Federal register July 31, 1998 Part D | Innovative Resources for Payors

[Federal Register: July 31, 1998 (Volume 63, Number 147)]
[Rules and Regulations]
[Page 41103-41131]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy98-28]

[[pp. 41103-41131]] Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 1999 Rates

[[Continued from page 41102]]

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[GRAPHIC] [TIFF OMITTED] TR31JY98.050

BILLING CODE 4120-01-C

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Appendix A--Regulatory Impact Analysis

I. Introduction

Section 804(2) of Title 5, United States Code (as added by
section 251 of Public Law 104-121), specifies that a "major rule"
is any rule that the Office of Management and Budget finds is likely
to result in--
An annual effect on the economy of $100 million or
more;
A major increase in costs or prices for consumers,
individual industries, Federal, State, or local government agencies,
or geographic regions; or
Significant adverse effects on competition, employment,
investment, productivity, innovation, or on the ability of United
States-based enterprises to compete with foreign-based enterprises
in domestic and export markets.
We estimate that the impact of this final rule will be to
decrease payments to hospitals by approximately $530 million in FY
1999. Therefore, this rule is a major rule as defined in Title 5,
United States Code, section 804(2).
We have examined the impacts of this final rule as required by
Executive Order 12866 and the Regulatory Flexibility Act (RFA)
(Public Law 96-354). Executive Order 12866 directs agencies to
assess all costs and benefits of available regulatory alternatives
and, when regulation is necessary, to select regulatory approaches
that maximize net benefits (including potential economic,
environmental, public health and safety effects; distributive
impacts; and equity). The RFA requires agencies to analyze options
for regulatory relief for small businesses. For purposes of the RFA,
most hospitals, and most other providers, physicians, and health
care suppliers are small entities, either by nonprofit status or by
having revenues of $5 million or less annually.
Also, section 1102(b) of the Social Security Act requires us to
prepare a regulatory impact analysis for any final rule that may
have a significant impact on the operations of a substantial number
of small rural hospitals. Such an analysis must conform to the
provisions of section 603 of the RFA. With the exception of
hospitals located in certain New England counties, for purposes of
section 1102(b) of the Act, we define a small rural hospital as a
hospital with fewer than 100 beds that is located outside of a
Metropolitan Statistical Area (MSA) or New England County
Metropolitan Area (NECMA). Section 601(g) of the Social Security
Amendments of 1983 (Public Law 98-21) designated hospitals in
certain New England counties as belonging to the adjacent NECMA.
Thus, for purposes of the prospective payment system, we classify
these hospitals as urban hospitals.
It is clear that the changes being made in this document will
affect both a substantial number of small rural hospitals as well as
other classes of hospitals, and the effects on some may be
significant. Therefore, the discussion below, in combination with
the rest of this final rule, constitutes a combined regulatory
impact analysis and regulatory flexibility analysis.
In accordance with the provisions of Executive Order 12866, this
final rule was reviewed by the Office of Management and Budget.

II. Changes in the Final Rule

Since we published the proposed rule, the market basket
estimates for hospitals subject to the prospective payment system
and hospitals and units excluded from the system have both fallen by
0.2 percentage points. As a result, the updates are 0.2 percent
lower than the updates reflected in the impact analysis for the
proposed rule.
Also, in the proposed rule, we included discharges to swing beds
under the expanded transfer definition. In this final rule we are
not including swing beds from the definition of a postacute care
setting. The overall payment impact of this change is relatively
very small (an increase of approximately $4 million).
With the exception of these two changes, we are generally
implementing the policy and statutory changes discussed in the
proposed rule.

III. Limitations of Our Analysis

As has been the case in previously published regulatory impact
analyses, the following quantitative analysis presents the projected
effects of our policy changes, as well as statutory changes
effective for FY 1999, on various hospital groups. We estimate the
effects of individual policy changes by estimating payments per case
while holding all other payment policies constant. We use the best
data available, but we do not attempt to predict behavioral
responses to our policy changes, and we do not make adjustments for
future changes in such variables as admissions, lengths of stay, or
case mix.
We received no comments on the methodology used for the impact
analysis in the proposed rule.

IV. GME Payment to Nonhospital Providers

In the past, Medicare only paid hospitals for GME costs.
Therefore, FQHCs, RHCs, and Medicare+Choice organizations may have
been reluctant to train large numbers of residents since Medicare
would not reimburse their incurred training costs. This final rule
specifies that Medicare will reimburse the qualified nonhospital
provider for Medicare's share of the reasonable costs of the
training where the qualified nonhospital provider incurs all or
substantially all of the costs of the training at that site. This
final rule may facilitate more training of residents in settings
where many of those residents will ultimately practice after their
training is completed. Additionally, this could result in an
increase in the number of physicians practicing in underserved
areas.
In addition, hospitals are currently allowed to count residents
working in nonhospital sites in their FTE count of residents for
determining indirect and direct graduate medical education payments,
if the hospital incurs "all or substantially all of the costs" of
the training at the non-hospital site. The regulation defined the
statutory requirement of "all or substantially all" to mean at
least the residents' salaries and fringe benefits. In this final
rule, we are defining "all or substantially all" of the costs of
training in the nonhospital site to mean residents' salaries and
fringe benefits as well as the portion of teaching physicians'
salaries and fringe benefits that can be allocated to direct GME. We
believe that this definition will not discourage training in
nonhospital settings.
Section 4625 of the Balanced Budget Act, which provides for
direct graduate medical education payments to nonhospital providers,
would have minimal impact in the context of total graduate medical
education costs. We believe that the most significant impact
resulting from making payment directly to qualified nonhospital
providers and the redefinition of "all or substantially all" will
be that additional nonhospital sites may participate in training
residents. We expect that such an impact will result in little if
any additional cost to Medicare.

V. Hospitals Included in and Excluded From the Prospective Payment
System

The prospective payment systems for hospital inpatient operating
and capital-related costs encompass nearly all general, short-term,
acute care hospitals that participate in the Medicare program. There
were 45 Indian Health Service hospitals in our database, which we
excluded from the analysis due to the special characteristics of the
prospective payment method for these hospitals. Among other short-
term, acute care hospitals, only the 50 such hospitals in Maryland
remain excluded from the prospective payment system under the waiver
at section 1814(b)(3) of the Act. Thus, as of July 1998, we have
included 4,975 hospitals in our analysis. This represents about 82
percent of all Medicare-participating hospitals. The majority of
this impact analysis focuses on this set of hospitals.
The remaining 18 percent are specialty hospitals that are
excluded from the prospective payment system and continue to be paid
on the basis of their reasonable costs (subject to a rate-of-
increase ceiling on their inpatient operating costs per discharge).
These hospitals include psychiatric, rehabilitation, long-term care,
children's, and cancer hospitals. The impacts of our final policy
changes on these hospitals are discussed below.

VI. Impact on Excluded Hospitals and Units

As of July 1998, there were 1,077 specialty hospitals excluded
from the prospective payment system and instead paid on a reasonable
cost basis subject to the rate-of-increase ceiling under
Sec. 413.40. In addition, there were 2,408 psychiatric and
rehabilitation units in hospitals otherwise subject to the
prospective payment system. These excluded units are also paid in
accordance with Sec. 413.40.
As required by section 1886(b)(3)(B) of the Act, the update
factor applicable to the rate-of-increase limit for excluded
hospitals and units for FY 1999 would be between 0 and 2.4 percent,
depending on the hospital's costs in relation to its limit.
The impact on excluded hospitals and units of the update in the
rate-of-increase limit depends on the cumulative cost increases
experienced by each excluded hospital or unit since its applicable
base period. For excluded hospitals and units that have maintained
their cost increases at a

[[Page 41105]]

level below the percentage increases in the rate-of-increase limits
since their base period, the major effect will be on the level of
incentive payments these hospitals and units receive. Conversely,
for excluded hospitals and units with per-case cost increases above
the cumulative update in their rate-of-increase limits, the major
effect will be the amount of excess costs that would not be
reimbursed.
We note that, under Sec. 413.40(d)(3), an excluded hospital or
unit whose costs exceed 110 percent of its rate-of-increase limit
receives its rate-of-increase limit plus 50 percent of the
difference between its reasonable costs and 110 percent of the
limit, not to exceed 110 percent of its limit. In addition, under
the various provisions set forth in Sec. 413.40, certain excluded
hospitals and units can obtain payment adjustments for justifiable
increases in operating costs that exceed the limit. At the same
time, however, by generally limiting payment increases, we continue
to provide an incentive for excluded hospitals and units to restrain
the growth in their spending for patient services.

VII. Quantitative Impact Analysis of the Final Policy Changes Under the
Prospective Payment System for Operating Costs

A. Basis and Methodology of Estimates

In this final rule, we are announcing policy changes and payment
rate updates for the prospective payment systems for operating and
capital-related costs. We have prepared separate impact analyses of
the changes to each system. This section deals with changes to the
operating prospective payment system.
The data used in developing the quantitative analyses presented
below are taken from the FY 1997 MedPAR file and the most current
provider-specific file that is used for payment purposes. Although
the analyses of the changes to the operating prospective payment
system do not incorporate cost data, the most recently available
hospital cost report data were used to categorize hospitals. Our
analysis has several qualifications. First, we do not make
adjustments for behavioral changes that hospitals may adopt in
response to these final policy changes. Second, due to the
interdependent nature of the prospective payment system, it is very
difficult to precisely quantify the impact associated with each
change. Third, we draw upon various sources for the data used to
categorize hospitals in the tables. In some cases, particularly the
number of beds, there is a fair degree of variation in the data from
different sources. We have attempted to construct these variables
with the best available source overall. For individual hospitals,
however, some miscategorizations are possible.
Using cases in the FY 1997 MedPAR file, we simulated payments
under the operating prospective payment system given various
combinations of payment parameters. Any short-term, acute care
hospitals not paid under the general prospective payment systems
(Indian Health Service hospitals and hospitals in Maryland) are
excluded from the simulations. Payments under the capital
prospective payment system, or payments for costs other than
inpatient operating costs, are not analyzed here. Estimated payment
impacts of final FY 1999 changes to the capital prospective payment
system are discussed below in section VIII of this Appendix.
The final changes discussed separately below are the following:
The effects of implementing the expanded transfer
definition enacted by section 4407 of the BBA, which counts as a
transfer any discharge from one of 10 DRGs if upon discharge the
patient is admitted to an excluded hospital or distinct part unit or
a skilled nursing facility, or is provided home health care that is
related to the hospitalization within 3 days of the date of
discharge.
The effects of the annual reclassification of diagnoses
and procedures and the recalibration of the DRG relative weights
required by section 1886(d)(4)(C) of the Act.
The effects of changes in hospitals' wage index values
reflecting the wage index update (FY 1995 data).
The effects of two changes to the wage index for FY
1999: (1) Including the Part A costs associated with physicians
under contract; and (2) removing the overhead costs related to
departments excluded from the wage data used to calculate the wage
index (for example, skilled nursing facilities and distinct part
units).
The effects of geographic reclassifications by the
Medicare Geographic Classification Review Board (MGCRB) that will be
effective in FY 1999.
The total change in payments based on FY 1999 policies
relative to payments based on FY 1998 policies.
To illustrate the impacts of the FY 1999 changes, our analysis
begins with a FY 1999 baseline simulation model using: the FY 1998
GROUPER (version 15.0); the FY 1998 wage index; the transfer
definition prior to implementation of section 4407 of the BBA; and
no MGCRB reclassifications. Outlier payments are set at 5.1 percent
of total DRG payments.
Each final and statutory policy change is then added
incrementally to this baseline model, finally arriving at an FY 1999
model incorporating all of the changes. This allows us to isolate
the effects of each change.
Our final comparison illustrates the percent change in payments
per case from FY 1998 to FY 1999. Four factors have significant
impacts here. First is the update to the standardized amounts. In
accordance with section 1886(d)(3)(A)(iv) of the Act, we are
updating the large urban and the other areas average standardized
amounts for FY 1999 by the most recently forecasted hospital market
basket increase for FY 1999 of 2.4 percent minus 1.9 percentage
points. Similarly, section 1886(b)(3)(C)(ii) of the Act provides
that the update factor applicable to the hospital-specific rates for
sole community hospitals (SCHs) and Medicare-dependent, small rural
hospitals (MDHs) is equal to the market basket increase of 2.4
percent minus 1.9 percentage points (for an update of 0.5 percent).
A second significant factor impacting changes in hospitals'
payments per case from FY 1998 to FY 1999 is a change in MGCRB
reclassification status from one year to the next. That is,
hospitals reclassified in FY 1998 that are no longer reclassified in
FY 1999 may have a negative payment impact going from FY 1998 to FY
1999; conversely, hospitals not reclassified in FY 1998 that are
reclassified in FY 1999 may have a positive impact. In some cases,
these impacts can be quite substantial, so if a relatively small
number of hospitals in a particular category lose their
reclassification status, the percentage increase in payments for the
category may be below the national mean.
A third significant factor is that we currently estimate that
actual outlier payments during FY 1998 will be 5.4 percent of actual
total DRG payments. When the FY 1998 final rule was published, we
projected FY 1998 outlier payments would be 5.1 percent of total DRG
payments, and the standardized amounts were reduced correspondingly.
The effects of the slightly higher than expected outlier payments
during FY 1998 (as discussed in the Addendum to this final rule) are
reflected in the analyses below comparing our current estimates of
FY 1998 payments per case to estimated FY 1999 payments per case.
Fourth, payments per case in FY 1999 are reduced from FY 1998
for hospitals that receive the indirect medical education (IME) or
the disproportionate share (DSH) adjustments. Section
1886(d)(5)(B)(ii) of the Act provides that the IME adjustment is
reduced from approximately a 7.0 percent increase for every 10
percent increase in a hospital's resident-to-bed ratio in FY 1998,
to a 6.5 percent increase in FY 1999. Similarly, in accordance with
section 1886(d)(5)(F)(ix) of the Act, the DSH adjustment for FY 1999
is reduced by 2 percent from what would otherwise have been paid,
compared to a 1 percent reduction for FY 1998.
Table I demonstrates the results of our analysis. The table
categorizes hospitals by various geographic and special payment
consideration groups to illustrate the varying impacts on different
types of hospitals. The top row of the table shows the overall
impact on the 4,975 hospitals included in the analysis. This is 113
fewer hospitals than were included in the impact analysis in the FY
1998 final rule with comment period (62 FR 46119).
The next four rows of Table I contain hospitals categorized
according to their geographic location (all urban, which is further
divided into large urban and other urban, or rural). There are 2,810
hospitals located in urban areas (MSAs or NECMAs) included in our
analysis. Among these, there are 1,611 hospitals located in large
urban areas (populations over 1 million), and 1,199 hospitals in
other urban areas (populations of 1 million or fewer). In addition,
there are 2,165 hospitals in rural areas. The next two groupings are
by bed-size categories, shown separately for urban and rural
hospitals. The final groupings by geographic location are by census
divisions, also shown separately for urban and rural hospitals.
The second part of Table I shows hospital groups based on
hospitals' FY 1999 payment classifications, including any
reclassifications under section 1886(d)(10) of the Act. For example,
the rows labeled urban,

