To assist readers in referencing sections contained in this html document, we are providing a 
linked table of contents.

[Federal Register: March 7, 2003 (Volume 68, Number 45)]
[Proposed Rules]               
[Page 11233-11292]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr03-27]                         


[[Page 11233]]

-----------------------------------------------------------------------

Part III





Department of Health and Human Services





-----------------------------------------------------------------------



Centers for Medicare & Medicaid Services



-----------------------------------------------------------------------



42 CFR Part 412




Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Proposed Annual Payment Rate Updates and Policy Changes; 
Proposed Rule


[[Page 11234]]


-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1472-P]
RIN 0938-AL92

 
Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Proposed Annual Payment Rate Updates and Policy Changes

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: In this proposed annual update of the payment rates for the 
Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs), we are proposing 
to change the annual period during which the updated payment rates for 
the LTCH PPS would be effective from October 1 through September 30 to 
July 1 through June 30. We also are proposing to change the publication 
schedule for these updates to allow for an effective date of July 1 
(instead of August 1). The proposed payment amounts and factors used to 
determine the proposed updated Federal rates that are described in this 
proposed rule have been determined based on this proposed revised 
update rate year. In addition, we are proposing that the annual update 
of the long-term care diagnosis-related groups (LTC-DRG) 
classifications and relative weights will remain linked to the annual 
adjustments of the acute care hospital inpatient diagnosis-related 
group system, effective each October 1. The proposed outlier threshold 
for July 1, 2003 through June 30, 2004 would be derived from the 
proposed rate year calculations. In order to conform to a proposed 
change in the acute care hospital inpatient PPS (IPPS) outlier policy, 
we are proposing a change for outlier payments under the LTCH PPS.
    We also are proposing a policy change eliminating bed-number 
restrictions for pre-1997 LTCHs that have established satellite 
facilities and that elect to be paid 100 percent of the Federal rate.

DATES: Comments will be considered if received at the appropriate 
address, as provided below, no later than 5 p.m. on May 6, 2003.

ADDRESSES: Mail written comments (an original and three copies) to the 
following address only: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1472-P, PO Box 
8010, Baltimore, MD 21244-1850.
    If you prefer, you may deliver, by hand or courier, your written 
comments (an original and three copies) to one of the following 
addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, MD 
21244-1850.

(Because access to the interior of the Humphrey Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for commenters who wish to retain proof of filing by stamping 
in and keeping an extra copy of the comments being filed.)

    Comments mailed to those addresses specified as appropriate for 
courier delivery may be delayed and could be considered late.
    Because of staffing and resource limitation, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code CMS-1472-P.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.
    For comments that relate to information collection requirements, 
mail a copy of comments to the following address:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Security and Standards Group, 
Regulations Development and Issuances Group Standards, PRA Reports 
Clearance Office, 7500 Security Boulevard, Baltimore, MD 21244-1850. 
Attn: John Burke, CMS-1472-P; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 3001, New Executive Office Building, Washington, DC 20503, 
Attn: Brenda Aguilar, CMS Desk Officer.

FOR FURTHER INFORMATION CONTACT:
Tzvi Hefter, (410) 786-4487 (General information)
Judy Richter, (410) 786-2590 (General information, transition payments, 
payment adjustments, and onsite discharges and readmissions)
Michele Hudson, (410) 786-5490 (Calculation of the payment rates, 
relative weights and case-mix index, and payment adjustments)
Tiffany Eggers, (410) 786-0400 (Market basket update, short-stay 
outliers and interrupted stays)
Ann Fagan, (410) 786-5662 (Patient classification system)
Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and budget 
neutrality)
Linda McKenna, (410) 786-4537 (Payment adjustments and transition 
period)
Kathryn McCann, (410) 786-7623 (Medigap)
Robert Nakielny, (410) 786-4466 (Medicaid)

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments

    Comments received timely will be available for public inspection as 
they are processed, generally beginning approximately 4 weeks after 
publication of a document, in Room C5-12-08 of the Centers for Medicare 

& Medicaid Services, 7500 Security Blvd., Baltimore, MD, on Monday 
through Friday of each week from 8:30 a.m. to 5 p.m. Please call (410) 
786-7197 to schedule an appointment to view public comments.

Availability of Copies and Electronic Access

    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, PO Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $10. As an alternative, you can view 
and photocopy the Federal Register document at most libraries 
designated as Federal Depository Libraries and at many other public and 
academic libraries throughout the country that receive the Federal 
Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The Web site address is: 
http://www.gpoaccess.gov/nara/index.html.
    To assist readers in referencing sections contained in this 
preamble, we are providing the following table of contents.

-----------------------------------------------------------------------
Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH

[[Page 11235]]

    C. Transition Period for Implementation of the LTCH PPS
    D. Limitation on Charges to Beneficiaries
    E. System Implementation for the LTCH PPS
II. Summary of the Major Contents of This Proposed Rule
    A. Proposed Change in the Annual Update
    B. Proposed Update Changes
III. Proposed Changes in the Annual Update of the LTCH PPS

IV. Proposed Changes in Long-Term Care Diagnosis-Related Group (LTC-DRG)
    Classifications and Relative Weights
    A. Background
    B. Patient Classifications into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    F. Proposed Changes to the Method for Updating the LTC-DRG 
       Relative Weights
V.  Proposed Policy Change Relating to Payments to LTCHs That Are 
    Satellite Facilities
VI. Proposed Changes to the LTCH PPS Rates for the Proposed 2004 
    LTCH PPS Rate Year

    A. Overview of the Development of the Proposed Payment Rates
    B. Proposed Update to the Standard Federal Rate for the Proposed 
       2004 LTCH PPS Rate Year
    1. Proposed Standard Federal Rate Update
    a. Description of the Proposed Market Basket for the Proposed 
       2004 LTCH PPS Rate Year
    b. Proposed LTCH Market Basket Increase for the Proposed 2004 
       LTCH PPS Rate Year
    2. Proposed Standard Federal Rate for the Proposed 2004 LTCH PPS 
       Rate Year
    C. Calculation of Proposed LTCH Prospective Payments for the 
       Proposed 2004 LTCH PPS Rate Year
    1. Proposed Adjustment for Area Wage Levels
    2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Proposed Adjustment for High-Cost Outliers
    4. Proposed Adjustment for Special Cases
    a. General
    b. Short-Stay Outlier Cases
    c. Interrupted Stay
    d. Onsite Discharges and Readmittances
    e. Treatment of Swing Beds Under the Interrupted Stay and Onsite 
       Discharge and Readmittance Policies
    5. Other Proposed Payment Adjustments
    6. Proposed Budget Neutrality Offset to Account for the 
       Transition Methodology
VII. Computing the Proposed Adjusted Federal Prospective Payments
VIII. Transition Period
IX. Proposed Payments to New LTCHs
X. Method of Payment
XI. Monitoring
XII. Collection of Information Requirements

XIII. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    4. Unfunded Mandates
    5. Federalism
    B. Anticipated Effects
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of Prospective Payments
    4. Results
    5. Effect on the Medicare Program
    6. Effect on Medicare Beneficiaries
    C. Executive Order 12866
XIV. Response to Public Comments
Regulations Text
Addendum-Tables

Acronyms

    Because of the many terms to which we refer by acronym in this 
proposed rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:

BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-
554
CMS Centers for Medicare & Medicaid Services
DRGs Diagnosis-related groups
FY Federal fiscal year
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act, Pub. L. 104-
191
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
OSCAR Online Survey Certification and Reporting (System)
PPS Prospective Payment System
QIO Quality Improvement Organization (formerly Peer Review Organization 
(PRO))
SNF Skilled nursing facility
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248

-----------------------------------------------------------------------

I. Background

A. Legislative and Regulatory Authority

    The Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) (Pub. 
L. 106-113) and the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provide for payment 
for both the operating and capital-related costs of hospital inpatient 
stays in long-term care hospitals (LTCHs) under Medicare Part A based 
on prospectively set rates. The Medicare prospective payment system for 
LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) of 
the Social Security Act (the Act), effective for cost reporting periods 
beginning on or after October 1, 2002. Section 1886(d)(1)(B)(iv)(I) of 
the Act defines a LTCH as ``a hospital which has an average inpatient 
length of stay (as determined by the Secretary) of greater than 25 
days.'' Section 1886(d)(1)(B)(iv)(II) of the Act also provides another 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (as determined by the Secretary) of greater 
than 20 days and has 80 percent or more of its annual Medicare 
inpatient discharges with a principal diagnosis that reflects a finding 
of neoplastic disease in the 12-month cost reporting period ending in 
FY 1997.
    Section 123 of Pub. L. 106-113 requires the prospective payment 
system for LTCHs to be a per discharge system with a diagnosis-related 
group (DRG) based patient classification system that reflects the 
differences in patient resources and costs in LTCHs while maintaining 
budget neutrality. Section 123 also requires that the system be 
implemented for cost reporting periods beginning on or after October 1, 
2002.
    Section 307(b)(1) of Pub. L. 106-554 mandates the examination of 
the feasibility and the impact of basing payment under the LTCH 
prospective payment system (LTCH PPS) on the use of existing (or 
refined) hospital DRGs that have been modified to account for different 
resource use of LTCH patients as well as the use of the most recently 
available hospital discharge data. Further, section 307(b)(1) provides 
that the Secretary shall examine and may provide for adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In a Federal Register document issued on August 30, 2002 (67 FR 
55954), we implemented the LTCH PPS authorized under Pub. L. 106-113 
and Pub. L. 106-554. This system uses

[[Page 11236]]

information from LTCH patient records to classify patients into 
distinct long-term care diagnosis-related groups (LTC-DRGs) based on 
clinical characteristics and expected resource needs. Payments are 
calculated for each LTC-DRG and provisions are made for appropriate 
payment adjustments. Payment rates under the LTCH PPS are updated 
annually and published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 
Pub. L. 97-248, for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA hospital payment provisions are 
located at 42 CFR part 413.) With the implementation of the prospective 
payment system for inpatient acute care hospitals authorized by the 
Social Security Amendments of 1983 (Pub. L. 98-21), which added section 
1886(d) to the Act, certain hospitals, including LTCHs, were excluded 
from the PPS for acute care hospitals and paid their reasonable costs 
for inpatient services subject to a per discharge limitation or target 
amount under the TEFRA system. For each cost reporting period, a 
ceiling on payments to each hospital excluded from the acute care 
hospital inpatient prospective payment system (IPPS) was determined by 
multiplying the hospital's updated target amount by the number of total 
current year Medicare discharges. The August 30, 2002 final rule 
further details payment policy under the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of Pub. L. 106-
113. That same final rule, which established regulations for the LTCH 
PPS under 42 CFR part 412, Subpart O, also contained provisions related 
to covered inpatient services, limitation on charges to beneficiaries, 
medical review requirements, furnishing of inpatient hospital services 
directly or under arrangement, and reporting and recordkeeping 
requirements.
    We refer readers to the August 30, 2002 final rule for a 
comprehensive discussion of the research and data that supported the 
establishment of the LTCH PPS.

