpatient prospective payment system 
for all DRGs.
    Example 2: A beneficiary stays in the LTCH for 5 days and is 
discharged to an inpatient acute care hospital and the length of 
stay at the acute care hospital is a number of days that is 9 days 
or less before being discharged and readmitted back to the LTCH. The 
beneficiary remains in the LTCH for an additional 9 days after 
readmission to the LTCH following the acute care hospital stay. This 
case would be treated as an interrupted stay and Medicare hospital 
payments for this beneficiary would be as follows:
     Payment to the acute care hospital under the acute care 
hospital inpatient prospective payment system for the DRG for the 
acute care hospital stay.
     The stay was interrupted because the acute care 
hospital stay was 9 days or less. Therefore, a single payment will 
be made to the LTCH under the LTCH prospective payment system. This 
payment would be a short-stay outlier payment (under Sec. 412.529) 
if the total LTCH length of stay (14 days) is up to and including 
five-sixths of the geometric average length of stay of the LTC-DRG. 
If the total LTCH length of stay is greater than five-sixths of the 
geometric average length of stay of the LTC-DRG, then the LTCH would 
receive the full DRG payment.
    Example 3: A beneficiary stays in the LTCH for 5 days and is 
discharged to an IRF and the length of stay at the IRF is 27 days or 
less. The beneficiary is readmitted to the LTCH for an additional 12 
days, so that the combined 17 days is greater than five-sixths of 
the geometric average length of stay for the LTC-DRG after 
readmission to the LTCH following the IRF stay. This case will be an 
interrupted stay and Medicare hospital payments for this beneficiary 
will be as follows:
     Payment to the IRF under the IRF prospective payment 
system for the combination of the CMG and the comorbidity tier for 
the IRF stay; and
     Since the stay was interrupted because the IRF stay was 
within one standard deviation from the geometric average length of 
stay at an IRF, a single payment will be made under LTCH prospective 
payment system. This payment will be a full LTC-DRG payment because 
the total LTCH length of stay is greater than five-sixths of the 
geometric average length of stay of the LTC-DRG.
    In Example 2 and Example 3, upon return to the LTCH following the 
discharge from the acute care hospital or the IRF, the day count will 
be resumed at day 6 of the LTCH stay. If the beneficiary was then 
discharged within a period that is up to and including five-sixths of 
the geometric average length of stay for the LTC-DRG, the stay will be 
paid as a short-stay outlier (see Sec. 412.529); and if the beneficiary 
was discharged beyond the short-stay threshold (five-sixths of the 
geometric average length of stay for the LTC-DRG), the case will be 
paid for the full LTC-DRG.

F. Other Special Cases

    Under other Medicare prospective payment systems, specifically for 
inpatient acute care hospitals and for IRFs, there are separate 
policies for other types of special cases such as transfer cases and 
patients who expire. As stated in the proposed rule, we continue to 
believe the short-stay outlier policy (under Sec. 412.529) and the 
interrupted stay policy (under Sec. 412.531) will adequately address 
these circumstances. For instance, a case with a stay that is up to and 
including five-sixths of the geometric average length of stay of the 
LTC-DRG will be paid under the short-stay outlier policy regardless of 
whether or not the patient is transferred upon discharge to his or her 
home or to another setting where Medicare will make additional 
payments, or whether the patient expired. Moreover, if a beneficiary's 
stay at the LTCH is greater than five-sixths of the geometric average 
length of stay of the LTC-DRG, a full LTC-DRG payment will be made 
regardless of the destination following discharge. Therefore, in this 
final rule, we are not implementing a separate policy for cases that 
are transferred (except for those that are encompassed by the 
interrupted stay policy) or for patients who expire.
    Currently, under the acute care hospital inpatient prospective 
payment system, discharges in 10 DRGs are considered to be transfers if 
the patients are discharged to another Medicare postacute site of care, 
such as a LTCH, under section 1886(d)(5)(J)(ii) of the Act and 
implemented in regulations at Sec. 412.4. The rationale behind this 
provision was Congressional concern that Medicare may, in some cases, 
be ``overpaying hospitals for patients who are transferred to a 
postacute care setting after a very short acute care hospital stay.'' 
(Conference Agreement, H.R. Conf. Rept. No. 105-217, 105th Cong., 1st 
Sess., at 740 (1997).) In such a scenario, Medicare will also have to 
pay the postacute care provider for care that theoretically could have 
been provided at the acute care hospital. Section 1886(d)(5)(J)(iv) of 
the Act authorizes the Secretary to expand the postacute care transfer 
policy to additional DRGs. From the standpoint of LTCHs, the impact of 
expanding the acute care hospital inpatient prospective payment system 
postacute care transfer policy could be significant for the LTCH 
prospective payment system since this policy could affect behavior at 
acute care hospitals. If additional discharges will be paid as 
transfers, these patients may be kept longer at acute care hospitals in 
order to avoid a reduced payment for the transfer and then have a 
shorter length of stay during the subsequent stay at the LTCH. 
Presently, approximately 70 percent of LTCH Medicare patients are 
admitted following discharge from an acute care hospital. In the FY 
2003 acute care hospital inpatient prospective payment system proposed 
rule (67 FR 31455), we solicited public comment on the feasibility of 
an expansion of the postacute care transfer policy (10-DRG policy). 
However, based on the public comments received, as described in the 
acute care hospital inpatient prospective payment system final rule on 
August 1, 2002 (67 FR 50048-50052), we decided not to expand this 
policy for FY 2003, but to further study the issue for consideration at 
a later date.

[[Page 56007]]

    Comment: One commenter argued against a possible expansion of the 
inpatient acute hospital postacute care transfer policy to LTCHs 
because of its possible effects on LTCHs.
    Response: As we indicated above, we have decided to postpone any 
expansion of the postacute care transfer policy under the acute care 
hospital inpatient prospective payment system until we have done 
further study and evaluation.

G. Onsite Discharges and Readmittances

    As we explained above, we do not believe that a separate policy 
governing transfers of Medicare patients between LTCHs and acute care 
hospitals is necessary at this time. However, we are implementing a 
policy that will address transfers between LTCHs and distinct-part 
SNFs, acute care hospitals, IRFs, or psychiatric facilities when the 
LTCH and any of these other providers are co-located because of the 
potential for inappropriate shifting of patients among these providers 
without clinical justification to maximize Medicare payment. This 
situation may occur when a distinct-part SNF is part of a LTCH or when 
the LTCH is located within an acute care hospital or an IRF as either a 
``hospital-within-a-hospital (as defined in Sec. 412.22(e)) or a 
``satellite facility'' (as defined in Sec. 412.22(h)) and a distinct-
part SNF (as defined in section 1819(a) of the Act) is also part of the 
same acute care hospital or IRF. (Section V.C.9. of this preamble 
describes findings from Urban's research on the admission and discharge 
patterns between LTCHs and SNFs.)
    Similarly, a long-term care ``hospital-within-a-hospital'' or 
satellite facility may be co-located with a psychiatric or 
rehabilitation hospital that is also a hospital within the same acute 
care hospital or is a satellite facility situated in the same acute 
care hospital (Secs. 412.25 and 412.27), or may be co-located in an 
acute care hospital with a psychiatric unit (Sec. 412.27) or a 
satellite psychiatric or rehabilitation unit (Sec. 412.25(e)).
    We believe that a per discharge system, such as the prospective 
payment system for LTCHs, could provide inappropriate incentives to 
prematurely discharge patients to one of these other onsite providers 
once their lengths of stay at the LTCH exceeded the thresholds 
established by the short-stay outlier policies described in section 
X.C. of this preamble. These discharges will be based on payment 
considerations rather than on a clinical basis as an extension of the 
normal progression of appropriate patient care. If the long-term care 
hospital-within-a-hospital inappropriately discharges Medicare patients 
to the distinct-part SNF, or the onsite IRF, psychiatric facility, or 
acute care hospital without providing a complete episode of hospital-
level care, Medicare will make inappropriate payments to the long-term 
care hospital-within-a-hospital, since payments under the prospective 
payment system will have been calculated based on a complete episode of 
such care. This type of a case could then be followed by a readmission 
to the LTCH from the onsite provider for an additional LTC-DRG payment. 
(In the case of a discharge from a LTCH to an offsite acute care 
hospital, an IRF, or a SNF with a subsequent return to the LTCH, 
payments will also be considered under the interrupted stay policy set 
forth at section X.E. of this final rule and at Sec. 412.531.)
    In determining an appropriate response to onsite discharges and 
readmittances, we are implementing a policy consistent with our policy 
described in the July 30, 1999 acute care hospital inpatient 
prospective payment system final rule (64 FR 41535) that addresses 
inappropriate discharges of patients between an acute care hospital 
inpatient prospective payment system excluded hospital-within-a-
hospital (such as a LTCH) to the host acute care hospital, that 
culminated in a readmission to the hospital-within-a-hospital. In that 
context, we expressed the same concern noted above--that these types of 
moves were occurring for financial rather than clinical reasons. In 
order to discourage these practices, we implemented regulations at 
Sec. 413.40(a)(3) to specify how to calculate the cost per discharge 
under the excluded hospital payment provisions. Under those 
regulations, during a cost reporting period, if the hospital-within-a-
hospital discharges more than 5 percent of its inpatients to the acute 
care hospital where it is located, and those patients are readmitted to 
the excluded hospital-within-a-hospital, Medicare considers each 
patient's entire stay as one discharge for purposes of calculating the 
cost per discharge of the excluded hospital-within-a-hospital. In 
determining whether a patient has previously been discharged and then 
readmitted, we consider all prior discharges, even if the discharge 
occurs late in one cost reporting period and the readmission occurs in 
the next cost reporting period. Only when the excluded hospital's 
number of cases involving a discharge from the excluded hospital-
within-a-hospital to the host acute care hospital followed by a 
readmission to the hospital-within-a-hospital exceed 5 percent of the 
total number of its discharges in a particular cost reporting period 
are the first discharges not counted for payment purposes. (If the 5-
percent threshold is not triggered, all discharges are counted 
separately.)
    With the implementation of the per discharge prospective payment 
system for LTCHs, in this final rule and in the proposed rule, we are 
adopting a similar policy to address inappropriate discharges and 
readmittances between LTCHs and other onsite providers by establishing 
a threshold beyond which the original patient stay and the readmission 
will be paid as one discharge (see Sec. 412.532). By paying only one 
discharge, we will discourage those transfers that will be based on 
payment considerations instead of on a clinical basis. Generally, if a 
LTCH readmits more than 5 percent of its Medicare patients who are 
discharged to an onsite SNF, IRF, or psychiatric facility, or to an 
onsite acute care hospital, only one LTC-DRG payment will be made to 
the LTCH for discharges and readmittances during the LTCH's cost 
reporting period. Therefore, payment for the entire stay will be paid 
either as one full LTC-DRG payment or a short-stay outlier, depending 
on the duration of the entire LTCH stay.
    In applying the 5-percent threshold, we will apply one threshold 
for discharges and readmittances with a co-located acute care hospital, 
consistent with the policy that has been in place under 
Sec. 413.40(a)(3) for acute care hospitals and excluded hospitals 
described above. There will also be a separate 5-percent threshold for 
all discharges and readmittances with co-located SNFs, IRFs, and 
psychiatric facilities. In the case of a LTCH that is co-located with 
an acute care hospital, an IRF, or a SNF, the onsite discharge and 
readmittance policies would apply in addition to the interrupted stay 
policy that we discussed in section X.E. of this preamble and at 
Sec. 412.531. This means that even if a discharged LTCH patient who was 
readmitted to the LTCH following a stay in an acute care hospital of 
greater than 9 days, if the facilities share a common location and the 
5-percent threshold were exceeded, the subsequent discharges from the 
LTCH will not represent a separate hospitalization for payment 
purposes, so only one LTC-DRG payment will be made.
    Similarly, if the LTCH has exceeded its 5-percent threshold for all 
discharges to an onsite IRF, SNF, or psychiatric hospital or unit with 
readmittances to the LTCH, the subsequent discharges