[[Page 41106]]

large urban, other urban, and rural show the numbers of hospitals
paid based on these categorizations (after consideration of
geographic reclassifications) are 2,894, 1,698, 1,196, and 2,081,
respectively.
The next three groupings examine the impacts of the final
changes on hospitals grouped by whether or not they have residency
programs (teaching hospitals that receive an IME adjustment),
receive DSH payments, or some combination of these two adjustments.
There are 3,880 nonteaching hospitals in our analysis, 854 teaching
hospitals with fewer than 100 residents, and 241 teaching hospitals
with 100 or more residents.
In the DSH categories, hospitals are grouped according to their
DSH payment status, and whether they are considered urban or rural
after MGCRB reclassifications. Hospitals in the rural DSH
categories, therefore, represent hospitals that were not
reclassified for purposes of the standardized amount or for purposes
of the DSH adjustment. (They may, however, have been reclassified
for purposes of the wage index.) The next category groups hospitals
considered urban after geographic reclassification, in terms of
whether they receive the IME adjustment, the DSH adjustment, both,
or neither.
The next row separately examines hospitals that available data
show may qualify under section 4401(b) of the BBA for the special
temporary relief provision, which grants an additional 0.3 percent
update to the standardized amounts (in addition to the 0.5 percent
update other hospitals receive during FY 1999), resulting in a 0.8
percent update for this category of hospitals. To be eligible, a
hospital must not be an MDH, nor may it receive either IME or DSH
payments. It must also experience a negative margin on its operating
prospective payments during FY 1999. We estimated eligible hospitals
based on whether they had a negative operating margin on their FY
1995 cost report (latest available data). Finally, to qualify, a
hospital must be located in a State where the aggregate FY 1995
operating prospective payments were less than the aggregate
associated costs for all of the non-IME, non-DSH, non-MDH hospitals
in the State. There are 344 hospitals in this row.
The next four rows examine the impacts of the final changes on
rural hospitals by special payment groups (SCHs, rural referral
centers (RRCs), and MDHs), as well as rural hospitals not receiving
a special payment designation. The RRCs (145), SCHs (637), MDHs
(352), and SCH and RRCs (59) shown here were not reclassified for
purposes of the standardized amount. There are six SCHs that will be
reclassified for the standardized amount in FY 1999 that, therefore,
are not included in these rows. There are seven hospitals that
continue to be paid under the same rules as SCHs, by virtue of their
prior designation as essential access community hospitals (EACH).
These hospitals are categorized in our analysis as SCHs (there are
also three EACH/RRCs).
The next two groupings are based on type of ownership and the
hospital's Medicare utilization expressed as a percent of total
patient days. These data are taken primarily from the FY 1995
Medicare cost report files, if available (otherwise FY 1994 data are
used). Data needed to determine ownership status or Medicare
utilization percentages were unavailable for 115 hospitals. For the
most part, these are new hospitals.
The next series of groupings concern the geographic
reclassification status of hospitals. The first three groupings
display hospitals that were reclassified by the MGCRB for both FY
1998 and FY 1999, or for either of those 2 years, by urban/rural
status. The next rows illustrate the overall number of FY 1999
reclassifications, as well as the numbers of reclassified hospitals
grouped by urban and rural location. The final row in Table I
contains hospitals located in rural counties but deemed to be urban
under section 1886(d)(8)(B) of the Act.

Table I.--Impact Analysis of Changes for FY 1999 Operating Prospective Payment System
[Percent Changes in Payments Per Case]

Contract MGCRB
Num. of Pac tran. DRG re- New wage phys. pt Allocated DRG & WI recl- All FY 99
hosps.\1\ prov- calib.\3\ Data \4\ A Costs overhead changes assifi- changes
ision \2\ \5\ costs \6\ \7\ cation \9\
(0) (1) (2) (3) (4) (5) (6) (7) (8)
(BY GEOGRAPHIC LOCATION):
ALL HOSPITALS.................................. 4,975 -0.6 0.1 0.0 0.0 0.0 0.0 0.0 -1.0
URBAN HOSPITALS................................ 2,810 -0.7 0.2 -0.1 0.0 -0.1 -0.2 -0.4 -1.3
LARGE URBAN................................ 1,611 -0.7 0.2 -0.4 0.0 -0.1 -0.5 -0.5 -1.7
OTHER URBAN................................ 1,199 -0.6 0.1 0.4 0.0 -0.1 0.3 -0.4 -0.7
RURAL HOSPITALS................................ 2,165 -0.4 0.1 0.7 0.0 0.4 1.0 2.7 1.3
BED SIZE (URBAN):
0-99 BEDS...................................... 704 -0.8 0.1 -0.2 0.0 0.0 -0.2 -0.6 -0.9
100-199 BEDS................................... 937 -0.9 0.2 -0.2 0.0 -0.1 -0.2 -0.5 -1.2
200-299 BEDS................................... 568 -0.7 0.2 -0.2 0.0 -0.1 -0.2 -0.4 -1.2
300-499 BEDS................................... 449 -0.6 0.1 -0.1 0.0 -0.1 -0.2 -0.5 -1.4
500 OR MORE BEDS............................... 152 -0.5 0.1 0.1 0.0 -0.2 0.0 -0.3 -1.6
BED SIZE (RURAL):
0-49 BEDS...................................... 1,137 -0.2 0.0 0.7 0.0 0.5 1.0 0.0 1.0
50-99 BEDS..................................... 634 -0.3 0.0 0.6 0.0 0.4 0.8 1.1 0.8
100-149 BEDS................................... 229 -0.5 0.1 0.6 -0.1 0.5 1.0 3.6 1.1
(0) (1) (2) (3) (4) (5) (6) (7) (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------
150-199 BEDS................................... 91 -0.5 0.1 0.8 0.0 0.4 1.1 4.5 2.5
200 OR MORE BEDS............................... 74 -0.4 0.1 0.8 0.0 0.3 1.1 5.3 1.7
URBAN BY CENSUS DIVISION:
NEW ENGLAND.................................... 152 -0.7 0.1 -1.1 0.2 -0.3 -1.2 -0.2 -2.6
MIDDLE ATLANTIC................................ 425 -0.4 0.2 0.2 0.2 -0.1 0.3 -0.4 -0.9
SOUTH ATLANTIC................................. 414 -0.6 0.2 0.7 -0.2 -0.1 0.5 -0.5 -0.4
EAST NORTH CENTRAL............................. 476 -0.8 0.1 -0.4 -0.2 -0.3 -0.9 -0.4 -2.2
EAST SOUTH CENTRAL............................. 162 -0.5 0.2 0.7 -0.2 -0.3 0.2 -0.5 -0.7
WEST NORTH CENTRAL............................. 189 -0.7 0.1 0.6 0.2 0.2 1.0 -0.5 -0.1
WEST SOUTH CENTRAL............................. 354 -1.0 0.2 -0.7 0.3 -0.1 -0.4 -0.5 -1.6
MOUNTAIN....................................... 129 -0.9 0.1 -0.1 0.1 -0.1 -0.2 -0.5 -1.1
PACIFIC........................................ 461 -0.8 0.2 -0.9 -0.2 0.1 -0.9 -0.4 -2.0
PUERTO RICO.................................... 48 -0.8 0.3 0.9 -0.2 -0.3 0.5 -0.6 -0.3
RURAL BY CENSUS DIVISION:
NEW ENGLAND.................................... 53 -0.4 0.0 1.0 0.0 0.0 0.9 1.4 -0.3
MIDDLE ATLANTIC................................ 80 -0.2 0.0 0.7 0.4 0.2 1.2 1.7 1.3
SOUTH ATLANTIC................................. 286 -0.4 0.1 0.6 -0.2 0.3 0.7 3.8 1.8
EAST NORTH CENTRAL............................. 285 -0.4 0.1 0.8 -0.1 0.3 1.0 2.1 1.3
EAST SOUTH CENTRAL............................. 269 -0.3 0.1 1.3 -0.2 0.4 1.5 2.7 1.7
WEST NORTH CENTRAL............................. 500 -0.3 -0.1 0.9 0.0 0.7 1.5 2.3 1.4
WEST SOUTH CENTRAL............................. 342 -0.5 0.1 0.1 0.1 0.5 0.6 3.5 0.7

[[Page 41107]]

(0) (1) (2) (3) (4) (5) (6) (7) (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------
MOUNTAIN....................................... 204 -0.2 0.0 0.2 -0.1 0.5 0.5 1.8 0.6
PACIFIC........................................ 141 -0.5 0.1 0.3 -0.2 0.5 0.6 2.4 0.7
PUERTO RICO.................................... 5 -0.5 0.0 2.3 -0.2 -0.2 1.8 1.7 -0.2
(BY PAYMENT CATEGORIES):
URBAN HOSPITALS................................ 2,894 -0.7 0.2 -0.1 0.0 -0.1 -0.2 -0.4 -1.3
LARGE URBAN................................ 1,698 -0.7 0.2 -0.4 0.0 -0.1 -0.4 -0.3 -1.6
OTHER URBAN................................ 1,196 -0.6 0.1 0.4 0.0 -0.1 0.3 -0.4 -0.6
RURAL HOSPITALS................................ 2,081 -0.4 0.1 0.7 0.0 0.4 1.0 2.4 1.1
TEACHING STATUS:
NON-TEACHING................................... 3,880 -0.7 0.1 0.1 -0.1 0.1 0.2 0.3 -0.3
LESS THAN 100 RES.............................. 854 -0.7 0.1 -0.1 0.0 -0.1 -0.2 -0.3 -1.1
100+ RESIDENTS................................. 241 -0.5 0.2 -0.1 0.1 -0.2 -0.1 -0.3 -2.0
DISPROPORTIONATE SHARE HOSPITALS (DSH):
NON-DSH........................................ 3,089 -0.6 0.1 0.1 0.0 0.0 0.0 0.3 -0.6
URBAN DSH:
100 BEDS OR MORE........................... 1,404 -0.7 0.2 -0.1 0.0 -0.1 -0.1 -0.4 -1.4
FEWER THAN 100 BEDS........................ 88 -0.6 0.2 -0.6 -0.1 0.0 -0.7 -0.4 -1.2
RURAL DSH:
SOLE COMMUNITY (SCH)....................... 162 -0.2 0.0 0.7 -0.1 0.3 0.8 0.0 1.0
REFERRAL CENTERS (RRC)..................... 53 -0.5 0.2 1.1 -0.1 0.4 1.4 5.6 2.5
(0) (1) (2) (3) (4) (5) (6) (7) (8)
OTHER RURAL DSH HOSP:
100 BEDS OR MORE........................... 60 -0.6 0.2 0.9 -0.2 0.5 1.3 1.1 0.7
FEWER THAN 100 BEDS........................ 119 -0.2 0.0 1.1 -0.1 0.5 1.4 -0.2 1.3
URBAN TEACHING AND DSH:
BOTH TEACHING AND DSH.......................... 709 -0.7 0.2 -0.1 0.0 -0.1 -0.2 -0.5 -1.6
TEACHING AND NO DSH............................ 331 -0.6 0.1 -0.1 0.0 -0.2 -0.3 -0.1 -1.3
NO TEACHING AND DSH............................ 783 -0.8 0.2 0.0 -0.1 0.0 0.0 -0.2 -0.7
NO TEACHING AND NO DSH......................... 1,071 -0.7 0.1 -0.1 0.0 -0.1 -0.2 -0.4 -0.9
SPECIAL UPDATE HOSPITALS (UNDER SEC. 4401(b) OF
PUBLIC LAW 105-33)................................ 344 -0.6 0.1 0.0 -0.1 -0.1 -0.1 -0.2 -0.8
RURAL HOSPITAL TYPES:
NONSPECIAL STATUS HOSPITALS.................... 888 -0.4 0.1 0.9 -0.1 0.6 1.3 1.2 0.7
RRC............................................ 145 -0.6 0.2 0.9 0.0 0.4 1.4 6.4 2.2
SCH............................................ 637 -0.1 -0.1 0.3 0.0 0.2 0.4 0.1 0.4
MDH............................................ 352 -0.2 0.0 0.8 0.0 0.5 1.2 0.5 1.0
SCH AND RRC.................................... 59 -0.2 0.0 0.3 -0.1 0.2 0.3 2.0 1.2
TYPE OF OWNERSHIP:
VOLUNTARY...................................... 2,858 -0.6 0.1 0.0 0.0 -0.1 -0.1 -0.1 -1.0
PROPRIETARY.................................... 671 -0.9 0.2 0.1 -0.1 0.0 0.0 0.2 -1.0
GOVERNMENT..................................... 1,331 -0.5 0.2 0.1 0.0 0.1 0.2 0.3 -0.5
(0) (1) (2) (3) (4) (5) (6) (7) (8)
UNKNOWN........................................ 115 -0.8 0.2 0.3 -0.2 0.1 0.4 -0.5 -1.0
MEDICARE UTILIZATION AS A PERCENT OF INPATIENT
DAYS:
0-25........................................... 247 -0.6 0.2 -1.0 0.0 0.0 -0.8 -0.2 -2.0
25-50.......................................... 1,264 -0.7 0.2 -0.2 0.0 -0.1 -0.2 -0.3 -1.5
50-65.......................................... 1,978 -0.6 0.1 0.2 0.0 -0.1 0.1 0.2 -0.6
OVER 65........................................ 1,371 -0.6 0.1 0.2 0.0 0.0 0.3 0.1 -0.2
UNKNOWN........................................ 115 -0.8 0.2 0.3 -0.2 0.1 0.4 -0.5 -1.0
HOSPITALS RECLASSIFIED BY THE MEDICARE GEOGRAPHIC
REVIEW BOARD:
RECLASSIFICATION STATUS DURING FY 98 AND FY 99:
RECLASSIFIED DURING BOTH FY98 AND FY99..... 315 -0.5 0.1 0.6 -0.1 0.2 0.7 6.8 -0.5
URBAN.................................. 72 -0.4 0.2 0.4 -0.1 -0.2 0.1 4.9 -1.0
RURAL.................................. 243 -0.5 0.1 0.7 -0.1 0.4 1.1 8.3 -0.1
RECLASSIFIED DURING FY 99 ONLY............. 170 -0.5 0.1 0.5 0.0 0.3 0.8 5.0 5.4
URBAN.................................. 15 -0.7 0.1 -0.1 0.1 0.1 0.1 4.6 2.3
RURAL.................................. 155 -0.5 0.1 0.7 0.0 0.3 1.0 5.1 6.3
RECLASSIFIED DURING FY 98 ONLY............. 126 -0.7 0.1 0.3 -0.1 -0.1 0.1 -0.6 -3.6
URBAN.................................. 53 -0.8 0.1 0.2 -0.1 -0.3 -0.1 -0.7 -2.9
(0) (1) (2) (3) (4) (5) (6) (7) (8)
RURAL.................................. 73 -0.3 0.1 0.6 -0.1 0.4 1.0 -0.5 -5.9
FY 99 RECLASSIFICATIONS:
ALL RECLASSIFIED HOSP.......................... 485 -0.5 0.1 0.6 -0.1 0.2 0.7 6.2 1.4
STAND. AMOUNT ONLY......................... 94 -0.6 0.1 0.5 0.0 -0.2 0.3 1.0 -0.7
WAGE INDEX ONLY............................ 281 -0.5 0.1 0.4 -0.1 0.3 0.6 6.9 -1.2
BOTH....................................... 47 -0.6 0.2 0.9 -0.2 -0.3 0.5 3.7 -2.2
NONRECLASSIFIED............................ 4,526 -0.7 0.1 0.0 0.0 -0.1 -0.1 -0.4 -0.9
ALL URBAN RECLASS.............................. 87 -0.5 0.2 0.3 -0.1 -0.2 0.1 4.8 -0.3
STAND. AMOUNT ONLY......................... 26 -0.4 0.2 1.3 -0.1 -0.3 0.9 0.8 0.1
WAGE INDEX ONLY............................ 40 -0.5 0.1 -0.3 0.0 0.1 -0.2 7.2 0.0
BOTH....................................... 21 -0.5 0.2 0.8 -0.2 -0.5 0.1 2.8 1.3