B. Criteria for Classification as a LTCH

    LTCHs must have a provider agreement with Medicare and must have an 
average Medicare inpatient length of stay of greater than 25 days, or, 
for cost reporting periods beginning on or after August 5, 1997, for a 
hospital that was first excluded from the PPS in 1986, must have an 
average inpatient length of stay for all patients, including both 

Medicare and non-Medicare inpatients, of greater than 20 days and 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principle diagnosis that reflects a finding of neoplastic disease. 
Subject to the provisions of Sec.  412.23(e)(3), the average Medicare 
inpatient length of stay is determined based on all covered and 
noncovered days of stay of Medicare patients as calculated by dividing 
the total number of covered and noncovered days of stay of Medicare 

inpatients (less leave or pass days) by the number of total Medicare 
discharges for the hospital's most recent complete cost reporting 
period. Fiscal intermediaries verify that LTCHs meet the average length 
of stay requirements.
    The fiscal intermediary's determination of whether or not a 
hospital qualifies as an LTCH is based on the hospital's discharge data 
from its most recent cost reporting period and is effective at the 
start of the hospital's next cost reporting period, under Sec.  
412.22(d). If a hospital does not meet the length of stay requirement, 
the hospital may provide the intermediary with data indicating a change 
in the hospital's average length of stay by the same method for the 
immediately preceding 6-month period (Sec.  412.23(e)(3)(ii)). (For 
procedural efficiency and in order to comply with the timing 
requirement of Sec.  412.22(d), we have a longstanding policy of 
allowing hospitals to submit data for a period greater than 5 months 
for this purpose.) Requirements for hospitals seeking classification as 
LTCHs that have undergone a change in ownership, as described in Sec.  
489.18, are set forth in Sec.  412.23(e)(3)(iii).
    LTCHs that exist as hospitals-within-hospitals or satellite 
facilities must also meet the criteria set forth in Sec.  412.22(e) or 
Sec.  412.22(h), respectively, to be excluded from the IPPS and paid 
under the LTCH PPS.
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c) and, therefore, are not subject to the 
LTCH PPS rules:
    [sbull] Veterans Administration hospitals.
    [sbull] Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
    [sbull] Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of Pub. L. 90-
248 (42 U.S.C. 1395b-1) or section 222(a) of Pub. L. 92-603 (42 U.S.C. 
1395b-1 (note)) (statewide all-payer systems, subject to the rate-of-
increase test at section 1814(b) of the Act).
    [sbull] Nonparticipating hospitals furnishing emergency services to 
Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule (67 FR 56038), we provided for a 
5-year transition period from cost-based reimbursement to fully Federal 
prospective payment for LTCHs. During the 5-year period, two payment 
percentages are to be used to determine a LTCH's total payment under 
the PPS. The blend percentages are as follows:

------------------------------------------------------------------------
                                              Prospective
                                                payment      Cost-based
Cost reporting periods beginning on or after    federal    reimbursement
                                                  rate          rate
                                               percentage    percentage
------------------------------------------------------------------------
Oct. 1, 2002................................          20            80
Oct. 1, 2003................................          40            60
Oct. 1, 2004................................          60            40
Oct. 1, 2005................................          80            20
Oct. 1, 2006................................         100             0
------------------------------------------------------------------------

    The phase-in for payments to the full prospective payment Federal 
rate will apply according to each LTCH's cost reporting period.

D. Limitation on Charges to Beneficiaries

    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH prospective payment 
system (67 FR 55974-55975). Under Sec.  412.507, as consistent with 
other established hospital prospective payment systems, a LTCH may not 
bill a Medicare beneficiary for more than the deductible and 
coinsurance amounts as specified under Sec. Sec.  409.82, 409.83, and 
409.87 and for items and services as specified under Sec.  489.30(a), 
if the Medicare payment to the LTCH is the full LTC-DRG payment amount. 
However, if the Medicare payment was for a short-stay outlier case 
(Sec.  412.529) that was less than the full LTC-DRG payment amount, the 
LTCH could also charge the beneficiary for services for which the costs 
of those services or the days those services were provided were not a 
basis for calculating the Medicare short-stay outlier payment (Sec.  
412.507).
    Since the origin of the Medicare system, the intent of our 
regulations has been to set limits on beneficiary liability and to 
clearly establish the circumstances under which the

[[Page 11237]]

beneficiary would be required to assume responsibility for payment; 
that is, upon exhausting benefits described in 42 CFR part 409, subpart 
F. The discussion in the August 30, 2002 final rule was not meant to 
establish rates or payments for, or define, Medicare-eligible expenses. 
While CMS regulates beneficiary liability for coinsurance and 
deductibles for hospital stays that are covered by Medicare, payments 
from Medigap insurers to providers for inpatient hospital coverage 
after Medicare benefits are exhausted are not regulated by CMS. 
Furthermore, regulations beginning at Sec.  403.200 and the 1991 
National Association of Insurance Commissioners (NAIC) Model Regulation 
for Medicare Supplemental Insurance, which was incorporated by 
reference into section 1882 of the Act, govern the relationship between 
Medigap insurers and beneficiaries.

E. System Implementation for the LTCH PPS

    When we established the regulations to implement the LTCH PPS on 
August 30, 2002 (67 FR 55954), effective for cost reporting periods 
that began on or after October 1, 2002, we did not have computer system 
changes in place that were necessary to accommodate claims processing 
and payment under the system. However, after January 1, 2003, we made 
the necessary system changes. Accordingly, after January 1, 2003, the 
fiscal intermediary will reconcile the payment amounts that had been 
made to LTCHs for all covered inpatient hospital services furnished to 

Medicare beneficiaries from cost reporting periods that began on or 
after October 1, 2002, through January 1, 2003, with the amounts that 
were payable under the LTCH PPS methodology. Because the LTCH PPS was 
effective at the start of the LTCH's first cost reporting period that 
began on or after October 1, 2002, only those LTCHs with cost reporting 
periods that started October 1, 2002, through January 1, 2003, will 
experience the payment reconciliation necessitated by this 3-month 
period prior to systems implementation. The claims submission procedure 
of using ICD-9-CM codes has not changed following the systems 
implementation of the LTCH PPS.
    We also want to note that as of October 16, 2002, a LTCH that was 
required to comply with the Administrative Simplification Standards 
under the Health Insurance Portability and Accountability Act (HIPAA) 
(Pub. L. 104-191) and that had not obtained an extension in compliance 
with the Administrative Compliance Act (Pub. L. 107-105) is obligated 
to comply with the standards for submitting claim forms to the LTCH's 
Medicare fiscal intermediary (45 CFR 162.1002 and 45 CFR 162.1102). 
Beginning October 16, 2003, LTCHs that obtained an extension and that 
are required to comply with the HIPPA Administrative Simplification 
Standards must start submitting electronic claims in compliance with 
the HIPPA regulations cited above, among others.

-----------------------------------------------------------------------
II. Summary of the Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth the proposed annual 
update to the payment rates for the Medicare LTCH PPS and proposing 
other policy changes. The following is a summary of the major areas 
that we are addressing in this proposed rule:

A. Proposed Change in the Annual Update

    We are proposing to change the annual update to the Federal payment 
rate under the LTCH PPS from the Federal fiscal year (October 1 through 
September 30) to a ``LTCH rate year'' of July 1 through June 30, 
beginning July 1, 2003, as discussed in section III. of this preamble. 
(In this proposed rule, we would define the LTCH rate year as the 
period of July 1 to June 30 for updates to the LTCH PPS.) We are 
proposing to publish information on the annual update in the Federal 
Register by June 1 of each year. We recognize that it may be necessary 
to address issues affecting LTCHs at a time that does not conform to 
this schedule and in those circumstances, we could utilize the IPPS 
proposed and final rule for this purpose.

B. Proposed Update Changes

    [sbull] In section IV. of this preamble, we are proposing that the 
annual update of the LTC-DRG classifications and relative weights would 
remain linked to the annual adjustments of the acute care hospital 
inpatient DRG system, which are based on the annual revisions to the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM) codes, effective each October 1.
    [sbull] In section V. of this preamble, we discuss a proposed 
policy change in how Medicare payment under the LTCH PPS would be made 
to certain LTCHs that have satellite facilities.
    [sbull] In sections VI. through X. of this preamble, we discuss our 
proposed determination of the LTCH PPS rates that would be applicable 
to the proposed LTCH rate year of July 1, 2003 through June 30, 2004, 
including proposed revisions to the wage index, the proposed excluded 
hospital with capital market basket that would be applied to the 
current standard Federal rate to determine the prospective payment 
rates, the applicable adjustments to payments, the proposed outlier 
threshold, the transition period, and the proposed budget neutrality 
factor.
    [sbull] We are also proposing to revise Sec.  412.525(a) and Sec.  
412.529(c)(4) regarding adjustments to outlier payments under the LTCH 
PPS in order to conform the regulation to a proposed policy change 
under the IPPS that is published in the Federal Register on March 4, 
2003.
    [sbull] In section XI. of this preamble, we discuss our continuing 
monitoring efforts to evaluate the LTCH PPS.
    [sbull] In section XIII. of this preamble, we set forth an analysis 
of the impact of the proposed changes in this proposed rule on Medicare 

expenditures and on Medicare-participating LTCHs and Medicare 
beneficiaries.

-----------------------------------------------------------------------
III. Proposed Changes in the Annual Update of the LTCH PPS

    In existing regulations at Sec.  412.535 that were issued in the 
August 30, 2002 final rule, we specify a schedule for publishing 
information on the LTCH PPS on or before August 1, which coincided with 
the statutorily mandated publication schedule for the IPPS. We are 
proposing to revise Sec.  412.535 to provide generally for a change in 
the annual rate update for the LTCH PPS, starting on July 1.
    Section 1886(e)(5)(A) of the Act requires that, for the IPPS, the 
proposed rule be published in the Federal Register ``not later than the 
April 1 before each fiscal year; and the final rule, not later than the 
August 1 before such fiscal year.'' The statute imposes no such 
publication schedule for the LTCH PPS. In the August 30, 2002 final 
rule (67 FR 55977), we stated that we were considering changing the 
publication schedule of the LTCH PPS annual rulemaking cycle in order 
to avoid concurrent publication of annual rules for these two systems 
for purposes of administrative feasibility and efficiency. In 
considering a change in the publication schedule of the LTCH PPS final 
rule, we contemplated a change in the effective date for updating the 
Federal rates for the LTCH PPS. Therefore, in this proposed rule, we 
are proposing to change the effective date of the annual update for the 
LTCH PPS from October 1 to July 1 of each year in order to facilitate a 
timely publication of these two significant payment updates (acute care 
hospital inpatient and LTCH). Thus, the annual update of the

[[Page 11238]]

