I R PInnovative Resources for Payors
	
[Federal Register: July 31, 1998 (Volume 63, Number 147)]
[Rules and Rmegulations]
[Page 40953-41002]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy98-25]


[[Page 40953]]




 Table of Contents 


 Supplementary Information  




Addendum 



Appendix A -- Regulatory Impact Analysis>



Appendix B--Technical Appendix on the 
  Capital Cost Model and Required Adjustments


Appendix C--Recommendation of Update Factors for Operating Cost Rates of 
  Payment for Inpatient Hospital Services


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Part II

Department of Health and Human Services

_______________________________________________________________________

Health Care Financing Administration

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42 CFR Parts 405, 412, and 413

Medicare Program: Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 1999 Rates; Final Rule

[[Page 40954]]

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 405, 412, and 413

[HCFA-1003-F]
RIN 0938-AI22


Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 1999 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

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SUMMARY: We are revising the Medicare hospital inpatient prospective
payment systems for operating costs and capital-related costs to
implement applicable statutory requirements, including section 4407 of
the Balanced Budget Act of 1997 (BBA), as well as changes arising from
our continuing experience with the systems. In addition, in the
addendum to this final rule, we describe changes in the amounts and
factors necessary to determine rates for Medicare hospital inpatient
services for operating costs and capital-related costs. These changes
are applicable to discharges occurring on or after October 1, 1998. We
also set forth rate-of-increase limits as well as changes for hospitals
and hospital units excluded from the prospective payment systems.
Finally, we are implementing the provisions of section 4625 of the BBA
concerning payment for the direct costs of graduate medical education.

DATES: The provisions of this final rule are effective October 1, 1998.
This rule is a major rule as defined in Title 5, United States Code,
section 804(2). Pursuant to 5 U.S.C. section 801(a)(1)(A), we are
submitting a report to the Congress on this rule on July 31, 1998.

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FOR FURTHER INFORMATION CONTACT:
Nancy Edwards, (410) 786-4531, Operating Prospective Payment, DRG, and
Wage Index Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, and Graduate Medical Education Issues.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

    Sections 1886(d) and (g) of the Social Security Act (the Act) set
forth a system of payment for the operating and capital costs of acute
care hospital inpatient stays under Medicare Part A (Hospital
Insurance) based on prospectively-set rates. Under these prospective
payment systems (PPS), Medicare payment for hospital inpatient
operating and capital-related costs is made at predetermined, specific
rates for each hospital discharge. Discharges are classified according
to a list of diagnosis-related groups (DRGs).
    Certain specialty hospitals are excluded from the prospective
payment systems. Under section 1886(d)(1)(B) of the Act, the following
hospitals and units are excluded from PPS: psychiatric hospitals or
units, rehabilitation hospitals or units, children's hospitals, long
term care hospitals, and cancer hospitals. For these hospitals and
units, Medicare payment for operating costs is based on reasonable
costs subject to certain limits.
    Under section 1886(a)(4) of the Act, costs incurred in connection
with approved graduate medical education (GME) programs are excluded
from the operating costs of inpatient hospital services. Hospitals with
approved GME programs are paid for the direct costs of GME in
accordance with section 1886(h) of the Act; the amount of payment for
direct GME costs for a cost reporting period is based on the number of
the hospital's residents in that period and the hospital's costs per
resident in a base year.
    The regulations governing the hospital inpatient prospective
payment system are located in 42 CFR part 412. The regulations
governing excluded hospitals are located in both parts 412 and 413, and
the graduate medical education regulations are found in part 413.

B. Summary of the Provisions of the May 8, 1998 Proposed Rule

    On May 8, 1998, we published a proposed rule in the Federal
Register (63 FR 25576) setting forth proposed changes to the Medicare
hospital inpatient prospective payment systems for both operating costs
and capital-related costs, which would be effective for discharges
occurring on or after October 1, 1998. We also proposed changes in
payments for excluded hospitals and payments for graduate medical
education costs. The following is a summary of the major issues
addressed and changes we proposed to make:
     We proposed changes to the FY 1999 DRG classifications and
relative weights, as required by section 1886(d)(4)(C) of the Act.
     We proposed to update the hospital wage data for FY 1999.
We also proposed changes to the data categories included in the wage
index and revisions to the wage index based on hospital redesignations.
     We discussed several provisions of the regulations in 42
CFR parts 412 and 413 and set forth certain proposed changes concerning
definition of transfer cases, rural referral centers, disproportionate
share adjustment, bad debts, and direct graduate medical education
programs.
     We discussed several provisions of the regulations in 42
CFR Part 412 and set forth certain proposed changes and clarifications
concerning capital indirect medical education payments and payments to
new hospitals.
     We discussed the criteria governing excluded hospitals
including caps on the target amounts for FY 1999 and exceptions.
     In the addendum to the proposed rule, we set forth
proposed changes to the amounts and factors for determining the FY 1999
prospective payment rates for operating costs and capital-related
costs. We also proposed update factors for determining the rate-of-
increase limits for cost reporting periods

[[Page 40955]]

beginning in FY 1999 for hospitals and hospital units excluded from the
prospective payment system.
     In Appendix A of the proposed rule, we set forth an
analysis of the impact that the proposed changes would have on affected
entities.
     In Appendix B of the proposed rule, we set forth the
technical appendix on the proposed FY 1999 capital cost model.
     In Appendix C, as required by section 1886(e)(3)(B) of the
Act, we set forth a report to Congress on our initial estimate of a
recommended update factor for FY 1999 for both hospitals included in
and hospitals excluded from the prospective payment systems.
     In Appendix D of the proposed rule, we set forth our
recommendation of the appropriate percentage change for FY 1999 for the
large urban area and other area average standardized amounts (and
hospital-specific rates applicable to sole community and Medicare-
dependent, small rural hospitals) for hospital inpatient services paid
for under the prospective payment system for operating costs.
     In Appendix D of the proposed rule, we also set forth our
recommendation of the appropriate percentage change for FY 1999 for
target rate-of-increase limits to the allowable operating costs of
hospital inpatient services furnished by hospitals and hospital units
excluded from the prospective payment system.
     In the proposed rule, we discussed in detail the March 1,
1998 recommendations concerning hospital inpatient policies made by the
Medicare Payment Advisory Commission (MedPAC) as well as our responses
to those recommendations. Under section 1805(b) of the Act, MedPAC is
required to submit a report to Congress, not later than March 1 of each
year, that reviews and makes recommendations on Medicare payment
policies.

C. Public Comments Received in Response to the Proposed Rule

    A total of 214 items of correspondence containing comments on the
proposed rule were received timely. The main areas of concern addressed
by the commenters were the change in the definition of transfer cases
and the revisions to the wage index. We also received a number of
comments on the proposal to pay qualified nonhospital providers for the
direct costs of graduate medical education.
    Summaries of the public comments received and our responses to
those comments are set forth below under the appropriate section.


II. Changes to DRG Classifications and Relative Weights

A. Background

    Under the prospective payment system, we pay for inpatient hospital
services on the basis of a rate per discharge that varies by the DRG to
which a beneficiary's stay is assigned. The formula used to calculate
payment for a specific case takes an individual hospital's payment rate
per case and multiplies it by the weight of the DRG to which the case
is assigned. Each DRG weight represents the average resources required
to care for cases in that particular DRG relative to the average
resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
annually. These adjustments are made to reflect changes in treatment
patterns, technology, and any other factors that may change the
relative use of hospital resources. The changes to the DRG
classification system and the recalibration of the DRG weights for
discharges occurring on or after October 1, 1998 are discussed below.

B. DRG Reclassification

1. General
    Cases are classified into DRGs for payment under the prospective
payment system based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay, as well
as age, sex, and discharge status of the patient. The diagnosis and
procedure information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM). The Medicare fiscal intermediary enters the
information into its claims system and subjects it to a series of
automated screens called the Medicare Code Editor (MCE). These screens
are designed to identify cases that require further review before
classification into a DRG can be accomplished.
    After screening through the MCE and any further development of the
claims, cases are classified by the GROUPER software program into the
appropriate DRG. The GROUPER program was developed as a means of
classifying each case into a DRG on the basis of the diagnosis and
procedure codes and demographic information (that is, sex, age, and
discharge status). It is used both to classify past cases in order to
measure relative hospital resource consumption to establish the DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights.
    Currently, cases are assigned to one of 496 DRGs in 25 major
diagnostic categories (MDCs). Most MDCs are based on a particular organ
system of the body (for example, MDC 6, Diseases and Disorders of the
Digestive System); however, some MDCs are not constructed on this basis
since they involve multiple organ systems (for example, MDC 22, Burns).
    In general, cases are assigned to an MDC based on the principal
diagnosis, before assignment to a DRG. However, there are five DRGs to
which cases are directly assigned on the basis of procedure codes.
These are the DRGs for liver, bone marrow, and lung transplant (DRGs
480, 481, and 495, respectively) and the two DRGs for tracheostomies
(DRGs 482 and 483). Cases are assigned to these DRGs before
classification to an MDC.
    Within most MDCs, cases are then divided into surgical DRGs (based
on a surgical hierarchy that orders individual procedures or groups of
procedures by resource intensity) and medical DRGs. Medical DRGs
generally are differentiated on the basis of diagnosis and age. Some
surgical and medical DRGs are further differentiated based on the
presence or absence of complications or comorbidities (hereafter CC).
    Generally, GROUPER does not consider other procedures; that is,
nonsurgical procedures or minor surgical procedures generally not
performed in an operating room are not listed as operating room (OR)
procedures in the GROUPER decision tables. However, there are a few
non-OR procedures that do affect DRG assignment for certain principal
diagnoses, such as extracorporeal shock wave lithotripsy for patients
with a principal diagnosis of urinary stones.
    We proposed several changes to the DRG classification system for FY
1999. The proposed changes, the comments we received concerning them,
our responses to those comments, and the final DRG changes are set
forth below. Unless otherwise noted, our DRG analysis is based on the
full (100 percent) FY 1997 MedPAR file based on

[[Page 40956]]

bills received through September 30, 1997.
2. MDC 5 (Diseases and Disorders of the Circulatory System)
    In the August 29, 1997 hospital inpatient final rule with comment
period (62 FR 45974), we noted that, because of the many recent changes
in heart surgery, we were considering conducting a comprehensive review
of the MDC 5 surgical DRGs. We have begun that review, and based upon
our analysis thus far, we proposed the following DRG changes.
    a. Coronary Bypass. There are two DRGs that capture coronary bypass
procedures: DRG 106 (Coronary Bypass with Cardiac Catheterization) and
DRG 107 (Coronary Bypass without Cardiac Catheterization). The
procedures that allow a coronary bypass case to be assigned to DRG 106
include percutaneous valvuloplasty, percutaneous transluminal coronary
angioplasty (PTCA), cardiac catheterization, coronary angiography, and
arteriography.
    In analyzing the FY 1997 MedPAR file, we noted that, of cases
assigned to DRG 106, the average standardized charges for coronary
bypass cases with PTCA were significantly higher than those cases
without PTCA. There were approximately 4,400 cases in DRG 106 where
PTCA is performed as a secondary procedure. These cases had an average
standardized charge of approximately $69,000. The average charge of the
approximately 95,000 cases in DRG 106 without PTCA was approximately
$52,000.
    Based on this analysis, we proposed to create a new DRG for
coronary bypass cases with PTCA. The cases currently in DRG 106 without
PTCA would be assigned to another DRG and the cases currently assigned
to DRG 107 would be unmodified. Because we would replace two DRGs with
three new DRGs, we proposed to revise the DRG numbers and titles
accordingly. The new DRGs and their titles are set forth below:

DRG 106  Coronary Bypass with PTCA
DRG 107  Coronary Bypass with Cardiac Catheterization
DRG 109  Coronary Bypass without Cardiac Catheterization

We note that DRG 109 has been an empty DRG for the last several years.
    We received several comments regarding this proposal.
    Comment: While the commenters supported the creation of a new DRG
to capture coronary bypass surgeries with PTCA, some of the commenters
were concerned about the renumbering of the current DRGs 106 and 107.
They believe splitting the cases currently assigned to DRG 106 into new
DRGs 106 and 107 and reassigning the cases currently assigned to DRG
107 to DRG 109 will make it difficult to conduct DRG trend analyses.
The commenters suggested that DRGs 106 and 107 should not be modified
and that DRG 109 be used to capture coronary bypass with PTCA. Two
commenters stated that a DRG that has been invalidated (109) should not
be reintroduced.
    Response: Although we understand the commenters' concern, we also
believe that the sequencing of surgical DRGs in hierarchy order is
appropriate. In this case, our alternative to the proposed revision
would have been to delete DRGs 106 and 107 and create three new DRGs
that would have been placed at the end of the DRG table, that is, after
current DRG 503. Because we did have an empty surgical DRG in MDC 5 and
it was numerically close to DRGs 106 and 107, we believed our proposed
retitling was the best alternative.
    We note that the surgical DRGs in MDC 5 have been renumbered and
retitled several times since they were first introduced in 1983. As
stated above, we are currently conducting a comprehensive review of the
MDC 5 surgical DRGs. If that review results in the reclassification of
procedures among the current DRGs, we will probably renumber and
retitle those DRGs.
    Comment: We received one comment requesting clarification of the
DRG assignment for PTCA and cardiac catheterization procedures when
performed in conjunction with coronary bypass. The commenter suggested
that we add the phrase "without PTCA" to the titles of DRGs 107 and
109 to more aptly describe the cases assigned to those DRGs.
    Response: Coronary bypass performed in conjunction with single or
multiple PTCA or percutaneous valvuloplasty will be assigned to DRG
106. The procedure codes for PTCA and percutaneous valvuloplasty are as
follows: 35.96, 36.01, 36.02, and 36.05. Procedures assigned to DRG 107
would include any coronary bypass with cardiac catheterization,
coronary angiography, or coronary arteriography, and DRG 109 is for
cases with the coronary bypass procedure only. We believe that the
proposed titles accurately describe the cases assigned to each of the
DRGs and that adding the phrase "without PTCA" to the titles of DRGs
107 and 109 is unnecessary. We are incorporating our proposed DRG
changes and DRG numbers and titles in the final DRG classifications.
    b. Implantable heart assist system and annuloplasty. In the August
29, 1997 final rule with comment period, we moved implant of an
implantable, pulsatile heart assist system (procedure code 37.66) from
DRGs 110 and 111 (Major Cardiovascular Procedures) 1 to DRG
108 (Other Cardiothoracic Procedures). Although this move improved
payment for these procedures, they were still much more expensive than
the other cases in DRG 108 ($96,000 for heart assist versus an average
of $54,000 for all other cases in the FY 1996 MedPAR file). We stated
that we would continue to review the MDC 5 surgical DRGs in an attempt
to find a DRG placement for these cases that would be more similar in
terms of resource use.
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    \1\ A single title combined with two DRG numbers is used to
signify pairs. Generally, the first DRG is for cases with CC and the
second DRG is for cases without CC. If a third number is included,
it represents cases with patients who are age 0-17. Occasionally, a
pair of DRGs is split between age >17 and age 0-17.
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    As discussed in the proposed rule, in reviewing the FY 1997 MedPAR
file, we noted that heart assist system implant continues to be the
most expensive procedure in DRG 108. In fact, other than heart
transplant, heart assist system implant is the most expensive procedure
in MDC 5. The average FY 1997 charge for these cases, when assigned to
DRG 108, is over $150,000 compared to about $53,000 for all cases in
DRG 108. Obviously, the charges for heart assist implant are increasing
at a much greater rate than the average charges for DRG 108. In
addition, the length of stay for cases coded with 37.66 is
approximately 32 days compared to about 11 days for all other DRG 108
cases.
    One possibility for improving payment for these cases is to move
them to DRGs 104 and 105 (Cardiac Valve Procedures). Those DRGs, which
split on the basis of the performance of cardiac catheterization, have
average charges of approximately $66,000 and $51,000, respectively.
While heart assist implant cases are still more expensive than the
average case in these DRGs, payment would be improved. Clinically,
placement of heart assist implant in DRGs 104 and 105 is not without
precedent. Effective with FY 1988, we placed implant of a total
automatic implantable cardioverter defibrillator (AICD) in these DRGs.
In addition, the vast majority of procedures assigned to DRG 108
involve surgically splitting open the sternum to perform the procedure.
However, implant of the heart assist device does not require this
approach.
    While reviewing the DRG 108 cases, we also noted that procedure
code 35.33

[[Page 40957]]

(annuloplasty) is assigned to this DRG. Annuloplasty is a valve
procedure and is clinically more similar to the cases assigned to DRGs
104 and 105 than it is to the cases assigned to DRG 108. In addition,
the average standardized charge for annuloplasty cases assigned to DRG
108 is about $67,000, well above the overall average charge of
approximately $53,000 for cases in DRG 108. Therefore, we proposed to
move annuloplasty from DRG 108 to DRGs 104 and 105.
    In order to more accurately reflect the cases assigned to DRGs 104
and 105, we proposed to retitle them as follows:

DRG 104  Cardiac Valve and Other Major Cardiothoracic Procedures
with Cardiac Catheterization
DRG 105  Cardiac Valve and Other Major Cardiothoracic Procedures
without Cardiac Catheterization.

    We received only supportive comments for our proposal to move
annuloplasty to DRGs 104 and 105; therefore, that change is included in
the final DRGs.
    Comment: Commenters generally appreciated any improvement in the
payment for heart assist devices. However, some of them continue to
urge HCFA to reclassify these cases to DRG 103 (Heart Transplant) or to
their own DRG. Two commenters were unsure if we had proposed a
classification change which was reflected in the proposed DRG weights
or had merely requested comment on such a change. Another commenter was
concerned that cases reassigned to DRG 105 (those in which there is no
cardiac catheterization performed) would receive a lower payment than
they currently do in DRG 108.
    Response: First, we note that the proposed DRG weights did include
this change; that is, we moved over 2,000 heart assist implant cases
from DRG 108 to DRGs 104 and 105 before recalibrating the proposed
weights. In addition, although the final FY 1999 weight for DRG 105 is
slightly lower than the weight for DRG 108 (5.7099 and 5.9764,
respectively), the much higher DRG 104 weight (7.3690) results in an
overall improvement in payment for these cases when reclassified. Using
the FY 1997 MedPAR cases, we estimate that at least 40 percent of the
heart assist implant cases will be assigned to DRG 104. Thus, as long
as a hospital treats a mix of heart assist implant cases, with and
without the cardiac catheterization procedure, its overall payment
should be higher under the revised classification. We presume this will
be the case for virtually all hospitals.
    With regard to the comments concerning reclassification of this
procedure to DRG 103 or a new DRG, we refer the reader to our response
to a similar comment in the August 29, 1997 final rule (62 FR 45967).
3. MDC 22 (Burns)
    Under the current DRG system, burn cases are assigned to one of six
DRGs in MDC 22 (Burns), which have not been revised since 1986. In our
FY 1998 hospital inpatient proposed rule (June 2, 1997; 62 FR 29912),
in response to inquiries we had received, we indicated that we would
conduct a comprehensive review of MDC 22 to determine whether changes
in these DRGs could more appropriately capture the variation in
resource use associated with different classes of burn patients. We
solicited public comments on this issue, particularly asking for
recommendations on ways to categorize related diagnosis and procedure
codes to produce DRG groupings that would be more homogeneous in terms
of resource use.
    In our May 8, 1998 proposed rule (63 FR 25579), we discussed in
detail the results of our review of MDC 22. We received a proposal
(endorsed by the American Burn Association (ABA)) for restructuring the
DRGs based on several statistical and clinical criteria, including age,
severity of the burn, and the presence of complications or
comorbidities. Subsequently, we worked closely with representatives of
the ABA and with the clinicians who developed the proposal in order to
refine it for Medicare purposes. Based on this work, we proposed to
replace the six existing DRGs in MDC 22 with eight new DRGs. For ease
of reference and classification, the current DRGs in MDC 22, DRGs 456
through 460 and 472, would no longer be valid, and we would establish
new DRGs 504 through 511 to contain all cases that currently group to
MDC 22. (The complete titles of the new DRGs are set forth below.)
    In reviewing the Medicare burn cases, we found that the most
important distinguishing characteristic in terms of resource use was
the amount of body surface affected by the burn and how much of that
burn was a 3rd degree burn. The second most important factor was
whether or not the patient received a skin graft. Thus, a patient with
burns covering at least 20 percent of body area, with at least 10
percent of that a 3rd degree burn, consumed the most resources.
However, if a patient met these criteria and did not receive a skin
graft, then the case was much less expensive and the average length of
stay fell from over 30 days to 8 days. The first two proposed burn DRGs
reflect these distinctions (DRGs 504 and 505).
    After classifying the most extensive burn cases, we found that the
patients with 3rd degree burns that did not meet the criteria to be
assigned to DRGs 504 and 505 were the most expensive of the remaining
cases (that is, those patients whose burns did not meet the at least 20
percent body area or at least 10 percent 3rd degree criteria). These
burns are referred to clinically as "full-thickness burns." A subset
of these full-thickness burn cases, those with skin graft or an
inhalation injury, were much more expensive than the other cases. After
dividing these patients into two groups, with or without skin graft or
inhalation injury, we examined whether other factors had an influence
on resource use. We found that patients who had a CC (complication or
comorbidity) or a concomitant significant trauma consumed more
resources whether or not they had a skin graft or inhalation injury.
Thus, the next four proposed DRGs were defined as full-thickness burns
with skin graft or inhalation injury with or without CC or significant
trauma, or full-thickness burns without skin graft or inhalation injury
with or without CC or significant trauma (DRGs 506 through 509).
    Finally, the last two proposed DRGs (510 and 511) were for cases
with nonextensive burns. These cases are also split on the basis of CCs
or concomitant significant trauma.
    Consistent with the recommendations of several commenters on last
year's proposed rule, the new burn DRGs would no longer include a
separate DRG for cases in which burn patients were transferred to
another acute care facility.
    The specific diagnosis and procedure codes that were included in
each of the eight proposed DRGs and their titles are as follows.
    DRGs 504 and 505--Extensive 3rd Degree Burns with and without Skin
Graft. DRGs 504 and 505 include all cases with burns involving at least
20 percent of body surface area combined with a 3rd degree burn
covering at least 10 percent of body surface area. Thus, these cases
have diagnosis codes of 948.xx, with a fourth digit of 2 or higher
(indicating that burn extends over 20 percent or more of body surface)
and a fifth digit of 1 or higher (indicating a 3rd degree burn
extending over 10 percent or more of body surface). Cases with the
appropriate diagnosis codes are classified into DRG 504 if one of the
following skin graft procedure codes is present:

85.82  Split-thickness graft to breast
85.83  Full-thickness graft to breast
85.84  Pedicle graft to breast
86.60  Free skin graft, NOS
86.61  Full-thickness skin graft to hand

[[Page 40958]]