[[Page 41108]]

NONRECLASSIFIED............................ 2,696 -0.7 0.2 -0.1 0.0 -0.1 -0.2 -0.6 1.3
ALL RURAL RECLASS.............................. 398 -0.5 0.1 0.7 -0.1 0.4 1.1 7.0 2.4
STAND. AMOUNT ONLY......................... 55 -0.4 0.1 0.9 -0.1 0.4 1.1 4.8 2.7
WAGE INDEX ONLY............................ 314 -0.5 0.1 0.7 0.0 0.4 1.1 6.9 2.2
BOTH....................................... 29 -0.5 0.1 0.8 -0.1 0.3 1.1 10.0 3.8
NONRECLASSIFIED............................ 1,767 -0.3 0.0 0.7 0.0 0.4 0.9 -0.4 0.4
OTHER RECLASSIFIED HOSPITALS (SECTION
1886(d)(8)(B)).................................... 27 -0.5 0.1 -0.4 0.0 -0.3 -0.6 1.0 1.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Because data necessary to classify some hospitals by category are missing, the total number of hospitals in each category may not equal the national
total. Discharge data are from FY 1997, and hospital cost report data are from reporting periods beginning in FY 1994 and FY 1995.
\2\ This column displays the impact of the change enacted by section 4407 of the BBA, which defines discharges from 1 of 10 DRGs to postacute care as
transfers. Under our final policy, 3 of the 10 DRGs will be paid under an alternative methodology where they will receive 50 percent of the full DRG
amount on the first day and 50 percent of the current per diem transfer payment amount for each day of the stay. The remaining seven DRGs would be
paid using our current transfer payment methodology.
\3\ This column displays the payment impact of the recalibration of the DRG weights based on FY 1997 MedPAR data and the DRG classification changes, in
accordance with section 1886(d)(4)(C) of the Act.
\4\ This column shows the payment effects of updating the data used to calculate the wage index with data from the FY 1995 cost reports.
\5\ This column displays the impact of adding contract Part A physician costs to the wage data.
\6\ This column illustrates the payment impact of removing the overhead costs allocated to departments where the directly assigned costs are already
excluded from the wage index calculation (for example, SNFs and distinct part units).
\7\ This column displays the combined impact of the reclassification and recalibration of the DRGs, the updated and revised wage data used to calculate
the wage index, and the budget neutrality adjustment factor for these two changes, in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of
the Act. Thus, it represents the combined impacts shown in columns 2, 3, 4, and 5, and the FY 1999 budget neutrality factor of 0.999006.
\8\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects shown here
demonstrate the FY 1999 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 1999.
Reclassification for prior years has no bearing on the payment impacts shown here.
\9\ This column shows changes in payments from FY 1998 to FY 1999. It incorporates all of the changes displayed in columns 1, 6, and 7 (the changes
displayed in columns 2, 3, 4 and 5 are included in column 6). It also displays the impact of the FY 1999 update, changes in hospitals'
reclassification status in FY 1999 compared to FY 1998, the difference in outlier payments from FY 1998 to FY 1999, and the reductions to payments
through the IME and DSH adjustments taking effect during FY 1999. The sum of these columns may be different from the percentage changes shown here due
to rounding and interactive effects.

B. Impact of the Implementation of the Expanded Transfer Definition
(Column 1)

Section 1886(d)(5)(J) of the Act (added by section 4407 of the
BBA) requires the Secretary to select 10 DRGs for which discharges
(from any one of these DRGs) to a postacute care provider will be
treated as a transfer beginning with discharges on or after October
1, 1998. Column 1 shows the impact of this provision.
Although the expanded definition encompasses only 10 DRGs, they
were selected, in accordance with the statute, based upon their
large and disproportionate volume of cases receiving postacute care.
Therefore, the overall payment impact of this change is significant
(a 0.6 percent decrease in payments per case).
The 10 DRGs that we are including under this provision are
identified in section IV.A. of the preamble to this final rule. In
addition to selecting 10 DRGs, the statute authorizes the Secretary
to develop an alternative transfer payment methodology for DRGs
where a substantial portion of the costs of the cases occur very
early in the stay. This is particularly likely to happen in some
surgical DRGs because of the high cost of the surgical procedure.
Based on our analysis comparing the costs per case for these cases
with payments under our current transfer payment methodology, we
will pay the current transfer per diem for all DRGs except DRGs 209,
210, and 211. For those three DRGs, the alternative payment
methodology is 50 percent of the full DRG payment amount, plus 50
percent of the current per diem transfer payment for each day of the
stay, up to the full DRG payment.
To simulate the impact of these final policies, we adjusted
hospitals' transfer-adjusted discharges and case-mix index values
(using version 15 of the GROUPER) to reflect the impact of this
expansion in the transfer definition. The transfer-adjusted
discharge fraction is calculated one of two ways, depending on the
transfer payment methodology. Under our current transfer payment
methodology, and for all but the three DRGs receiving special
payment consideration, this adjustment is made simply by adding one
to the length of stay and dividing that amount by the geometric mean
length of stay for the DRG (with the resulting fraction not to
exceed 1.0). For example, a transfer after 3 days from a DRG with a
geometric mean length of stay of 6 days would have a transfer-
adjusted discharge fraction of 0.667 ((3+1)/6).
For transfers from any one of the three DRGs receiving the
alternative payment methodology, the transfer-adjusted discharge
fraction is 0.5 (to reflect that these cases receive half the full
DRG amount the first day), plus one-half of the result of dividing
one plus the length of stay prior to transfer by the geometric mean
length of stay for the DRG. As with the above adjustment, the result
is equal to the lesser of the transfer-adjusted discharge fraction
or 1.
The transfer-adjusted case-mix index values are calculated by
summing the transfer-adjusted DRG weights and dividing by the
transfer-adjusted discharges. The transfer-adjusted DRG weights are
calculated by multiplying the DRG weight by the lesser of 1 or the
transfer-adjusted discharge fraction for the case, divided by the
geometric mean length of stay for the DRG. In this way, simulated
payments per case can be compared before and after the change to the
transfer policy.
This change has the greatest impact among urban hospitals (0.7
percent decrease). Among urban hospitals, hospitals with up to 99
beds and those with between 100 and 199 beds are most affected, with
0.8 percent and 0.9 percent reductions in payments, respectively.
For urban hospitals grouped by census division, the Middle Atlantic
division has the smallest negative impact, a 0.4 percent decrease.
The Middle Atlantic division has traditionally had the longest
average lengths of stay, therefore, it is reasonable that the impact
is smallest here. Transfer cases with a length of stay more than the
(geometric) mean length of stay minus one day do not experience any
payment impact under this provision. (Full payment is reached one
day prior to the mean length of stay due to the double per diem paid
for the first day under our current transfer payment methodology.)
Rural hospitals experience a smaller payment impact overall,
especially the smallest rural hospitals: those with fewer than 50
beds (a 0.2 percent decrease). The smallest impacts among rural
census divisions are in the Middle Atlantic and the Mountain. The
largest rural impacts are in the West South Central and the Pacific
divisions, and Puerto Rico, all with 0.5 percent decreases. This
change is consistent with the shorter lengths of stay in these
geographic regions.
The largest negative impact is a 1.0 percent decrease in
payments observed among urban West South Central hospitals. The
smallest negative impact occurs in SCHs (0.1 percent decrease).
Those SCHs paid based on their hospital-specific amount would see no
impact related to this change, since there is no transfer adjustment
made to the hospital-specific amount.

[[Page 41109]]

C. Impact of the Changes to the DRG Classifications and Relative
Weights (Column 2)

In column 2 of Table I, we present the combined effects of the
DRG reclassifications and recalibration, as discussed in section II
of the preamble to this final rule. Section 1886(d)(4)(C)(i) of the
Act requires us to annually make appropriate classification changes
and to recalibrate the DRG weights in order to reflect changes in
treatment patterns, technology, and any other factors that may
change the relative use of hospital resources.
We compared aggregate payments using the FY 1998 DRG relative
weights (GROUPER version 15) to aggregate payments using the final
FY 1999 DRG relative weights (GROUPER version 16). Overall, payments
increase by 0.1 percent due to the DRG changes, although this is
prior to applying the budget neutrality factor for DRG and wage
index changes (see column 6). Consistent with the minor changes
reflected in the FY 1999 GROUPER, the redistributional impacts of
DRG reclassifications and recalibration across hospital groups are
very small (a 0.2 percent increase for large urban hospitals, and a
0.1 percent increase for other urban hospitals as well as for rural
hospitals). Within hospital categories, the net effects for urban
hospitals are small positive changes for all hospitals (a 0.2
percent increase for hospitals with between 100 and 299 beds, and a
0.1 percent increase for smaller or larger urban hospitals). Rural
hospitals with 100 or more beds experience an increase of 0.1
percent, for smaller rural hospitals, there is no impact (0.0
percent change).
The breakdowns by urban census division show that the increase
among urban hospitals is spread across all census categories, with
the largest increase (0.3 percent) for hospitals in Puerto Rico. For
rural hospitals, there is no impact (that is, a 0.0 percent change)
for hospitals in the New England, Middle Atlantic, and Mountain
census divisions. The West North Central division experiences a 0.1
percent decrease. All other rural census divisions experience a 0.1
percent increase. The only other hospital category experiencing a
negative impact is SCHs, with a 0.1 percent decrease.
This pattern of small increases or no change applies to all
other hospital categories. Overall, we attribute this change to the
increasing severity of illness of hospital inpatients. That is, as
greater numbers of less acutely ill patients are treated outside the
inpatient setting, the acuity of the remaining hospital inpatients
increases. Although, in the past, this effect was seen more clearly
in large urban and very large rural hospitals, which often had more
outpatient settings available for patient treatment, hospitals in
all areas now appear to be able to take advantage of this practice.
Of course, in general, these positive impacts are very minor, with
virtually no hospital group experiencing more than a 0.2 percent
increase.

D. Impact of Updating the Wage Data (Column 3)

Section 1886(d)(3)(E) of the Act requires that, beginning
October 1, 1993, we annually update the wage data used to calculate
the wage index. In accordance with this requirement, the wage index
for FY 1999 is based on data submitted for hospital cost reporting
periods beginning on or after October 1, 1994 and before October 1,
1995. As with the previous column, the impact of the new data on
hospital payments is isolated by holding the other payment
parameters constant in the two simulations. That is, column 3 shows
the percentage changes in payments when going from a model using the
FY 1998 wage index based on FY 1994 wage data before geographic
reclassifications to a model using the FY 1999 prereclassification
wage index based on FY 1995 wage data.
The wage data collected on the FY 1995 cost reports includes,
for the first time, contract labor costs and hours for top
management positions as allowable in the wage index calculation. In
addition, the changes to wage-related costs associated with hospital
and home office salaries that were discussed in the September 1,
1994 final rule (59 FR 45355) are reflected in the FY 1995 data.
These changes are reflected in column 3, as well as other year-to-
year changes in hospitals' labor costs.
The results indicate that the new wage data have no overall
impact in hospital payments. Rural hospitals as a category, however,
benefit from the update. Their payments increase by 0.7 percent.
These increases are attributable to increases above 5 percent in the
wage index values for the rural areas of several States.
Urban hospitals as a group are not significantly affected by the
updated wage data (a 0.1 percent decrease). The gains of hospitals
in other urban areas (0.4 percent increase) are offset by decreases
among hospitals in large urban areas (0.4 percent decrease). The
negative impact among large urban areas appears to be largely due to
three large urban MSAs with decreases of greater than 6 percent in
their wage index values due to the FY 1995 data.
Among urban census divisions, New England experiences the
largest decline, 1.1 percent. This is primarily attributable to a
2.0 percent decline in the Boston MSA's wage index. The negative
impact in the Pacific division is associated with three MSAs that
have a 7 percent decline in their wage index. On the other hand, in
urban Puerto Rico, two MSAs had increases of more than 10 percent.
The largest increases are in the rural census divisions. Rural
Puerto Rico experiences the greatest positive impact, 2.3 percent.
Hospitals in two other census divisions receive positive increases
of at least 1.0 percent; East South Central at 1.3 percent, and New
England at 1.0 percent. We believe these positive impacts of the new
wage data for rural hospitals stem from the expansion of the
contract labor definition, specifically the inclusion certain
management categories. On average, the hourly cost of contract labor
increased for rural hospitals by 5.9 percent. Among urban hospitals,
the increase was 4.2 percent.

E. Impact of Including Contract Physician Part A Costs (Column 4)

As discussed in section III.C.1 of the preamble, we began
collecting separate wage data for both direct and contract physician
Part A services on the FY 1995 cost report. This change was made in
order to address any potential inequity of including only salaried
Part A physician costs in the wage index while some States had laws
prohibiting their hospitals from employing physicians directly
(forcing hospitals to contract with physicians for administrative
services). We are including contract physician Part A costs in the
wage index calculation.
Column 4 shows the payment impacts of including these data.
Although only two States currently maintain the prohibition against
hospitals directly employing physicians (Texas and California), many
hospitals in other States reported these costs as well. Thus, the
impacts of this final change extend well beyond Texas and
California.
In general, most hospital categories experience either no
changes due to this final policy, or small (0.1 percent) increases
or decreases. Urban hospitals in the West South Central census
division (which includes Texas) have a 0.3 percent increase.
Hospitals in the Pacific division (which includes California) have a
decrease of 0.2 percent overall in their wage index.
The MSA with the greatest increase due to this change is
Galveston-Texas City, TX. Although hospitals in this MSA experience
a drop in their wage index due to the use of FY 1995 data, much of
that decrease is recovered by a 12 percent increase resulting from
the inclusion of contract physician Part A costs. Two California
MSAs experience increases in their wage indexes of at least 1.0
percent: Stockton-Lodi and Fresno.