[[Page 56008]]

will not be treated as a separate discharge for Medicare payment 
purposes, notwithstanding provisions of the interrupted stay policy 
with regard to lengths of stay at an IRF or a SNF (see 
Secs. 412.531(b)(4)(ii) and (b)(4)(iii)). (As under the interrupted 
stay policy, payment to an acute care hospital under the acute care 
hospital inpatient prospective payment system, to an IRF under the IRF 
prospective payment system, and to a SNF under the SNF prospective 
payment system, will not be affected. Payments to the psychiatric 
facility also will not be affected.) We are aware that situations could 
arise where, under sound clinical judgment, a patient who no longer 
required LTCH-level of care could be discharged to a SNF and then 
experience a setback necessitating rehospitalization. However, it is 
likely that, in such a scenario, in most cases the patient will be 
subsequently admitted to an acute care hospital rather than readmitted 
to the LTCH located within the acute care hospital. In addition, as we 
stated in the proposed rule, if the patient is being treated by a LTCH 
that also specializes in treating psychiatric or rehabilitation 
patients, it is unlikely that the patient who, for some medical reason, 
needed to be transferred to an onsite psychiatric or rehabilitation 
hospital or unit, will need to be readmitted to the LTCH. We believe 
that the 5-percent thresholds for discharges to onsite acute care 
hospitals and for discharges to onsite IRFs, SNFs, and psychiatric 
facilities followed by readmission to the LTCH provide adequate 
flexibility for those rare circumstances where such actions would be 
clinically preferable.
    We continue to believe that the combination of a discharge-based 
payment system that inherently contains financial incentives for 
shifting patients to another site of care and the close proximity of 
other sites of care such as other onsite hospitals-within-hospitals, 
satellites, and distinct-part SNFs, necessitates this type of policy. 
We will monitor such discharges and analyze data and compare practice 
patterns before and after the implementation of the LTCH prospective 
payment system and, if warranted, may consider extending it to offsite 
providers.
    Comment: Several commenters urged us to postpone implementation of 
this policy pending the collection of data or a formal study confirming 
that patient-shifting abuses among co-located providers are actually 
occurring.
    Response: As we note in section X.I. of this final rule, we will be 
developing a monitoring system that would, among other things, assist 
us in evaluating the impact of the LTCH prospective payment system on 
patient care patterns among Medicare providers. We are sufficiently 
concerned about the growth in the number of co-located providers and 
the inappropriate shifting of patients to co-located providers. 
Therefore, we disagree with commenters that our onsite discharges and 
readmittances policy should be postponed. As noted above, we have 
designed this policy in order to discourage patient-shifting for other 
than clinical purposes. In addition, our policy for onsite discharges 
and readmittances is consistent with the policy originally described in 
the July 30, 1999 acute care hospital inpatient prospective payment 
system final rule (64 FR 41535) which addressed inappropriate 
discharges from an excluded hospital paid under the TEFRA system, such 
as a LTCH, that was co-located as a hospital-within-a-hospital to a 
host acute care hospital, culminating in the readmission to the LTCH. 
In establishing this onsite policy (as well as the interrupted stay 
policy discussed in section X.E. of this preamble) for separately 
located providers, there has been no attempt to discourage the transfer 
of a Medicare patient at a LTCH to another onsite provider for 
treatment not available at the LTCH or for nonhospital level care 
available in a SNF. However, we have established regulations regarding 
a patient's subsequent readmission to the LTCH immediately following 
the discharge from this other onsite provider, a circumstance that we 
believe could have less clinical justification than the initial LTCH 
discharge and admission to the other onsite provider. We continue to 
believe that the two 5-percent thresholds in this final rule for 
readmittances to the LTCH prior to the triggering of payment 
consequences for the LTCH provide sufficient flexibility for those 
unusual cases when such action could be clinically warranted.
    Comment: Several commenters noted that the onsite discharge and 
transfer policy was unnecessary since the interrupted stay policy 
already addressed our concerns in this area. In addition, one commenter 
stated that readmissions to freestanding LTCHs equaled those to onsite 
LTCHs and that an additional onsite policy imposed expensive and 
unnecessary recordkeeping responsibilities on providers.
    Response: Notwithstanding the concerns that led us to establish our 
interrupted stay policy, we believe that the very nature of co-located 

Medicare providers provides an even stronger incentive for unnecessary 
patient shifting and must be discouraged at the outset of establishing 
prospective payments for LTCHs. Unless and until a LTCH exceeds the 5-
percent threshold for readmittances from the onsite acute care hospital 
or the 5-percent threshold for readmittances from onsite IRFs, 
psychiatric hospitals or units, or SNFs, Medicare payments will be 
based on the interrupted stay policy. This means that if a LTCH patient 
is admitted to one of these other providers following a LTCH 
hospitalization, and then readmitted to the LTCH, the length of stay at 
the intervening provider will determine whether the LTCH 
hospitalizations are paid as one or more discharges. Should one of the 
5-percent thresholds be exceeded, all LTCH readmissions from either the 
acute care hospital or the IRF, SNF, and psychiatric facility combined 
for that cost reporting year will be paid as one discharge, regardless 
of the length of stay at the intervening provider.
    We wish to clarify that if, for example, the 5-percent threshold 
for onsite discharges and readmissions is exceeded during a particular 
cost reporting period between the co-located LTCH and the acute care 
hospital, all onsite discharges and readmittances between these two 
providers during that cost reporting period will be paid as one 
discharge, even those that occurred prior to the threshold having been 
exceeded. This would also be the case for onsite discharges and 
readmissions that exceed the combined 5-percent threshold for IRFs, 
SNFs, and psychiatric facilities that are co-located with a LTCH.
    This policy reflects our concerns about patient transfers among co-
located providers that are based on financial rather than medical 
considerations. As noted above, although a patient's discharge from a 
LTCH to another Medicare provider could represent a reasonable sequence 
of care, the direct admission of that patient to the LTCH should be a 
relatively rare occurrence. However, if over 5 percent of the total 
number of patients who are discharged from a LTCH during a cost 
reporting period are subsequently directly readmitted from a co-located 
provider, we believe that such behavior signifies a pattern of 
inappropriate patient-shifting among onsite Medicare providers and, 
therefore, we will treat all of the patients in that site of care group 
who are discharged and readmitted as if they are only one discharge and 
make only one LTC-DRG payment for those discharges.
    We do not believe that the onsite policy (or the interrupted stay 
policy as it has been revised in this final rule)

[[Page 56009]]

imposes an additional burden on providers since the standard of care in 
clinical practice requires tracking a patient's recent medical history 
upon admission, and sound hospital management requires ongoing 
evaluation of discharge and readmittance patterns.
    Comment: Several commenters urged us to support, with research, any 
extension of the onsite policy to Medicare providers that are not co-
located with LTCHs.
    Response: Our monitoring of all LTCH discharges and readmittances 
as we implement the LTCH prospective payment system will yield data 
that will enable us to determine whether extension of this policy is 
warranted.
    Comment: One commenter pointed to the distinction between co-
located and co-owned hospitals. Two commenters sought to clarify what 
was meant by the category of ``co-located'' or ``onsite'' providers. 
Another commenter suggested that we apply the onsite policy with regard 
to SNFs only to those SNFs that are co-located in the same building.
    Response: There is clearly a distinction between the co-location 
and co-ownership of Medicare providers, although some hospitals and 
units are both co-located and owned by the same corporate entity. 
Governing regulations at Sec. 412.22(e) and (f) for hospitals-within-
hospitals and Sec. 412.22(h) and (i) for satellite facilities, and at 
Sec. 412.25 for satellite units place no restriction on hospital or 
unit ownership. As we monitor the implementation of the LTCH 
prospective payment system, we will be noting the impact of ownership 
and location patterns, among others, in our evaluation of existing 
payment policy.
    We are defining ``co-located'' and ``onsite'' for purposes of the 
policy established under Sec. 412.532, in accordance with existing 
definitions for hospitals-within-hospitals and satellite facilities. 
Under Sec. 412.22(e), hospitals-within-hospitals are defined as ``* * * 
hospital that occupies space in a building also used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital * * *'' Satellite facilities are 
defined in Sec. 412.22(h) as ``* * * a part of a hospital that provides 
inpatient services in a building that is also used by another hospital, 
or in one or more entire buildings located on the same campus as 
buildings used by another hospital.'' The definition of ``campus'' is 
set forth in Sec. 413.65(a)(2). In this final rule, we have revised 
Sec. 412.532 to specifically reference these definitions. We do not see 
any basis for us to change these definitions only for SNFs and, 
therefore, we will be categorizing onsite SNFs by the same standards as 
that used for other Medicare providers.
    Comment: Two commenters expressed concern that, in promulgating a 
policy that discouraged onsite patient transfers, we were ignoring the 
fact that SNFs were a logical destination for LTCH patients upon 
completion of their course of treatment. These commenters believed that 
we should not establish payment disincentives for a LTCH that 
discharges a patient to a co-located SNF.
    Response: We agree with the commenters that, in some instances, a 
patient's placement in a SNF following hospitalization in a LTCH is a 
reasonable sequence of care. Our onsite discharge and readmission 
policy does not challenge the initial discharge from the LTCH or 
admission to the SNF, but rather the subsequent readmission to the LTCH 
directly from the onsite SNF. We do not believe that our onsite 
transfer policy discourages appropriate onsite patient transfers. Under 
the LTCH prospective payment system, if, during a cost reporting 
period, a LTCH readmits more than 5 percent of its total number of 

