[Federal Register: May 19, 2003 (Volume 68, Number 96)]
[Proposed Rules]               
[Page 27203-27252]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my03-18]                         
 
[[pp. 27203-27252]] Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems and Fiscal Year 2004 Rates

[[Continued from page 27202]]

[[Page 27203]]

the hospital's cost reporting period, divided by the number of days in 
the cost reporting period. The regulations specify certain types of 
beds to be excluded from this count (for example, beds or bassinets in 
the healthy newborn nursery, custodial care beds, and beds in excluded 
distinct part hospital units).
    Further instructions for counting beds are detailed in section 
2405.3, Part I, of the Medicare Provider Reimbursement Manual (PRM). 
That section states that a bed must be permanently maintained for 
lodging inpatients and it must be available for use and housed in 
patient rooms or wards. Thus, beds in a completely or partially closed 
wing of the facility are considered available only if the hospital can 
put the beds into use when they are needed.
    Currently, if a bed can be staffed for inpatient care either by 
nurses on staff or from a nurse registry within 24 to 48 hours, the 
unoccupied bed is determined available.\5\ In most cases, it is a 
straightforward matter to determine whether unoccupied beds can be 
staffed within this timeframe because they are located in a unit that 
is otherwise staffed and occupied (an unoccupied bed is available for 
patient care but it is not occupied by a patient on a particular day). 
The determination is not as simple in situations where a room in an 
otherwise occupied unit has been altered for other purposes, such as 
for a staff lounge or for storage.
---------------------------------------------------------------------------

    \5\ This policy was first articulated in correspondence to the 
Blue Cross and Blue Shield Association (BCBSA) on November 2, 1988, 
and published in BCBSA's Administrative Bulletin 1841, 
88.01, on November 18, 1988.
---------------------------------------------------------------------------

    Section 2405.3 of the PRM states that beds in unoccupied rooms or 
wards are to be excluded from the bed count if the associated costs are 
excluded from depreciable plant assets because the area is not 
available for patient use. However, issues continue to arise with 
regard to how to treat entire units or even entire floors that are 
unoccupied over a period of time. For example, in one recent Provider 
Reimbursement Review Board (PRRB) decision, the hospital acknowledged 
that an entire floor was temporarily unoccupied for approximately 2 
years. Rooms on the floor were used for office space, storage and 
outpatient services. The PRRB ruled that current rules allowed these 
beds to be counted. Specifically, the PRRB found the beds could 
reasonably be made ready for inpatient use within 24 to 48 hours, the 
rooms were counted on the hospital's cost report as depreciable plant 
assets available for patient care, and the hospital could adequately 
provide patient care in the beds using staff nurses or nurses from a 
nurse registry. Upon review, the Administrator also ultimately upheld 
this decision based on existing policies and instructions.
    We do not believe that an accurate bed count should include beds 
that are essentially hypothetical in nature; for example, when the beds 
are on a floor that is not used for inpatient care throughout the 
entire cost reporting period (and, indeed, may have been used for other 
purposes). Followed to the extreme, a hospital could count every bed in 
its facility, even if it had no intention of ever using a bed for 
inpatient care, as long as it would be theoretically possible to place 
an inpatient in the bed. We do not believe such a result would 
accurately reflect a hospital's inpatient bed capacity. Even though 
some teaching hospitals have an incentive to minimize the bed count for 
payment purposes, some DSH hospitals have an incentive to maximize the 
bed count for the same reason. Our current policy is intended to 
reflect a hospital's bed count as accurately as possible, achieving a 
balance between capturing short-term shifts in occupancy and long-term 
changes in capacity. Therefore, we believe further clarification and 
refinement of our policies relating to counting available beds is 
necessary.
    In the FY 2003 IPPS proposed rule published on May 9, 2002 (67 FR 
31462), we proposed that, if a hospital's reported bed count results in 
an occupancy rate (average daily census of patients divided by the 
number of beds) below 35 percent, the applicable bed count, for 
purposes of establishing the number of available beds for that hospital 
would exclude beds that would result in an average annual occupancy 
rate below 35 percent. However, at the time the FY 2003 IPPS final rule 
was published on August 1, 2002 (67 FR 50060), we decided not to 
proceed with the proposed changes as final and to reconsider the issue 
as part of a future comprehensive analysis of our bed and patient day 
counting policies.
    In this proposed rule, rather than establish a minimum standard 
occupancy rate, we are proposing to determine whether beds in a unit 
are available based upon whether the unit was used to provide patient 
care of a level generally payable under the IPPS (``IPPS level of 
care'') at any time during the 3 preceding months. If any of the beds 
in the unit were used to provide an IPPS level of care at any time 
during the preceding 3 months, all of the beds in the unit are counted 
for purposes of determining available bed days during the current 
month. If no patient care of a type generally payable under the IPPS 
was provided in that unit during the 3 preceding months, the beds in 
the unit are to be excluded from the determination of available bed 
days during the current month (proposed Sec. Sec.  412.105(b)(2) and 
412.106(a)(1)(ii)(C)).
    For example, our policy as to how to count beds during minor 
renovations of units, wards, or individual rooms has been that unless 
the space costs are treated as nonallowable, the beds would be counted. 
Under the policy we are proposing, beds in an otherwise unoccupied unit 
that are occupied (for purposes of providing IPPS-level care) at any 
time during the 3 preceding months would be counted as available for 
the current month. This would apply even if the rooms were undergoing 
renovation during a portion of that 3-month period.
    We believe a unit or ward can be defined as a group of rooms 
staffed by nurses assigned to a single nursing station. In most cases, 
the patients treated within a single unit or ward will receive a 
similar level of care (that is, acute, intensive, rehabilitation, 
psychiatric, or skilled nursing). However, we encourage comments on the 
most useful definition of a unit or ward.
    We believe this proposed policy would provide a clear standard for 
both hospitals and fiscal intermediaries to use to determine whether 
otherwise unoccupied beds should be counted. We note that if the 
required time period for excluding the unoccupied beds were to be set 
too low, hospitals could potentially manipulate their available bed 
count by not admitting any patients to a unit during low occupancy 
periods, thereby distorting the measure of hospital size. We believe 3 
months, one quarter of a hospital's fiscal year, represents a 
reasonable standard for determining that a unit is not being used to 
provide patient care and may be excluded from the hospital's available 
bed count.
    It is also necessary to consider our policy with respect to 
individual beds within rooms located in an otherwise occupied unit when 
those beds are used for alternative purposes. For example, section 
2405.3 of the PRM states that beds used for the following are excluded 
from the definition (of a bed): Postanesthesia or postoperative 
recovery rooms, outpatient areas, emergency rooms, ancillary 
departments nurses' and other staff residences, and other such areas as 
are regularly maintained and utilized for only a portion of the stay of 
patients or for purposes other than inpatient lodging. In some 
situations, beds used for these excluded

[[Page 27204]]

purposes may be intermingled with acute care inpatient beds.
    Beds being used to provide specific categories of nonacute 
services, such as outpatient services in an observation bed or skilled 
nursing services in a swing-bed, are excluded from the count. As 
discussed later, this flows from our policy that the bed days are 
treated consistently with the assignment of the costs on the Medicare 

cost report of the services provided in the bed.
    In the case of individual rooms in an otherwise occupied unit that 
are altered to be used for other uses besides inpatient care, we are 
proposing the bed(s) should be counted if a patient could be admitted 
to the room within 24 hours (proposed Sec.  412.105(b)(3)). This would 
apply even if the bed(s) were not currently located in the room, as 
long as a bed could be physically placed in the room and made available 
within 24 hours. We are proposing that it would no longer be necessary 
for the hospital to determine whether a bed could be staffed within 24 
to 48 hours. For example, in the case of a room that has been altered 
for use as a staff lounge, if the room could be made available to house 
a patient merely by replacing the lounge furniture with a patient bed, 
the bed should be counted as available.
    Under this proposal, other than when an inpatient room is used to 
provide observation services, labor/delivery room services, or skilled 
nursing services in a swing-bed (all discussed later in this proposed 
rule), the alternative purpose of the room is only relevant if it 
impacts whether the room could be made available for patient occupancy 
within 24 hours. If the hospital was fully occupied (no other room was 
available), and the room still was not put into service when needed, 
that would provide evidence that the room could not be made available 
and beds in the room should be excluded from the bed count.
    Therefore, we are proposing to amend Sec.  412.105(b) to indicate 
that the bed days in a unit that is unoccupied by patients receiving 
IPPS-level care for the 3 preceding months are to be excluded from the 
available bed day count for the current month. We are further proposing 
the beds in a unit that was occupied for IPPS-level care during the 3 
preceding months should be counted unless they could not be made 
available for patient occupancy within 24 hours, or they are used to 
provide outpatient observation services or swing-bed skilled nursing 
care.
3. Nonacute Care Beds and Days
    As noted above, these policies are consistent with the reporting of 
the days, costs, and beds that are used to calculate the costs of 
hospital inpatient care in individual cost centers on the Medicare cost 
report. Furthermore, since the IME and DSH adjustments are part of the 
IPPS, we read the statute to apply only to inpatient beds and days.
    Under the existing provisions of Sec.  412.105(b), the regulations 
specifically exclude beds or bassinets in the healthy newborn nursery, 
custodial care beds, or beds in excluded distinct part hospital units 
as types of beds excluded from the count of available beds.
    Existing regulations at Sec.  412.106(a)(1)(ii) state that the 
number of patient days used in the DSH percentage calculation includes 
only those days attributable to areas of the hospital that are subject 
to the IPPS and excludes all others. This regulation was added after 
being proposed in the March 22, 1988 Federal Register (53 FR 9339), and 
made final in the September 30, 1988 Federal Register (53 FR 38479). At 
that time, we indicated that, ``based on a reading of the language in 
section 1886(d)(5)(F) of the Act, which implements the disproportionate 
share provision, we are in fact required to consider only those 
inpatient days to which the prospective payment system applies in 
determining a prospective payment hospital's eligibility for a 
disproportionate share adjustment.'' Using this reasoning, we stated 
that the DSH patient percentage calculation should only include patient 
days associated with the types of services paid under the IPPS.
    As noted previously, a recent decision in the Ninth Circuit Court 
of Appeals (Alhambra v. Thompson) ruled that days attributable to 
groups of beds that are not separately certified as distinct part beds 
(that is, nonacute care beds in which care provided is at a level below 
the level of routine inpatient acute care), but are adjacent to or in 
an acute care ``area,'' are included in the ``areas of the hospital 
that are subject to the prospective payment system'' and should be 
counted in calculating the Medicare DSH patient percentage.
    In light of the Ninth Circuit decision that our rules were not 
sufficiently clear to permit exclusion of bed days based on the area 
where the care is provided, we are proposing to revise our regulations 
to be more specific. Therefore, in this proposed rule, we are proposing 
to clarify that beds and patient days are excluded from the 
calculations at Sec.  412.105(b) and Sec.  412.106(a)(1)(ii) if the 
nature of the care provided in the unit or ward is inconsistent with 
what is typically furnished to acute care patients, regardless of 
whether these units or wards are separately certified or are located in 
the same general area of the hospital as a unit or ward used to provide 
an acute level of care. Although the intensity of care may vary within 
a particular unit, such that some patients may be acute patients while 
others are nonacute, we understand that a patient-by-patient review of 
whether the care received would be paid under the IPPS would be unduly 
burdensome. Therefore, we believe it is more practical to permit the 
application of this principle based upon the location at which the 
services were furnished.
    In particular, we are proposing to revise our regulations to 
clarify that the beds and patient days attributable to a nonacute care 
unit or ward should not be included in the calculations at Sec.  
412.105(b) and Sec.  412.106(a)(1)(ii), even if the unit is not 
separately certified by Medicare as a distinct-part unit and even if 
the unit or ward is within the same general location of the hospital as 
areas that are subject to the IPPS.
    Exceptions to this policy are outpatient observation and swing-bed 
days, which are excluded from the count of available bed days even if 
the care is provided in an acute care unit. Our policies pertaining to 
these beds are discussed further below. Another exception is healthy 
newborn nursery days. The costs, days, and beds of a healthy newborn 
nursery are excluded from inpatient calculations for Medicare purposes. 
Meanwhile, for the purpose of computing the Medicaid patient share 
computation of the DSH patient percentages, these days are included 
both as Medicaid patient days and as total patient days. Nursery costs 
are not directly included in calculating Medicare hospital inpatient 
care costs because Medicare does not generally cover services for 
infants. However, Medicaid does offer extensive coverage to infants, 
and nursery costs would be directly included in calculating Medicaid 
hospital inpatient care costs. Therefore, these costs, days, and beds 
are excluded for Medicare purposes, but included for determining the 
Medicaid DSH percentage. (This policy was previously communicated 
through a memorandum to CMS Regional Offices on February 27, 1997.)
    Generally, as discussed previously, if the nature of the care 
provided in the unit or ward is consistent with what is typically 
furnished to acute care patients, and, therefore, would be 
characteristic of services paid under the IPPS, the patient days, beds, 
and costs of that unit or ward would be classified as inpatient acute 
care (except for observation bed days and swing bed days, as discussed 
later in this