LTCH PPS Federal rates would no longer be linked to the start of the 
Federal fiscal year, as is the update of the IPPS. This proposed change 
would necessitate publication of the final rule for the LTCH PPS by no 
later than June 1 of each year (proposed revised Sec.  412.535).
    We also are proposing to amend Sec.  412.503 to include a 
definition of ``long-term care hospital rate year''. A ``long-term care 
hospital rate year'' would mean the 12-month period of July 1 through 
June 30. We would use this period for those calculations related to 
updating the Federal rate for payments under the LTCH PPS. The 
determination of the proposed fixed-loss threshold for outlier payment 
calculations, under Sec.  412.525(a), would also be calculated based on 
the proposed LTCH rate year. (Section VI.C. of this proposed rule 
includes a more detailed discussion of our proposed outlier policy.)
    Proposing a change for the annual Federal rate update period for 
the LTCH PPS has also necessitated a proposed recalculation of the 
excluded hospital market basket with capital estimate for the proposed 
forthcoming payment year, July 1, 2003 through June 30, 2004. In the 
August 30, 2002 final rule, we adopted a Federal rate of $34,956 that 
was computed based on the excluded hospital with capital market basket 
calculated for the 12-month Federal fiscal year of October 1, 2002 
through September 30, 2003. As already noted, we are proposing to 
change the Federal rate update for the LTCH PPS from the Federal fiscal 
year to a 12-month year of July 1 through June 30, and the proposed 
rates in this proposed rule are based on this period. Because the 
Federal rate of $34,956 was originally computed based on a 12-month 
year, but in actuality will only be utilized for 9 months, if the 
proposed change in the LTCH PPS rate update year is finalized, we are 
proposing a budget neutral adjustment to the market basket update 
taking this 3-month differential into account in setting the Federal 
rate for July 1, 2003 through June 30, 2004. In addition, we are 
proposing that the change in the proposed 2004 LTCH PPS rate year be 
budget neutral. In section VI.B.1 of this proposed rule, we describe 
this proposed adjustment in greater detail.
    We are proposing to update the LTCH PPS wage index that adjusts for 
differences in area wages under Sec.  412.525(c) using the FY 1999 IPPS 
wage data because these are the best available data (as discussed in 
section VI.C. of this preamble).
    We also are proposing to recalculate the budget neutrality offset 
to account for the effect of the transition period and the policy 
allowing LTCHs to elect 100 percent Federal rate payments rather than 
the transition blend. In addition, we are proposing an updated fixed-
loss amount for determining outlier payments based on the updated 
proposed Federal rate (as discussed in section VII. of this preamble).
    As discussed in section IV.C. of this proposed rule, we are not 
proposing an update to the LTC-DRG classifications or relative weights 
at this time. Currently, the LTC-DRG patient classifications utilized 
by the LTCH PPS for FY 2003 are based directly on the same version of 
DRGs used by the IPPS, that is, GROUPER 20.0. Therefore, we are not 
proposing any change to the timing of the annual update of the LTC-DRG 
classifications and relative weights. They would remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, 
which are based on the annual revisions to the ICD-9-CM codes, 
effective each October 1. Table 3 of the Addendum to the August 30, 
2002 final rule (67 FR 56076-56084), which we are reprinting as Table 3 
of the Addendum to this proposed rule, contains the LTC-DRG 
classifications and relative weights that we propose to continue to 
apply to discharges occurring during the period of July 1, 2003 through 
September 30, 2003. As an aid in calculating payment under the short-
stay outlier policy, under Sec.  412.529, we also are including, in 
column 3 of Table 3, the proposed five-sixths average length of stay 
that would be applied to each LTC-DRG in determining whether the LTCH 
stay is a short-stay outlier. The average length of stay for each DRG 
based on the FY 2001 MedPAR data, which were used for the FY 2003 LTCH 
PPS final rule, are still the best available complete LTCH discharge 
data available at this time.
    The revised LTC-DRG classifications and relative weights for 
discharges occurring from October 1, 2003 through September 30, 2004, 
for payments under the LTCH PPS during that period would continue to be 
based on the annual updates to the acute care hospital inpatient DRG 
system. The FY 2004 DRGs and relative weights for the IPPS have not yet 
been proposed and we are unable to propose updated LTC-DRGs and 
relative weights (which would be based on the proposed updated acute 
care hospital inpatient DRGs and relative weights) at this time. Thus, 
we are proposing that the LTC-DRG classifications and relative weights 
would be presented for public comment in the proposed rule for the IPPS 
and finalized in the IPPS final rule, for an effective date of October 
1, 2003.
    The proposed change in the rate year for the LTCH PPS from October 
1 through September 30 to July 1 through June 30 means that, although 
the Federal rate calculations in the August 30, 2002 final rule were 
based on a 12-month year, only 9 months will elapse before the proposed 
July 1, 2003 update. We are proposing a prospective adjustment to the 
market basket update to take into account this 3-month differential in 
setting the proposed rates for July 1, 2003 through June 30, 2004.
    Specifically, the proposed updates for the proposed 2004 LTCH PPS 
rate year would be affected as follows:
    [sbull] The proposed update to the standard Federal rate calculated 
in accordance with Sec.  412.523(c)(3) would be adjusted to account for 
updating the standard Federal rate on July 1, 2003, instead of October 
1, 2003.
    [sbull] The fixed-loss amount for determining high-cost outlier 
payments under Sec.  412.525(a) would also be updated based on the 
proposed Federal rate effective for July 1, 2003 through June 30, 2004.
    In section VI.B.1 of this proposed rule, we discuss the proposed 
computational adjustments resulting from our proposed establishment of 
a LTCH PPS rate year beginning July 1, 2003 through June 30, 2004.
    Several provisions of the LTCH PPS would not be affected by the 
proposed change in the annual rate update year for the LTCH PPS from 
October 1 to July 1 because these policies are not based on any of the 
Federal rate calculations for the LTCH PPS. Specifically, the following 
provisions would not be affected:
    [sbull] The transition blends provided for under Sec.  412.533(a) 
would not be affected because they are linked to the start of each 
LTCH's cost reporting period, rather than to the start of the Federal 
fiscal year. (LTCHs being paid under the transition blend methodology 
would receive those blends for the entire 5-year transition period, 
unless they elect payments based on 100 percent of the Federal rate.) 
For instance, for cost reporting periods that began on or after October 
1, 2002, and before October 1, 2003, the total payment for a LTCH is 80 
percent of the amount that would have been calculated under the TEFRA 
payment system for that specific LTCH and 20 percent of the Federal 
prospective payment amount. For cost reporting periods beginning on or 
after October 1, 2003 and before October 1, 2004, the total payment for 
a LTCH is 60 percent of the amount that would have been calculated 
under the

[[Page 11239]]

TEFRA payment system for that specific LTCH and 40 percent of the 
Federal prospective payment amount.
    [sbull] The 5-year phase-in of the adjustment for differences in 
area wage levels under Sec.  412.525(c) would not be affected because 
they are linked to the start of each LTCH's cost reporting period, 
rather than to the start of the Federal fiscal year. For cost reporting 
periods that began on or after October 1, 2002 and before September 30, 
2003, the applicable LTCH PPS wage index is one-fifth of the full LTCH 
wage index value, and for cost reporting periods beginning on or after 
October 1, 2003 and before September 30, 2004, the applicable LTCH PPS 
wage index is two-fifths of the full LTCH wage index value.
    [sbull] The LTC-DRGs and their relative weights and the GROUPER 
would not be affected since they would continue to be updated effective 
October 1 through September 30 each year based on the changes to the 
DRGs published in the IPPS final rule.
    Section XII. of this proposed rule contains an impact analysis that 
reflects the impact of these proposed changes.
    In summary, we are proposing to amend Sec.  412.535 to indicate 
that information on the unadjusted Federal payment rates and a 
description of the methodology and data used to calculate the payment 
rates under the LTCH PPS would be published in the Federal Register on 
or before June 1 prior to the beginning of each proposed LTCH PPS rate 
year beginning July 1. We are proposing that information on the DRG 
classification system and associated weighting factors, with the DRGs 
from which the LTC-DRGs are derived, would be published in the proposed 
IPPS rule and, ultimately, the final rule for the IPPS (the final IPPS 
rule is published on or before August 1 of each Federal fiscal year).

-----------------------------------------------------------------------
IV. Proposed Changes in Long-Term Care Diagnosis-Related Group (LTC-
DRG) Classifications and Relative Weights

A. Background

    Section 123 of Pub. L. 106-113 specifically requires that the PPS 
for LTCHs be a per discharge system with a DRG-based patient 
classification system reflecting the differences in patient resources 
and costs in LTCHs while maintaining budget neutrality. Section 
307(b)(1) of Pub. L. 106-554 modified the requirements of section 123 
of Pub. L. 106-113 by specifically requiring that the Secretary examine 
``the feasibility and the impact of basing payment under such a system 
[the LTCH PPS] on the use of existing (or refined) hospital diagnosis-
related groups (DRGs) that have been modified to account for different 
resource use of long-term care hospital patients as well as the use of 
the most recently available hospital discharge data.''
    In accordance with section 307(b)(1) of Pub. L. 106-554 and Sec.  
412.515 of our existing regulations, the LTCH PPS uses information from 
LTCH patient records to classify patient cases into distinct long-term 
care diagnosis-related groups (LTC-DRGs) based on clinical 
characteristics and expected resource needs. The LTC-DRGs used as the 
patient classification component of the LTCH PPS correspond to the DRGs 
in the IPPS. We apply weights to the existing hospital inpatient DRGs 
to account for the difference in resource use by patients exhibiting 
the case complexity and multiple medical problems characteristic of 
LTCHs.
    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
In order to deal with the large number of low volume DRGs (all DRGs 
with fewer than 25 cases), we group low volume DRGs into 5 quintiles 
based on average charge per discharge. (A listing of the composition of 
low volume quintiles appears in the August 30, 2002 final rule at 67 FR 
55986.) We also take into account adjustments to payments for cases in 
which the stay at the LTCH is five-sixths of the geometric average 
length of stay and classify these cases as short-stay outlier cases. (A 
detailed discussion of the application of the Lewin Group model that 
was used to develop the LTC-DRGs appears in the August 30, 2002 final 
rule at 67 FR 55978.)

B. Patient Classifications into DRGs

    Generally, under the LTCH PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into LTC-DRGs for payment based on the following six data 
elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the ICD-9-CM. As of 
October 16, 2002, a LTCH that was required to comply with the HIPAA 
Administrative Simplification Standards and that had not obtained an 
extension in compliance with the Administrative Compliance Act (Pub. L. 
107-105) is obligated to comply with the standards at 45 CFR 162.1002 
and 45 CFR 162.1102. Completed claim forms are to be submitted to the 
LTCH's Medicare fiscal intermediary.
    Medicare fiscal intermediaries enter the clinical and demographic 
information into their claims processing systems and subject this 
information to a series of automated screening processes called the 

Medicare Code Editor (MCE). These screens are designed to identify 
cases that require further review before assignment into a DRG can be 
made. During this process, the following type of cases are selected for 
further development:
    [sbull] Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
    [sbull] Cases including surgical procedures not covered under 
Medicare (for example, organ transplant in a nonapproved transplant 
center).
    [sbull] Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 
136.3, Pneumocystosis, contains all appropriate digits, but if it is 
reported with either fewer or more than 4 digits, the claim will be 
rejected by the MCE as invalid.)
    [sbull] Cases with principal diagnoses that do not usually justify 
admission to the hospital. (For example, code 437.9, Unspecified 
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the 
principal diagnosis.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH GROUPER 
is specialized computer software based on the same GROUPER used by the 
IPPS. The GROUPER software was developed as a means of classifying each 
case into a DRG on the basis of diagnosis and procedure codes and other 
demographic information (age, sex, and discharge status). Following the 
LTC-DRG assignment, the Medicare fiscal intermediary will determine the 
prospective payment by using the Medicare PRICER program, which 
accounts for hospital-specific adjustments. As provided for under the 
IPPS, we provide an opportunity for the

[[Page 11240]]

LTCH to review the LTC-DRG assignments made by the fiscal intermediary 
and to submit additional information within a specified timeframe 
(Sec.  412.513(c)).
    The GROUPER is used both to classify past cases in order to measure 
relative hospital resource consumption to establish the DRG weights and 
to classify current cases for purposes of determining payment. The 
records for all Medicare hospital inpatient discharges are maintained 
in the MedPAR file. The data in this file are used to evaluate possible 
DRG classification changes and to recalibrate the DRG weights during 
our annual update. DRG weights are based on data for the population of 
LTCH discharges, reflecting the fact that LTCH patients represent a 
different patient mix than patients in short-term acute care hospitals.

C. Organization of DRGs

    The DRGs are organized into 25 Major Diagnostic Categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. The GROUPER does not recognize all ICD-9-CM 
procedure codes as procedures that affect DRG assignment, that is, 
procedures which are not surgical (for example, EKG), or minor surgical 
procedures (for example, 86.11, Biopsy of skin and subcutaneous 
tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). We note that CCs are defined by 
certain secondary diagnoses not related to, or not inherently a part 
of, the disease process identified by the principal diagnosis. (For 
example, the GROUPER would not recognize a code from the 800.0x series, 
Skull fracture, as a CC when combined with principal diagnosis 850.4, 
Concussion with prolonged loss of consciousness, without return to 
preexisting conscious level.) In addition, we note that the presence of 
additional diagnoses does not automatically generate a CC, as not all 
DRGs recognize a comorbid or complicating condition in their 
definition. (For example, DRG 466, Aftercare without History of 
Malignancy as Secondary Diagnosis, is based solely on the principal 
diagnosis, without consideration of additional diagnoses for DRG 
determination.)
    In its June 2000 Report to Congress, MedPAC recommended that the 
Secretary ``* * * improve the hospital inpatient prospective payment 
system by adopting, as soon as practicable, diagnosis-related group 
refinements that more fully capture differences in severity of illness 
among patients.'' (Recommendation 3A, p. 63) We have determined it is 
not practical at this time to develop a refinement to inpatient 
hospital DRGs based on severity due to time and resource requirements. 
However, this does not preclude us from development of a severity-
adjusted DRG refinement in the future. That is, a refinement to the 
list of comorbidities and complications could be incorporated into the 
existing DRG structure. It is also possible a more comprehensive 
severity adjusted structure may be created if a new code set is 
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic 
coding) and ICD-10-CS (for procedure coding) or by other code sets, a 
severity concept may be built into the resulting DRG assignments. Of 
course any change to the code set would be adopted through the process 
established in the HIPAA Administrative Simplification provisions.