86.62  Other skin graft to hand
86.63  Full-thickness skin graft to other sites
86.65  Heterograft to skin
86.66  Homograft to skin
86.67  Dermal regenerative graft (new code in FY 1999--see Table 6A
in section VI. of the Addendum)
86.69  Other skin graft to other sites
86.70  Pedicle of flap graft, NOS
86.71  Cutting and preparation of pedicle grafts or flaps
86.72  Advancement of pedicle graft
86.73  Attachment of pedicle or flap graft to hand
86.74  Attachment of pedicle or flap graft to other sites
86.75  Revision of pedicle or flap graft
86.93  Insertion of tissue expander

    DRGs 506 and 507--Full Thickness Burn with Skin Graft or Inhalation
Injury with or without CC or Significant Trauma. These DRGs include all
other cases of 3rd degree burns that also have either a skin graft or
an inhalation injury. Thus, these cases have diagnosis codes of 941.xx
through 946.xx, and 949.xx, with a fourth digit of 3 or higher, as well
as cases with codes of 948.xx that did not group into DRGs 504 or 505
(that is, 948.00, 948.01, and 948.1x through 948.9x with a fifth digit
of 0). In addition, cases classified into DRGs 506 and 507 must have
either one of the skin graft procedure codes listed above or one of the
following diagnosis codes for inhalation injuries:

518.5  Pulmonary insufficiency following trauma and surgery
518.81  Respiratory failure
518.84  Acute and chronic respiratory failure (new code in FY 1999--
see Table 6A in section VI. of the Addendum)
947.1  Burn of larynx, trachea, or lung
987.9  Toxic effect of gas, fume, or vapor, NOS

Cases that meet both of these coding criteria are assigned to DRG 506
if there is a diagnosis code indicating either a CC (based on the
standard DRG CC list) or concomitant significant trauma (based on the
significant trauma diagnosis codes, listed by body site, used for
classification in MDC 24).
    DRGs 508 and 509--Full Thickness Burn without Skin Graft or
Inhalation Injury with or without CC or Significant Trauma. These DRGs
include all other cases of 3rd degree burns. Thus, these DRGs include
all cases without a skin graft or inhalation injury that have diagnosis
codes of 941.xx through 946.xx, and 949.xx, with a fourth digit of 3 or
higher, as well as cases with codes of 948.xx that did not group into
DRGs 504 or 505. DRG 508 also requires a secondary diagnosis from the
standard CC list or the trauma list based on the significant trauma
diagnosis codes, listed by body site, used for classification in MDC
24.
    DRGs 510 and 511--Nonextensive Burns with and without CC or
Significant Trauma. The remaining burn cases would be classified into
one of these two proposed DRGs, depending on whether or not the claim
included a diagnosis code reflecting the presence of a CC or a
significant trauma, as explained above.
    Comment: We received five comments on this proposed change. In
general, the commenters, including the ABA, strongly supported the
proposed restructuring of MDC 22. The commenters agreed that the new
burn DRGs should bring about meaningful improvements to the clinical
coherency and payment equity for the cases assigned to the MDC 22 DRGs.
One commenter noted that under the new DRGs, diagnosis codes in the
948.xx series (that is, the codes used to identify the extent of body
surface involved in a burn and the percentage of the body surface with
a 3rd degree burn) would take on added importance and emphasized the
need for coder education in this area. Another commenter submitted
several suggestions for additional procedure codes that should be added
to the list of procedure codes that would result in assignment to DRG
504 and to DRGs 506 and 507. These codes include both additional codes
that the commenter believes should be considered as skin grafts (such
as procedure codes 08.61 through 08.69, reconstruction of eyelid with
flaps or grafts) as well as codes for other procedures (for example,
limb reattachments or eyeball enucleations) that, as the commenter
pointed out, are now considered a related operating room procedure
under existing DRG 472, Extensive Burns with Operating Room Procedure.
This commenter also suggested that DRGs 506 and 507 be identified as
surgical DRGs in Table 5 of the addendum to the final rule.
    Response: We appreciate the positive responses generated by this
proposal. We agree that our proposed changes will place greater
emphasis on the need for accurate use of the series 948.xx diagnosis
codes. We note that this issue has been addressed in the American
Hospital Association's quarterly publication, "Coding Clinic for ICD-
9-CM." In the 1994, 4th quarter issue, Coding Clinic stated "It is
advisable to use category 948 as additional coding when needed to
provide data for evaluating burn mortality, such as that needed by burn
units. It is also advisable to use category 948 as an additional code
for reporting purposes when there is mention of a third-degree burn
involving 20 percent or more of the body surface." We believe the vast
majority of burn cases already include the 948.xx coding if
appropriate, especially those treated in burn centers. However, we will
be pleased to work with other hospital groups that are interested in
developing educational materials related to the accurate coding of burn
cases.
    In developing the coding classifications used to assign cases under
the burn DRGs, we worked closely with the ABA and its medical
consultants to identify the most significant distinguishing
characteristics in terms of resource use in burn cases. This process
involved both grouping cases that were clinically similar as well as
conducting a series of test runs to maximize the amount of variation in
resource use that could be explained using varying groups of diagnosis
and procedure codes. As stated in the May 8 proposed rule (63 FR
25579), we estimate that the proposed changes to the burn DRGs would
increase by more than 25 percent the amount of variation in resource
use explained by the DRGs in MDC 22, as well as improve the clinical
coherence of the cases within each DRG. As recommended by the ABA, the
procedure codes used to identify skin grafts coincide with the
procedure codes now in use under existing DRG 458, Non-Extensive Burns
with Skin Graft, and we believe that these codes represent the most
resource-intensive skin grafts. Therefore, we are not adding the codes
suggested by the commenter.
    We recognize that some procedures now listed under DRG 472 will no
longer affect DRG assignment under the restructured burn DRGs. However,
we believe that the substantially increased ability of the new DRGs to
explain the variation in resource use among burn cases clearly
indicates the appropriateness of narrowing the focus of the
classification system to emphasize the extent and severity of the burn,
in conjunction with skin grafts or inhalation injury. Our analysis
indicated that the presence of skin grafts or inhalation injuries had a
much more consistent effect on the consumption of hospital resources
than the presence of one of the numerous operating room procedures now
listed under DRG 472. We also note that, since the skin graft
procedures now classified to DRG 504 were classified to former DRG 472,
many DRG 472 cases will now be assigned to DRG 504, which has a higher
weight than 472 did (14.1153 versus 10.2429). When the FY 1999 cases
become available, we will review them to assess the revisions to MDC 22
and the possible need for the type of changes suggested by the
commenter.

[[Page 40959]]

    Finally, we note that we do not classify DRGs 506 and 507 as
surgical DRGs because they include not only cases involving skin
grafts, which are considered surgical procedures, but also cases
involving inhalation injuries, which would not necessarily involve any
surgical procedures. Thus, in this final rule, we are adopting the
changes to the burn DRGs as proposed.
4. Legionnaires' Disease
    Effective with discharges occurring on or after October 1, 1997, a
new diagnosis code was created for pneumonia due to Legionnaires'
disease (code 482.84). In the August 29, 1997 final rule with comment
period, we assigned this code to DRGs 79, 80, and 81 (Respiratory
Infections and Inflammations) (62 FR 46090). However, we did not
include this code as a human immunodeficiency virus (HIV) major related
condition in MDC 25 (HIV Infections). Because pneumonia due to
Legionnaires' disease is a serious respiratory condition that has a
deleterious effect on patients with HIV, we proposed to assign
diagnosis code 482.84 to DRG 489 (HIV with Major Related Condition) as
a major related condition. In addition, we did not assign the code as a
major problem in DRGs 387 (Prematurity with Major Problems) and 389
(Full Term Neonate with Major Problems). These DRGs are assigned to MDC
15 (Newborns and Other Neonates with Conditions Originating in the
Perinatal Period). Again, as a part of the proposed rule, we assigned
diagnosis code 482.84 as a major problem in DRGs 387 and 389 because of
its effect on resource use in treating newborns.
    Commenters supported these proposed revisions, and we are
incorporating them into the final DRGs.
5. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. It is, therefore, necessary to have a decision rule by which
these cases are assigned to a single DRG. The surgical hierarchy, an
ordering of surgical classes from most to least resource intensive,
performs that function. Its application ensures that cases involving
multiple surgical procedures are assigned to the DRG associated with
the most resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibration, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications, to determine if the ordering of classes coincided
with the intensity of resource utilization, as measured by the same
billing data used to compute the DRG relative weights.
    A surgical class can be composed of one or more DRGs. For example,
in MDC 5, the surgical class "heart transplant" consists of a single
DRG (DRG 103) and the class "major cardiovascular procedures"
consists of two DRGs (DRGs 110 and 111). Consequently, in many cases,
the surgical hierarchy has an impact on more than one DRG. The
methodology for determining the most resource-intensive surgical class
involves weighing each DRG for frequency to determine the average
resources for each surgical class. For example, assume surgical class A
includes DRGs 1 and 2 and surgical class B includes DRGs 3, 4, and 5.
Assume also that the average charge of DRG 1 is higher than that of DRG
3, but the average charges of DRGs 4 and 5 are higher than the average
charge of DRG 2. To determine whether surgical class A should be higher
or lower than surgical class B in the surgical hierarchy, we would
weigh the average charge of each DRG by frequency (that is, by the
number of cases in the DRG) to determine average resource consumption
for the surgical class. The surgical classes would then be ordered from
the class with the highest average resource utilization to that with
the lowest, with the exception of "other OR procedures" as discussed
below.
    This methodology may occasionally result in a case involving
multiple procedures being assigned to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER searches for the procedure in the
most resource-intensive surgical class this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average relative
weight is ordered above a surgical class with a higher average relative
weight. For example, the "other OR procedures" surgical class is
uniformly ordered last in the surgical hierarchy of each MDC in which
it occurs, regardless of the fact that the relative weight for the DRG
or DRGs in that surgical class may be higher than that for other
surgical classes in the MDC. The "other OR procedures" class is a
group of procedures that are least likely to be related to the
diagnoses in the MDC but are occasionally performed on patients with
these diagnoses. Therefore, these procedures should only be considered
if no other procedure more closely related to the diagnoses in the MDC
has been performed.
    A second example occurs when the difference between the average
weights for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
since, by virtue of the hierarchy change, the relative weights are
likely to shift such that the higher-ordered surgical class has a lower
average weight than the class ordered below it.
    Based on the preliminary recalibration of the DRGs, we proposed to
modify the surgical hierarchy as set forth below. However, in
developing the proposed rule, we were unable to test the effects of the
proposed revisions to the surgical hierarchy and to reflect these
changes in the proposed relative weights due to the unavailability of
revised GROUPER software at the time the proposed rule was prepared.
Rather, we simulated most major classification changes to approximate
the placement of cases under the proposed reclassification and then
determined the average charge for each DRG. These average charges then
serve as our best estimate of relative resource use for each surgical
class. We test the proposed surgical hierarchy changes after the
revised GROUPER is received and reflect the final changes in the DRG
relative weights in the final rule.
    We proposed to revise the surgical hierarchy for MDC 3 (Diseases
and Disorders of the Ear, Nose, Mouth and Throat) as follows:
     We would reorder Sinus and Mastoid Procedures (DRGs 53-54)
above Myringotomy with Tube Insertion (DRGs 61-62).
     We would reorder Mouth Procedures (DRGs 168-169) above
Tonsil and Adenoid Procedure Except Tonsillectomy and/or Adenoidectomy
Only (DRGs 57-58).
    We received two comments in support of our surgical hierarchy
proposals. However, for this final rule, we tested the proposed changes
using the most recent MedPAR file and the revised GROUPER software, and
we found that the proposal to move Sinus and Mastoid Procedures (DRGs
53-54) above Myringotomy with Tube Insertion (DRGs 61-62) is not
supported. Therefore, this change will not be made in this final rule.
The proposed reordering of DRGs 53 and 54 above Cleft Lip and Palate
Repair (DRG 52) (DRG 52 is currently ordered below DRGs 61 and 62 but
above DRGs 53 and 54) is still supported and will be