[[Page 27205]]

preamble). Conversely, if the intensity and type of care provided in 
the unit or ward are not typical of a service that would be paid under 
the IPPS (for example, nonacute care), we are proposing that the beds 
and patient days attributable to a nonacute care unit or ward should 
not be included in the calculations of beds and patient days at Sec.  
412.105(b) and Sec.  412.106(a)(1)(ii).
    This proposed policy is not intended to focus on the level or type 
of care provided to individual patients in a unit, but rather on the 
level and type of care provided in the unit as a whole. For example, 
the bed days for a patient participating in an experimental procedure 
that is not covered under the IPPS should be counted as long as the 
patient is treated in a unit of the hospital that generally provides 
acute inpatient care normally payable under the IPPS. The expectation 
is that a patient located in an acute care unit or ward of the hospital 
is receiving a level of care that is consistent with what would be 
payable under the IPPS.
    There are instances where services that are provided in units 
excluded from the IPPS (such as rehabilitation and psychiatric 
distinct-part units) are consistent with the level of care that would 
qualify for payment under the IPPS. However, Sec. Sec.  412.105(b) and 
412.106(a)(1)(ii) specifically exclude the beds and patient days 
associated with these excluded units. That exclusion is because the 
costs of care provided in these units are paid outside the IPPS, even 
though some of the care provided is of a type that would be payable 
under the IPPS if the care was provided in an IPPS unit.
    We are proposing to revise Sec.  412.105(b) to clarify that beds in 
units or wards established or used to provide a level of care that is 
not consistent with what would be payable under the IPPS cannot be 
counted (proposed paragraph (b)(1)). We also are proposing to revise 
the DSH regulations at Sec.  412.106(a)(1)(ii) to clarify that the 
number of patient days includes only those attributable to patients 
that receive care in units or wards that furnish a level of care that 
would generally be payable under the IPPS (proposed paragraph 
(a)(1)(ii)(C)).
    We note these proposed revisions are clarifications of our 
regulations to reflect our longstanding interpretation of the statutory 
intent, especially relating to the calculation of the Medicare DSH 
patient percentage.
4. Observation Beds and Swing-Beds
    Observation services are those services furnished by a hospital on 
the hospital's premises that include use of a bed and periodic 
monitoring by a hospital's nursing or other staff in order to evaluate 
an outpatient's condition or to determine the need for a possible 
admission to the hospital as an inpatient. When a hospital places a 
patient under observation but has not formally admitted him or her as 
an inpatient, the patient initially is treated as an outpatient. 
Consequently, the observation bed days are not recognized under the 
IPPS as part of the inpatient operating costs of the hospital.
    Observation services may be provided in a distinct observation bed 
area, but they may also be provided in a routine inpatient care area. 
In either case, our policy is the bed days attributable to beds used 
for observation services are excluded from the counts of available bed 
days and patient days at Sec. Sec.  412.105(b) and 412.106(a)(1)(ii). 
This policy was clarified in a memorandum that was sent to all CMS 
Regional Offices (for distribution to fiscal intermediaries) dated 
February 27, 1997, which stated that if a hospital provides observation 
services in beds that are generally used to provide hospital inpatient 
services, the equivalent days that those beds are used for observation 
services should be excluded from the count of available bed day count 
(even if the patient is ultimately admitted as an acute inpatient).
    A swing-bed is a bed otherwise available for use to provide acute 
inpatient care that is also occasionally used to provide SNF care. The 
criteria to qualify as a swing-bed hospital are located under Sec.  
482.66, and for a swing-bed CAH under Sec.  485.645. Under Sec.  
413.114(a)(1), payment for posthospital SNF care furnished in swing-
beds is in accordance with the provisions of the prospective payment 
system for SNF care (effective for services furnished in cost reporting 
periods beginning on and after July 1, 2002). Similar to observation 
beds and patient days, swing-beds and patient days are excluded from 
the counts of available bed days and patient days at Sec. Sec.  
412.105(b) and 412.106(a)(1)(ii) when the swing-bed is used to furnish 
SNF care.\6\
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    \6\ Ibid.
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    Observation beds and swing-beds are both special, frequently 
temporary, alternative uses of acute inpatient care beds. That is, only 
the days an acute inpatient care unit bed is used to provide outpatient 
observation services are to be deducted from the available bed count 
under Sec.  412.105(b). Otherwise, the bed is considered available for 
acute care services (as long as it otherwise meets the criteria to be 
considered available). This same policy applies for swing-beds. The 
policies to exclude observation bed days and swing-bed days stem from 
the fact that these bed days are not payable under the IPPS (unless the 
patient is ultimately admitted, in the case of observation bed days).
    Some hospitals have contested our policy excluding swing-beds and 
patient days and observation beds and patient days under existing 
Sec. Sec.  412.105(b) and 412.106(a)(1)(ii). For example, in Clark 
Regional Medical Center v. United States Department of Health & Human 
Services, 314 F.3d 241 (6th Cir. 2002), the court upheld the district 
court's ruling that all bed types not specifically excluded from the 
definition of available bed days in the regulations must be included in 
the count of available bed days. The hospitals involved in this 
decision wanted to include observation and swing-bed days in their bed 
count calculation in order to qualify for higher DSH payments as 100 
bed hospitals. The Court found that ``the listing of beds to be 
excluded from the count restricts the class of excluded beds only to 
those specifically listed.'' Because observation beds and swing-beds 
are not currently specifically mentioned in Sec.  412.105(b) as being 
excluded from the bed count, the Court ruled that these beds must be 
included in the count.
    The list of the types of beds excluded from the count under 
existing Sec.  412.105(b) was never intended to be an exhaustive list 
of all of the types of beds to be excluded from the bed count under 
this provision. In fact, over the years, specific bed types have been 
added to the list as clarifications of the types of beds to be 
excluded, not as new exclusions (see the September 1, 1994 Federal 
Register (59 FR 45373) and September 1, 1995 Federal Register (60 FR 
45810), where we clarified exclusions under our policy that were not 
previously separately identified in the regulation text).
    Courts also have recently found that observation and swing-bed days 
are included under the `plain meaning' of Sec.  412.106(a)(1)(ii), 
which reads: ``The number of patient days includes only those days 
attributable to areas of the hospital that are subject to the 
prospective payment system and excludes all others.'' However, the 
preamble language when this provision was promulgated clarified its 
meaning (53 FR 38480):
    [sbull] ``Although previously the Medicare regulations did not 
specifically define the inpatient days for use in the computation of a 
hospital's disproportionate share patient percentage, we believe that, 
based on a

[[Page 27206]]

reading of the language in section 1886(d)(5)(F) of the Act, which 
implements the disproportionate share provision, we are in fact 
required to consider only those inpatient days to which the prospective 
payment system applies in determining a prospective payment hospital's 
eligibility for a disproportionate share adjustment.''
    Our policy excluding outpatient observation and swing-bed days is 
consistent with this regulatory interpretation of days to be counted 
under Sec.  412.106(a)(1)(ii). That is, the services provided in these 
beds are not payable under the IPPS (unless the patient is admitted, in 
the case of observation bed days).
    As outlined previously, our consistent and longstanding policy, 
which has been reviewed and upheld previously by several courts, 
including the United States District Court for the District of 
Columbia, is based on the principle of counting beds in the same manner 
as the patient days and costs are treated. Our policy to exclude 
observation and swing-bed days under the regulations at Sec.  
412.105(b) and Sec.  412.106(a)(1)(ii) stems from this policy.
    However, we are proposing to amend our policy with respect to 
observation bed days of patients who ultimately are admitted. As noted 
previously, our current policy is that these bed days are excluded from 
the available bed day and the patient day counts. This policy was 
communicated in a memorandum to all CMS Regional Offices on February 
27, 1997. Specifically, we are proposing that, if a patient is admitted 
as an acute inpatient subsequent to receiving outpatient observation 
services, because the charges of the observation ancillary services the 
patient receives are currently treated as inpatient charges on the cost 
report, in order to be consistent with our policy to treat the costs 
and patient days consistently, we will begin to include the patient bed 
days associated with the observation services in the inpatient bed day 
count.
    In order to avoid any potential future misunderstandings about our 
policies regarding the exclusion of observation and swing-bed days 
under the regulations at Sec.  412.105(b) and Sec.  412.106(a)(1)(ii), 
we are proposing to revise our regulations to specify our policy that 
observation and swing-bed bed days are to be excluded from the counts 
of both available beds and patient days, unless a patient treated in an 
observation bed is ultimately admitted, in which case the beds and days 
would be included in those counts.
5. Labor, Delivery, Recovery, and Postpartum Beds and Days
    Prior to December 1991, Medicare's policy on counting days for 
maternity patients required an inpatient day to be counted for an 
admitted maternity patient in the labor/delivery room at the census 
taking hour. This is consistent with Medicare policy for counting days 
for admitted patients in any other ancillary department at the census-
taking hour. However, based on decisions adverse to the government 
regarding this policy in a number of Federal courts of appeal, 
including the United States Court of Appeals for the District of 
Columbia Circuit, the policy regarding the counting of inpatient days 
for maternity patients was revised.
    Therefore, our current policy regarding the treatment of labor and 
delivery bed days was initially described in Section 2205.2 of the PRM. 
Section 2205.2. of the PRM states that a maternity inpatient in the 
labor/delivery room at midnight is not included in the census of 
inpatient routine care if the patient has not occupied an inpatient 
routine bed at some time since admission. For example, if a Medicaid 
patient is in the labor room at the census and has not yet occupied a 
routine bed, the bed day is not counted as a routine bed day of care in 
Medicaid or total days and, therefore, is not included in the counts 
under existing Sec. Sec.  412.105(b) and 412.106(a)(1)(ii). If the 
patient is in the labor room at the census but had first occupied a 
routine bed, a routine bed day is counted, in Medicaid and total days, 
for DSH purposes and for apportioning the cost of routine care on the 
cost report (consistent with our longstanding policy to treat days, 
costs, and beds similarly).
    Increasingly, hospitals are redesigning their maternity areas from 
separate labor and delivery rooms apart from the postpartum rooms, to 
single labor, delivery room, and postpartum (LDRP) rooms. In order to 
appropriately track the days and costs of LDRP rooms, it is necessary 
to apportion them between the labor and delivery ancillary cost center 
and the routine adults and pediatrics cost center. This is done by 
determining the proportion of the patient's stay in the LDRP room that 
the patient was receiving ancillary services (labor and delivery) as 
opposed to routine adult and pediatric services (recovery and 
postpartum).
    An example of this would be if 25 percent of the patient's time in 
the LDRP room was for labor/delivery services and 75 percent for 
routine care, over the course of a 4-day stay in the LDRP room. In that 
case, 75 percent of the time the patient spent in the LDRP room is 
applied to the total bed days and costs (resulting in 3 routine adults 
and pediatrics bed days for this patient, 75 percent of 4 total days). 
The resulting days (or portion of days) are included in total days and 
in Medicaid days for all purposes. For purposes of determining hospital 
bed count, the time when the beds are unoccupied should be counted as 
available bed days using an average percentage (for example, 75 percent 
adults and pediatrics and 25 percent ancillary) based on all patients. 
In other words, 75 percent of the days the bed is unoccupied would be 
counted in the available bed count.
    We realize that it may be burdensome for a hospital to determine 
for each patient in this type of room the amount of time spent in 
labor/delivery and the amount of time spent receiving routine care. 
Alternatively, the hospital could calculate an average percentage of 
time patients receive ancillary services, as opposed to routine 
inpatient care during a typical month, to apply the rest of the year.
6. Days Associated with Demonstration Projects Under Section 1115 of 
the Act
    Some States extend medical benefits to a given population that 
could not have been made eligible for Medicaid under a State plan 
amendment under section 1902(r)(2) or section 1931(b) of the Act, under 
a demonstration under a section 1115(a)(2) demonstration project (also 
referred to as a section 1115 waiver). These populations are specific, 
finite populations identifiable in the award letters and special terms 
and conditions for the demonstrations.
    On January 20, 2000, we issued an interim final rule with comment 
period (65 FR 3136), followed by a final rule issued on August 1, 2000 
(65 FR 47086 through 47087), to allow hospitals to include the patient 
days of all populations that receive benefits under a section 1115 
demonstration project in calculating the Medicare DSH adjustment. 
Previously, hospitals were to include only those days for populations 
under the section 1115 demonstration project who were, or could have 
been made, eligible under a State plan. Patient days of those expansion 
waiver groups who could not be made eligible for medical assistance 
under the State plan were not to be included for determining Medicaid 
patient days in calculating the Medicare DSH patient percentage. Under 
the January 20, 2000 interim final rule with comment period (65 FR 
3137), hospitals could include in the numerator of the Medicaid 
fraction those patient days for individuals who receive benefits under