D. Update of LTC-DRGs

    For FY 2003, the LTC-DRG patient classification system was based on 
LTCH data from the FY 2001 MedPAR file, which contained hospital bills 
received through March 31, 2001, for hospital discharges occurring in 
FY 2001. The patient classification system consisted of 510 DRGs that 
formed the basis of the FY 2003 LTCH PPS GROUPER. The 510 LTC-DRGs 
included two ``error DRGs''. As in the IPPS, we included two error DRGs 
in which cases that cannot be assigned to valid DRGs will be grouped. 
These two error DRGs are DRG 469 (Principal Diagnosis Invalid as a 
Discharge Diagnosis) and DRG 470 (Ungroupable). (See the August 1, 
2001, Medicare Program final rule, Changes to the Hospital Inpatient 
Prospective Payment Systems and Rates and Costs of Graduate Medical 
Education; Fiscal Year 2002 Rates, 66 FR 40062.) The other 508 LTC-DRGs 
are the same DRGs used in the IPPS GROUPER for FY 2003 (Version 20.0).
    In the health care industry, annual changes to the ICD-9-CM codes 
are effective for discharges occurring on or after October 1 each year. 
Thus, the manual and electronic versions of the GROUPER software, which 
are based on the ICD-9-CM codes, are also revised annually and 
effective for discharges occurring on or after October 1 each year. As 
discussed earlier, the patient classification system for the LTCH PPS 
(LTC-DRGs) is based on the IPPS patient classification system (CMS-
DRGs), which is updated annually and effective for discharges occurring 
on or after October 1 through September 30 each year. The updated DRGs 
and GROUPER software are based on the latest revision to the ICD-9-CM 
codes, which are published annually in the IPPS proposed rule and final 
rule. The new or revised ICD-9-CM codes are not used by the industry 
for either the IPPS or the LTCH PPS until the beginning of the next 
Federal fiscal year (effective for discharges occurring on or after 
October 1 through September 30). (The use of the ICD-9-CM codes in this 
manner is consistent with current usage and the HIPAA regulations.) 
October 1 is also when the changes to the CMS-DRGs and the next version 
of the GROUPER software becomes effective.
    As discussed in section III. of this proposed rule, we are 
proposing to make the annual update to the LTCH PPS effective from July 
1 through June 30 each year. As a result of this change the LTCH PPS 
would use two GROUPERS during the course of a 12-month period: one 
GROUPER for 3 months (from July 1 through September 30); and an updated 
GROUPER for 9 months (from October 1 through June 30). The need to use 
two GROUPERs is based upon the October 1 effective date of the updated 
ICD-9-CM coding system. As previously discussed, new ICD-9-CM codes may 
result in changes to the structure of the DRGs. In order for the 
industry to be on the same schedule (for both the IPPS and the LTCH 
PPS) for the use of the most current ICD-9-CM codes, it is necessary 
for us to propose to apply two GROUPER programs to the LTCH PPS. 
Although we do not believe that this will have any adverse effect on 
LTCHs, we are interested in receiving comments on this issue. LTCHs 
would continue to code diagnosis and procedures using the most current 
version of the ICD-9-CM coding system.
    Currently, for Federal FY 2003, we are using Version 20.0 of the 
GROUPER software for both the IPPS and the LTCH PPS. For discharges 
beginning on October 1, 2003 (Federal FY 2004), we are proposing our 
intent to use Version 21.0 of the GROUPER software for both the IPPS 
and the LTCH PPS. Thus, proposed changes to the CMS-DRGs

[[Page 11241]]

(the DRGs on which the LTC-DRGs are based), and their relative weights, 
as well as the LTC-DRGs and their relative weights that would be 
effective for October 1, 2003 through September 30, 2004, would be 
presented in the IPPS FY 2004 proposed rule that will be published in 
the spring of 2003 in the Federal Register. Accordingly, we would then 
notify LTCHs of any revised LTC-DRG relative weights based on the final 
DRGs and Version 21.0 GROUPER for the IPPS that would be effective 
October 1, 2003.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG will help 
determine the amount that will be paid for the case, it is important 
that the coding is accurate. Classifications and terminology used in 
the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as 
recommended to the Secretary by the National Committee on Vital and 
Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set, 
National Center for Health Statistics, April 1980'') and as revised in 
1984 by the Health Information Policy Council (HIPC) of the U.S. 
Department of Health and Human Services.
    We wish to point out that the ICD-9-CM coding terminology and the 
definitions of principal and other diagnoses of the UHDDS are 
consistent with the requirements of the HIPPA Administrative 
Simplification Act of 1996 (45 CFR Part 162). Furthermore, the UHDDS 
has been used as a standard for the development of policies and 
programs related to hospital discharge statistics by both governmental 
and nongovernmental sectors for over 30 years. In addition, the 
following definitions (as described in the 1984 Revision of the UHDDS, 
approved by the Secretary of Health and Human Services for use starting 
January 1986) are requirements of the ICD-9-CM coding system, and have 
been used as a standard for the development of the CMS-DRGs:
    [sbull] Diagnoses include all diagnoses that affect the current 
hospital stay.
    [sbull] Principal diagnosis is defined as the condition established 
after study to be chiefly responsible for occasioning the admission of 
the patient to the hospital for care.
    [sbull] Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the length of stay or both. Diagnoses that relate 
to an earlier episode of care that have no bearing on the current 
hospital stay are excluded.
    [sbull] All procedures performed will be reported. This includes 
those that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    We provide LTCHs with a 60-day window after the date of the notice 
of the initial LTC-DRG assignment to request review of that assignment. 
Additional information may be provided by the LTCH to the fiscal 
intermediary as part of that review.
2. Maintenance of the ICD-9-CM Coding System
    The ICD-9-CM Coordination and Maintenance (C&M) Committee is a 
Federal interdepartmental committee, co-chaired by the National Center 
for Health Statistics (NCHS) and CMS, that is charged with maintaining 
and updating the ICD-9-CM system. The C&M Committee is jointly 
responsible for approving coding changes, and developing errata, 
addenda, and other modifications to the ICD-9-CM to reflect newly 
developed procedures and technologies and newly identified diseases. 
The C&M Committee is also responsible for promoting the use of Federal 
and non-Federal educational programs and other communication techniques 
with a view toward standardizing coding applications and upgrading the 
quality of the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The C&M Committee encourages participation by health-related 
organizations in the above process and holds public meetings for 
discussion of educational issues and proposed coding changes twice a 
year at the CMS Central Office located in Baltimore, Maryland. The 
agenda and dates of the meetings can be accessed on the CMS Web site 
at: http://www.cms.gov/paymentsystems/icd9.


    All changes to the ICD-9-CM coding system affecting DRG assignment 

are addressed annually in the IPPS proposed and final rules. Because 
the DRG-based patient classification system for the LTCH PPS is based 
on the IPPS DRGs, these changes will also affect the LTCH PPS LTC-DRG 
patient classification system.
    As discussed above, the ICD-9-CM coding changes that have been 
adopted by the C&M Committee become effective at the beginning of each 
Federal fiscal year, October 1. Regardless of the proposed change to 
the annual update of the LTCH PPS year to July 1, we are proposing that 
coders would use the most current updated ICD-9-CM coding book from 
October 1 through September 30 of each year. This would mean that 
coders and LTCHs that use the updated ICD-9-CM coding system would be 
on the same schedule (effective October 1) as the rest of the health 
care industry. The newest version of ICD-9-CM is not available for use 
until October 1, which would be 4 months after the date that we are 
proposing to publish the LTCH annual payment rate update final rule. 
The new codes on which the LTC-DRGs are based would go into effect and 
be available for use for discharges occurring on or after October 1 
through September 30 of each year. This annual schedule of the revision 
to the ICD-9-CM coding system and the change of the ICD-9-CM coding 
books or electronic coding programs has been in effect since the 
adoption of Revision 9 of the ICD in 1979.
    Of particular note to LTCHs will be the invalid diagnosis codes 
(Table 6C) and the invalid procedure codes (Table 6D) located in the 
annual proposed and final rules for the IPPS. Claims with invalid codes 
will not be processed by the Medicare claims processing system.
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    We emphasize the need for proper coding by LTCHs. Inappropriate 
coding of cases can adversely affect the uniformity of cases in each 
LTC-DRG and produce inappropriate weighting factors at recalibration. 
We continue to urge LTCHs to focus on improved coding practices. 
Because of concerns raised by LTCHs concerning correct coding, we have 
asked the American Hospital Association (AHA) to provide additional 
clarification or instruction on proper coding in the LTCH setting. The 
AHA will provide this instruction via their established process of 
addressing questions through their publication ``Coding Clinic for ICD-
9-CM''. Written questions or requests for clarification may be 
addressed to the Central Office on ICD-9-CM, American Hospital 
Association, One North Franklin, Chicago, IL 60606. A form for the 
question(s) is available to be downloaded and mailed on AHA's Web site 
at: http://www.ahacentraloffice.org. In addition, current coding 

at: http://www.ahacentraloffice.org. In addition, current coding 

guidelines are available at the National Center for Health Statistics 
(NCHS) Web site:

[[Page 11242]]

http://www.cdc.gov/nchs.icd9.htm.

    In conjunction with the cooperating parties of the C&M Committee 

(AHA, AHIMA, and NCHS), we have reviewed actual medical records and are 
concerned about the quality of the documentation under the LTCH PPS, as 
was the case at the beginning of the IPPS. We fully believe that, with 
experience, the quality of the documentation and coding will improve, 
just as it did for the IPPS. As noted above, the cooperating parties 
have plans to assist their members with improvement in documentation 
and coding issues for the LTCHs through specific questions and coding 
guidelines. The importance of good documentation is emphasized in the 
revised ICD-9-CM Official Guidelines for Coding and Reporting (October 
1, 2002): ``A joint effort between the attending physician and coder is 
essential to achieve complete and accurate documentation, code 
assignment, and reporting of diagnoses and procedures. The importance 
of consistent, complete documentation in the medical record cannot be 
overemphasized. Without such documentation, the application of all 
coding guidelines is a difficult, if not impossible, task. (Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002, page 115)
    To improve medical record documentation, LTCHs should be aware that 
if the patient is being admitted for continuation of treatment of an 
acute or chronic condition, guidelines at Section I.B.10 of the Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable 
concerning selection of principal diagnosis. To clarify coding advice 
issued in the August 30, 2002 final rule (67 FR 55979-55981), we would 
like to point out that, at Guideline I.B.12, Late Effects, a late 
effect is considered to be the residual effect (condition produced) 
after the acute phase of an illness or injury has terminated (Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002, page 129). We have received 
question regarding whether a LTCH should report the ICD-9-CM code(s) 
for an unresolved acute condition instead of the code(s) for late 
effect or rehabilitation. Depending on the documentation in the medical 
record, either code could be appropriate in a LTCH. Since 
implementation of the LTCH PPS, our Medicare fiscal intermediaries have 
been conducting training and providing assistance to LTCHs in correct 
coding. We have also issued manuals containing procedures as well as 
coding instructions to LTCHs and fiscal intermediaries. We will 
continue to conduct such training and provide guidance on an as-needed 
basis. We also refer readers to the detailed discussion on correct 
coding practices in the August 30, 2002 final rule (67 FR 55979-55981).