Medicare patients from an onsite or co-located SNF, IRF, or psychiatric 
hospital or unit or readmits more than 5 percent of its patients from 
an onsite acute care hospital (in both situations, generating a second 
admission to the LTCH for that patient), the Medicare program will pay 
the LTCH for only one discharge in such cases for all patient 
discharges and readmittances from that provider or group of providers 
during that cost reporting period. The principal goal of our onsite 
discharge and readmission policy is to discourage patient-shifting from 
one Medicare site of care to another so that Medicare will pay only 
once for a particular episode of illness.
    Existing ownership regulations do not guard against the potential 
gaming of the Medicare system in this way by a corporate entity owning 
both co-located providers (as well as an onsite acute care hospital, an 
IRF, or a psychiatric hospital or unit). Therefore, our policies under 
the LTCH prospective payment system have been designed to discourage 
financially motivated movement of patients among onsite Medicare 

providers. We also believe that the two distinct 5-percent thresholds 
allow for those unusual circumstances when therapeutic judgment could 
reasonably dictate a patient's readmission to the onsite LTCH from the 
other onsite provider to which the patient had been originally 
discharged.
    Comment: One commenter, a corporation that owns IRFs, suggested 
that the onsite discharge and readmission policy should limit 
readmissions to LTCHs to 5 percent total readmissions from all co-
located providers (acute care hospitals, IRFs, psychiatric facilities, 
and SNFs) rather than 5 percent from an onsite acute care hospital and 
5 percent from an onsite IRF, SNF, and psychiatric facility combined.
    Response: We believe that the 2 distinct 5-percent onsite discharge 
and readmission thresholds are based on a realistic understanding of 
current treatment patterns at LTCHs and provide adequate flexibility 
for clinical decisionmaking. When we were designing the onsite 
discharge and readmission policy, we took into account research by 
Urban that detailed sources and destinations of LTCH patients. As we 
noted in our discussion of the universe of LTCHs in section V.C. of 
this final rule, most LTCH patients who are transferred to other sites 
of care go to acute care hospitals. Therefore, at one end of the 
spectrum were patients who required further acute care, and at the 
other end, patients who no longer required LTCH-level care. Our two 5-
percent threshold policies recognize that there are two distinct groups 
of patient groups being discharged from LTCHs: (1) Those requiring more 
intensive, acute hospital care; and (2) those whose medical conditions 
have stabilized or improved so that they can receive care at an IRF, a 
psychiatric facility or to a SNF.
    We believe that it is appropriate that acute care hospitals have a 
separate 5-percent threshold, and since fewer patients go to SNFs, 
IRFs, and psychiatric facilities, a collective 5-percent threshold for 
those facilities is adequate.
    Comment: Two commenters questioned how we would actually implement 
the onsite discharge and readmission policy from a systems perspective.
    Response: In order to practically implement payments under the 
onsite discharge and readmission policy, fiscal intermediaries will 
reconcile Medicare payments and discharge data received by LTCHs during 
the course of that cost reporting year, at the close of each cost 
reporting period. We will issue program memoranda detailing 
instructions for fiscal intermediaries and providers regarding billing, 
data collection, and systems operations following the publication of 
this final rule.
    Comment: One commenter supported reducing the incentives to 
transfer patients inappropriately, but also

[[Page 56010]]

expressed concern that our onsite policy may not take into account the 
clinical needs of Medicare patients and could discourage even 
appropriate transfers. The commenter further suggested that Medicare's 
QIO should monitor patient care at LTCHs in general and onsite 
readmissions in particular. Another commenter believed that our onsite 
policy constrained clinical decisionmaking and restricted a Medicare 
beneficiary's choice of provider.
    Response: We appreciate the commenter's support for our policy 
efforts regarding inappropriate transfer of patients among onsite 
Medicare providers. While we agree that the decision to move a patient 
from one care setting to another should be made on purely clinical 
grounds, we remain concerned about discharges based on financial 
concerns, particularly among Medicare providers that are both co-
located and owned by the same parent corporation. In this final rule, 
we are establishing a payment policy for LTCHs based on our best 
available data. We are not prohibiting a LTCH from serving a patient 
nor have we dictated where a patient should receive care. For this 
reason, we will retain the onsite discharge and readmission policy as 
we implement the LTCH prospective payment system. Regarding review by 
QIOs, we have established medical review requirements at 
Sec. 412.508(a) in accordance with existing regulations at 
Secs. 412.44, 412.46, and 412.48 and consistent with other established 
prospective payment systems policies. As noted throughout this final 
rule, we expect that the implementation of the LTCH prospective payment 
system will generate data that will allow indepth analysis and 
evaluation of our policies. To that end, we have established a 
monitoring protocol with our Office of Research, Development, and 
Information.

H. Additional Issues for Onsite Facilities

1. Issues Proposed for Discussion in the March 22, 2002 Proposed Rule 
(67 FR 13416)
    As we prepare to implement a prospective payment system for LTCHs, 
we are reevaluating certain existing policies for hospitals-within-
hospitals and satellite facilities that were established under the 
TEFRA payment system for excluded hospitals.
    Existing regulations at Sec. 412.22(e) specify exclusion criteria 
based on ownership and control for hospitals-within-hospitals and their 
host hospitals (59 FR 45330, September 1, 1994). We are concerned about 
possible manipulation of Medicare payments by a single entity that owns 
or controls an acute care hospital and a co-located LTCH. We believe 
that such a situation could lead to premature patient discharges from 
the acute care hospital to the co-located LTCH, resulting in two 

Medicare payments to the controlling entity for one episode of care. 
Since LTCHs are generally capable of providing a wide range of medical 
treatment, we are concerned about the following scenario: the costs of 
treating an acute care hospital patient exceed the payment that the 
hospital would receive for that specific DRG and the acute care 
hospital ``discharges'' the patient who still requires treatment, for 
admission to an onsite LTCH. Under this circumstance, the LTCH would, 
in fact, function as an excluded unit of an acute care hospital, a 
situation inconsistent with section 1886(d)(1)(B) of the Act, which 
allows excluded rehabilitation and psychiatric units in acute care 
hospitals but not long-term care units. Through the interrupted stay 
and onsite discharge and readmittance policies set forth in sections 
X.E. and X.G., respectively, of this final rule, which limit potential 
inappropriate Medicare payments, we believe that we have addressed some 
of the concerns that originally led us to establish the rules in 
Sec. 412.22(e).
    In the March 22, 2002 proposed rule, we solicited comments on 
possible changes to our payment policy regarding ownership and control 
for hospitals-within-hospitals.
    Comment: Two commenters supported maintaining the existing 
regulations governing hospitals-within-hospitals and further endorsed 
the proposed interrupted stay and co-located discharge and readmittance 
provisions. Several commenters encouraged stricter enforcement of our 
present policy on control and ownership. The commenters believed that, 
even though our regulations require hospital-within-hospitals to have 
separate governing bodies, chief medical officers, separate medical 
staffs and chief executive officer from host hospitals 
(Sec. 412.23(e)(1) through (e)(4)) and require basic hospital functions 
to be separated according to the fulfillment of one of three criteria 
at Sec. 412.23(e)(5), some hospitals-within-hospitals and their host 
hospitals have managed to circumvent the regulations. One of these 
commenters noted that, in such situations, the long-term care 
hospitals-within-hospitals were, in effect, functioning as LTCH units.
    Response: The expressed intent of existing separateness criteria at 
Sec. 412.22(e), first presented in the September 1, 1994 acute care 
hospital inpatient prospective payment system final rule (59 FR 45390 
and 45396), was to disallow the formation of a single hospital facility 
that included an acute care hospital paid under the prospective payment 
system and what would effectively be a LTCH unit that would be paid 
under the TEFRA payment system. We believe that formation of such a 
facility was contrary to the statutory intent of section 1886(d)(1)(B) 
of the Act. The existing regulations were implemented to prohibit such 
an arrangement. As we implement the prospective payment system for 
LTCHs, we remain extremely concerned about rapid growth in long-term 
care hospitals-within-hospitals and will be collecting data on the 
relationship among host hospitals, hospitals-within-hospitals, and 
parent corporations in order to determine the need for additional 
regulation or monitoring.
    Comment: Ten commenters urged us to strengthen existing 
separateness criteria in the regulation. Among the policies suggested 
were disallowing the establishing of separate corporations with common 
ownership and funding to operate a hospital-within-hospital by parent 
or controlling companies or host hospitals; precluding the provision of 
goods and services not consistent with ``fair market value''; and the 
guaranteeing of the long-term care hospital-within-hospital's loans or 
debts by the host hospital. Commenters pointed to loopholes in existing 
regulations that allow corporations to evade our intent. One hospital 
association urged us to disallow a parent company of the host hospital 
to establish a separate corporation that would control both the host 
hospital and finance a hospital-within-a-hospital. Another commenter 
proposed a percentage ceiling on patients that a long-term care 
hospital-within-a-hospital could admit from the host hospital, a strict 
definition of ``direct'' and ``indirect'' control for purposes of 
limiting common corporate ownership. One commenter noted that, although 
the forthcoming LTCH prospective payment system onsite discharge and 
admission policies (section X.G. of this final rule and Sec. 412.532) 
could deter LTCHs from financially benefiting from discharging patients 
and subsequently readmitting them, acute care hospitals could still 
make financially driven transfers of patients to LTCHs.
    Response: We believe that existing regulations, including the 
existing 10-DRG postacute care transfer policy at Sec. 412.4, are 
effective disincentives for acute care hospitals to transfer patients, 
for whom they could reasonably provide

