Proposed Rules - Federal Register May 7, 1999 | Innovative Resources for Payors

	
[Federal Register: May 7, 1999 (Volume 64, Number 88)]
[Proposed Rules]               
[Page 24715-24764]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my99-31]

Table of Contents

I. Background
II. Proposed Changes to the DRG Reclassifications and Recalibrations of Relative Weights
III. Proposed Changes to the Hospital Wage Index
IV. Other Decisions and Proposed Changes to the Prospective Payment System for Inpatient Operating and Graduate Medical Education Costs
V. Proposed Changes to the Prospective Payment System for Capital-Related Costs
VI. Proposed Changes for Hospitals and Hospital Units Excluded From the Prospective Payment System Determining Prospective Payment
VII. MedPAC Recommendation

Tables

Table 1A--National Adjusted Operating Standardized Amounts, Labor/Nonlabor
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 3C--Hospital Case Mix Indexes for Discharges Occurring in Federal Fiscal Year 1998 and Hospital Average Hourly Wage for Federal Fiscal Year 2000 Wage Index
Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas
Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified
Table 4D--Average Hourly Wage for Urban Areas
Table 4E--Average Hourly Wage for Rural Areas
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF)
Table 5--List of Diagnosis Related Groups (DRGs), Relative Weighting Factors, Geometric Mean Length of Stay, and Arithmetic Mean Length of Stay Points Used in the Prospective Payment System
Table 7A--Medicare Prospective Payment System Selected Percentile Lengths of Stay FY 98 MEDPAR Update 12/98 GROUPER V16.0
Table 7B--Medicare Prospective Payment System Selected Percentile Lengths of Stay FY 98 MEDPAR Update 12/98 GROUPER V17.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for Urban and Rural Hospitals (Case Weighted) March 1999
Table 8B--Statewide Average Capital Cost-to-Charge Ratios (Case Weighted)

Appendices

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Part II

Department of Health and Human Services

_______________________________________________________________________

Health Care Financing Administration

_______________________________________________________________________

42 CFR Parts 412, 413, 483, and 485

Medicare Program; Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 2000 Rates; Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 412, 413, 483, and 485

[HCFA-1053-P]
RIN 0938-AJ50

Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2000 Rates

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

ACTION: Proposed rule.

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

SUMMARY: We are proposing to revise the Medicare hospital inpatient
prospective payment systems for operating costs and capital-related
costs to implement changes arising from our continuing experience with
the systems. In addition, in the addendum to this proposed rule, we are
describing proposed changes in the amounts and factors necessary to
determine rates for Medicare hospital inpatient services for operating
costs and capital-related costs. These changes would be applicable to
discharges occurring on or after October 1, 1999. We also are setting
forth proposed rate-of-increase limits as well as proposed policy
changes for hospitals and hospital units excluded from the prospective
payment systems. Finally, we are proposing changes to the policies
governing payment to hospitals for the direct costs of graduate medical
education.

DATES: Comments will be considered if received at the appropriate
address, as provided below, no later than 5 p.m. on July 6, 1999.

ADDRESSES: Mail written comments (an original and three copies) to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: HCFA-1053-P P.O. Box 7517,
Baltimore, MD 21207.
If you prefer, you may deliver your written comments (an original
and three copies) to one of the following addresses:

Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW,
Washington, DC 20201, or
Room C5-11-03, Central Building, 7500 Security Boulevard, Baltimore, MD
21244-1850

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

SUPPLEMENTARY INFORMATION:

Comments, Procedures, Availability of Copies, and Electronic Access

Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-1053-P. Comments received timely will be available
for public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in Room 445-G of
the Department's offices at 200 Independence Avenue, SW, Washington,
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.
(phone: (202) 690-7890).
For comments that relate to information collection requirements,
mail a copy of comments to:

Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attn: Allison Herron Eydt, HCFA Desk Officer; and
Health Care Financing Administration, Office of Information Services,
Security Standards Group, Division of HCFA Enterprise Standards, Room
N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.
Attn: John Burke HCFA-1053-P.

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I. Background

A. Summary

Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. Section 1886(g) of the Act requires the
Secretary to pay for the capital-related costs of hospital inpatient
stays under a prospective payment system. Under these prospective
payment systems, Medicare payment for hospital inpatient operating and
capital-related costs is made at predetermined, specific rates for each
hospital discharge. Discharges are classified according to a list of
diagnosis-related groups (DRGs).
Certain specialty hospitals are excluded from the prospective
payment systems. Under section 1886(d)(1)(B) of the Act, the following
hospitals and hospital units are excluded from the prospective payment
system: psychiatric hospitals or units, rehabilitation hospitals or
units, children's hospitals, long-term care hospitals, and cancer
hospitals. For these hospitals and units, Medicare payment for
operating costs is based on reasonable costs subject to a hospital-
specific annual limit.
Under section 1886(a)(4) of the Act, costs incurred in connection
with approved graduate medical education (GME) programs are excluded
from the operating costs of inpatient hospital services. Hospitals with
approved GME programs are paid for the direct costs of GME in
accordance with section 1886(h) of the Act; the amount of payment for
direct GME costs for a cost reporting period is based on the hospital's
number of residents in that period and the hospital's costs per
resident in a base year.
The regulations governing the hospital inpatient prospective
payment system are located in 42 CFR part 412. The regulations
governing excluded hospitals and hospital units are located in parts
412 and 413, and the GME regulations are located in part 413.
On July 31, 1998, we published a final rule in the Federal Register
(63 FR 40954) that implemented both statutory requirements and other
changes to the Medicare hospital inpatient prospective

[[Page 24717]]

payment systems for both operating costs and capital-related costs, as
well as changes addressing payment for excluded hospitals and payments
for GME costs. Generally, these changes were effective for discharges
occurring on or after October 1, 1998.
In addition, on February 25, 1999, we published in the Federal
Register (64 FR 9378) a final rule that implemented revised wage index
values, geographic adjustment factors, operating standardized amounts,
and capital Federal rates for hospitals subject to the inpatient
hospital prospective payment system. These changes are effective for
discharges occurring on or after March 1, 1999.

B. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the
Medicare hospital inpatient prospective payment systems for both
operating costs and capital-related costs. We also are proposing
changes concerning GME costs and excluded hospitals and units,
including critical access hospitals (CAHs). This proposed rule would be
effective for discharges occurring on or after October 1, 1999.
We note that the efforts that we are undertaking to make the
Medicare computer systems compliant on January 1, 2000, will not delay
our ability to make timely and updated payments to hospitals under the
FY 2000 prospective payment system final rule that will follow this
proposed rule. The following is a summary of the major changes that we
are proposing to make.
1. Proposed Changes to the DRG Reclassifications and Recalibrations of
Relative Weights
Section 1886(d)(4)(C) of the Act requires us to adjust the DRG
classifications and relative weights at least annually. In order to
avoid compromising our ability to process and pay hospital claims
during the period leading up to and immediately following January 1,
2000, we are not implementing any revisions to the International
Classification of Diseases, Ninth Revision, Clinical Modification (ICD-
9-CM) coding system. The changes that we are proposing to make relating
to DRG reclassifications and recalibrations for FY 2000 are set forth
in section II of is preamble.
2. Proposed Changes to the Hospital Wage Index
In section III of this preamble, we discuss proposed revisions to
the wage index and the annual update of the wage data. Specific issues
addressed in this section include the following:
<bullet> The FY 2000 wage index update, using FY 1996 wage data.
<bullet> The exclusion from the wage index of Part A physician wage
costs that are teaching-related, as well as resident and Part A
certified registered nurse anesthetist (CRNA) costs.
<bullet> Revisions to the wage index based on hospital
redesignations.
3. Other Decisions and Proposed Changes to the Prospective Payment
System for Inpatient Operating and Graduate Medical Education Costs
In section IV of this preamble, we discuss several provisions of
the regulations in 42 CFR Parts 412 and 413 and set forth proposed
changes concerning the following:
<bullet> Sole community hospitals.
<bullet> Rural referral centers.
<bullet> Indirect medical education adjustment.
<bullet> Medicare Geographic Classification Review Board (MGCRB)
decisions.
<bullet> Direct GME programs.
4. Proposed Changes to the Prospective Payment System for Capital-
Related Costs
In section V of this preamble, we discuss the special exceptions
process for certain eligible hospitals to receive additional payments
for major construction or renovation projects that began soon after the
start of the capital prospective payment system.
5. Proposed Changes for Hospitals and Hospital Units Excluded From the
Prospective Payment Systems
In section VI of this preamble, we discuss the following proposals
concerning excluded hospital and hospital units and CAHs:
<bullet> Limits on and adjustments to the proposed target amounts
for FY 2000.
<bullet> Changes in bed size or status of excluded hospitals or
hospital units.
<bullet> Payment for services furnished at satellite hospital
locations.
<bullet> Responsibility for care of patients in hospitals within
hospitals.
<bullet> The allowable emergency response time for CAHs located in
frontier or other specifically defined remote areas.
<bullet> Compliance with minimum data set requirements by CAHs with
swing bed approval.
6. Determining Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits
In the addendum to this proposed rule, we set forth proposed
changes to the amounts and factors for determining the FY 2000
prospective payment rates for operating costs and capital-related
costs. We also address update factors for determining the rate-of-
increase limits for cost reporting periods beginning in FY 2000 for
hospitals and hospital units excluded from the prospective payment
system.
7. Impact Analysis
In Appendix A, we set forth an analysis of the impact that the
proposed changes described in this proposed rule would have on affected
entities.
8. Capital Acquisition Model
Appendix B contains the technical appendix on the proposed FY 2000
capital cost model.
9. Report to Congress on the Update Factor for Hospitals under the
Prospective Payment System and Hospitals and Units Excluded From the
Prospective Payment System
Section 1886(e)(3)(B) of the Act requires the Secretary to report
to Congress on our initial estimate of a recommended update factor for
FY 2000 for both hospitals included in and hospitals excluded from the
prospective payment systems. This report is included as Appendix C to
this proposed rule.
10. Proposed Recommendation of Update Factor for Hospital Inpatient
Operating Costs
As required by sections 1886(e)(4) and (e)(5) of the Act, Appendix
D provides our recommendation of the appropriate percentage change for
FY 2000 for the following:
<bullet> Large urban area and other area average standardized
amounts (and hospital-specific rates applicable to sole community and
Medicare-dependent, small rural hospitals) for hospital inpatient
services paid for under the prospective payment system for operating
costs.
<bullet> Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals and
hospital units excluded from the prospective payment system.
11. Discussion of Medicare Payment Advisory Commission Recommendations
Under section 1805(b) of the Act, the Medicare Payment Advisory
Commission (MedPAC) is required to submit a report to Congress, not
later than March 1 of each year, that reviews and makes recommendations
on Medicare payment policies. The March 1, 1999 report made several
recommendations concerning hospital inpatient payment policies. These
recommendations, and the action we are proposing to take with regard to
them

[[Page 24718]]

(when an action is recommended) are discussed in detail in this
document. See section VII of this preamble for specific information.
For further information relating specifically to the MedPAC March 1
report or to obtain a copy of the report, contact MedPAC at (202) 653-
7220.

II. Proposed Changes to DRG Reclassifications and Recalibrations of
Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital
services on the basis of a rate per discharge that varies by the DRG to
which a beneficiary's stay is assigned. The formula used to calculate
payment for a specific case takes an individual hospital's payment rate
per case and multiplies it by the weight of the DRG to which the case
is assigned. Each DRG weight represents the average resources required
to care for cases in that particular DRG relative to the average
resources used to treat cases in all DRGs.
Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
at least annually. These adjustments are made to reflect changes in
treatment patterns, technology, and any other factors that may change
the relative use of hospital resources.
As discussed in more detail in section II.B.8 of this preamble, we
are not implementing any revisions to the ICD-9-CM codes. We have
undertaken, and continue to undertake, major efforts to ensure that all
of the Medicare computer systems are ready to function on January 1,
2000. If we were to implement changes to the ICD-9-CM codes on October
1, 1999, we would endanger the functioning of the Medicare computer
systems, and, specifically, we might compromise our ability to process
hospital bills. We can, however, reclassify existing codes into
different DRGs, if appropriate. The proposed changes to the DRG
classification system, and the proposed recalibration of the DRG
weights for discharges occurring on or after October 1, 1999, are
discussed below.

B. DRG Reclassification

1. General
Cases are classified into DRGs for payment under the prospective
payment system based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay, as well
as age, sex, and discharge status of the patient. The diagnosis and
procedure information is reported by the hospital using ICD-9-CM codes.
The Medicare fiscal intermediary enters the information into its claims
processing system and subjects it to a series of automated screens
called the Medicare Code Editor (MCE). These screens are designed to
identify cases that require further review before classification into a
DRG can be accomplished.
After screening through the MCE and any further development of the
claims, cases are classified by the GROUPER software program into the
appropriate DRG. The GROUPER program was developed as a means of
classifying each case into a DRG on the basis of the diagnosis and
procedure codes and demographic information (that is, sex, age, and
discharge status). It is used both to classify past cases in order to
measure relative hospital resource consumption to establish the DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights.
Currently, cases are assigned to one of 499 DRGs in 25 major
diagnostic categories (MDCs). Most MDCs are based on a particular organ
system of the body (for example, MDC 6, Diseases and Disorders of the
Digestive System); however, some MDCs are not constructed on this basis
since they involve multiple organ systems (for example, MDC 22, Burns).
In general, cases are assigned to an MDC based on the principal
diagnosis, before assignment to a DRG. However, there are five DRGs to
which cases are directly assigned on the basis of procedure codes.
These are the DRGs for liver, bone marrow, and lung transplants (DRGs
480, 481, and 495, respectively) and the two DRGs for tracheostomies
(DRGs 482 and 483). Cases are assigned to these DRGs before
classification to an MDC.
Within most MDCs, cases are then divided into surgical DRGs (based
on a surgical hierarchy that orders individual procedures or groups of
procedures by resource intensity) and medical DRGs. Medical DRGs
generally are differentiated on the basis of diagnosis and age. Some
surgical and medical DRGs are further differentiated based on the
presence or absence of complications or comorbidities (CC).
Generally, GROUPER does not consider other procedures; that is,
nonsurgical procedures or minor surgical procedures generally not
performed in an operating room are not listed as operating room (OR)
procedures in the GROUPER decision tables. However, there are a few
non-OR procedures that do affect DRG assignment for certain principal
diagnoses, such as extracorporeal shock wave lithotripsy for patients
with a principal diagnosis of urinary stones.
The changes we are proposing to make to the DRG classification
system for FY 2000 and other decisions concerning DRGs are set forth
below.
2. MDC 15 (Newborns and Other Neonates with Conditions Originating in
the Perinatal Period)
Based on inquiries we have received, we reviewed the
appropriateness of including diagnosis codes V29.2 (Newborn observation
for suspected respiratory condition) and V29.3 (Newborn observation for
other genetic problem) in the list of allowable secondary diagnoses
under DRG 391 (Normal Newborn). Currently, when one of these codes is
the only secondary diagnosis for an otherwise healthy newborn, the case
is assigned to DRG 390 (Neonate with Other Significant Problems).
Diagnosis codes V29.2 and V29.3 are used to indicate that the
newborn was observed for a suspected condition but none was found.
Other newborn observation codes in this series (V29.0, V29.1, V29.8,
and V29.9) are included in the allowable secondary diagnoses under DRG
391. We believe that the presence of diagnosis code V29.2 or V29.3
should not exclude a newborn from being classified as normal.
Therefore, we are proposing to include diagnosis codes V29.2 and V29.3
in the list of allowable secondary diagnosis under DRG 391.
3. MDC 19 (Mental Diseases and Disorders)
We have received correspondence about the title of DRG 425, "Acute
Adjustment Reaction and Disturbances of Psychosocial Dysfunction"
under MDC 19. The correspondents state that the use of the terms
"disturbances" and "dysfunction" is redundant since the terms have
similar meanings. They suggested that we remove the term
"disturbances."
We agree with the correspondents and are proposing to revise the
title of DRG 425 to read "Acute Adjustment Reaction and Psychological
Dysfunction."

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4. MDC 22 (Burns)
In the FY 1999 final prospective payment system rule that was
effective October 1, 1998 (63 FR 40957), we implemented an extensive
redesign of the DRGs for burns to more appropriately capture the
variation in resource use associated with different classes of burn
patients. The redesigned DRGs, 504 through 511, are split on such
factors as whether there is an extensive burn, a full-thickness burn,
or an inhalation injury, as well as other factors such as skin graft,
trauma, or presence of a CC. DRGs 504 and 505 are assigned to cases
with extensive third degree burns; that is, cases in which the burns
cover at least 20 percent of body surface area combined with a third
degree burn covering at least 10 percent of body surface area. DRGs 506
through 509 are assigned to all other cases with full-thickness burns
(that is, a third degree burn). Finally, DRGs 510 and 511 are assigned
to cases with nonextensive burns (that is, only first and second degree
burns).
After these DRGs went into effect on October 1, 1998, we were
contacted by several hospitals about our inclusion of the following
codes as full-thickness burns:

948.00 Body burn involving less than 10 percent of body surface,
third degree less than 10 percent or unspecified
948.10 Body burn involving 10 to 19 percent of body surface, third
degree less than 10 percent or unspecified
948.20 Body burn involving 20 to 29 percent of body surface, third
degree less than 10 percent or unspecified
948.30 Body burn involving 30 to 39 percent of body surface, third
degree less than 10 percent or unspecified
948.40 Body burn involving 40 to 49 percent of body surface, third
degree less than 10 percent or unspecified
948.50 Body burn involving 50 to 59 percent of body surface, third
degree less than 10 percent or unspecified
948.60 Body burn involving 60 to 69 percent of body surface, third
degree less than 10 percent or unspecified
948.70 Body burn involving 70 to 79 percent of body surface, third
degree less than 10 percent or unspecified
948.80 Body burn involving 80 to 89 percent of body surface, third
degree less than 10 percent or unspecified
948.90 Body burn involving 90 percent or more of body surface,
third degree less than 10 percent or unspecified

The hospitals are concerned that the use of the fifth digit "0"
on codes 948.10 through 948.90 can capture cases in which there
actually is no third degree burn. The hospitals requested that we
consider removing from the full-thickness burn DRGs 506 through 509 all
codes in the 948 category with a fifth digit of "0".
We agree that the codes in category 948 with a fifth digit of "0"
should not be assigned to DRGs 506 through 509 as full-thickness burns
since not all of these cases will have a third degree burn. Therefore,
we are proposing to remove these codes from DRGs 506 through 509 and to
add them to DRG 510 (Nonextensive Burns with CC or Significant Trauma)
and DRG 511 (Nonextensive Burns without CC or Significant Trauma).
If a case with a code of 948.10 is a full-thickness burn, this
information would be captured in the burn code for the site of the burn
(for example, 943.35 (Third degree burn of shoulder)) and the case
would be correctly assigned to a full-thickness burn DRG. Hospitals
have been instructed in Coding Clinic for ICD-9-CM, Fourth Quarter,
1994 (pages 22 through 28) to code the site of the burn first (940
through 947), when known. Codes from category 948 may be used as a
principal diagnosis only when the site of the burn is not specified.
Category 948 is used as an additional code to provide information on
the percentage of total body that is burned or to show the percentage
of burn that was third degree. When hospitals report codes properly,
full-thickness burns will be assigned to a code for burn of the
specific site (940 through 947). This site code also shows the degree
of the burn. Furthermore, for those rare cases where the site is not
provided, but it is known that 10 percent or more of the body has a
third degree burn, hospitals may report this information through the
use of category 948 with a fifth digit of "1" through "9". All of
these cases will be classified as full-thickness burns in DRGs 506
through 509. Therefore, our proposal to remove codes 948.1 through
948.9 with a fifth digit of "0" will not prevent cases from being
assigned to one of the full-thickness DRGs when there is a third degree
burn and the case is correctly coded.
5. Surgical Hierarchies
Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. It is, therefore, necessary to have a decision rule by which
these cases are assigned to a single DRG. The surgical hierarchy, an
ordering of surgical classes from most to least resource intensive,
performs that function. Its application ensures that cases involving
multiple surgical procedures are assigned to the DRG associated with
the most resource-intensive surgical class.
Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibration, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications, to determine if the ordering of classes coincided
with the intensity of resource utilization, as measured by the same
billing data used to compute the DRG relative weights.
A surgical class can be composed of one or more DRGs. For example,
in MDC 5, the surgical class "heart transplant" consists of a single
DRG (DRG 103) and the class "major cardiovascular procedures"
consists of two DRGs (DRGs 110 and 111). Consequently, in many cases,
the surgical hierarchy has an impact on more than one DRG. The
methodology for determining the most resource-intensive surgical class
involves weighting each DRG for frequency to determine the average
resources for each surgical class.
For example, assume surgical class A includes DRGs 1 and 2 and
surgical class B includes DRGs 3, 4, and 5. Assume also that the
average charge of DRG 1 is higher than that of DRG 3, but the average
charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To
determine whether surgical class A should be higher or lower than
surgical class B in the surgical hierarchy, we would weight the average
charge of each DRG by frequency (that is, by the number of cases in the
DRG) to determine average resource consumption for the surgical class.
The surgical classes would then be ordered from the class with the
highest average resource utilization to that with the lowest, with the
exception of "other OR procedures" as discussed below.
This methodology may occasionally result in a case involving
multiple procedures being assigned to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER searches for the procedure in the
most resource-intensive surgical class, this result is unavoidable.
We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average relative
weight is ordered above a surgical class with a higher average relative
weight. For example, the "other OR procedures" surgical class is
uniformly ordered last in the surgical hierarchy of each MDC in which
it occurs, regardless of the fact that the relative weight for the DRG
or

[[Page 24720]]

DRGs in that surgical class may be higher than that for other surgical
classes in the MDC. The "other OR procedures" class is a group of
procedures that are least likely to be related to the diagnoses in the
MDC but are occasionally performed on patients with these diagnoses.
Therefore, these procedures should only be considered if no other
procedure more closely related to the diagnoses in the MDC has been
performed.
A second example occurs when the difference between the average
weights for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
since, by virtue of the hierarchy change, the relative weights are
likely to shift such that the higher-ordered surgical class has a lower
average weight than the class ordered below it.
Based on the preliminary recalibration of the DRGs, we are
proposing to modify the surgical hierarchy as set forth below. As we
stated in the September 1, 1989 final rule (54 FR 36457), we are unable
to test the effects of proposed revisions to the surgical hierarchy and
to reflect these changes in the proposed relative weights due to the
unavailability of revised GROUPER software at the time the proposed
rule is prepared. Rather, we simulate most major classification changes
to approximate the placement of cases under the proposed
reclassification and then determine the average charge for each DRG.
These average charges then serve as our best estimate of relative
resource use for each surgical class. We test the proposed surgical
hierarchy changes after the revised GROUPER is received and reflect the
final changes in the DRG relative weights in the final rule. Further,
as discussed in section II.C of this preamble, we anticipate that the
final recalibrated weights will be somewhat different from those
proposed, since they will be based on more complete data. Consequently,
further revision of the hierarchy, using the above principles, may be
necessary in the final rule.
At this time, we propose to revise the surgical hierarchy for the
Pre-MDC DRGs and MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth
and Throat) as follows:
<bullet> In the Pre-MDC DRGs, we would reorder Lung Transplant (DRG
495) above Bone Marrow Transplant (DRG 481).
<bullet> In MDC 3, we would reorder Tonsil and Adenoid Procedure
Except Tonsillectomy and/or Adenoidectomy Only (DRGs 57 and 58) above
Cleft Lip and Palate Repair (DRG 52).
6. Refinement of Complications and Comorbidities (CC) List
There is a standard list of diagnoses that are considered CCs. We
developed this list using physician panels to include those diagnoses
that, when present as a secondary condition, would be considered a
substantial complication or comorbidity. In previous years, we have
made changes to the standard list of CCs, either by adding new CCs or
deleting CCs already on the list. At this time, we do not propose to
delete any of the diagnosis codes on the CC list.
In the September 1, 1987 final notice concerning changes to the DRG
classification system (52 FR 33143), we modified the GROUPER logic so
that certain diagnoses included on the standard list of CCs would not
be considered a valid CC in combination with a particular principal
diagnosis. Thus, we created the CC Exclusions List. We made these
changes to preclude coding of CCs for closely related conditions, to
preclude duplicative coding or inconsistent coding from being treated
as CCs, and to ensure that cases are appropriately classified between
the complicated and uncomplicated DRGs in a pair.
In the May 19, 1987 proposed notice concerning changes to the DRG
classification system (52 FR 18877), we explained that the excluded
secondary diagnoses were established using the following five
principles:
<bullet> Chronic and acute manifestations of the same condition
should not be considered CCs for one another (as subsequently corrected
in the September 1, 1987 final notice (52 FR 33154)).
<bullet> Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for a condition should not be considered CCs for
one another.
<bullet> Conditions that may not co-exist, such as partial/total,
unilateral/bilateral, obstructed/unobstructed, and benign/malignant,
should not be considered CCs for one another.
<bullet> The same condition in anatomically proximal sites should
not be considered CCs for one another.
<bullet> Closely related conditions should not be considered CCs
for one another.
The creation of the CC Exclusions List was a major project
involving hundreds of codes. The FY 1988 revisions were intended to be
only a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered complications or comorbidities of another diagnosis. For
that reason, and in light of comments and questions on the CC list, we
have continued to review the remaining CCs to identify additional
exclusions and to remove diagnoses from the master list that have been
shown not to meet the definition of a CC. (See the September 30, 1988
final rule for the revision made for the discharges occurring in FY
1989 (53 FR 38485); the September 1, 1989 final rule for the FY 1990
revision (54 FR 36552); the September 4, 1990 final rule for the FY
1991 revision (55 FR 36126); the August 30, 1991 final rule for the FY
1992 revision (56 FR 43209); the September 1, 1992 final rule for the
FY 1993 revision (57 FR 39753); the September 1, 1993 final rule for
the FY 1994 revisions (58 FR 46278); the September 1, 1994 final rule
for the FY 1995 revisions (59 FR 45334); the September 1, 1995 final
rule for the FY 1996 revisions (60 FR 45782); the August 30, 1996 final
rule for the FY 1997 revisions (61 FR 46171); the August 29, 1997 final
rule for the FY 1998 revisions (62 FR 45966); and the July 31, 1998
final rule for the FY 1999 revisions (63 FR 40954)). We are not
proposing to add or delete any codes from the CC list.
In addition, as discussed in detail in section II.B.8 of this
preamble, because we are not making changes to the ICD-9-CM codes for
FY 2000, we do not need to modify the current list for new or deleted
codes. Therefore, there are no proposed revisions to the CC Exclusions
List for FY 2000.
7. Review of Procedure Codes in DRGs 468, 476, and 477
Each year, we review cases assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
OR Procedure Unrelated to Principal Diagnosis) in order to determine
whether it would be appropriate to change the procedures assigned among
these DRGs.
DRGs 468, 476, and 477 are reserved for those cases in which none
of the OR procedures performed is related to the principal diagnosis.
These DRGs are intended to capture atypical cases, that is, those cases
not occurring with sufficient frequency to represent a distinct,
recognizable clinical group. DRG 476 is assigned to those discharges in
which one or more of the following prostatic procedures are performed
and are unrelated to the principal diagnosis:

60.0 Incision of prostate
60.12 Open biopsy of prostate
60.15 Biopsy of periprostatic tissue

[[Page 24721]]

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

All remaining OR procedures are assigned to DRGs 468 and 477, with
DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. The original list of the ICD-9-CM procedure codes
for the procedures we consider nonextensive procedures, if performed
with an unrelated principal diagnosis, was published in Table 6C in
section IV. of the Addendum to the September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990,
August 30, 1991, September 1, 1992, September 1, 1993, September 1,
1994, September 1, 1995, August 30, 1996, and August 29, 1997, we moved
several other procedures from DRG 468 to 477, and some procedures from
DRG 477 to 468. (See 55 FR 36135, 56 FR 43212, 57 FR 23625, 58 FR
46279, 59 FR 45336, 60 FR 45783, 61 FR 46173, and 62 FR 45981,
respectively.) No procedures were moved in FY 1999, as noted in the
July 31, 1998 final rule (63 FR 40962).
a. Adding Procedure Codes to MDCs. We annually conduct a review of
procedures producing DRG 468 or 477 assignments on the basis of volume
of cases in these DRGs with each procedure. Our medical consultants
then identify those procedures occurring in conjunction with certain
principal diagnoses with sufficient frequency to justify adding them to
one of the surgical DRGs for the MDC in which the diagnosis falls.
Based on this year's review, we identified several procedures that we
are proposing to move from DRG 468 to one of the surgical DRGs. We did
not identify any necessary changes in procedures under DRG 477 and are,
therefore, not proposing to move any procedures from DRG 477 to one of
the surgical DRGs.
First, we are proposing to move three codes from DRG 468 to MDC 1
(Diseases and Disorders of the Nervous System), all of which would be
assigned to DRGs 7 and 8 (Peripheral and Cranial Nerve and Other
Nervous System Procedure).\1\ Procedure code 38.7 (Interruption of the
vena cava) is sometimes performed in conjunction with treatment for the
principal diagnosis 434.11 (Cerebral embolism with infarction), which
is assigned to MDC 1. Under the current configuration, procedure code
38.7 is not assigned to MDC 1. Therefore when this procedure is
performed by a neurological condition, such as a cerebral embolism with
infarction, the discharge does not group to one of the surgical DRGs
within MDC 1. It is assigned instead to DRG 468 as an unrelated
procedure. Since our medical advisors tell us that procedure code 38.7
is appropriately performed for neurological conditions, we are
proposing to add it to DRGs 7 and 8.
---------------------------------------------------------------------------

\1\ A single title combined with two DRG numbers is used to
signify pairs. Generally, the first DRG is for cases with CC and the
second DRG is for cases without CC. If a third number is included,
it represents cases with patients who are age 0-17. Occasionally, a
pair of DRGs is split between age >17 and age 0-17.
---------------------------------------------------------------------------

Second, we are also proposing that procedure codes 83.92 (Insertion
or replacement of skeletal muscle stimulator) and 83.93 (Removal of
skeletal muscle stimulator) both be categorized with other procedures
on the nervous system. These procedures can be performed on patients
with a principal diagnosis in MDC 1, such as 344.00 (Quadriplegia
unspecified) or 344.31 (Monoplegia of lower limb, affecting dominant
side). Therefore, these two codes would also be assigned to DRGs 7 and
8.
Third, procedure code 39.50 (Angioplasty or atherectomy of
noncoronary vessel) is not currently assigned to MDC 4 (Diseases and
Disorders of the Respiratory System). This procedure can be performed
for patients who develop pulmonary embolism. The principal diagnosis
for pulmonary embolism is in MDC 4, and, to increase clinical
coherence, we propose to add procedure code 39.50 to that MDC in DRGs
76 and 77 (Other Respiratory System OR Procedures).
Fourth, insertion of totally implantable infusion pump (procedure
code 86.06) is not assigned to MDC 5 (Diseases and Disorders of the
Circulatory System) in the current DRG configuration. Infusion pumps
should be assigned to all MDCs where subcutaneous insertion of the pump
is appropriate. Procedure code 86.06 may be performed on patients with
a principal diagnosis in MDC 5 such as 451.83 (Phlebitis and
thrombophlebitis of the deep veins of other extremities). Therefore, we
are proposing to add procedure code 86.06 to DRG 120 (Other Circulatory
System OR Procedures) in MDC 5.
b. Reassignment of Procedures Among DRGs 468, 476, and 477. We also
reviewed the list of procedures that produce assignments to DRGs 468,
476, and 477 to ascertain if any of those procedures should be moved
from one of these DRGs to another based on average charges and length
of stay. Generally, we move only those procedures for which we have an
adequate number of discharges to analyze the data. Based on our review
this year, we are not proposing to move any procedures from DRG 468 to
DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to
DRGS 468 or 476.
8. Changes to the ICD-9-CM Coding System
As described in section II.B.1 of this preamble, the ICD-9-CM is a
coding system that is used for the reporting of diagnoses and
procedures performed on a patient. In September 1985, the ICD-9-CM
Coordination and Maintenance Committee was formed. This is a Federal
interdepartmental committee, co-chaired by the National Center for
Health Statistics (NCHS) and HCFA, that is charged with the mission of
maintaining and updating the ICD-9-CM system. That mission includes
approving coding changes, and developing errata, addenda, and other
modifications to the ICD-9-CM to reflect newly developed procedures and
technologies and newly identified diseases. The Committee is also
responsible for promoting the use of Federal and non-Federal
educational programs and other communication techniques with a view
toward standardizing coding applications and upgrading the quality of
the classification system.
The NCHS has lead responsibility for the ICD-9-CM diagnosis codes
included in the Tabular List and Alphabetic Index for Diseases, while
HCFA has lead responsibility for the ICD-9-CM procedure codes included
in the Tabular List and Alphabetic Index for Procedures.
The Committee encourages participation in the above process by
health-related organizations. In this regard, the Committee holds
public meetings for discussion of educational issues and proposed
coding changes. These meetings provide an opportunity for
representatives of recognized organizations in the coding field, such
as the American Health Information Management Association (AHIMA)
(formerly American Medical Record Association (AMRA)), the American
Hospital Association (AHA), and various physician specialty groups as

[[Page 24722]]

well as physicians, medical record administrators, health information
management professionals, and other members of the public to contribute
ideas on coding matters. After considering the opinions expressed at
the public meetings and in writing, the Committee formulates
recommendations, which then must be approved by the agencies.
The Committee presented proposals for coding changes for FY 2000 at
public meetings held on June 14 and November 2, 1998. Even though the
Committee conducted public meetings and considered approval of coding
changes for FY 2000 implementation, we are not implementing any changes
to ICD-9-CM codes for FY 2000. We have undertaken, and continue to
undertake, major efforts to ensure that all of the Medicare computer
systems are ready to function on January 1, 2000. If we were to make
system changes to capture additions, deletions, and modifications to
ICD-9-CM codes for FY 2000, we would endanger the functioning of the
Medicare computer systems, and, specifically, we might compromise our
ability to process hospital bills. Therefore, the code proposals
presented at the public meetings held on June 14 and November 2, 1998,
that (if approved) ordinarily would have been included as new codes for
October 1, 1999, will not be included in this proposed rule. These code
changes to ICD-9-CM will be considered for inclusion in the next annual
update for FY 2001. The initial meeting for consideration of coding
changes for implementation in FY 2001 will be held on May 13, 1999.
Copies of the minutes of the 1998 meetings can be obtained from the
HCFA Home Page at http://www.hcfa.gov/pubaffr.htm, under the "What's
New" listing. Paper copies of these minutes are no longer available
and the mailing list has been discontinued. We encourage commenters to
address suggestions on coding issues involving diagnosis codes to:
Donna Pickett, Co-Chairperson; ICD-9-CM Coordination and Maintenance
Committee; NCHS; Room 1100; 6525 Belcrest Road; Hyattsville, Maryland
20782. Comments may be sent by E-mail to: dfp4@cdc.gov.
Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination
and Maintenance Committee; HCFA, Center for Health Plans and Providers,
Plan and Provider Purchasing Policy Group, Division of Acute Care; C4-
07-07; 7500 Security Boulevard; Baltimore, Maryland 21244-1850.
Comments may be sent by E-mail to: pbrooks@hcfa.gov.
9. Other Issue: Implantation of Muscle Stimulator
In the July 31, 1998 final rule, we responded to a comment on the
DRG assignment for implantation of a muscle stimulator (63 FR 40964).
In that document, we stated that we would readdress this issue after
reviewing the FY 1998 MedPAR file.
There is concern in the manufacturing industry that the current DRG
assignment for the implantation of a muscle stimulator and the
associated tendon transfer for quadriplegics is inappropriate. When the
procedures are performed during two separate admissions, the tendon
transfer (procedure code 82.56 (Other hand tendon transfer or
transplantation)) is assigned to DRGs 7 and 8 and the insertion of the
muscle stimulator (procedure code 83.92 (Insertion or replacement of
skeletal muscle stimulator)) is assigned to DRG 468. However, when both
procedures are performed in the same admission, the case is assigned to
DRGs 7 and 8.
As discussed in section II.B.7.a of this preamble, we are proposing
to assign code 83.92 to DRGs 7 and 8 in MDC 1. Therefore, if a case
involves either procedure code 82.56 or 83.92, or both procedure codes,
the case would be assigned to DRGs 7 and 8.
A presentation on one type of muscle stimulator was made by a
device manufacturer before the ICD-9-CM Coordination and Maintenance
Committee on November 2, 1998. The manufacturer strongly suggested that
a new code assignment be made for the procedure for insertion of this
stimulator and that it be placed in category 04.9 (Other operations on
cranial and peripheral nerves). However, based on comments received by
the Committee, there was an overwhelming response from the coding
community that a new code should not be created. The commenters believe
that these codes (82.56 and 83.92) adequately described the procedures
since the patient receives a tendon transfer in addition to the
skeletal muscle stimulator insertion. This is done so that the
quadriplegic patient can achieve some hand grasping ability where there
was none before. Some quadriplegic patients receive the tendon transfer
on one admission and the stimulator insertion on a subsequent
admission. Others have both procedures performed on the same admission.
Since the tendon transfer and stimulator insertion are being performed
on quadriplegic patients, a condition found in MDC 1, we propose to add
procedure codes 82.56 and 83.92 to DRGs 7 and 8.

C. Recalibration of DRG Weights

We are proposing to use the same basic methodology for the FY 2000
recalibration as we did for FY 1999. (See the July 31, 1998 final rule
(63 FR 40965).) That is, we would recalibrate the weights based on
charge data for Medicare discharges. However, we propose to use the
most current charge information available, the FY 1998 MedPAR file.
(For the FY 1999 recalibration, we used the FY 1997 MedPAR file.) The
MedPAR file is based on fully-coded diagnostic and surgical procedure
data for all Medicare inpatient hospital bills.
The proposed recalibrated DRG relative weights are constructed from
FY 1998 MedPAR data, based on bills received by HCFA through December
1998, from all hospitals subject to the prospective payment system and
short-term acute care hospitals in waiver States. The FY 1998 MedPAR
file includes data for approximately 11.2 million Medicare discharges.
The methodology used to calculate the proposed DRG relative weights
from the FY 1998 MedPAR file is as follows:
<bullet> To the extent possible, all the claims were regrouped
using the proposed DRG classification revisions discussed above in
section II.B of this preamble. As noted in section II.B.5, due to the
unavailability of revised GROUPER software, we simulate most major
classification changes to approximate the placement of cases under the
proposed reclassification. However, there are some changes that cannot
be modeled.
<bullet> Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education and
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
<bullet> The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG.
<bullet> We then eliminated statistical outliers, using the same
criteria as was used in computing the current weights. That is, all
cases that are outside of 3.0 standard deviations from the mean of the
log distribution of both the charges per case and the charges per day
for each DRG.
<bullet> The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
A transfer case is counted as a

[[Page 24723]]

fraction of a case based on the ratio of its length of stay to the
geometric mean length of stay of the cases assigned to the DRG. That
is, a 5-day length of stay transfer case assigned to a DRG with a
geometric mean length of stay of 10 days is counted as 0.5 of a total
case.
<bullet> We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner
consistent with the methodology for all other DRGs except that the
transplant cases that were used to establish the weights were limited
to those Medicare-approved heart, heart-lung, liver, and lung
transplant centers that have cases in the FY 1998 MedPAR file.
(Medicare coverage for heart, heart-lung, liver, and lung transplants
is limited to those facilities that have received approval from HCFA as
transplant centers.)
<bullet> Acquisition costs for kidney, heart, heart-lung, liver,
and lung transplants continue to be paid on a reasonable cost basis.
Unlike other excluded costs, the acquisition costs are concentrated in
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant
for heart and heart-lung transplants); DRG 480 (Liver Transplant); and
DRG 495 (Lung Transplant)). Because these costs are paid separately
from the prospective payment rate, it is necessary to make an
adjustment to prevent the relative weights for these DRGs from
including the effect of the acquisition costs. Therefore, we subtracted
the acquisition charges from the total charges on each transplant bill
that showed acquisition charges before computing the average charge for
the DRG and before eliminating statistical outliers.
When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We propose to use that same case threshold
in recalibrating the DRG weights for FY 2000. Using the FY 1998 MedPAR
data set, there are 39 DRGs that contain fewer than 10 cases. We
computed the weights for the 39 low-volume DRGs by adjusting the FY
1999 weights of these DRGs by the percentage change in the average
weight of the cases in the other DRGs.
The weights developed according to the methodology described above,
using the proposed DRG classification changes, result in an average
case weight that is different from the average case weight before
recalibration. Therefore, the new weights are normalized by an
adjustment factor, so that the average case weight after recalibration
is equal to the average case weight before recalibration. This
adjustment is intended to ensure that recalibration by itself neither
increases nor decreases total payments under the prospective payment
system.
Section 1886(d)(4)(C)(iii) of the Act requires that beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payment to hospitals is affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.b of the Addendum to this proposed rule, we are
proposing to make a budget neutrality adjustment to assure that the
requirement of section 1886(d)(4)(C)(iii) of the Act is met.

D. Use of Non-MedPAR Data for Reclassification and Recalibration of the
DRGs

1. Introduction
As in past years, in the DRG reclassification and recalibration
process for the FY 2000 proposed rule, we used the MedPAR file, which
consists of data for approximately 11 million Medicare discharges. In
the FY 1999 rulemaking process, we used the FY 1997 MedPAR file to
recalibrate DRGs and evaluate possible changes to DRG classifications;
for this FY 2000 proposed rule, we used the FY 1998 MedPAR file. The
Conference Report that accompanied the Balanced Budget Act of 1997
stated that "in order to ensure that Medicare beneficiaries have
access to innovative new drug therapies, the conferees believe that
HCFA should consider, to the extent feasible, reliable, validated data
other than Medicare Provider Analysis and Review (MedPAR) data in
annually recalibrating and reclassifying the DRGs." (H. R. Conf. Rep.
No. 105-217 at 734 (1997)).
Consistent with that language, we considered non-MedPAR data both
in the rulemaking process for FY 1999 and in developing this proposed
rule. We received non-MedPAR data from entities on behalf of the
manufacturer of a specific drug, platelet inhibitors; the manufacturer
is seeking to obtain a new DRG assignment for cases involving platelet
inhibitors. The non-MedPAR data purported to show cases involving
platelet inhibitors. As discussed further below, we concluded it was
not feasible to use the non-MedPAR data submitted to us because, among
other things, we did not have information to verify that the cases
actually involved the drug, nor did we have information to verify that
the cases reflected a representative sample (and did not simply reflect
high cost cases).
Effective October 1, 1998, we implemented a code for platelet
inhibitors, but until we receive bills for Medicare discharges
occurring during FY 1999, the MedPAR data do not enable us to
distinguish between cases with platelet inhibitors and cases without
platelet inhibitors (63 FR 40963). Representatives of the
pharmaceutical company first presented us with non-MedPAR data during
the rulemaking process for FY 1999. The data was compiled by a health
information company, and purported to show, for cases from a sample of
hospitals, the average standardized charges (as calculated by the
health information company) for different classes of patients.
In the FY 1999 final rule, we stated a number of reasons why we
rejected the non-MedPAR data we had received. First, we could not
validate whether the data reflected Medicare beneficiaries. Second, the
data came from a limited number of hospitals (83) having an information
sharing contract with the health information company that compiled the
database; the company failed to provide us with information that would
enable us to verify whether the data reflected a representative sample
of hospitals or claims. Third, for over 90 percent of the cases, the
company failed to provide us with information on which hospital
furnished the treatment. This means that we could not validate the data
on standardized charges nor could we use the data to determine an
appropriate DRG weight for the DRG from which the cases would be
reclassified. For these reasons (and others), we concluded in the July
31, 1998 final rule that we could not use the data to change the DRG
assignment of cases involving platelet inhibitor drug therapy from DRG
112 (Percutaneous Cardiovascular Pacemaker Procedures) to DRG 116
(Other Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery
Stent Implant).
After publication of the July 31, 1998 final rule, we met and
corresponded on several occasions with the manufacturers, vendors, and
legal representatives of the pharmaceutical company in an effort to
resolve data issues. We reiterated that, among other things, we needed
to know for each case

[[Page 24724]]

the hospital that furnished the services. We have not received
information necessary to validate the data itself or its
representativeness.
We remain open to considering non-MedPAR data in the DRG
reclassification and recalibration process, but, consistent with the
Conference Report, as well as our longstanding policies, the data must
be "reliable" and "validated." The July 31, 1998 final rule
reflects the major factors that we consider in evaluating whether data
are feasible, reliable, and validated, but we believe it might be
useful to discuss these issues in greater detail.
2. The DRG Reclassification and Recalibration Process
In order to understand whether it is feasible to use non-MedPAR
data, and whether the data are reliable and validated, it is critical
to understand the DRG recalibration and reclassification process. As
described earlier, one of the first steps in the annual DRG
recalibration is that the Medicare hospital inpatient claims (in the
MedPAR file) from the preceding Federal fiscal year are classified
using the DRG classification system (proposed or final) for the
upcoming year. Cases are classified into DRGs based on the principal
diagnosis, up to eight additional diagnoses, and up to six procedures
performed during the stay, as well as age, sex, and discharge status of
the patient. Each case is classified into one and only one DRG.
As the term suggests, the relative weight for each DRG reflects
relative resource use. The recalibration process requires data that
enable us to compare resource use across DRGs. As explained earlier, as
part of the recalibration process, we standardize the charges reflected
on each Medicare claim to remove the effects of area wage differences,
the IME adjustment, and the DSH adjustment; in order to standardize
charges, we need to know which hospital furnished the service. For each
DRG, we calculate the average of the standardized charges for the cases
classified to the DRG. To calculate DRG relative weights, we compare
average standardized charges across DRGs.
In evaluating whether it is appropriate to reclassify cases from
one DRG to another, we examine the average standardized charges for
those cases. The recalibration process and the reclassification process
are integrally related; to evaluate whether cases involving a certain
procedure should be reclassified, we need to have information that (1)
enables us to identify cases that involve the procedure and cases that
do not involve the procedure, and (2) enables us to determine
appropriate DRG relative weights if certain cases are reclassified.
3. Feasible, Reliable, Validated Data
As indicated earlier, the Conference Report reflected the
conferees' belief that, "to the extent feasible," HCFA should
consider "reliable, validated data" in recalibrating and
reclassifying DRGs. The concepts of reliability and validation are
closely related. In order for us to use non-MedPAR data, the non-MedPAR
data must be reliable in and of itself in that the data must be
independently validated. When an entity submits non-MedPAR data, we
must be able to independently review the medical records and verify
that a particular procedure was performed for each of the cases that
purportedly involved the procedure. This verification requires the
identification of a particular Medicare beneficiary and the hospital
where the beneficiary was treated, as well as the dates involved.
Although it is unlikely that we would review 100 percent of thousands
of cases submitted for review, at a minimum, we must be able to
validate data through a random sampling methodology. We must also be
able to verify the charges that are reflected in the data.
Independent validation is particularly critical in part because the
non-MedPAR data might be submitted by (or on behalf of) entities that
have a financial interest in obtaining a new DRG assignment and in
obtaining the highest possible DRG relative weight. If we receive non-
MedPAR data that purport to reflect cases involving a certain procedure
and a certain level of charges, we must have some way to verify the
data.
Even if non-MedPAR data are reliable and verifiable, that does not
mean it is necessarily "feasible" to use the data for purposes of
recalibration and reclassification. In order to be feasible for these
purposes, the non-MedPAR data must enable us to appropriately measure
relative resource use across DRGs. It is critical that cases are
classified into one and only one DRG in the recalibration process, and
that we have information that enables us to standardize charges for
each case and determine appropriate DRG relative weights. Moreover, the
data must reflect a complete set of cases or, at a minimum, a
representative sample of hospitals and claims.
If cases are classified into more than one DRG (or into the
incorrect DRG) in the recalibration process, or if the non-MedPAR data
reflect an unrepresentative sample of cases, the measure of relative
resource would be distorted. For example, cases of percutaneous
transluminal coronary angioplasty (PTCA) treated with GPIIb/IIIa
platelet inhibitors (procedure code 99.20) are currently classified to
DRG 112. The drug manufacturer has provided us with information on the
average charges for a sample of cases that purportedly involve PTCA,
for the purpose of evaluating whether these cases should be moved to
the higher-weighted DRG 116. However, without adequate identification
of the cases to allow us to specifically identify all of the cases
treated with platelet inhibitors, the relative weight for DRG 112 would
reflect the costs of platelet inhibitor cases. This distortion would
result in excessive payments under DRG 112, and thus undermine the
integrity of the recalibration process.
Therefore, in order for the use of non-MedPAR data to be feasible,
generally we must be able to accurately and completely identify all of
the cases to be reclassified from one DRG to another. At a minimum, we
must have some mechanism for ensuring that DRG weights are not
inappropriately inflated (or deflated) to the extent that a DRG weight
reflects cases that would be reclassified to a different DRG.
In short, then, for use of non-MedPAR data to be feasible for
purposes of DRG recalibration and reclassification, the data must,
among other things (1) be independently verifiable, (2) reflect a
complete set of cases (or a representative sample of cases), and (3)
enable us to calculate appropriate DRG relative weights and ensure that
cases are classified to the "correct" DRG, and to one DRG only, in
the recalibration process.
Applying this analysis, the non-MEDPAR data we have received with
respect to platelet inhibitors are unreliable and its use is not
feasible. The health information company, on behalf of the
pharmaceutical company, has provided us with a sample of cases that
purported to reflect platelet inhibitors, and also purported to reflect
the standardized charges for those cases, but the company has failed to
provide us with information that would enable us to verify that the
cases actually involved platelet inhibitors or verify the level of
charges.
Moreover, the data are not useful for purposes of measuring
relative resource use. We have not received sufficient information to
verify whether the hospitals are representative of all hospitals in the
country and whether the non-MedPAR data reflects a representative
sample of all cases involving platelet inhibitors. Also, we have not
received sufficient information

[[Page 24725]]

to use the non-MedPAR data to calculate appropriate DRG relative
weights.
4. Submission of Data
Finally, in order for use of non-MEDPAR data to be feasible, we
must have sufficient time to evaluate and test the data. The time
necessary to do so depends upon the nature and quality of the data
submitted. Generally, however, a significant sample of the data should
be submitted by August 1, approximately 8 months prior to the
publication of the proposed rule, so that we can test the data and make
a preliminary assessment as to the feasibility of its use.
Subsequently, a complete database should be submitted no later than
December 1 for consideration in conjunction with the next year's
proposed rule.
5. How the Prospective Payment System Ensures Access to New
Technologies
As noted at the outset of this discussion, the Conference Report
that accompanied the BBA indicated that we should consider non-MEDPAR
data, to the extent feasible, "in order to ensure that Medicare
beneficiaries have access to innovative new drug therapies." (H. R.
Conf. Rep. No. 105-217 at 734 (1997)) There seems to be a concern that,
if a new technology is introduced, and if the new technology is costly,
then Medicare would not make adequate payment if the new technology is
not immediately placed in a new DRG. This concern is unfounded. As
explained below, the Medicare hospital inpatient prospective payment
does ensure access to new drug therapies, and new technologies in
general.
First, to the extent a case involving a new technology is extremely
costly relative to the cases reflected in the DRG relative weight, the
hospital might qualify for outlier payments, additional payments over
and above the standard PPS payment.
Second, Medicare promotes access to new technologies by making
payments under the propsective payment system that are designed to
ensure that Medicare payments for a hospital's cases as a whole are
adequate. We establish DRGs based on factors such as clinical coherence
and resource utilization. Each diagnosis-related group encompasses a
variety of cases, reflecting a range of services and a range of
resources. Generally, then, each DRG reflects some higher cost cases
and some lower cost cases.
For some cases, the hospital's costs might be higher than the
payment under the propsective payment system; this does not mean that
the DRG classifications are "inappropriate." For other cases, the
hospital's costs will be lower than the payment under the prospective
payment system. We believe that Medicare makes appropriate payments for
a hospital's cases as a whole.
Each year we examine the best data available to assess whether DRG
changes are appropriate and to recalibrate DRG relative weights. As we
have indicated on numerous occasions, it usually takes 2 years from the
time a procedure is assigned a code to collect the appropriate MedPAR
data and then make an assessment as to whether a DRG change is
appropriate. This timetable applies to reclassifications that would
lead to decreased payment as well as those that would increase payment.
In fact, the introduction of new technologies itself might lead to
either higher than average costs or lower costs.
Our ability to evaluate and implement potential DRG changes depends
on the availability of validated, representative data. We believe that
our policies ensure access to new technologies and are critical to the
integrity of the recalibration process. As explained above, we remain
open to using non-MedPAR data if the data are reliable and validated
and enable us to appropriately measure relative resource use.