F. Proposed Changes to the Method for Updating the LTC-DRG Relative 
Weights

    As previously discussed, under the LTCH PPS, each LTCH will receive 
a payment that represents an appropriate amount for the efficient 
delivery of care to Medicare patients. The system must be able to 
account adequately for each LTCH's case-mix in order to ensure both 
fair distribution of Medicare payments and access to adequate care for 
those Medicare patients whose care is more costly. Therefore, in 
accordance with Sec.  412.523(c), we adjust the standard Federal PPS 
rate by the LTC-DRG relative weights in determining payment to LTCHs 
for each case.
    Under this payment system, relative weights for each LTC-DRG are a 
primary element used to account for the variations in cost per 
discharge and resource utilization among the payment groups (Sec.  
412.515). To ensure that Medicare patients who are classified to each 
LTC-DRG have access to an appropriate level of services and to 
encourage efficiency, we calculate a relative weight for each LTC-DRG 
that represents the resources needed by an average inpatient LTCH case 
in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight 
of 2 will, on average, cost twice as much as cases in a LTC-DRG with a 
weight of 1.
    As we discussed in the August 30, 2002 final rule (67 FR 55984-
55995), the LTC-DRG relative weights effective under the LTCH PPS for 
Federal FY 2003 were calculated using the March 2002 update of FY 2001 
MedPAR data and Version 20.0 of the CMS GROUPER software. We use total 
days and total charges in the calculation of the LTC-DRG relative 
weights.
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
Such distribution of cases with relatively high (or low) charges in 
specific LTC-DRGs has the potential to inappropriately distort the 
measure of average charges. To account for the fact that cases may not 
be randomly distributed across LTCHs, we use a hospital-specific 
relative value method to calculate relative weights. We believe this 
method removes this hospital-specific source of bias in measuring 
average charges. Specifically, we reduce the impact of the variation in 
charges across providers on any particular LTC-DRG relative weight by 
converting each LTCH's charge for a case to a relative value based on 
that LTCH's average charge. (See the August 30, 2002 final rule (67 FR 
55985) for further information of the hospital-specific relative value 
methodology.)
    In order to account for LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into 
one of five categories (quintiles) based on average charges, for the 
purposes of determining relative weights. For FY 2003 based on the FY 
2001 MedPAR data, we identified 161 LTC-DRGs that contained between 1 
and 24 cases. This list of low volume LTC-DRGs was then divided into 
one of the five low volume quintiles, each containing a minimum of 32 
LTC-DRGs (161/5 = 32 with 1 LTC-DRG as a remainder). Each of the low 
volume LTC-DRGs grouped to a specific quintile received the same 
relative weight and average length of stay using the formula applied to 
the regular LTC-DRGs (25 or more cases), as described below. (See the 
August 30, 2002 final rule (67 FR 55985-55988) for further explanation 
of the development and composition of each of the five low volume 
quintiles for FY 2003.)
    After grouping the cases in the appropriate LTC-DRG, we calculate 
the relative weights by first removing statistical outliers and cases 
with a length of stay of 7 days or less. Next, we adjust the number of 
cases in each LTC-DRG for the effect of short-stay outlier cases under 
Sec.  412.529. The short-stay adjusted discharges and corresponding 
charges were used to calculate ``relative adjusted weights'' in each 
LTC-DRG using the hospital-specific relative value method described 
above. (See the August 30, 2002 final rule (67 FR 55989-55995) for 
further details on the steps for calculating the LTC-DRG relative 
weights.)
    We also adjust the LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights. That is, we make an 
adjustment if cases classified to the LTC-DRG ``with comorbidities 
(CCs)'' of a ``with CC''/``without CC'' pair had a lower average charge 
than the corresponding LTC-DRG ``without CCs'' by assigning the same 
weight to both LTC-DRGs in the ``with CC''/``without CC'' pair. (See 
August 30, 2002, 67 FR 55990-55991). In addition, of the 510 LTC-DRGs 
in the LTCH PPS for FY 2003, based on the FY 2001 MedPAR data, we 
identified 159 LTC-DRGs for which there were no LTCH cases in the 
database. That is, no

[[Page 11243]]

patients who would have been classified to those DRGs were treated in 
LTCHs during FY 2001 and, therefore, no charge data were reported for 
those DRGs. Thus, in the process of determining the relative weights of 
LTC-DRGs, we were unable to determine weights for these 159 LTC-DRGs 
using the method described above. However, since patients with a number 
of the diagnoses under these LTC-DRGs may be treated at LTCHs beginning 
in FY 2003, we assigned relative weights to each of the 159 ``no 
volume'' LTC-DRGs based on clinical similarity and relative costliness 
to one of the remaining 351 (510 - 159 = 351) LTC-DRGs for which we 
were able to determine relative weights, based on the FY 2001 claims 
data. (A list of the no volume LTC-DRGs and further explanation of 
their relative weight assignment can be found in the August 30, 2002 
final rule (67 FR 55991-55994).)
    Furthermore, we establish LTC-DRG relative weights of 0.0000 for 
heart, kidney, liver, lung, pancreas, and simultaneous pancreas/kidney 
transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively) 
because Medicare will only cover these procedures if they are performed 
at a hospital that has been certified for the specific procedures by 

Medicare and presently no LTCH has been so certified. If in the future, 
however, a LTCH applies for certification as a Medicare-approved 
transplant center, we believe that the application and approval 
procedure would allow sufficient time for us to propose appropriate 
weights for the LTC-DRGs effected. At the present time, though, we only 
include these six transplant LTC-DRGs in the GROUPER program for 
administrative purposes because since the LTCH PPS uses the same 
GROUPER program for LTCHs as is used under the IPPS, removing these 
DRGs would be administratively burdensome.
    As we stated previously, we are proposing that we would continue to 
use the same LTC-DRGs and relative weights until October 1, 2003. 
Accordingly, Table 3 in the Addendum to this proposed rule lists the 
LTC-DRGs and their respective relative weights and arithmetic mean 
length of stay that we are proposing would continue to be used for the 
period of July 1, 2003 through September 30, 2003. (This table is the 

same as Table 3 of the Addendum to the August 30, 2002 final rule (67 
FR 56076-56084), except that it includes the proposed five-sixth of the 
average length of stay for short-stay outliers under Sec.  412.529. As 
we noted in section IV.D. of this preamble, we are proposing that the 
final DRGs and GROUPER for FY 2004 that would be used for the IPPS and 
the LTCH PPS, effective October 1, 2003, would be presented in the IPPS 
FY 2004 final rule published no later than August 1, 2003 in the 
Federal Register.
    Accordingly, we would notify LTCHs of the revised LTC-DRG relative 
weights for use in determining payments for discharges occurring 
between October 1, 2003 and September 30, 2004, based on the final DRGs 
and Version 21.0 GROUPER published in the IPPS rule on or before August 
1, 2003.

-----------------------------------------------------------------------
V. Proposed Policy Change Related to Payments to LTCHs That Are 
Satellite Facilities

    In the March 22, 2002 proposed rule related to the establishment of 
the LTCH PPS (67 FR 13416), we stated that we were considering 
proposing the elimination of the bed limit in Sec.  412.22(h)(2)(i) for 
pre-1997 excluded hospitals once the applicable prospective payment 
system was fully phased in and all payments were based on 100 percent 
of the Federal prospective payment rates. This statement generated a 
number of comments and in the August 30, 2002 final rule (67 FR 56012), 
we stated our agreement with commenters who urged us to adopt a policy 
eliminating the bed-number restrictions for pre-1997 LTCHs with 
satellite facilities, as soon as a LTCH elected to be paid based on 100 
percent of the Federal prospective rate. However, we also noted that we 
would address a change in the policy concerning bed limits in the next 
update of the LTCH PPS. Therefore, we are now proposing to eliminate 
the application of the bed-number restrictions set forth in Sec.  
412.22(h)(i) for LTCHs established prior to 1997 with satellite 
facilities, effective at the start of the first cost reporting year 
that the LTCH is paid under the 100 percent fully Federal prospective 
payment system. This would be either when the LTCH elects to be paid 
based on 100 percent of the Federal prospective rate or when the LTCH 
is transitioned to 100 percent of the Federal prospective rate, 
whichever comes first.
    Presently, section 1886(b)(3) of the Act, as amended by section 
4414 of Pub. L. 105-33, requires existing LTCHs to be subject to caps 
on their target amounts for cost reporting periods beginning on or 
after October 1, 1997 through September 30, 2002. For purposes of 
calculating these caps, the statute required the Secretary to 
``estimate the 75th percentile of the target amounts for such hospitals 
within [each] class for cost reporting periods ending during fiscal 
year 1996.'' Section 1886(b)(3)(H) of the Act, as amended by section 
121 of Pub. L. 106-113, directed the Secretary to provide for an 
appropriate wage adjustment to the caps on the target amounts for 
psychiatric and rehabilitation hospitals and units and LTCHs effective 
for cost reporting periods beginning on or after October 1, 1999 
through September 30, 2002. In addition, payment limits were 
established for new excluded hospitals or units (excluding children's 
hospitals) effective October 1, 1997. For new excluded hospitals (that 
is, post-1997 LTCHs), section 1886(b)(7) of the Act, as added by 
section 4416 of Pub. L. 105-33, specified that the payment amount for 
the facility's first two 12-month cost reporting periods, for which the 
hospital has a settled cost report, must not exceed 110 percent of the 
national median of target amounts of similarly classified hospitals for 
cost reporting periods ending during FY 1996, updated by the hospital 
market basket increase percentage to the first cost reporting period in 
which the hospital receives payment, as adjusted by section 
1886(b)(7)(C) of the Act. The result of section 4414 and 4416 of Pub. 
L. 105-33 was a distinction between the LTCHs established prior to and 
those established after 1997 with lower payment caps for the post-1997 
LTCHs.
    In the July 30, 1999 final rule for the IPPS (64 FR 41532-41533), 
we promulgated regulations at Sec.  412.22(h)(2)(i) to discourage pre-
1997 excluded hospitals, which had the higher caps on target amounts as 
discussed above (under Sec.  413.40(c)(4)(iii), which implemented 
section 4414 of Pub. L. 105-33), from creating satellite arrangements 
rather than establishing new hospitals, in order to avoid the payment 
impact of the lower caps that apply to new hospitals (under Sec.  
413.40(f)(2)(ii) which implemented section 4416 of Pub. L. 105-33). 
Under the July 30, 1999 acute care hospital inpatient final rule (64 FR 
41490), in order to address this possibility of gaming if a pre-1997 
excluded hospital, such as a LTCH, established a satellite facility 
and, in doing so, its total beds, in both the parent hospital (or unit) 
and the satellite facility, exceeded the number of State-licensed and 
Medicare-certified beds in the parent hospital on the last day of its 
last cost reporting period beginning before October 1, 1997, the 
excluded hospital would be paid under the inpatient DRG system instead 
of receiving payment as an excluded hospital under the TEFRA payment 
system. Although the excluded hospital

[[Page 11244]]

could ``transfer'' bed capacity from the parent facility to the 
satellite, it could not increase its total bed capacity beyond the 
level it had in the most recent cost reporting period beginning before 
October 1, 1997, and still be paid as a hospital excluded from the 
IPPS. However, no such limitation was imposed on a LTCH (or other 
excluded facility) established after October 1, 1997 because it would 
have already been subject to the lower payment limits under Sec.  
413.40(f)(2)(ii) of 110 percent of the national median of target 
amounts for similarly classified hospitals. Therefore, it would not 
benefit from the higher 75 percent cap on target amounts under Sec.  
413.40(c)(4) by establishing a satellite facility, as would a pre-1997 
LTCH.
    The rationale for the bed-limit provision based on the distinction 
between these groups of hospitals was the potential for gaming, by 
creating a satellite facility with a higher TEFRA target cap where, in 
reality, the satellite facility should have been a separately certified 
excluded facility, which would have been subject to the lower cap on 
payments to new (post-1997) facilities paid under the TEFRA system. 
Once the LTCH is paid based on 100 percent of the Federal prospective 
rate, however, the LTCH will no longer be subject to TEFRA caps and 
LTCH prospective payments will be the same regardless of when the LTCH 
was established. Therefore, we are proposing to eliminate the bed-limit 
provision once the LTCH is paid based on 100 percent of the LTCH 
Federal PPS rate. Finally, under this proposed policy, the bed 
limitation on ``existing'' LTCHs would, however, continue to apply to 
those LTCHs while they are paid based on the transition blend, and, 
therefore, continue to receive a percentage of their payments based on 
the TEFRA payment rules, until they transition to a rate based on 100 
percent of the Federal prospective payment rate.