[[Page 56011]]

treatment, to LTCHs. However, as noted below, we are requiring all 
LTCHs to inform their fiscal intermediary and their CMS Regional Office 
if they are co-located Medicare providers and will be collecting data 
on the corporate relationships between these providers. We plan to 
revise our policies and take action as necessary if our research 
reveals circumvention of CMS policy goals.
    Comment: One commenter suggested that an additional criteria to 
prevent abuse by hospitals-within-hospitals would be to strengthen the 
regulations about disclosure of other alternatives as part of hospital 
discharge planning, one of the Medicare conditions of participation for 
hospitals, as described in Sec. 482.43.
    Response: Discharge planning is one of our basic hospital health 
and safety requirements. Under Sec. 482.43(b)(6), a hospital is 
currently required to discuss the results of the discharge planning 
evaluation with the patient or individual acting on the patient's 
behalf. In addition, Secs. 482.43(c)(4) and (c)(5) already require the 
hospital to reassess the patient's discharge plan if there are factors 
that may affect continuing care needs or the appropriateness of the 
discharge plan and to counsel and prepare patients and family members 
for posthospital care. Accordingly, based on these existing safeguards, 
we do not believe that there is a need to modify Sec. 482.43.
    Comment: Five commenters urged us to refrain from issuing any 
additional regulations affecting hospitals-within-hospitals, 
particularly relating to ownership of a hospital-within-a-hospital. Two 
commenters recommended the elimination of all LTCH ownership rules, and 
one commenter suggested that we consider ``leveling the long-term acute 
care hospital playing field''. The commenter believed that such action 
would allow true competition and remove any unnecessary barrier to 
general acute care hospitals entering into the long-term acute care 
hospital business.
    Response: We believe it essential to establish regulations 
discouraging the transfer of Medicare patients from one provider to 
another for any reason other than for clear clinical benefits of the 
patient. However, without the separate ownership and control 
requirements at Sec. 412.22(e), we believe that LTCHs located within a 
host acute care hospital could function as LTCH units. This is a 
prospect that is inconsistent with the purpose and scheme of section 
1886(d)(1)(B) of the Act, which provides for the exclusion of 
psychiatric and rehabilitation units, but not for the exclusion of LTCH 
units. The acute care hospital inpatient prospective payment system was 
originally based on the principle of determining an average cost per 
discharge, and the average was determined by including all discharges, 
short and long stays. For an acute care hospital to move its patients 
to a ``LTC unit'' rather than treating the patient for the entire spell 
of illness would allow the hospital to have had the benefit of a 
payment for that patient that had been based on including long-stay 
patients in calculating the average cost per discharge, while in 
actuality no longer treating those longer stay types of patients.
    In our final rule for the acute care hospital inpatient prospective 
payment system (September 1, 1994 Federal Register (59 FR 45389)), we 
noted that we intended for the hospital-within-hospital policy to allow 
``adequate flexibility for legitimate networking and sharing of 
services * * *'' and we believe that existing policies can contribute 
to efficiency, convenience and clinical benefits. Whether or not we 
will promulgate additional ownership and control regulations for 
hospitals-within-hospitals will be based on the results of our 
collection and analysis of data that we will be gathering for 
monitoring and compliance purposes.
    Comment: Several commenters urged us to publish a proposed rule to 
provide the opportunity for public comments for any proposed changes to 
the regulations governing hospitals-within-hospitals.
    Response: At this point, we do not have specific plans to revise 
any existing policies on hospitals-within-hospitals. As we implement 
the LTCH prospective payment system, we will be monitoring hospitals-
within-hospitals and satellite facilities for, among other behaviors, 
compliance with existing regulations, growth in numbers, and transfer 
patterns. In order to facilitate this monitoring and compliance, we are 
requiring that LTCHs notify their fiscal intermediaries and their CMS 
regional office about their co-location with any other Medicare 

providers by December 1, 2002 (within 60 days following the initial 
effective date of the LTCH prospective payment system).
    Therefore, we are revising the regulations at Secs. 412.22(e) and 
412.22(h) to incorporate this required notification. If, as a 
consequence of these monitoring activities, we determine that we need 
to revisit existing regulations dealing with ownership and control of 
hospitals-within-hospitals, we will follow the notice and comment 
rulemaking process.
    Comment: One commenter, a LTCH that is co-located, as a hospital-
within-a-hospital with a larger tertiary care center that is an acute 
care hospital, with both facilities having a common owner, asserted 
that the single ownership of both hospitals actually affords 
significant benefits to patients in the LTCH from the standpoint of 
clinical care as well as medical efficiency and management.
    Response: We agree with the commenter's assertion that the location 
of a long-term care hospital-within-a-hospital co-located within a host 
acute care hospital has a number of advantages from the standpoint of 
patient convenience and management, provided the requirements set forth 
in Sec. 412.22(e) are satisfied and the patients in each of the co-
located hospitals receive a full episode of care in that hospital.
    Comment: One commenter suggested that the prospective payment 
system for LTCHs take into account that freestanding LTCHs have 
considerably higher infrastructure costs than LTCHs that exist as 
hospitals-within-hospitals.
    Response: The Urban Institute's research based on FY 1997 cost 
reports from LTCHs revealed that there is no significant difference 
between the payment-to-cost ratios for LTCHs that exist as hospitals-
within-hospitals and freestanding LTCHs. We expect to update these data 
and, therefore, as noted above, we are revising the regulations at 
Secs. 412.22(e) and (h) to require LTCHs to notify their fiscal 
intermediaries and their CMS regional office of their co-location with 
any other Medicare providers within 60 days of their first cost 
reporting period that begins on or after October 1, 2002. These data 
will enable us to evaluate possible cost differentials between LTCHs 
that are co-located and those that are freestanding. As we analyze the 
data, we will determine if and what payment system adjustments would be 
appropriate to propose.
    Comment: One commenter questioned whether we were soliciting 
comments on the possibility of allowing LTCHs to house units of other 
excluded hospital categories, such as rehabilitation or psychiatric 
units.
    Response: Under Sec. 412.25(a)(1)(ii), a unit excluded from the 
acute care hospital inpatient prospective payment system is precluded 
from locating in a facility that is excluded from the acute care 
hospital inpatient prospective payment system, such as a LTCH. We have 
no plans to revise this policy.
    We also solicited comments on our policy regarding LTCHs that have 
established satellite facilities. In Sec. 412.22(h)(1), we define a 
satellite as ``a part of a hospital that provides inpatient

[[Page 56012]]

services in a building also used by another hospital, or in one or more 
entire buildings located on the same campus as buildings used by 
another hospital.'' Satellite arrangements exist when an existing 
hospital that is excluded from the acute care hospital inpatient 
prospective payment system and that is either a freestanding hospital 
or a hospital-within-a-hospital under Sec. 412.22(e) shares space in a 
building or on a campus occupied by another hospital in order to 
establish an additional location for the excluded hospital. The July 
30, 1999 acute care hospital inpatient prospective payment system final 
rule (64 FR 41532-41534) includes a detailed discussion of our policies 
regarding Medicare payments for satellite facilities of hospitals 
excluded from the acute care hospital inpatient prospective payment 
system. In the March 22, 2002 proposed rule, we indicated that we would 
consider the possibility of revisiting the policies we established for 
these satellites. In accordance with section 1886(b) of the Act, as 
amended by sections 4414 and 4416 of Public Law 105-33, we established 
two different target limits on payments to excluded hospitals, 
depending upon when the facilities were established. The target amount 
limit for excluded hospitals or units established before October 1, 
1997 was set at the 75th percentile of the target amounts of similarly 
classified hospitals, as specified in Sec. 413.40(c)(4)(iii), for cost 
reporting periods ending during FY 1996, as updated to the applicable 
cost reporting period. For excluded hospitals and units established on 
or after October 1, 1997, under section 4416 of Public Law 105-33, the 
payment amount for the hospital's first two 12-month cost reporting 
periods, as specified at Sec. 413.40(f)(2)(ii), may not exceed 110 
percent of the national median of target amounts of similarly 
classified hospitals for cost reporting periods ending during FY 1996, 
updated to the first cost reporting period in which the hospital 
receives payment.
    Because we were concerned that a number of pre-1997 excluded 
hospitals, governed by Sec. 413.40(c)(4)(iii), would seek to create 
satellite arrangements in order to avoid the effect of the lower 
payment caps that would apply to new hospitals under 
Sec. 413.40(f)(2)(ii), we established rules regarding the exclusion of 
and payments to satellites of existing facilities. If the number of 
beds in the hospital or unit (including both the base hospital or unit 
and the satellite location) exceeds the number of State-licensed and 
Medicare-certified beds in the hospital or unit on the last day of the 
hospital's or unit's last cost reporting period beginning before 
October 1, 1997, the facility would be paid under the acute care 
hospital inpatient DRG system. Therefore, while an excluded hospital or 
unit could ``transfer'' bed capacity from a base facility to a 
satellite, if it increased total bed capacity beyond the level it had 
in the most recent cost reporting period before October 1, 1997 (see 64 
FR 41532-41533, July 30, 1999), the hospital will not be paid as a 
hospital excluded from the acute care hospital inpatient prospective 
payment system. However, no similar limitation was imposed with respect 
to the number of total beds in excluded hospitals and units and 
satellite facilities of those excluded hospitals and units established 
after October 1, 1997, since those excluded hospitals and units were 
already subject to the lower payment limits of section 4416 of Public 
Law 105-33, and would, therefore, not benefit from the higher cap by 
creating a satellite facility.
    Section 123 of Public Law 106-113 confers broad authority on the 
Secretary regarding the implementation of the prospective payment 
system for LTCHs, and as described in section X.N. of this final rule, 
we will transition the LTCH prospective payment system over 5 years. 
During this period, payments to LTCHs will gradually change from a 
blend of hospital-specific reasonable cost-based payments and the 
Federal rate to a fully 100 percent Federal per-discharge LTC-DRG-based 
prospective payment system. In addition, IRFs also will be transitioned 
to 100 percent fully Federal prospective payment system payment 
starting with cost reporting periods beginning during FY 2003. In the 
proposed rule, we stated that we would consider whether to propose 
elimination of the bed-number criteria in Sec. 412.22(h)(2)(i) for pre-
1997 hospitals, once the applicable prospective payment system is fully 
phased in. All LTCHs would be paid based on 100 percent of the LTCH 
Federal rate by FY 2007 and the payment rates established under the 
TEFRA system at that time will no longer exist for this class of 
hospitals. In addition, we noted that, starting with cost reporting 
periods that begin during FY 2003, payment to IRFs are no longer cost 
based. We also noted that any policy change for lifting the bed-number 
criteria for hospitals under the LTCH or IRF prospective payment 
systems that we consider to propose would not apply while hospitals 
continue to be paid under the TEFRA system. Therefore, in the proposed 
rule, we stated that during the 5-year phasein period, the policies in 
Sec. 412.22(h)(2)(i) would continue to apply to LTCH satellites 
facilities.
    Comment: One commenter endorsed the policy that we may limit 
criterion for LTCHs with satellites once the LTCH prospective payment 
system is fully phased in by FY 2007. Under that existing policy, we 
limit a LTCH with a satellite to the number of beds that does not 
exceed the total number of beds the hospital was licensed to have on 
the last day of the hospital's last cost reporting period beginning 
before October 1, 1997.
    Ten other commenters urged us to adopt a policy eliminating the 
bed-number restrictions for satellites established by pre-1997 LTCHs as 
soon as a LTCH elects to be paid based on 100 percent of the standard 
Federal rate. The commenters recommended not waiting to eliminate the 
bed limit until FY 2007. The commenters explained that the rationale 
for the policies regarding bed limits for LTCHs with satellites was 
established subsequent to the enactment of the BBA in 1997, which set 
different target amount limits for each group. The commenters believed 
the policy should be obsolete once a LTCH is paid 100 percent under the 
fully Federal rate. Two of these commenters, while agreeing that we 
should adopt regulations eliminating the bed limits for pre-1997 LTCHs 
that elect to be paid based on 100 percent of the Federal rate, 
suggested limiting any proposal to those situations when the LTCH's 
TEFRA payment rate is lower than the most recent cap under 
Sec. 413.40(f)(2)(ii).
    Response: We agree that it may be appropriate to propose an 
elimination of the bed restriction prior to all hospitals transition to 
the LTCH prospective payment system. Although, in the proposed rule, we 
indicated that we would consider proposing a change to the existing 
bed-limit criterion in Sec. 412.22(h)(2)(i) for pre-1997 LTCHs once the 
LTCH prospective payment system was fully phased in, we agree with the 
argument presented by the commenters that it may be appropriate to 
propose dispensing with bed-number restrictions for those pre-1997 
LTCHs that elect to be paid under 100 percent of the Federal rate, at 
the start of the cost reporting period when this election is made. The 
rationale for the bed limit provision at Sec. 412.22(h)(2)(i) was the 
potential for gaming by creating a satellite location with a higher 
TEFRA target amount cap, where in reality the satellite would have been 
a separately certified LTCH but would have been subject to the lower 
cap on payments.