III. Proposed Changes to the Hospital Wage Index

A. Background

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

B. FY 2000 Wage Index Update

The proposed FY 2000 wage index values in section VI of the
Addendum to this proposed rule (effective for hospital discharges
occurring on or after October 1, 1999 and before October 1, 2000) are
based on the data collected from the Medicare cost reports submitted by
hospitals for cost reporting periods beginning in FY 1996 (the FY 1999
wage index was based on FY 1995 wage data).
We note that the FY 1999 wage index published in the July 31, 1998
final rule was further revised on February 25, 1999 (64 FR 9378) to
reflect approved revisions to the hospital wage data used to compute
the wage index. In that final rule, we implemented revised wage index
values, geographic adjustment factors, operating standardized amounts,
and capital Federal rates for hospitals subject to the inpatient
hospital prospective payment system. These changes are effective for
discharges occurring on or after March 1, 1999.
The proposed FY 2000 wage index includes the following categories
of data associated with costs paid under the

[[Page 24726]]

hospital inpatient prospective payment system (as well as outpatient
costs), which were also included in the FY 1999 wage index:
<bullet> Salaries and hours from short-term, acute care hospitals.
<bullet> Home office costs and hours.
<bullet> Certain contract labor costs and hours.
<bullet> Wage-related costs.
Consistent with the wage index methodology for FY 1999, the
proposed wage index for FY 2000 also continues to exclude the direct
and overhead salaries and hours for services not paid through the
inpatient prospective payment system such as skilled nursing facility
services, home health services, or other subprovider components that
are not subject to the prospective payment system.
We calculate a separate Puerto Rico-specific wage index and apply
it to the Puerto Rico standardized amount. (See 62 FR 45984 and 46041.)
This wage index is based solely on Puerto Rico's data. Finally, section
4410 of the BBA provides that, for discharges on or after October 1,
1997, the area wage index applicable to any hospital that is not
located in a rural area may not be less than the area wage index
applicable to hospitals located in rural areas in that State.

C. FY 2000 Wage Index Proposals

In the July 31, 1998 final rule, we reiterated our position that,
to the greatest degree possible, the hospital wage index should reflect
the wage costs associated with the areas of the hospital included under
the hospital inpatient prospective payment system (63 FR 40970). That
final rule contained a detailed discussion concerning the costs related
to teaching physicians, residents, and CRNAs, all of which are paid by
Medicare separately from the prospective payment system. For reasons
outlined in detail in that final rule, we decided not to remove those
costs from the calculation of the FY 1999 wage index, but to review
updated data and consider removing them in developing the FY 2000 wage
index.
In response to concerns within the hospital industry related to the
removal of these costs from the wage index calculation, the American
Hospital Association (AHA) convened a workgroup to develop a consensus
recommendation. The workgroup, which consisted of representatives from
national and state hospital associations, recommended that costs
related to teaching physicians, residents, and CRNAs should be phased
out of the wage index calculation over a 5-year period. As discussed in
more detail below, based upon our analysis of hospitals' FY 1996 wage
data, and consistent with the AHA workgroup's recommendation, we are
proposing to phase out these costs from the calculation of the wage
index over a 5-year period. The proposed FY 2000 wage index is based on
a blend of 80 percent of an average hourly wage including these costs,
and 20 percent of an average hourly wage excluding these costs.
1. Teaching Physician Costs
Before FY 1999, we included direct physician Part A costs and
excluded contract physician Part A costs from the wage index
calculation. Since some States prohibit hospitals from directly
employing physicians, hospitals in these States were unable to include
physician Part A costs because they were incurred under contract rather
than directly. Therefore, for cost reporting periods beginning in 1995,
we began separately collecting physician Part A costs (both direct and
contract) so we could evaluate how to best handle these costs in the
wage index calculation. Based on our analysis of the 1995 wage data, we
decided to include the contract physician salaries in the wage index
beginning with FY 1999.
In the July 31, 1998 final rule, in response to comments regarding
the inclusion in physician Part A costs of teaching physician costs for
which teaching hospitals are already compensated through the Medicare
GME payment, we stated that we would collect teaching physician data
"as expeditiously as possible in order to analyze whether it is
feasible to separate teaching physician costs from other physician Part
A costs" (63 FR 40968). Excluding teaching physician costs from the
wage index calculation is consistent with our general policy to exclude
from that calculation those costs that are paid separately from the
prospective payment system.
Because the FY 1996 cost reports did not identify teaching
physician salaries and hours separately from physician Part A costs, we
instructed our fiscal intermediaries to collect, through a survey,
teaching physician costs and hours from the teaching hospitals they
service. Specifically, we requested collection of data on the costs and
hours related to teaching physicians that were included in Line 4
(salaried), Line 10 (contracted), Line 12 (home office and related
organizations), and Line 18 (wage-related costs) of the Worksheet S-3,
Part II. In our instructions accompanying the survey, we indicated that
these teaching-related costs are those payable under the per resident
amounts (Sec. 413.86) and reported on Worksheet A, Line 23 of the
hospital's cost report.
The survey data collected as of the last week of January 1999 are
included in the preliminary public use file made available on the
Internet on February 5, 1999. At that time, we had received completed
surveys for over one-half of teaching hospitals reporting physician
Part A costs on their Worksheet S-3, Part II (372 out of 700). In early
February 1999, we instructed intermediaries to review the survey data
for consistency with the Supplemental Worksheet A-8-2 of the hospitals'
cost reports. Supplemental Worksheet A-8-2 is used to apply the
reasonable compensation equivalency limits to the costs of provider-
based physicians, itemizing these costs by the corresponding line
number on Worksheet A.
When we notified the fiscal intermediaries (and the fiscal
intermediaries notified the hospitals) of the availability to review
the survey data on the Internet, we also established deadlines of March
5, 1999 for hospitals to request changes to the teaching survey data,
and April 5, 1999, for the fiscal intermediaries to submit the data to
HCRIS. The additional data collected from the hospitals through the
fiscal intermediaries by April 5 will be included in the final wage
data file released in May 1999.
Due to the extraordinary effort needed to collect these data and
the importance of accurately removing teaching physician costs, we will
consider requests from a hospital to revise its teaching survey data as
reflected on the final wage data file released in May 1999. (We are not
extending the deadline for requests for revisions to cost report data.)
Requests must be received by HCFA and the hospital's fiscal
intermediary no later than June 7, 1999, and must include all necessary
supporting documentation. As described above, these data were not
originally collected on the FY 1996 cost report. The deadlines
established under our annual process for editing and verifying the wage
data reflect the fact that hospitals prepare and submit their cost
reports at least 1 year, and generally more than 1 year, before the
deadline for requesting changes. Because the timeframe in which the
survey data were collected was considerably shorter, we have extended
the deadline for revising those data.
Since we published the July 31, 1998 final rule, we have received a
recommendation from the hospital industry concerning the methodology
that could be used to exclude physician

[[Page 24727]]

teaching-related costs from the wage index. The industry recommended
that we implement a 5-year phase-out of all physician Part A wage costs
that are teaching-related, as well as all resident and Part A CRNA
costs. In FY 2000, the first year of the phase-out, the applicable wage
index would be based on a blend of 80 percent of the current policy,
which would include all physician Part A costs, and 20 percent of the
new policy, which would exclude teaching physician Part A, resident,
and CRNA costs. The percentages would be adjusted 20 percent each year
until FY 2004, when all teaching physician, resident, and CRNA costs
would be eliminated from the wage index calculation.
The workgroup also recommended that if the teaching data collected
by the intermediaries are not accurate or reliable, HCFA would include
only 20 percent of reported physician Part A costs in the calculation,
based on the assumption that 80 percent of total physician Part A costs
are related to teaching physicians.
We appreciate the industry's willingness to work with us on this
issue and recommend a reasonable and practical solution. In developing
our proposed FY 2000 wage index, we have adopted most of the components
of this recommendation.
In developing the proposed FY 2000 wage index, we calculated the
teaching costs to be removed from the wage index as follow. If we had
complete survey data for a hospital, that amount was subtracted from
the amount reported on the Worksheet S-3 for physician Part A costs.
However, relying solely on the survey data would have resulted in the
removal of no teaching physician costs for many hospitals.
As noted above, the hospital industry recommended that if HCFA
believes the survey data are not reliable or accurate, it should remove
80 percent of the total physician Part A costs and hours. Although we
considered this option, we believe that removing 80 percent of the
total physician Part A costs and hours across the board would not
recognize the variations among hospitals in terms of the percentage of
their physician Part A costs consisting of teaching physician costs. Of
the hospitals for which we have survey data, teaching physician costs,
as reflected on the survey, amount to, on average, approximately 68
percent. If we adopted the recommended methodology, we would not only
negate the efforts of those hospitals and their fiscal intermediaries
that did complete the teaching physician survey, we would also actually
penalize hospitals that cooperated in completing the survey by removing
an amount in excess of actual teaching physician Part A costs they
reported.
Therefore, under our proposal, for any hospital that completed the
survey, we removed from the wage data the physician Part A teaching
costs and hours reported on the survey form. These data had been
verified by the fiscal intermediary before submission to HCFA. If we
did not have survey data for a teaching hospital as of February 22,
1999, we removed 80 percent of the hospital's reported total physician
Part A costs and hours for the proposed wage index. Based upon our
communications with fiscal intermediaries, we believe we will have a
substantially higher response rate for the survey data by the time we
calculate the final FY 2000 wage index values. As discussed above, we
have instructed the fiscal intermediaries to undertake a further
attempt to collect these data for those hospitals that initially did
not report survey data. We believe that since the average percentage of
teaching costs compared to total physician Part A costs is less than 80
percent, it would be an advantage to a hospital to complete the survey.
Although removing 80 percent from the amount reported on the
Worksheet S-3 for physician Part A costs allows an estimate of teaching
physician costs to be removed in the majority of cases in which survey
data are not available, there are instances in which a teaching
hospital did not report either survey data or any physician Part A
costs on its Worksheet S-3. We have identified 72 such teaching
hospitals in our database. For purposes of calculating the proposed FY
2000 wage index for these 72 hospitals, we subtracted the costs
reported on Line 23 of the Worksheet A, Column 1 (Resident and Other
Program Costs) from Line 1 of the Worksheet S-3. These costs (from Line
23, Column 1 of Worksheet A) are included in Line 1 of the Worksheet S-
3, which is the sum of Column 1, Worksheet A. They also represent costs
for which the hospital is paid through the per resident amount under
the direct GME payment. Therefore, we believe it is appropriate to
remove these costs from the wage index calculation in situations in
which hospitals have failed to otherwise identify their teaching
physician costs. To determine the hours to be removed, we divided the
costs reported on Line 23 of the Worksheet A, Column 1 by the national
average hourly wage for physician Part A costs based upon Line 4 of the
Worksheet S-3 (the national average hourly wage is $54.48). We have
indicated these 72 hospitals by an asterisk in Table 3C of this
proposed rule.
We invite comments as to whether the proposed method we have used
to remove teaching-related costs based on the amount included in Line
23, Column 1 of Worksheet A would be an appropriate method for removing
GME costs in the future (and perhaps other excluded area costs as
well). We are especially concerned that the earliest cost report on
which we will be able to make the necessary changes to capture the
separate reporting of teaching physician Part A costs would be cost
reports that would be submitted for cost reporting periods beginning
during FY 1998. Therefore, we are considering the potential for
subtracting the costs in Lines 20, 22, and 23 of Worksheet A from Line
1 of Worksheet S-3, Part II, in calculating the FY 2001 wage index. The
current Worksheet S-3 is not designed to net out of Line 1 costs that
are otherwise included in Column 1 of Worksheet A, but it would be
possible to use data from the Worksheet A in a manner similar to that
described above.
2. Resident and CRNA Part A Costs
The wage index presently includes salaries and wage-related costs
for residents in approved medical education programs and for CRNAs
employed by hospitals under the rural pass-through provision
(Sec. 412.113(c)). Because Medicare pays for these costs outside the
prospective payment system, removing these costs from the wage index
calculation would be consistent with our general policy to exclude
costs that are not paid through the prospective payment system.
However, because these costs were not separately identifiable before
the FY 1995 wage data, we could not remove them.
We began collecting the resident and CRNA wage data separately on
the FY 1995 cost report. However, there were data reporting problems
associated with these costs. For example, the original FY 1995 cost
report instructions for reporting resident costs on Line 6 of Worksheet
S-3, Part III, erroneously included teaching physician salaries and
other teaching program costs. Also, the FY 1995 Worksheet S-3 did not
provide for separate reporting of CRNA wage-related costs. These
problems were corrected in the reporting instructions for the FY 1996
cost report, and we are now proposing to remove CRNA and resident costs
over a 5-year period.
3. Transition Period
The proposed FY 2000 wage index is based on a blend of 80 percent
of

[[Page 24728]]

hospitals' average hourly wages without removing the costs and hours
associated with teaching physician Part A, residents, and CRNAs, and 20
percent of the average hourly wage after removing these costs and hours
from the wage index calculation. This methodology is consistent with
the recommendation of the industry workgroup for a 5-year phase-out of
these costs. The transition methodology is discussed in detail in
section III.E of this preamble.

D. Verification of Wage Data From the Medicare Cost Report

The data for the proposed FY 2000 wage index were obtained from
Worksheet S-3, Parts II and III of the FY 1996 Medicare cost reports.
The data file used to construct the proposed wage index includes FY
1996 data submitted to the Health Care Provider Cost Report Information
System (HCRIS) as of early February 1999. As in past years, we
performed an intensive review of the wage data, mostly through the use
of edits designed to identify aberrant data.
From mid-January to mid-February 1999, we asked our fiscal
intermediaries to revise or verify data elements that resulted in
specific edit failures. Some unresolved data elements are included in
the calculation of the proposed FY 2000 wage index pending their
resolution before calculation of the final FY 2000 wage index. We have
instructed the intermediaries to complete their verification of
questionable data elements and to transmit any changes to the wage data
(through HCRIS) no later than April 5, 1999. We expect that all
unresolved data elements will be resolved by that date. The revised
data will be reflected in the final rule.
Also, as part of our editing process, we removed data for eight
hospitals that failed edits. For four of these hospitals, we were
unable to obtain sufficient documentation to verify or revise the data
because the hospitals are no longer participating in the Medicare
program or are in bankruptcy status. Two hospitals had negative average
hourly wages after allocating overhead to their excluded areas, and
were therefore removed from the calculation. The data from the
remaining two hospitals were removed because inclusion of their data
would have significantly distorted the wage index values. The data for
these hospitals will be included in the final wage index if we receive
corrected data that pass our edits. As a result, the proposed FY 2000
wage index is calculated based on FY 1996 wage data for 5,035
hospitals.

E. Computation of the Wage Index

The method used to compute the proposed FY 2000 wage index is as
follows:
Step 1--As noted above, we are proposing to base the FY 2000 wage
index on wage data reported on the FY 1996 Medicare cost reports. We
gathered data from each of the non-Federal, short-term, acute care
hospitals for which data were reported on the Worksheet S-3, Parts II
and III of the Medicare cost report for the hospital's cost reporting
period beginning on or after October 1, 1995 and before October 1,
1996. In addition, we included data from a few hospitals that had cost
reporting periods beginning in September 1995 and reported a cost
reporting period exceeding 52 weeks. These data were included because
no other data from these hospitals would be available for the cost
reporting period described above, and because particular labor market
areas might be affected due to the omission of these hospitals.
However, we generally describe these wage data as FY 1996 data.
Step 2--Salaries--The method used to compute a hospital's average
hourly wage is a blend of 80 percent of the hospital's average hourly
wage including all teaching physician Part A, resident, and CRNA costs,
and 20 percent of the hospital's average hourly wage after eliminating
all teaching physician, resident, and CRNA costs.
In calculating a hospital's average salaries plus wage-related
costs, including all teaching physician Part A, resident, and CRNA
costs, we subtracted from Line 1 (total salaries) the Part B salaries
reported on Lines 3 and 5, home office salaries reported on Line 7, and
excluded salaries reported on Lines 8 and 8.01 (that is, direct
salaries attributable to skilled nursing facility services, home health
services, and other subprovider components not subject to the
prospective payment system). We also subtracted from Line 1 the
salaries for which no hours were reported on Lines 2, 4, and 6. To
determine total salaries plus wage-related costs, we added to the net
hospital salaries the costs of contract labor for direct patient care,
certain top management, and physician Part A services (Lines 9 and 10),
home office salaries and wage-related costs reported by the hospital on
Lines 11 and 12, and nonexcluded area wage-related costs (Lines 13, 14,
16, 18, and 20). We note that contract labor and home office salaries
for which no corresponding hours are reported were not included.
We then calculated a hospital's salaries plus wage-related costs by
subtracting from total salaries the salaries plus wage-related costs
for teaching physicians (see section III.C.1 of this preamble for a
detail discussion of this policy), Part A CRNAs (Lines 2 and 16), and
residents (Lines 6 and 20).
Step 3--Hours--With the exception of wage-related costs, for which
there are no associated hours, we computed total hours using the same
methods as described for salaries in Step 2.
Step 4--For each hospital reporting both total overhead salaries
and total overhead hours greater than zero, we then allocated overhead
costs. First, we determined the ratio of excluded area hours (sum of
Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours
(Line 1 minus Lines 3, 5, and 7 of Worksheet S-3, Part II). We then
computed the amounts of overhead salaries and hours to be allocated to
excluded areas by multiplying the above ratio by the total overhead
salaries and hours reported on Line 13 of Worksheet S-3, Part III.
Finally, we subtracted the computed overhead salaries and hours
associated with excluded areas from the total salaries and hours
derived in Steps 2 and 3.
Step 5--For each hospital, we adjusted the total salaries plus
wage-related costs to a common period to determine total adjusted
salaries plus wage-related costs. To make the wage adjustment, we
estimated the percentage change in the employment cost index (ECI) for
compensation for each 30-day increment from October 14, 1995 through
April 15, 1997 for private industry hospital workers from the Bureau of
Labor Statistics' Compensation and Working Conditions. We use the ECI
because it reflects the price increase associated with total
compensation (salaries plus fringes) rather than just the increase in
salaries. In addition, the ECI includes managers as well as other
hospital workers. This methodology to compute the monthly update
factors uses actual quarterly ECI data and assures that the update
factors match the actual quarterly and annual percent changes. The
factors used to adjust the hospital's data were based on the midpoint
of the cost reporting period, as indicated below.

Midpoint of Cost Reporting Period
------------------------------------------------------------------------
Adjustment
After Before factor
------------------------------------------------------------------------
10/14/95......................................... 11/15/95 1.023163
11/14/95......................................... 12/15/95 1.021153
12/14/95......................................... 01/15/96 1.019151
01/14/96......................................... 02/15/96 1.017157
02/14/96......................................... 03/15/96 1.015246
03/14/96......................................... 04/15/96 1.013489

[[Page 24729]]

04/14/96......................................... 05/15/96 1.011888
05/14/96......................................... 06/15/96 1.010428
06/14/96......................................... 07/15/96 1.009099
07/14/96......................................... 08/15/96 1.007900
08/14/96......................................... 09/15/96 1.006788
09/14/96......................................... 10/15/96 1.005719
10/14/96......................................... 11/15/96 1.004695
11/14/96......................................... 12/15/96 1.003653
12/14/96......................................... 01/15/97 1.002529
01/14/97......................................... 02/15/97 1.001325
02/14/97......................................... 03/15/97 1.000000
03/14/97......................................... 04/15/97 0.998514
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning
January 1, 1996 and ending December 31, 1996 is June 30, 1996. An
adjustment factor of 1.009099 would be applied to the wages of a
hospital with such a cost reporting period. In addition, for the data
for any cost reporting period that began in FY 1996 and covers a period
of less than 360 days or more than 370 days, we annualized the data to
reflect a 1-year cost report. Annualization is accomplished by dividing
the data by the number of days in the cost report and then multiplying
the results by 365.
Step 6--Each hospital was assigned to its appropriate urban or
rural labor market area before any reclassifications under sections
1886(d)(8)(B) or 1886(d)(10) of the Act. Within each urban or rural
labor market area, we added the total adjusted salaries plus wage-
related costs obtained in Step 5 for all hospitals in that area to
determine the total adjusted salaries plus wage-related costs for the
labor market area.
Step 7--We divided the total adjusted salaries plus wage-related
costs obtained under both methods in Step 6 by the sum of the
corresponding total hours (from Step 4) for all hospitals in each labor
market area to determine an average hourly wage for the area.
Because the proposed FY 2000 wage index is based on a blend of
average hourly wages, we then added 80 percent of the average hourly
wage calculated without removing teaching physician Part A, residents,
and CRNA costs, and 20 percent of the average hourly wage calculated
with these costs removed.
Step 8--We added the total adjusted salaries plus wage-related
costs obtained in Step 5 for all hospitals in the nation and then
divided the sum by the national sum of total hours from Step 4 to
arrive at a national average hourly wage (using the same blending
methodology described in Step 7). Using the data as described above,
the national average hourly wage is $20.9675.
Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8.
Step 10--Following the process set forth above, we developed a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. (The national Puerto Rico
standardized amount is adjusted by a wage index calculated for all
Puerto Rico labor market areas based on the national average hourly
wage as described above.) We added the total adjusted salaries plus
wage-related costs (as calculated in Step 5) for all hospitals in
Puerto Rico and divided the sum by the total hours for Puerto Rico (as
calculated in Step 4) to arrive at an overall average hourly wage of
$9.96607 for Puerto Rico. For each labor market area in Puerto Rico, we
calculated the hospital wage index value by dividing the area average
hourly wage (as calculated in Step 7) by the overall Puerto Rico
average hourly wage.
Step 11--Section 4410 of the BBA provides that, for discharges on
or after October 1, 1997, the area wage index applicable to any
hospital that is not located in a rural area may not be less than the
area wage index applicable to hospitals located in rural areas in that
State. Furthermore, this wage index floor is to be implemented in such
a manner as to assure that aggregate prospective payment system
payments are not greater or less than those that would have been made
in the year if this section did not apply. For FY 2000, this change
affects 185 hospitals in 39 MSAs. The MSAs affected by this provision
are identified in Table 4A by a footnote.