[[Page 27207]]

a section 1115 expansion waiver demonstration project (effective with 
discharges occurring on or after January 20, 2000).
    In the January 20, 2000 interim final rule with comment period, we 
explained that including the section 1115 expansion populations ``in 
the Medicare DSH calculation is fully consistent with the Congressional 
goals of the Medicare DSH adjustment to recognize the higher costs to 
hospitals of treating low-income individuals covered under Medicaid.''
    Since that revision, we have become aware that there are certain 
section 1115 demonstration projects that serve expansion populations 
with benefit packages so limited that the benefits are not similar to 
the medical assistance available under a Medicaid State plan. These 
section 1115 demonstration projects extend coverage only for specific 
services and do not include inpatient care in the hospital. Because of 
the limited nature of the coverage offered, the population involved may 
have a significantly higher income than traditional Medicaid 
beneficiaries.
    In allowing hospitals to include patient days related to section 
1115 expansion waiver populations, our intention was to include patient 
days of section 1115 expansion waiver populations who receive benefits 
under the demonstration project that are similar to those available to 
traditional Medicaid beneficiaries, including inpatient benefits. 
Because of the differences between expansion populations in these 
limited benefit demonstrations and traditional Medicaid beneficiaries, 
we are proposing that the Medicare DSH calculation should exclude from 
treatment as Medicaid patient days those patient days attributable to 
limited benefit section 1115 expansion waiver populations (proposed 
Sec.  412.106(b)(4)(i)).
    For example, a State may extend a family planning benefit to an 
individual for 2 years after she has received the 60-day postpartum 
benefit under Medicaid, or a State may choose to provide a family 
planning benefit to all individuals below a certain income level, 
regardless of having previously received the Medicaid postpartum 
benefit. This is a limited, temporary benefit that is generally 
administered in a clinic setting (see section 1905(a)(4)(C) of the 
Act). Also, a number of States are developing demonstrations that are 
limited to providing beneficiaries an outpatient prescription drug 
benefit. Generally, these limited benefits under a demonstration 
project do not include inpatient benefits. If a hospital were to 
include the days attributable to patients receiving benefits under such 
a limited benefit, the hospital would be able to receive higher DSH 
payments, perhaps substantially, for patients who may otherwise be 
insured for inpatient care. For example, these limited demonstrations 
provide benefits that may be needed to supplement private insurance 
coverage for individuals who do not have incomes low enough to qualify 
for Medicaid under the State plan. We do not believe such patients 
should be counted in the DSH patient percentage as eligible for title 
XIX.
    As we have noted previously, at the time the Congress enacted the 

Medicare DSH adjustment provision, there were no approved section 1115 
demonstration projects involving expansion populations and the statute 
does not address the treatment of these days. Although we did not 
initially include patient days for individuals who receive extended 
benefits only under a section 1115 demonstration project, we 
nevertheless expanded our policy in the January 20, 2000 revision to 
these rules to include such patient days. We now believe that this 
reading is warranted only to the extent that those individuals receive 
inpatient benefits under the section 1115 demonstration project.
    Therefore, we are proposing to revise Sec.  412.106(b)(4)(i) to 
clarify that patients must be eligible for medical assistance inpatient 
hospital benefits under an approved State Medicaid plan (or similar 
benefits, including inpatient hospital benefits, under a section 1115 
demonstration project) in order for their hospital inpatient days to be 
counted as Medicaid days in the calculation of a hospital's DSH patient 
percentage. Under this proposed clarification, hospital inpatient days 
attributed to patients who do not receive coverage for inpatient 
hospital benefits either under the approved State plan or through a 
section 1115 demonstration would not be counted in the calculation of 
Medicaid days for purposes of determining a hospital's DSH patient 
percentage.
    Under this reading, in the examples given above, the days 
associated with a hospital inpatient who receives coverage of 
prescription drugs or family planning services on an outpatient basis, 
but no inpatient hospital coverage, through either a Medicaid State 
plan or a section 1115 demonstration, would not be counted as Medicaid 
days for purposes of determining the DSH patient percentage.
    This proposed revision would address an unintended potential 
consequence of our interpretation that hospitals may include in the DSH 
calculation patient days associated with section 1115 demonstration 
populations (65 FR 3136). As discussed above, that interpretation was 
based on our finding that individuals receiving a comprehensive benefit 
package under a section 1115 demonstration project could appropriately 
be included in the numerator of the Medicaid fraction even though the 
statute does not require such an inclusion, but did not address 
individuals who were receiving limited benefit packages under a section 
1115 demonstration project.
7. Dual-Eligible Patient Days
    As described above, the DSH patient percentage is equal to the sum 
of the percentage of Medicare inpatient days attributable to patients 
entitled to both Medicare Part A and SSI benefits, and the percentage 
of total inpatient days attributable to patients eligible for Medicaid 
but not entitled to Medicare Part A benefits. If a patient is a 
Medicare beneficiary who is also eligible for Medicaid, the patient is 
considered dual-eligible and the patient days are included in the 
Medicare fraction of the DSH patient percentage but not the Medicaid 
fraction. This is consistent with the language of section 
1886(d)(5)(F)(vi)(II) of the Act, which specifies that patients 
entitled to benefits under Part A are excluded from the Medicaid 
fraction.
    This policy currently applies even after the patient's Medicare 

coverage is exhausted. In other words, if a dual-eligible patient is 
admitted without any Medicare Part A coverage remaining, or the patient 
exhausts Medicare Part A coverage while an inpatient, his or her 
patient days are counted in the Medicare fraction before and after 
Medicare coverage is exhausted. This is consistent with our inclusion 
of Medicaid patient days even after the patient's Medicaid coverage is 
exhausted.
    We are proposing to change our policy, to begin to count in the 
Medicaid fraction of the DSH patient percentage the patient days of 
dual-eligible Medicare beneficiaries whose Medicare coverage has 
expired. We note the statute referenced above stipulates that patient 
days attributable to patients entitled to benefits under Medicare Part 
A are to be excluded from the Medicaid fraction, while the statute 
specifies the Medicaid fraction is to include patients who are eligible 
for Medicaid.
    As noted above, our current policy regarding dual-eligible patient 
days is that they are counted in the Medicare fraction and excluded 
from the

[[Page 27208]]

Medicaid fraction, even if the patient's Medicare Part A coverage has 
been exhausted. We believe this interpretation is consistent with the 
statutory intent of section 1886(d)(5)(F)(vi)(II) of the Act. However, 
we recognize there are other plausible interpretations. In addition, on 
a more practical level, we recognize it is often difficult for fiscal 
intermediaries to differentiate the days for dual-eligible patients 
whose Part A coverage has been exhausted. The degree of difficulty 
depends on the data provided by the States, which may vary from one 
State to the next. Some States identify all dual-eligible beneficiaries 
in their lists of Medicaid patient days provided to the hospitals, 
while in other States the fiscal intermediary must identify patient 
days attributable to dual-eligible beneficiaries by matching Medicare 

Part A bills with the list of Medicaid patients provided by the State. 
The latter case is problematic when Medicare Part A coverage is 
exhausted because no Medicare Part A bill may be submitted for these 
patients. Thus, the fiscal intermediary has no data by which to readily 
verify any adjustment for these cases in the Medicaid data provided by 
the hospital. Currently, the fiscal intermediaries are reliant on the 
hospitals to identify the days attributable to dual-eligible 
beneficiaries so these days can be excluded from the Medicaid patient 
days count.
    Therefore, in order to facilitate consistent handling of these days 
across all hospitals, we are proposing that the days of patients who 
have exhausted their Medicare Part A coverage will no longer be 
included in the Medicare fraction. Instead, we are proposing these days 
should be included in the Medicaid fraction of the DSH calculation. (We 
note that not all SSI recipients are Medicaid eligible. Therefore, it 
will not be automatic that the patient days of SSI recipients will be 
counted in the Medicaid fraction when their Part a coverage expires.)
    Under this proposed change, before a hospital could count patient 
days attributable to dual-eligible beneficiaries in the Medicaid 
fraction, the hospital must submit documentation to the fiscal 
intermediary that justifies including the days in the Medicaid fraction 
after the Medicare Part A benefits have been exhausted. That is, if the 
State provides data on all the days associated with all dual-eligible 
patients treated at a hospital, regardless of whether the beneficiary 
had Medicare Part A coverage, the hospital is responsible for providing 
documentation showing which days should be included in the Medicaid 
fraction because Medicare Part A coverage was exhausted.
8. Medicare+Choice (M+C) Days
    Under Sec.  422.1, an M+C plan ``means health benefits coverage 
offered under a policy or contract by an M+C organization that includes 
a specific set of health benefits offered at a uniform premium and 
uniform level of cost-sharing to all Medicare beneficiaries residing in 
the service area of the M+C plan.'' Generally, each M+C plan must 
provide coverage of all services that are covered by Medicare Part A 
and Part B (or just Part B if the M+C plan enrollee is only entitled to 
Part B).
    We have received questions whether patients enrolled in an M+C Plan 
should be counted in the Medicare fraction or the Medicaid fraction of 
the DSH patient percentage calculation. The question stems from whether 
M+C plan enrollees are entitled to benefits under Medicare Part A since 
M+C plans are administered through Medicare Part C.
    We note that, under Sec.  422.50, an individual is eligible to 
elect an M+C plan if he or she is entitled to Medicare Part A and 
enrolled in Part B. However, once a beneficiary has elected to join an 
M+C plan, that beneficiary's benefits are no longer administered under 
Part A.
    Therefore, we are proposing to clarify that once a beneficiary 
elects Medicare Part C, those patient days attributable to the 
beneficiary should not be included in the Medicare fraction of the DSH 
patient percentage. These patient days should be included in the count 
of total patient days in the Medicaid fraction (the denominator), and 
the patient's days for the M+C beneficiary who is also eligible for 
Medicaid would be included in the numerator of the Medicaid fraction.