F. Impact of Removing Overhead Costs of Excluded Areas (Column 5)

Prior years' wage index calculations have removed the direct
wages and hours associated with certain subprovider components
excluded from the prospective payment system; however, the overhead
costs associated with these excluded components have not been
removed. We revised the FY 1995 cost report to allow hospitals to
report separately overhead salaries and hours, and for the FY 1999
wage index we are removing the overhead costs and hours allocated to
areas of the hospital excluded from the wage index calculation.
Column 5 displays the impacts on FY 1999 payments per case of
implementing this change. The overall payment impact is 0.0 percent;
however, the impact diverges along urban and rural lines. Urban
hospitals lose 0.1 percent as a result of removing these overhead
costs, while rural hospitals gain 0.4 percent.
Hospitals in the rural West North Central census division
experience the largest percentage increase (0.7 percent). All the
rural Statewide wage indexes increased in this census division, led
by Minnesota (3.2 percent) and South Dakota (2.4 percent).
The combined wage index changes in Table I are determined by
summing the individual impacts in columns 3, 4, and 5. For example,
the rural West North Central census division gains 0.9 percent from
the new wage data, and 0.7 percent from removing the overhead costs
allocated to

[[Page 41110]]

excluded areas. Therefore, the combined impact of the FY 1999 wage
index for these hospitals is a 1.6 percent increase.
The following chart compares the shifts in wage index values for
labor market areas for FY 1999 relative to FY 1998. This chart
demonstrates the impact of the changes for the FY 1999 wage index
relative to the FY 1998 wage index. The majority of labor market
areas (305) experience less than a 5 percent change. A total of 38
labor market areas experience an increase of more than 5 percent,
with 9 having an increase greater than 10 percent. A total of 28
areas (all urban) experience decreases of more than 5 percent,
although, of those, all decline by less than 10 percent.

------------------------------------------------------------------------
Number of labor
market areas
Percentage change in area wage index values ---------------------
FY 1998 FY 1999
------------------------------------------------------------------------
Increase more than 10 percent..................... 2 9
Increase more than 5 percent and less than 10
percent.......................................... 24 29
Increase or decrease less than 5 percent.......... 334 305
Decrease more than 5 percent and less than 10
percent.......................................... 9 28
Decrease more than 10 percent..................... 1 0
------------------------------------------------------------------------

Among urban hospitals, 129 would experience an increase of more
than 5 percent and 23 more than 10 percent. More rural hospitals
have increases greater than 5 percent (355), but none greater than
10 percent. On the negative side, 186 urban hospitals but no rural
hospitals have decreases in their wage index values of at least 5
percent (none have decreases greater than 10 percent). The following
chart shows the impact for urban and rural hospitals.

------------------------------------------------------------------------
Number of hospitals
Percentage change in area wage index values ---------------------
Urban Rural
------------------------------------------------------------------------
Increase more than 10 percent..................... 23 0
Increase more than 5 percent and less than 10
percent.......................................... 129 355
Increase or decrease less than 5 percent.......... 2472 1810
Decrease more than 5 percent and less than 10
percent.......................................... 186 0
Decrease more than 10 percent..................... 0 0
------------------------------------------------------------------------

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

The impact of DRG reclassifications and recalibration on
aggregate payments is required by section 1886(d)(4)(C)(iii) of the
Act to be budget neutral. In addition, section 1886(d)(3)(E) of the
Act specifies that any updates or adjustments to the wage index are
to be budget neutral. As noted in the Addendum to this final rule,
we compared aggregate payments using the FY 1998 DRG relative
weights and wage index to aggregate payments using the FY 1999 DRG
relative weights and wage index. Based on this comparison, we
computed a wage and recalibration budget neutrality factor of
0.999006. In Table I, the combined overall impacts of the effects of
both the DRG reclassifications and recalibration and the updated
wage index are shown in column 6. The 0.0 percent impact for All
Hospitals demonstrates that these changes, in combination with the
budget neutrality factor, are budget neutral.
For the most part, the changes in this column are the sum of the
changes in columns 2, 3, 4, and 5, minus approximately 0.1 percent
attributable to the budget neutrality factor. There may, of course,
be some variation of plus or minus 0.1 percent due to rounding.

H. Impact of MGCRB Reclassifications (Column 7)

Our impact analysis to this point has assumed hospitals are paid
on the basis of their actual geographic location (with the exception
of ongoing policies that provide that certain hospitals receive
payments on bases other than where they are geographically located,
such as hospitals in rural counties that are deemed urban under
section 1886(d)(8)(B) of the Act). The changes in column 7 reflect
the per case payment impact of moving from this baseline to a
simulation incorporating the MGCRB decisions for FY 1999. As noted
below, these decisions affect hospitals' standardized amount and
area wage index assignments. In addition, rural hospitals may be
reclassified for purposes of receiving a higher DSH adjustment.
Beginning in 1998, by February 28 of each year, the MGCRB makes
reclassification determinations that will be effective for the next
fiscal year, which begins on October 1. (In previous years, these
determinations were made by March 30.) The MGCRB may approve a
hospital's reclassification request for the purpose of using the
other area's standardized amount, wage index value, or both. For FYs
1999 through 2001, a hospital may reclassify for purposes of
qualifying for a DSH adjustment or to receive a higher DSH payment.
The FY 1999 final wage index values incorporate all of the
MGCRB's reclassification decisions for FY 1999. The wage index
values also reflect all decisions made by the HCFA Administrator
through the appeals and review process. The overall effect of
geographic reclassification is required by section 1886(d)(8)(D) of
the Act to be budget neutral. Therefore, we applied an adjustment of
0.993433 to ensure that the effects of reclassification are budget
neutral. (See section II.A.4 of the Addendum to this final rule.)
As a group, rural hospitals benefit from geographic
reclassification. Their payments rise 2.7 percent, while payments to
urban hospitals decline 0.4 percent. Hospitals in other urban areas
see a decrease in payments of 0.4 percent, while large urban
hospitals lose 0.5 percent. Among urban hospital groups (that is,
bed size, census division, and special payment status), payments
generally decline.
A positive impact is evident among all rural hospital groups
except the smallest hospitals (under 50 beds), which experience no
payment impact overall. The smallest increase among the rural census
divisions is 1.4 percent for New England. The largest increase is in
rural South Atlantic, with an increase of 3.8 percent.
Among rural hospitals designated as RRCs, 116 hospitals are
reclassified for purposes of the wage index only, leading to the 6.4
percent increase in payments among RRCs overall. This positive
impact on RRCs is also reflected in the category of rural hospitals
with 200 or more beds, which has a 5.3 percent increase in payments.
Rural hospitals reclassified for FY 1998 and FY 1999 experience
a 8.3 percent increase in payments. This may be due to the fact that
these hospitals have the most to gain from reclassification and have
been reclassified for a period of years. Rural hospitals
reclassified for FY 1999 only experience a 5.1 percent increase in
payments, while rural hospitals reclassified for FY 1998 only
experience a 0.5 percent decrease in payments. Urban hospitals
reclassified for FY 1998 but not FY 1999 experience a 0.7 percent
decline in payments overall. Urban hospitals reclassified for FY
1999 but not for FY 1998 experience a 4.6 percent increase in
payments.
The FY 1999 Reclassification rows of Table I show the changes in
payments per case for all FY 1999 reclassified and nonreclassified
hospitals in urban and rural locations for each of the three
reclassification categories (standardized amount only, wage index
only, or both). The table illustrates that the largest impact for
reclassified rural hospitals is for those hospitals reclassified for
both the standardized amount and the wage index. These hospitals
receive a 10.0 percent increase in payments. In addition, rural
hospitals reclassified just for the wage index receive a 6.9 percent
payment increase. The overall impact on reclassified hospitals is to
increase their payments per case by an average of 6.2 percent for FY
1999.
Among the 27 rural hospitals deemed to be urban under section
1886(d)(8)(B) of the Act, payments increase 1.0 percent due to MGCRB
reclassification. This is because, although these hospitals are
treated as being attached to an urban area in our baseline (their
redesignation is ongoing, rather than annual like the MGCRB
reclassifications), they are eligible for MGCRB reclassification.
For FY 1999, one hospital in this category reclassified to a large
urban area.
The reclassification of hospitals primarily affects payment to
nonreclassified hospitals through changes in the wage index and the
geographic reclassification budget neutrality adjustment required by
section 1886(d)(8)(D) of the Act. Among hospitals that are not
reclassified, the overall impact of hospital reclassifications is an
average decrease in payments per case of about 0.4 percent. Urban
nonreclassified hospitals decrease slightly more, experiencing a 0.6
percent decrease (roughly the amount of the budget neutrality
offset).
The number of reclassifications for purposes of the standardized
amount, or for

[[Page 41111]]

both the standardized amount and the wage index, has decreased from
149 in FY 1998 to 141 in FY 1999. The number of wage index only
reclassifications decreased from 284 in FY 1998 to 281 in FY 1999.

I. All Changes (Column 8)

Column 8 compares our estimate of payments per case,
incorporating all changes reflected in this final rule for FY 1999
(including statutory changes), to our estimate of payments per case
in FY 1998. It includes the effects of the 0.5 percent update to the
standardized amounts and the hospital-specific rates for SCHs and
MDHs. It also reflects the 0.3 percentage point difference between
the projected outlier payments in FY 1999 (5.1 percent of total DRG
payments) and the current estimate of the percentage of actual
outlier payments in FY 1998 (5.4 percent), as described in the
introduction to this Appendix and the Addendum to this final rule.
Additional changes affecting the difference between FY 1998 and
FY 1999 payments are the reductions to the IME and DSH adjustments
enacted by the BBA. These changes initially went into effect during
FY 1998 and include additional decreases in payment for each of
several succeeding years. As noted in the introduction to this
impact analysis, for FY 1999, IME is reduced to approximately a 6.5
percent rate of increase, and DSH is reduced by 2 percent from what
hospitals otherwise would receive. We estimate the overall effect of
these statutory changes to be a 0.5 percent reduction in FY 1999
payments relative to FY 1998. For hospitals receiving both IME and
DSH, the impact is estimated to be a 0.9 percent reduction in
payments per case.
Column 8 also includes the impacts of FY 1999 MGCRB
reclassifications compared to the payment impacts of FY 1998
reclassifications. Therefore, when comparing FY 1999 payments to FY
1998, the percent changes due to FY 1999 reclassifications shown in
column 7 need to be offset by the effects of reclassification on
hospitals' FY 1998 payments (column 7 of Table 1, August 29, 1997
final rule with comment period; 62 FR 46119). For example, the
impact of MGCRB reclassifications on rural hospitals' FY 1998
payments was approximately a 2.2 percent increase, offsetting much
of the 2.7 percent increase in column 7 for FY 1999. Therefore, the
net change in FY 1999 payments due to reclassification for rural
hospitals is actually closer to an increase of 0.5 percent relative
to FY 1998. However, last year's analysis contained a somewhat
different set of hospitals, so this might affect the numbers
slightly.
There might also be interactive effects among the various
factors comprising the payment system that we are not able to
isolate. For these reasons, the values in column 8 may not equal the
sum of the changes in columns 1, 6, and 7, plus the other impacts
that we are able to identify.
The overall payment change from FY 1998 to FY 1999 for all
hospitals is a 1.0 percent decrease. This reflects the 0.6 percent
net change in total payments due to the postacute transfer change
for FY 1999 shown in column 1; the 0.5 percent update for FY 1999,
the 0.3 percent lower outlier payments in FY 1999 compared to FY
1998 (5.1 percent compared to 5.4 percent); and the 0.5 percent
reduction due to lower IME and DSH payments.
Hospitals in urban areas experience a 1.3 percent drop in
payments per case compared to FY 1998. Urban hospitals lose 0.9
percent due to the combined effects of the expanded transfer
definition and the DRG and wage index changes. The 0.4 percent
negative impact due to reclassification is offset by an identical
negative impact for FY 1998. The impact of reducing IME and DSH is a
0.5 percent reduction in FY 1999 payments per case. Most of this
negative impact is incurred by hospitals in large urban areas, where
payments are expected to fall 1.7 percent per case compared to 0.7
percent per case for hospitals in other urban areas.
Hospitals in rural areas, meanwhile, experience a 1.3 percent
payment increase. As discussed previously, this is primarily due to
a smaller negative impact due to the expanded transfer definition
(0.4 percent decrease compared to 0.6 percent nationally) and the
positive effect due to the wage index and DRG changes (1.0 percent
increase).
Among census divisions, urban New England displays the largest
negative impact, 2.6 percent. This outcome is primarily related to
the 1.1 percent decrease due to the new wage data. Similarly, urban
East North Central experiences a 2.2 percent drop in payments per
case, due to a 0.9 percent drop due to the combined wage index and
DRG changes. The urban Pacific and the urban West South Central also
experience overall larger payment declines, with 2.0 and 1.6 percent
decreases, respectively. The urban West North Central has the
smallest negative change among urban census divisions (0.1 percent),
stemming primarily from a 1.0 percent increase due to the DRG and
wage index changes. Hospitals in this census division also are less
reliant on IME and DSH funding, and are, therefore, impacted less by
these reductions.
The only rural census division to experience a negative payment
impact is New England (0.3 percent decrease). This appears to result
from a much smaller reclassification effect for rural New England
hospitals in FY 1999. For FY 1998, the impact of MGCRB
reclassification for these hospitals was a 2.1 percent increase (see
62 FR 46119). For FY 1999, the increase is only 1.4 percent. The
largest increases by a rural census division are in the South
Atlantic and the East South Central, with 1.8 and 1.7 percent
increases, respectively. In the South Atlantic, this is primarily
due to a larger FY 1999 benefit from MGCRB reclassifications. For
the East South Central, it is largely due to a 1.3 percent increase
from the FY 1995 wage data.
Among special categories of rural hospitals, RRCs have the
largest increase, 2.2 percent. This carries over to other categories
as well: rural hospitals with between 150 and 200 beds have a 2.5
percent rise in payments (there are 37 RRCs in this category); and
RRCs receiving DSH see a 2.5 percent increase.
The largest negative payment impacts from FY 1998 to FY 1999 are
among hospitals that were reclassified for FY 1998 and are not
reclassified for FY 1999. Overall, these hospitals lose 3.6 percent.
The urban hospitals in this category lose 2.9 percent, while the
rural hospitals lose 5.9 percent. On the other hand, hospitals
reclassified for FY 1999 that were not reclassified for FY 1998
would experience the greatest payment increases: 5.4 percent
overall; 6.3 percent for 155 rural hospitals; and 2.3 percent for 15
urban hospitals.