[[Page 56013]]

Once the hospital is paid under 100 percent of the prospective payment 
system rate, there is no longer a reason for the hospital to create a 
new hospital as a satellite since such a creation would not affect the 
hospital's prospective payment system payment. Accordingly, we will 
address a change in the policy concerning bed limits in the next update 
of the LTCH prospective payment system. Since the bed-restriction 
provisions on LTCHs with satellites were applicable under the TEFRA 
payment system, those LTCHs that are transitioning into full 
prospective payment and that, therefore, are still receiving a 
percentage of their payments under TEFRA rules, we believe, should 
continue to be subject to these restrictions during the phasein.
    Finally, we do not believe that it may be appropriate to propose 
the more restrictive option suggested by the two commenters. Allowing 
only those hospitals with TEFRA target amounts that are below the BBA 
cap or the target amount to exceed the limit is not consistent with our 
original basis for the limit. Once a hospital is not subject to the BBA 
cap on the target amount, the limit should be lifted with no 
consideration of the comparison of the hospital's cost to its target 
amount.
    Comment: Several commenters urged us to consider dispensing with 
the satellite bed-number restrictions for IRFs once the IRF prospective 
payment system is fully phased in for cost reporting periods beginning 
during FY 2003.
    Response: We appreciate the comments on this issue. This area is 
currently under our review and may be addressed in the future when 
changes to the IRF prospective payment system are addressed.
    Comment: One commenter suggested that, under the LTCH prospective 
payment system, satellite facilities should not have to independently 
comply with the 25-day average length of stay requirements separate 
from the parent LTCH.
    Response: We disagree with the commenter's suggestion and are not 
revising the regulations that require a satellite facility of a LTCH to 
independently meet the average 25-day length of stay requirement under 
Sec. 412.22(h)(2)(ii)(D). In establishing regulations for satellite 
facilities of excluded hospitals in the July 30, 1999 acute care 
hospital inpatient prospective payment system final rule (64 FR 41534), 
we clarified the need to establish financial and administrative linkage 
between the satellite facility and the parent excluded hospital, and we 
required the satellite facility to comply independently with selected 
statutory requirements for qualifying into the category of excluded 
provider of the parent hospital. We were concerned that existing 
hospitals that were excluded from the prospective payment system were 
establishing new hospitals under the guise of satellite facilities in 
order to circumvent several Medicare payment provisions. We also wanted 
to safeguard against the possibility of these satellites of excluded 
hospitals actually functioning as a part of an acute care hospital for 
the financial benefit of both facilities without any consequential 
clinical benefit to patients who could have reasonably been treated at 
an acute care hospital.
    We continue to believe it is essential that the satellite facility 
of such an excluded hospital retain the identity of the type of 
excluded hospital of which it is a part by separately complying with 
such requirements, thereby ensuring that patients hospitalized at the 
satellite facility would receive the appropriate specialized care for 
which Medicare is paying. In the case of a LTCH, we require that a 
satellite facility meet the 25-day average length of stay requirement 
independently, since we do not believe patients not requiring long-term 
hospital-level care should be admitted to either the LTCH or its 
satellite and we are concerned that, without requiring separate 
compliance, shorter lengths of stay at either the LTCH or its satellite 
could be balanced by longer stays at the other. Therefore, we will 
continue to separately calculate the length of stay for patients at 
LTCH satellite facilities to ensure that the satellite facility is 
actually a LTCH that warrants payments under the LTCH prospective 
payment system.
    Comment: One commenter urged us to limit the growth of LTCH 
satellites by prohibiting additional LTCH satellites from being 
established after October 1, 2002.
    Response: We do not believe that the action suggested by the 
commenter is warranted at this time.
2. Criteria for Exclusion of Satellite Facilities From the Hospital 
Inpatient Prospective Payment System Published in the August 1, 2002 
Acute Care Hospital Final Rule (67 FR 49982)
    In the final rule for the acute care hospital inpatient prospective 
payment system, published on August 1, 2002 (67 FR 49982), we included 
a discussion of policy changes for satellites of prospective payment 
system-excluded hospitals and units and revised Sec. 412.22(h) (67 FR 
50105). Effective for cost reporting periods beginning on or after 
October 1, 2002, a hospital or unit that has a satellite facility must 
meet the following criteria in order to be excluded from the acute care 
hospital inpatient prospective payment system for any period: (1) It is 
not under the control of the governing body or the chief executive 
officer of the hospital in which it is located; and (2) it furnishes 
inpatient care through the use of medical personnel who are not under 
the control of the medical staff or the chief medical officer of the 
hospital in which it is located. We further indicated that a number of 
the criteria that apply to hospitals-within-hospitals would not be 
applicable to satellite facilities. One example is the requirement that 
the cost of services that the hospital-within-a-hospital receives from 
the ``host'' hospital is not more than 15 percent of the hospital's 
inpatient operating costs would not be an appropriate criterion. This 
criterion would not be appropriate because the test would not only look 
at the costs incurred by the satellite facility but also at the costs 
incurred by the entire hospital, including both the satellite facility 
and the main hospital.
    We remain concerned that a significant potential exists for co-
located providers to circumvent Medicare policy. For example, an 
excluded hospital would not be prohibited, under current rules, from 
setting up one or more satellites that could be much larger than the 
main provider hospital, but under the rules published on August 1, 
2002, do not need to meet the separateness requirements for hospitals-
within-hospitals in Sec. 412.22(e)(5). In this scenario, a small main 
provider (having, for example, 50 beds), which itself could be co-
located with an acute hospital as a hospital-within-a-hospital, could 
establish a large satellite (having, for example, 200 beds). Although 
this activity would be equivalent to the creation of a hospital-within-
a-hospital, the hospital would, under current rules, only be required 
to comply with the satellite regulations at Sec. 412.22(h), not the 
additional requirements for hospitals-within-hospitals (see 
Sec. 412.22(e)(5)). We believe such a result would defeat the purpose 
of the hospital-within-a-hospital and satellite rules, by leading to 
the creation of facilities which are not sufficiently independent of 
the hospitals in which they are located to qualify for separate 
payment.
    As noted in the above discussion of hospitals-within-hospitals and 
satellites under the LTCH prospective payment system, we will be 
monitoring all aspects of onsite Medicare providers. If we see 
potentially abusive configurations being developed, we may consider 
proposing further regulations

[[Page 56014]]

that would provide effective safeguards against such abuse, such as 
requiring any satellite facility of a prospective payment system-
excluded hospital that shares a building or a campus with another 

Medicare provider to individually meet separateness requirements 
substantially the same as those in Sec. 412.22(e)(5).