D. Medicare Geographic Classification Review Board (MGCRB) 
Reclassification Process (Sec.  412.230)

    With the creation of the MGCRB, beginning in FY 1991, under section 
1886(d)(10) of the Act, hospitals could request reclassification from 
one geographic location to another for the purpose of using the other 
area's standardized amount for inpatient operating costs or the wage 
index value, or both (September 6, 1990 interim final rule with comment 
period (55 FR 36754), June 4, 1991 final rule with comment period (56 
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing 
regulations in subpart L of part 412 (Sec. Sec.  412.230 et seq.) set 
forth criteria and conditions for redesignations for purposes of the 
wage index or the average standardized amount, or both, from rural to 
urban, rural to rural, or from an urban area to another urban area, 
with special rules for SCHs and rural referral centers.
    Effective with reclassifications for FY 2003, section 
1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the 
average of the 3 years of hourly wage data from the most recently 
published data for the hospital when evaluating a hospital's request 
for reclassification. The regulations at Sec.  412.230(e)(2)(ii) 
stipulate that the wage data are taken from the CMS hospital wage 
survey used to construct the wage index in effect for prospective 
payment purposes. To evaluate applications for wage index 
reclassifications for FY 2004, the MGCRB used the 3-year average hourly 
wages published in Table 2 of the August 1, 2002 IPPS final rule (67 FR 
50135). These average hourly wages are taken from data used to 
calculate the wage indexes for FY 2001, FY 2002, and FY 2003, based on 
cost reporting periods beginning during FY 1997, FY 1998, and FY 1999, 
respectively.
    Last year, we received a comment suggesting that we allow for the 
correction of inaccurate data from prior years as part of a hospital's 
bid for geographic reclassification (67 FR 50027). The commenter 
suggested that not to allow corrections to the data results in 
inequities in the calculation in the average hourly wage for purposes 
of reclassification. In the August 1, 2002 IPPS final rule, we 
responded:
    ``Hospitals have ample opportunity to verify the accuracy of the 
wage data used to calculate their wage index and to request revisions, 
but must do so within the prescribed timelines. We consistently 
instruct hospitals that they are responsible for reviewing their data 
and availing themselves to the opportunity to correct their wage data 
within the prescribed timeframes. Once the data are finalized and the 
wage indexes published in the final rule, they may not be revised, 
except through the mid-year correction process set forth in the 
regulations at Sec.  412.63(x)(2). Accordingly, it has been our 
consistent policy that if a hospital does not request corrections 
within the prescribed timeframes for the development of the wage index, 
the hospital may not later seek to revise its data in an attempt to 
qualify for MGCRB reclassification.
    ``Allowing hospitals the opportunity to revise their data beyond 
the timelines required to finalize the data used to calculate the wage 
index each year would lessen the importance of complying with those 
deadlines. The likely result would be that the data used to compute the 
wage index would not be as carefully scrutinized because

[[Page 27209]]

hospitals would know they may change it later, leading to inaccuracy in 
the data and less stability in the wage indexes from year to year.''
    Since responding to this comment in the FY 2003 IPPS final rule, we 
have become aware of a situation in which a hospital does not meet the 
criteria to reclassify because its wage data were erroneous in prior 
years, and these data are now being used to evaluate its 
reclassification application. In addition, in this situation, the 
hospital's wage index was subject to the rural floor because the 
hospital was located in an urban area with an actual wage index below 
the statewide rural wage index for the State, and it was for a time 
period preceding the requirement for using 3 years of data. Therefore, 
the hospital contends, it had no incentive to ensure its wage data were 
completely accurate. (However, we would point out that hospitals are 
required to certify that their cost reports submitted to CMS are 
complete and accurate. Furthermore, inaccurate or incomplete reporting 
may have other payment implications beyond the wage index.)
    While we continue to have all of the concerns we expressed in last 
year's final rule, we now more fully understand this particular 
hospital's situation. Although we do have administrative authority to 
establish a policy allowing corrections for this particular set of 
circumstances, we are concerned about establishing a precedent that 
could reduce the importance of ensuring that the final wage data 
published in the annual IPPS final rule are complete and accurate. As 
we indicated in our response last year, we are concerned this could 
lead to less accuracy and stability in the wage indexes from year to 
year.
    However, we are soliciting comments on whether it may be 
appropriate to establish a policy whereby, for the limited purpose of 
qualifying for reclassification based on data from years preceding the 
establishment of the 3-year requirement (that is, cost reporting years 
beginning before FY 2000), a hospital in an urban area that was subject 
to the rural floor for the period during which the wage data the 
hospital wishes to revise were used to calculate the wage index, a 
hospital may request that its wage data be revised.

E. Costs of Approved Nursing and Allied Health Education Activities 
(Sec.  413.85)

1. Background
    Medicare has historically paid providers for the share of the costs 
that providers incur in connection with approved educational 
activities. The activities may be divided into the following three 
general categories to which different payment policies apply:
    [sbull] Approved graduate medical education (GME) programs in 
medicine, osteopathy, dentistry, and podiatry. Medicare makes direct 
and indirect medical education payments to hospitals for residents 
training in these programs. Existing policy on direct GME payment is 
found at 42 CFR 413.86, and for indirect GME payment at 42 CFR 412.105.
    [sbull] Approved nursing and allied health education programs 
operated by the provider. The costs of these programs are excluded from 
the definition of inpatient hospital operating costs and are not 
included in the calculation of payment rates for hospitals paid under 
the IPPS or in the calculation of payments to hospitals and hospital 
units excluded from the IPPS that are subject to the rate-of-increase 
ceiling. These costs are separately identified and ``passed through'' 
(that is, paid separately on a reasonable cost basis). Existing 
regulations on nursing and allied health education program costs are 
located at 42 CFR 413.85.
    [sbull] All other costs that can be categorized as educational 
programs and activities are considered to be part of normal operating 
costs and are included in the per discharge amount for hospitals 
subject to the IPPS, or are included as reasonable costs that are 
subject to the rate-of-increase limits for hospitals and hospital units 
excluded from the IPPS.
    In this section, we are proposing to clarify our policy governing 
payments to hospitals for provider-operated nursing and allied health 
education programs. Under the regulations at Sec.  413.85 (``Cost of 
approved nursing and allied health educational activities''), Medicare 

makes reasonable cost payment to hospitals for provider-operated 
nursing and allied health education programs. A program is considered 
to be provider-operated if the hospital meets the criteria specified in 
Sec.  413.85(f), which means the hospital directly incurs the training 
costs, controls the curriculum and the administration of the program, 
employs the teaching staff, and provides and controls both clinical 
training and classroom instruction (where applicable) of a nursing or 
allied health education program.
    In the January 12, 2001 Federal Register (66 FR 3358), we published 
a final rule that clarified the policy for payments for approved 
nursing and allied health education activities in response to section 
6205(b)(2) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 
101-239) and sections 4004(b)(1) and (2) of the Omnibus Budget 
Reconciliation Act of 1990 (Pub. L. 101-508).
    Section 6205(b)(2) of Public Law 101-239 directed the Secretary to 
publish regulations clarifying the rules governing allowable costs of 
approved educational activities. The Secretary was directed to publish 
regulations to specify the conditions under which those costs are 
eligible for pass-through, including the requirement that there be a 
relationship between the approved nursing or allied health education 
program and the hospital. Section 4004(b)(1) of Public Law 101-508 
provides an exception to the requirement that programs be provider-
operated to receive pass-through payments. The section provides that, 
effective for cost reporting periods beginning on or after October 1, 
1990, if certain conditions are met, the costs incurred by a hospital 
(or by an educational institution related to the hospital by common 
ownership or control) for clinical training (as defined by the 
Secretary) conducted on the premises of the hospital under an approved 
nursing or allied health education program that is not operated by the 
hospital are treated as pass-through costs and paid on the basis of 
reasonable cost. Section 4004(b)(2) of Public Law 101-508 sets forth 
the conditions that a hospital must meet to receive payment on a 
reasonable cost basis under section 4004(b)(1).
2. Continuing Education Issue for Nursing and Allied Health Education
    Since publication of the January 12, 2001 final rule on nursing and 
allied health education, we have encountered questions concerning the 
substantive difference between provider-operated continuing education 
programs for nursing and allied health education (which would not be 
reimbursable under Medicare on a reasonable cost basis) and provider-
operated approved programs that are eligible to receive Medicare 
reasonable cost payment. In that final rule, we stated that Medicare 
would generally provide reasonable cost payment for ``programs of long 
duration designed to develop trained practitioners in a nursing or 
allied health discipline, such as professional nursing or occupational 
therapy. This is contrasted with a continuing education program of a 
month to a year in duration in which a practitioner, such as a 
registered nurse, receives training in a specialized skill such as 
enterostomal therapy. While such training is undoubtedly valuable in 
enabling the nurse to treat patients with special needs and in 
improving the level of

[[Page 27210]]

patient care in a provider, the nurse, upon completion of the program, 
continues to function as a registered nurse, albeit one with special 
skills. Further distinction can be drawn between this situation and one 
in which a registered nurse undergoes years of training to become a 
CRNA. For these reasons, the costs of continuing education training 
programs are not classified as costs of approved educational activities 
that are passed-through and paid on a reasonable cost basis. Rather, 
they are classified as normal operating costs covered by the 
prospective payment rate or, for providers excluded from the IPPS, as 
costs subject to the target rate-of-increase limits'' (66 FR 3370).
    Accordingly, upon publication of the final rule, we revised Sec.  
413.85(h)(3) to include continuing education programs in the same 
category as ``educational seminars and workshops that increase the 
quality of medical care or operating efficiency of the provider.'' 
Costs associated with continuing education programs, as stated above, 
are recognized as normal operating costs and are paid in accordance 
with applicable principles.
    We received an inquiry requesting further clarification on what is 
meant by continuing education. It is our belief that provider-operated 
programs that do not lead to any specific certification in a specialty 
would be classified as continuing education. By certification, we do 
not mean certification in a specific skill, such as when an individual 
is certified to use a specific piece of machinery or perform a specific 
procedure. Rather, we believe certification would mean the ability to 
perform in the specialty as a whole.
    Although, in the past, we believe we have allowed hospitals to be 
paid for operating a pharmacy ``residency'' program, it has come to our 
attention that those programs do not meet the criteria for approval as 
a certified program. Once individuals have finished their undergraduate 
degree in pharmacy, there are some individuals who go on to participate 
in 1-year hospital-operated postundergraduate programs. It is our 
understanding that many individuals complete the 1-year 
postundergraduate program practice pharmacy inside the hospital 
setting. However, we also understand that there are pharmacists who do 
not complete the 1-year postundergraduate program, but have received 
the undergraduate degree in pharmacy, who also practice pharmacy inside 
the hospital setting. Because pharmacy students need not complete the 
1-year residency program to be eligible to practice pharmacy in the 
hospital setting, the 1-year programs that presently are operated by 
hospitals would be considered continuing education, and therefore, 
would be ineligible for pass-through reasonable cost payment.
    We understand that all individuals who wish to be nurses practicing 
in a hospital must either complete a 4-year degree program in a 
university setting, a 2-year associate degree in a community or junior 
college setting, or a diploma program traditionally offered in a 
hospital setting. Since participants that complete a provider-operated 
diploma nursing program could not practice as nurses without that 
training, the diploma nursing programs are not continuing education 
programs and, therefore, may be eligible for pass-through treatment.
    Because of the apparent confusion concerning continuing education 
programs in the nursing and allied health reasonable cost context, we 
are proposing to revise Sec.  413.85(h)(3) to state that educational 
seminars, workshops, and continuing education programs in which the 
employees participate that enhance the quality of medical care or 
operating efficiency of the provider and, effective October 1, 2003, do 
not lead to certification required to practice or begin employment in a 
nursing or allied health specialty, would be treated as educational 
activities that are part of normal operating costs. We also are 
proposing to add a conforming definition of ``certification'' for 
purposes of nursing and allied health education under Sec.  413.85(c) 
to mean ``the ability to practice or begin employment in a specialty as 
a whole.''
3. Programs Operated by Wholly Owned Subsidiary Educational 
Institutions of Hospitals
    Another matter that has come to CMS' attention since publication of 
the January 12, 2001 final rule (66 FR 3363) on nursing and allied 
health education concerns the preamble language of the rule, which 
states:
    ``Concerning those hospitals that have established their own 
educational institution to meet accrediting standards, we believe that, 
in some cases, these providers can be eligible to receive payment for 
the classroom and clinical training of students in approved programs. 
If the provider demonstrates that the educational institution it has 
established is wholly within the provider's control and ownership and 
that the provider continues to incur the costs of both the classroom 
and clinical training portions of the program, the costs would continue 
to be paid on a reasonable cost basis. An independent college would not 
meet these criteria.
    ``An example of a program that could be considered provider-
operated would be one in which the hospital is the sole corporate 
member of the college, elects the board of trustees, has board members 
in common, employs the faculty and pays the salaries, controls the 
administration of the program and the curriculum, and provides the site 
for the clinical and classroom training on the premises of the 
hospital. We believe that, in these situations, the community has not 
undertaken to finance the training of health professionals; the 
provider has merely restructured its provider-operated program to meet 
certain State or accrediting requirements. In most cases, providers 
have aligned themselves with already established educational 
institutions. We note that a program operated by an educational 
institution that is related to the provider through common ownership or 
control would not be considered to meet the criteria for provider 
operated.'' (66 FR 3363)
    We have received a question from a hospital that pertains to the 
cited preamble language in the narrow circumstance where the hospital 
previously received Medicare reasonable cost payment for direct 
operation of nursing or allied health education programs and then 
established its own wholly owned subsidiary college to operate the 
programs, in order to meet accreditation standards. The hospital has 
continued to receive Medicare payments after the hospital moved 
operation of the programs to the wholly owned subsidiary college. The 
hospital believes that, based on the cited preamble language regarding 
wholly owned subsidiary colleges and the lack of prior specific 
guidance on this particular organizational structure (as well as its 
continued receipt of pass-through payments) and because the hospital 
continues to pay all of the costs of the nursing and allied health 
education programs, the hospital is still the direct operator of the 
programs and should continue to receive pass-through treatment. 
However, we believe that once the hospital moved the direct operation 
of its nursing and allied health education programs to the college, the 
programs no longer met our provider-operated criteria at Sec.  
413.85(f). At the very least, it appears that the hospital did not hire 
the faculty for the program(s) and did not have direct control of the 
curriculum of the program(s) after operation was transferred to the 
wholly owned subsidiary college. As we stated in the