-----------------------------------------------------------------------
VI. Proposed Changes to the LTCH PPS Rates for the Proposed 2004 LTCH 
PPS Rate Year

A. Overview of the Development of the Proposed Payment Rates

    The PPS for LTCHs was effective for cost reporting periods 
beginning on or after October 1, 2002. Effective with that cost 
reporting period, LTCHs are paid, during a 5-year transition period, on 
the basis of an increasing proportion of the LTCH PPS Federal rate and 
a decreasing proportion of a hospital's payment under TEFRA, unless the 
hospital makes a one-time election to receive payment based on 100 
percent of the Federal rate (see Sec.  412.533). New LTCHs (as defined 
at Sec.  412.23(e)(4)) are paid based on 100 percent of the Federal 
rate, with no phase-in transition payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth in our regulations at Sec. Sec.  412.521 
through 412.529. Below we discuss the factors that we are proposing to 
use to update the LTCH PPS standard Federal rate for the proposed 2004 
LTCH PPS rate year, which would be effective for LTCHs paid under the 
PPS for discharges occurring on or after July 1, 2003 through June 30, 
2004.
    In the August 30, 2002 final rule (67 FR 56029-56031), for cost 
reporting periods beginning on or after October 1, 2002 (FY 2003), we 
computed the LTCH PPS standard Federal payment rate by updating the 
best available (FY 1998 or FY 1999) Medicare inpatient operating and 
capital costs per case data, using the excluded hospital market basket.
    Section 123(a)(1) of Pub. L. 106-113 requires that the PPS 
developed for LTCHs be budget neutral. Therefore, in calculating the 
standard Federal rate for FY 2003 under Sec.  412.523(d)(2), we set 
total estimated PPS payments equal to estimated payments that would 
have been made under the TEFRA methodology if the PPS for LTCHs were 
not implemented. Section 307(a) of Pub. L. 106-554 specified that the 
increases to the hospital-specific target amounts and cap on the target 
amounts for LTCHs for FY 2002 provided for by section 307(a)(1) of Pub. 
L. 106-554 shall not be taken into account in the development and 
implementation of the LTCH PPS. In addition, the statute provides for 
enhanced bonus payments for LTCHs for FY 2001 and FY 2002 provided for 
by section 122 of Pub. L. 106-113. Furthermore, as specified at Sec.  
412.523(d)(1), the standard Federal rate is reduced by an adjustment 
factor to account for the estimated proportion of outlier payments 
under the LTCH PPS to total LTCH PPS payments (8 percent). For further 
details on the development of the FY 2003 standard Federal rate, see 
the August 30, 2002 final rule (67 FR 56027-56037). Under the existing 
regulations at Sec.  412.523(c)(3)(ii) for fiscal years after FY 2003, 
we update the standard Federal rate annually to adjust for the most 
recent estimate of the projected increases in prices for LTCH inpatient 
hospital services.

B. Proposed Update to the Standard Federal Rate for the Proposed 2004 
LTCH PPS Rate Year

    In the August 30, 2002 final rule (67 FR 56033), we established a 
LTCH PPS standard Federal rate of $34,956.15 for FY 2003. Based on the 
most recent estimate of the excluded hospital with capital market 
basket, adjusted to account for the proposed change in the rate year 
update cycle for the LTCH PPS rates discussed in section III. of this 
proposed rule, the proposed LTCH PPS standard Federal rate, effective 
from July 1, 2003 through June 30, 2004, would be $35,726.64 (as 
discussed below).
    In the discussion that follows, we explain how we developed the 
proposed update to the standard Federal rate. The proposed Federal rate 
for the proposed 2004 LTCH PPS rate year is calculated based on the 
proposed update factor of 1.0250. Thus, the proposed standard Federal 
rate for the proposed 2004 LTCH PPS rate year would increase 2.2 
percent compared to the FY 2003 standard Federal rate.
1. Proposed Standard Federal Rate Update
    In the August 30, 2002 final rule, we established in Sec.  412.523 
that, for years after FY 2003, the annual update to the LTCH PPS 
standard Federal rate will be equal to the percentage change in the 
excluded hospital with capital market basket (described in further 
detail below). As we discussed in the August 30, 2002 final rule (67 FR 
56087), in the future we may propose to develop a framework to update 
payments to LTCHs that would account for other appropriate factors that 
affect the efficient delivery of services and care provided to Medicare 

patients. Because the LTCH PPS has only been implemented for cost 
reporting periods beginning on or after October 1, 2002, we have not 
yet collected sufficient data to allow for the analysis and development 
of an update framework under the LTCH PPS. Therefore, at this time, we 
are not proposing an update framework for the LTCH PPS. However, a 
conceptual basis for the proposal of developing an update framework in 
the future can be found in Appendix B of the August 30, 2002 final rule 
(67 FR 56086-56090).
a. Description of the Proposed Market Basket for LTCHs for the Proposed 
2004 LTCH PPS Rate Year
    A market basket has historically been used in the Medicare program 
to account for price increases of the services furnished by providers. 
The market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. The 
development of the LTCH

[[Page 11245]]

PPS standard Federal rate is discussed in further detail in the August 
30, 2002 final rule (67 FR 56027-56037).
    Under the reasonable cost-based TEFRA reimbursement system, the 
excluded hospital market basket was used to update the hospital-
specific limits on payment for operating costs of LTCHs. The excluded 
hospital market basket is based on operating costs from FY 1992 cost 
report data and includes Medicare-participating long-term care, 
rehabilitation, psychiatric, cancer, and children's hospitals. Since 
LTCHs' costs are included in the excluded hospital market basket, this 
market basket index, in part, also reflects the costs of LTCHs. 
However, in order to capture the total costs (operating and capital-
related) of LTCHs, we added a capital component to the excluded 
hospital market basket for use under the LTCH PPS. We refer to this 
index as the excluded hospital with capital market basket.
    Beginning with the implementation of the LTCH PPS in FY 2003, the 
excluded hospital with capital market basket based on FY 1992 Medicare 
cost report data has been used for updating payments to LTCHs. The FY 
1992-based market basket reflected the distribution of costs in FY 1992 
for Medicare-participating freestanding rehabilitation, long-term care, 
psychiatric, cancer, and children's hospitals. This information was 
derived from the FY 1992 Medicare cost reports. A full discussion of 
the methodology and data sources used to construct the FY 1992-based 
excluded hospital with capital market basket is included in Appendix A 
of the August 30, 2001 final rule (67 FR 56085-56086). In this proposed 
rule, we are proposing to revise and rebase the excluded hospital with 
capital market basket, based on more recent data, to an FY 1997 base 
year for application beginning with the proposed 2004 LTCH PPS rate 
year.
    We believe it is appropriate to propose to rebase the LTCH PPS 
market basket based on the most recent complete data available (FY 
1997) since these data would more accurately reflect LTCH current 
costs. This proposed rebasing of the LTCH PPS market basket from an FY 
1992 base year to a FY 1997 base year is consistent with the rebasing 
of both the IPPS and the excluded hospital market basket used under the 
TEFRA payment system for FY 2003, as discussed in the August 1, 2002 
IPPS final rule (67 FR 50032-50047).
    The operating portion of the proposed FY 1997-based excluded 
hospital with capital market basket that we are proposing to use under 
the LTCH PPS is derived from the FY 1997-based excluded hospital market 
basket used under the TEFRA payment system. The methodology we proposed 
to use to develop the proposed operating portion of the market basket 
under the LTCH PPS is the same methodology used to describe the 
rebasing of the excluded hospital market basket used under the TEFRA 
payment system, which is described in greater detail in the August 1, 
2002 IPPS final rule (67 FR 50042-50044). In brief, the operating cost 
category weights in the FY 1997-based excluded market basket added to 
100.0. These weights were determined from FY 1997 Medicare cost report 
data, the 1997 Business Expenditure Survey, and the 1997 Annual Input-
Output data from the Bureau of the Census. In this proposed rule, in 
applying the proposed FY 1997-based market basket we are proposing to 
make the same two methodological revisions that we established when we 
rebased the hospital inpatient market basket and the excluded hospital 
market basket in the August 1, 2002 IPPS final rule: (1) Changing the 
wage and benefit price proxies to use the Employment Cost Index (ECI) 
wage and benefit data for hospital workers; and (2) adding a cost 
category for blood and blood products.
    When we add the weight for capital costs to the excluded hospital 
market basket, the sum of the operating and capital weights must still 
equal 100.0. Based on FY 1997 Medicare cost reports for excluded 
hospitals, the capital cost weight would be 8.968 percent. Because 
capital costs would account for 8.968 percent of total costs for 
excluded hospitals in FY 1997, operating costs must, therefore, account 
for 91.032 percent (100 percent-8.968 percent). Each operating cost 
category weight in the FY 1997-based excluded hospital market basket 
from the August 1, 2002 IPPS final rule (67 FR 50442-50444) was 
multiplied by 0.91032 to determine its weight in the FY 1997-based 
excluded hospital with capital market basket.
    The aggregate capital component of the proposed FY 1997-based 
excluded hospital market basket (8.968 percent) was determined from the 
same set of Medicare cost reports used to derive the operating 
component. The detailed capital cost categories of depreciation, 
interest, and other capital expenses were also determined using the 

Medicare cost reports. We needed to determine two sets of weights for 
the capital portion of the proposed revised and rebased market basket. 
The first set of weights identifies the proportion of capital 
expenditures attributable to each capital cost category; the second set 
represents relative vintage weights for depreciation and interest. The 
vintage weights identify the proportion of capital expenditures that is 
attributable to each year over the useful life of capital assets within 
a cost category (See 67 FR 50046-50047, August 1, 2002, for a 
discussion of how vintage weights are determined).
    The cost categories, price proxies, and base-year FY 1992 and 
proposed FY 1997 weights for the proposed excluded hospital with 
capital market basket are presented below in Table I. The vintage 
weights for the proposed FY 1997-based excluded hospital with capital 
market basket are presented in Table II.

 Table I.--Proposed Excluded Hospital With Capital Input Price Index (FY 1992-Based and Proposed FY 1997-Based)
                                              Structure and Weights
----------------------------------------------------------------------------------------------------------------
                                                               Weights (%), base-year     Proposed weights (%)
          Cost category               Price/wage variable            FY 1992 1 2          base-year FY 1997 1 2
----------------------------------------------------------------------------------------------------------------
Total............................                             100.000                   100.000
Compensation.....................                             57.935                    57.579
    Wages and Salaries...........  ECI--Wages and Salaries,   47.417                    47.335
                                    Civilian Hospital
                                    Workers.
    Employee Benefits............  ECI--Benefits, Civilian    10.519                    10.244
                                    Hospital Workers to
                                    Capture Total Costs.
Professional fees: Non-Medical...  ECI--Compensation:         1.908                     4.423
                                    Professional & Technical.
Utilities........................  .........................  1.524                     1.180
    Electricity..................  PPI--Commercial Electric   0.916                     0.726
                                    Power.
    Fuel Oil, Coal, etc..........  PPI--Commercial Natural     0.365                     0.248
                                    Gas.
    Water and Sewerage...........  CPI-U--Water & Sewerage     0.243                     0.206
                                    Maintenance.