[[Page 40960]]

incorporated in the final GROUPER, as will the proposed reordering of
DRGs 168 and 169 above DRGs 57 and 58.
6. Refinement of Complications and Comorbidities List
    There is a standard list of diagnoses that are considered CCs. We
developed this list using physician panels to include those diagnoses
that, when present as a secondary condition, would be considered a
substantial complication or comorbidity. In previous years, we have
made changes to the standard list of CCs, either by adding new CCs or
deleting CCs already on the list. We did not propose to delete any of
the diagnosis codes on the CC list.
    In the September 1, 1987 final notice concerning changes to the DRG
classification system (52 FR 33143), we modified the GROUPER logic so
that certain diagnoses included on the standard list of CCs would not
be considered a valid CC in combination with a particular principal
diagnosis. Thus, we created the CC Exclusions List. We made these
changes to preclude coding of CCs for closely related conditions, to
preclude duplicative coding or inconsistent coding from being treated
as CCs, and to ensure that cases are appropriately classified between
the complicated and uncomplicated DRGs in a pair.
    In the May 19, 1987 proposed notice concerning changes to the DRG
classification system (52 FR 18877), we explained that the excluded
secondary diagnoses were established using the following five
principles:
     Chronic and acute manifestations of the same condition
should not be considered CCs for one another (as subsequently corrected
in the September 1, 1987 final notice (52 FR 33154)).
     Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for a condition should not be considered CCs for
one another.
     Conditions that may not co-exist, such as partial/total,
unilateral/bilateral, obstructed/unobstructed, and benign/malignant,
should not be considered CCs for one another.
     The same condition in anatomically proximal sites should
not be considered CCs for one another.
     Closely related conditions should not be considered CCs
for one another.
    The creation of the CC Exclusions List was a major project
involving hundreds of codes. The FY 1988 revisions were intended to be
only a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered complications or comorbidities of another diagnosis. For
that reason, and in light of comments and questions on the CC list, we
have continued to review the remaining CCs to identify additional
exclusions and to remove diagnoses from the master list that have been
shown not to meet the definition of a CC. (See the September 30, 1988
final rule for the revision made for the discharges occurring in FY
1989 (53 FR 38485); the September 1, 1989 final rule for the FY 1990
revision (54 FR 36552); the September 4, 1990 final rule for the FY
1991 revision (55 FR 36126); the August 30, 1991 final rule for the FY
1992 revision (56 FR 43209); the September 1, 1992 final rule for the
FY 1993 revision (57 FR 39753); the September 1, 1993 final rule for
the FY 1994 revisions (58 FR 46278); the September 1, 1994 final rule
for the FY 1995 revisions (59 FR 45334); the September 1, 1995 final
rule for the FY 1996 revisions (60 FR 45782); the August 30, 1996 final
rule for the FY 1997 revisions (61 FR 46171); and the August 29, 1997
final rule for the FY 1998 revisions (62 FR 45966)).
    We proposed a limited revision of the CC Exclusions List to take
into account the changes that will be made in the ICD-9-CM diagnosis
coding system effective October 1, 1998. (See section II.B.8, below,
for a discussion of ICD-9-CM changes.) These proposed changes were made
in accordance with the principles established when we created the CC
Exclusions List in 1987. We received no comments on these proposed
changes and we are incorporating them as final changes.
    Tables 6F and 6G in section VI of the Addendum to this final rule
contain the revisions to the CC Exclusions List that would be effective
for discharges occurring on or after October 1, 1998. Each table shows
the principal diagnoses with changes to the excluded CCs. Each of these
principal diagnoses is shown with an asterisk and the additions or
deletions to the CC Exclusions List are provided in an indented column
immediately following the affected principal diagnosis.
    CCs that are added to the list are in Table 6F--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 1998,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6G--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 1998 the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $92.00
plus $6.00 shipping and handling and on microfiche for $20.50, plus
$4.00 for shipping and handling. A request for the FY 1988 CC
Exclusions List (which should include the identification accession
number, (PB) 88-133970) should be made to the following address:
National Technical Information Service; United States Department of
Commerce; 5285 Port Royal Road; Springfield, Virginia 22161; or by
calling (703) 487-4650.
    Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, and 1998) and those in Tables 6F and 6G of this document must be
incorporated into the list purchased from NTIS in order to obtain the
CC Exclusions List applicable for discharges occurring on or after
October 1, 1998.
    Alternatively, the complete documentation of the GROUPER logic,
including the current CC Exclusions List, is available from 3M/Health
Information Systems (HIS), which, under contract with HCFA, is
responsible for updating and maintaining the GROUPER program. Version
16.0 of this manual, which will include the final FY 1999 DRG changes,
will be available in October 1998 for $225.00, which includes $15.00
for shipping and handling. This manual may be obtained by writing 3M/
HIS at the following address: 100 Barnes Road; Wallingford, Connecticut
06492; or by calling (203) 949-0303.
7. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
OR Procedure Unrelated to Principal Diagnosis) in order to determine
whether it would be appropriate to change the procedures assigned among
these DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none
of the OR procedures performed is related to the principal diagnosis.
These DRGs are intended to capture atypical cases, that is, those cases
not occurring with sufficient frequency to represent a

[[Page 40961]]

distinct, recognizable clinical group. DRG 476 is assigned to those
discharges in which one or more of the following prostatic procedures
are performed and are unrelated to the principal diagnosis.

60.0  Incision of prostate
60.12  Open biopsy of prostate
60.15  Biopsy of periprostatic tissue
60.18  Other diagnostic procedures on prostate and periprostatic
tissue
60.21  Transurethral prostatectomy
60.29  Other transurethral prostatectomy
60.61  Local excision of lesion of prostate
60.69  Prostatectomy NEC
60.81  Incision of periprostatic tissue
60.82  Excision of periprostatic tissue
60.93  Repair of prostate
60.94  Control of (postoperative) hemorrhage of prostate
60.95  Transurethral balloon dilation of the prostatic urethra
60.99  Other operations on prostate

    All remaining OR procedures are assigned to DRGs 468 and 477, with
DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. The original list of the ICD-9-CM procedure codes
for the procedures we consider nonextensive procedures, if performed
with an unrelated principal diagnosis, was published in Table 6C in
section IV. of the Addendum to the September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990,
August 30, 1991, September 1, 1992, September 1, 1993, September 1,
1994, September 1, 1995, August 30, 1996, and August 29, 1997, we moved
several other procedures from DRG 468 to 477, as well as moving some
procedures from DRG 477 to 468. (See 55 FR 36135, 56 FR 43212, 57 FR
23625, 58 FR 46279, 59 FR 45336, 60 FR 45783, 61 FR 46173, and 62 FR
45981, respectively.)
    a. Adding procedure codes to MDCs. We annually conduct a review of
procedures producing DRG 468 or 477 assignments on the basis of volume
of cases in these DRGs with each procedure. Our medical consultants
then identify those procedures occurring in conjunction with certain
principal diagnoses with sufficient frequency to justify adding them to
one of the surgical DRGs for the MDC in which the diagnosis falls.
Based on this year's review, we did not identify any necessary changes;
therefore, we did not propose to move any procedures from DRGs 468 and
477 to one of the surgical DRGs.
    b. Reassignment of procedures among DRGs 468, 476, and 477. We also
reviewed the list of procedures that produce assignments to DRGs 468,
476, and 477 to ascertain if any of those procedures should be moved
from one of these DRGs to another based on average charges and length
of stay. Generally, we move only those procedures for which we have an
adequate number of discharges to analyze the data. Based on our review
this year, we did not propose to move any procedures from DRG 468 to
DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to
DRGS 468 or 476.
8. Changes to the ICD-9-CM Coding System
    As discussed above in section II.B.1 of this preamble, the ICD-9-CM
is a coding system that is used for the reporting of diagnoses and
procedures performed on a patient. In September 1985, the ICD-9-CM
Coordination and Maintenance Committee was formed. This is a Federal
interdepartmental committee charged with the mission of maintaining and
updating the ICD-9-CM. That mission includes approving coding changes,
and developing errata, addenda, and other modifications to the ICD-9-CM
to reflect newly developed procedures and technologies and newly
identified diseases. The Committee is also responsible for promoting
the use of Federal and non-Federal educational programs and other
communication techniques with a view toward standardizing coding
applications and upgrading the quality of the classification system.
    The Committee is co-chaired by the National Center for Health
Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the
ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic
Index for Diseases while HCFA has lead responsibility for the ICD-9-CM
procedure codes included in the Tabular List and Alphabetic Index for
Procedures.
    The Committee encourages participation in the above process by
health-related organizations. In this regard, the Committee holds
public meetings for discussion of educational issues and proposed
coding changes. These meetings provide an opportunity for
representatives of recognized organizations in the coding fields, such
as the American Health Information Management Association (AHIMA)
(formerly American Medical Record Association (AMRA)), the American
Hospital Association (AHA), and various physician specialty groups as
well as physicians, medical record administrators, health information
management professionals, and other members of the public to contribute
ideas on coding matters. After considering the opinions expressed at
the public meetings and in writing, the Committee formulates
recommendations, which then must be approved by the agencies.
    The Committee presented proposals for coding changes at public
meetings held on June 5 and December 4 and 5, 1997, and finalized the
coding changes after consideration of comments received at the meetings
and in writing within 30 days following the December 1997 meeting. The
initial meeting for consideration of coding issues for implementation
in FY 2000 was held on June 4, 1998. Copies of the minutes of the 1997
meetings can be obtained from the HCFA Home Page @ http://www.hcfa.gov/
pubaffr.htm, under the "What's New" listing. Paper copies of these
minutes are no longer available and the mailing list has been
discontinued. We encourage commenters to address suggestions on coding
issues involving diagnosis codes to: Donna Pickett, Co-Chairperson;
ICD-9-CM Coordination and Maintenance Committee; NCHS; Room 1100; 6525
Belcrest Road; Hyattsville, Maryland 20782. Comments may be sent by E-
mail to: dfp4@cdc.gov.
    Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination
and Maintenance Committee; HCFA, Center for Health Plans and Providers,
Plan and Provider Purchasing Policy Group, Division of Acute Care; C4-
05-27; 7500 Security Boulevard; Baltimore, Maryland 21244-1850.
Comments may be sent by E-mail to: pbrooks@hcfa.gov.
    The ICD-9-CM code changes that have been approved will become
effective October 1, 1998. The new ICD-9-CM codes are listed, along
with their proposed DRG classifications, in Tables 6A and 6B (New
Diagnosis Codes and New Procedure Codes, respectively) in section VI.
of the Addendum to this proposed rule. As we stated above, the code
numbers and their titles were presented for public comment in the ICD-
9-CM Coordination and Maintenance Committee meetings. Both oral and
written comments were considered before the codes were approved.
Therefore, we solicited comments only on the proposed DRG
classifications.
    Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment.
Diagnosis codes that have been replaced by expanded codes, other codes,
or have been deleted are in Table 6C (Invalid Diagnosis Codes). These
invalid diagnosis codes will not be recognized by the GROUPER beginning
with discharges occurring on or after October 1, 1998. The