[[Page 27211]]

preamble language quoted above: ``a program operated by an educational 
institution that is related to the provider through common ownership or 
control would not be considered to meet the criteria for provider 
operated'' (66 FR 3363).
    However, we understand that some hospitals, including this 
hospital, may have interpreted the preamble language that stated, ``if 
the provider demonstrates that the educational institution it has 
established is wholly within the provider's control and ownership and 
that the provider continues to incur the costs of both the classroom 
and clinical training portions of the program, the costs would continue 
to be paid on a reasonable cost basis'' (Ibid.), to mean that hospitals 
that establish wholly owned subsidiary colleges or educational 
institutions would continue to receive Medicare reasonable cost payment 
if the hospitals incur the costs of the classroom instruction and 
clinical training. We are proposing to clarify that transferring 
operation of previously provider-operated programs to educational 
institutions, even if the institutions are wholly owned by the 
hospital, does not necessarily mean that the programs continue to meet 
our provider-operated criteria under Sec.  413.85(f). In order to 
remain provider operated, the hospital must have direct control of the 
program; the hospital itself must employ the teaching staff, have 
direct control of the program curriculum, and meet other requirements, 
as stated at Sec.  413.85(f).
    While we are proposing to clarify that merely operating programs 
through a wholly owned subsidiary college does not constitute direct 
operation of nursing or allied health education programs unless the 
hospital itself meets the requirements of the regulations at Sec.  
413.85(f), we believe it would be unfair to recoup Medicare payments 
that have already been made to hospitals that meet this very narrow 
fact pattern. Therefore, we are proposing that Medicare would not 
recoup reasonable cost payment from hospitals that have received pass-
through payments for portions of cost reporting periods occurring on or 
before October 1, 2003 (the effective date of finalizing this proposed 
rule) for the nursing or allied health education program(s) where the 
program(s) had originally been operated by the hospital, and then 
operation of the program(s) had been transferred by the hospital to a 
wholly owned subsidiary educational institution in order to meet 
accreditation standards prior to October 1, 2003, and where the 
hospital had continuously incurred the costs of both the classroom and 
clinical training portions of the programs at the educational 
institution.
    In addition, we are proposing that, for portions of cost reporting 
periods occurring on or after October 1, 2003, such a hospital would 
continue to receive reasonable cost payments for the clinical training 
costs incurred by the hospital for the program(s) described above that 
were previously provider operated. However, we are further proposing 
that, with respect to classroom costs, only those classroom costs 
incurred by the hospital for the courses that were paid by Medicare on 
a reasonable cost basis and included in the hospital's provider-
operated program(s) could continue to be reimbursed on a reasonable 
cost basis. That is, Medicare would pay on a reasonable cost basis for 
the classroom costs associated with the courses provided as part of the 
nursing and allied health education programs (for example, the courses 
relating to the theory and practice of the particular nursing and 
allied health discipline(s)) that were offered by the hospital when the 
hospital was the direct operator of the program(s).
    We believe this proposed policy is appropriate since continued 
pass-through payment will allow these hospitals to maintain equal 
footing with other hospitals that receive pass-through payments and 
have maintained their provider-operated programs. In addition, it would 
not be equitable to discontinue longstanding Medicare pass-through 
payment to these hospitals (in fact, reasonable cost payment to at 
least one of these hospitals for nonprovider-operated programs preceded 
the publication of the January 12, 2001 final rule on nursing and 
allied health education payments by many years) that restructured 
operation of their nursing and allied health education program(s) as 
wholly owned subsidiaries in order to meet accreditation standards 
while relying on their understanding of CMS' prior expressions of 
provider-operated requirements and the recent preamble language. If 
these providers were now forced to restructure in order to meet the 
requirements of Sec.  413.85(f), they would not be able to maintain 
their accreditation.
    We note that Congress has specifically expressed its intent that 
providers that have restructured their programs to be operated by a 
wholly owned subsidiary educational institution in order to meet 
accreditation standards should continue to receive Medicare reasonable 
cost payment. In the conference report accompanying the Consolidated 
Appropriations Resolution for FY 2003, Congress stated:
    ``The conferees are particularly concerned about nursing and allied 
health educational programs that cannot meet the regulations set forth 
at 42 CFR 413.85(f) solely as a result of regional educational 
accrediting criteria. Given the shortage of nursing and allied health 
professionals, the conferees support the payment of costs on a 
reasonable cost basis for a hospital that has historically been the 
operator of nursing and allied health education programs(s) that 
qualified for Medicare payments under 42 CFR 413.85, but, solely in 
order to meet educational standards, subsequently relinquishes some 
control over the program(s) to an educational institution, which meets 
regional accrediting standards; is wholly owned by the provider; and is 
supported by the hospital, that is, the hospital is incurring the costs 
of both the classroom and clinical training of the program.'' (H.R. 
Rep. No. 108-10, 108th Cong., 1st Sess., 1115 (2003).)
    However, the proposed policy does not allow these hospitals to be 
paid for additional classroom costs for courses that were not paid on a 
reasonable cost basis to the hospitals in conjunction with their 
provider-operated programs (for example, additional classes needed to 
meet degree requirements). We believe that to allow pass-through 
payment for those additional costs would provide these hospitals with 
an unfair advantage over other hospitals with provider-operated 
programs.
    We note that any hospital that chooses to restructure its programs 
to be operated by a wholly owned subsidiary educational institution on 
or after the effective date of this proposal when finalized (October 1, 
2003) would not be eligible for pass-through payments under this 
proposed provision unless the hospital continues to meet the 
requirements of Sec.  413.85(f). We believe it is appropriate to limit 
the proposed payments to hospitals that restructured before this 
proposed rule is made final because our policy with respect to programs 
by a wholly owned subsidiary of a hospital will have been clarified in 
that final rule.
    We are proposing to revise Sec.  413.85 by adding new paragraphs 
(d)(1)(iii) and (g)(3) to reflect this proposed payment policy.

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

1. Background
    Under section 1886(h) of the Act, Medicare pays hospitals for the 
direct costs of graduate medical education

[[Page 27212]]

(GME). The payments are based in part on the number of residents 
trained by the hospital. Section 1886(h)(4)(F) of the Act caps the 
number of allopathic and osteopathic residents that hospitals may count 
for direct GME.
    Section 1886(h) of the Act, as added by section 9202 of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 
99-272) and implemented in regulations at Sec.  413.86(e), establishes 
a methodology for determining payments to hospitals for the costs of 
approved GME programs. Section 1886(h)(2) of the Act, as added by 
COBRA, sets forth a payment methodology for the determination of a 
hospital-specific, base-period per resident amount (PRA) that is 
calculated by dividing a hospital's allowable costs of GME for a base 
period by its number of residents in the base period. The base period 
is, for most hospitals, the hospital's cost reporting period beginning 
in FY 1984 (that is, the period of October 1, 1983 through September 
30, 1984). The PRA is multiplied by the weighted number of full-time 
equivalent (FTE) residents working in all areas of the hospital complex 
(or nonhospital sites, when applicable), and the hospital's Medicare 

share of total inpatient days to determine Medicare's direct GME 
payments.
    Existing regulations at Sec.  413.86(e)(4) specify the methodology 
for calculating each hospital's weighted average PRA and the steps for 
determining whether a hospital's PRA will be revised.
2. Prohibition Against Counting Residents Where Other Entities First 
Incur the Training Costs
    a. General Background on Methodology for Determining FTE Resident 
Count. As we explain earlier in this preamble, Medicare makes both 
direct and indirect GME payments to hospitals for the training of 
residents. Direct GME payments are reimbursed in accordance with 
section 1886(h) of the Act, based generally on hospital-specific PRAs, 
the number of FTE residents a hospital trains, and the hospital's 
Medicare patient share. The indirect costs of GME are reimbursed in 
accordance with section 1886(d)(5)(B) of the Act, based generally on 
the ratio of the hospital's FTE residents to the number of hospital 
beds. It is well-established that the calculation of both direct GME 
and IME payments is affected by the number of FTE residents that a 
hospital is allowed to count; generally, the greater the number of FTE 
residents a hospital counts, the greater the amount of Medicare direct 
GME and IME payments the hospital will receive. In an attempt to end 
the implicit incentive for hospitals to increase the number of FTE 
residents, Congress instituted a cap on the number of allopathic and 
osteopathic residents a hospital is allowed to count for direct GME and 
IME purposes under the provisions of section 1886(h)(4)(F) (direct GME) 
and section 1886(d)(5)(B)(v) (IME) of the Act. Dental and podiatric 
residents were not included in this statutorily mandated cap.
    With respect to reimbursement of direct GME costs, since July 1, 
1987, hospitals have been allowed to count the time residents spend 
training in sites that are not part of the hospital (referred to as 
``nonprovider'' or ``nonhospital sites'') under certain conditions. 
Section 1886(h)(4)(E) of the Act requires that the Secretary's rules 
concerning computation of FTE residents for purposes of separate 
reimbursement of direct GME costs ``provide that only time spent in 
activities relating to patient care shall be counted and that all the 
time so spent by a resident under an approved medical residency 
training program shall be counted towards the determination of full-
time equivalency, without regard to the setting in which the activities 
are performed, if the hospital incurs all, or substantially all, of the 
costs for the training program in that setting.'' (Section 
1886(h)(4)(E) of the Act, as added by section of 9314 of the Omnibus 
Budget Reconciliation Act of 1986, Pub. L. 99-509.)
    Regulations on time spent by residents training in nonhospital 
sites for purposes of direct GME payment were first implemented in the 
September 29, 1989 final rule (54 FR 40286). We stated in that rule 
(under Sec.  413.86(f)(3)) that a hospital may count the time residents 
spend in nonprovider settings for purposes of direct GME payment if the 
residents spend their time in patient care activities and there is a 
written agreement between the hospital and the nonprovider entity 
stating that the hospital will incur all or substantially all of the 
costs of the program. The regulations at that time defined ``all or 
substantially all'' of the costs to include the residents' compensation 
for the time spent at the nonprovider setting.
    Prior to October 1, 1997, for IME payment purposes, hospitals could 
only count the time residents spend training in areas subject to the 
IPPS and outpatient areas of the hospital. Section 4621(b)(2) of the 
Balanced Budget Act of 1997 (Pub. L. 105-33) revised section 
1886(d)(5)(B) of the Act to allow providers to count time residents 
spend training in nonprovider sites for IME purposes, effective for 
discharges occurring on or after October 1, 1997. Specifically, section 
1886(d)(5)(B)(iv) of the Act was amended to provide that ``all the time 
spent by an intern or resident in patient care activities under an 
approved medical residency program at an entity in a non-hospital 
setting shall be counted towards the determination of full-time 
equivalency if the hospital incurs all, or substantially all, of the 
costs for the training program in that setting.''
    In the regulations at Sec. Sec.  412.105(f)(1)(ii)(C) and 
413.86(f)(4) (as issued in the July 31, 1998 Federal Register), we 
specify the requirements a hospital must meet in order to include a 
resident training in a nonhospital site in its FTE count for Medicare 
reimbursement for portions of cost reporting periods occurring on or 
after January 1, 1999 for both direct GME and for IME payments. The 
regulations at Sec.  413.86(b) redefine ``all or substantially all of 
the costs for the training program in the nonhospital setting'' as the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable), and the portion of the cost of teaching physicians' 
salaries and fringe benefits attributable to direct GME. A written 
agreement between the hospital and the nonhospital site is required 
before the hospital may begin to count residents training at the 
nonhospital site; the agreement must provide that the hospital will 
incur the costs of the resident's salary and fringe benefits while the 
resident is training in the nonhospital site. The hospital must also 
provide reasonable compensation to the nonhospital site for supervisory 
teaching activities, and the written agreement must specify that 
compensation amount.
    b. Inappropriate Counting of FTE Residents. As we stated above, 
dental residents, along with podiatric residents, are excepted from the 
statutory cap on the count of FTE residents for both direct GME and IME 
payment purposes. We have become aware of a practice pertaining to the 
counting of FTE residents at a nonhospital site, particularly dental 
residents, that we see as inappropriate under Medicare policy. Most 
often, the situation involves dental schools that, for a number of 
years, have been training dental residents in programs at the dental 
schools of universities affiliated with teaching hospitals, and the 
schools have been directly incurring the costs of the dental residents 
training at the dental schools (for example, the teaching faculty 
costs, the resident salary costs, the office space costs, and