F. Revisions to the Wage Index Based on Hospital Redesignation

Under section 1886(d)(8)(B) of the Act, hospitals in certain rural
counties adjacent to one or more MSAs are considered to be located in
one of the adjacent MSAs if certain standards are met. Under section
1886(d)(10) of the Act, the Medicare Geographic Classification Review
Board (MGCRB) considers applications by hospitals for geographic
reclassification for purposes of payment under the prospective payment
system.
The methodology for determining the wage index values for
redesignated hospitals is applied jointly to the hospitals located in
those rural counties that were deemed urban under section 1886(d)(8)(B)
of the Act and those hospitals that were reclassified as a result of
the MGCRB decisions under section 1886(d)(10) of the Act. Section
1886(d)(8)(C) of the Act provides that the application of the wage
index to redesignated hospitals is dependent on the hypothetical impact
that the wage data from these hospitals would have on the wage index
value for the area to which they have been redesignated. Therefore, as
provided in section 1886(d)(8)(C) of the Act, the wage index values
were determined by considering the following:
<bullet> If including the wage data for the redesignated hospitals
would reduce the wage index value for the area to which the hospitals
are redesignated by 1 percentage point or less, the area wage index
value determined exclusive of the wage data for the redesignated
hospitals applies to the redesignated hospitals.
<bullet> If including the wage data for the redesignated hospitals
reduces the wage index value for the area to which the hospitals are
redesignated by more than 1 percentage point, the hospitals that are
redesignated are subject to that combined wage index value.
<bullet> If including the wage data for the redesignated hospitals
increases the wage index value for the area to which the hospitals are
redesignated, both the area and the redesignated hospitals receive the
combined wage index value.
<bullet> The wage index value for a redesignated urban or rural
hospital cannot be reduced below the wage index value for the rural
areas of the State in which the hospital is located.
<bullet> Rural areas whose wage index values would be reduced by
excluding the wage data for hospitals that have been redesignated to
another area continue to have their wage index values calculated as if
no redesignation had occurred.
<bullet> Rural areas whose wage index values increase as a result
of excluding the wage data for the hospitals that have been
redesignated to another area have their wage index values calculated
exclusive of the wage data of the redesignated hospitals.
<bullet> The wage index value for an urban area is calculated
exclusive of the wage data for hospitals that have been reclassified to
another area. However, geographic reclassification may not reduce the
wage index value for an urban area below the statewide rural wage index
value.
We note that, except for those rural areas in which redesignation
would reduce the rural wage index value, the wage index value for each
area is computed exclusive of the wage data for hospitals that have
been redesignated from the area for purposes of their wage index. As a
result, several urban areas listed in Table 4A have no hospitals

[[Page 24730]]

remaining in the area. This is because all the hospitals originally in
these urban areas have been reclassified to another area by the MGCRB.
These areas with no remaining hospitals receive the prereclassified
wage index value. The prereclassified wage index value will apply as
long as the area remains empty.
The proposed revised wage index values for FY 2000 are shown in
Tables 4A, 4B, 4C, and 4F in the Addendum to this proposed rule.
Hospitals that are redesignated should use the wage index values shown
in Table 4C. Areas in Table 4C may have more than one wage index value
because the wage index value for a redesignated urban or rural hospital
cannot be reduced below the wage index value for the rural areas of the
State in which the hospital is located. When the wage index value of
the area to which a hospital is redesignated is lower than the wage
index value for the rural areas of the State in which the hospital is
located, the redesignated hospital receives the higher wage index
value, that is, the wage index value for the rural areas of the State
in which it is located, rather than the wage index value otherwise
applicable to the redesignated hospitals.
Tables 4D and 4E list the average hourly wage for each labor market
area, before the redesignation of hospitals, based on the FY 1996 wage
data. In addition, Table 3C in the Addendum to this proposed rule
includes the adjusted average hourly wage for each hospital based on
the preliminary FY 1996 data as of February 22, 1999. The MGCRB will
use the average hourly wage published in the final rule to evaluate a
hospital's application for reclassification for FY 2001, unless that
average hourly wage is later revised in accordance with the wage data
correction policy described in Sec. 412.63(w)(2). In such cases, the
MGCRB will use the most recent revised data used for purposes of the
hospital wage index. We note that in adjudicating these wage index
reclassification requests during FY 2000, the MGCRB will use the
average hourly wages for each hospital and labor market area that are
reflected in the final FY 2000 wage index.
At the time this proposed wage index was constructed, the MGCRB had
completed its review of FY 2000 reclassification requests. The proposed
FY 2000 wage index values incorporate all 441 hospitals redesignated
for purposes of the wage index (hospitals redesignated under section
1886(d)(8)(B) or 1886(d)(10) of the Act) for FY 2000. The final number
of reclassifications may be different because some MGCRB decisions are
still under review by the Administrator and because some hospitals may
withdraw their requests for reclassification.
Any changes to the wage index that result from withdrawals of
requests for reclassification, wage index corrections, appeals, and the
Administrator's review process will be incorporated into the wage index
values published in the final rule following this proposed rule. The
changes may affect not only the wage index value for specific
geographic areas, but also the wage index value redesignated hospitals
receive, that is, whether they receive the wage index value for the

area to which they are redesignated, or a wage index value that
includes the data for both the hospitals already in the area and the
redesignated hospitals. Further, the wage index value for the area from
which the hospitals are redesignated may be affected.
Under Sec. 412.273, hospitals that have been reclassified by the
MGCRB are permitted to withdraw their applications within 45 days of
the publication of this Federal Register document. The request for
withdrawal of an application for reclassification that would be
effective in FY 2000 must be received by the MGCRB by June 21, 1999. A
hospital that requests to withdraw its application may not later
request that the MGCRB decision be reinstated.

G. Requests for Wage Data Corrections

To allow hospitals time to evaluate the wage data used to construct
the proposed FY 2000 hospital wage index, we made available to the
public a data file containing the FY 1996 hospital wage data. As stated
in section II.D of this preamble, the data file used to construct the
proposed wage index includes FY 1996 data submitted to HCRIS as of
early February 1999. In a memorandum dated February 1, 1999, we
instructed all Medicare intermediaries to inform the prospective
payment hospitals that they serve of the availability of the wage data
file and the process and timeframe for requesting revisions. The wage
data file was made available February 5, 1999 through the Internet at
HCFA's home page (http://www.hcfa.gov). We also instructed the
intermediaries to advise hospitals of the availability of these data
either through their representative hospital organizations or directly
from HCFA. Additional details on ordering this data file are discussed
in section IX.A of this preamble, "Requests for Data from the
Public."
In addition, Table 3C in the Addendum to this proposed rule
contains each hospital's adjusted average hourly wage used to construct
the proposed wage index values. It should be noted that the hospital
average hourly wages shown in Table 3C do not reflect any changes made
to a hospital's data after February 22, 1999. Changes approved by a
hospital's fiscal intermediary and forwarded to HCRIS by April 5, 1999
will be reflected on the final public use wage data file scheduled to
be made available May 7, 1999.
We believe hospitals have had ample time to ensure the accuracy of
their FY 1996 wage data. Moreover, the ultimate responsibility for
accurately completing the cost report rests with the hospital, which
must attest to the accuracy of the data at the time the cost report is
filed. However, if, after review of the wage data file released
February 5, 1999, a hospital believed that its FY 1996 wage data were
incorrectly reported, the hospital was to submit corrections along with
complete, detailed supporting documentation to its intermediary by
March 5, 1999. Hospitals were notified of this deadline, and of all
other possible deadlines and requirements, through written
communications from their fiscal intermediaries in early February 1999.
Any wage data corrections to be reflected in the final wage index
must have been reviewed and verified by the intermediary and
transmitted to HCFA on or before April 5, 1999. (The deadline for
hospitals to request changes from their fiscal intermediaries was March
5, 1999.) These deadlines are necessary to allow sufficient time to
review and process the data so that the final wage index calculation
can be completed for development of the final prospective payment rates
to be published by August 1, 1999. We cannot guarantee that corrections
transmitted to HCFA after April 5, 1999 will be reflected in the final
wage index.
After reviewing requested changes submitted by hospitals,
intermediaries transmitted any revised cost reports to HCRIS and
forwarded a copy of the revised Worksheet S-3, Parts II and III to the
hospitals. In addition, fiscal intermediaries were to notify hospitals
of the changes or the reasons that changes were not accepted.
This procedure ensures that hospitals have every opportunity to
verify the data that will be used to construct their wage index values.
We believe that fiscal intermediaries are generally in the best
position to make evaluations regarding the appropriateness of a
particular cost and whether it should be included in the wage index
data. However, if a hospital disagrees with the intermediary's
resolution of a requested change, the hospital may

[[Page 24731]]

contact HCFA in an effort to resolve policy disputes. We note that the
April 5 deadline also applies to these requested changes. We will not
consider factual determinations at this time, as these should have been
resolved earlier in the process.
We have created the process described above to resolve all
substantive wage data correction disputes before we finalize the wage
data for the FY 2000 payment rates. Accordingly, hospitals that do not
meet the procedural deadlines set forth above will not be afforded a
later opportunity to submit wage data corrections or to dispute the
intermediary's decision with respect to requested changes.
The final wage data public use file will be released by May 7,
1999. Hospitals should examine both Table 3C of this proposed rule and
the May 7 final public use wage data file (which reflects revisions to
the data used to calculate the values in Table 3C) to verify the data
HCFA is using to calculate the wage index. Hospitals will have until
June 7, 1999 to submit requests to correct errors in the final wage
data due to data entry or tabulation errors by the intermediary or
HCFA. The correction requests that will be considered at that time will
be limited to errors in the entry or tabulation of the final wage data
that the hospital could not have known about before the release of the
final wage data public use file.
The final wage data file released on May 7, 1999 will contain the
wage data that will be used to construct the wage index values in the
final rule. As noted above in section III.C of this preamble, this file
will include hospitals' teaching survey data as well as cost report
data. As with the file made available in February 1999, HCFA will make
the final wage data file released in May 1999 available to hospital
associations and the public (on the Internet). However, with the
exception of the teaching survey data, this file is being made
available only for the limited purpose of identifying any potential
errors made by HCFA or the intermediary in the entry of the final wage
data that result from the correction process described above (with the
March 5 deadline), not for the initiation of new wage data correction
requests. Hospitals are encouraged to review their hospital wage data
promptly after the release of the final file.
If, after reviewing the final file, a hospital believes that its
wage data are incorrect due to a fiscal intermediary or HCFA error in
the entry or tabulation of the final wage data, it should send a letter
to both its fiscal intermediary and HCFA. The letters should outline
why the hospital believes an error exists and provide all supporting
information, including dates. These requests must be received by HCFA
and the intermediaries no later than June 7, 1999. Requests mailed to
HCFA should be sent to: Health Care Financing Administration; Center
for Health Plans and Providers; Attention: Stephen Phillips, Technical
Advisor; Division of Acute Care; C4-07-07; 7500 Security Boulevard;
Baltimore, MD 21244-1850. Each request must also be sent to the
hospital's fiscal intermediary. The intermediary will review requests
upon receipt and contact HCFA immediately to discuss its findings.
At this point in the process, changes to the hospital wage data
will be made only in those very limited situations involving an error
by the intermediary or HCFA that the hospital could not have known
about before its review of the final wage data file. (As noted above,
however, we are also allowing hospitals to request changes to their
teaching survey data. These requests must comply with all of the
documentation and deadline requirements as otherwise specified in this
proposed rule.) Specifically, neither the intermediary nor HCFA will
accept the following types of requests at this stage of the process:
<bullet> Requests for wage data corrections that were submitted too
late to be included in the data transmitted to HCRIS on or before April
5, 1999.
<bullet> Requests for correction of errors that were not, but could
have been, identified during the hospital's review of the February 1999
wage data file.
<bullet> Requests to revisit factual determinations or policy
interpretations made by the intermediary or HCFA during the wage data
correction process.
Verified corrections to the wage index received timely (that is, by
June 7, 1999) will be incorporated into the final wage index to be
published by July 30, 1999 and effective October 1, 1999.
Again, we believe the wage data correction process described above
provides hospitals with sufficient opportunity to bring errors in their
wage data to the intermediary's attention. Moreover, because hospitals
will have access to the final wage data by early May 1999, they will
have the opportunity to detect any data entry or tabulation errors made
by the intermediary or HCFA before the development and publication of
the FY 2000 wage index by July 30, 1999 and the implementation of the
FY 2000 wage index on October 1, 1999. If hospitals avail themselves of
this opportunity, the wage index implemented on October 1 should be
free of these errors. Nevertheless, in the unlikely event that errors
should occur after that date, we retain the right to make midyear
changes to the wage index under very limited circumstances.
Specifically, in accordance with Sec. 412.63(w)(2), we may make
midyear corrections to the wage index only in those limited
circumstances in which a hospital can show (1) that the intermediary or
HCFA made an error in tabulating its data; and (2) that the hospital
could not have known about the error, or did not have an opportunity to
correct the error, before the beginning of FY 2000 (that is, by the
June 7, 1999 deadline). As indicated earlier, since a hospital will
have the opportunity to verify its data, and the intermediary will
notify the hospital of any changes, we do not foresee any specific
circumstances under which midyear corrections would be made. However,
should a midyear correction be necessary, the wage index change for the
affected area will be effective prospectively from the date the
correction is made.
In the September 1, 1994 Federal Register, we stated that we did
not believe that a "formal appeals process" regarding intermediary
decisions denying hospital requests for wage data revisions was
necessary, given the numerous opportunities provided to hospitals to
verify and revise their data (59 FR 45351). We continue to believe that
the process described above provides hospitals more than adequate
opportunity to ensure that their data are correct. Nevertheless, we
wish to clarify that, while there is no formal appeals process that
culminates before the publication of the final rule and that is
described above, hospitals may later seek formal review of denials of
requests for wage data revisions made as a result of that process.
Once the final wage index values are calculated and published in
the Federal Register, the last opportunity for a hospital to seek to
have its wage data revised is under the limited circumstances described
in Sec. 412.63(w)(2). As we noted in the September 1, 1995 Federal
Register, however, hospitals are entitled to appeal any denial of a
request for a wage data revision made as a result of HCFA's wage data
correction process to the Provider Reimbursement Review Board (PRRB),
consistent with the rules for PRRB appeals found at 42 CFR part 405,
Subpart R (60 FR 45795). As we also stated in the 1995 Federal
Register, and as the regulation at Sec. 412.63(w)(5) provides, any
subsequent reversal of a denial of a wage revision request that

[[Page 24732]]

results from a hospital's appeal to the PRRB or beyond will be given
effect by paying the hospital under a revised wage index that reflects
the revised wage data at issue. The revised wage data will not,
however, be used for purposes of revisiting past adjudications of
requests for geographic reclassification.

IV. Other Decisions and Proposed Changes to the Prospective Payment ystem for Inpatient Operating Costs and Graduate Medical Education Costs

A. Sole Community Hospitals (SCHs)(Sec. 412.92)

If a hospital is classified as a SCH because, by reason of certain
factors, it is the sole source of inpatient hospital services
reasonably available to Medicare beneficiaries in a geographic area,
the hospital is paid based on the highest of the following: the
applicable adjusted Federal rate; the updated hospital-specific rate
based on a 1982 base period; or the updated hospital-specific rate
based on a 1987 base period. Under our existing rules, urban hospitals
within 35 miles of another hospital cannot qualify as SCHs. Since 1983,
we have consistently defined an "urban" area for purposes of
determining if a hospital qualifies for SCH status as a MSA or NECMA as
defined by OMB.
In the past, we have considered and rejected two alternatives to
the MSA definitions of an urban area for SCH purposes. These
alternatives were the urbanized areas as defined by the Census Bureau
and the health facility planning areas (HFPAs) as used by the Health
Resource Services Administration. We have concluded that the MSA
definition continues to be the most appropriate geographic delimiter
available at this time. Therefore, we propose to continue to apply the
MSA definition of an urban area for SCH status purposes.
We propose to continue our current policy for several reasons.
First, as we have previously noted, since OMB considers local commuting
patterns in establishing urban definitions, we believe that residents
in urban areas have access to hospital services either by living in
close proximity to a hospital or by establishing a heavy commuting
pattern to an area in which a hospital is located (48 FR 39780,
September 1, 1983). We do not believe that either Census Bureau
urbanized areas or HFPAs take commuting patterns into account in the
way that OMB's MSAs do. We believe commuting patterns serve as an
important indicia of whether a hospital is the sole hospital reasonably
accessible by Medicare beneficiaries in an area.
In addition, we note that our use of MSAs to define urban areas for
SCH status purposes has direct statutory support. Section 1886(d)(2)(D)
of the Act specifically authorizes us to use OMB's MSA definition of
urban areas for purposes of calculating the prospective payment system
standardized amounts. SCH status represents an adjustment to the usual
prospective payment that a hospital would receive, and since that
prospective payment is based on the standardized amount, among other
factors, we believe it would be anomalous to employ one definition of
urban area for purposes of calculating the standardized amount and
another for purposes of determining if the hospital qualified as a SCH.
To do so would be to use one set of geographic delimiters in applying
the general rule (payment under the prospective payment system based on
the standardized amount) but a different set in determining exceptions
to the rule (payment under the prospective payment system adjusted to
take into account SCH status). We do not think this would be
appropriate. For this reason, also, we propose to continue to define
"urban" for SCH purposes as meaning MSAs as defined by OMB, not as
meaning either Census Bureau urbanized areas or HFPAs.

B. Rural Referral Centers (Sec. 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act,
Sec. 412.96 sets forth the criteria a hospital must meet in order to
receive special treatment under the prospective payment system as a
rural referral center. For discharges occurring before October 1, 1994,
rural referral centers received the benefit of payment based on the
other urban rather than the rural standardized amount. As of that date,
the other urban and rural standardized amounts were the same. However,
rural referral centers continue to receive special treatment under both
the disproportionate share hospital (DSH) payment adjustment and the
criteria for geographic reclassification.
One of the criteria under which a rural hospital may qualify as a
rural referral center is to have 275 or more beds available for use. A
rural hospital that does not meet the bed size criterion can qualify as
a rural referral center if the hospital meets two mandatory criteria
(specifying a minimum case-mix index and a minimum number of
discharges) and at least one of the three optional criteria (relating
to specialty composition of medical staff, source of inpatients, or
volume of referrals). With respect to the two mandatory criteria, a
hospital may be classified as a rural referral center if its--
<bullet> Case-mix index is at least equal to the lower of the
median case-mix index for urban hospitals in its census region,
excluding hospitals with approved teaching programs, or the median
case-mix index for all urban hospitals nationally; and
<bullet> Number of discharges is at least 5,000 discharges per year
or, if fewer, the median number of discharges for urban hospitals in
the census region in which the hospital is located. (The number of
discharges criterion for an osteopathic hospital is at least 3,000
discharges per year.)
1. Case-Mix Index
Section 412.96(c)(1) provides that HCFA will establish updated
national and regional case-mix index values in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. The methodology we use to determine the
proposed national and regional case-mix index values is set forth in
regulations at Sec. 412.96(c)(1)(ii). The proposed national case-mix
index value includes all urban hospitals nationwide, and the proposed
regional values are the median values of urban hospitals within each
census region, excluding those with approved teaching programs (that
is, those hospitals receiving indirect medical education payments as
provided in Sec. 412.105).
These values are based on discharges occurring during FY 1998
(October 1, 1997 through September 30, 1998) and include bills posted
to HCFA's records through December 1998. Therefore, we are proposing
that, in addition to meeting other criteria, hospitals with fewer than
275 beds, if they are to qualify for initial rural referral center
status for cost reporting periods beginning on or after October 1,
1999, must have a case-mix index value for FY 1998 that is at least--
<bullet> 1.3438; or
<bullet> The median case-mix index value for urban hospitals
(excluding hospitals with approved teaching programs as identified in
Sec. 412.105) calculated by HCFA for the census region in which the
hospital is located.
The median case-mix values by region are set forth in the following
table:

------------------------------------------------------------------------
Case-mix
Region index
value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)...................... 1.2480
2. Middle Atlantic (PA, NJ, NY).............................. 1.2504

[[Page 24733]]

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)....... 1.3269
4. East North Central (IL, IN, MI, OH, WI)................... 1.2593
5. East South Central (AL, KY, MS, TN)....................... 1.2772
6. West North Central (IA, KS, MN, MO, NE, ND, SD)........... 1.1871
7. West South Central (AR, LA, OK, TX)....................... 1.3003
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................. 1.3280
9. Pacific (AK, CA, HI, OR, WA).............................. 1.3277
------------------------------------------------------------------------

The preceding numbers will be revised in the final rule to the
extent required to reflect the updated FY 1998 MedPAR file, which will
contain data from additional bills received through March 31, 1999.
For the benefit of hospitals seeking to qualify as referral centers
or those wishing to know how their case-mix index value compares to the
criteria, we are publishing each hospital's FY 1998 case-mix index
value in Table 3C in section IV of the Addendum to this proposed rule.
In keeping with our policy on discharges, these case-mix index values
are computed based on all Medicare patient discharges subject to DRG-
based payment.
2. Discharges
Section 412.96(c)(2)(i) provides that HCFA will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. We are
proposing to update the regional standards. The proposed regional
standards are based on discharges for urban hospitals' cost reporting
periods that began during FY 1997 (that is, October 1, 1996 through
September 30, 1997). That is the latest year for which we have complete
discharge data available.
Therefore, we are proposing that, in addition to meeting other
criteria, a hospital, if it is to qualify for initial rural referral
center status for cost reporting periods beginning on or after October
1, 1999, must have as the number of discharges for its cost reporting
period that began during FY 1998 a figure that is at least--
<bullet> 5,000; or
<bullet> The median number of discharges for urban hospitals in the
census region in which the hospital is located, as indicated in the
following table.

------------------------------------------------------------------------
Number of
Region discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)..................... 6672
2. Middle Atlantic (PA, NJ, NY)............................. 8635
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)...... 7753
4. East North Central (IL, IN, MI, OH, WI).................. 7390
5. East South Central (AL, KY, MS, TN)...................... 6741
6. West North Central (IA, KS, MN, MO, NE, ND, SD).......... 5662
7. West South Central (AR, LA, OK, TX)...................... 5344
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................ 7993
9. Pacific (AK, CA, HI, OR, WA)............................. 5993
------------------------------------------------------------------------

We note that the number of discharges for hospitals in each census
region is greater than the national standard of 5,000 discharges.
Therefore, 5,000 discharges is the minimum criterion for all hospitals.
These numbers will be revised in the final rule based on the latest FY
1997 cost report data.
We reiterate that an osteopathic hospital, if it is to qualify for
rural referral center status for cost reporting periods beginning on or
after October 1, 1999, must have at least 3,000 discharges for its cost
reporting period that began during FY 1997.

C. Changes to the Indirect Medical Education Adjustment (Sec. 412.105)

Section 1886(d)(5)(B) of the Act provides that prospective payment
hospitals that have residents in an approved graduate medical education
(GME) program receive an additional payment to reflect the higher
indirect operating costs associated with GME. The regulations regarding
the calculation of this additional payment, known as the indirect
medical education (IME) adjustment, are located at Sec. 412.105.
In the August 29, 1997 final rule (62 FR 46029), we redesignated
the previous Sec. 412.105(g) as Sec. 412.105(f), and added a new
paragraph (g) to implement section 1886(d)(5)(B) of the Act as revised
by section 4621 of the Balanced Budget Act of 1997. However, when we
redesignated paragraph (g) as paragraph (f), we inadvertently did not
revise all of the relevant cross-references to reflect this
redesignation. Specifically, at Sec. 412.105(f)(1)(iii), there are
three cross-references to paragraph (g)(1)(ii). These cross-references
are incorrect in light of the redesignation of previous paragraph (g)
as paragraph (f). We are proposing to revise Sec. 412.105(f)(1)(iii) to
correct these cross-references.