I. Monitoring System

    In the March 22, 2002 proposed rule, we proposed various policies 
that we believed would provide equitable payment for stays that reflect 
less than the full course of treatment and reduce the incentives for 
inappropriate admissions, transfers, or premature discharges of 
patients that are present in a discharge-based prospective payment 
system. We also proposed to collect and interpret data on changes in 
average lengths of stay under the prospective payment system for 
specific LTC-DRGs and the impact of these changes on the Medicare 
program.
    We are planning to develop a monitoring system that will assist us 
in evaluating the LTCH prospective payment system. If our data indicate 
that changes might be warranted, we may revisit these issues and 
consider proposing revisions to these policies in the future.
    Comment: One commenter stated that, in designing the LTCH 
prospective payment system, we compared current costs to payments under 
the new prospective payment system. The commenter indicated that, since 
these costs may be higher than necessary, it is possible that 
additional payments for care provided in LTCHs may not be an 
appropriate expenditure of Medicare funds. The commenter urged us to 
gather data on the following basic issues:
     Where patients who need acute long-term care are treated 
in areas where there are no LTCHs;
     How costs and outcomes compare for similar patients in 
long-term care hospitals and other settings in areas where LTCHs do not 
exists;
     How costs compare for hospitals with and without onsite 
LTCHs;
     How costs compare for onsite LTCHs and freestanding LTCHs; 
and
     How the presence or absence of LTCHS affects transfers to 
acute care hospitals and other post-acute care settings.
    Response: We agree with the commenter that these areas of study are 
essential to our ongoing monitoring and evaluation activities for 
implementation of the LTCH prospective payment system. We note that the 
establishment of the prospective payment system for LTCHs is required 
by statute. The statute specifically requires that the system be budget 
neutral to payments under the current TEFRA system. However, as we 
stated earlier, we intend to develop a monitoring system that will 
assist us in evaluating the LTCH prospective payment system. If our 
data indicate that changes are warranted, we may revisit these issues 
and, consistent with statutory requirements, consider revising these 
policies in the future.
    Given that the only unique requirement that distinguishes a LTCH 
from other hospitals is an average length of stay of greater than 25 
days, we continue to be concerned about the extent to which LTCH 
services and patients differ from those services and patients treated 
in other Medicare covered settings (for example, SNFs and IRFs) and how 
the LTCH prospective payment system will affect the access, quality, 
and costs across the health care continuum. Thus, we will monitor 
trends in the supply and utilization of LTCHs and Medicare's costs in 
LTCH and relative to other Medicare providers. For example, we may 
conduct medical record reviews of Medicare patients to monitor changes 
in service use (for example, ventilator use) over a LTCH episode of 
care and to assess patterns in the average length of stay at the 
facility level. We will consider future changes to LTCH coverage and 
payment policy based upon the results of such analyses.

J. Payment Adjustments

    As indicated earlier, the Secretary generally has broad authority 
under section 123 of Public Law 106-113 in developing the prospective 
payment system for LTCHs. Thus, the Secretary has discretion to 
determine whether (and how) to make adjustments to the prospective 
payments to LTCHs. Section 307(b) of Public Law 106-554 directs the 
Secretary to ``examine'' appropriate adjustments to the prospective 
payments to LTCHs, including certain specific adjustments, but under 
that section the Secretary continues to have discretion as to whether 
to provide for adjustments.
    In determining whether to include specific payment adjustments 
under the prospective payment system for LTCHs, we conducted extensive 
regression analyses of the relationship between LTCH costs (including 
both operating and capital-related costs per case) and several factors 
that may affect costs such as the percent of Medicaid patients treated, 
the percent of Supplemental Security Income (SSI) patients treated, 
geographic location, and medical education programs. The 
appropriateness of potential payment adjustments is based on both cost 
effects estimated by regression analysis and other factors, including 
simulated payments that we discuss later in this section of the 
preamble.
    Our analyses in the proposed rule were based on data from 222 LTCHs 
for which both costs from the cost reports in HCRIS and case-mix data 
from the MedPAR file were available. For this final rule, we collected 
costs from the cost reports and case-mix data from the MedPAR file on 
198 LTCHs. We excluded LTCHs that are all-inclusive providers and 
providers reimbursed in accordance with demonstration projects (section 
X.K.2.a. of this preamble). We estimated costs for each case by 
multiplying hospital-specific cost-to-charge ratios by the LTCH's 
charges for that case. Cost-to-charge ratios were determined by 
obtaining costs from FY 1998 or FY 1999 cost report data, or both, as 
available in the HCRIS minimum data set, and charges from the Medicare 

claims data available in the MedPAR file. Because the universe of LTCHs 
has grown relatively rapidly over the last several years, in order to 
maximize the number of LTCHs in the database, we used the most recent 
cost report data available for each LTCH. If we had both FY 1998 and FY 
1999 cost report data, we used the most complete cost reporting period 
(that is, the cost reporting period with the greater number of months). 
If we used FY 1998 cost report data because FY 1999 data were either 
unavailable (due to the time lag in cost report settlement) or 
incomplete, we updated the FY 1998 data for inflation using the FY 1999 
excluded hospital market basket increase (2.4 percent) as published in 
the July 31, 1998 acute care hospital inpatient prospective payment 
system FY 1999 final rule (63 FR 40954). As indicated in Appendix A of 
this final rule, we are using the excluded hospital market basket with 
a capital component to update payment rates. The excluded hospital 
market basket is currently used to update LTCHs' target amounts for 
inflation under the TEFRA system. We believe that the use of the 
excluded hospital market basket to update LTCHs' costs for inflation is 
appropriate because the excluded hospital market basket measures price 
increases of the services furnished by excluded hospitals, including 
LTCHs. We believe that there is insufficient data to develop a market 
basket based only on LTCH costs at this time.
    As we explained in the proposed rule, in computing hospital-
specific cost-to-charge ratios, we matched the costs for which we had 
the most recent and

[[Page 56015]]

complete cost reporting period data to the claims in the MedPAR file 
for each month in that cost reporting period.
    Comment: One commenter believed that a rural adjustment is an 
important component of the LTCH prospective payment system; the IRF 
prospective payment system provides for a 19.4 percent payment 
adjustment for rural hospitals and units. In the absence of a rural 
adjustment, the commenter believed that those LTCHs located in rural 
areas will be placed at a competitive disadvantage in the purchasing of 
hospital services and medical supplies since they share the labor 
market with rehabilitation hospitals.
    Response: As we explained in the proposed rule, while our data did 
identify 14 rural LTCHs, the analysis of the data associated with these 
rural providers did not support a payment adjustment for LTCHs located 
in rural areas.
    Therefore, under the proposed LTCH prospective payment system, all 
LTCHs would be treated the same for the purposes of payment, regardless 
of location. With regard to the 14 rural LTCHs, in the proposed rule, 
we compared the hospital's projected payments to both their projected 
costs and to what TEFRA payments would be and determined a proposed 
LTCH prospective payment system payment-to-cost ratio of 1.1337 and a 
proposed new LTCH prospective payment system payment-to-current TEFRA 
payment ratio of 1.2327 for those hospitals. These ratios showed that 
the prospective payments under the proposed LTCH prospective payment 
system for rural hospitals were expected to exceed their costs by 13.37 
percent and exceed their payments under the TEFRA system by 23.27 
percent. In this final rule, based on updated data and including the 
policy changes discussed above, rural hospitals are still projected to 
have positive ratios; for example, a new LTCH prospective payment 
system payment-to-current TEFRA payment ratio of 1.0796 and a new LTCH 
prospective payment system payment-to-cost ratio of 1.0333 (based on 
estimated TEFRA payments and case-mix data that were available from the 
MedPAR file for 194 LTCHs). Therefore, we believe the data continue to 
support our position that a rural location adjustment is not warranted 
at this time. We also point out that this was not the case for 
rehabilitation facilities. The regression data for IRFs showed a basis 
for recognizing additional costs at rural locations. Thus, under the 
IRF prospective payment system, there was a need for some type of 
adjustment for rural location.
    Comment: One commenter supported our assessment that because of the 
low number of rural LTCHs (5 percent of the total universe) and the 
modest volume of patients treated in these facilities, there should not 
be a rural location adjustment.
    Response: We appreciate the commenter's support of our position on 
this issue. However, we note that our policy was not based on the 
number of rural LTCHs or the volume of patients. Rather, the policy 
decision not to include a rural adjustment in the LTCH prospective 
payment system is based on a regression analysis of data from rural 
hospitals, which did not show that an adjustment is appropriate.
    Comment: One commenter asked whether the cost-to-charge ratios that 
appear in the ratesetting file on the CMS website were adjusted for 
inflation.
    Response: We did not apply an inflation factor to the cost-to-
charge ratios since both costs and charges were taken from the same 
year's data (for example, FY 1999). Since we would use the same 
inflation factor for both the numerator (costs) and denominator 
(charges), the resulting ratio with the inflation factor applied would 
be equal to the ratio without the application of the inflation factor. 
Therefore, an inflation factor is unnecessary. In determining the cost-
to-charge ratios, costs were taken directly from the MedPAR file.
    Comment: One commenter asked why cost-to-charge ratios greater than 
``2'' were in the calculation of payment amounts.
    Response: We believe that the cost-to-charge ratios greater than 
``2'' are legitimate and, thus, we did not believe it was appropriate 
to exclude them.
    Comment: One commenter noted that cost-to-charge ratios are defined 
as the ``ratio of costs to charges from total cost report data in HCRIS 
matching charge data from the MedPAR files,'' and asked if this meant 
that a ratio of costs from the cost report to charges from the MedPAR 
file was used to determine the cost-to-charge ratio or if this meant 
that the cost-to-charge ratios appearing in the cost reports were 
applied to charges in the MedPAR file. If the latter method was used, 
the commenter wanted to know how the cost-to-charge ratios were 
calculated from the cost report data.
    Response: A ratio of costs from the cost report to charges from the 
MedPAR file was created to determine the cost-to-charge ratio. The 
cost-to-charge ratios were determined by dividing the average cost per 
case from the LTCH's most recent available cost report by the LTCH's 
average covered charge per case from corresponding MedPAR data for the 
same months as the months covered by the cost reporting period. For 
example, for a LTCH with a 12-month cost reporting period beginning on 
July 1, 1999 and ending on June 30, 2000, we used MedPAR data for 
claims discharged from July 1999 through June 2000 to compute its cost-
to-charge ratio. The cost per case for each hospital is calculated by 
summing all costs and dividing by the number of corresponding cases.
    Multivariate regression analysis is the standard statistical 
technique for examining cost variation that was used to analyze 
potential payment adjustments for LTCHs. We looked at two standard 
models--(1) a double log regression explanatory model to examine the 
impact of all relevant factors that might potentially affect a LTCH's 
cost per case; and (2) a payment model that examines the impacts of 
those factors that were determined to affect costs and, therefore, were 
used to determine payment rates. In multivariate regression, the 
estimated average cost per case (the dependent variable) at the LTCH 
can be explained or predicted by several independent variables, 
including the case-mix index, the wage index for the LTCH, and a vector 
of additional explanatory variables that may affect a LTCH's cost per 
case, such as a teaching program or the proportion of low-income 
patients. The case-mix index is the average of the LTC-DRG weights, 
derived by the hospital-specific relative value method, for each LTCH. 
Short-stay outlier cases are weighted based on the ratio of the length 
of stay for the short-stay case to the average length of stay for 
nonshort-stay cases in that LTC-DRG. We simulated payments using an 
estimated budget-neutral payment rate and the regression coefficients 
as proxies for payment system adjustments. Then we calculated payment-
to-cost ratios for different classes of hospitals for specific 
combinations of payment policies.
    We examined payment variables applicable to the hospital inpatient 
and IRF prospective payment systems, including the disproportionate 
share patient percentage, both the resident-to-average daily census 
ratio and the resident-to-bed ratio teaching variables, and variables 
that account for location in a rural or large urban area. A discussion 
of the major payment variables and our findings appears below.
1. Area Wage Adjustment
    Section 307(b) of Public Law 106-554 requires that we examine the