Table II.--Impact Analysis of Changes for FY 1999 Operating Prospective Payment System
[Payments per case]

Average FY Average FY
Number of 1998 1999
hospitals payment per payment per All changes
case case
(1) (2) \1\ (3) \1\ (4)
----------------------------------------------------------------------------------------------------------------
(BY GEOGRAPHIC LOCATION):
ALL HOSPITALS........................................... 4,975 6,773 6,707 -1.0
URBAN HOSPITALS......................................... 2,810 7,342 7,246 -1.3
LARGE URBAN AREAS....................................... 1,611 7,891 7,758 -1.7
OTHER URBAN AREAS....................................... 1,199 6,589 6,544 -0.7
RURAL AREAS............................................. 2,165 4,460 4,517 1.3
BED SIZE (URBAN):
0-99 BEDS............................................... 704 4,931 4,889 -0.9
100-199 BEDS............................................ 937 6,128 6,056 -1.2
200-299 BEDS............................................ 568 6,934 6,851 -1.2

[[Page 41112]]

300-499 BEDS............................................ 449 7,846 7,738 -1.4
500 OR MORE BEDS........................................ 152 9,743 9,592 -1.6
BED SIZE (RURAL):
0-49 BEDS............................................... 1,137 3,665 3,701 1.0
50-99 BEDS.............................................. 634 4,176 4,207 0.8
100-149 BEDS............................................ 229 4,613 4,662 1.1
150-199 BEDS............................................ 91 4,776 4,895 2.5
200 OR MORE BEDS........................................ 74 5,610 5,704 1.7
URBAN BY CENSUS DIV:
NEW ENGLAND............................................. 152 7,887 7,682 -2.6
MIDDLE ATLANTIC......................................... 425 8,181 8,107 -0.9
SOUTH ATLANTIC.......................................... 414 6,978 6,948 -0.4
EAST NORTH CENTRAL...................................... 476 7,029 6,873 -2.2
EAST SOUTH CENTRAL...................................... 162 6,569 6,524 -0.7
(1) (2) \1\ (3) \1\ (4)
WEST NORTH CENTRAL...................................... 189 7,001 6,996 -0.1
WEST SOUTH CENTRAL...................................... 354 6,830 6,720 -1.6
MOUNTAIN................................................ 129 7,046 6,971 -1.1
PACIFIC................................................. 461 8,409 8,245 -2.0
PUERTO RICO............................................. 48 3,065 3,056 -0.3
RURAL BY CENSUS DIV:
NEW ENGLAND............................................. 53 5,305 5,287 -0.3
MIDDLE ATLANTIC......................................... 80 4,818 4,881 1.3
SOUTH ATLANTIC.......................................... 286 4,610 4,694 1.8
EAST NORTH CENTRAL...................................... 285 4,496 4,553 1.3
EAST SOUTH CENTRAL...................................... 269 4,162 4,235 1.7
WEST NORTH CENTRAL...................................... 500 4,178 4,236 1.4
WEST SOUTH CENTRAL...................................... 342 3,991 4,017 0.7
MOUNTAIN................................................ 204 4,750 4,779 0.6
PACIFIC................................................. 141 5,608 5,647 0.7
PUERTO RICO............................................. 5 2,374 2,370 -0.2
(BY PAYMENT CATEGORIES):
URBAN HOSPITALS......................................... 2,894 7,299 7,207 -1.3
LARGE URBAN AREAS....................................... 1,698 7,798 7,670 -1.6
OTHER URBAN AREAS....................................... 1,196 6,570 6,530 -0.6
RURAL AREAS............................................. 2,081 4,444 4,494 1.1
TEACHING STATUS:
NON-TEACHING............................................ 3,880 5,468 5,450 -0.3
FEWER THAN 100 RESIDENTS................................ 854 7,228 7,145 -1.1
100 OR MORE RESIDENTS................................... 241 10,974 10,755 -2.0
DISPROPORTIONATE SHARE HOSPITALS (DSH):
NON-DSH................................................. 3,089 5,837 5,799 -0.6
URBAN DSH:
100 BEDS OR MORE.................................... 1,404 7,951 7,843 -1.4
FEWER THAN 100 BEDS................................. 88 5,068 5,007 -1.2
(1) (2) \1\ (3) \1\ (4)
RURAL DSH:
SOLE COMMUNITY (SCH)................................ 162 4,211 4,251 1.0
REFERRAL CENTERS (RRC).............................. 53 5,294 5,428 2.5
OTHER RURAL DSH HOSP:
100 BEDS OR MORE.................................... 60 4,134 4,162 0.7
FEWER THAN 100 BEDS................................. 119 3,553 3,600 1.3
URBAN TEACHING AND DSH:
BOTH TEACHING AND DSH................................... 709 8,975 8,828 -1.6
TEACHING AND NO DSH..................................... 331 7,384 7,291 -1.3
NO TEACHING AND DSH..................................... 783 6,318 6,271 -0.7
NO TEACHING AND NO DSH.................................. 1,071 5,664 5,612 -0.9
SPECIAL UPDATE HOSPITALS (UNDER SEC. 4401(b) OF PUBLIC
LAW 105-33............................................. 344 5,276 5,236 -0.8
RURAL HOSPITAL TYPES:
NONSPECIAL STATUS
HOSPITALS............................................... 888 3,920 3,947 0.7
RRC..................................................... 145 5,170 5,286 2.2
SCH..................................................... 637 4,484 4,502 0.4

[[Page 41113]]

MDH..................................................... 352 3,715 3,753 1.0
SCH AND RRC............................................. 59 5,339 5,402 1.2
TYPE OF OWNERSHIP:
VOLUNTARY............................................... 2,858 6,956 6,884 -1.0
PROPRIETARY............................................. 671 6,160 6,096 -1.0
GOVERNMENT.............................................. 1,331 6,243 6,209 -0.5
UNKNOWN................................................. 115 7,894 7,811 -1.0
MEDICARE UTILIZATION AS A PERCENT OF INPATIENT DAYS:
0-25.................................................... 247 8,931 8,755 -2.0
25-50................................................... 1,264 8,254 8,127 -1.5
50-65................................................... 1,978 6,170 6,134 -0.6
OVER 65................................................. 1,371 5,253 5,241 -0.2
UNKNOWN................................................. 115 7,894 7,811 -1.0
HOSPITALS RECLASSIFIED BY THE MEDICARE GEOGRAPHIC REVIEW
BOARD:
RECLASSIFICATION STATUS DURING FY98 AND FY99:
RECLASSIFIED DURING BOTH FY98 AND FY99.............. 315 5,971 5,944 -0.5
URBAN........................................... 72 7,376 7,302 -1.0
RURAL........................................... 243 5,258 5,254 -0.1
RECLASSIFIED DURING FY99 ONLY....................... 170 5,149 5,427 5.4
URBAN........................................... 15 8,019 8,207 2.3
RURAL........................................... 155 4,668 4,960 6.3
RECLASSIFIED DURING FY98 ONLY....................... 126 6,310 6,084 -3.6
URBAN........................................... 53 7,218 7,011 -2.9
RURAL........................................... 73 4,453 4,188 -5.9
FY 99 RECLASSIFICATIONS:
ALL RECLASSIFIED HOSP................................... 485 5,683 5,763 1.4
STAND. AMT. ONLY.................................... 94 5,940 5,899 -0.7
WAGE INDEX ONLY..................................... 281 6,007 5,935 -1.2
BOTH................................................ 47 6,407 6,264 -2.2
NONRECLASS.......................................... 4,526 6,851 6,786 -0.9
ALL URBAN RECLASS....................................... 87 7,497 7,472 -0.3
STAND. AMT. ONLY.................................... 26 5,630 5,635 0.1
WAGE INDEX ONLY..................................... 40 8,874 8,872 0.0
BOTH................................................ 21 6,810 6,725 -1.3
NONRECLASS.......................................... 2,696 7,348 7,249 -1.3
ALL RURAL RECLASS....................................... 398 5,016 5,134 2.4
STAND. AMT. ONLY.................................... 55 4,374 4,494 2.7
WAGE INDEX ONLY..................................... 314 5,083 5,194 2.2
BOTH................................................ 29 5,039 5,231 3.8
NONRECLASS.......................................... 1,767 4,109 4,127 0.4
OTHER RECLASSIFIED HOSPITALS (SECTION 1886(d)(8)(B)).... 27 4,765 4,714 -1.1
----------------------------------------------------------------------------------------------------------------
\1\ These payment amounts per case do not reflect any estimates of annual case-mix increase.

Table II presents the projected impact on payments per case of
the final changes for FY 1999 for urban and rural hospitals and for
the different categories of hospitals shown in Table I. It compares
the projected payments per case for FY 1999 with the average
estimated per case payments for FY 1998, as calculated under our
models. Thus, this table presents, in terms of the average dollar
amounts paid per discharge, the combined effects of the changes
presented in Table I. The percentage changes shown in the last
column of Table II equal the percentage changes in average payments
from column 8 of Table I.

VIII. Impact of Changes in the Capital Prospective Payment System

A. General Considerations

We now have data that were unavailable in previous impact
analyses for the capital prospective payment system. Specifically,
we have cost report data available for the fourth year of the
capital prospective payment system (cost reports beginning in FY
1995) available through the March 1998 update of the Health Care
Provider Cost Report Information System (HCRIS). We also have
updated information on the projected aggregate amount of obligated
capital approved by the fiscal intermediaries. However, our impact
analysis of payment changes for capital-related costs is still
limited by the lack of hospital-specific data on several items.
These are the hospital's projected new capital costs for each year,
its projected old capital costs for each year, and the actual
amounts of obligated capital that will be put in use for patient
care and recognized as Medicare old capital costs in each year. The
lack of this information affects our impact analysis in the
following ways:
Major investment in hospital capital assets (for
example in building and major fixed equipment) occurs at irregular
intervals. As a result, there can be significant variation in the
growth rates of Medicare capital-related costs per case among
hospitals. We do not have the necessary hospital-specific budget
data to project the hospital capital growth rate for individual
hospitals.
Moreover, our policy of recognizing certain obligated
capital as old capital makes it difficult to project future capital-
related costs for individual hospitals. Under Sec. 412.302(c), a
hospital is required to notify

[[Page 41114]]

its intermediary that it has obligated capital by the later of
October 1, 1992, or 90 days after the beginning of the hospital's
first cost reporting period under the capital prospective payment
system. The intermediary must then notify the hospital of its
determination whether the criteria for recognition of obligated
capital have been met by the later of the end of the hospital's
first cost reporting period subject to the capital prospective
payment system or 9 months after the receipt of the hospital's
notification. The amount that is recognized as old capital is
limited to the lesser of the actual allowable costs when the asset
is put in use for patient care or the estimated costs of the capital
expenditure at the time it was obligated. We have substantial
information regarding intermediary determinations of projected
aggregate obligated capital amounts. However, we still do not know
when these projects will actually be put into use for patient care,
the actual amount that will be recognized as obligated capital when
the project is put into use, or the Medicare share of the recognized
costs. Therefore, we do not know actual obligated capital
commitments for purposes of the FY 1999 capital cost projections. In
Appendix B of this final rule, we discuss the assumptions and
computations that we employ to generate the amount of obligated
capital commitments for use in the FY 1999 capital cost projections.
In Table III of this section, we present the redistributive
effects that are expected to occur between "hold-harmless"
hospitals and "fully prospective" hospitals in FY 1999. In
addition, we have integrated sufficient hospital-specific
information into our actuarial model to project the impact of the
final FY 1999 capital payment policies by the standard prospective
payment system hospital groupings. While we now have actual
information on the effects of the transition payment methodology and
interim payments under the capital prospective payment system and
cost report data for most hospitals, we still need to randomly
generate numbers for the change in old capital costs, new capital
costs for each year, and obligated amounts that will be put in use
for patient care services and recognized as old capital each year.
We continue to be unable to predict accurately FY 1999 capital costs
for individual hospitals, but with the most recent data hospitals'
experience under the capital prospective payment system, there is
adequate information to estimate the aggregate impact on most
hospital groupings.

B. Projected Impact Based on the Final FY 1999 Actuarial Model

1. Assumptions

In this impact analysis, we model dynamically the impact of the
capital prospective payment system from FY 1998 to FY 1999 using a
capital cost model. The FY 1999 model, as described in Appendix B of
this final rule, integrates actual data from individual hospitals
with randomly generated capital cost amounts. We have capital cost
data from cost reports beginning in FY 1989 through FY 1995 as
reported on the March 1998 update of HCRIS, interim payment data for
hospitals already receiving capital prospective payments through
PRICER, and data reported by the intermediaries that include the
hospital-specific rate determinations that have been made through
April 1, 1998 in the provider-specific file. We used these data to
determine the final FY 1999 capital rates. However, we do not have
individual hospital data on old capital changes, new capital
formation, and actual obligated capital costs. We have data on costs
for capital in use in FY 1995, and we age that capital by a formula
described in Appendix B. Therefore, we need to randomly generate
only new capital acquisitions for any year after FY 1995. All
Federal rate payment parameters are assigned to the applicable
hospital.
For purposes of this impact analysis, the FY 1999 actuarial
model includes the following assumptions:
Medicare inpatient capital costs per discharge will
change at the following rates during these periods:

Average Percentage Change in Capital Costs Per Discharge
------------------------------------------------------------------------
Percentage
Fiscal year change
------------------------------------------------------------------------
1997........................................................ -3.02
1998........................................................ -0.46
1999........................................................ 0.61
------------------------------------------------------------------------

We have reduced our estimate of the growth in Medicare costs per
discharge from the August 29, 1997 final rule with comment period to
this final rule based on later cost data. We are now estimating a
much smaller increase in costs per discharge.
The Medicare case-mix index will increase by 1.0
percent in FY 1998 and FY 1999.
The Federal capital rate and hospital-specific rate
were updated in FY 1996 by an analytical framework that considers
changes in the prices associated with capital-related costs, and
adjustments to account for forecast error, changes in the case-mix
index, allowable changes in intensity, and other factors. The final
FY 1999 update for inflation is 0.10 percent (see section IV of the
Addendum).

2. Results

We have used the actuarial model to estimate the change in
payment for capital-related costs from FY 1998 to FY 1999. Table III
shows the effect of the capital prospective payment system on low
capital cost hospitals and high capital cost hospitals. We consider
a hospital to be a low capital cost hospital if, based on a
comparison of its initial hospital-specific rate and the applicable
Federal rate, it will be paid under the fully prospective payment
methodology. A high capital cost hospital is a hospital that, based
on its initial hospital-specific rate and the applicable Federal
rate, will be paid under the hold-harmless payment methodology.
Based on our actuarial model, the breakdown of hospitals is as
follows:

Capital Transition Payment Methodology for FY 1999
----------------------------------------------------------------------------------------------------------------
Percent of Percent of
Type of hospital Percent of Percent of capital capital
hospitals discharges costs payments
----------------------------------------------------------------------------------------------------------------
Low Cost Hospital........................................... 66 62 53 58
High Cost Hospital.......................................... 34 38 47 42
----------------------------------------------------------------------------------------------------------------

A low capital cost hospital may request to have its hospital-
specific rate redetermined based on old capital costs in the current
year, through the later of the hospital's cost reporting period
beginning in FY 1994 or the first cost reporting period beginning
after obligated capital comes into use (within the limits
established in Sec. 412.302(e) for putting obligated capital in to
use for patient care). If the redetermined hospital-specific rate is
greater than the adjusted Federal rate, these hospitals will be paid
under the hold-harmless payment methodology. Regardless of whether
the hospital became a hold-harmless payment hospital as a result of
a redetermination, we continue to show these hospitals as low
capital cost hospitals in Table III.
Assuming no behavioral changes in capital expenditures, Table
III displays the percentage change in payments from FY 1998 to FY
1999 using the above described actuarial model. With the final
Federal rate, we estimate aggregate Medicare capital payments will
increase by 2.78 percent in FY 1999.