D. Medicare Geographic Classification Review Board: Conforming Changes
Secs. 412.256 and 412.276

In the May 12, 1998 final rule (63 FR 26321), we revised the
regulations governing the timeframes for submittal of applications by
hospitals to the MGCRB for geographic reclassifications and for MGCRB
decisions to take into consideration the revised statutory publication
schedule for the annual prospective payment policies and rates (that
is, August 1 instead of September 1) implemented by the BBA. In making
those changes, we inadvertently omitted conforming changes to two other
sections of the regulations that also specify timeframes that are
affected by the change to an August 1 publication date--Secs. 412.256
and 412.276. We propose to revise Sec. 412.256(c)(2) to specify that at
the request of the hospital, the MGCRB may, for good cause, grant a
hospital that has submitted an application by September 1 (instead of
October 1) an extension beyond September 1 (instead of October 1) to
complete its application. In addition, we propose to revise
Sec. 412.276(a) to specify that the MGCRB notifies the parties in
writing, with a copy to HCFA, and issues a decision within 180 days
after the "first day of the 13-month period preceding the Federal
fiscal year for which the hospital had filed a completed application"
for reclassification, to make the language consistent with the statute
and the May 1998 changes made to the application deadline in
Sec. 412.256(a)(2).

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

Under section 1886(h) of the Act, Medicare pays hospitals for the
direct costs of graduate medical education (GME). The payments are
based on the number of residents trained by the hospital. The BBA
revised section 1886(h) of the Act to cap the number of residents that
hospitals may count for direct GME. We have issued rules to implement
the caps for GME (62 FR 46002, August 29, 1997; 63 FR 26327, May 12,
1998; and 63 FR 40986, July 31, 1998). Since the publication of these
rules we have received a number of questions relating to GME. In
addition, we have received information related to other aspects of our
GME policies. In response to these questions and information, we are
clarifying certain GME policies and also making some technical changes
to the regulations text. In addition, we are proposing certain changes
in GME policy.

[[Page 24734]]

1. Approved Geriatric Programs
Under sections 1886(h)(5)(F) and (G) of the Act and Sec. 413.86(g),
Medicare counts each resident within an initial residency period as a
1.0 full-time equivalent (FTE) for purposes of determining GME
payments. Each resident beyond the initial residency period is counted
as 0.5 full-time equivalent. Section 1886(h)(5)(F) of the Act extends
the initial residency period by up to 2 years if an individual is in a
geriatric or preventive medicine residency or fellowship. At
Sec. 413.86(b), we specify that an "approved geriatric program" is
"a fellowship program of one or more years in length that is approved
by the Accreditation Council for Graduate Medical Education (ACGME)
under the ACGME's criteria for geriatric fellowship programs." In
recent years, geriatric programs have been approved by other national
organizations. Consistent with the statute, we are proposing to clarify
the definition of approved geriatric programs at Sec. 413.86(b) to
include fellowship programs approved by the American Osteopathic
Association, the Commission on Dental Accreditation, and the Council on
Podiatric Medical Education. These organizations, in addition to ACGME,
are recognized by HCFA as the accrediting bodies for determining
approved educational activities. We also would make a conforming change
to Sec. 413.86(g)(1)(iii) to recognize approved geriatric programs
accredited by all national approving organizations.
2. Hospital Payment for Resident Training in Nonhospital Settings
Under sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act,
hospitals may count residents working in nonhospital sites for indirect
and direct medical education respectively if the hospital incurs "all
or substantially all" of these education costs. The requirements for
counting the time residents spend training in nonhospital settings are
addressed at Sec. 413.86(f)(4). Currently, the requirements for
hospital payment under this provision are that the resident spend his
or her time in patient care activities and that a written agreement
exist between the hospital and the nonhospital site. This written
agreement must indicate that the hospital will incur the cost of the
residents' salaries and fringe benefits while the residents are
training in the nonhospital site and that the hospital is providing
reasonable compensation to the nonhospital site for supervisory
teaching activities. In addition, the written agreement must indicate
the compensation the hospital is providing to the nonhospital site for
supervisory teaching activities.
Under the statute, the time residents spend at nonhospital sites
may be counted "if the hospital incurs all, or substantially all, of
the costs of the training program in that setting." The existing
regulations text, however, is framed in terms of the hospital having an
agreement that it "will incur" the costs in the nonhospital setting.
We are proposing to make a technical change to the regulations text by
adding a new Sec. 413.86(f)(4)(iii), to clarify that in order to count
residents at a nonhospital site, the hospital must actually incur all
or substantially all of the costs for the training program, as defined
in Sec. 413.86(b), in the nonhospital site. This definition of all or
substantially all requires the hospital to incur the expenses of the
residents' salaries and fringe benefits (including travel and lodging
where applicable) and the portion of the cost of teaching physicians'
salaries and fringe benefits attributable to direct GME.
3. New Residency Programs
In the regulations we published on August 29, 1997 and May 12,
1998, we established special rules for adjusting the full-time
equivalent (FTE) resident caps for indirect and direct GME for new
medical residency programs. In general, the special rules allow for
adjustments to the caps based on a number of residents participating in
the program in its third year of existence. In Secs. 413.86(g)(6)(i)
and 413.86(g)(6)(ii), we set forth a methodology for adjusting hospital
FTE caps for new medical residency training programs established on or
after January 1, 1995. We are proposing the following clarifications,
technical changes, and policy changes:
a. In Sec. 413.86(g)(6)(i), we specify that, if a hospital had no
residents before January 1, 1995, the adjustments for new programs are
based on the highest number of residents in any program year during the
third year of the newly established program. However,
Sec. 413.86(g)(6)(ii) does not explicitly state the methodology for
adjusting caps for hospitals that did have residents in the most recent
cost reporting period ending before January 1, 1995. The adjustments of
the caps for programs established on or after January 1, 1995 and on or
before August 5, 1997, also are made based on the number of residents
in the third year of the new program. We are proposing to revise
Sec. 413.86(g)(6)(ii) to clarify that, for a hospital that did have
residents in the most recent cost reporting period ending on or before
December 31, 1996 (the proposed revised date described in section
IV.E.3.d. of this preamble), the adjustment is based on the highest
number of residents in any program year in the third year of the new
program.
b. Sections 413.86(g)(6)(i) and 413.86(g)(6)(ii) specify that the
adjustment to the cap is also based on the number of years in which
residents are expected to complete each program based on the minimum
accredited length for the type of program. We are proposing to add
language to clarify how to account for situations in which the
residents spend an entire program year (or years) at one hospital and
the remaining year (or years) of the program at another hospital. In
this situation, the adjustment to the FTE cap is based on the number of
years the residents are training at each hospital, not the minimum
accredited length for the type of program. If we were to use the
minimum accredited length for the program in this case, the total
adjustment to the cap might exceed the total accredited slots available
to the hospitals participating in the program. In the May 12, 1998
final rule (63 FR 26334), we specified that the adjustment to the FTE
cap may not exceed the number of accredited resident slots available.
c. It was brought to our attention that the regulations do not
explicitly address how to apply the cap during the first 3 years of a
new program before the adjustments to the cap are established. We are
proposing to clarify our policy on new residency programs by adding
language in Secs. 413.86(g)(6)(i) and 413.86(g)(6)(ii) to specify how
to determine the hospital's cap in the first 3 years of a new residency
program, before the implementation of the hospital's permanent
adjustment to its FTE cap effective beginning with the fourth year of
the program. We are proposing to specify that the cap may be adjusted
during each year of the first 3 years of the hospital's new residency
program, using the actual number of residents participating in the new
program. The adjustment may not exceed the number of accredited slots
available to the hospital for each program year.
d. As discussed above, on August 29, 1997, we implemented the
hospital-specific caps on the number of residents that a hospital can
count for purposes of GME payments in a final rule with comment period
(62 FR 46002). In both the May 12, 1998 and July 31, 1998 final rules
(63 FR 26327 and 63 FR 40954), we responded to comments we received on
this provision. We did not receive any comments about hospitals that
participated in residency training in the

[[Page 24735]]

past, had terminated their participation prior to the hospitals' cost
reporting period ending in calendar year 1996, and have now again begun
a new residency program. After publication of the July 31, 1998 final
rule, we were contacted by representatives of some hospitals that had a
resident cap of zero because they had temporarily terminated their GME
programs in the past and had no residents training during the cost
reporting period ending in 1996. Based on the existing regulations,
these hospitals have FTE caps of zero. There is no provision in the
existing regulations for making adjustments to the cap to allow these
hospitals to receive payment for indirect and direct GME for allopathic
and osteopathic residents.
To address this issue, we are proposing to revise
Sec. 413.86(g)(6)(i) to allow for an adjustment to a hospital's FTE cap
if the hospital had no allopathic and osteopathic residents in its cost
reporting period ending during calendar year 1996. This change would
allow all hospitals that did not participate in allopathic and
osteopathic resident training in the cost reporting period ending in
calendar year 1996 to receive adjustments to the indirect and direct
GME FTE caps for new residency programs. We believe it is appropriate
to revise the regulations to allow for payment during the first 3 years
of the new program and for an adjustment to the FTE cap 3 years after
these hospitals restart participation in residency training, similar to
the existing adjustment for hospitals that never participated in
residency training. We propose to revise Sec. 413.86(g)(6)(i) to allow
a hospital that has zero residents for the cost reporting period ending
during the calendar year 1996 to receive an adjustment. This change
would be effective for discharges occurring on or after October 1,
1999, for purposes of the IME adjustment and for cost reporting periods
beginning on or after October 1, 1999, for purposes of direct GME.
In addition, we are proposing to make a change in
Sec. 413.86(g)(6)(ii) to make the language similar to that in
Sec. 413.86(g)(6)(i) to specify that hospitals that did have residents
in the cost reporting period ending on or before December 31, 1996, are
allowed adjustments to the cap for new programs begun on or after
January 1, 1995, and on or before August 5, 1997. Currently,
Sec. 413.86(g)(6)(ii) refers to a hospital that did have residents in
its most recent cost reporting period ending on or before January 1,
1995. The regulation states that these hospitals also may qualify for
an adjustment to the caps, but only for medical residency programs
created on or after January 1, 1995, and on or before August 5, 1997.
Since we are proposing to revise Sec. 413.86(g)(6)(i) to indicate that
a hospital may qualify for an adjustment to the cap under that
paragraph if it did not have residents in the cost reporting period
ending during calendar year 1996, we are proposing to make a similar
change in Sec. 413.86(g)(6)(ii) to indicate that this paragraph
provides for an adjustment to the cap for hospitals that did have
residents in its most recent reporting period ending on or before
December 31, 1996. We are proposing this revision to make the language
of these two paragraphs consistent. Hospitals may qualify either under
Sec. 413.86(g)(6)(i) or Sec. 413.86(g)(6)(ii). For hospitals that
qualify under Sec. 413.86(g)(6)(i), the FTE caps are established 3
years after the hospital either begins or restarts participation in
residency training for programs that began on or after January 1, 1995.
However, for hospitals that qualify under Sec. 413.86(g)(6)(ii),
adjustments to the cap are limited to those programs that began on or
after January 1, 1995 and on or before August 5, 1997.
e. We are proposing to make technical changes to
Secs. 413.86(g)(6)(i) and 413.86(g)(6)(ii), which refer to whether a
hospital had residents in its most recent cost reporting period on or
before December 31, 1996. Instead of simply specifying "residents,"
we are proposing to reference "allopathic and osteopathic residents,"
because the FTE cap applies only to allopathic and osteopathy
residents. There is no FTE cap on the number of podiatry and dentistry
residents. Therefore, we are proposing to add the words "allopathic
and osteopathic" in Secs. 413.86(g)(6)(i) and 413.86(g)(6)(ii) before
the word "resident".
4. Adjustment to GME Caps for Certain Hospitals To Account for
Residents in New Medical Residency Training Programs
Section 4623 of the BBA amended section 1886(h) of the Act to
provide for "special rules" in applying FTE caps for medical
residency training programs established on or after January 1, 1995. In
the August 29, 1997 and May 12, 1998 final rules (62 FR 46002 and 63 FR
26327), we implemented special rules to account for residents in new
medical residency training programs. We are proposing to implement
another special rule to permit an adjustment to the FTE cap for a
hospital if the entire facility was under construction prior to August
5, 1997 (the date of enactment of the BBA) and if the hospital
sponsored a new medical residency training program but the residents
temporarily trained at another hospital.
Under current policies, if a new medical residency training was
established on or after January 1, 1995, a hospital may receive an
adjustment to its FTE cap to account for residents in the new program.
If the residents in the new program begin training in one hospital and
are subsequently "transferred" to another hospital, the second
hospital does not receive an adjustment to its FTE cap; if we made an
adjustment for the second hospital, then two hospitals would receive an
adjustment for the same resident.
We believe, however, that an adjustment for the second hospital
might be appropriate in certain limited circumstances. If the second
hospital sponsored a new medical residency training program but the
residents in the new program temporarily trained at the first hospital
because the second hospital was still being built, then we believe it
might be appropriate to permit an adjustment for the second hospital.
Otherwise, the second hospital's FTE cap would be zero, and the
hospital would not receive any GME or IME payments.
We are proposing to permit an adjustment under this policy only if
the second hospital (the sponsor of the new program) began construction
of its entire facility prior to the date of enactment of the BBA. Prior
to August 5, 1997, a hospital would not have had knowledge of the
provisions of the BBA and thus would not have known that a decision to
temporarily train residents at another hospital might have resulted in
the hospital being unable to receive GME and IME payments in the
future. In contrast, a hospital that began construction of an entirely
new facility on or after August 5, 1997 would have had notice of
changes in the law prior to making a decision to temporarily train
residents at another hospital.
Thus, we are proposing to add a new Sec. 413.86(g)(7) (existing
Sec. 413.86(g)(7) would be redesignated as Sec. 413.86(g)(9)) to
address application of the FTE caps with regard to a hospital that
began construction of an entire facility prior to August 5, 1997,
sponsored medical residency training programs, and temporarily trained
those residents at another hospital(s) until the new facility was
completed. For hospitals that meet these criteria, we propose that the
FTE caps will be determined in a manner similar to those hospitals that
qualify for an adjustment to the FTE cap under Sec. 413.86(g)(6)(i).
That is, the hospital's cap would equal the lesser of (a) the product
of the highest number of

[[Page 24736]]

residents in any program year during the third year of the first
program's existence for all new residency training programs at either
the newly constructed facility or the temporary training site and the
number of years in which residents are expected to complete the
programs based on the minimum accredited length for each type of
program; or (b) the number of accredited slots available for each year
of the program. If the medical residency training programs sponsored by
the newly constructed hospital have been in existence for 3 years or
more by the time the residents begin training at the newly constructed
hospital, the newly constructed hospital's cap would be the number of
residents training in the third year of the first of those programs
begun at the a temporary training site. If the medical residency
training programs sponsored by the newly constructed hospital have been
in existence for less than 3 years when the residents begin training at
the newly constructed hospital, the hospital's cap would be based on
the number of residents training at the newly constructed hospital in
the third year of the first of those programs (including the years at
the temporary training site). This provision would be effective for
portions of cost reporting periods occurring on or after October 1,
1999.
5. Temporary Adjustments to FTE Cap To Reflect Residents Affected by
Hospital Closure
In the May 12, 1998 prospective payment system final rule (63 FR
26330), we indicated that we would allow a temporary adjustment to a
hospital's resident cap under limited circumstances and if certain
criteria are met when a hospital assumes the training of additional
residents because of another hospital's closure. The temporary
adjustment to the FTE cap is available to the hospital only for the
period of time necessary to train those displaced residents. Once the
residents leave the hospital or complete their programs, the hospital
cap would be based solely on the statutory base year (with any
applicable adjustments for new medical residency training programs or
affiliated group arrangements).
Under current policies, we permit a temporary adjustment to the FTE
cap for a hospital only if it assumed additional medical residents from
a hospital that closed in the July 1996-June 1997 residency training
year. We are proposing to allow adjustments to address hospital
closures after this period. Thus, we would allow an adjustment for a
hospital if it takes on additional residents from a hospital that
closes at any time on or after July 1, 1996. This adjustment is
intended to account for residents who may have partially completed a
medical residency training program and would be unable to complete
their training without a residency position at another hospital.
We are proposing this change because hospitals have indicated a
reluctance to accept additional residents from a closed hospital
without a temporary adjustment to their caps. Therefore, we are
proposing to add a new Sec. 413.86(g)(8) to allow a temporary
adjustment to a hospital's FTE cap to reflect residents added because
of a hospital's closure at any time on or after July 1, 1996. We would
allow an adjustment to a hospital's FTE cap if the hospital meets the
following criteria: (a) the hospital is training additional residents
from a hospital that closed on or after July 1, 1996; and (b) the
hospital that is training the additional residents who are assumed from
the closed hospital submits a request to its fiscal intermediary at
least 60 days before the beginning of training of the residents for a
temporary adjustment to its FTE cap, documents that the hospital is
eligible for this temporary adjustment to its FTE cap by identifying
the residents who have come from the closed hospital and have caused
the hospital to exceed its cap, and specifies the length of time that
the adjustment is needed. After the displaced residents leave the
hospital's training program or complete their residency program, the
hospital's cap would be based solely on the statutory base year (with
any applicable adjustments for new medical residency training programs
or affiliated group arrangements).
6. Determining the Weighted Number of FTE Residents
Section 413.86(g)(1)(ii) states that for residency programs in
osteopathy, dentistry, and podiatry, the minimum requirement for
certification in a specialty or subspecialty is the minimum number of
years of formal training necessary to satisfy the requirements of the
appropriate approving body listed in Sec. 415.200(a). This reference is
incorrect. The correct section in which approving bodies for residency
programs are listed is Sec. 415.152. We propose to make this
correction.
Section 413.86(g)(1)(i) specifies that the initial residency period
is the minimum number of years of formal training necessary to satisfy
board eligibility in the particular specialty for which the resident is
training, as specified in the 1985-1986 Directory of Residency Training
Programs. Section 1886(h)(5)(G)(iii) of the Act allows the Secretary to
increase or decrease the initial residency period if the minimum number
of years of formal training specified in a later edition of the
directory is different from the period specified in the 1985-1986
Directory of Residency Training Programs. We are proposing to revise
the regulations text to state that the initial residency period is
determined using the most recently published edition of the Graduate
Medical Education Directory, not the 1985-1986 Directory.
7. Clarification of a Statement in the Preamble of the May 12, 1998
Final Rule Relating to Affiliated Groups
In the May 12, 1998 final rule (63 FR 26341), in the third column
of page 26341, in the sentence prior to section "O. Payment to Managed
Care Plans for Graduate Medical Education," we stated, "If the
combined FTE counts for the individual hospitals that are members of
the same affiliated group do not exceed the aggregate cap, we will pay
each hospital based on its FTE cap as adjusted per agreements." The
phrase "do not exceed" should have read "exceed." Thus, the
sentence should have read, "If the combined FTE counts for individual
hospitals that are members of the same affiliated group exceed the
aggregate cap, we will pay each hospital based on its FTE cap as
adjusted per agreements." We regret any confusion that resulted from
this misstatement.

V. Proposed Changes to the Prospective Payment System for Capital-Related Costs: Special Exceptions Process

Section 1886(g) of the Act requires the Secretary to pay for
hospital capital-related costs "in accordance with a prospective
payment system established by the Secretary." Under the statute, the
Secretary has broad authority in establishing and implementing the
capital prospective payment system. We initially implemented the
capital prospective payment system in an August 30, 1991 final rule (56
FR 43409), in which we established a 10-year transition period to
change the payment methodology for Medicare inpatient capital-related
costs from a reasonable cost-based methodology to a prospective
methodology (based fully on the Federal rate).
Generally, during the transition period, inpatient capital-related
costs will be paid on a per discharge basis, and the amount of payment
depends on the relationship between the hospital-specific rate and the
Federal rate during the hospital's base year. A hospital with

[[Page 24737]]

a base year hospital-specific rate less than the Federal rate will be
paid under the fully prospective payment methodology during the
transition period. This method is based on a dynamic blend percentage
of the hospital's hospital-specific rate and the applicable Federal
rate for each year during the transition period. A hospital with a base
period hospital-specific rate greater than the Federal rate will be
paid under the hold harmless payment methodology during the transition
period. A hospital paid under the hold harmless payment methodology
receives the higher of (1) a blended payment of 85 percent of
reasonable cost for old capital plus an amount for new capital based on
a portion of the Federal rate or (2) a payment based on 100 percent of
the adjusted Federal rate. The amount recognized as old capital is
generally limited to the allowable Medicare capital-related costs that
were in use for patient care as of December 31, 1990. Under limited
circumstances, capital-related costs for assets obligated prior to
December 31, 1990, but put in use for patient care after December 31,
1990 may also be recognized as old capital if certain conditions are
met. These costs are known as obligated capital costs. New capital
costs are generally defined as allowable Medicare capital-related costs
for assets put in use for patient care after December 31, 1990.
Beginning in FY 2001, at the conclusion of the transition period for
the capital prospective payment system, capital payments will be based
solely on the Federal rate for most hospitals.
In the August 30, 1991 final rule, we also established a capital
exceptions policy, which provides for exceptions payments during the
transition period (Sec. 412.348). We also indicated that we would
carefully monitor the impact of the capital prospective payment system
in order to determine whether some type of permanent exceptions process
was necessary and the circumstances under which additional payments
would be made.
In the Conference Report that accompanied the Omnibus Budget
Reconciliation Act (OBRA) of 1993 (Pub. L. 103-66), Congress addressed
obligated capital criteria for hospitals in States with a lengthy
certificate of need (CON) process. The language states, "The conferees
note that in the proposed rule for fiscal year 1994 changes to the
hospital inpatient prospective payment system that was published in the
Federal Register on May 26, 1993, the Secretary indicated that
insufficient information was available to complete a systematic
evaluation of the obligated capital criteria for hospitals in states
with a lengthy Certificate-of-Need process in time to consider
appropriate changes during the fiscal year 1994 rulemaking process. The
conferees expect the Secretary to complete the assessment in time for
consideration in the fiscal year 1995 rulemaking process and that
appropriate changes in payment policy will be made to address the
problems of hospitals subject to a lengthy Certificate-of-Need review
process or subject to other circumstances which are not fully addressed
in the current rules. In addition, the conferees believe the Secretary
should evaluate whether current policies provide adequate protection to
sole community hospitals and hospitals that serve a disproportionate
share of low income patients." (H.R. Conf. Rep. No. 103-66, at 744
(1993)).
In the May 27, 1994 proposed hospital inpatient prospective payment
rule (59 FR 27744), we described our analysis of provisions related to
obligated capital for hospitals subject to lengthy CON processes and
proposed a change to the deadline for putting an asset into use for
patient care (Sec. 412.302(c)(2)(i)(D)). We proposed changing the
deadline from "the earlier of" September 30, 1996, or 4 years from
the date of CON approval to "the later of" September 30, 1996, or 4
years from the date of CON approval.
In addition, in the May 27, 1994 proposed rule, we noted that the
same hospitals that had asked for changes in the obligated capital
provisions had also recommended changes to the capital exceptions
policy, which would provide exceptions payments after the conclusion of
the capital prospective payment transition period. These hospitals had
asked that the minimum payment level for urban hospitals with at least
100 beds and a DSH percentage of at least 20.2 percent be guaranteed
through the rest of the transition and extended for at least 10 years
after the transition. We noted that we had tried to address the
concerns of these hospitals in developing the proposed special
exceptions process that was discussed in the same proposed rule.
In the September 1, 1994 final rule (59 FR 45376), we adopted the
proposed change to the deadline for putting an asset into use in the
obligated capital regulations (Sec. 412.348). We also implemented the
capital special exceptions process and adopted qualifying criteria for
the classes of eligible hospitals. The classes of eligible hospitals
include urban hospitals with a DSH percentage of 20.2 percent and at
least 100 beds and sole community hospitals.
Under the special exceptions provision at Sec. 412.348(g), an
additional payment may be made for up to 10 years beyond the end of the
capital prospective payment system transition period for eligible
hospitals that meet (1) a project need requirement, (2) a project size
requirement, and (3) in the case of certain urban hospitals, an excess
capacity test. In the September 1, 1994 final rule, we described the
special exceptions process as "* * * narrowly defined, focusing on a
small group of hospitals who found themselves in a disadvantaged
position. The target hospitals were those who had an immediate and
imperative need to begin major renovations or replacements just after
the beginning of the capital prospective payment system. These
hospitals would not be eligible for protection under the old capital
and obligated capital provisions, and would not have been allowed any
time to accrue excess capital prospective payments to fund these
projects." (59 FR 45385)
In addition to sole community hospitals and urban hospitals with at
least 100 beds that have a DSH percentage of at least 20.2 percent,
hospitals eligible for special exceptions include urban hospitals with
at least 100 beds that receive at least 30 percent of their revenue
from State or local funds for indigent care, and hospitals with a
combined inpatient Medicare and Medicaid utilization of at least 70
percent.
To qualify for a special exceptions payment, a hospital must
satisfy a project need requirement as described at Sec. 412.348(g)(2)
and a project size requirement as described at Sec. 412.348(g)(5). For
hospitals in States with CON requirements, the project need requirement
is satisfied by obtaining a CON approval. For other hospitals, the
project need requirement is satisfied by meeting an age of assets test.
The project size requirement is satisfied if the hospital completes the
qualifying project between the period beginning on or after its first
cost reporting period beginning on or after October 1, 1991, and the
end of its last cost reporting period beginning before October 1, 2001,
and the project costs are (1) at least $200 million or (2) at least 100
percent of the hospital's operating cost during the first 12-month cost
reporting period beginning on or after October 1, 1991. The minimum
payment level under special exceptions for all qualifying hospitals is
70 percent of allowable capital-related costs. Special exception
payments are offset against positive Medicare capital and operating
margins.