[[Page 27213]]

any overhead expenses of the programs). We also understand that there 
are dental clinics at these dental schools that treat patients (that 
is, are involved in ``patient care activities'').
    As a result of the provisions that Congress added to allow 
hospitals to count FTE residents and receive IME payment, as well as 
direct GME payment, if the hospital incurs ``all or substantially all'' 
the costs of training residents in nonhospital settings, a significant 
number of dental schools are shifting the resident training costs of 
the dental programs from the schools to the hospital, and thus to the 

Medicare program, when the hospitals count the FTE dental residents 
training in these dental schools (that is, ``nonhospital sites'') under 
the regulations at Sec.  413.86(f)(4). Furthermore, in the case of 
training dentists at dental school clinics, as a result of this cost-
shifting and because dental residents are excepted from the cap, 
hospitals are receiving significant amounts of Medicare direct GME and 
IME payments when they have incurred relatively small costs of the 
residents training in a dental school.
    The following actual situations are illustrative of the 
inappropriate application of Medicare direct GME and IME policy that we 
have found:
    [sbull] An academic medical center hospital associated with a 
university has been training allopathic residents for at least 20 
years. Prior to 1999, the university s affiliated dental school had 
always incurred the costs of dental residency programs at the dental 
school. Beginning with the hospital's cost report for its fiscal year 
ending in 1999, for the first time ever, the hospital has requested 
direct GME and IME payment for an additional 67 FTE residents because 
the hospital claims it has begun to incur ``all or substantially all'' 
of the costs of the dental residents training in the university's 
affiliated dental school, in accordance with the regulations at Sec.  
413.86(f)(4).
    [sbull] A university dental school in one State has been incurring 
the costs of dental residency programs at its dental school for several 
years. Beginning in FY 1999, a teaching hospital in a neighboring State 
decided to begin incurring ``all or substantially all'' of the costs of 
the dental residents training in the dental clinics in the program 
(which is located in a different State from the hospital) in order to 
receive Medicare direct GME and IME payment for an additional 60 FTE 
residents.
    [sbull] In another situation, a teaching hospital on the East Coast 
of the United States has requested direct GME and IME payment for an 
additional 60 FTE dental residents, some of whom are training in dental 
programs at nonhospital sites located in Hawaii, New Mexico, and the 
Netherlands, because it has begun to incur ``all or substantially all'' 
of the costs of dental residents training in those remote ``nonhospital 
sites''. Prior to 1999, the costs for these dental programs were funded 
by nonhospital sources.
    We note that such inappropriate cost-shifting practices are by no 
means limited to the dental school context. Indeed, we understand that 
there are some hospitals with resident counts below their direct GME 
and IME FTE resident caps that have recently (as of October 1, 1997, 
when it became possible to receive significant IME payments under the 
amendment made by Pub. L. 105-33) started to incur ``all or 
substantially all'' of the costs of residents who had been training at 
sites outside of the hospital without any financial assistance from the 
hospital, in order for the hospital to count those FTE residents and 
receive Medicare direct GME and IME payments for the additional 
residents. The actual costs of the programs that are being shifted from 
nonhospital entities to hospitals are relatively small, compared to the 
direct GME and IME payments that hospitals receive as a result of 
incurring ``all or substantially all'' of the training costs.
    [sbull] In another example, an academic medical center hospital in 
one State asked Medicare to allow it to count an additional 10 FTEs for 
both direct GME and IME payment, beginning with its fiscal year ending 
1999 cost report, because the hospital claims it is incurring all or 
substantially all of the costs of training osteopathic family practice 
residents in a walk-in clinic. The osteopathic family practice 
residency program had previously been sponsored by this clinic for 
several years and the residents do not participate in any training at 
the hospital.
    c. Congressional Intent. Congress has delegated broad authority to 
the Secretary to implement a policy on the count of FTE residents for 
purposes of calculating direct GME and IME payments. For IME payment, 
section 1886(d)(5)(B) of the Act simply states that ``the Secretary 
shall provide for an additional payment amount'' which includes ``the 
ratio of the hospital's full-time equivalent interns and residents to 
beds.'' The methodology to compute the count of FTE residents for IME 
is not established in the statute. Similarly, for direct GME, section 
1886(h)(4)(A) of the Act states that ``the Secretary shall establish 
rules consistent with this paragraph for the computation of the number 
of full-time equivalent residents in an approved medical residency 
training program.''
    Although not in the context of the general rules for counting FTE 
residents, Congress similarly acknowledged its intent to defer to the 
Secretary with respect to the rules for implementing ``limits'' or caps 
on the number of FTE residents hospitals may count for purposes of 
direct GME and IME payment. The conference agreement that accompanied 
Pub. L. 105-33, which established a cap on the number of allopathic and 
osteopathic residents a hospital may count, states--
    ``[T]he Conferees recognize that such limits raise complex issues, 
and provide for specific authority for the Secretary to promulgate 
regulations to address the implementation of this provision. The 
Conferees believe that rulemaking by the Secretary would allow careful 
but timely consideration of this matter, and that the record of the 
Secretary's rulemaking would be valuable when Congress revisits this 
provision.'' (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess., 821 
(1997).
    The absence of statutory specificity on determining FTE counts in 
these situations and the declared Congressional delegations of 
authority to the Secretary on the subject are clear indications that 
Congress has given the Secretary broad discretion to promulgate 
reasonable regulations in order to implement the policy on the counting 
of residents for direct GME and IME payments.
    When Congress enacted the nonhospital site provisions for both 
direct GME and IME, Congress intended to address application of the FTE 
count policy to situations where the training site had been the 
hospital. The intent was to create incentives for hospitals to move 
resident training from the hospital to nonhospital settings. We believe 
that Congress did not intend for hospitals to be able to add to their 
FTE counts residents that had historically trained outside the hospital 
in other settings. Training in those nonhospital settings had 
historically occurred without Congress offering any financial incentive 
to hospitals to move the training out of the hospital.
    This Congressional intent is evident in the legislative history of 
both the direct GME and the IME provisions on nonhospital settings. 
First, legislative history associated with passage of the direct GME 
provision (as part of Pub. L. 99-509) indicates that Congress intended 
to broaden the scope of settings in which a hospital could train its 
residents and still receive separate direct GME cost reimbursement, and 
to

[[Page 27214]]

provide incentives to hospitals for training residents in primary care 
programs. The Conference committee report indicates that ``[s]ince it 
is difficult to find sufficient other sources of funding [than 
hospitals and Medicare] for the costs of such training, [that is, 
training in freestanding primary care settings such as family practice 
clinics or ambulatory surgery centers] assignments to these settings 
are discouraged. It is the Committee's view that training in these 
settings is desirable, because of the growing trend to treat more 
patients out of the inpatient hospital setting and because of the 
encouragement it gives to primary care.'' (Emphasis added.) (H.R. Rep. 
No. 99-727, 99th Cong., 1st Sess., 70 (1986).)
    Thus, from the start of the policy allowing payment for training in 
nonprovider sites, we believe Congress intended to create a monetary 
incentive for hospitals to rotate residents from the hospital to the 
nonhospital settings. We believe Congress did not intend for hospitals 
to be paid for residents who had previously been training at 
nonhospital sites without hospital funding.
    Further, in the Conference committee report accompanying the 
provision of Pub. L. 105-33 on IME payment for training in nonhospital 
settings, Congress stated that ``[t]he conference agreement includes 
new permission for hospitals to rotate residents through nonhospital 
settings, without reduction in indirect medical education funds.'' 
(Emphasis added.) (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess., 
817 (1997).)
    We note that, prior to enactment of Pub. L. 105-33, if a hospital 
rotated a resident to train at a nonhospital site, the hospital could 
not count the time the resident spent at the nonhospital site for 
purposes of Medicare IME payments. As a result, the lack of IME 
payments acted as a disincentive and discouraged hospitals from 
rotating residents out of the hospital. Therefore, Congress authorized 
hospitals to count residents in nonhospital sites for IME purposes as a 
specific incentive to encourage hospitals to rotate their residents to 
nonhospital sites (and not to encourage hospitals to incur the costs of 
a program at a nonhospital site that had already been funded by other 
sources). This legislative intent becomes more apparent when the nature 
of the Medicare IME payment is considered. The Medicare IME payment is 
inherently a payment that reflects the increased operating costs of 
treating inpatients as a result of the hospital having a residency 
program. For example, as explained in the September 29, 1989 final rule 
(54 FR 40286), the indirect costs of medical education might include 
added costs resulting from an increased number of tests ordered by 
residents as compared to the number of tests normally ordered by more 
experienced physicians.
    The IME payment is an adjustment that is made for each Medicare 

discharge from the areas subject to the IPPS in a teaching hospital. 
The authorization by Congress for IME payments relating to nonhospital 
services while residents are training at nonhospital sites would be 
absurd if not viewed as an incentive to transfer existing residency 
training from the hospital to the nonhospital setting. We do not 
believe Congress intended to permit such IME payments to be allowable 
to the hospital that is incurring ``all or substantially all the 
costs'' of residents training in nonhospital sites except in the 
situation where the hospital rotated residents from the hospital to the 
nonhospital settings. The illustrative situations described above in 
which nonhospital sites, such as dental schools, are shifting the costs 
of existing programs to the hospitals are not consistent with the 
intent of Congress to encourage hospitals to rotate residents from the 
hospital setting to nonhospital sites.
    Thus, we believe Congress intended both cited provisions of the Act 
on counting residents in nonhospital sites for purposes of direct GME 
and IME payments to be limited to situations in which hospitals rotate 
residents from the hospital to the nonhospital settings, and not 
situations in which nonhospital sites transfer the costs of an existing 
program at a nonhospital site to the hospital.
    d. Medicare Principles on Redistribution of Costs and Community 
Support. It is longstanding Medicare policy that if the community has 
undertaken to bear the costs of medical education, these costs are not 
to be assumed by the Medicare program. In addition, medical education 
costs that have been incurred by an educational institution may not be 
redistributed to the Medicare program. Indeed, these concepts, 
community support and redistribution of costs, have been a part of 
Medicare GME payment policy since the inception of the Medicare 

program. Both the House and Senate Committee reports accompanying Pub. 
L. 89-97 (the authorizing Medicare statute) indicate that Congress 
intended Medicare to share in the costs of medical education only in 
situations in which the community has not stepped in to incur them:
    ``Many hospitals engage in substantial education activities, 
including the training of medical students, internship and residency 
programs, the training of nurses and the training of various 
paramedical personnel. Educational activities enhance the quality of 
care in an institution and it is intended, until the community 
undertakes to bear such education costs in some other way, that a part 
of the net cost of such activities * * * should be considered as an 
element in the cost of patient care, to be borne to an appropriate 
extent by the hospital insurance program. (Emphasis added.) (S. Rep. 
No. 404, 89th Cong., 1st Sess., 36 (1965); H.R. Rep. No. 213, 89th 
Cong., 1st Sess., 32 (1965).)
    The principle behind the congressional committee report language 
for Pub. L. 89-97 that Medicare would share in the costs of educational 
activities until communities bore them in some other way has guided 
Medicare policy on educational activities from the inception of the 
Medicare program. The principles of community support and 
redistribution of costs associated with payment for GME have been 
continually reiterated in various regulations, manual provisions, and 
implementing instructions to fiscal intermediaries. As recently as the 
final rule published in the Federal Register on January 12, 2001, we 
stated:
    ``We note that the proposed revisions in the proposed rule 
inadvertently did not include community support as the basis for an 
offset from the allowed cost of a GME or nursing and allied health 
program. In this final rule, we restate our longstanding policy that 
Medicare will share in the costs of educational activities of providers 
where communities have not assumed responsibility for financing these 
programs. Medicare's policy is to offset from otherwise allowable 
education costs, community funding for these activities.'' (66 FR 3368)
    We note the instructions that CMS (then HCFA) gave to its Regional 
Offices in the 1990 audit instructions for purposes of calculating the 
direct GME base period PRA specifically addressed redistribution of 
costs and community support in the GME context:
    ``Where costs for services related to medical education activities 
have historically been borne by the university, it is assumed the 
community has undertaken to support these activities, and subsequent 
allocation of these costs to a hospital constitutes a redistribution of 
costs from an educational institution to a patient care institution. In 
such a situation, these costs are not allowable under the Medicare 

program. (See 42 CFR

[[Page 27215]]