[[Page 11246]]


Professional Liability Insurance.  CMS--Professional           0.983                     0.733
                                    Liability Insurance
                                    Premiums Index.
All Other Products and Services..                              28.571                    27.117
    All Other Products...........                              22.027                    17.914
        Pharmaceuticals..........  PPI--Ethical                2.791                     6.318
                                    (Prescription) Drugs.
        Food: Direct Purchase....  PPI--Processed Foods and    2.155                     1.122
                                    Feeds.
        Food: Contract Service...  CPI-U--Food Away from       0.998                     1.043
                                    Home.
        Chemicals................  PPI--Industrial Chemicals   3.413                     2.133
        Blood and Blood Products.  PPI--Blood and Blood                                  0.748
                                    Derivatives, Human Use.
        Medical Instruments......  PPI--Medical Instruments    2.868                     1.795
                                    & Equipment.
        Photographic Supplies....  PPI--Photographic           0.364                     0.167
                                    Supplies.
        Rubber and Plastics......  PPI--Rubber & Plastic       4.423                     1.366
                                    Products.
        Paper Products...........  PPI--Converted Paper and    1.984                     1.110
                                    Paperboard Products.
        Apparel..................  PPI--Apparel.............   0.809                     0.478
        Machinery and Equipment..  PPI--Machinery &            0.193                     0.852
                                    Equipment.
        Miscellaneous Products...  PPI--Finished Goods Less    2.029                     0.783
                                    Food and Energy.
    All Other Services...........                              6.544                     9.203
        Telephone................  CPI-U--Telephone Services   0.574                     0.348
        Postage..................  CPI-U--Postage...........   0.268                     0.702
        All Other: Labor           ECI--Compensation for       4.945                     4.453
         Intensive.                 Private Service
                                    Occupations.
        All Other: Non-Labor       CPI-U--All Items.........   0.757                     3.700
         Intensive.
Capital-Related Costs............                              9.080                     8.968
    Depreciation.................                              5.611                     5.586
        Building & Fixed           Boeckh-Institutional        3.570                     3.503
         Equipment.                 Construct. Index--
                                    Vintage Weighted (23
                                    years).
        Movable Equipment........  PPI--Machinery &            2.041                     2.083
                                    Equipment--Vintage
                                    Weighted (11 Years).
    Interest Costs...............                              3.212                     2.682
        Government/ Nonprofit....  Yield on Domestic           2.730                     2.280
                                    Municipal Bonds (Bond
                                    Buyer 20 Bonds)--Vintage
                                    Weighted (23 years).
        For-profit...............  Yield on Moody's Aaa        0.482                     0.402
                                    Bonds--Vintage Weighted
                                    (23 Years).
        Other Capital-Related      CPI-U--Residential Rent..   0.257                     0.699
         Costs.
----------------------------------------------------------------------------------------------------------------
\1\ The operating cost category weights in the excluded hospital market basket described in the August 1, 2002
  final rule (67 FR 50042-50044) add to 100.0. When we add an additional set of cost category weights (total
  capital weight = 8.968 percent) to this original group, the sum of the weights in the new index must still add
  to 100.0. Capital costs account for 8.968 percent of the market basket; operating costs account for 91.032
  percent. Each weight in the FY 1997-based excluded hospital market basket from the August 1, 2002 final rule
  (67 FR 50042-50044) was multiplied by 0.91032 to determine its weight in the proposed FY 1997-based excluded
  hospital with capital market basket.
\2\ Weights may not sum to 100.0 due to rounding.


Table II.--Proposed Excluded Hospital With Capital Input Price Index (FY
                          1997) Vintage Weights
------------------------------------------------------------------------
                                       Building                Interest:
                                       and fixed    Movable    capital-
 Year (from farthest to most recent)   equipment   equipment    related
                  *                    (23-year    (11-year    (23-year
                                      weights) *  weights) *  weights) *
------------------------------------------------------------------------
1...................................      0.018       0.063       0.007
2...................................      0.021       0.068       0.009
3...................................      0.023       0.074       0.011
4...................................      0.025       0.080       0.012
5...................................      0.026       0.085       0.014
6...................................      0.028       0.091       0.016
7...................................      0.030       0.096       0.019
8...................................      0.032       0.101       0.022
9...................................      0.035       0.108       0.026
10..................................      0.039       0.114       0.030
11..................................      0.042       0.119       0.035
12..................................      0.044   ..........      0.039
13..................................      0.047   ..........      0.045
14..................................      0.049   ..........      0.049
15..................................      0.051   ..........      0.053
16..................................      0.053   ..........      0.059
17..................................      0.057   ..........      0.065
18..................................      0.060   ..........      0.072
19..................................      0.062   ..........      0.077
20..................................      0.063   ..........      0.081
21..................................      0.065   ..........      0.085

[[Page 11247]]


22..................................      0.064   ..........      0.087
23..................................      0.065   ..........      0.090
                                     -------------
    Total...........................      1.0000      1.0000      1.0000
------------------------------------------------------------------------
* Weights may not sum to 1.000 due to rounding.

    Table III. compares the FY 1992-based excluded hospital with 
capital market basket to the proposed FY 1997-based excluded hospital 
with capital market basket. As shown in the table, the proposed rebased 
and revised market basket grows slightly faster over the FY 1999-2001 
period than the FY 1992-based market basket. The major reason for this 
was the switching of the wage and benefit proxy to the ECI for hospital 
workers from the previous occupational blend. This revision had a 
similar impact on the IPPS and excluded market baskets, as described in 
the August 1, 2002 final rule (67 FR 50043-50047).

 Table III.--Percent Changes in the FY 1992-Based and Proposed FY 1997-
   Based Excluded Hospital with Capital Market Baskets, FYs 1999-2004
------------------------------------------------------------------------
                                                    Percentage change
                                               -------------------------
                                                  FY 1992-     Proposed
                                                   based      rebased FY
               Fiscal year (FY)                   excluded    1997-based
                                                  hospital     excluded
                                                   market       market
                                                   basket       basket
------------------------------------------------------------------------
1999..........................................          2.3          2.7
2000..........................................          3.4          3.1
2001..........................................          3.9          4.0
Average historical............................          3.2          3.3
2002..........................................          2.8          3.7
2003..........................................          2.8          3.1
2004..........................................          3.0          3.3
Average forecast..............................          2.9          3.3
------------------------------------------------------------------------

    In the August 30, 2002 LTCH PPS final rule (67 FR 56016 and 56085-
56086), we discussed why we believe the excluded hospital with capital 
market basket provides a reasonable measure of the price changes facing 
LTCHs. However, we have been researching the feasibility of developing 
a market basket specific to LTCH services. This research has included 
analyzing data sources for cost category weights, specifically the 

Medicare cost reports, and investigating other data sources on cost, 
expenditure, and price information specific to LTCHs. Based on this 
research (as discussed below), at this time we are not proposing to 
develop a market basket specific to LTCH services.
    Our analysis of the Medicare cost reports indicates that the 
distribution of costs among major cost report categories (wages, 
pharmaceuticals, capital) for LTCHs is not substantially different from 
the proposed 1997-based excluded hospital with capital market basket 
presented in this proposed rule. Data on other major cost categories 
(benefits, blood, contract labor) that we would like to analyze were 
excluded by many LTCHs in their Medicare cost reports. An analysis 
based on only the data available to us for these cost categories 
presented a potential problem since no other major cost category weight 
would be based on LTCH data.
    We conducted a sensitivity analysis of annual percent changes in 
the market basket when the weights for wages, pharmaceuticals, and 
capital in LTCHs were substituted into the excluded hospital with 
capital market basket. Other cost categories were recalibrated using 
ratios available from the IPPS market basket. On average between FY 
1995 and FY 2002, the proposed excluded hospital with capital market 
basket shows increases at nearly the same average annual rate (2.9 
percent) as the market basket with LTCH weights for wages, 
pharmaceuticals, and capital (2.8 percent). This difference is less 
than the 0.25 percentage point criterion that determines whether a 
forecast error adjustment is warranted under the IPPS update framework.
    We believe that an excluded hospital with capital market basket 
adequately reflects the price changes facing LTCHs. We will continue to 
solicit comments about issues particular to LTCHs that should be 
considered in relation to the proposed FY 1997-based excluded hospital 
with capital market basket and to encourage suggestions for additional 
data sources that may be available.
    b. Proposed LTCH Market Basket Increase for the Proposed 2004 LTCH 
PPS Rate Year
    As stated earlier, for LTCHs paid under the LTCH PPS, we are 
proposing that the 2004 rate year update would apply to discharges 
occurring from July 1, 2003 through June 30, 2004. Because we are 
proposing to change the timeframe of the standard Federal rate annual 
update, we needed to calculate an update factor that would reflect this 
proposed change in the update cycle. Presently, the current rate cycle 
is October 1, 2002 through September 30, 2003. This means that the 
standard Federal rate ($34.956.15; see the August 30, 2002 final rule, 
67 FR 56033) was determined based on the market basket increase through 
September 30, 2003. Since we are proposing to change the rate update 
cycle and, therefore, update the standard Federal rate 3 months earlier 
(that is, July 1, 2003 instead of October 1, 2003), we need to propose 
an adjustment to the projected full (12-month) market basket increase 
to eliminate the projected increase for the 3-month overlapping period 
(July 1, 2003 through September 30, 2003).
    Thus, we needed to account for the fact that the FY 2003 standard 
Federal rate of $34,956.15 already includes an update for the 3-month 
period from July 1, 2003 through September 30, 2003. In the absence of 
this proposed change, the update for FY 2004 would have been calculated 
using the estimated increase between FY 2003 and FY 2004. For the 
proposed update for the proposed 2004 LTCH PPS rate year, we calculated 
the estimated increase between FY 2003 and the proposed 2004 LTCH PPS 
rate year. Based on the fourth quarter 2002 forecast of the proposed 
rebased FY 1997-based excluded hospital with capital market basket, 
this calculation results in an increase that is 0.8 percentage points 
less than it would have been if the proposed change in the LTCH PPS 
rate cycle would not be made. The projected market basket increase for 
this 3-month period (0.8

[[Page 11248]]

percent) was already included in the FY 2003 standard Federal rate and, 
therefore, needs to be deducted from the projected market basket 
increase for the 12-month period of July 1, 2003 through June 30, 2004 
(3.3 percent) in order to account for the proposed change in the update 
cycle.
    Consistent with our historical practice of estimating market basket 
increases, based on Global Insights' (formerly DRI-WEFA) fourth quarter 
2002 forecast of the proposed rebased FY 1997-based excluded hospital 
with capital market basket, we are proposing an update of 2.5 percent, 
as shown in Table IV. below.

    Table IV.--Calculation of Proposed Market Basket Increase for the
         Proposed 2004 LTCH Prospective Payment System Rate Year
------------------------------------------------------------------------
                                                                 Percent
------------------------------------------------------------------------
Proposed 2004 rate year full market basket with capital              3.3
 increase*....................................................
Adjustment for the proposed change in the update cycle**......      -0.8
Proposed 2004 market basket increase..........................      2.5
------------------------------------------------------------------------
\*\ Projected market basket increase for the 12-month period of July 1,
  2003 through June 30, 2004.
\**\ Projected market basket increase for the 3-month period of July 1,
  2003 through September 30, 2003 already included in the FY 2003
  standard Federal rate.

    In addition, based on the best available data for 194 LTCHs, we 
estimate that LTCH prospective payment system payments would be $1.960 
billion for the proposed 2004 LTCH prospective payment system rate 
year. As indicated previously, we are proposing to update the FY 2003 
standard Federal rate and wage index data 3 months early (July 1, 2003 
instead of October 1, 2003). We are proposing that this change be 
budget neutral because, as we discussed in the August 30, 2002 final 
rule (67 FR 56027), total estimated LTCH PPS payments in FY 2003 will 
equal estimated payments that would have been made under the reasonable 
cost-based principles if the LTCH PPS were not implemented. Based on 
the most recent data, for the 3-month period from July 1, 2003 through 
September 30, 2003, the proposed increase in the standard Federal rate 
would result in an additional cost of $5.66 million to the FY 2003 
Federal budget. Accordingly, in order to maintain budget neutrality for 
the proposed change in the rate update cycle, under proposed Sec.  
412.523(c)(3)(ii), we are proposing to adjust the standard Federal rate 
by a factor of 0.997 (($1.960 billion--$5.66 million)/$1.960 billion) 
or -0.003. Also, we propose to revise this adjustment factor in the 
final rule based on the best available data.
    Therefore, we are proposing to update the current standard Federal 
rate ($34,956.15) established in the August 30, 2002 final rule (67 FR 
56033) by 2.2 percent (2.5 percent minus 0.3 percent) for discharges 
paid under the LTCH PPS that occur on or after July 1, 2003 through 
June 30, 2004. This proposed update represents the most recent estimate 
of the increase in the excluded hospital with capital market basket for 
the proposed 2004 LTCH PPS rate year, adjusted by the above described 
factor to transition to the proposed change in the rate update cycle to 
July 1, and is based on the best available data for 194 LTCHs.
2. Proposed Standard Federal Rate for the Proposed 2004 LTCH PPS Rate 
Year
    In the August 30, 2002 LTCH PPS final rule (67 FR 56033), we 
established a standard Federal rate of $34,956.15. For the proposed 
2004 LTCH PPS rate year, we are proposing a standard Federal rate of 
$35,726.64. Since the proposed standard Federal rate has already been 
adjusted for differences in case-mix, wages, cost-of-living, and high-
cost outlier payments, we are not proposing any additional adjustments 
in the proposed standard Federal rate for these factors.