[[Page 41115]]

Table III.--Impact of Proposed Changes for FY 1999 on Payments per Discharge
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent
Number of Adjusted Average Hospital Hold Exceptions Total change
hospitals Discharges Federal Federal specific harmless payment payment over FY
payment percent payment payment 1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 1998 Payments per Discharge:
Low Cost Hospitals............................... 3,258 6,777,970 $458.00 72.42 $86.30 $3.85 $8.89 $557.04 ........
Fully Prospective............................ 3,024 6,149,617 441.23 70.00 95.12 ........ 7.61 543.95 ........
100% Federal Rate............................ 204 554,222 650.05 100.00 ........ 17.77 667.82 ........
Hold Harmless................................ 30 74,130 413.10 61.17 ........ 351.63 49.36 814.09 ........
High Cost Hospitals.............................. 1,643 4,203,327 635.31 95.72 ........ 37.11 15.30 687.72 ........
100% Federal Rate............................ 1,415 3,748,353 660.94 100.00 ........ ........ 10.62 671.56 ........
Hold Harmless................................ 228 454,974 424.09 61.78 ........ 342.86 53.86 820.81 ........
--------------------------------------------------------------------------------------------------
Total Hospitals.......................... 4,901 10,981,297 525.87 81.61 53.27 16.58 11.35 607.06 ........
FY 1999 Payments per Discharge:
Low Cost Hospitals............................... 3,258 6,626,732 527.01 81.53 58.33 3.13 9.57 598.04 7.36
Fully Prospective............................ 3,024 6,012,484 515.37 80.00 64.29 ........ 8.28 587.94 8.09
100% Federal Rate............................ 207 545,059 663.77 100.00 ........ ........ 17.97 681.75 2.09
Hold Harmless................................ 27 69,188 460.62 66.21 ........ 300.02 55.73 816.37 0.28
High Cost Hospitals.............................. 1,643 4,107,081 656.33 96.98 ........ 26.89 20.02 703.24 2.26
100% Federal Rate............................ 1,438 3,730,929 674.49 100.00 ........ ........ 14.16 688.65 2.54
Hold Harmless................................ 205 376,151 476.26 68.09 ........ 293.59 78.14 847.99 3.31
--------------------------------------------------------------------------------------------------
Total Hospitals.......................... 4,901 10,733,812 576.49 87.61 36.01 12.22 13.57 638.29 5.15
--------------------------------------------------------------------------------------------------------------------------------------------------------

We project that low capital cost hospitals paid under the fully
prospective payment methodology will experience an average increase
in payments per case of 7.36 percent, and high capital cost
hospitals will experience an average increase of 2.26 percent.
For hospitals paid under the fully prospective payment
methodology, the Federal rate payment percentage will increase from
70 percent to 80 percent and the hospital-specific rate payment
percentage will decrease from 30 to 20 percent in FY 1999. The
Federal rate payment percentage for hospitals paid under the hold-
harmless payment methodology is based on the hospital's ratio of new
capital costs to total capital costs. The average Federal rate
payment percentage for high cost hospitals receiving a hold-harmless
payment for old capital will increase from 61.78 percent to 68.09
percent. We estimate the percentage of hold-harmless hospitals paid
based on 100 percent of the Federal rate will increase from 86.3
percent to 87.6 percent. We estimate that high cost hold-harmless
hospitals will experience an increase in payments of 3.31 per cent
from FY 1998 to FY 1999. This is different from our projection in
the proposed rule, which projected a decrease in payments. This
change is a result of lower projected capital costs, which means
some hospitals who otherwise would have been paid hold-harmless will
now receive 100 percent of the federal rate. Since these are the
lowest cost hospitals in the hold-harmless grouping, removing these
hospitals from the mix increased the average projected hold-harmless
payment and, consequently, the average projected total payment.
We expect that the average hospital-specific rate payment per
discharge will decrease from $53.27 in FY 1998 to $36.01 in FY 1999.
This is partly due to the decrease in the hospital-specific rate
payment percentage from 30 percent in FY 1998 to 20 percent in FY
1999.
We are making no changes in our exceptions policies for FY 1999.
As a result, the minimum payment levels would be:
90 percent for sole community hospitals;
80 percent for urban hospitals with 100 or more beds
and a disproportionate share patient percentage of 20.2 percent or
more; or
70 percent for all other hospitals.
We estimate that exceptions payments will be 2.13 percent of the
total capital payments in FY 1999. Since the August 29, 1997 final
rule with comment period, we have reduced our estimates of capital
cost per case based on more recent data. Although we still estimate
that more hospitals will receive exceptions payment in FY 1999 than
in FY 1998 fewer hospitals will have costs over the exceptions
threshold then we previously estimated. The projected distribution
of the eligible hospitals and exception payments is shown in the
table below:

Estimated FY 1999 Exceptions Payments
------------------------------------------------------------------------
Percent of
Type of hospital Number of exceptions
hospitals payments
------------------------------------------------------------------------
Low Capital Cost.............................. 185 44
High Capital Cost............................. 215 56
-------------------------
Total..................................... 400 100
------------------------------------------------------------------------

C. Cross-Sectional Comparison of Capital Prospective Payment
Methodologies

Table IV presents a cross-sectional summary of hospital
groupings by capital prospective payment methodology. This
distribution is generated by our actuarial model.

Table IV.--Distribution by Method of Payment (Hold-Harmless/Fully Prospective) of Hospitals Receiving Capital
Payments

(2) Hold-harmless (3)
(1) Total -------------------------- Percentage
No. of Percentage Percentage paid fully
Hospitals paid hold- paid fully prospective
harmless federal rate
(A) (B)
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals........................................... 4,901 4.7 33.6 61.7
Large urban areas (populations over 1 million).......... 1,574 5.4 41.1 53.5
Other urban areas (populations of 1 million of fewer)....... 1,178 5.4 41.6 53.0

[[Page 41116]]

Rural areas............................................. 2,149 3.9 23.6 72.5
Urban hospitals......................................... 2,752 5.4 41.3 53.3
0-99 beds........................................... 656 5.3 34.8 59.9
100-199 beds........................................ 929 7.3 47.0 45.6
200-299 beds........................................ 567 5.5 41.4 53.1
300-499 beds........................................ 448 1.8 40.8 57.4
500 or more beds.................................... 152 4.6 35.5 59.9
Rural hospitals......................................... 2,149 3.9 23.6 72.5
0-49 beds........................................... 1,124 3.6 15.7 80.6
50-99 beds.......................................... 632 4.6 28.5 66.9
100-149 beds........................................ 229 3.1 39.7 57.2
150-199 beds........................................ 90 5.6 26.7 67.8
200 or more beds.................................... 74 1.4 48.6 50.0
By Region:
Urban by Region......................................... 2,752 5.4 41.3 53.3
New England......................................... 151 0.0 27.8 72.2
Middle Atlantic..................................... 421 5.0 33.3 61.8
South Atlantic...................................... 409 5.1 53.8 41.1
East North Central.................................. 472 4.7 31.4 64.0
East South Central.................................. 157 7.0 52.2 40.8
West North Central.................................. 183 6.6 36.1 57.4
West South Central.................................. 334 12.0 57.2 30.8
Mountain............................................ 125 4.8 52.0 43.2
Pacific............................................. 452 3.3 37.6 59.1
Puerto Rico......................................... 48 2.1 27.1 70.8
Rural by Region......................................... 2,149 3.9 23.6 72.5
New England......................................... 53 0.0 22.6 77.4
Middle Atlantic..................................... 79 5.1 24.1 70.9
South Atlantic...................................... 282 2.5 33.0 64.5
East North Central.................................. 283 3.2 19.1 77.7
East South Central.................................. 267 0.7 35.2 64.0
West North Central.................................. 498 3.4 16.3 80.3
West South Central.................................. 339 3.5 28.0 68.4
Mountain............................................ 203 11.3 14.3 74.4
Pacific............................................. 140 6.4 22.1 71.4
Large urban areas (populations over 1 million).......... 1,661 5.5 40.9 53.6
Other urban areas (populations of 1 million of fewer)... 1,175 5.1 41.8 53.1
Rural areas............................................. 2,065 3.9 23.0 73.1
Teaching Status:
Non-teaching........................................ 3,809 4.8 33.1 62.1
Fewer than 100 Residents............................ 852 4.9 35.7 59.4
100 or more Residents............................... 240 2.9 32.9 64.2
Disproportionate share hospitals (DSH):
Non-DSH............................................. 3,030 5.1 29.2 65.6
Urban DSH:
100 or more beds................................ 1,398 4.6 44.1 51.3
Less than 100 beds.............................. 82 2.4 26.8 70.7
Rural DSH:
Sole Community (SCH/EACH)....................... 162 4.3 22.8 72.8
Referral Center (RRC/EACH)...................... 53 3.8 49.1 47.2
Other Rural:
100 or more beds............................ 60 1.7 40.0 58.3
Less than 100 beds.......................... 116 0.0 28.4 71.6
Urban teaching and DSH:.............................
Both teaching and DSH............................... 707 3.8 36.8 59.4
Teaching and no DSH................................. 330 6.1 32.1 61.8
No teaching and DSH................................. 773 5.0 49.0 45.9
No teaching and no DSH.............................. 1,026 6.3 41.5 52.1
Rural Hospital Types:
Non special status hospitals........................ 875 1.7 24.2 74.1
RRC/EACH............................................ 145 1.4 39.3 59.3
SCH/EACH............................................ 636 8.8 19.5 71.7
Medicare-dependent hospitals (MDH).................. 350 0.9 18.0 81.1

[[Page 41117]]

SCH, RRC and EACH................................... 59 8.5 30.5 61.0
Type of Ownership:
Voluntary........................................... 2,848 4.7 33.1 62.2
Proprietary......................................... 658 8.2 60.2 31.6
Government.......................................... 1,329 3.2 21.1 75.6
Medicare Utilization as a Percent of Inpatient Days:
0-25................................................ 237 3.8 32.1 64.1

25-50............................................... 1,259 5.3 41.5 53.1
50-65............................................... 1,972 5.3 33.4 61.4
Over 65............................................. 1,367 3.7 26.5 69.8
----------------------------------------------------------------------------------------------------------------

As we explain in Appendix B, we were not able to determine a
hospital-specific rate for 74 of the 4,975 hospitals in our
database. Consequently, the payment methodology distribution is
based on 4,901 hospitals. These data should be fully representative
of the payment methodologies that will be applicable to hospitals.
The cross-sectional distribution of hospital by payment
methodology is presented by: (1) Geographic location, (2) region,
and (3) payment classification. This provides an indication of the
percentage of hospitals within a particular hospital grouping that
will be paid under the fully prospective payment methodology and the
hold-harmless payment methodology.
The percentage of hospitals paid fully Federal (100 percent of
the Federal rate) as hold-harmless hospitals is expected to increase
to 33.6 percent in FY 1999. We note that the number of hospitals
paid fully Federal as hold-harmless hospitals has not increased as
quickly as we predicted in the August 29, 1997 final rule with
comment period because of revised estimates.
Table IV indicates that 61.7 percent of hospitals will be paid
under the fully prospective payment methodology. (This figure,
unlike the figure of 66 percent for low cost capital hospitals in
the previous section, takes account of the effects of
redeterminations. In other words, this figure does not include low
cost hospitals that, following a hospital-specific rate
redetermination, are now paid under the hold-harmless methodology.)
As expected, a relatively higher percentage of rural and
governmental hospitals (72.5 percent and 75.6 percent, respectively
by payment classification) are being paid under the fully
prospective methodology. This is a reflection of their lower than
average capital costs per case. In contrast, only 31.6 percent of
proprietary hospitals are being paid under the fully prospective
methodology. This is a reflection of their higher than average
capital costs per case. (We found at the time of the August 30, 1991
final rule (56 FR 43430) that 62.7 percent of proprietary hospitals
had a capital cost per case above the national average cost per
case.)

D. Cross-Sectional Analysis of Changes in Aggregate Payments

We used our FY 1999 actuarial model to estimate the potential
impact of our final changes for FY 1999 on total capital payments
per case, using a universe of 4,901 hospitals. The individual
hospital payment parameters are taken from the best available data,
including: the April 1, 1998 update to the provider-specific file,
cost report data, and audit information supplied by intermediaries.
In Table V we present the results of the cross-sectional analysis
using the results of our actuarial model and the aggregate impact of
the FY 1999 payment policies. Columns 3 and 4 show estimates of
payments per case under our model for FY 1998 and FY 1999. Column 5
shows the total percentage change in payments from FY 1998 to FY
1999. Column 6 presents the percentage change in payments that can
be attributed to Federal rate changes alone.
Federal rate changes represented in Column 6 include the 1.8
percent increase in the Federal rate, a 1.0 percent increase in case
mix, changes in the adjustments to the Federal rate (for example,
the effect of the new hospital wage index on the geographic
adjustment factor), and reclassifications by the MGCRB. Column 5
includes the effects of the Federal rate changes represented in
Column 6. Column 5 also reflects the effects of all other changes,
including: the change from 70 percent to 80 percent in the portion
of the Federal rate for fully prospective hospitals, the hospital-
specific rate update, changes in the proportion of new to total
capital for hold-harmless hospitals, changes in old capital (for
example, obligated capital put in use), hospital-specific rate
redeterminations, and exceptions. The comparisons are provided by:
(1) Geographic location, (2) region, and (3) payment classification.
The simulation results show that, on average, capital payments
per case can be expected to increase 5.1 percent in FY 1999. The
results show that the effect of the Federal rate changes alone is to
increase payments by 1.8 percent. In addition to the increase
attributable to the Federal rate changes, a 3.3 percent increase is
attributable to the effects of all other changes.
Our comparison by geographic location shows that urban and rural
hospitals will experience slightly different rates of increase in
capital payments per case (4.9 percent and 6.7 percent,
respectively). This difference is due to the lower rate of increase
for urban hospitals relative to rural hospitals (1.6 percent and 3.4
percent, respectively) from the Federal rate changes alone. Urban
hospitals will gain approximately the same as rural hospitals (3.3
percent for both) from the effects of all other changes.
All regions are estimated to receive increases in total capital
payments per case, partly due to the increased share of payments
that are based on the Federal rate (from 70 to 80 percent). Changes
by region vary from a low of 4.0 percent increase (West South
Central urban region) to a high of 8.6 percent increase (Middle
Atlantinc Rural Region).
By type of ownership, government hospitals are projected to have
the largest rate of increase (6.6 percent, 2.2 percent due to
Federal rate changes and 4.4 percent from the effects of all other
changes). Payments to voluntary hospitals will increase 5.2 percent
(a 1.8 percent increase due to Federal rate changes and a 3.4
percent increase from the effects of all other changes) and payments
to proprietary hospitals will increase 3.1 percent (a 1.5 percent
increase due to Federal rate changes and a 1.6 percent increase from
the effects of all other changes).
Section 1886(d)(10) of the Act established the MGCRB. Hospitals
may apply for reclassification for purposes of the standardized
amount, wage index, or both and for purposes of DSH, for FY 1999-
2001. Although the Federal capital rate is not affected, a
hospital's geographic classification for purposes of the operating
standardized amount does affect a hospital's capital payments as a
result of the large urban adjustment factor and the disproportionate
share adjustment for urban hospitals with 100 or more beds.
Reclassification for wage index purposes affects the geographic
adjustment factor since that factor is constructed from the hospital
wage index.