[[Page 40962]]

corresponding new or expanded diagnosis codes are included in Table 6A.
Procedure codes that have been replaced by expanded codes, other codes,
or have been deleted are in Table 6D (Invalid Procedure Codes).
Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis
Code Titles), which also include the proposed DRG assignments for these
revised codes. For FY 1999, there are no revisions to procedure code
titles.
    We received several comments about our proposed DRG assignments of
new and revised codes.
    Comment: One commenter believes that revised diagnosis code 518.81
(acute respiratory failure) should be assigned as a "major
complication" in DRG 121 since it was classified in this manner prior
to the code revision. In addition, new diagnosis codes 518.83 (chronic
respiratory failure) and 518.84 (acute and chronic respiratory failure)
each should also be classified as a "major complication" in DRG 121.
Several commenters stated that new procedure code 37.67 (implantation
of cardiomyostimulation system) should not be classified to DRGs 442,
443, and 486 since the procedure is not performed for either injuries
or trauma. Commenters also noted that the DRG assignments as set forth
in Tables 6A through 6E in the May 8, 1998 proposed rule (63 FR 22576)
were not always aligned properly with the appropriate MDC number.
    Response: We agree with the commenter that diagnosis codes 518.81,
518.83, and 518.84 should be included on the "major complication"
list for DRG 121. As noted in the comment, code 518.81 is currently
designated as a major complication and the assignment remains valid. In
addition, the expanded codes 518.83 and 518.84 should be assigned to
the major complication list because these conditions were formerly
assigned to code 518.81. We also agree that procedure code 37.67 should
not have been assigned to DRGs 442, 443, and 486 for the reasons cited
by the commenter. We have revised Tables 6A, 6C, and 6E to reflect
these changes. In addition, we have reformatted the tables to correct
any alignment problems. Finally, we note that in Table 6B, the DRG
assignment of procedure code 86.67 should list only DRGs 504, 506, and
507 under MDC 22. DRGs 458 and 472, which were listed in the proposed
rule, have been deleted as a result of our restructuring of the burn
DRGs (see section II.B.3 of this preamble).
9. Other Issues
    a. Palliative care. Effective October 1, 1996 (FY 1997), we
introduced a diagnosis code to allow the identification of those cases
in which palliative care was delivered to a hospital inpatient. This
code, V66.7 (Encounter for palliative care), was unusual in that there
had been no previous code assignment that included the concept of
palliative care. Since this was a new concept, instructional materials
were developed and distributed by the AHA as well as specialty groups
on the use of this new code. With new codes, it sometimes takes several
years for physician documentation to improve and for coders to become
accustomed to looking for this type of information in order to assign a
code. There is an inclusion note listed under V66.7 which indicates
that this code should be used as a secondary diagnosis only; the
patient's medical problem would always be listed first. Currently, use
of diagnosis code V66.7 does not have an impact on DRG assignment.
Consistent with prior practice, we have waited until the FY 1997 data
became available for analysis before considering any possible
modifications to the DRGs.
    As discussed in the proposed rule, in analyzing the FY 1997 bills
received through September 1997, we found that 4,769 discharges
included V66.7 as a secondary diagnosis. These cases were widely
distributed throughout 199 DRGs. The vast majority of these DRGs
included five or fewer discharges with use of palliative care. Only 12
DRGs included more than 100 cases. These were the following:

------------------------------------------------------------------------
                                                              Number of
               DRG                           Title              cases
------------------------------------------------------------------------
10...............................  Nervous System Neoplasms          144
                                    with CC.
14...............................  Specific Cerebrovascular          272
                                    Disorders Except TIA.
79...............................  Respiratory Infections            139
                                    and Inflammations Age
                                    >17 with CC.
82...............................  Respiratory Neoplasms...          526
89...............................  Simple Pneumonia and              200
                                    Pleurisy Age >17 with
                                    CC.
127..............................  Heart Failure and Shock.          184
172..............................  Digestive Malignancy              226
                                    with CC.
203..............................  Malignancy of                     285
                                    Hepatobiliary System or
                                    Pancreas.
239..............................  Pathological Fractures            218
                                    and Musculosketal and
                                    Connective Tissue
                                    Malignancy.
296..............................  Nutritional and                   173
                                    Miscellaneous Metabolic
                                    Disorders Age >17 with
                                    CC.
403..............................  Lymphoma and Non-Acute            178
                                    Leukemia with CC.
416..............................  Septicemia Age >17......          147
------------------------------------------------------------------------

    Six of these DRGs are cancer-related; however, the other DRGs are
quite diverse. Upon further analysis, we found that, for the most part,
discharges with code V66.7 do not significantly differ in length of
stay from the discharges in the same DRG without code V66.7. The length
of stay for discharges with code V66.7 are sometimes longer and
sometimes shorter and the comparative length of stay for a given DRG
tends to vary by only one day. In general, the average charges for a
palliative care case discharge with a secondary code of V66.7 were
lower than the charges for other discharges within the DRG. However,
these differences were relatively small and were well within the
standard variation of charges for cases in the DRG.
    One approach we could take to revise the DRGs would be to divide
those DRGs with a large number of cases coded with V66.7 into two
different DRGs, with and without palliative care. However, the
relatively small proportion of cases in each DRG argues against this
approach; no DRG has more than 1 percent of its cases coded with
palliative care and, in most cases, the percentage is well under 1
percent. An alternative approach would be to group all palliative care
cases, regardless of the underlying disease or condition, into one new
DRG. However, the charges of these cases are so varied that this is not
a logical choice. In addition, there is a lack of clinical coherence in
such an approach. The underlying diagnoses of these cases range from
respiratory conditions to heart failure to septicemia.

[[Page 40963]]

Because there are so few cases in the FY 1997 data and they are so
widely dispersed among different DRGs, we did not propose any DRG
modification. We will make a more detailed analysis of these cases over
the next year based on a more complete FY 1997 data file as well as
review of the FY 1998 cases that will be available later this year. As
time goes by, hospital coders and physicians should become more aware
of this code and we hope that more complete data will assist our
decision-making process.
    We received a few comments supporting our decision to make no DRG
changes at this time for palliative care cases. One commenter agreed
with our statement that it may take several years for use of this code
to spread through the medical community.
    b. PTCA. Effective with discharges occurring on or after October 1,
1997, we reassigned cases of PTCA with coronary artery stent implant
from DRG 112 (Percutaneous Cardiovascular Procedures) to DRG 116 (Other
Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery Stent
Implant). In the August 29, 1997 final rule with comment period, we
responded to several commenters who contended that PTCA cases treated
with platelet inhibitors were as resource intensive as the PTCA with
stent implant cases and that these cases should also be moved to DRG
116. However, there is currently no code that describes the infusion of
platelet inhibitors. Therefore, we were unable to make any changes in
the DRGs for FY 1998.
    As set forth in Table 6B, New Procedure Codes in section VI. of the
addendum to this final rule, a new procedure code for injection or
infusion of platelet inhibitors (code 99.20) will be effective with
discharges occurring on or after October 1, 1998. Our usual policy on
new codes is to assign them to the same DRG or DRGs as their
predecessor code. Because infusion of platelet inhibitors is currently
assigned to a non-OR procedure code, we followed our usual practice and
designated code 99.20 as a non-OR code that does not affect DRG
assignment.
    We will not have any data on this new code until we receive bills
for FY 1999. Thus, we would be unable to make any changes in DRG
assignment until FY 2001. We note, however, that the Conference Report
that accompanied the Balanced Budget Act of 1997 contained language
stating that "* * * in order to ensure that Medicare beneficiaries
have access to innovative new drug therapies, the Conferees believe
that HCFA should consider, to the extent feasible, reliable, validated
data other than MedPAR data in annually recalibrating and reclassifying
the DRGs." (H.R. Rep. No. 105-217 at 734 (1997)). At the time the
proposed rule was published, we had received no data that would have
allowed us to make an appropriate modification of DRG 112 for PTCA
cases with platelet infusion therapy. In that rule, we stated that we
would review and analyze any data we received during the comment period
about the use of platelet inhibitors for Medicare beneficiaries.
    Since publication of the proposed rule, we received some data
concerning the use of GPIIb/IIIa platelet inhibitor drug therapy as
well as some comments on the issue. A discussion of the data and the
comments and our responses are set forth below.
    Comment: The data we received were provided by the pharmaceutical
company that manufactures a GPIIb/IIIa platelet inhibitor. In its
comment accompanying the data, the company states its belief that the
data conclusively demonstrate that procedure code 99.20 should be
assigned to DRG 116 effective for discharges occurring on or after
October 1, 1998. We received two other comments from hospitals
supporting this reassignment in order to improve payment for a
beneficial drug therapy. Another hospital urged HCFA not to make the
reassignment because the commenter believes that there is no evidence
that use of the drug decreases mortality or the risk of need for
emergency coronary bypass in patients undergoing stent implantation. In
addition, this commenter believes that the price charged for platelet
inhibitor is exorbitant and that HCFA should not directly subsidize a
pharmaceutical company through a DRG change. Finally, two commenters, a
drug company and a pharmaceutical association, were encouraged by
HCFA's willingness to consider data other than MedPAR data for
analyzing possible DRG changes.
    The data we received comprise two different sets of Medicare
beneficiaries who received PTCA, PTCA with implant of a coronary stent,
PTCA with platelet inhibitor therapy, or PTCA with both implant of a
stent and platelet inhibitor therapy. One set of data consists of just
under 500 patients who received treatment in seven hospitals during a
clinical trial conducted between January 1, 1996 and June 15, 1997. The
other set consists of just over 6,200 patients treated in 83 hospitals
between October 1, 1995 and December 31, 1996 (this is data from a
health care information company that, among other products and
services, performs clinical and financial analysis of data under
contract with hospitals). For the first set of data, the hospitals are
identified; however, for the second set of data, the hospital
identifying information is confidential and was not released to HCFA.
In order to provide HCFA with standardized charges, the information
company obtained the HCFA provider-specific file and standardized the
charges before providing them to HCFA.
    According to the commenter, based on the data provided the
approximate average standardized charges for the different classes of
patients are as follows:

     PTCA alone--$17,000.
     PTCA and stent--$22,000.
     PTCA and platelet inhibitor--$24,000.
     PTCA and both stent and platelet inhibitor--$29,000.