[[Page 56016]]

appropriateness of an area wage adjustment. Such an adjustment would 
account for area differences in hospital wage levels and would be made 
by adjusting the LTCH prospective payment system payment rate by a 
factor that will reflect the relative hospital wage level in the 
geographic area of the hospital, as compared to the national average 
hospital wage level. In the March 22, 2002 proposed rule, we did not 
propose implementing an area wage adjustment for payments to LTCHs 
because our regression analysis indicated at that time that a wage 
adjustment would not increase the accuracy of payments. However, as 
discussed below, based on the comments we received, we have 
reconsidered the appropriateness of including an area wage adjustment 
in the LTCH prospective payment system. Under the acute care hospital 
inpatient prospective payment system, a wage index is applied to the 
labor-related share of the operating standardized amount to adjust for 
local cost variation. The hospital wage data are used also to make an 
area wage adjustment under the IRF prospective payment system, the SNF 
prospective payment system, the home health prospective payment system, 
and the outpatient hospital prospective payment system.
    As we discussed in the March 22, 2002 proposed rule, we analyzed 
the appropriateness of an area wage adjustment for LTCHs by evaluating 
the labor-related share from the excluded hospital with capital market 
basket. (This is the same market basket that is used in the IRF 
prospective payment system.) Currently, under the TEFRA reasonable 
cost-based reimbursement system, the excluded hospital market basket is 
used to update the cap on LTCHs' target amounts, which are used to 
determine payments to LTCHs for inpatient operating costs. Since we 
proposed to implement a single standard Federal rate under the LTCH 
prospective payment system (section X.K. of this preamble), we used a 
market basket with a capital component. A further explanation of the 
excluded hospital with capital market basket can be found in Appendix A 
of this final rule.
    The labor-related share is the relative importance of wages, fringe 
benefits, professional fees, postal services, labor-intensive services, 
and a portion of the capital share for FY 2003. We determined a labor-
related share of the excluded hospital with capital market basket by 
first estimating the portion related to operating costs. The excluded 
hospital with capital market basket is based on available cost data for 
facilities excluded from the acute care hospital inpatient prospective 
payment system, including long-term care, rehabilitation, psychiatric, 
cancer, and children's hospitals.
    In the proposed rule, we determined a labor-related share of the 
excluded hospital with capital market basket by first estimating the 
portion related to operating costs. Using the excluded hospital with 
capital market basket, we determined the labor-related share of 
operating costs to be 69.428 percent for FY 2003, which is calculated 
as the sum of the relative importance for wages and salaries (50.381 
percent), employee benefits (11.525), professional fees (2.059), postal 
services (0.244), and all other labor intensive services (5.219).
    The labor-related share of capital costs in the market basket 
needed to be considered as well. We used the portion of capital 
attributed to labor, which our Office of the Actuary estimated on the 
basis of cumulative knowledge of prospective payment systems, to be 46 
percent. This was the same percentage used for both the acute care 
hospital inpatient capital prospective payment system and the IRF 
prospective payment system. In the proposed rule for FY 2003, we 
estimated, based on the historical knowledge of prospective payment 
systems, the relative importance for capital to be 7.552 percent of the 
excluded hospital with capital market basket. We then multiplied 46 
percent by 7.552 percent to determine that the labor-related share for 
capital costs for FY 2003 to be 3.474 percent. We then added the 3.474 
percent for capital costs to the 69.428 percent for operating costs to 
determine the total labor-related share based on the excluded hospital 
with capital market basket. Thus, in the proposed rule, when we 
examined an adjustment to account for area differences in hospital wage 
levels, we used a labor-related share of 72.902 percent for the LTCH 
prospective payment system.
    Based on updated data, for this final rule we estimate the relative 
importance for capital for FY 2003 to be 7.515 percent of the excluded 
hospital with capital market basket. We then, for this final rule, 
multiplied 46 percent by 7.515 percent to determine that the labor-
related share for capital costs for FY 2003 to be 3.457 percent. 
Accordingly, based on updated data for FY 2003, the labor-related share 
of the excluded hospital with capital market basket is 72.885 percent 
(69.428 plus 3.457).
    Specifically, in the proposed rule, we examined the appropriateness 
of accounting for differences in area wage levels by multiplying the 
labor-related share of the unadjusted Federal payment by the FY 2002 
inpatient acute care hospital wage index, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. (This methodology is the same as the methodology used under 
the IRF prospective payment system and the SNF prospective payment 
system.) For purposes of both the proposed rule and the final rule, 
wage data to compute LTCH-specific wage indices were not available. 
However, LTCHs and other postacute care facilities (for example, IRFs, 
SNFs, and HHAs) generally compete in the same local labor market for 
the same types of employees as inpatient acute care hospitals.
    Comment: Several commenters recommended that we develop a wage 
index based on LTCH data. One commenter suggested that if LTCH wage 
data are unavailable due to the lack of Worksheet S-3 data, other means 
could be utilized in the short term to create a labor adjustment 
mechanism. Alternatively, the commenter suggested that the wage indices 
used for the acute care hospital inpatient prospective payment system 
could be weighted to account only for those wage areas containing a 
LTCH.
    One commenter suggested that the payments under the LTCH 
prospective payment system should be adjusted using the current 
inpatient acute care hospital wage indices, but a different labor-
related share should be chosen to reflect the experience of LTCHs. 
Another commenter recommended establishing a LTCH wage index using the 
labor share estimated by the excluded hospital market basket and the 
wage indices used in the IRF prospective payment system.
    Response: At this time, we are unable to develop a separate wage 
index for LTCHs based solely on LTCH data. Currently, there is a lack 
of specific LTCH wage and staffing data necessary to develop a separate 
LTCH wage index accurately. As we stated in the proposed rule, in order 
to accumulate the data needed for such an effort, we would need to make 
modifications to the Medicare hospital cost report. Because we do not 
have LTCH specific wage data, at this time we are unable to determine 
an appropriate weighting factor for the acute care wage index to 
account only for those wage areas containing a LTCH. In the future, we 
will continue to research the appropriateness of the acute care 
hospital wage index for LTCHs and may investigate the feasibility of 
developing a wage index specific to LTCHs. However, at this time, we 
believe that the wage index based on acute care

[[Page 56017]]