[[Page 24738]]

When we established the special exceptions process, we selected the
hospital's cost reporting period beginning before October 1, 2001, as
the project completion date in order to limit cost-based exceptions
payments to a period of not more than 10 years beyond the end of the
transition to the fully Federal capital prospective payment system.
Because hospitals are eligible to receive special exceptions payments
for up to 10 years from the year in which they complete their project
(but for not more than 10 years after September 30, 2001, the end of
the capital prospective payment transition), if a project is completed
by September 30, 2001, exceptions payments could continue up to
September 30, 2011. In addition, we believed that for projects
completed after the September 30, 2001, hospitals would have had the
opportunity to reserve their prior years' capital prospective payment
system payments for financing projects.
In the July 31, 1998 final rule (63 FR 40999), we stated that a few
hospitals had expressed concern with the required completion date of
October 1, 2001, and other qualifying criteria for the special
exceptions payment. Therefore, we solicited certain information from
hospitals on major capital construction projects that might qualify for
the capital special exceptions payments so we could determine if any
changes in the special exceptions criteria or process were necessary.
Four hospitals responded timely with information on their major
capital construction projects. The hospitals submitted information
about their location, the cost of the project, the date that the
certificate of need approval was received, the start date of the
project, and the anticipated completion date.
Some hospitals suggested that we change the existing project
completion date criterion, that is, the criterion that the qualifying
projects must be completed between the hospital's first cost reporting
period beginning on or after October 1, 1991, and the end of its last
cost reporting period beginning before October 1, 2001. They proposed
that, as an alternative, a hospital be eligible for the special
exceptions payment if the hospital had received its CON approval for
the qualifying project by September 1, 1995, and had spent $750,000 or
10 percent of total project cost by that date, and that the project
completion date be changed to December 31, 2005 (which would be well
beyond the 10 years we have established for the capital prospective
payment system transition). However, other hospitals recommended that
we not institute a date by which a hospital must have received its CON
approval.
In addition, some hospitals have suggested other ways in which the
special exceptions process could be revised. Some of these hospitals
expressed concern about the project size requirement and stated that
small community-based institutions were unlikely to be able to support
debt in the range of $200 million.
We understand that a few hospitals may not meet the DSH percentage
requirement of at least 20.2 percent. Some of these hospitals suggested
lowering the qualifying percentage to 15 percent. They also suggested
changing the payment level for special exceptions from 70 percent to 85
percent and changing the requirement at Sec. 412.348(g)(8)(ii)(B) that
special exception payments be offset against positive Medicare
operating and capital margins. They suggested limiting the offset
provision to capital margins. In addition, some of these hospitals
suggested capping special exceptions payments that result from changes
to the current special exceptions process at $40 million annually.
While we have no specific proposal at this time to revise the
special exceptions process, we specifically invite comments from
hospitals and other interested parties on the suggestions and
recommendations discussed above. We note that, since the capital
special exceptions process is budget neutral, any liberalization of the
policy would require a commensurate reduction in the capital rate paid
to all hospitals. Even after the end of the capital prospective payment
system transition, we will continue to make an adjustment to the
capital Federal rate in a budget neutral manner to pay for exceptions,
as long as an exceptions policy is in force. Currently, the limited
special exceptions policy will allow for exceptions payments through
September 30, 2011.
We have little information about the impact of any of the
recommended changes, since no hospitals are currently being paid under
the special exceptions process. Until FY 2001, the special exceptions
provision pays either the same as the regular exceptions process or
less for high DSH and sole community hospitals. We will attempt to
obtain information on projects that may qualify for special exceptions
payments through our fiscal intermediaries during the comment period.
However, we are reluctant to place a significant data gathering burden
on fiscal intermediaries at this time because of their current workload
resulting from the major efforts to make the Medicare computer systems
compliant on January 1, 2000. Based on comments that we receive from
hospitals and any data received from the fiscal intermediaries, we may
address changes to the special exceptions criteria in the final rule,
or we may propose changes in the criteria in the FY 2001 hospital
inpatient prospective payment system proposed rule.

VI. Proposed Changes for Hospitals and Hospital Units Excluded From the Prospective Payment System

A. Limits on and Adjustments to the Target Amounts for Excluded
Hospitals and Units (Secs. 413.40(b)(4) and (g))

1. Updated Caps
Section 1886(b)(3) of the Act (as amended by section 4414 of the
BBA) establishes caps on the target amounts for certain excluded
hospitals and units for cost reporting periods beginning on or after
October 1, 1997 through September 30, 2002. The caps on the target
amounts apply to the following three categories of excluded hospitals:
psychiatric hospitals and units, rehabilitation hospitals and units,
and long-term care hospitals.
A discussion of how the caps on the target amounts were calculated
can be found in the August 29, 1997 final rule with comment period (62
FR 46018); the May 12, 1998 final rule (63 FR 26344); and the July 31,
1998 final rule (64 FR 41000). For purposes of calculating the caps,
the statute requires us to calculate the 75th percentile of the target
amounts for each class of hospital (psychiatric, rehabilitation, or
long-term care) for cost reporting periods ending during FY 1996. The
resulting amounts are updated by the market basket percentage to the
applicable fiscal year.
The current estimate of the market basket increase for excluded
hospitals and units for FY 2000 is 2.6 percent. Accordingly, the
proposed caps on target amounts for cost reporting periods beginning in
FY 2000 are as follows:

<bullet> Psychiatric hospitals and units: $11,067
<bullet> Rehabilitation hospitals and units: $20,071
<bullet> Long-term care hospitals: $39,596
2. New Excluded Hospitals and Units (Sec. 413.40(f))
a. Updated Caps for New Hospitals and Units. Section 1886(b)(7) of
the Act establishes a payment methodology for new psychiatric hospitals
and units, rehabilitation hospitals and units, and long-term care
hospitals. Under the statutory methodology, for a hospital that is
within a class of hospitals specified in the statute and that first

[[Page 24739]]

receives payments as a hospital or unit excluded from the prospective
payment system on or after October 1, 1997, the amount of payment will
be determined as follows. For the first two 12-month cost reporting
periods, the amount of payment is the lesser of (1) the operating costs
per case, or (2) 110 percent of the national median of target amounts
for the same class of hospitals for cost reporting periods ending
during FY 1996, updated to the first cost reporting period in which the
hospital receives payments and adjusted for differences in area wage
levels.
The proposed amounts included in the following table reflect the
updated 110 percent of the wage neutral national median target amounts
for each class of excluded hospitals and units for cost reporting
periods beginning during FY 2000. These figures are updates to the
final FY 1999 figures by the estimated market basket increase of 2.6
percent. For a new provider, the labor-related share of the target
amount is multiplied by the appropriate geographic area wage index and
added to the nonlabor-related share in order to determine the per case
limit on payment under the statutory payment methodology for new
providers.

------------------------------------------------------------------------
Labor- Nonlabor-
Class of excluded hospital or unit related related
share share
------------------------------------------------------------------------
Psychiatric....................................... $6,376 $2,536
Rehabilitation.................................... 12,537 4,984
Long-Term Care.................................... 16,158 6,424
------------------------------------------------------------------------

b. Multicampus Excluded Hospitals. Section 1886(b) of the Act, as
amended by the BBA, provides for caps on target amounts for certain
classes of excluded hospitals, and also provides a statutory payment
methodology for new excluded hospitals. A question has arisen regarding
the appropriate target amount to be used for an excluded hospital or
unit that was part of a multicampus hospital but alters its
organizational structure so that it is no longer part of that
multicampus hospital. The question was raised by long-term care
hospitals that are seeking alternate structures due to the application
of the cap on hospital-specific target amounts specified in
Sec. 413.40(c)(4)(iii).
In these cases, to determine the appropriate target amount, we must
determine whether the excluded hospital or unit established under the
organizational restructure is a new provider. Under Sec. 413.40(f)(1),
a new excluded hospital or unit is a provider of hospital inpatient
services that (1) has operated as the type of hospital or unit for
which HCFA granted it approval to participate in the Medicare program,
under present or previous ownership (or both), for less than 1 full
year; and (2) has provided the type of hospital inpatient services for
which HCFA granted it approval to participate for less than 2 full
years. For a new children's hospital, a 2-year exemption from the
application of the target amount is permitted (Sec. 413.40(f)(2)(i)).
For the first two 12-month cost reporting periods, a new psychiatric or
rehabilitation hospital or unit or a long-term care hospital receives
the lower of its new inpatient operating cost per case or 110 percent
of a national median of target amounts for the class of hospital,
updated and adjusted for area wages (Sec. 413.40(f)(2)(ii)).
If the entity that separated itself from the multicampus hospital
provides inpatient services of a different type than it had when it was
part of the multicampus hospital so that it qualifies as a different
class of excluded hospital or unit (for example, from long-term care to
rehabilitation), we would calculate a new target amount per discharge
for the newly created hospital or unit. However, if the entity does not
operate as a different class of hospital or unit, it does not meet the
criteria at Sec. 413.40(f)(1) to qualify as a new provider. Instead, if
the entity replaces a hospital or unit that had been excluded from the
prospective payment system (for example, the entity had previously been
a long-term care hospital before becoming part of the multicampus
hospital), the previously established hospital-specific target amount
for the hospital prior to becoming part of the multicampus hospital
would again be applicable. This is consistent with our current policy
for a hospital or unit excluded from the prospective payment system
that has periods in which the hospital or unit is not subject to the
target amount, as specified at Sec. 413.40(b)(1)(i). The target amount
established earlier for the hospital or unit is again applicable
despite intervening cost reporting periods during which the hospital or
unit was not subject to that target amount due to other provisions of
the law or regulations that applied while it was part of the
multicampus hospital. In contrast, we propose to revise
Sec. 413.40(b)(1)(iii) to specify that if the entity continues to
operate as the same class of hospital that is excluded from the
prospective payment system, but does not replace a provider that
existed prior to being part of a multicampus hospital (for example, a
newly created long-term care hospital became part of a multicampus
hospital and subsequently separates from the multicampus hospital to
operate separately), the base period for calculating a hospital-
specific target amount for the newly separated hospital is the first
cost reporting period of at least 12 months effective with the revised
Medicare certification.
3. Exceptions
The August 29, 1997 final rule with comment period (62 FR 46018)
specified that a hospital that has a hospital-specific target amount
that is capped at the 75th percentile of target amounts for hospitals
in the same class (psychiatric, rehabilitation, or long-term care)
would not be granted an adjustment payment (also referred to as an
exception payment) based solely on a comparison of its costs or patient
mix in its base year to its costs or patient mix in the payment year.
Since the hospital's target amount would not be determined based on its
own experience in a base year, any comparison of costs or patient mix
in its base year to costs or patient mix in the payment year would be
irrelevant.
In addition, the July 31, 1998 final rule (63 FR 41001) revised
Sec. 413.40(g)(1) to specify, under paragraph (g)(1)(iv), that in the
case of a psychiatric hospital or unit, rehabilitation hospital or
unit, or long-term care hospital, the amount of the adjustment payment
may not exceed the applicable limit amounts for hospitals of the same
class.
Similarly, for hospitals and units with a FY 1998 hospital-specific
revised target amount established under the rebasing provision at
Sec. 413.40(b)(1)(iv), in determining whether the hospital qualifies
for an adjustment and the amount of the adjustment, we compare the
hospital's operating costs to the average costs and statistics for the
cost reporting periods used to determine the FY 1998 revised target
amount. Since the rebased FY 1998 target amount is an average of three
cost reporting periods, as described in Sec. 413.40(b)(1)(iv),
comparisons of costs from the cost year to the FY 1998 cost period
would be inaccurate. Therefore, as specified in the August 29, 1997
final rule with comment period (62 FR 46018), a determination of
whether the hospital qualifies for an adjustment and the amount of an
adjustment is based on a comparison of the hospital's operating costs
and its costs used to calculate the FY 1998 rebased target amount.
The conditions that must be met to qualify for an adjustment remain
unchanged, as specified in Chapter 30 of the Provider Reimbursement
Manual. Making comparisons between the base year and the cost year
requires that each particular inpatient service be

[[Page 24740]]

compared. For example, to determine whether the hospital qualifies for
an adjustment and the amount of an adjustment for increased routine
services or an increase in a particular ancillary service, we compare
the costs incurred by the hospital in the cost year to the hospital's
routine services or ancillary services in the base year. Therefore, for
hospitals that have been rebased under the provisions of
Sec. 413.40(b)(1)(iv) and qualify for an adjustment under the
provisions of Sec. 413.40(g), the base year figures used for costs,
utilization, length-of-stay, etc., are determined based on the average
of the costs and utilization statistics from the same 3 cost reporting
years used in calculating the FY 1998 rebased target amount. While we
recognize that additional calculations are necessary to prepare an
adjustment payment request in this manner, we believe it is the most
equitable means of determining an adjustment payment. We also point out
that the averaging calculation for the various cost centers and
utilization statistics must only be performed the first year a provider
requests an adjustment after FY 1998, and thereafter those averaged
calculations may be utilized for subsequent years' adjustment requests.
Therefore, once these averages are calculated, the same values will
be used for determining the amount of any subsequent year adjustments.
We propose to revise Sec. 413.40(g)(1) to clarify these limitations
on the adjustment payments.
4. Development of Case-Mix Adjusted Prospective Payment System for
Rehabilitation Hospitals and Units
Section 4421 of the BBA added a new section 1886(j) to the Act
which mandates the phase-in of a case-mix adjusted prospective payment
system for inpatient rehabilitation services (freestanding hospitals
and units) for cost reporting periods beginning on or after October 1,
2000 and before October 1, 2002. The prospective payment system will be
fully implemented for cost reporting periods beginning on or after
October 1, 2002.
As provided in section 1886(j)(3)(A) of the Act, the prospective
payment rates will be based on the inpatient operating and capital
costs of rehabilitation facilities. Payments will be adjusted for case-
mix using patient classification groups, area wages, inflation, and
outlier and any other factors the Secretary determines necessary. We
will set prospective payment amounts so that total payments under the
system during FY 2001 and FY 2002 are projected to equal 98 percent of
the amount of payments that would have been made under the current
payment system. Outlier payments in a fiscal year may not be projected
or estimated to exceed 5 percent of the total payments based on the
rates for that fiscal year.

B. Changes in Bed Size or Status of Hospital Units Excluded Under the
Prospective Payment System

Existing regulations (Secs. 412.25(b) and (c)) specify that, for
purposes of payment to a psychiatric or rehabilitation unit that is
excluded from the prospective payment system, changes in the bed size
or the status of excluded hospital units will be recognized only at the
beginning of a cost reporting period. These regulations have been in
effect since the inception of the inpatient hospital prospective
payment system and were intended to simplify administration of the
exclusion provisions of the prospective payment systems by establishing
clear rules for the timing of changes in these excluded units.
Recently, a number of hospitals have suggested that we consider a
change in our policy to recognize, for purposes of exclusion from the
prospective payment system, reductions in number of beds in, or entire
closure of, units at any time during a cost reporting period. They
indicated that the bed capacity made available as a result of these
changes could be used, as they need them, to provide additional
services to meet patient needs in the acute care part of the hospital
that is paid under the prospective payment system.
We have evaluated the concerns of the hospitals and the effect on
the administration of the Medicare program and the health care of
beneficiaries of making these payment changes. As a result of this
evaluation, we believe it is reasonable to adopt a more flexible policy
on recognition of hospitals' changes in the use of their facilities.
However, we note that whenever a hospital establishes an excluded unit
within the hospital, our Medicare fiscal intermediary must be able to
determine costs of the unit separately from costs of the part of the
hospital paid under the prospective payment system. The proper
determination of costs ensures that the hospital is paid the correct
amount for services in each part of the facility, and that payments
under the prospective payment system do not duplicate payments made
under the rules applicable to excluded hospitals and units, or vice
versa. For this reason, we do not believe it would be appropriate to
recognize, for purposes of exclusion from the prospective payment
system, changes in the bed size or status of an excluded unit that are
so frequent that they interfere with the ability of the intermediary to
accurately determine costs.
Moreover, section 1886(d)(1)(B) of the Act authorizes exclusion
from the prospective payment system of specific types of hospitals and
units, but not of specific admissions or stays, such as admissions for
rehabilitation or psychiatric care, in a hospital paid under the
prospective payment system. Without limits on the frequency of changes
in excluded units for purposes of proper Medicare payment, there is the
potential for some hospitals to adjust the status or size of their
excluded units so frequently that the units would no longer be distinct
entities and the exclusion would effectively apply only to certain
types of care.
To provide more flexibility to hospitals while not recognizing
changes that undermine statutory requirements and principles, we
propose to revise Secs. 412.25(b) and (c) to provide that, for purposes
of exclusion from the prospective payment system, the number of beds
and square footage of an excluded unit may be decreased, or an excluded
unit may be closed in its entirety, at any time during a cost reporting
period under certain conditions. The hospital would be required to give
the fiscal intermediary and the HCFA Regional Office a 30-day advance
written notice of the intended change and to maintain all information
needed to accurately determine costs attributable to the excluded unit
and proper payments. However, any unit that is closed during a cost
reporting period could not be paid again as a unit excluded from the
prospective payment system until the start of the next cost reporting
period. If the number of beds or square footage of a unit excluded from
the prospective payment system is decreased during a cost reporting
period, that decrease would remain in effect for the remainder of that
period.
We note that the number of beds and square footage of the part of
the hospital paid under the prospective payment system may also be
affected by a change in the size or status of a unit that is excluded
from the prospective payment system. If the bed capacity and square
footage were previously part of the excluded unit and are then included
in the part of the hospital paid under the prospective payment system
and are used to treat acute patients rather than excluded unit
patients, the additional bed capacity and square footage would,
starting with the effective date of the change, be counted as part of
the

[[Page 24741]]

hospital paid under the prospective payment system. We would count the
bed capacity and square footage for purposes of calculating available
bed-days and the number of beds under Secs. 412.105 and 412.106,
relating to payments for the indirect costs of GME and service to a
disproportionate share of low-income patients. On the other hand, if
the bed capacity and square footage are taken out of service or added
to another Medicare provider, such as a distinct-part SNF, they would
not be counted as part of the hospital paid under the prospective
payment system.

C. Payment for Services Furnished at Satellite Hospital Locations

Under Medicare, each hospital is treated, for purposes of
certification, coverage, and payment, as a single institution. That is,
each entity that is approved to participate in Medicare as a
"hospital" must separately comply with applicable health and safety
requirements as a condition of participation under regulations at Part
482, with provider agreement requirements specified in regulations at
Part 489, and with requirements relating to the scope of benefits under
Medicare Part A and B specified in parts 409 and 410. Our policies that
involve the movement of patients from one hospital to another, or from
outpatient to inpatient status at a same hospital, are premised on the
assumption that each hospital is organized and operated as a separate
institution.
Section 412.22(e) of the regulations permits an entity that is
located in the same building or in separate buildings on the same
campus as another hospital to be treated, for purposes of exclusion
under the prospective payment systems, as a "hospital within a
hospital." This status is available, however, only when the entity
meets specific, stringent criteria designed to ensure that the
hospital-within-a-hospital is organized as a separate entity and
operates as a separate entity.
Recently, we have received several requests for approval of
"satellite" arrangements, under which an existing hospital that is
excluded under the prospective payment system, and that is either a
freestanding hospital or a hospital-within-a-hospital under
Sec. 412.22(e), wishes to lease space in a building or on a campus
occupied by another hospital, and, in some cases, to have most or all
services to patients furnished by the other hospital under contractual
agreements, including arrangements permitted under section 1861(w)(1)
of the Act. In most cases, a hospital intends to have several of these
satellite locations so that the hospital would not exist at any single
location, but only as an aggregation of beds located at several sites.
Generally, the excluded hospital seeks to have the satellite facility
treated as if the satellite facility were "part of" the excluded
hospital.
The fundamental problem with satellite arrangements is that the
satellite facility might be "part of" the excluded hospital only on a
nominal basis (that is, only on paper). The satellite facility might
not operate as part of the excluded hospital, but instead might
effectively be a "part of" the hospital within which it is located,
or might effectively be its own separate entity. From a payment
perspective, if the satellite facility is effectively not part of the
excluded hospital, then Medicare would make inappropriately high
payments if Medicare treats the satellite facility as part of the
excluded hospital.
Perhaps most significantly, if Medicare treated the satellite
facility as part of the excluded hospital, the services in the
satellite facility might inappropriately be paid by Medicare on the
basis of reasonable costs (subject to limits) when they should be paid
on the basis of prospective payment. If the satellite facility operates
as "part of" the prospective payment system hospital in which it is
located, and not as part of the excluded hospital with which it is
affiliated, then the considerations underlying exclusion from the
prospective payment system do not apply to the services furnished in
satellite facilities. Thus, if the satellite facility is effectively
part of the prospective payment system hospital, then the services
should be paid under the prospective payment system.
Satellite arrangements can lead to inappropriate Medicare payments
in a number of ways. For example, an excluded long-term care hospital
might set up a satellite facility within an acute care hospital paid
under the prospective payment system. Such a configuration could make
it relatively easy for the prospective payment hospital to discharge a
patient prematurely to the excluded long-term care hospital satellite
location that is in its building or on its campus. The result could be
inappropriate duplication of payment, in that the prospective payment
system hospital would receive full payment under the DRG system even if
it did not complete the acute treatment of the patient, and the
hospital excluded under the prospective payment systems would receive
payment for some services that should have been furnished in the
prospective payment system hospital and paid under the prospective
payment system. While the discharge and transfer regulations at
Sec. 412.4 provide disincentives to these inappropriate transfers in
some 10 DRGs, there are many other cases not assigned to these DRGs in
which such transfers could occur.
Another potential abuse related to duplication of Medicare payment
could occur with respect to the preadmission payment window provisions
of section 1886(a)(4) of the Act (implemented under regulations at
Secs. 412.2(c)(5) and 413.40(c)(2)). Under the regulations, services
provided by the hospital or by an entity wholly owned or operated by
the hospital within the 3 calendar days before admission to a
prospective payment system hospital, or within 1 calendar day before
admission to a hospital excluded from the prospective payment system,
are treated for payment purposes as if they had been furnished during
the inpatient stay. For prospective payment system hospitals, the
provision is designed to prevent services historically furnished by
hospitals during the early parts of inpatient stays from being
"unbundled" and furnished just prior to admission and billed on an
outpatient basis. If this situation were to occur, the result would be
that outpatient payment under Medicare Part B would be made for
services for which Part A payment is provided under the prospective
payment system, that is, duplication of payments for outpatient and
inpatient services. For hospitals excluded from the prospective payment
system, the payment window provision is intended to minimize
beneficiary liability for Part B deductible and coinsurance amounts
while encouraging use of outpatient facilities rather than inpatient
facilities when appropriate.
If excluded hospitals were able to set up satellite facilities
within hospitals paid under the prospective payment system and obtain
exclusion from the prospective payment system for the satellite
facilities, the two hospitals could easily circumvent the preadmission
payment window requirements by setting up outpatient departments of
both hospitals at each site where both have inpatient facilities, and
scheduling patients who are to be admitted to one hospital to receive
preadmission care at the outpatient department of the other hospital.
Thus, exclusion of satellite facilities could result in payments that
are inconsistent with the purpose of the payment window. (We note that
this abuse could also occur, at least theoretically, if the satellite
facilities were not excluded from the prospective payment system.
However, allowing exclusion from the