Based on these data, the drug's manufacturer urges us to reassign
procedure code 99.20 to DRG 116. The commenter also argues that failure
to improve the payment for these cases may result in Medicare
beneficiaries being denied equal access to potentially life-saving
treatment.
    Response: We have reviewed the data submitted as well as considered
the comments we have received. Based on the data provided, it appears
that the cost of a PTCA case with platelet inhibitor drug therapy is at
least as expensive as a PTCA case with stent implant. However, the vast
majority of the cases (over 90 percent) cannot be linked to a hospital.
In addition, although the large data set does constitute a sample of
cases, as claimed by the commenter, it is not a random sample, but
rather a sample of those hospitals that contract with the health
information company. The pharmaceutical company states that the 83
hospitals are representative of all hospitals in the country, but we
have no way to verify that claim. Because the data cannot be verified,
and do not reflect a complete data set or a random sample, HCFA cannot
use the data to make a change in the DRG assignment.
    The language that Congress included in the Conference Report that
accompanied the Balanced Budget Act of 1997 stated that HCFA should "*
* * consider, to the extent feasible, reliable, validated data other
than MedPAR data in annually recalibrating and reclassifying the
DRGs." The data we have been given does not meet these requirements.
We cannot validate whether the data are Medicare beneficiaries nor can
we verify which hospitals provided the treatment or the amount of
charges reported to Medicare. In addition, we do not believe that we

[[Page 40964]]

should base any DRG reclassification decisions that will increase
payment for a set of cases on data that would not meet HCFA's strict
requirements for making a DRG change that would lower the relative
weight for a set of cases (see discussion below concerning radiosurgery
procedures).
    As we have stated in several proposed and final rules (most
recently in the August 30, 1996 final rule in a discussion of the
coronary artery stent implant (61 FR 46170) and the August 29, 1997
final rule in response to a comment on the DRG assignment for new
diagnosis code 686.01) (62 FR 45982), our longstanding practice is to
assign a new code to the same DRG or DRGs as its predecessor code. Our
compelling reason for this practice is our inability to move the cases
associated with the new code to a new DRG assignment as part of the DRG
reclassification and recalibration process. Consequently, our policy is
to wait until we have a full year of Medicare data upon which to base
an analysis of what the most appropriate DRG assignment would be. We
can then move any cases that we would reassign so we can revise the DRG
relative weights accordingly. If we were to assign procedure code 99.20
to DRG 116 at this time, we would be unable to move the cases
associated with that code from DRG 112 into DRG 116 based on the data
provided. Thus, the relative weight of DRG 112 would still reflect the
cases with procedure code 99.20. Since these cases presumably have much
higher charges than the other PTCA cases, the relative weight for DRG
112 would be overstated, which means the payments to those cases would
be overstated. In addition, the charges for PTCA cases with platelet
inhibitor drug therapy would not be reflected in the DRG 116 relative
weight.
    Our practice of waiting until we have identifiable MedPAR data
applies to all DRG changes, that is, both those changes that would
enhance payment for a particular diagnosis or procedure, as well as,
those that would decrease payment for a particular diagnosis or
procedure. We note that, in FY 1996, when we created a new procedure
code for stereotactic radiosurgery (92.3), we assigned the code to DRGs
1, 2, and 3, because that is where the predecessor procedure code was
assigned. However, since code 92.3 is a nonoperating room procedure, we
were relatively sure that the code would not remain assigned to DRG 1,
2, and 3 (which are the highest weighted surgical DRGs in MDC 1) once
we had the actual charge data. As discussed in the August 29, 1997
final rule (62 FR 45971), procedure code 92.3 was reassigned to DRGs 7
and 8 once we had the FY 1996 data to analyze. Therefore, we
"overpaid" those cases for 2 years; that is, their charges were much
less than the average charges for DRGs 1, 2, and 3.
    We believe that any data we use to reclassify and recalibrate DRGs
must be comprehensive and valid, as well as verifiable by HCFA.
    Concerning the commenter's argument that failure to change the DRG
assignment for infusion of platelet inhibitor will compromise the
availability of this treatment for Medicare beneficiaries, we note, as
we have in several previous documents, that it is a violation of a
hospital's Medicare provider agreement to place restrictions on the
number of Medicare beneficiaries it accepts for treatment unless it
places the same restrictions on all other patients.
c. Implantation of Muscle Stimulator
    Comment: We received one comment arguing that the current DRG
assignment for the implantation of a muscle stimulator and the
associated tendon transfer for quadriplegics is inappropriate. The
specific muscle stimulator device (an implanted neuroprosthesis that
restores functional hand motion in people with quadriplegia who are 24
months post-injury) was approved by the Food and Drug Administration in
August 1996. The device is designed to provide neuromuscular
stimulation for certain patients with quadriplegia so that they can
grasp with their hand and perform tasks such as holding eating utensils
and pens and brushing their teeth. In many cases, the patient also
undergoes a tendon transfer to the hand during the same admission or
during a prior admission. The commenter notes that when the tendon
transfer (procedure code 82.56 (other hand tendon transfer or
transplantation)) and the insertion of the muscle stimulator (procedure
code 83.92 (insertion or replacement of skeletal muscle stimulator))
are performed during the same admission, the case is assigned to DRG 7
or 8 (Peripheral and Cranial Nerve and Other Nerve System Procedures).
However, when the procedures are performed during two separate
admissions, the tendon transfer is assigned to DRGs 7 and 8 and the
insertion of the muscle stimulator is assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis). The commenter stated that
although payment for DRGs 7, 8, and 468 are all significantly less than
the cost of the hospital stay and the device, DRG 468 pays more and
results in the hospital losing less money. The commenter noted that the
device alone costs $24,500 and hospitals report losses of $11,000 to
$26,000 when the device is inserted and a tendon transfer is performed
during the same admission (resulting in assignment to DRGs 7 and 8).
However, when the insertion of the device is performed in a separate
admission, the cases are assigned to DRG 468 and hospitals' losses are
limited to $4,000 to $18,000.
    The commenter believes that hospitals will refuse to perform this
very useful surgery unless the DRG assignment is revised. If the
insertion of the muscle stimulator were assigned to a surgical DRG in
MDC 1 where the diagnosis codes for quadriplegia are assigned, the
highest paying DRG assignment would be DRGs 1, 2, and 3 (Craniotomy).
Besides being clinically inappropriate, the commenter believes the
weights for these DRGs are too low to adequately pay for this
procedure.
    The commenter recommended both a short and a long-term solution for
this problem. For now, all cases with insertion of muscle stimulators
performed in conjunction with tendon transfer should be assigned to DRG
468. In the long term, HCFA should establish a new DRG for the
implantation of muscle stimulation devices and other stimulation
devices as they become available.
    Response: In examining the latest FY 1997 MedPAR file (bills
received through March 1998), we found only three cases for
implantation of muscle stimulators for quadriplegics. One case was
assigned to DRG 7 and the other two to DRG 8. The standardized charge
and length of stay for each case is set forth below.

------------------------------------------------------------------------
                                                               Length of
                      DRG                        Standardized     stay
                                                    charge       (days)
------------------------------------------------------------------------
7..............................................       $25,227          7
8..............................................         8,849          2
8..............................................        42,183          2
------------------------------------------------------------------------

The average charge for all cases assigned to DRG 7 is approximately
$21,000 and the average charge for DRG 8 cases is about $11,500.
    With so few cases, we would prefer to review the data in the FY
1998 MedPAR file before making any reclassification. Therefore, we will
add these cases to our FY 2000 DRG reclassification analysis agenda. We
note that the charges reported for two of the three cases are
significantly less than the costs that the commenter believes would be
incurred for this surgery (approximately $35,000).
    It would be inappropriate to assign the muscle stimulator
insertions solely

[[Page 40965]]

to DRG 468. This DRG was created to capture a set of clinically
unrelated cases where the only operating room procedures performed are
unrelated to the patient's principal diagnosis. To permanently assign a
procedure code only to DRG 468 would be contrary to the basic design
and precepts of the DRG system.

C. Recalibration of DRG Weights

    We proposed to use the same basic methodology for the FY 1999
recalibration as we did for FY 1998. (See the August 29, 1997 final
rule with comment (62 FR 45982).) That is, we recalibrated the weights
based on charge data for Medicare discharges. However, we used the most
current charge information available, the FY 1997 MedPAR file, rather
than the FY 1996 MedPAR file. The MedPAR file is based on fully-coded
diagnostic and surgical procedure data for all Medicare inpatient
hospital bills.
    The final recalibrated DRG relative weights are constructed from FY
1997 MedPAR data, based on bills received by HCFA through March 1998,
from all hospitals subject to the prospective payment system and short-
term acute care hospitals in waiver States. The FY 1997 MedPAR file
includes data for approximately 11.3 million Medicare discharges.
    The methodology used to calculate the DRG relative weights from the
FY 1997 MedPAR file is as follows:
     All the claims were regrouped using the DRG classification
revisions discussed above in section II.B of this preamble.
     Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education costs,
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
     The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG.
     We then eliminated statistical outliers, using the same
criteria as was used in computing the current weights. That is, all
cases that are outside of 3.0 standard deviations from the mean of the
log distribution of both the charges per case and the charges per day
for each DRG.
     The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
A transfer case (including a postacute care transfer case as discussed
in section IV.A of this preamble) is counted as a fraction of a case
based on the ratio of its length of stay (plus one day to account for
the double per diem payment for the first day) to the geometric mean
length of stay of the cases assigned to the DRG. That is, a 5-day
length of stay transfer case assigned to a DRG with a geometric mean
length of stay of 10 days is counted as 0.6 of a total case. Transfers
from DRGs 209, 210, or 211 to postacute care are counted as a fraction
of a discharge based on the ratio determined by dividing the geometric
mean length of stay for the DRG by the sum of half the geometric mean
and half the length of stay for the case, plus one.
     We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner
consistent with the methodology for all other DRGs except that the
transplant cases that were used to establish the weights were limited
to those Medicare-approved heart, heart-lung, liver, and lung
transplant centers that have cases in the FY 1995 MedPAR file.
(Medicare coverage for heart, heart-lung, liver, and lung transplants
is limited to those facilities that have received approval from HCFA as
transplant centers.)
     Acquisition costs for kidney, heart, heart-lung, liver,
and lung transplants continue to be paid on a reasonable cost basis.
Unlike other excluded costs, the acquisition costs are concentrated in
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant
for heart and heart-lung transplants); DRG 480 (Liver Transplant); and
DRG 495 (Lung Transplant)). Because these costs are paid separately
from the prospective payment rate, it is necessary to make an
adjustment to prevent the relative weights for these DRGs from
including the effect of the acquisition costs. Therefore, we subtracted
the acquisition charges from the total charges on each transplant bill
that showed acquisition charges before computing the average charge for
the DRG and before eliminating statistical outliers.
    When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We proposed to use that same case
threshold in recalibrating the DRG weights for FY 1999. Using the FY
1997 MedPAR data set, there are 37 DRGs that contain fewer than 10
cases. We computed the weights for the 37 low-volume DRGs by adjusting
the FY 1998 weights of these DRGs by the percentage change in the
average weight of the cases in the other DRGs.
    The weights developed according to the methodology described above,
using the final DRG classification changes, result in an average case
weight that is different from the average case weight before
recalibration. Therefore, the new weights are normalized by an
adjustment factor, so that the average case weight after recalibration
is equal to the average case weight before recalibration. This
adjustment is intended to ensure that recalibration by itself neither
increases nor decreases total payments under the prospective payment
system.
    Comment: One commenter was concerned about the general trend in the
relative weights. This commenter calculated average relative weights
for each MDC as well as the overall average DRG weight. Based upon this
calculation, the commenter noted that the average weight for the pre-
MDC DRGs and MDCs 8 (Diseases and Disorders of the Musculoskeletal
system and Connective Tissue) and 24 (Multiple Significant Trauma) are
decreasing. Concerning MDC 8, the commenter believes the average weight
is decreasing because of the use of postacute care for these DRGs,
noting that 4 of them are included in the list of 10 DRGs affected by
the transfer to postacute care provision (see section IV.A of this
preamble for a discussion of this provision). The commenter suggested
that we leave the FY 1998 weights intact for MDC 8 until we can assess
the effect of postacute care transfers on average standardized amounts.
For the pre-MDCs and MDC 24, the commenter believes that the cases
assigned to these categories are extremely resource-intensive and that
the average weights should not be decreasing. Finally, the commenter
noted that, although the total weight increased for MDC 22 (Burns), the
average weight decreased. The commenter believes this is inconsistent
with the statement in the proposed rule that the changes being made to
MDC 22 would improve the explanation of variation in resource use in
those DRGs (63 FR 25579).
    Response: We reviewed the table of average DRG weights presented in
the comment, both overall and within MDCs, and we found that the
commenter has mistakenly used a simple averaging methodology to
determine the mean weight rather than a weighted averaging methodology,
which is how the DRG relative weights are calculated. For example,
suppose an MDC has three DRGs and there are 3 cases assigned to DRG 1,
6 cases assigned to DRG 2, and 7 cases assigned to DRG 3. The weights
for the DRGs are

[[Page 40966]]

1.000, 2.000, and 3.000, respectively. The simple average weight for
the three DRGs would be calculated by adding the weights and dividing
by the number of DRGs as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY98.051

However, the weighted average would be calculated by first multiplying
the weights of each DRG by the number of cases in that DRG and dividing
by the number of cases as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY98.052

    Because of this mistake in average weight calculation, the
commenter has made some incorrect conclusions. For example, the
commenter states that the average DRG weight for FY 1998 is 1.3681 and
the average of the proposed FY 1999 weights is 1.3895. In reality, the
average FY 1998 weight is 1.4606 and the average of the proposed FY
1999 weights is 1.4673.