hospital wage data contains the best and most appropriate data to use, 
and it is the same wage index used in the prospective payment system 
for other postacute care for providers (IRFs, SNFs, and HHAs). 
Therefore, we believe the acute care hospital wage index for FY 2003 is 
appropriate since LTCHs and other postacute care facilities generally 
compete in the same local labor market for the same types of employees 
as inpatient acute care hospitals.
    In addition, we believe that the labor-related share, which is 
based on the excluded hospital with capital market basket, 
appropriately reflects the experience of LTCHs since it is based on 
available cost data for facilities excluded from the acute care 
hospital inpatient prospective payment system, including long-term 
care, rehabilitation, psychiatric, cancer, and children's hospitals.
    Comment: Many commenters expressed concern that no area wage 
adjustment was provided for in the LTCH prospective payment system. 
Specifically, they noted the following issues: (1) LTCHs in high wage 
areas will have difficulty competing in labor markets with other 
providers whose payments are wage adjusted; (2) LTCHs in high wage 
areas will have difficulty in recruiting staff with the appropriate 
skill mixes; and (3) services in high wage areas will need to be cut to 
meet fixed LTCH prospective payment system payments that are not 
adjusted to account for differences in area wages. Given these 
concerns, one commenter submitted findings by The Lewin Group regarding 
the regression analysis on a wage adjustment for LTCHs.
    The Lewin Group performed an analysis which showed that by removing 
from the sample one LTCH that has high volume and very low cost per 
case, the wage index is shown to have a positive and statistically 
significant impact on overall costs (the wage index coefficient was 
found to be 18.8 percent, which is approximately 25 percent of the full 
labor-cost share). Therefore, the commenter believed it is appropriate 
to include the area wage adjustment in a 5-year transition period. The 
commenter also suggested that if we are not inclined to include an area 
wage adjustment, an alternative would be to use a modified area wage 
index adjustment that have ``soft'' upper and lower wage adjustment 
limits to lessen the gains and losses that otherwise might occur.
    Another commenter stated that based on the analysis by The Lewin 
Group, the statistical results found by us may be influenced by a small 
number of extreme values from a few hospitals that unduly influenced 
the statistical models. Other commenters asserted that the sample of 
LTCHs used by us is not statistically valid for determining whether a 
wage adjustment is appropriate. One commenter pointed out that the 
ratesetting file used by us consisted of 20 percent of the LTCHs being 
located in Texas and 10 percent located in Louisiana. The commenter 
believed that, since these two States typically have lower wages than 
the rest of the country, by not incorporating a wage adjustment, we are 
inappropriately reimbursing providers across all States and failing to 
take into account the evidence before it.
    One commenter claimed that as it is obvious the data or the 
statistical analysis, or both, used by us are not accurate or 
appropriate for the sample of LTCHs used, it is not reasonable to 
conclude that LTCHs have a labor-related share of cost of only 19.91 
percent. The commenter cited Tables 7 and 8 of the Health Care 
Financing Administration Review/Winter 2001, which show the cost of 
routine nursing care (including bed and board) as representing an 
average 66 percent of costs of the LTCHs. Another commenter stated that 
even though the results of our regression model do not support a wage 
adjustment, there is empirical data compiled by the Bureau of Labor 
Statistics that clearly identified the wide variability of wages across 
the country. Several other commenters asserted that allowing a wage 
adjustment for other providers, but not LTCHs, based on statistical 
accuracy from a past time period, is poor public policy and this policy 
could lead to destabilization of payments rates and should be avoided.
    One commenter stated that our belief that an area wage index 
adjustment as a component of a LTCH prospective payment system does not 
improve the statistical accuracy of the payment is counter intuitive, 
fails to address concerns that inadequate financing of labor costs will 
adversely affect patient care, and fails to address a statement made by 
MedPAC staff that the quality of LTCH data may have an effect on 
analysis of this issue.
    Several commenters also cited MedPAC's June 2001 Report to 
Congress, in which it states that ``the objective of the geographic 
adjustment is to make Medicare's payment rates accurately reflect the 
costs efficient providers would incur in furnishing services to 
beneficiaries given local market wages.'' In that same report, MedPAC 
also stated that without a geographic wage adjustment, Medicare's 
payment rates would be too high in labor markets with relatively low 
wage rates and providers would face incentives to furnish too many 
services, while Medicare's payment rates would be too low in labor 
markets with relatively high wage rates, ``giving providers financial 
incentives to produce too few services, stint on services or inputs 
(especially labor), or cease participating in Medicare.''
    Other commenters pointed out that numerous older LTCHs, located 
primarily in high wage areas, have been constrained by their TEFRA 
target amounts and have been more vigilant in reigning in their 
expenses. Another commenter speculated that if the average cost per 
case in LTCHs did not vary with the wage index, the data were 
unreliable or there is a wide heterogeneity among services. The 
commenter believed that service heterogeneity is significant because 
newer facilities have not been subject to the same cost limits as older 
facilities, and there is a large mix of old and new facilities in the 
LTCH sector. Furthermore, the commenter explained that, historically, 
older facilities tend to be located in the northeastern region of the 
country where the cost of labor is higher on average than in other 
areas of the country. Therefore, the historical effect of the TEFRA 
caps may be obscuring the effect of regional differences in wage levels 
in the empirical model. The commenter added that, moreover, the theory 
of prospective payment systems is that the national rate is intended to 
cover a set of clinically similar services. Given that wage levels have 
proven to vary regionally, by not providing a wage adjustment, the 
policy gives the national average rate less purchasing power in high 
labor cost regions of the country, thus diminishing the level of care 
available to LTCH Medicare beneficiaries in those areas.
    Other commenters expressed concern that since, at present, 
approximately 33 percent of LTCHs are geographically clustered in three 
States (Texas, Louisiana, and Massachusetts), it would appear that a 
prospective payment system with no wage adjustment would encourage 
further clustering of LTCHs. Another commenter also noted that the 
negative statistical finding could perpetuate acknowledged distortions 
of the TEFRA payment system. Thus, a wage adjustment for high wage 
areas would be appropriate.
    With respect to our assertion that including a wage adjustment 
would inappropriately redistribute payments to LTCHs by shifting 
reimbursement to LTCHs that are located in an area within a higher wage 
index, but in fact, with lower costs, one commenter stated that

[[Page 56018]]

we need to recognize and reward these efficient providers, which would 
be consistent with the objectives of the proposed prospective payment 
system for LTCHs, that is, ``to provide incentives to control costs and 
to furnish services as efficiently as possible.''
    Response: In examining the comments and suggestions we received, 
several issues led us to reconsider our previous decision. First, we 
agree with the commenters that there is a possibility that TEFRA 
policies may have in some way affected the relationship between LTCHs' 
geographic location and costs. As was pointed out by several 
commenters, older LTCHs with relatively low TEFRA ceilings are often 
located in large urban areas, which may provide an explanation for the 
results of our statistical analysis. In addition, the historical effect 
of the TEFRA caps may be affecting the expected effect of regional 
differences in wage levels of LTCHs operating under the prospective 
payment system. We also agree with many of the commenters' concerns 
that, by providing for a wage adjustment, LTCHs in high wage areas may 
help ensure that these LTCHs can compete in labor markets with other 
providers whose payments are wage adjusted; can recruit appropriate 
staff; and can deliver sufficient high quality services to Medicare 

beneficiaries.
    As to the sensitivity analysis that was conducted, we agree with 
commenters that it is reasonable to expect that a hospital's wage costs 
will affect total costs and that, in consequence, the payment amounts 
under the new system should be adjusted using a wage index. However, 
the statistical analysis presented by one commenter included analysis 
where the effect of wages, though small, was positive and significant, 
as well as other models where the effect was small and negative, but 
also significant. This indicates that the regression estimates are very 
sensitive to the inclusion and exclusion of certain facilities. 
Unfortunately, this limits our ability to base policy on the results of 
the commenter.
    We believe that it is reasonable to assume that wages have an 
effect on case-mix adjusted LTCH costs. However, we believe that these 
inconsistent results may be due to limitations in the current data from 
the LTCHs. This is not surprising because case-mix information has not 
been previously used for payment for these hospitals, and since various 
LTCHs have been subject to varying TEFRA limits. Despite the results of 
the commenter's statistical analysis, we have reconsidered our proposal 
not to include a wage adjustment and now believe that the conceptual 
reasons for having an area wage adjustment support transitioning into a 
wage adjustment, notwithstanding the data problems and issues with the 
regression analysis. We reevaluated the statistical analysis presented 
in the proposed rule along with our most recent findings based on the 
latest available data. Based on the results of this reevaluation, we 
now agree with the commenter's suggestion that it is appropriate to 
phase-in a wage adjustment over a transition period.
    In the proposed rule, we analyzed the results of the wage index 
coefficient derived from regression analysis to validate the labor-
related share calculated from the market basket. In the regression, we 
standardized each LTCH's cost per case by the various factors, such as 
case-mix, bed size, number of cases, length of stay, and occupancy. The 
wage index coefficient allowed us to approximate the labor-related 
portion of cost per case. Since the labor-related share derived from 
the market basket is the proportion of costs that have been identified 
as being influenced by the local labor amount, we expected this 
coefficient to be statistically significant and near our market basket 
measure. The double-log regression analysis in the proposed rule 
generated a wage index coefficient, which approximated the labor-
related portion of cost per case, that was not near the market basket 
measure (72.902 percent). For this final rule, based on updated data we 
reran the regression, and the double log regression continues to show a 
wage index coefficient for the market basket, which at most is 
approximately 20 percent.
    While the statistical analysis did not show a significant 
relationship between LTCHs' costs and their geographic location, we 
believe it is appropriate to include some adjustment for area wages. 
Accordingly, we will incorporate a wage index adjustment, but beginning 
with FY 2003, as one commenter suggested, we will transition to a full 
wage adjustment over a 5-year period. Accordingly, for the first year 
of the LTCH prospective payment system, the area wage adjustment will 
be one-fifth of the full FY 2002 wage index without geographic 
reclassifications. We will continue to reevaluate LTCH data as they 
become available and would propose to adjust the phasein if subsequent 
data support a change. Therefore, we are amending Sec. 412.525 to add a 
new paragraph (c), which provides for an appropriate adjustment to the 
labor-related share of the unadjusted LTCH Federal rate.
    As we described in the proposed rule and as several commenters 
supported, we are establishing a LTCH wage index using the labor-
related share estimated by the excluded hospital market basket with 
capital and the wage indices computed from data from inpatient acute 
care hospital wage data without regard to reclassifications under 
sections 1886(d)(8) or 1886(d)(10) of the Act. This is consistent with 
the area wage adjustments under the prospective payment systems for 
other postacute care providers (IRFs, SNFs, and HHAs).
    As discussed above, to calculate wage adjusted payments for the 
payment rates set forth in this final rule, the prospectively 
determined unadjusted LTCH Federal rate is multiplied by the labor-
related percentage (72.902) to determine the labor-related share of 
LTCH Federal rate. The labor-related share is then multiplied by the 
applicable LTCH wage index as shown in Table 1 (for urban areas) and 
Table 2 (for rural areas) in the Addendum of this final rule. For FY 
2003, the applicable LTCH wage index will be one-fifth (the first 
year's proportionate fraction of a 5-year phasein) of the full FY 2002 
inpatient acute care hospital wage index, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. (See section X.J.2. of this preamble regarding geographic 
reclassification.) The resulting wage-adjusted labor-related share is 
then added to the nonlabor-related share (27.098 percent), resulting in 
a wage adjusted payment rate. The following example illustrates how the 
wage-adjusted LTCH Federal rate would be computed for a LTCH located in 
Chicago, IL (MSA 1600) with a hypothetical LTCH unadjusted Federal rate 
of $10,000. The FY 2003 one-fifth LTCH wage index value for MSA 1600 is 
1.0202. The labor-related share (72.885 percent) of the hypothetical 
LTCH Federal rate is $7,288.50 ($10,000 x 0.72885) and the nonlabor-
related share (27.115 percent) is $2,711.50 ($10,000 x 0.27115). 
Therefore, the wage-adjusted LTCH payment rate is:

$10,147.23 = ($7,288.50 x 1.0202) + $2,711.50.

    For FY 2003, the applicable LTCH wage index for LTCHs located in 
urban areas and for LTCHs located in rural areas are shown in Tables 1 
and 2, respectively, in the Addendum to this final rule.
    Comment: MedPAC examined two possible reasons why we found that the 
differences in local input prices were not significant predicators of 
costs for care in LTCHs: high correlation of patient need with local 
wages and a lack

[[Page 56019]]

of variation in wages for locations. It found ``the correlation of 
patient need and wages to be low'' and that ``the wages for counties 
where LTCHs are located did vary widely.'' MedPAC also hypothesized 
that limitations on increases in costs imposed by the TEFRA payment 
system could have distorted costs; however, it was unable to test this 
third possibility. MedPAC expressed concern that if we do not adjust 
rates for local input prices, ``hospitals with low wages may be 
overpaid and those with high wages may be underpaid.'' However, MedPAC 
also contended that ``if CMS does adjust to account for differences in 
wages, the opposite error may result.'' In conclusion, MedPAC stated 
that the need for a wage adjustment should be reexamined when better 
data are available.
    Three additional commenters agreed with our proposal not to include 
an adjustme