[[Page 24742]]

prospective payment system of satellites increases the likelihood that
such arrangements will actually be set up.)
There also is a potential for satellite facilities to be used as a
means to avoid the effects of section 4416 of the BBA, which is
implemented in regulations at Sec. 413.40(f)(2)(ii). This section
limits the target amounts for psychiatric and rehabilitation hospitals
and units and long-term care hospitals that are first paid as hospitals
excluded from the prospective payment system on or after October 1,
1997, to 110 percent of the national median of the target amounts of
similarly classified hospitals. This limitation applies to the
hospital's first two 12-month cost reporting periods. Section
413.40(c)(4)(iii), which implements provisions of section 4414 of the
BBA, sets the 75th percentile of the target amounts of similarly
classified hospitals as a limit on costs for psychiatric and
rehabilitation hospitals and units and long-term care hospitals
excluded from the prospective payment system before October 1, 1997. If
we permitted exclusion of satellite facilities, a hospital chain could
set up new locations and avoid the limits applicable to new providers
by characterizing the new locations as satellites of existing
hospitals. This result would effectively nullify the anticipated
budgetary savings of section 4416 of the BBA in such situations.
While many hospitals furnish care to cancer patients, exclusion
from the prospective payment system as a cancer hospital is not
available to a facility unless it was classified as such on or before
December 31, 1991 (section 1886(d)(10)(B)(v) of the act and regulations
at Sec. 412.23(f)). The statute effectively prohibits recognition of
newly established hospitals as cancer hospitals. If we were to permit
satellite locations of excluded hospitals to be set up within
prospective payment system hospitals and to be excluded from the
prospective payment system, existing cancer hospitals might set up
satellite locations in prospective payment hospitals, thus avoiding the
prohibition on new cancer hospitals. This practice would be
inconsistent with section 1886(d)(10)(B)(v) and its implementing
regulations. It also could potentially allow a hospital under the
prospective payment system to admit or transfer all high-cost cancer
patients to the "cancer hospital satellite" while making a profit on
the low-cost cancer patients remaining at the prospective payment
system hospital.
Finally, we note that rehabilitation units that are excluded from
the prospective payment system are required to have a medical director
of rehabilitation who furnishes services to the unit or its patients at
least 20 hours per week (Sec. 412.29(f)(1)). However, this requirement
presumably would not apply if the facility is described not as a unit
of the hospital in which it is based, but as a satellite of an existing
rehabilitation hospital, since that hospital would already have its
medical director. The existence of a high level of physician oversight
of rehabilitation is a key identifier of the kind of unit that provides
inpatient hospital-level rehabilitation care as its primary activity,
not merely as an adjunct or extension of acute care. We believe
allowing satellites of rehabilitation hospitals to be set up in
prospective payment system hospitals and excluded from the prospective
payment system would undermine the requirement for that level of
physician oversight, and limit our ability to exclude only those units
providing the appropriate level of rehabilitation services.
We believe that a number of excluded hospitals are seeking
satellite arrangements so that the services furnished in the satellite
facility are inappropriately paid on an excluded basis when they should
be paid on a prospective basis. We also believe that a number of
excluded hospitals are seeking satellite arrangements in order to avoid
the effect of the payment caps that apply to new hospitals and would
apply to the satellite facility if the satellite facility received
separate certification. And, as discussed above, satellite arrangements
can lead to other problems. To prevent inappropriate Medicare payment
for services furnished in satellite facilities, we propose to revise
Secs. 412.22 and 412.25 to provide for payment to satellite facilities
of hospitals and units that are excluded from the prospective payment
system under specific rules. With respect to both hospitals and units,
we would define "satellite facility" as a part of a hospital that
provides inpatient services in a building also used by another
hospital, or in one or more buildings on the same campus as buildings
also used by another hospital, but is not a "hospital-within-a-
hospital," since it is also part of another hospital. If the satellite
facility is located in a hospital that is paid under the prospective
payment system, Medicare would pay for services furnished at the
satellite facility by using the same rates that apply to the
prospective payment hospital within which the satellite is located. As
explained earlier, we believe that, if the satellite facility is
effectively "part of" the prospective payment system hospital, then
it should be paid under the prospective payment system.
If the satellite facility is located in a hospital excluded from
the prospective payment system, then Medicare would pay for the
services furnished in the satellite facility as follows: we would
examine the discharges of the satellite facility and we would apply the
target amount for the excluded hospital in which the hospital is
located, subject to the applicable cap for the hospital of which the
satellite is a part. Also, when the satellite facility is established,
we would treat the satellite facility as a new hospital for payment
purposes. That is, for the satellite's first two 12-month cost
reporting periods, the satellite would be subject to the cap that
applies to new hospitals of the same class as the hospital of which the
satellite is a part. We believe that application of the cap for new
hospitals is appropriate because we believe that a number of hospitals
are attempting to avoid the new hospital caps by characterizing
entities as satellites rather than new hospitals.
Under our proposal, satellite facilities excluded from the
prospective payment system prior to the effective date of the revised
regulations (October 1, 1999) would not be subject to those new
regulations as long as they operate under the same terms and conditions
in effect on September 30, 1999. We would make this exception available
only to those facilities that can document to the HCFA regional offices
that they are operating as satellite facilities excluded from the
prospective payment system as of that date, not to facilities that
might be excluded from the prospective payment system as of that date
and at some later time enter into satellite arrangements. The proposed
rules for payments to satellite facilities would not apply to
multicampus arrangements, that is, those in which a hospital has
several locations but does not share a building or a campus with any
other hospital at any location.
We also solicit comment on a possible further exception. In section
4417 of the BBA, Congress extended the long-term care hospital
exclusion to a hospital "that first received payment under this
subsection [subsection 1886(d)(1)(B)(iv) of the Act] in 1986 which has
an average inpatient length of stay (as determined by the Secretary) of
greater than 20 days and that has 80 percent or more of its annual
Medicare inpatient discharges with a principal diagnosis of neoplastic
disease in the 12-month cost reporting period ending in fiscal year
1997." In view of the specific provision made for a hospital meeting
these requirements, we are considering whether a satellite facility
opened by such a hospital

[[Page 24743]]

should be exempt from the proposed rules on satellites on this
preamble. We welcome comment on this issue and on whether such an
exclusion could be implemented without compromising the effectiveness
of the proposed changes.
We recognize that there may be some operational difficulties
differentiating services, costs, and discharges of the satellite
facilities from those of the existing hospital that is excluded from
the prospective payment system. If these operational problems cannot be
overcome, we might, in the final rule, revise Secs. 412.22 and 412.25
to prohibit exclusion of any hospital or hospital unit from the
prospective payment system that is structured, entirely or in part, as
a satellite facility in a hospital paid under the prospective payment
system. The effect of this change would be that all Medicare payments
to such a hospital or hospital unit with a satellite facility would be
made under the prospective payment system.
Before deciding to propose these changes, we considered whether the
hospital-within-a-hospital rules in Sec. 412.22(e) provide adequate
protection against abuses of the prospective payment system exclusion
by satellite facilities. For the reasons described below, we concluded
that they do not.
The current hospital-within-a-hospital criteria were issued through
proposed rules published in the Federal Register on May 27, 1994 (59 FR
27708) and final rules published on September 1, 1994 (59 FR 45330). In
those documents, we explained that the DRG system is based on an
averaging concept that provides appropriate payment for the type and
mix of cases treated by acute care hospitals, but that the averaging
concept underlying the DRG system does not apply to long-stay
hospitals, which have few short-stay or low-cost cases and might be
systematically underpaid if the prospective payment system were applied
to them. We explained that it would not be appropriate to make
prospective payment system exclusion available to long-stay units of
acute hospitals, since those units account for only part of the
hospital's patient load and the principles underlying the prospective
payment system do apply to the larger hospital. We also stated that the
hospital-within-a-hospital criteria, now codified at Sec. 412.22(e),
ensure that facilities structured as hospitals-within-hospitals are
sufficiently separate from the host hospitals to warrant exclusion from
the prospective payment system as separate hospitals.
The considerations that make it inappropriate to exclude long-stay
units of general hospitals from the prospective payment system also
make it inappropriate, in our view, to allow exclusion from prospective
payment system of facilities that treat only a part of the patient load
of the larger prospective payment system hospitals in which they are
located, but are presented as satellites of another facility. In
responding to a comment in the September 1, 1994 final rule, we stated
that we believe that the hospital-within-a-hospital criteria should
have application in all cases involving joint occupancy of a building
or campus by an applicant long-term hospital and another hospital (59
FR 45330). After further review of the issue, however, we have now
concluded that while the hospital-within-a-hospital criteria are
designed to prevent potential abuses similar to those posed by
satellites, the criteria themselves cannot be effectively applied to
satellite arrangements. This is because the criteria are designed to
apply to hospitals that exist only in one location. For example, under
Sec. 412.22(e)(5)(ii), one criterion for showing separate operation of
a hospital-within-a-hospital is that the hospital's costs of services
obtained under contracts or other arrangements from the host hospital
(or from a controlling third entity) be no more than 15 percent of the
hospital's total inpatient operating cost. Because a satellite facility
would integrate its costs with those of the hospital with which it is
affiliated, it is possible that the entire hospital could meet this
test even though all costs of the satellite facility were incurred
under contracts or arrangements. Likewise, the criterion regarding the
source of inpatient referrals (Sec. 412.22(e)(5)(iii)) could be met by
an entire hospital, even though most or all patients treated at a
satellite facility were referred from the hospital in which the
satellite is located. Thus, existing hospital-within-a-hospital
criteria are not adequate to deal with satellite issues.

D. Responsibility for Care of Patients in Hospitals Within Hospitals

Normally, hospitals that admit patients, including hospitals
subject to the prospective payment system and "hospitals-within-
hospitals" that are excluded from the prospective payment system,
accept overall responsibility for the patients' care and furnish all
services they require. In accordance with section 1886(d)(5)(I) of the
Act and implementing regulations at Sec. 412.4, for payment purposes,
the prospective payment system distinguishes between "discharges"
(situations in which a patient leaves an acute care hospital paid under
the prospective payment system after receiving complete acute care
treatment) and "transfers" (situations in which acute care treatment
is not completed at the first hospital and the patient is transferred
to another acute care hospital for continued, related care). The
payment rules at Sec. 413.30, which apply to hospitals excluded from
the prospective payment system, also are premised on the assumption
that discharges occur only when the excluded hospital's care of the
patient is complete.
It has come to our attention that, given the co-location of
prospective payment system facilities and facilities excluded from the
prospective payment system in a hospital-within-a-hospital, and the
absence of clinical constraints on the movement of patients, there may
be situations where, in such settings, patients appear to have been
moved from one facility to another for financial rather than clinical
reasons. The excluded hospital-within-a-hospital might have incentives
to inappropriately discharge patients early (to the prospective payment
system hospital within which it is located) in order to minimize its
overall costs and in turn to minimize its cost per discharge. If the
excluded hospital-within-a-hospital inappropriately discharges patients
to the prospective payment system hospital without providing a complete
episode of the type of care furnished by the excluded hospital, then
Medicare would make inappropriate payments to the hospital-within-a-
hospital. This is the case because payments made to an excluded
hospital are made on a per-stay basis, up to the hospital's per
discharge target amount, and any artificial decrease in the hospital's
cost per stay could lead to the hospital inappropriately avoiding its
target amount cap mandated by section 4414 of the BBA and receiving
inappropriate bonus and relief payments under section 4415 of the BBA.
For example, if a long-term care hospital has an average length of
stay of 30 days and incurs a cost per patient-day of $1,500, its
average cost per stay is $45,000 ($1,500 x 30). If that hospital
discharged 20 percent of its patients to a prospective payment system
hospital before the 30th day of their stay at the long-term care
hospital, the patients might still stay, on average, a total of 30 days
at the two hospitals. However, by transferring an increased number of
patients early during the period, the long-term care hospital would be
able to reduce its cost per discharge.
If the hospital's cap on its target amount is $38,593 and the
hospital's cost per discharge is $45,000, then the hospital's payments
would be based on

[[Page 24744]]

a target amount of $38,593. If, as a result of the inappropriate
discharges, the cost per stay is $37,500, Medicare payment to the
hospital would be based on a target amount of $37,500, plus an
additional amount under the bonus provisions of Sec. 413.40(d)(2). In
addition, a separate DRG payment would be made to the prospective
payment system hospital that completed the treatment at the satellite
location. Thus, Medicare payments for a 30-day period of inpatient care
would increase without any additional quality of care or benefit to the
patient. The additional payment would merely be a result of
artificially decreasing the long-term care hospital's cost per
discharge and adding a second payment to the prospective payment system
hospital.
We believe it is important to address possible financial incentives
for inappropriate early discharges from excluded hospitals-within-
hospitals to prospective payment system hospitals. Therefore, we
considered several approaches for preventing inappropriate Medicare
payments to an excluded hospital-within-a-hospital for inappropriate
discharges to the prospective payment system hospital in which it is
located. One approach would be to provide that, if an excluded
hospital-within-a-hospital transfers patients from its beds to beds of
the prospective payment system hospital with which it is located, the
hospital-within-a-hospital would not qualify for exclusion in the next
cost reporting period. We recognize that this approach might
"penalize" hospitals for transfers that are medically appropriate.
However, we need to balance (1) our concern with preventing
inappropriate Medicare payment and (2) our need to have a rule that is
administratively feasible.
A second possible approach would be to provide that the hospital-
within-a-hospital would qualify for exclusion only if it transfers
patients to the prospective payment system hospital only when the
services the patients require cannot be furnished by the hospital-
within-a-hospital. This approach has the advantage of specifically
targeting inappropriate early discharges, but it has the significant
disadvantage of being difficult if not impossible to administer because
of the extent of case review that would be required to implement it.
After considering these options, we have decided to propose a third
approach. Under this approach, we would deny exclusion to a hospital-
within-a-hospital for a cost reporting period if, during the most
recent cost reporting period for which information is available, the
excluded hospital-within-a-hospital transferred more than 5 percent of
its inpatients to the prospective payment system hospital in which it
is located. We believe that a 5-percent allowance of transfers under
this approach would (1) avoid the need for administratively burdensome
case review, (2) provide adequate flexibility for transfers in those
cases where the hospital-within-a-hospital is not equipped or staffed
to provide the services required by the patient, and (3) limit the
extent to which patients may be transferred inappropriately.
We welcome comments on our proposed approach as well as suggestions
on other ways to address the possible incentives for inappropriate
transfers in a manner that is administratively feasible.

E. Critical Access Hospitals (CAHS)

1. Emergency Response Time Requirements for CAHs in Frontier and Remote
Areas
Because of the high cost of staffing rural hospital emergency rooms
and the low volume of services in those facilities, we do not require
CAHs to have emergency personnel on site at all times. Thus, for CAHs,
the regulations at Sec. 485.618(d) require a doctor of medicine or a
doctor of osteopathy, a physician assistant, or a nurse practitioner
with training and experience in emergency care to be on call and
immediately available by telephone or radio contact, and available on
site within 30 minutes, on a 24-hour basis. We included this
requirement because we recognize the need of rural residents to have
reasonable access to emergency care in their local communities.
Section 1820(h) of the Act, as added by section 4201 of the BBA,
states that any medical assistance facility (MAF) in Montana shall be
deemed to have been certified by the Secretary as a CAH if that
facility is otherwise eligible to be designated by the State as a CAH.
However, under the current requirements, following the initial
transition of a MAF to CAH status, the former MAF would be subject to
the CAH requirements during any subsequent review, one of which is the
30-minute emergency response time for emergency services currently
required under Sec. 485.518(d).
Recently, some facilities have suggested that in many "frontier"
areas (that is, those having fewer than six residents per square mile),
the requirement of a 30-minute response might be too restrictive for
CAHs, especially those MAFs transitioning to CAH status.
We are aware it is costly and difficult to recruit and train the
personnel needed to operate emergency rooms in the most remote,
sparsely populated rural areas. On the other hand, in contemplating any
changes to the emergency response timeframe for CAHs, we must ensure
that the response time is not extended to the point that patient health
and safety are jeopardized.
In order to recognize the special needs of sparsely populated rural
areas in meeting beneficiaries' health needs, and at the same time to
protect patients' health and safety, we are proposing to revise
Sec. 485.618(d) to allow a response time of up to 60 minutes for a CAH
if (1) it is located in an area of the State that is defined as a
frontier area (that is, having fewer than six residents per square mile
based on the latest population data published by the Bureau of the
Census) or meets other criteria for a remote location adopted by the
State and approved by HCFA under criteria specified in its rural health
care plan under section 1820(b) of the Act; (2) the State determines
that, under its rural health care plan, allowing the longer emergency
response time is the only feasible method of providing emergency care
to residents of the area; and (3) the State maintains documentation
showing that a response time up to 60 minutes at a particular CAH it
designates is justified because other available alternatives would
increase the time required to stabilize the patient in an emergency.
The criteria for remote location would, like other parts of the rural
health care plan, be subject to review and approval by the HCFA
Regional Office, as would the State's documentation regarding the
emergency response time.
We note that, under the terms of the Montana State Code applicable
to MAFs, at times when no emergency response person is available to
come to the facility, a MAF's director of nursing is permitted to come
to the facility and authorize the transfer of a patient seeking
emergency services to another facility. Under one possible reading of
the State requirement, this activity could be seen as an alternative
way of complying with the emergency services requirement and the MAF's
(and CAH's) responsibilities under section 1867 of the Act (the
Emergency Medical Treatment and Active Labor Amendments Provision) to
provide emergency medical screening and stabilization services to
patients who come to the hospital seeking emergency treatment. We
request comments on

[[Page 24745]]

whether the Medicare regulations in Secs. 485.618(d) and 489.24 should
be further revised to explicitly permit this practice to continue
following the transition of a MAF to CAH status. We are particularly
interested in obtaining comment from practitioners on the risks and
benefits involved in adoption of this practice.
2. Compliance With Minimum Data Set (MDS) Requirements by CAHs With
Swing-Bed Approval
Existing regulations allow CAHs to obtain approval from HCFA to use
their inpatient beds to provide posthospital SNF care (Sec. 485.645).
To obtain such approval, however, the CAH must agree to meet specific
requirements that also apply to SNFs, including the comprehensive
assessment requirements at Sec. 483.20(b) of the SNF conditions of
participation.
Section 483.20(b)(1) specifies that a SNF must make a comprehensive
assessment of a resident's needs, using the resident assessment
instrument specified by the State. Section 483.20(b)(2) further
specifies that, subject to the timeframes in Sec. 413.343(b), the
assessments must be conducted within 14 calendar days after the patient
is admitted; within 14 days after the facility determines, or should
have determined, that there is a significant change in the patient's
physical or mental condition; and at least once every 12 months.
Section 413.343(b) specifies that in accordance with the methodology in
Sec. 413.337(c) related to the adjustment of the Federal rates for
case-mix (the SNF prospective payment system), patient assessments must
be performed on the 5th, 14th, 30th, 60th, and 90th days following
admission.
It is clear that the timeframes for patient assessments required
under Sec. 413.343(b) are linked to the prospective payment system for
SNFs. The methodology specifically referenced in Sec. 413.337(c) refers
to the SNF prospective payment system. Therefore, it is apparent that
the patient assessments and concomitant timeframes for performing such
assessments are inextricably intertwined with the case-mix adjustment
under the SNF prospective payment system. CAHs with swing-bed approval
are not paid for their services to SNF-level patients under that SNF
prospective payment system but are paid under the payment method
described in Sec. 413.114, which does not include a case-mix
adjustment. Therefore, the timeframes for patient assessments as
dictated by Sec. 413.343(b) are not applicable to CAHs and are not
required to be met by CAHs. Nevertheless, to make it explicit that the
patient assessment timeframes required under Sec. 413.343(b) do not
apply, we propose to revise Sec. 485.645 to state that the requirements
in Sec. 413.343(b), and the timeframes specified in Sec. 483.20, do not
apply to CAHs.

VII. MedPAC Recommendation

We have reviewed the March 1, 1999 report submitted by MedPAC to
Congress and have given its recommendations careful consideration in
conjunction with the proposals set forth in this document.
Recommendations 3A and 3B concerning the update factors for inpatient
hospital operating costs and for hospitals and hospital distinct-part
units excluded from the prospective payment system are discussed in
Appendix D to this proposed rule. Other recommendations are discussed
below.

A. Excluded Hospitals and Hospital Units (Recommendations 4B and 4C)

Recommendation: The Congress should adjust the wage-related portion
of the excluded hospital target amount caps (the 75th percentile of
target amounts for hospitals in the same class (psychiatric hospital or
unit, rehabilitation hospital or unit, or long-term care hospitals)) to
account for geographic differences in labor costs. The Commission
presumes legislation would be necessary to adjust the caps for wages.
Response: We previously addressed this issue in the May 12, 1998
final rule (63 FR 26345). In that discussion, we explain why we believe
the statutory language, the statutory scheme, and the legislative
history, viewed together, strongly argue against making a wage
adjustment in applying the target amount caps under the current
statute.
Recommendation: Additional research in case-mix classification
systems for psychiatric patients should be encouraged, with the aim of
developing a case-mix adjusted prospective payment system for
psychiatric patients in the future.
Response: As MedPAC indicated in its recommendation discussion,
prior research has indicated substantial difficulties in developing a
psychiatric case-mix classification system. Another issue is the
adequate identification of a system that reflects the unique
characteristics of psychiatric care for the Medicare population,
primarily the elderly. During the past year, we have met with industry
representatives to discuss further research efforts on this issue as
well as understand the initial impacts of the recent legislative
changes to excluded hospital payment system on psychiatric hospitals
and units. We will continue these efforts in FY 2000.

B. Disproportionate Share Hospitals (DSH) (Recommendations 3C, 3D, and
3E)

Recommendations: The Congress should require that disproportionate
share payments be distributed according to each hospital's share of
low-income patient costs, defined broadly to include all care to the
poor. The measure of low-income costs should reflect: (1) Medicare
patients eligible for Supplemental Security Income, Medicaid patients,
patients sponsored by other indigent care programs, and uninsured and
underinsured patients as represented by uncompensated care (both
charity and bad debts); and (2) services provided in both inpatient and
outpatient settings.
As under current policy, disproportionate share payment should be
made in the form of an adjustment to the per-case payment rate. In this
way, the total payment each hospital receives will reflect its volume
of Medicare patients.
Through a minimum threshold for low-income share, the formula for
distributing disproportionate share payments should concentrate
payments among hospitals with the highest shares of poor patients. A
reasonable range for this threshold would be levels that make between
50 percent and 60 percent of hospitals eligible for a payment. The size
of the payment adjustment, however, should increase gradually from zero
at the threshold. The same distribution formula should apply to all
hospitals covered by prospective payment.
The Secretary should collect the data necessary to revise the
disproportionate share payment system from all hospitals paid under
prospective payment system.
Response: We continue to give careful consideration to MedPAC's
recommendations concerning the DSH adjustment made to operating
payments under the prospective payment system.
We are in the process of preparing a report to Congress on the
Medicare DSH adjustment that includes several options for amending the
statutory disproportionate share adjustment formula. We believe that
any adjustment to the DSH formula or data sources should be directed
and supported by the Congress.
The MedPAC option involves collecting data on uncompensated care,
that is, charity and bad debts. Ideally, this would be a direct measure
of a hospital's indigent care burden. However, there are problems
associated with verification of such data and

[[Page 24746]]

consistency of reporting nationally. We appreciate the Commission's
recommendations about and assistance with the Medicare DSH adjustment
as we formulate our legislative proposal and await Congressional
action.

VIII. Other Required Information

A. Requests for Data From the Public

In order to respond promptly to public requests for data related to
the prospective payment system, we have set up a process under which
commenters can gain access to the raw data on an expedited basis.
Generally, the data are available in computer tape or cartridge format;
however, some files are available on diskette as well as on the
Internet at HTTP://WWW.HCFA.GOV/STATS/PUBFILES.HTML. Data files are
listed below with the cost of each. Anyone wishing to purchase data
tapes, cartridges, or diskettes should submit a written request along
with a company check or money order (payable to HCFA-PUF) to cover the
cost to the following address: Health Care Financing Administration,
Public Use Files, Accounting Division, P.O. Box 7520, Baltimore,
Maryland 21207-0520, (410) 786-3691. Files on the Internet may be
downloaded without charge.
1. Expanded Modified MEDPAR-Hospital (National)
The Medicare Provider Analysis and Review (MedPAR) file contains
records for 100 percent of Medicare beneficiaries using hospital
inpatient services in the United States. (The file is a Federal fiscal
year file, that is, discharges occurring October 1 through September 30
of the requested year.) The records are stripped of most data elements
that will permit identification of beneficiaries. The hospital is
identified by the 6-position Medicare billing number. The file is
available to persons qualifying under the terms of the Notice of
Proposed New Routine Uses for an Existing System of Records published
in the Federal Register on December 24, 1984 (49 FR 49941), and amended
by the July 2, 1985 notice (50 FR 27361). The national file consists of
approximately 11 million records. Under the requirements of these
notices, an agreement for use of HCFA Beneficiary Encrypted Files must
be signed by the purchaser before release of these data. For all files
requiring a signed agreement, please write or call to obtain a blank
agreement form before placing an order. Two versions of this file are
created each year. They support the following:
<bullet> Notice of Proposed Rulemaking (NPRM) published in the
Federal Register. This file, scheduled to be available by the end of
April, is derived from the MedPAR file with a cutoff of 3 months after
the end of the fiscal year (December file).
<bullet> Final Rule published in the Federal Register. The FY 1998
MedPAR file used for the FY 2000 final rule will be cutoff 6 months
after the end of the fiscal year (March file) and is scheduled to be
available by the end of April.