    (Note: These average weights are based on the MedPAR cases used
to recalibrate the weights; that is, the FY 1998 weights are based
on FY 1996 cases reclassified into the FY 1998 DRGs and the proposed
FY 1999 weights are based on FY 1997 cases reclassified into the FY
1999 DRGS).
    The average weight of the final FY 1999 weights is 1.4679.

    Contrary to the commenter's assertion, the average weight of the
proposed FY 1999 MDC 22 DRGs did not decrease compared to the FY 1998
MDC 22 weights (4.6663 and 4.5234, respectively). In addition, although
all of the FY 1999 proposed pre-MDC DRG weights except DRG 483
decreased relative to FY 1998, the increase in DRG 483 was large enough
(coupled with an increase in cases) to result in an overall higher
average weight for the pre-MDC DRGs. We note that the weights for DRGs
481, 482, and 483 have increased between the proposed and final FY 1999
recalibrations. As we have noted in the past, the weights for the
transplant DRGs (481, 482, and 495) have gradually decreased over the
years. In addition, the transplant DRGs have a relatively small number
of cases with a large range of reported charges. A few very low or high
charge cases can make a relatively dramatic difference in the weights
from year to year (August 29, 1997; 62 FR 45983).
    Finally, with regard to the commenter's request that we set the FY
1999 MDC 8 weights equal to the FY 1998 weights, we could refer the
commenter to the discussion above concerning the steps we take in
recalibrating the weights. Each year, when we recalibrate the DRG
weights, we use charge data from the most recent Medicare cases
available. That is, we use the charges reported by hospitals to
establish the weights. In this way, we ensure that we are using the
most recent hospital charging practices and patterns to set the new
relative weights. Because each DRG weight is "relative" to all other
DRG weights, we cannot arbitrarily freeze a set of those DRGs at the
previous year's weights. In a relative system such as this, if some
weights increase, others must decrease. Finally, as discussed above,
when we recalibrate the weights, a transfer case is counted as a
fraction of a case rather than a whole case.
    Section 1886(d)(4)(C)(iii) of the Act requires that beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payment to hospitals is affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.b of the Addendum to this final rule, we make a budget
neutrality adjustment to assure that the requirement of section
1886(d)(4)(C)(iii) of the Act is met.


III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts "for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level." In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New
England County Metropolitan Areas (NECMAs) issued by the Office of
Management and Budget (OMB). OMB also designates Consolidated MSAs
(CMSAs). A CMSA is a metropolitan area with a population of one million
or more, comprised of two or more PMSAs (identified by their separate
economic and social character). For purposes of the hospital wage
index, we use the PMSAs rather than CMSAs since they allow a more
precise breakdown of labor costs. If a metropolitan area is not
designated as part of a PMSA, we use the applicable MSA. Rural areas
are areas outside a designated MSA, PMSA, or NECMA.
    Effective April 1, 1990, the term Metropolitan Area (MA) replaced
the term Metropolitan Statistical Area (MSA) (which had been used since
June 30, 1983) to describe the set of metropolitan areas comprised of
MSAs, PMSAs, and CMSAs. The terminology was changed by OMB in the March
30, 1990 Federal Register to distinguish between the individual
metropolitan areas known as MSAs and the set of all metropolitan areas
(MSAs, PMSAs, and CMSAs) (55 FR 12154). For purposes of the prospective
payment system, we will continue to refer to these areas as MSAs.
    Section 1886(d)(3)(E) of the Act also requires that the wage index
be updated annually beginning October 1, 1993. Furthermore, this
section provides that the Secretary base the update on a survey of
wages and wage-related costs of short-term, acute care hospitals. The
survey should measure, to the extent feasible, the earnings and paid
hours of employment by occupational category, and must exclude the
wages and wage-related costs incurred in furnishing skilled nursing
services. We also adjust the wage index, as discussed below in section
III.F, to take into account the geographic reclassification of
hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of
the Act.

B. FY 1999 Wage Index Update

    The final FY 1999 wage index (effective for hospital discharges
occurring on or after October 1, 1998 and before October 1, 1999) is
based on the data collected from the Medicare cost reports submitted by
hospitals for cost reporting periods beginning in FY 1995 (the FY 1998
wage index was

[[Page 40967]]

based on FY 1994 wage data). The FY 1999 wage index includes the
following categories of data, which were also included in the FY 1998
wage index:
     Total salaries and hours from short-term, acute care
hospitals.
     Home office costs and hours.
     Direct patient care contract labor costs and hours.
The wage index also continues to exclude the direct salaries and hours
for nonhospital services such as skilled nursing facility services,
home health services, or other subprovider components that are not
subject to the prospective payment system. Finally, as discussed in
detail in the August 29, 1997 final rule with comment period, we
calculate a separate Puerto Rico-specific wage index and apply it to
the Puerto Rico standardized amount. (See 62 FR 45984 and 46041) This
wage index is based solely on Puerto Rico's data.
    For FY 1999 we proposed two changes to the categories of data
included in the wage index: adding contract labor costs and hours for
top management positions and replacing the fringe benefit category with
the wage-related costs associated with hospital and home office
salaries category. These two changes reflect changes to the Medicare
cost report that were discussed in the September 1, 1994 final rule
with comment period (59 FR 45355). The changes were made to the cost
report for cost reporting periods beginning during FY 1995. Because we
are using wage data from the FY 1995 cost report for the FY 1999 wage
index, these two changes will be reflected in the wage index for the
first time in FY 1999.
    As discussed in detail in the September 1, 1994 final rule with
comment period (59 FR 45355), we expanded the definition of contract
services reported on the Worksheet S-3 to include the labor-related
costs associated with contract personnel in a hospital's top four
management positions: Chief Executive Officer/Hospital Administrator,
Chief Operating Officer, Chief Financial Officer, and Nursing
Administrator. We also revised the cost report to reflect a change in
terminology from "fringe benefits" to "wage-related costs," to
promote the consistent reporting of these costs. (See September 1, 1994
final rule with comment period (59 FR 45356-45359).) We made this
change in terminology because we believed it would eliminate confusion
regarding those wage-related costs that are incorporated in the wage
index versus the broader definition of fringe benefits recognized under
the Medicare cost reimbursement principles. Wage-related costs, which
include core and other wage-related costs, are reported on the Form
HCFA-339, the Provider Cost Report Reimbursement Questionnaire.
    Finally, we analyzed the wage data for the following costs, which
were separately reported for the first time on the FY 1995 cost
reports:
     Physician Part A costs.
     Resident and Certified Registered Nurse Anesthetist (CRNA)
Part A costs.
     Overhead cost and hours by cost center.
Our analyses and proposals concerning these data are set forth below in
section III.C.
    Comment: MedPAC submitted a general comment on the wage index.
First, the Commission stated that several of the issues raised in the
proposed rule stem from the failure of the wage index to account for
the mix of occupational categories employed by each hospital and that
if the wage index reflected this mix it would be more accurate. In
addition, MedPAC, noted that new measures are needed to implement each
new prospective system as well as for Medicare+Choice plans and
suggested that attention should be given to alternative strategies for
obtaining labor prices that could eliminate the need to collect data
separately for each type of provider affected. MedPac intends to
examine this issue during the upcoming year.
    Response: We have addressed the issue of occupational mix in the
past. In the May 27, 1994 Federal Register, we indicated we were not
proposing to collect occupational mix data due to a lack of support
from the hospital industry for an additional reporting burden with
uncertain impact (59 FR 27724). However, certain segments of the
industry continue to insist that an occupational mix would make the
wage index fairer. We will continue to evaluate all the data and
evidence that we receive on this issue. With respect to MedPAC's
interest in examining alternative data collection strategies, we look
forward to the results of its examination, and will provide whatever
assistance we can.

C. Issues Relating to the FY 1999 Wage Index

1. Physician Part A Costs
    Currently, if a hospital directly employs a physician, the Part A
portion of the physician's salary and wage-related costs (that is,
administrative and teaching services) is included in the calculation of
the wage index. However, the costs for contract physician Part A
services are not included. Our policy has been that, to be included in
the wage index calculation, a contracted service must be direct patient
care, or, beginning with the FY 1999 wage index, top level management
(see discussion above). Because some States have laws that prohibit
hospitals from directly hiring physicians, the hospitals in those
States have claimed that they are disadvantaged by the wage index's
exclusion of contract physician Part A costs. We began collecting
separate wage data for both direct and contract physician Part A
services on the FY 1995 cost report in order to analyze this issue. As
we discussed in the September 1, 1994 final rule with comment period
(59 FR 45354), our original purpose in collecting these data was to
exclude all physician Part A costs from the wage index.
    When we made the change to the cost report, there were five States
in which hospitals were prohibited from directly employing physicians.
We understand that only two States currently maintain this prohibition:
Texas and California. Thus, the number of hospitals affected by our
current policy has decreased. Nevertheless, the fact that hospitals in
these two States are still prohibited from directly employing
physicians for Part A services and, therefore, must enter into
contractual agreements with physicians for these services, perpetuates
the perceived inequity.
    The main reason we planned to exclude all Part A physician costs
rather than include the contract costs was our concern that it would be
difficult to accurately attribute the Part A costs and hours of these
contract physicians. In addition, we were concerned that including
these costs could inappropriately inflate the hospitals' average hourly
wages. That is, we anticipated that average costs for contract
physicians would be significantly higher than the costs for those
physicians directly employed by the hospital. However, our analysis of
the data shows that the average hourly wages for contract physician
Part A costs are very similar to, and, in fact slightly lower than, the
costs for salaried physician Part A services.
    Based on this result, we believe that continuing to include the
directly employed physician Part A costs and adding the costs for
contract physicians is the better policy. Thus, we proposed to
calculate the FY 1999 wage index including both direct and contract
physician Part A costs.
    Of the 5,070 hospitals included in the FY 1995 wage data file,
approximately 32 percent reported contract physician Part A costs.
Including these costs would raise the wage index values for