[[Page 41118]]

To present the effects of the hospitals being reclassified for
FY 1999 compared to the effects of reclassification for FY 1998, we
show the average payment percentage increase for hospitals
reclassified in each fiscal year and in total. For FY 1999
reclassifications, we indicate those hospitals reclassified for
standardized amount purposes only, for wage index purposes only, and
for both purposes. The reclassified groups are compared to all other
nonreclassified hospitals. These categories are further identified
by urban and rural designation.
Hospitals reclassified for FY 1999 as a whole are projected to
experience a 7.1 percent increase in payments (a 3.8 percent
increase attributable to Federal rate changes and a 3.3 percent
increase attributable to the effects of all other changes). Payments
to nonreclassified hospitals will increase slightly less (6.2
percent) than reclassified hospitals (7.1 percent) overall. Payments
to nonreclassified hospitals will increase less than reclassified
hospitals from the Federal rate changes (1.9 percent compared to 3.8
percent), but they will gain about the same from the effects of all
other changes (3.3 percent for both).

Table V.--Comparison of Total Payments Per Case
[FY 1998 Payments Compared to FY 1999 Payments]
----------------------------------------------------------------------------------------------------------------
Portion
Number of Average FY Average FY attributable
hospitals 1998 pay- 1999 pay- All changes to Federal
ments/case ments/case rate change
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals............................. 4,901 607 638 5.1 1.8
Large urban areas (populations over 1
million)................................. 1,574 700 733 4.7 1.4
Other urban areas (populations of 1
million or fewer)........................ 1,178 596 628 5.3 1.9
Rural areas............................... 2,149 406 433 6.7 3.4
Urban hospitals........................... 2,752 656 688 4.9 1.6
0-99 beds............................. 656 482 502 4.3 1.5
100-199 beds.......................... 929 581 606 4.4 1.5
200-299 beds.......................... 567 626 655 4.8 1.6
300-499 beds.......................... 448 682 718 5.4 1.6
500 or more beds...................... 152 830 872 5.1 1.6
Rural hospitals........................... 2,149 406 433 6.7 3.4
0-49 beds............................. 1,124 323 346 7.2 3.0
50-99 beds............................ 632 389 413 6.2 2.8
100-149 beds.......................... 229 423 450 6.4 3.2
150-199 beds.......................... 90 437 468 7.2 4.2
200 or more beds...................... 74 499 534 7.0 4.1
By Region:
Urban by Region........................... 2,752 656 688 4.9 1.6
New England........................... 151 663 700 5.7 0.9
Middle Atlantic....................... 421 711 747 5.1 2.0
South Atlantic........................ 409 642 674 5.0 2.3
East North Central.................... 472 615 646 4.9 0.9
East South Central.................... 157 602 626 4.0 1.4
West North Central.................... 183 638 677 6.1 2.6
West South Central.................... 334 664 691 4.0 1.2
Mountain.............................. 125 684 715 4.6 1.5
Pacific............................... 452 717 752 4.9 1.1
Puerto Rico........................... 48 272 286 5.5 2.6
Rural by Region........................... 2,149 406 433 6.7 3.4
New England........................... 53 474 505 6.3 2.4
Middle Atlantic....................... 79 427 463 8.6 3.9
South Atlantic........................ 282 437 467 7.0 3.7
East North Central.................... 283 402 431 7.2 3.5
East South Central.................... 267 376 400 6.3 3.5
West North Central.................... 498 387 410 6.0 3.4
West South Central.................... 339 372 394 6.1 2.8
Mountain.............................. 203 421 442 4.9 2.3
Pacific............................... 140 466 501 7.3 3.0
By Payment Classification:
All hospitals............................. 4,901 607 638 5.1 1.8
Large urban areas (populations over 1
million)................................. 1,661 693 725 4.7 1.4
Other urban areas (populations of 1
million or fewer)........................ 1,175 594 626 5.4 2.0
Rural areas............................... 2,065 404 430 6.5 3.2
Teaching Status:
Non-teaching.......................... 3,809 513 538 4.9 2.0
Fewer than 100 Residents.............. 852 643 678 5.5 1.7
100 or more Residents................. 240 897 944 5.2 1.5
Urban DSH:
100 or more beds.................. 1,398 690 725 5.0 1.6
Less than 100 beds................ 82 457 475 3.9 1.0
Rural DSH:
Sole Community (SCH/EACH)......... 162 362 379 4.7 2.7
Referral Center (RRC/EACH)........ 53 472 507 7.4 4.6
Other Rural:
100 or more beds.................. 60 378 397 5.1 2.8
Less than 100 beds................ 116 318 339 6.5 3.4

[[Page 41119]]

Urban teaching and DSH:
Both teaching and DSH................. 707 759 799 5.2 1.6
Teaching and no DSH................... 330 662 701 5.8 1.6
No teaching and DSH................... 773 580 607 4.7 1.8
No teaching and no DSH................ 1,026 554 576 3.9 1.6
Rural Hospital Types:
Nonspecial status hospitals........... 875 368 391 6.1 2.7
RRC/EACH.............................. 145 469 503 7.3 4.3
SCH/EACH.............................. 636 390 412 5.9 2.3
Medicare-dependent hospitals (MDH).... 350 323 352 9.0 3.7
SCH, RRC and EACH..................... 59 499 526 5.5 3.2
Hospitals Reclassified by the Medicare
Geographic Classification:
Review Board:
Reclassification Status During
FY98 and FY99:
Reclassified During Both FY98
and FY99..................... 315 541 568 5.0 1.9
Reclassified During FY99 Only..... 170 466 521 11.8 7.8
Reclassified During FY98 Only..... 106 598 607 1.6 -1.4
FY99 Reclassifications:
All Reclassified Hospitals........ 485 515 551 7.1 3.8
All Nonreclassified Hospitals..... 4,453 613 645 5.2 1.9
All Urban Reclassified Hospitals.. 87 651 695 6.7 2.3
Urban Nonreclassified Hospitals... 2,638 657 689 4.9 1.6
All Reclassified Rural Hospitals.. 398 464 498 7.4 4.5
Rural Nonreclassified Hospitals... 1,751 369 392 6.1 2.4
Other Reclassified Hospitals (Section
1886(D)(8)(B))....................... 27 470 492 4.6 1.3
Type of Ownership:
Voluntary............................. 2,848 621 654 5.2 1.8
Proprietary........................... 658 612 631 3.1 1.5
Government............................ 1,329 530 566 6.6 2.2
Medicare Utilization as a Percent of
Inpatient Days:
0-25.................................. 237 687 736 7.2 1.2
25-50................................. 1,259 726 761 4.7 1.5
50-65................................. 1,972 561 591 5.3 2.0
----------------------------------------------------------------------------------------------------------------

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

Under section 1886(g)(1)(A) of the Act, we set capital
prospective payment rates for FY 1992 through FY 1995 so that
aggregate prospective payments for capital costs were projected to
be 10 percent lower than the amount that would have been payable on
a reasonable cost basis for capital-related costs in that year. To
implement this requirement, we developed the capital acquisition
model to determine the budget neutrality adjustment factor. Even
though the budget neutrality requirement expired effective with FY
1996, we must continue to determine the recalibration and geographic
reclassification budget neutrality adjustment factor, and the
reduction in the Federal and hospital-specific rates for exceptions
payments. To determine these factors, we must continue to project
capital costs and payments.
We have used the capital acquisition model since the start of
prospective payments for capital costs. We now have 4 years of cost
reports under the capital prospective payment system. For FY 1998,
we developed a new capital cost model to replace the capital
acquisition model. This revised model makes use of the data from
these cost reports.
The following cost reports are used in the capital cost model
for this final rule: the March 31, 1998 update of the cost reports
for PPS-IX (cost reporting periods beginning in FY 1992), PPS-X
(cost reporting periods beginning in FY 1993), PPS-XI (cost
reporting periods beginning in FY 1994), and PPS-XII (cost reporting
periods beginning in FY 1995). In addition, to model payments, we
use the April 1, 1998 update of the provider-specific file, and the
March 1994 update of the intermediary audit file.
Since hospitals under alternative payment system waivers (that
is, hospitals in Maryland) are currently excluded from the capital
prospective payment system, we excluded these hospitals from our
model.
We developed FY 1992 through FY 1998 hospital-specific rates
using the provider-specific file and the intermediary audit file.
(We used the cumulative provider-specific file, which includes all
updates to each hospital's records, and chose the latest record for
each fiscal year.) We checked the consistency between the provider-
specific file and the intermediary audit file. We ensured that
increases in the hospital-specific rates were at least as large as
the published updates (increases) for the hospital-specific rates
each year. We were able to match hospitals to the files as shown in
the following table:

------------------------------------------------------------------------
Number of
Source hospitals
------------------------------------------------------------------------
Provider-Specific File Only................................ 118
Provider-Specific and Audit File........................... 4,857
------------
Total.................................................. 4,975
------------------------------------------------------------------------

Ninety-seven of the 4,975 hospitals had unusable or missing data
or had no cost reports available. We determined from the cost
reports that 23 of the 97 hospitals were paid under the hold-
harmless methodology. Since the hospital-specific amount is not used
to determine payments for these hospitals, we were able to include
these 23 hospitals in the analysis. We used the cost report data of
4,901 hospitals for the analysis. Seventy-four hospitals could not
be used in the analysis because of insufficient information. These
hospitals account for approximately 0.3 percent of admissions,
therefore, any effects from the elimination of their cost report
data should be minimal.
We analyzed changes in capital-related costs (depreciation,
interest, rent, leases, insurance, and taxes) reported in the cost
reports. We found a wide variance among hospitals in the growth of
these costs. For hospitals with more than 100 beds, the distribution
and mean of these cost increases were different for large changes in
bed-size

[[Page 41120]]

(greater than +20 percent). We also analyzed changes in the growth
in old capital and new capital for cost reports that provided this
information. For old capital, we limited the analysis to decreases
in old capital. We did this since the opportunity for most hospitals
to treat "obligated" capital put into service as old capital has
expired. Old capital costs should, therefore, decrease as assets
become fully depreciated, and as interest costs decrease as the loan
is amortized.
The new capital cost model separates the hospitals into three
mutually exclusive groups. Hold-harmless hospitals with data on old
capital were placed in the first group. Of the remaining hospitals,
those hospitals with fewer than 100 beds comprise the second group.
The third group consists of all hospitals that did not fit into
either of the groups. Each of these groups displayed unique patterns
of growth in capital costs. We found that the gamma distribution is
useful in explaining and describing the patterns of increase in
capital costs. A gamma distribution is a statistical distribution
that can be used to describe patterns of growth rates, with greatest
proportion of rates being at the low end. We use the gamma
distribution to estimate individual hospital rates of increase as
follows:
(1) For hold-harmless hospitals, old capital cost changes were
fitted to a truncated gamma distribution, that is, a gamma
distribution covering only the distribution of cost decreases. New
capital costs changes were fitted to the entire gamma distribution
allowing for both decreases and increases.
(2) For hospitals with fewer than 100 beds (small), total
capital cost changes were fitted to the gamma distribution allowing
for both decreases and increases.
(3) Other (large) hospitals were further separated into three
groups:
Bed-size decreases over 20 percent (decrease).
Bed-size increases over 20 percent (increase).
Other (no-change).
Capital cost changes for large hospitals were fitted to gamma
distributions for each bed-size change group, allowing for both
decreases and increases in capital costs. We analyzed the
probability distribution of increases and decreases in bed-size for
large hospitals. We found the probability somewhat dependent on the
prior year change in bed-size and factored this dependence into the
analysis. Probabilities of bed-size change were determined. Separate
sets of probability factors were calculated to reflect the
dependence on prior year change in bed-size (increase, decrease, and
no change).
The gamma distributions were fitted to changes in aggregate
capital costs for the entire hospital. We checked the relationship
between aggregate costs and Medicare per discharge costs. For large
hospitals, there was a small variance, but the variance was larger
for small hospitals. Since costs are used only for the hold-harmless
methodology and to determine exceptions, we decided to use the gamma
distributions fitted to aggregate cost increases for estimating
distributions of cost per discharge increases.
Capital costs per discharge calculated from the cost reports
were increased by random numbers drawn from the gamma distribution
to project costs in future years. Old and new capital were projected
separately for hold-harmless hospitals. Aggregate capital per
discharge costs were projected for all other hospitals. Because the
distribution of increases in capital costs varies with changes in
bed-size for large hospitals, we first projected changes in bed-size
for large hospitals before drawing random numbers from the gamma
distribution. Bed-size changes were drawn from the uniform
distribution with the probabilities dependent on the previous year
bed-size change. The gamma distribution has a shape parameter and a
scaling parameter. (We used different parameters for each hospital
group, and for old and new capital.)
We used discharge counts from the cost reports to calculate
capital cost per discharge. To estimate total capital costs for FY
1997 (the MedPR data year) and later, we use the number of
discharges from the MedPAR data. Some hospitals have considerably
more discharges in FY 1997 than in the years for which we calculated
cost per discharge from the cost report data. Consequently, a
hospital with few cost report discharges would have a high capital
cost per discharge since fixed costs would be allocated over only a
few discharges. If discharges increase substantially, the cost per
discharge would decrease because fixed costs would be allocated over
more discharges. If the projection of capital cost per discharge is
not adjusted for increases in discharges, the projection of
exceptions would be overstated. We address this situation by
recalculating the cost per discharge with the MedPAR discharges if
the MedPAR discharges exceed the cost report discharges by more than
20 percent. We do not adjust for increases of less than 20 percent
because we have not received all of the FY 1997 discharges, and we
have removed some discharges from the analysis because they are
statistical outliers. This adjustment reduces our estimate of
exceptions payments, and consequently, the reduction to the Federal
rate for exceptions is smaller. We will continue to monitor our
modeling of exceptions payments and make adjustments as needed.
The average national capital cost per discharge generated by
this model is the combined average of many randomly generated
increases. This average must equal the projected average national
capital cost per discharge, which we projected separately (outside
this model). We adjusted the shape parameter of the gamma
distributions so that the modeled average capital cost per discharge
matches our projected capital cost per discharge. The shape
parameter for old capital was not adjusted since we are modeling the
aging of "existing" assets. This model provides a distribution of
capital costs among hospitals that is consistent with our aggregate
capital projections.
Once each hospital's capital-related costs are generated, the
model projects capital payments. We use the actual payment
parameters (for example, the case-mix index and the geographic
adjustment factor) that are applicable to the specific hospital.
To project capital payments, the model first assigns the
applicable payment methodology (fully prospective or hold-harmless)
to the hospital as determined from the provider-specific file and
the cost reports. The model simulates Federal rate payments using
the assigned payment parameters and hospital-specific estimated
outlier payments. The case-mix index for a hospital is derived from
the FY 1997 MedPAR file using the FY 1999 DRG relative weights
published in section V. of the Addendum to this final rule. The
case-mix index is increased each year after FY 1997 based on
analysis of past experiences in case-mix increases. Based on
analysis of recent case-mix increases, we estimate that case-mix
will increase 1.0 percent in FY 1998 and 1.0 percent in FY 1999.
(Since we are using FY 1997 cases for our analysis, the FY 1997
increase in case mix has no effect on projected capital payments.)
Changes in geographic classification and revisions to the
hospital wage data used to establish the hospital wage index affect
the geographic adjustment factor. Changes in the DRG classification
system and the relative weights affect the case-mix index.
Section 412.308(c)(4)(ii) requires that the estimated aggregate
payments for the fiscal year, based on the Federal rate after any
changes resulting from DRG reclassifications and recalibration and
the geographic adjustment factor, equal the estimated aggregate
payments based on the Federal rate that would have been made without
such changes. For FY 1998, the budget neutrality adjustment factor
was 1.00015.
Since we implemented a separate geographic adjustment factor for
Puerto Rico, we applied separate budget neutrality adjustments for
the national geographic adjustment factor and the Puerto Rico
geographic adjustment factor. We applied the same budget neutrality
factor for DRG reclassifications and recalibration nationally and
for Puerto Rico. Separate adjustments were unnecessary for FY 1998
since the geographic adjustment factor for Puerto Rico was
implemented in 1998.
To determine the factors for FY 1999, we first determined the
portions of the Federal national and Puerto Rico rates that would be
paid for each hospital in FY 1999 based on its applicable payment
methodology. Using our model, we then compared, separately for the
national rate and the Puerto Rico rate, estimated aggregate Federal
rate payments based on the FY 1998 DRG relative weights and the FY
1998 geographic adjustment factor to estimated aggregate Federal
rate payments based on the FY 1998 relative weights and the FY 1999
geographic adjustment factor. In making the comparison, we held the
FY 1999 Federal rate portion constant and set the other budget
neutrality adjustment factor and the exceptions reduction factor to
1.00. We determined that, to achieve budget neutrality for the
changes in the national geographic adjustment factor, an incremental
budget neutrality adjustment of 0.99930 for FY 1999 should be
applied to the previous cumulative FY 1998 adjustment of 1.00015,
yielding a cumulative adjustment of 0.99945 through FY 1999. Since
this is the first adjustment for Puerto Rico, the incremental and
cumulative adjustment for Puerto Rico would be 0.99883 through FY