C. Calculation of Proposed LTCH Prospective Payments for the Proposed 
2004 LTCH PPS Rate Year

    The basic methodology for determining prospective payment rates for 
LTCH inpatient operating and capital-related costs is set forth in 
Sec.  412.521. In accordance with Sec.  412.515, we assign appropriate 
weighting factors to each LTC-DRG to reflect the estimated relative 
cost of hospital resources used for discharges within that group as 
compared to discharges classified within other groups. The amount of 
the prospective payment is based on the standard Federal rate, 
established under Sec.  412.523, and adjusted for the LTC-DRG relative 
weights, differences in area wage levels, cost-of-living in Alaska and 
Hawaii, high-cost outliers, and other special payment provisions 
(short-stay outliers under Sec.  412.529 and interrupted stays under 
Sec.  412.531). In accordance with Sec.  412.533, during the 5-year 
transition period, payment is based on the applicable transition blend 
percentage of the adjusted Federal rate and the TEFRA rate unless the 
LTCH makes a one-time election to receive payment based on 100 percent 

of the Federal rate. A LTCH defined as ``new'' under Sec.  412.23(e)(4) 
is paid based on 100 percent of the Federal rate with no blended 
transition payments (Sec.  412.533(d)). As discussed in the August 30, 
2002 final rule and in accordance with Sec.  412.533(a), the applicable 
transition blends are as follows:

------------------------------------------------------------------------
                                                    Federal
  Cost reporting periods beginning on or after       rate     TEFRA rate
                                                  percentage  percentage
------------------------------------------------------------------------
Oct. 1, 2002....................................         20          80
Oct. 1, 2003....................................         40          60
Oct. 1, 2004....................................         60          40
Oct. 1, 2005....................................         80          20
Oct. 1, 2006....................................        100           0
------------------------------------------------------------------------

    Accordingly, for cost reporting periods beginning during FY 2003 
(that is, on or after October 1, 2002, and before September 30, 2003), 
blended payments under the transition methodology are based on 80 
percent of the LTCH's TEFRA rate and 20 percent of the adjusted Federal 
rate. For cost reporting periods beginning during FY 2004 (that is, on 
or after October 1, 2003 and before September 30, 2004), blended 
payments under the transition methodology will be based on 60 percent 
of the LTCH's TEFRA rate and 40 percent of the adjusted Federal rate.
1. Proposed Adjustment for Area Wage Levels
    Under the authority of section 307(b) of Pub. L. 106-554, we 
established an adjustment to account for differences in LTCH area wage 
levels under Sec.  412.525(c) using the labor-related share estimated 
by the excluded hospital market basket with capital and wage indices 
that were computed using wage data from acute care inpatient hospitals 
without regard to reclassification under section 1886(d)(8) or section 
1886(d)(10) of the Act. Furthermore, as we discussed in the August 30, 
2002 final rule (67 FR 56015-56019), we established a 5-year transition 
to the full wage adjustment. For cost reporting periods beginning on or 
after October 1, 2002 and before September 30, 2003 (FY 2003), the 
applicable LTCH wage index value is one-fifth of the full FY 2002 acute 
care hospital inpatient wage index data, without taking into account 
geographic reclassification under section 1886(d)(8) and section 
1886(d)(10) of the Act.
    In that same final rule (67 FR 56018), we stated that we would 
continue to reevaluate LTCH data as they become available and would 
propose to adjust the phase-in if subsequent data support

[[Page 11249]]

a change. Because the LTCH PPS was only recently implemented, 
sufficient new data have not been generated that would enable us to 
conduct a comprehensive reevaluation of the appropriateness of 
adjusting the phase-in. However, we have reviewed the most recent data 
available and did not find any evidence to support a change in the 5-
year phase-in of the wage index. Therefore, we are not proposing to 
adjust the phase-in at this time. In addition, as stated earlier, the 
5-year phase-in of the wage index would not be affected by the proposed 
establishment of a LTCH PPS rate year of July 1 to June 30. Instead, 
the 5-year phase-in of the wage index established in the August 30, 
2002 final rule (67 FR 56018) will continue to follow the Federal 
fiscal year. That is, for cost reporting periods beginning on or after 
October 1, 2003 and before September 30, 2004 (FY 2004), the applicable 
proposed LTCH wage index will be two-fifths of the proposed applicable 
LTCH PPS index values discussed below. However, we will reevaluate LTCH 
data as they become available and would propose to adjust the phase-in 
if subsequent data support a change.
    Section 412.525(c) provides that the adjustment to account for 
differences in area wage levels is made by multiplying the labor-
related portion of the Federal rate by the appropriate wage index value 
for the area in which the LTCH is physically located. In the August 30, 
2002 final rule (67 FR 56018), based on the best available data at that 
time, we stated that the wage index adjustment is based on the FY 2002 
inpatient acute care hospital wage index data without taking into 
account geographic reclassification under section 1886(d)(8) and 
section 1886(d)(10) of the Act. For the proposed 2004 LTCH PPS rate 
year, we are proposing that the wage index adjustment provided for 
under Sec.  412.525(c) be based on the most recent available inpatient 
acute care hospital wage data, that is, the FY 2003 inpatient acute 
care hospital wage index data without taking into account geographic 
reclassification under section 1886(d)(8) and section 1886(d)(10) of 
the Act. As we noted above, the 5-year phase-in of the wage index 
adjustment would not be affected by the proposed change in the LTCH PPS 
rate update cycle and will continue to be based on the Federal fiscal 
year. However, we are proposing to update the data used to compute the 
annual wage index values on the proposed 2004 LTCH PPS rate year cycle 
(July through June). For example, for a LTCH with a cost reporting 
period from January 1, 2003 through December 31, 2003, the LTCH will be 
paid using the one-fifth wage index value for its entire cost reporting 
period. For the first 6 months of that period (January 1, 2003 through 
June 30, 2003), the one-fifth wage index value would be based on the FY 
2000 inpatient acute care hospital wage index data without taking into 
account geographic reclassifications under sections 1886(d)(8) and 
(d)(10) of the Act as established in the August 30, 2002 final rule (67 
FR 56018). Under our proposal to update the data used to compute the 
LTCH PPS wage index values for July 1, 2003 through June 30 2004, for 
the next 6 months (July 1, 2003 through December 31, 2003) the LTCH 
would still be paid using one-fifth of the wage index value, but the 
wage index value would now be computed using FY 2003 inpatient acute 
care hospital wage index data without taking into account geographic 
reclassifications under sections 1886(d)(8) and (d)(10) of the Act (as 
shown in Tables 1 and 2 of the Addendum of this proposed rule). For the 
LTCH's cost reporting period from January 1, 2004 through December 31, 
2004, the LTCH would be paid using the two-fifth wage index value. For 
the first 6 months of that period (January 1, 2004 through June 30, 
2004), the two-fifth wage index value would be based on the FY 2000 
inpatient acute care hospital wage index data without taking into 
account geographic reclassifications under sections 1886(d)(8) and 
(d)(10) of the Act, as shown in Tables 1 and 2 of the Addendum of this 
proposed rule.
    In the August 30, 2002 final rule (67 FR 56018), for FY 2003 we 
used the FY 2002 inpatient acute care hospital wage index data without 
taking into account geographic reclassifications under sections 
1886(d)(8) and (d)(10) of the Act. The inpatient acute care hospital 
wage index data, without taking into account geographic 
reclassification under section 1886(d)(8) or section 1886(d)(10) of the 
Act, is also used under other postacute care PPSs, such as the IRF PPS 
and the SNF PPS. As we discussed in the August 30, 2002 final rule (67 
FR 56019), since hospitals that are excluded from the IPPS are not 
required to provide wage-related information on the Medicare cost 
report and we would need to establish instructions for the collection 
of such LTCH data in order to establish a geographic reclassification 
adjustment under the LTCH PPS, the wage adjustment established under 
the LTCH PPS is based on a LTCH's actual location without regard to the 
urban or rural designation of any related or affiliated provider. In 
this proposed rule, for the proposed 2004 LTCH PPS rate year, we are 
proposing to use the FY 2000 inpatient acute care hospital wage index 
data without taking into account geographic reclassifications under 
sections 1886(d)(8) and (d)(10) of the Act, because it is the most 
recent available complete data. This is the same wage data that were 
used to compute the FY 2003 wage indices currently used under the IPPS. 
The proposed LTCH wage index values for July 1, 2003 through June 30, 
2004 is shown in Table 1 (for urban areas) and Table 2 (for rural 
areas) in the Addendum of this proposed rule. As noted above, for cost 
reporting periods beginning on or after October 1, 2002 and before 
September 30, 2003 (FY 2003), the applicable LTCH wage index is one-
fifth of the full FY 2003 acute care hospital inpatient wage index 
data, without taking into account geographic reclassifications under 
sections 1886(d)(8) and (d)(10) of the Act. For cost reporting periods 
beginning on or after October 1, 2003 and before September 30, 2003 (FY 
2004), the applicable proposed LTCH wage index would be two-fifths of 
the full FY 2003 acute care hospital inpatient wage index data, without 
taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act.
    In conjunction with our proposal to rebase the excluded hospital 
with capital market basket from an FY 1992 to an FY 1997 base year (as 
discussed in section VI.B.1.a. of this preamble), we also are proposing 
to use a labor-related share that is determined from our proposed FY 
1997-based excluded hospital with capital market basket. In the August 
30, 2002 final rule (67 FR 56016), we established a labor-related share 
of 72.885 percent based on the relative importance of the labor-related 
share of operating and capital costs of the excluded hospital with 
capital market basket with an FY 1992 base-year. In this proposed rule, 
as discussed in further detail below, we are proposing a labor-related 
share of 72.612 percent based on the relative importance of the labor-
related share of operating costs (wages and salaries, employee 
benefits, professional fees, postal services, and all other labor-
intensive services) and capital costs in the proposed FY 1997 rebased 
excluded hospital with capital market basket.
    To determine the proposed labor-related share, we use the cost 
categories contained in the proposed FY 1997-based excluded hospital 
with capital market basket that are influenced by local labor markets, 
which reflect the different rates of price change for these cost 
categories between the base year

[[Page 11250]]

(FY 1997) and this period. First, we estimate the portion related to 
operating costs, which we estimate to be 69.075 percent for the 
proposed LTCH PPS rate year of July 1, 2003 through June 30, 2004, 
calculated based on the Medicare cost reports for excluded hospitals as 
the sum of the relative importance for wages and salaries (48.967), 
employee benefits (11.032), professional fees (4.518), and labor-
intensive services (4.558), as shown in Table V. The labor-related 
share of capital costs in the market basket needed to be considered as 
well. After an analysis of FY 1997 Medicare cost report data, we found 
no evidence to revise our current estimate of the portion of capital 
costs that is influenced by local labor markets of 46 percent (see 67 
FR 56016, August 30, 2002). Based on the proposed change in the LTCH 
PPS rate update cycle, the relative importance of capital is estimated 
to be 7.692 percent. Because the relative importance of capital is 
7.692 percent of the proposed FY 1997-based excluded hospital with 
capital market basket for the proposed 2004 LTCH PPS rate year, we 
multiplied 46 percent by 7.692 percent to determine the labor-related 
share of capital costs to be 3.538 percent. We then added the 3.543 
that was calculated for capital costs to the 69.075 percent that was 
calculated for operating costs to determine the total labor-related 
relative importance of 72.612. Therefore, we are proposing to use a 
labor-related share of 72.612 percent for the proposed 2004 LTCH PPS 
rate year.

       Table V.--Proposed Labor-Related Share Relative Importance
------------------------------------------------------------------------
                                          Relative          Relative
                                        importance FY     importance FY
                                         1992-based        1997-based
            Cost category               market basket     market basket
                                       (proposed 2004    (proposed 2004
                                        LTCH PPS rate     LTCH PPS rate
                                            year)             year)
------------------------------------------------------------------------
Wages and salaries..................            50.572           48.967
Employee benefits...................            11.882           11.032
Professional fees...................             2.052            4.518
Postage.............................             0.254  ................
All other labor intensive services..             5.242            4.558
    Subtotal........................            70.001           69.075
                                     -------------------
Labor-related share of capital costs             3.412            3.538