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2 MSAs (4 hospitals) by more than 5 percent and 7 MSAs (43 hospitals)
by between 2 and 5 percent. Two MSAs and one Statewide rural area (74
hospitals) would experience a decrease between 2 and 5 percent. The
wage index values for the remaining 365 areas (4,949 hospitals) would
be relatively unaffected, experiencing changes of between -2 and 2
percent.
    We received several comments regarding the inclusion of contract
physician costs, and physician Part A costs generally. The specific
comments and our responses are set forth below.
    Comment: A national hospital association noted its concern about
the inclusion of teaching-related costs in the wage index because
Medicare pays separately for the salaries of teaching physicians
through direct graduate medical education (GME) payments. Nevertheless,
the commenter supports the inclusion of contract physician costs in the
FY 1999 wage index. The commenter indicated that it would work to
develop a consensus among hospital and health system representatives on
which physician salaries, if any, should be included in future wage
indexes. Another commenter supported the inclusion of contract
physician costs but recommended that HCFA take swift action to remove
teaching physician costs "to achieve geographic equity in payments."
    Several commenters believe that all physician Part A costs,
including teaching physician costs, should be recognized in calculating
the wage index. The commenters asserted that these are costs of doing
business, and including them in the wage index appropriately measures
the geographic variations in what hospitals pay for labor. However,
numerous commenters argued that it is inappropriate to include teaching
physician costs in the wage index because, in effect, it results in
double payment to teaching hospitals for these costs. Recognizing that
HCFA does not have the data available to separately identify the
portion of physician costs attributable to teaching physicians, these
commenters believe it would be preferable to remove all Part A
physician costs from the wage index calculation.
    Response: As a conceptual matter, we believe that physician Part A
costs other than teaching physician costs should be included in the
wage index because these costs are paid under the prospective payment
system. Further, in light of the data now available, we believe
including contract physician Part A costs improves equity in the wage
index by allowing hospitals that are prohibited by State law from
directly employing physicians to include their costs of contracted
physicians.
    With regard to teaching physician costs, the 1995 cost report does
not separate teaching physician costs from other physician Part A
costs. Consequently, we are unable to exclude teaching physician costs
from the FY 1999 wage index. We believe the optimal approach is to
consider this issue directly in developing the FY 2000 wage index. To
facilitate evaluation of this issue, we will instruct the fiscal
intermediaries to separate teaching physician costs from hospitals' FY
1996 wage data. We will carefully analyze those data, and any changes
we propose to make based on that analysis will be included in the FY
2000 proposed rule.
    We do not agree with the commenters' suggestion that, in lieu of
collecting data that would allow us to separately identify teaching
physician costs, we should remove all physician salaries from the wage
index. These physician Part A costs are incurred by the hospital for
services related to such positions as medical director and clinical
department heads. As such, they are legitimate labor costs included
under the prospective payment system. Based on our analysis of the FY
1995 cost reports, we believe that the data reported for physician Part
A costs are sufficiently reliable and complete that inclusion of
physician Part A costs (direct as well as contract costs) for FY 1999
results in a wage index that better reflects relative hospital labor
costs than a wage index that excludes all physician Part A costs.
Moreover, as stated above, we believe the addition of contract
physician Part A costs in the FY 1999 wage index improves the fairness
and accuracy of the wage index relative to the FY 1998 wage index
(which included direct physician Part A costs (salaries) but not
contract physician Part A costs). Thus, rather than excluding all
physician Part A costs, we believe the more responsible approach is to
collect the necessary data as expeditiously as possible in order to
analyze whether it is feasible to separate teaching physician costs
from other physician Part A costs.
    Comment: Several commenters favored not only including physician
salaries in the wage index, but also continuing to include teaching
physician salaries. Commenters believe that if Congress had known about
the payment redistributions that would result from eliminating teaching
physician salaries from the wage index before it had enacted the
reductions applicable to teaching hospitals in the Balanced Budget Act
of 1997, it may not have enacted such deep cuts. One commenter also
suggested that if we excluded physician salaries, we would need to
restandardize the large urban standardized amount to reflect the new
wage index.
    Another commenter stated that the costs of teaching physicians and
residents should be included in the wage index because Medicare
payments for GME are not sufficient to compensate hospitals for their
GME costs. This commenter compared hospitals' direct GME costs on the
Medicare cost report with the payments they receive and estimated a
shortfall of $900 million. The commenter further noted that reductions
in Medicare disproportionate share payments as a result of the Balanced
Budget Act would have the effect of increasing the empirical estimate
for the indirect graduate medical education adjustment, leading to a
further shortfall in payments for GME.
    Response: We cannot know what Congress would or would not have done
if it had known about the impacts of future changes to wage index
policy. Rather, refinements to the wage data should be evaluated on
their individual merits in terms of whether they contribute to or
detract from the fairness and accuracy of the wage index. We disagree
that changes to the wage index may require restandardization of the
large urban standardized amount. The large urban standardized amount
was not created by a separate standardization of the costs of hospitals
in large urban areas, but by applying differential update factors
established by Congress.
    We also disagree with the comment that the wage index should
continue to include costs related to teaching physicians and residents
because current and future GME payments are not fully compensating
hospitals for their GME costs. The adequacy of direct GME payments is a
separate issue by virtue of the fact that these costs are recognized
separately and paid for through Medicare outside the prospective
payment system. The amount Medicare pays for direct GME is based on
policy considerations related to the nature of GME, and reflects
Medicare's fair share of those costs. Similarly, indirect GME costs are
distinct from hospitals' labor costs, and the level of IME payments is
not relevant to the wage index.
    Comment: Many commenters referred to an analysis done by one
commenter showing the projected payment impacts by State of our
proposed policy of including physician (both direct and contract),
resident, and CRNA costs in the wage index. These commenters

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referred to the large losses that, according to this analysis, certain
States will allegedly suffer because of this policy (California: $79
million; Florida: $36 million; Texas: $10 million). Corresponding gains
were cited among northeast hospitals. The suggestion of these comments
was that we should revise our proposed policy and exclude all of these
costs to redistribute these losses and gains.
    Response: We disagree with the characterization of this analysis.
With the exception of contract physician costs, all of these costs have
been included in prior wage indexes. Therefore, the commenter's
analysis does not reflect the impact of the proposed wage index
relative to the current wage index. With respect to the losses in
certain States cited by the commenter, our analysis indicates that, the
projected payment impacts of including contract physician costs
relative to a wage index without these costs are, respectively: a $13
million decrease, a $15 million decrease, and an $18 million increase.
We note that these figures do not reflect the impact of changes to the
wage indexes in these areas resulting from updating from the 1994 wage
data to 1995 wage data, or the exclusion of allocated overhead. They
do, however, present a clearer picture of the impacts in these States
of including contract physician costs relative to current policy.
    Comment: One commenter vigorously opposes the inclusion of contract
physician Part A costs, arguing we should instead exclude all physician
Part A costs. The commenter, a national association of health systems,
argued that this proposal contradicts the objectives we identified in
the May 27, 1994 proposed rule (59 FR 27720) and the September 1, 1994
final rule (59 FR 45354), where we discussed the need to separately
collect physician Part A costs. The commenter raises the following
points and ultimately recommends excluding all physician Part A costs
from the calculation of the wage index.
    First, the commenter contends that, by choosing to include
physician Part A contract costs rather than exclude all physician Part
A costs, we "have expanded the unfair and unjustifiable policy tilt
enjoyed by teaching hospitals." To emphasize this point, the commenter
notes that over 70 percent of all contract physician costs stem from
teaching hospitals (90 percent of salaried physician costs are also
from teaching hospitals).
    Second, the commenter states that our rationale for proposing to
include contract physician costs focused narrowly on whether these
costs would inappropriately inflate the wage data. This narrow focus,
according to the commenter, left out any explanation of why it is
better to include contract physician costs rather than to exclude all
Part A physician costs.
    Third, the commenter quotes liberally from our discussion in the
proposed and final rules published in 1994, particularly our rationale
for providing for separate reporting of physician Part A costs on the
cost report. Referenced specifically are the three reasons why HCFA
believed at that time that eliminating physician Part A costs would be
preferable to including contracted physician costs. These reasons were:
(1) Physician costs are not driven by normal labor market situations;
(2) many hospitals indicated difficulties in accurately determining
hours for these physicians' services; and (3) some hospitals have
difficulty separating costs related to Part A from those related to
Part B. The commenter specifically asks HCFA why it has changed its
beliefs.
    Finally, the commenter surmises that one reason we proposed to
include contract physician costs is that few areas would experience a
significant change in their wage index values. To refute this, the
commenter describes the results of analysis of the impacts of the
proposed policy. The analysis found "a dramatic and damaging impact on
California, the largest state in the nation in terms of hospitals and
number of Medicare discharges." The commenter believes that "HCFA's
wage index policy should be based not on whether the outcome will
result in little change, but on whether it is the right policy in the
first place."
    Response: We appreciate the considered arguments and detailed
analysis presented by the commenter and understand the importance of
this issue to the hospitals represented by the association. We agree
with the commenter that the primary consideration in developing and
refining the hospital wage index should be the "right policy." In the
context of the hospital wage index, we believe we should promote the
fair and accurate measurement of relative hospital wage levels across
geographic areas. At the same time, we believe it is appropriate to
consider the potential impact of possible courses of action, though we
agree with the commenter that the potential impact should not be the
driving force in policy decisions.
    In the context of the hospital wage index, it is also critical to
keep in mind that developing the "right policy" is a function not
only of conceptual issues but also of data issues. If, for example, we
believe as a conceptual matter that a certain type of cost should be
included in the wage index, but the data on those costs are incomplete
and unreliable, then including the costs in the wage index (which are
conceptually right) could (because of the data problems) distort the
measure of relative wage levels across geographic areas, and thus
detract from the fairness and accuracy of the wage index; similarly, if
we believe as a conceptual matter that a certain type of cost should be
excluded from the wage index, but there is incomplete and unreliable
data to separate those costs from other costs, then excluding the costs
based on bad data could detract from the equity of the wage index.
Thus, our ability to implement a "conceptually right" policy depends
on the availability of reliable and complete data.
    As indicated above in the response to another comment, we believe
there is good reason to include all physician Part A costs, rather than
exclude all physician Part A costs as the commenter recommends. Among
other things, with the exception of teaching physician costs, physician
Part A costs are Part A costs that are paid under the prospective
payment system. In addition, physician Part A costs represent above-
average costs, although only a small percentage of the total for most
hospitals; therefore, excluding all physician Part A costs might
understate the relative wages of some hospitals. Based on our analysis
of the FY 1995 cost reports, we believe that data reported for
physician Part A costs are sufficiently reliable and complete that
inclusion of the costs results in a wage index that is more fair and
accurate, relative to a wage index which would exclude all physician
Part A costs, even if the data are not perfect.
    As discussed above, although we have decided to adopt our proposal
to include contract physician Part A costs in the wage index, we intend
to direct the fiscal intermediaries to separately identify physician
Part A costs (salaried and contracted) related to teaching for cost
reports beginning during FY 1996. Although this information will not be
reported separately on the Worksheet S, Part III until FY 1997 cost
reports, we believe this issue merits undertaking a special auditing
effort of the FY 1996 cost reports.
    With regard to the high proportion of physician costs attributable
to teaching hospitals, although the distribution of costs seems
disproportionate (and this is a large part of the reason we are
expediting our efforts to separate teaching physician costs from other
physician costs), our analysis of these

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data indicates that, among hospitals reporting these costs, there is
little difference between teaching and nonteaching hospitals in terms
of the relative impact of these costs on hospitals' average hourly
wages. That is, among both teaching and nonteaching hospitals reporting
physician Part A costs, these costs make up between 3 and 4 percent of
their total wage costs. Therefore, although more teaching hospitals
report these costs than nonteaching hospitals (47 percent of teaching
hospitals versus 30 percent of nonteaching hospitals), the average
hourly wages of teaching hospitals are not more heavily weighted by
these costs than they are for nonteaching hospitals.
    In fact, two of the MSAs that would be most negatively affected by
excluding all physician costs from the wage data, Pittsburgh, PA and
Rochester, NY, both have more nonteaching hospitals reporting physician
costs than teaching hospitals. We believe the commenter's perception
that we are tilting the wage index policy toward teaching hospitals is
misguided and reflects an oversimplifi