[[Page 41121]]

1999. We apply these new adjustments, then compare estimated
aggregate Federal rate payments based on the FY 1998 DRG relative
weights and the FY 1999 geographic adjustment factors to estimated
aggregate Federal rate payments based on the FY 1999 DRG relative
weights and the FY 1999 geographic adjustment factors. The
incremental adjustment for DRG classifications and changes in
relative weights would be 1.00336 nationally and for Puerto Rico.
The cumulative adjustments for DRG classifications and changes in
relative weights and for changes in the geographic adjustment
factors through 1999 would be 1.00281 nationally, and 1.00219 for
Puerto Rico. The following table summarizes the adjustment factors
for each fiscal year:

Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Puerto Rico
-----------------------------------------------------------------------------------------------------------
Incremental adjustment Incremental adjustment
Fiscal year ------------------------------------------ -----------------------------------------------------
Geographic DRG Cumulative Geographic DRG
adjustment reclassifications Combined adjustment reclassifications Combined Cumulative
factor and recalibration factor and recalibration
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992........................................ .......... ................. ......... 1.00000 .......... ................. ......... ..........
1993........................................ .......... ................. 0.99800 0.99800 .......... ................. ......... ..........
1994........................................ .......... ................. 1.00531 1.00330 .......... ................. ......... ..........
1995........................................ .......... ................. 0.99980 1.00310 .......... ................. ......... ..........
1996........................................ .......... ................. 0.99940 1.00250 .......... ................. ......... ..........
1997........................................ .......... ................. 0.99873 1.00123 .......... ................. ......... ..........
1998........................................ .......... ................. 0.99892 1.00015 .......... ................. ......... 1.00000
1999........................................ 0.99930 1.00336 1.00266 1.00281 0.99883 1.00336 1.00219 1.00219
--------------------------------------------------------------------------------------------------------------------------------------------------------

The methodology used to determine the recalibration and
geographic (DRG/GAF) budget neutrality adjustment factor is similar
to that used in establishing budget neutrality adjustments under the
prospective payment system for operating costs. One difference is
that, under the operating prospective payment system, the budget
neutrality adjustments for the effect of geographic
reclassifications are determined separately from the effects of
other changes in the hospital wage index and the DRG relative
weights. Under the capital prospective payment system, there is a
single DRG/GAF budget neutrality adjustment factor (the national
rate and the Puerto Rico rate are determined separately) for changes
in the geographic adjustment factor (including geographic
reclassification) and the DRG relative weights. In addition, there
is no adjustment for the effects that geographic reclassification
has on the other payment parameters, such as the payments for
serving low-income patients or the large urban add-on payments.
In addition to computing the DRG/GAF budget neutrality adjustment
factor, we used the model to simulate total payments under the
prospective payment system.
Additional payments under the exceptions process are accounted for
through a reduction in the Federal and hospital-specific rates.
Therefore, we used the model to calculate the exceptions reduction
factor. This exceptions reduction factor ensures that aggregate
payments under the capital prospective payment system, including
exceptions payments, are projected to equal the aggregate payments that
would have been made under the capital prospective payment system
without an exceptions process. Since changes in the level of the
payment rates change the level of payments under the exceptions
process, the exceptions reduction factor must be determined through
iteration.
In the August 30, 1991 final rule (56 FR 43517), we indicated that
we would publish each year the estimated payment factors generated by
the model to determine payments for the next 5 years. The table below
provides the actual factors for fiscal years 1992 through 1999, and the
estimated factors that would be applicable through FY 2003. We caution
that these are estimates for fiscal years 2000 and later, and are
subject to revisions resulting from continued methodological
refinements, receipt of additional data, and changes in payment policy
changes. We note that in making these projections, we have assumed that
the cumulative national DRG/GAF budget neutrality adjustment factor
will remain at 1.00281 (1.00219 for Puerto Rico) for FY 1999 and later
because we do not have sufficient information to estimate the change
that will occur in the factor for years after FY 1999.
The projections are as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal
Update Exceptions Budget DRG/GAF Outlier Federal rate (after
Fiscal year factor reduction neutrality adjustment adjustment rate outlier
factor factor factor \1\ factor adjustment reduction)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992......................................................... N/A 0.9813 0.9602 .9497 415.59
1993......................................................... 6.07 .9756 .9162 .9980 .9496 417.29
1994......................................................... 3.04 .9485 .8947 1.0053 .9454 \2\ .9260 378.34
1995......................................................... 3.44 .9734 .8432 .9998 .9414 376.83
1996......................................................... 1.20 .9849 N/A .9994 .9536 \3\ .9972 461.96
1997......................................................... 0.70 .9358 N/A .9987 .9481 438.92
1998......................................................... 0.90 .9659 N/A .9989 .9382 \4\ .8222 371.51
1999......................................................... 0.10 .9783 N/A 1.0027 .9392 378.05
2000......................................................... 0.70 .9763 N/A \5\ 1.0000 \5\ .9392 379.92
2001......................................................... 0.70 .9735 N/A 1.0000 .9392 381.48
2002......................................................... 0.70 \6\ 1.0000 N/A 1.0000 .9392 394.61
2003......................................................... 0.80 \6\ 1.0000 N/A 1.0000 .9392 \4\ 1.0255 407.92
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Note: The incremental change over the previous year.
\2\ Note: OBRA 1993 adjustment.

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\3\ Note: Adjustment for change in the transfer policy.
\4\ Note: Balanced Budget Act of 1997 adjustment.
\5\ Note: Future adjustments are, for purposes of this projection, assumed to remain at the same level.
\6\ Note: We are unable to estimate exceptions payments for the year under the special exceptions provision (Sec. 412.348(g) of the regulations)
because the regular exceptions provision (Sec. 412.348(e)) expires.

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

I. Background

Several provisions of the Act address the setting of update
factors for inpatient services furnished in FY 1999 by hospitals
subject to the prospective payment system and those excluded from
the prospective payment system. Section 1886(b)(3)(B)(i)(XIV) of the
Act sets the FY 1999 percentage increase in the operating cost
standardized amounts equal to the rate of increase in the hospital
market basket minus 1.9 percent for prospective payment hospitals in
all areas. Section 1886(b)(3)(B)(iv) of the Act sets the FY 1999
percentage increase in the hospital-specific rates applicable to
sole community and Medicare-dependent, small rural hospitals equal
to the rate set forth in section 1886(b)(3)(B)(i) of the Act, that
is, the same update factor as all other hospitals subject to the
prospective payment system, or the rate of increase in the market
basket minus 1.9 percentage points. Under section
1886(b)(3)(B)(ii)(VII) of the Act, the FY 1999 percentage increase
in the rate of increase limits for hospitals excluded from the
prospective payment system can range from the rate of increase in
the excluded hospital market basket to zero, depending on the
hospital's costs in relation to its limit for the most recent cost
reporting period for which information is available.
In accordance with section 1886(d)(3)(A) of the Act, we are
updating the standardized amounts, the hospital-specific rates, and
the rate-of-increase limits for hospitals excluded from the
prospective payment system as provided in section 1886(b)(3)(B) of
the Act. Based on the second quarter 1998 forecast of the FY 1999
market basket increase of 2.4 percent for hospitals subject to the
prospective payment system, the updates in the standardized amounts
are 0.5 percent for hospitals in both large urban and other areas.
The update in the hospital-specific rate applicable to sole
community and Medicare-dependent, small rural hospitals is also 0.5
percent. The update for hospitals excluded from the prospective
payment system can be as high as the percentage increase in the
excluded hospital market basket (currently estimated at 2.4 percent)
or as low as zero, depending on the hospital's costs in relation to
its rate-of-increase limit. (See section V of the addendum to this
final rule.)
Section 1886(e)(4) of the Act requires that the Secretary,
taking into consideration the recommendations of the Medicare
Payment Advisory Commission (MedPAC), recommend update factors for
each fiscal year that take into account the amounts necessary for
the efficient and effective delivery of medically appropriate and
necessary care of high quality. In its March 1, 1998 report, MedPAC
stated that, although a somewhat lower update could be justified in
light of changes in the utilization and provision of hospital
inpatient care, the legislated update of the market basket increase
minus 1.9 percentage points will provide a reasonable level of
payments to hospitals.
Under section 1886(e)(5) of the Act, we are required to publish
the update factors recommended under section 1886(e)(4) of the Act.
Accordingly, we published the FY 1999 update factors recommended by
the Secretary as Appendix D of the May 8, 1998 proposed rule (63 FR
25704).

II. Secretary's Final Recommendations

We received two comments concerning our proposed
recommendations, neither of which took issue with the update
recommendation itself. Therefore, our final recommendations for the
operating update for both prospective and excluded hospitals do not
differ from the proposed, except that the forecast of the market
basket percentage increase has been revised from 2.6 to 2.4 percent
for prospective payment hospitals and from 2.5 to 2.4 percent for
excluded hospitals.
Comment: The commenters suggested that HCFA's update framework
take into account the impact of "Year 2000" (Y2K) systems"
conversions on hospital expenditures.
Response: The purpose of the hospital input price indexes in the
hospital market basket is to measure the price escalation associated
with the inputs needed to provide hospital services, not to measure
changes in the quantity and quality of inputs used to provide these
services. The increased costs associated with Y2K systems
conversions are in the form of 3 factors: (1) Increased quantities
(such as more workers), (2) increased price levels for higher
quality workers (with higher wage levels) or other inputs, and (3)
increased price escalation, holding constant the quantity and
quality of inputs (such as faster wage and input price escalation
rates). The third factor of increased escalation for wages and
prices should be picked up by the hospital input price indexes.
Since the input price indexes measure the "pure price" changes
associated with the inputs needed to provide hospital services, they
would reflect the potentially faster rate of price escalation faced
by hospitals from Y2K. An example would be higher market prices paid
by hospitals for goods and services purchased from suppliers that
also incurred higher production costs due to the Y2K conversion. We
believe that the price proxies used in the hospital input price
indexes, such as CPIs, PPIs, and ECIs, will reflect any escalating
prices since all sectors of the economy are faced with additional
costs of Y2K. This escalation will show up in the monthly or
quarterly updates of the price proxies from the Bureau of Labor
Statistics.
Any change in the mix of inputs caused by Y2K would not be
picked up in the index until it is rebased. Such a change would
cause a modification of the weights in the input price index.
However, any changes in the weights are likely to have a minimal
effect on the overall percent change in the index. For example, we
did a sensitivity analysis of this effect by increasing the weight
for professional and technical wages and benefits by 10 percent with
a corresponding 10 percent decrease in the non-professional and
technical wages and benefits. Altering the weights in this manner
had no impact on the overall percent change in the index.
Comment: MedPAC commented that HCFA's recommendations differed
from those of MedPAC in the proposed rule because HCFA did not
separately account for hospital product change. Hospital product
change reflects the dramatic change in recent years in the role of
the hospital inpatient setting in the continuum of care. More
patients are receiving postacute care after a hospital stay, and the
average length of acute care stays has declined sharply.
Response: HCFA recognizes the changes in hospital inpatient care
delivery noted by MedPAC and for FY 1999, accounted for them in the
determination of the intensity factor. To the extent that there is a
mismatch in component designation between HCFA and MedPAC, HCFA is
willing to work with MedPAC to set more clearly defined and mutually
agreeable categories for future update recommendations.

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[FR Doc. 98-20459 Filed 7-30-98; 8:45 am]
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