413.85(c) and HCFA Pub. L. 15-1, Sec.  406). For example, if in the 
past the hospital did not identify and claim costs attributable to the 
time teaching physicians spent supervising I&Rs [interns and residents] 
working at the hospital, it is assumed that these costs were borne by 
the university. Therefore, the hospital may not claim these costs in 
subsequent cost reports.'' (Instructions for Implementing Program 
Payments for Graduate Medical Education to ARAs for Medicare, Director 
of Office of Financial Operations of the Health Care Financing 
Administration, BPO-F12, February 12, 1990.)
    Furthermore, the regulation at Sec.  413.85(c) that was originally 
issued in the Federal Register on September 30, 1986 (51 FR 34793) 
(which was further refined, but conceptually left unchanged, as of 
March 12, 2001) addressed the Congressional intent not to increase 
program costs, as well. That paragraph (c) stated:
    ``Educational Activities. Many providers engage in education 
activities including training programs for nurses, medical students, 
interns and residents, and various paramedical specialties * * * . 
Although the intent of the program is to share in the support of 
educational activities customarily or traditionally carried on by 
providers in conjunction with operations, it is not intended that this 
program should participate in increased costs resulting from 
redistribution of costs from educational institutions or units to 
patient care institutions or units.''
    The Secretary of Health and Human Services interpreted this 
provision to deny reimbursement of educational costs that were borne in 
prior years by a hospital's affiliated medical school. The U.S. Supreme 
Court affirmed the Secretary's interpretation of the redistribution of 
costs regulation in Thomas Jefferson University v. Shalala (``Thomas 
Jefferson''), 512 U.S. 504 (1994). The Court found of Sec.  413.85(c) 
that:
    ``The regulation provides, in unambiguous terms, that the `costs' 
of these educational activities will not be reimbursed when they are 
the result of a `redistribution,' or shift, of costs of an 
`educational' facility to a `patient care' facility.'' (Emphasis 
added.) (Thomas Jefferson, 512 U.S. at 514). Thus, the Supreme Court in 
Thomas Jefferson held that it is well within the Secretary's discretion 
to interpret the language at Sec.  413.85(c), which was specifically 
derived from the legislative history of the original enacting Medicare 
legislation quoted above, to impose a substantive limitation on medical 
education payment.
    The Supreme Court's opinion in Thomas Jefferson lends substantial 
support and credibility to CMS' longstanding policy on community 
support and redistribution of costs in the GME context.
    e. Application of Redistribution of Costs and Community Support 
Principles. As we have described above, we have discovered an 
inappropriate application of Medicare direct GME and IME payment 
policies relating to the counting of FTE residents in nonhospital 
settings. As stated previously, we believe that: (1) Congress has given 
the Secretary broad discretion to implement policy on FTE resident 
counts; (2) Congress intended that the nonhospital site policy for both 
direct GME and IME would encourage hospitals to move resident training 
from the hospital to nonhospital settings, not to enable nonhospital 
sites to shift the costs of already established residency programs in 
the nonhospital site to the hospital; and (3) since the inception of 
the Medicare program, CMS' policy has been consistent with the intent 
of Congress that Medicare would only share in the costs of medical 
education until the community assumes the costs. The Supreme Court has 
specifically found that CMS' implementation of the redistribution of 
costs and community support principles is ``reasonable.'' (Thomas 
Jefferson, 512 U.S. at 514.)
    Accordingly, we are proposing that residents training at 
nonhospital sites may be counted in a hospital's FTE resident count 
only where the principles of redistribution of costs and community 
support are not violated. We are proposing this policy at this time to 
address the inappropriate practice of nonhospital sites shifting costs 
to hospitals solely to allow the hospitals to count residents training 
in the nonhospital sites. However, we believe the concepts of 
redistribution of costs and community support are equally relevant to 
the counting of FTEs residents by a hospital in general.
    We note again that the Medicare program has a long tradition of 
applying redistribution of costs and community support principles to 
medical education payments. As we have stated above, both the House and 
Senate Committee reports accompanying Pub. L. 89-97 (the 1965 
authorizing Medicare statute) indicate that Congress intended Medicare 

to share in the costs of medical education only where the community has 
not stepped in to incur them.
    We believe it is appropriate to employ the principles of 
redistribution of costs and community support to specifically address 
the inappropriate scenarios described above whereby hospitals attempt 
to inflate their FTE resident counts by assuming payment of training 
costs for residents in nonhospital sites that were previously funded by 
a nonhospital entity. Therefore, we are proposing to specify the 
application of the redistribution of costs and community support 
principles by adopting the definitions (with some modification to 
reflect the methodology for counting FTE residents applicable to GME) 
of ``community support'' and ``redistribution of costs'' at Sec.  
413.85(c), which relate to nursing and health education program costs, 
for use at Sec.  413.86(b), which relates to GME. In addition, we are 
proposing a general rule at proposed Sec.  413.86(i) on the application 
of community support and redistribution of costs principles to the 
counting of FTE residents for GME. We are proposing to (1) make the 
provisions under Sec.  413.86(f) relating to determining the number of 
FTE residents subject to the provisions of the proposed Sec.  
413.86(i); (2) add a proposed Sec.  413.86(f)(4) in order to clarify 
that the principles of redistribution of costs and community support 
are applicable to the counting of FTE residents, including when the 
residents are training in nonhospital settings; and (3) making the 
provisions of the proposed Sec.  413.86(i) specifically applicable to 
determining the number of FTE residents under Sec.  413.86(g)(4) 
through (6) and (g)(12).
    The general rule at proposed Sec.  413.86(i) contains two 
provisions. Proposed Sec.  413.86(i)(1) states the principles of 
community support and redistribution of costs: In relation to community 
support, we are proposing that if the community has undertaken to bear 
the costs of medical education through community support, the training 
costs of residents that are paid through community support are not 
considered GME costs to the hospital for purposes of Medicare payment. 
In relation to redistribution of costs, we are proposing that the costs 
of training residents that constitute a redistribution of costs from an 
educational institution to the hospital are not considered GME costs to 
the hospital for purposes of Medicare payment.
    In applying the redistribution of costs and community support 
principles, we are proposing under Sec.  413.86(i)(2) to state that a 
hospital must continuously incur direct GME costs of residents training 
in a particular program at a training site since the date the residents 
first began training in that site in order for the hospital to count 
the FTE residents in accordance with the

[[Page 27216]]

provisions of paragraphs (f) and (g)(4) through (g)(6), and (g)(12) of 
Sec.  413.86.
    We note that our reasons for specifically referencing the 
applicability of the principles of community support and redistribution 
of costs at Sec.  413.86(f)(4), the paragraph concerning counting 
residents training in nonhospital settings for direct GME purposes, are 
twofold. First, although we are already making the proposed Sec.  
413.86(i) applicable to Sec.  413.86(f), which would make the 
principles applicable to each paragraph under Sec.  413.86(f), in 
consideration of the inappropriate applications we have identified of 
the GME FTE-counting policy with respect to counting residents in 
nonhospital sites, we believe it is appropriate to also specifically 
address the applicability of the redistribution of costs and community 
support principles to Sec.  413.86(f)(4). In addition, we note that the 
proposed reference at Sec.  413.86(f)(4) has implications for IME 
payment as well, as explained below.
    Under existing Sec.  412.105(f)(1)(ii)(C), the rule for the 
counting of FTE residents training in nonhospital settings for IME 
payment, there is a specific reference indicating that the criteria set 
forth in Sec.  413.86(f)(4) must be met in order for a hospital to 
count the FTE residents training in nonhospital settings for purposes 
of IME payments. Thus, if under proposed Sec.  413.86(f)(4)(iv) (the 
paragraph making redistribution of costs and community support 
principles applicable) a hospital is not permitted to count the FTE 
residents training in a nonhospital site because of redistribution of 
costs or community support, the hospital would not be permitted to 
count the FTE residents for purposes of IME payment as well, because 
the IME regulation at Sec.  412.105(f)(1)(ii)(C) requires the criteria 
under Sec.  413.86(f)(4) to be met.
    As we have stated above, payment for IME is based on the concept 
that, as a direct result of the hospital's resident training program, 
the costs the hospital incurs for patient care are increased. When 
Congress included section 1886(d)(5)(B)(iv) of the Act as part of 
Public Law 105-33, the statute expanded the circumstances under which 
IME payments to a hospital could be made by allowing the hospital to 
count the number of residents training outside the hospital setting 
under certain conditions. Even though it is clear that those residents 
training outside the hospital cannot have any impact on patient care 
costs to the hospital, Congress nevertheless allowed the hospital to 
receive IME payments when the hospital counts FTE residents training in 
a nonhospital setting in accordance with section 1886(d)(5)(B)(iv) of 
the Act, where those residents would otherwise have trained in the 
hospital setting. As we have stated, Congress created an incentive (or 
removed a disincentive) with the provisions of Public Law 105-33 for 
hospitals to rotate residents to nonhospital settings by allowing 
hospitals to continue to receive IME payment as if the residents 
continued to train in the hospital setting. If there is a 
redistribution of costs or community support, we believe IME payment to 
the hospital would be contrary to Congressional intent to encourage the 
hospital to rotate residents from the hospital to the nonhospital site.
    In addition, when Congress included section 1886(d)(5)(B)(iv) of 
the Act as part of Public Law 105-33, the statutory authority for IME 
payment was premised on the hospital incurring the direct GME costs of 
the residents: ``all the time spent by an intern or resident in patient 
care activities under an approved medical residency program at an 
entity in a nonhospital setting shall be counted towards the 
determination of full-time equivalency if the hospital incurs all, or 
substantially all, of the costs for the training program in that 
setting.'' (Emphasis added.) (Section 4621(b)(2) of Public Law 105-33; 
section 1886(d)(5)(B)(iv) of the Act.) We believe Congress intended the 
hospital to incur direct GME costs of the program in the nonhospital 
site in order to count the FTE residents training in nonhospital 
settings for purposes of IME payment. Thus, in the situation where a 
hospital incurred direct GME costs but there was redistribution of 
costs or community support, a disallowance of direct GME payments as 
well as a disallowance of IME payments is appropriate.
    Although we are stating generally that the principles of community 
support and redistribution of cost have applied since the inception of 
Medicare to graduate medical education payment, as we have stated 
above, we have identified relatively recent inappropriate application 
of the nonhospital site policy for counting FTE residents. Therefore, 
we believe it is appropriate to propose to identify January 1, 1999, as 
the date our fiscal intermediaries should use to determine whether a 
hospital or another entity has been incurring the costs of training in 
a particular program at a training setting for purposes of determining 
whether there has been a redistribution of costs or community support. 
We are proposing that January 1, 1999 be used as the date the fiscal 
intermediaries should use for determinations, since it may be difficult 
for our fiscal intermediaries to obtain from hospitals contemporaneous 
documentation that the hospitals have appropriately been incurring the 
direct GME costs in earlier fiscal years. We believe the January 1, 
1999 date should simplify confirmation by our fiscal intermediaries and 
hospitals of whether the hospital or another entity had been incurring 
the costs of the program in particular training settings and whether 
redistribution of costs or community support had occurred. We have 
chosen the January 1, 1999 date because of administrative convenience 
and feasibility, so that necessary data are both valid and available, 
and in recognition of the fact that our fiscal intermediaries must 
prioritize their limited audit resources. While we are not requiring 
our fiscal intermediaries to determine whether a hospital had been 
incurring the training costs of a program prior to the January 1, 1999 
date, if the fiscal intermediaries determine that there is a 
redistribution of costs or community support exists with respect to 
certain residents prior to January 1, 1999, a disallowance of direct 
GME and IME payments with respect to those FTE residents would 
certainly be required.
    Since calculation of a hospital's FTE resident count is dependent 
upon whether the hospital incurred the training costs, we are proposing 
to require each teaching hospital and its fiscal intermediary to 
determine which entity had been incurring the training costs at least 
since January 1, 1999. For example, if a nonhospital entity, such as a 
school of medicine or dentistry, had incurred the costs of training the 
residents anytime on or after January 1, 1999, and a hospital 
subsequently begins to incur direct GME costs of training those FTE 
residents, the hospital would not qualify to count those FTE residents 
for purposes of direct GME and IME payments.
    We note that the proposal states that a hospital must have been 
continuously incurring the costs of the training since the date the 
residents first began training in that program. Accordingly, if a 
hospital had at one time incurred the costs of training residents in a 
particular program, whether at the hospital or in a nonhospital 
setting, but a nonhospital institution later assumed the costs of 
training in that setting, even if the hospital assumed payment for the 
training costs again, the hospital could not then count those residents 
for purposes of direct GME and IME payments.
    We note that if a hospital incurs the direct GME costs, whether 
training takes

[[Page 27217]]

place inside the hospital or in a nonhospital setting, in a new 
residency program, the hospital may be eligible to count the FTE 
residents as specified by the regulations under Sec.  413.86(g)(6).
    Consistent with the policy on redistribution of costs and community 
support discussed above, if a hospital incurs the direct GME costs of 
additional FTE residents training in an existing program in a hospital 
setting where the costs of the existing program had been incurred by a 
nonhospital entity and the hospital has continuously funded the 
additional residents in the existing program in the hospital setting 
since the date the residents first began training there, the 
redistribution of costs or community support principles would not 
prohibit the hospital from counting the additional FTE residents for 
purposes of direct GME and IME payments.
    We note that, under existing policy, to count residents in a 
nonhospital setting, a hospital is required to incur for ``all or 
substantially all of the costs of the program'' in that setting. In 
other words, a hospital is required to assume financial responsibility 
for the full complement of residents training in a nonhospital site in 
a particular program in order to count any FTE residents training there 
for purposes of IME payment. A hospital cannot count any FTE residents 
if it incurs ``all or substantially all of the costs'' for only a 
portion of the FTE residents in that program training setting. This 
policy is derived from the language of the IME and direct GME 
provisions of the statute on counting residents in nonhospital 
settings; both sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act 
state that the hospital must incur ``all, or substantially all, of the 
costs for the training program in that setting.'' (Emphasis added.) In 
contrast, as explained earlier, it is permissible under the proposed 
policy on the application of the redistribution of costs and community 
support principles for the hospital to count FTE residents where the 
hospital incurs direct GME costs of FTE residents that are added to an 
existing program, even though the hospital may not count the existing 
FTE residents due to the application of the redistribution of costs or 
community support rules. In the nonhospital setting, as a result of the 
interaction of these two separate FTE counting requirements--(1) that 
the hospital must not violate the redistribution of costs and the 
community support principles in order to count the resident FTEs in the 
nonhospital settings, and (2) that the hospital must incur ``all or 
substantially all'' of the costs for the training program in that 
setting--a hospital would be prohibited from counting FTE residents 
added to an existing program at a nonhospital site unless the hospital 
incurs all or substantially all of the costs of training all of the 
residents in that program at that setting. That is, even if the 
hospital incurs all or substantially of the costs for all of the 
training program at the nonhospital site, the hospital would only be 
able to count the additional FTE residents who were not excluded by 
application of the redistribution of costs or community support 
principles.
    For example, training in a general dentistry program with 10 FTE 
residents has taken place at a school of dentistry for 20 years. The 
school of dentistry has been incurring the training costs of the 
general dentistry residents since the inception of the program. 
Beginning in 2003, the school of dentistry has decided to add an 
additional 5 FTE residents to the program, and Hospital A decides to 
incur ``all or substantially all'' the costs of those 5 additional FTE 
residents only. Applying the policy concerning redistribution of costs 
and community support in combination with the policy on incurring all 
or substantially all of the costs, the hospital could not count the 
additional 5 FTE residents in the dental school since it is not paying 
for all or substantially all of the costs of the program. Even if the 
hospital were to incur all or substantially all of the costs for the 
training program for all 15 FTE residents, the hospital could not count 
the 10 FTEs that were part of the existing general dentistry program 
because of the redistribution of costs and community support 
principles; it would be a redistribution of costs for the hospital to 
begin to incur direct GME costs of the 10 FTE residents when the dental 
school had previously been incurring those costs.
    We note that such a result does not occur when a new program is 
established in the nonhospital site. If, from the outset of the 
program, the hospital incurs direct GME costs and also incurs ``all or 
substantially all'' of the costs for the training program for all the 
new residents training at the site, there would be no redistribution of 
costs or community support, and the hospital could count all of those 
residents in the new program in its FTE count (subject, of course, to 
the hospital's 1996 FTE resident cap).
    We also note that the interaction of the two provisions discussed 
above--redistribution of costs and community support, and ``all or 
substantially all''--does not occur when counting FTE residents 
training inside the hospital, since a hospital is not required to incur 
``all or substantially all'' of the costs for the training program 
inside the hospital.
    Furthermore, if one hospital had incurred the direct GME costs of 
training residents in a particular program in a nonhospital site from 
one point in time, for example, 1995 through 1999, and then another 
hospital consecutively incurs the costs from 2000 and thereafter, the 
second hospital may be eligible to receive direct GME and IME payments 
for training the FTE residents from the point in time where the second 
hospital incurred the direct GME costs, and the redistribution and 
community support exclusions would not apply. The second hospital may 
be eligible to receive Medicare direct GME and IME payments because the 
costs were incurred previously by a hospital, and not either the 
community or the university. Therefore, there was neither community 
support nor redistribution of costs.
    The following are some examples to clarify how these proposed 
policies would be implemented:

Example 1

    Since 1995, 10 FTE residents in an internal medicine program have 
been training in the Community Clinic. In accordance with the current 
provisions of Sec.  413.86(f), Hospital A has incurred all or 
substantially all of the costs of training the 10 FTE residents since 
1995. Assuming the current provisions of the regulations at Sec. Sec.  
412.105(f)(1)(ii)(C) and 413.86(f)(3) and (f)(4) are met, Hospital A 
may continue to receive IME and direct GME payments for 10 FTE 
residents because Hospital A had incurred direct GME costs continuously 
(as evidenced by contemporaneous documentation since January 1, 1999), 
as specified in our proposed regulation.
    Beginning July 1, 2004, in addition to continuing to incur all or 
substantially all of the costs of the first 10 FTE internal medicine 
residents training in the nonhospital site, Hospital A also incurs all 
or substantially all of the costs of training an additional 3 FTE 
internal medicine residents at that site. Accordingly, beginning July 
1, 2004, Hospital A may count all 13 FTE residents training in the 
Community Clinic for purposes of direct GME and IME payments, assuming 
Hospital A does not exceed its FTE cap for IME and direct GME.

Example 2

    Since 1995, 2.25 dental FTE residents in a dental school program 
were training in a dental clinic at the dental school. While the 2.25 
FTEs were training at the

[[Page 27218]]

clinic, the dental school paid for all of the costs of the dental 
program. Prior to July 1, 2000, Hospital A signed a written agreement 
with the clinic to incur all or substantially all of the costs of 
training the 2.25 FTE residents, from July 1, 2000 and onward. Thus, 
beginning with July 1, 2000, the dental school no longer incurred the 
costs of the program at this nonhospital site. In this scenario (even 
if Hospital A inappropriately received direct GME and IME payments for 
the 2.25 FTEs since July 1, 2000), Hospital A may not receive direct 
GME or IME payment for the 2.25 FTE residents training in the clinic 
because there would have been a redistribution of costs associated with 
training these 2.25 FTE residents from the dental school to the 
hospital.

Example 3

    Since 1995, 2.25 FTE residents in a family practice program were 
training in a physicians' group practice. While the 2.25 FTEs were 
training at the physicians' practice, a school of medicine paid for the 
costs of the family practice residency program. Prior to July 1, 2000, 
Hospital A signed a written agreement with the physicians' practice to 
send 1 additional family practice FTE resident to the physicians' 
practice and to incur all or substantially all of the costs of training 
the original 2.25 FTE residents and the 1 additional FTE, from July 1, 
2000 and onward. Thus, beginning with July 1, 2000, the school of 
medicine no longer incurred the costs of the program at this 
nonhospital site. Hospital A may not count the 2.25 FTE residents that 
had been training since 1995 in that physicians' practice for purposes 
of direct GME and IME payments because the training costs were shifted 
from the school of medicine to the hospital. However, Hospital A may 
count the 1 FTE resident the hospital began to rotate for training in 
the physicians' practice because there was no cost-shifting for that 
resident and Hospital A incurred ``all or substantially all'' of the 
costs of the entire family practice program in the physicians' office 
setting.

Example 4

    Residents in a surgery program have been rotating from a hospital 
to two nonhospital clinics, Clinic A and Clinic B, since 1996. The 
training of the surgery residents in Clinic A has been supported by a 
nonhospital institution since 1996, while the hospital has incurred all 
or substantially all of the costs of the surgery residents in Clinic B 
since 1996. The hospital cannot count the surgery FTE residents 
training in Clinic A, even if it begins to pay for all of the costs of 
the program at that site, since a nonhospital institution had supported 
the training in Clinic A since 1996 (in other words, the redistribution 
of costs and community support principles would prohibit the hospital 
from counting these FTE residents). However, if the hospital continues 
to incur all or substantially all of the costs of the surgery residents 
in Clinic B, the hospital may count the FTE residents training in 
Clinic B for purposes of direct GME and IME payments because there 
would be no cost-shifting to the hospital for these residents and the 
hospital would incur all or substantially all of the costs for the 
training program in that setting.
    3. Rural Track FTE Limitation for Purposes of Direct GME and IME 
for Urban Hospitals that Establish Separately Accredited Approved 
Medical Programs in a Rural Area (Sec. Sec.  412.105(f)(1)(x) and 
413.86(g)(12)) a. Change in the Amount of Rural Training Time Required 
for an Urban Hospital to Qualify for an Increase in the Rural Track FTE 
Limitation. To encourage the training of physicians in rural areas, 
section 407(c) of Pub. L. 106-113 amended sections 1886(d)(5)(B) and 
1886(h)(4)(H) of the Act to add a provision that, in the case of an 
urban hospital that establishes separately accredited approved medical 
residency training programs (or rural tracks) in a rural area or has an 
accredited training program with an integrated rural track, an 
adjustment shall be made to the urban hospital's cap on the number of 
residents. For direct GME, the amendment applies to payments to 
hospitals for cost reporting periods beginning on or after April 1, 
2000; for IME, the amendment applies to discharges occurring on or 
after April l, 2000.
    Section 407(c) of Pub. L. 106-113 did not define a ``rural track'' 
or an ``integrated rural track,'' nor are these terms defined elsewhere 
in the Act or in any applicable regulations.
    Currently, there are a number of accredited 3-year primary care 
residency programs in which residents train for 1 year of the program 
at an urban hospital and are then rotated for training for the other 2 
years of the 3-year program to a rural facility(ies). These separately 
accredited ``rural track'' programs are recognized by the Accreditation 
Council of Graduate Medical Education (ACGME) as ``1-2'' rural track 
programs. As far as CMS is able to determine, ACGME is the only 
accrediting body to ``separately accredit'' rural track residency 
programs, a requirement specified in Pub. L. 106-113.
    We implemented the rural track program provisions of section 
1886(d)(5)(B) and 1886(h)(4)(H) of the Act to address these ``1-2'' 
programs and to account for other programs that are not specifically 
``1-2'' programs but that include rural training components. As stated 
above, since there is no existing definition of ``rural track'' or 
``integrated rural track,'' we define at Sec.  413.86(b) a ``rural 
track'' and an ``integrated rural track'' as an approved medical 
residency training program established by an urban hospital in which 
residents train for a portion of the program at the urban hospital and 
then rotate for a portion of the program to a rural hospital(s) or to a 
rural nonhospital site(s). We have previously noted that the terms 
``rural track'' and ``integrated rural track,'' for purposes of this 
definition, are synonymous.
    To implement these provisions, we revised Sec.  413.86 to add 
paragraph (g)(11) (since redesignated as (g)(12)), and Sec.  412.105 to 
add paragraph (f)(1)(x) to specify that, for direct GME, for cost 
reporting periods beginning on or after April 1, 2000, or, for IME, for 
discharges occurring on or after April 1, 2000, an urban hospital that 
establishes a new residency program, or has an existing residency 
program, with a rural track (or an integrated rural track) may, under 
certain circumstances, include in its FTE count residents in those 
rural tracks, in addition to the residents subject to the FTE cap at 
Sec.  413.86(g)(4). (See the August 1, 2000 interim final rule with 
comment period (65 FR 47033) and the August 1, 2001 IPPS final rule (66 
FR 39902)). These regulations specify that an urban hospital may count 
the residents in the rural track in excess of the hospital's FTE cap up 
to a ``rural track FTE limitation'' for that hospital. We defined this 
rural track FTE limitation at Sec.  413.86(b) as the maximum number of 
residents (as specified in Sec.  413.86(g)(12)) training in a rural 
track residency program that an urban hospital may include in its FTE 
count, in addition to the number of FTE residents already included in 
the hospital's FTE cap.
    Generally, the rural track policy is divided into two categories: 
rural track programs in which residents are rotated to a rural area