Media: Tape/Cartridge
File Cost: $3,655.00 per fiscal year
Periods Available: FY 1988 through FY 1998
2. Expanded Modified MedPAR-Hospital (State)
The State MedPAR file contains records for 100 percent of Medicare
beneficiaries using hospital inpatient services in a particular State.
The records are stripped of most data elements that will permit
identification of beneficiaries. The hospital is identified by the 6-
position Medicare billing number. The file is available to persons
qualifying under the terms of the Notice of Proposed New Routine Uses
for an Existing System of Records published in the December 24, 1984
Federal Register notice, and amended by the July 2, 1985 notice. This
file is a subset of the Expanded Modified MedPAR-Hospital (National) as
described above. Under the requirements of these notices, an agreement
for use of HCFA Beneficiary Encrypted Files must be signed by the
purchaser before release of these data. Two versions of this file are
created each year. They support the following:
<bullet> NPRM published in the Federal Register. This file,
scheduled to be available by the end of April, is derived from the
MedPAR file with a cutoff of 3 months after the end of the fiscal year
(December file).
<bullet> Final Rule published in the Federal Register. The FY 1998
MedPAR file used for the FY 2000 final rule will be cutoff 6 months
after the end of the fiscal year (March file) and is scheduled to be
available by the end of April.

Media: Tape/Cartridge
File Cost: $1,130.00 per State per year
Periods Available: FY 1988 through FY 1998
3. HCFA Wage Data
This file contains the hospital hours and salaries for 1996 used to
create the proposed FY 2000 prospective payment system wage index. The
file will be available by the beginning of February for the NPRM and
the beginning of May for the final rule.

------------------------------------------------------------------------
Wage data PPS fiscal
Processing year year year
------------------------------------------------------------------------
1999.......................................... 1996 2000
1998.......................................... 1995 1999
1997.......................................... 1994 1998
1996.......................................... 1993 1997
1995.......................................... 1992 1996
1994.......................................... 1991 1995
1993.......................................... 1990 1994
1992.......................................... 1989 1993
1991.......................................... 1988 1992
------------------------------------------------------------------------

These files support the following:
<bullet> NPRM published in the Federal Register.
<bullet> Final Rule published in the Federal Register.

Media: Diskette/most recent year on the Internet
File Cost: $165.00 per year
Periods Available: FY 2000 PPS Update
4. HCFA Hospital Wages Indices (Formerly: Urban and Rural Wage Index
Values Only)
This file contains a history of all wage indices since October 1,
1983.

Media: Diskette/most recent year on the Internet
File Cost: $165.00 per year
Periods Available: FY 2000 PPS Update
5. PPS SSA/FIPS MSA State and County Crosswalk
This file contains a crosswalk of State and county codes used by
the Social Security Administration (SSA) and the Federal Information
Processing Standards (FIPS), county name, and a historical list of
Metropolitan Statistical Area (MSA)

.Media: Diskette/Internet
File Cost: $165.00 per year
Periods Available: FY 2000 PPS Update
6. Reclassified Hospitals New Wage Index (Formerly: Reclassified
Hospitals by Provider Only)
This file contains a list of hospitals that were reclassified for
the purpose of assigning a new wage index. Two versions of these files
are created each year. They support the following:
<bullet> NPRM published in the Federal Register.
<bullet> Final Rule published in the Federal Register.

Media: Diskette/Internet
File Cost: $165.00 per year
Periods Available: FY 2000 PPS Update
7. PPS-IV to PPS-XII Minimum Data Sets
The Minimum Data Set contains cost, statistical, financial, and
other information from Medicare hospital cost reports. The data set
includes only the most current cost report (as submitted,

[[Page 24747]]

final settled, or reopened) submitted for a Medicare participating
hospital by the Medicare fiscal intermediary to HCFA. This data set is
updated at the end of each calendar quarter and is available on the
last day of the following month.

Media: Tape/Cartridge
------------------------------------------------------------------------
Periods
beginning and before
on or after
------------------------------------------------------------------------
PPS-IV........................................ 10/01/86 10/01/87
PPS-V......................................... 10/01/87 10/01/88
PPS-VI........................................ 10/01/88 10/01/89
PPS-VII....................................... 10/01/89 10/01/90
PPS-VIII...................................... 10/01/90 10/01/91
PPS-IX........................................ 10/01/91 10/01/92
PPS-X......................................... 10/01/92 10/01/93
PPS-XI........................................ 10/01/93 10/01/94
PPS-XII....................................... 10/01/94 10/01/95
------------------------------------------------------------------------

(Note: The PPS-XIII and PPS-XIV Minimum Data Sets are part of the
PPS-XIII and PPS-XIV Hospital Data Set Files.)

File Cost: $770.00 per year
8. PPS-IX to PPS-XII Capital Data Set
The Capital Data Set contains selected data for capital-related
costs, interest expense and related information and complete balance
sheet data from the Medicare hospital cost report. The data set
includes only the most current cost report (as submitted, final settled
or reopened) submitted for a Medicare certified hospital by the
Medicare fiscal intermediary to HCFA. This data set is updated at the
end of each calendar quarter and is available on the last day of the
following month.

(Note: The PPS-XIII and PPS-XIV Capital Data Sets are part of the
PPS-XIII and PPS-XIV Hospital Data Set Files.)

File Cost: $770.00 per year
9. PPS-XIII and PPS-XIV Hospital Data Set
The file contains cost, statistical, financial, and other data from
the Medicare Hospital Cost Report. The data set includes only the most
current cost (as submitted, final settled, or reopened) submitted for a
Medicare Certified Hospital by the Medicare Fiscal Intermediary to
HCFA. The data set are updated at the end of each calendar quarter and
is available on the last day of the following month.

Media: Diskette/Internet
File Cost: $2,500.00

------------------------------------------------------------------------
Periods
beginning and before
on or after
------------------------------------------------------------------------
PPS-XIII...................................... 10/01/95 10/01/96
PPS-XIV....................................... 10/01/96 10/01/97
------------------------------------------------------------------------

10. Provider-Specific File
This file is a component of the PRICER program used in the fiscal
intermediary's system to compute DRG payments for individual bills. The
file contains records for all prospective payment system eligible
hospitals, including hospitals in waiver States, and data elements used
in the prospective payment system recalibration processes and related
activities. Beginning with December 1988, the individual records were
enlarged to include pass-through per diems and other elements.

Media: Diskette/Internet
File Cost: $265.00
Periods Available: FY 2000 PPS Update
11. HCFA Medicare Case-Mix Index File
This file contains the Medicare case-mix index by provider number
as published in each year's update of the Medicare hospital inpatient
prospective payment system. The case-mix index is a measure of the
costliness of cases treated by a hospital relative to the cost of the
national average of all Medicare hospital cases, using DRG weights as a
measure of relative costliness of cases. Two versions of this file are
created each year. They support the following:
<bullet> NPRM published in the Federal Register.
<bullet> Final rule published in the Federal Register.

Media: Diskette/most recent year on Internet
Price: $165.00 per year/per file
Periods Available: FY 1985 through FY 1998
12. DRG Relative Weights (Formerly Table 5 DRG)
This file contains a listing of DRGs, DRG narrative description,
relative weights, and geometric and arithmetic mean lengths of stay as
published in the Federal Register. The hardcopy image has been copied
to diskette. There are two versions of this file as published in the
Federal Register:
<bullet> NPRM.
<bullet> Final rule.

Media: Diskette/Internet
File Cost: $165.00
Periods Available: FY 2000 PPS Update
13. PPS Payment Impact File
This file contains data used to estimate payments under Medicare's
hospital inpatient prospective payment systems for operating and
capital-related costs. The data are taken from various sources,
including the Provider-Specific File, Minimum Data Sets, and prior
impact files. The data set is abstracted from an internal file used for
the impact analysis of the changes to the prospective payment systems
published in the Federal Register. This file is available for release 1
month after the proposed and final rules are published in the Federal
Register.

Media: Diskette/Internet
File Cost: $165.00
Periods Available: FY 2000 PPS Update
14. AOR/BOR Tables
This file contains data used to develop the DRG relative weights.
It contains mean, maximum, minimum, standard deviation, and coefficient
of variation statistics by DRG for length of stay and standardized
charges. The BOR tables are "Before Outliers Removed" and the AOR is
"After Outliers Removed." (Outliers refers to statistical outliers,
not payment outliers.) Two versions of this file are created each year.
They support the following:
<bullet> NPRM published in the Federal Register.
<bullet> Final rule published in the Federal Register.

Media: Diskette/Internet
File Cost: $165.00
Periods Available: FY 2000 PPS Update

For further information concerning these data tapes, contact The
HCFA Public Use Files Hotline at (410) 786-3691.
Commenters interested in obtaining or discussing any other data
used in constructing this rule should contact Stephen Phillips at (410)
786-4531.

B. Public Comments

Because of the large number of items of correspondence we normally
receive on a proposed rule, we are not able to acknowledge or respond
to them individually. However, in preparing the final rule, we will
consider all comments concerning the provisions of this proposed rule
that we receive by the date and time specified in the DATES section of
this preamble and respond to those comments in the preamble to that
rule. We emphasize that, given the statutory requirement under section
1886(e)(5) of the Act that our final rule for FY 2000 be published by
August 1, 1999, we will consider only those

[[Page 24748]]

comments that deal specifically with the matters discussed in this
proposed rule.

List of Subjects

42 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare,
Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,
Reporting and recordkeeping requirements.

42 CFR Part 483

Grant programs-health, Health facilities, Health professions,
Health records, Medicaid, Medicare, Nursing homes, Nutrition, Reporting
and recordkeeping requirements, Safety.

42 CFR Part 485

Grant programs-health, Health facilities, Medicaid, Medicare,
Reporting and recordkeeping requirements.

42 CFR Chapter IV is amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

A. Part 412 is amended as follows:
1. The authority citation for Part 412 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

2. Section 412.22 is amended by adding new paragraphs (e)(6) and
(h) to read as follows:

Sec. 412.22 Excluded hospitals and hospital units: General rules.

* * * * *
(e) Hospitals-within-hospitals. * * *
(6) Responsibility for care of patients. During the most recent
cost reporting period for which information is available, the hospital
transferred no more than 5 percent of its inpatients to the prospective
payment system hospital within which it is located.
* * * * *
(h) Satellite facilities. (1) For purposes of paragraphs (h)(2)
through (h)(5) of this section, a satellite facility is a part of a
hospital that provides inpatient services in a building also used by
another hospital, or in one or more entire buildings located on the
same campus as buildings used by another hospital.
(2) Effective for cost reporting periods beginning on or after
October 1, 1999, payment for services furnished in satellite facilities
of hospitals excluded from the prospective payment systems is made in
accordance with the rules specified in paragraphs (h)(3) and (h)(4) of
this section.
(3) If the satellite facility occupies space in the same building
or on the same campus as a hospital paid under the prospective payment
system, payment for services furnished at the satellite facility is
based on the same rates that apply to the prospective payment system
hospital within which the satellite is located.
(4) If the satellite facility occupies space in the same building
or on the same campus as a hospital excluded from the prospective
payment systems, payment for services furnished at the satellite
facility is made as follows:
(i) For the first two 12-month cost reporting periods during which
the satellite facility treats patients, payment for services furnished
at the satellite facility is made in accordance with the provisions of
Sec. 413.40(f)(2) of this subchapter.
(ii) For subsequent cost reporting periods, payment for services
furnished at the satellite facility is made based on the target amount
of the excluded hospital in which the satellite is located, but is
subject to the cap at the hospital of which the satellite is a part.
(5) The provisions of paragraphs (h)(2) through (h)(4) of this
section do not apply to any hospital or entity structured as a
satellite facility on September 30, 1999, and excluded from the
prospective payment systems on that date, to the extent the hospital
continues operating under the same terms and conditions, including the
number of beds and square footage considered, for purposes of Medicare
participation and payment, to be part of the hospital, in effect on
September 30, 1999.
3. Section 412.25 is amended by revising paragraphs (b) and (c) and
adding a new paragraph (e) to read as follows:

Sec. 412.25 Excluded hospital units: common requirements.

* * * * *
(b) Changes in the size of excluded units. For purposes of
exclusions from the prospective payment systems under this section,
changes in the number of beds and square footage considered to be part
of each excluded unit are allowed as specified in paragraphs (b)(1) and
(b)(2) of this section.
(1) Increase in size. The number of beds and square footage of an
excluded unit may be increased only at the start of a cost reporting
period.
(2) Decrease in size. The number of beds and square footage of an
excluded unit may be decreased at any time during a cost reporting
period if the hospital notifies the fiscal intermediary and the HCFA
Regional Office in writing of the planned decrease at least 30 days
before the date of the decrease, and maintains the information needed
to accurately determine costs that are attributable to the excluded
unit. Any decrease in the number of beds or square footage considered
to be part of an excluded unit made during a cost reporting period
continues in effect for the remainder of that period.
(c) Changes in the status of hospital units. For purposes of
exclusions from the prospective payment systems under this section, the
status of each hospital unit (excluded or not excluded) is determined
as specified in paragraphs (c)(1) and (c)(2) of this section.
(1) The status of a hospital unit may be changed from not excluded
to excluded only at the start of a cost reporting period. If a unit is
added to a hospital after the start of a cost reporting period, it
cannot be excluded from the prospective payment systems before the
start of a hospital's next cost reporting period.
(2) The status of a hospital unit may be changed from excluded to
not excluded at any time during a cost reporting period, but only if
the hospital notifies the fiscal intermediary and the HCFA Regional
Office in writing of the change at least 30 days before the date of the
change, and maintains the information needed to accurately determine
costs that are or are not attributable to the excluded unit. A change
in the status of a unit from excluded to not excluded that is made
during a cost reporting period continues in effect for the remainder of
that period.
* * * * *
(e) Satellite facilities. (1) For purposes of paragraphs (e)(2)
through (e)(5) of this section, a satellite facility is a part of a
hospital that provides inpatient services in a building also used by
another hospital, or in one or more entire buildings located on the
same campus as buildings used by another hospital.
(2) Effective for cost reporting periods beginning on or after
October 1, 1999, payment for services furnished in psychiatric or
rehabilitation units that are structured, entirely or in part, as
satellite facilities are made in accordance with the rules specified in
paragraphs (e)(3) and (e)(4) of this section.
(3) If the satellite facility occupies space in the same building
or on the same campus as a hospital paid under the prospective payment
systems,

[[Page 24749]]

payment for services furnished at the satellite facility is based on
same rates that apply to the prospective payment system hospital within
which the satellite is located.
(4) If the satellite facility occupies space in the same building
or on the same campus as a hospital excluded from the prospective
payment systems, payment for services furnished at the satellite
facility is made as follows:
(i) For the first two 12-month cost reporting periods during which
the satellite facility treats patients, payment for services furnished
at the satellite facility is made in accordance with the provisions of
Sec. 413.40(f)(2) of this subchapter.
(ii) For subsequent cost reporting periods, payment for services
furnished at the satellite facility is made based on the target amount
of the excluded hospital in which the satellite is located, but is
subject to the cap of the hospital of which the satellite is a part.
(5) The provisions of paragraph (e)(2) through (e)(4) of this
section do not apply to any unit structured as a satellite facility on
September 30, 1999, and excluded from the prospective payment systems
on that date, to the extent the unit continues operating under the same
terms and conditions, including the number of beds and square footage
considered to be part of the unit, in effect on September 30, 1999.

Sec. 412.105 [Amended]

4. Section 412.105 is amended by revising the cross reference
"paragraph (g)(1)(ii) of this section" in paragraphs (f)(1)(iii)
(three times) and (f)(2)(v) to read "paragraph (f)(1)(ii) of this
section".

Sec. 412.256 [Amended]

5. In Sec. 412.256, paragraph (c)(2), the date "October 1",
appearing in two places, is revised to read "September 1".
6. Section 412.276 is amended by revising paragraph (a) to read as
follows:

Sec. 412.276 Timing of MGCRB decision and its appeal.

(a) Timing. The MGCRB notifies the parties in writing, with a copy
to HCFA, and issues a decision within 180 days after the first day of
the 13-month period preceding the Federal fiscal year for which a
hospital has filed a complete application. The hospital has 15 days
from the date of the decision to request Administrator review.
* * * * *

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED
PAYMENT RATES FOR SKILLED NURSING FACILITIES

B. Part 413 is amended as follows:

1. The authority citation for Part 413 is revised to read as
follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and
(n), 1871, 1881, 1883, and 1886 of the Social Security Act (42
U.S.C. 1302, 1395f(b), 1395g, 1395l, 1395l(a), (i), and (n),
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

2. Section 413.40 is amended by revising paragraphs (b)(1)(iii) and
(g)(1) to read as follows:

Sec. 413.40 Ceiling on the rate-of-increase in hospital inpatient
costs.

* * * * *
(b) Cost reporting periods subject to the rate-of-increase ceiling.
(1) Base period. * * *
(iii) When the operational structure of a hospital or unit changes
(that is, a freestanding hospital becomes a unit or vice versa, or an
entity of a multicampus hospital becomes a newly created hospital or
unit or vice versa), the base period for the hospital or unit that
changed its operational structure is the first cost reporting period of
at least 12 months effective with the revised Medicare certification
classification.
* * * * *
(g) Adjustment. (1) General rules. (i) HCFA may adjust the amount
of the operating costs considered in establishing the rate-of-increase
ceiling for one or more cost reporting periods, including both periods
subject to the ceiling and the hospital's base period, under the
circumstances specified in paragraphs (g)(2), (g)(3), and (g)(4) of
this section.
(ii) When an adjustment is requested by the hospital, HCFA makes an
adjustment only to the extent that the hospital's operating costs are
reasonable, attributable to the circumstances specified separately,
identified by the hospital and verified by the intermediary.
(iii) When an adjustment is requested by the hospital, HCFA makes
an adjustment only if the hospital's operating costs exceed the rate-
of-increase ceiling imposed under this section.
(iv) In the case of a psychiatric hospital or unit, rehabilitation
hospital or unit, or long-term care hospital, the amount of payment
under paragraph (g)(3) of this section may not exceed the payment
amount based on the target amount determined under paragraph
(c)(4)(iii) of this section.
(v) In the case of a hospital or unit that received a revised FY
1998 target amount under the rebasing provisions of paragraph
(b)(1)(iv) of this section, the amount of an adjustment payment for a
cost reporting period is based on a comparison of the hospital's
operating costs for the cost reporting period to the average costs and
statistics for the cost reporting periods used to determine the FY 1998
rebased target amount.
* * * * *

Sec. 413.86 [Amended]

3. Section 413.86 is amended as follows:
a. In paragraph (b), the definition of "approved geriatric
program" is revised to read: "Approved geriatric program means a
fellowship program of one or more years in length that is approved by
one of the national organizations listed in Sec. 415.152 of this
chapter under that respective organization's criteria for geriatric
fellowship programs."
b. In paragraph (b), under paragraph (1) of the definition of
"approved medical residency program", the reference "Sec. 415.200(a)
of this chapter" is revised to read "Sec. 415.152 of this chapter".
c. In paragraph (e)(1)(ii)(C), the reference "paragraph (j)(2) of
this section" is revised to read "paragraph (k)(1) of this section".
d. In paragraph (e)(1)(iv), the reference, "paragraph (j)(1) of
this section", is revised to read "paragraph (k)(1) of this
section".
e. A new paragraph (f)(4)(iii) is added, paragraphs (g)(1) (i),
(ii), and (iii), (g)(6) introductory text and (g)(6) (i) and (ii) are
revised, paragraph (g)(7) is redesignated as paragraph (g)(9), and new
paragraphs (g)(7) and (g)(8) are added to read as follows:

Sec. 413.86 Direct graduate medical education payments.

* * * * *
(f) Determining the total number of FTE residents. * * *
(4) * * *
(iii) The hospital must incur all or substantially all of the costs
for the training program in the nonhospital setting in accordance with
the definition in paragraph (b) of this section.
(g) Determining the weighted number of FTE residents. * * *
(1) * * *
(i) For residency programs other than those specified in paragraphs
(g)(1)(ii) and (g)(1)(iii) of this section, the initial residency
period is the minimum

[[Page 24750]]

number of years of formal training necessary to satisfy the
requirements for initial board eligibility in the particular specialty
for which the resident is training, as specified in the most recently
published edition of the Graduate Medical Education Directory.
(ii) For residency programs in osteopathy, dentistry, and podiatry,
the minimum requirement for certification in a specialty or
subspecialty is the minimum number of years of formal training
necessary to satisfy the requirements of the appropriate approving body
listed in Sec. 415.152 of this chapter.
(iii) For residency programs in geriatric medicine accredited by
the appropriate approving body listed in Sec. 415.152 of this chapter,
these programs are considered approved programs on the later of--
(A) The starting date of the program within a hospital; or
(B) The hospital's cost reporting periods beginning on or after
July 1, 1985.
* * * * *
(6) If a hospital establishes a new medical residency training
program as defined in paragraph (g)(9) of this section on or after
January 1, 1995, the hospital's FTE cap described under paragraph
(g)(4) of this section may be adjusted as follows:
(i) If a hospital had no allopathic or osteopathic residents in its
most recent cost reporting period ending on or before December 31,
1996, and it establishes a new medical residency training program on or
after January 1, 1995, the hospital's unweighted FTE resident cap under
paragraph (g)(4) of this section may be adjusted based on the product
of the highest number of residents in any program year during the third
year of the first program's existence for all new residency training
programs and the number of years in which residents are expected to
complete the program based on the minimum accredited length for the
type of program. The adjustment to the cap may not exceed the number of
accredited slots available to the hospital for the new program.
(A) If the residents are spending an entire program year (or years)
at one hospital and the remainder of the program at another hospital,
the adjustment to each respective hospital's cap is equal to the
product of the highest number of residents in any program year during
the third year of the first program's existence and the number of years
the residents are training at each respective hospital.
(B) Prior to the implementation of the hospital's adjustment to its
FTE cap beginning with the fourth year of the hospital's residency
program(s), the hospital's cap may be adjusted during each of the first
3 years of the hospital's new residency program using the actual number
of residents participating in the new program. The adjustment may not
exceed the number of accredited slots available to the hospital for
each program year.
(C) Except for rural hospitals, the cap will not be adjusted for
new programs established more than 3 years after the first program
begins training residents.
(D) Rural hospitals that qualify for an adjustment to its FTE cap
under paragraph (g)(6)(i) of this section are permitted to be part of
the same affiliated group for purposes of an aggregate FTE limit.
(ii) If a hospital had allopathic or osteopathic residents in its
most recent cost reporting period ending on or before December 31,
1996, the hospital's unweighted FTE cap may be adjusted for new medical
residency training programs established on or after January 1, 1995 and
on or before August 5, 1997. The adjustment to the hospital's FTE
resident limit for the new program is based on the product of the
highest number of residents in any program year during the third year
of the newly established program and the number of years in which
residents are expected to complete each program based on the minimum
accredited length for the type of program.
(A) If the residents are spending an entire program year (or years)
at one hospital and the remainder of the program at another hospital,
the adjustment to each respective hospital's cap is equal to the
product of the highest number of residents in any program year during
the third year of the first program's existence and the number of years
the residents are training at each respective hospital.
(B) Prior to the implementation of the hospital's adjustment to its
FTE cap beginning with the fourth year of the hospital's residency
program, the hospital's cap may be adjusted during each of the first 3
years of the hospital's new residency program, using the actual number
of residents in the new programs. The adjustment may not exceed the
number of accredited slots available to the hospital for each program
year.
* * * * *
(7) A hospital that began construction of its facility prior to
August 5, 1997, sponsored new medical residency training programs, and
temporarily trained those residents at another hospital(s) until the
facility was completed may receive an adjustment to its FTE cap.
(i) The newly constructed hospital's FTE cap is equal to the lesser
of:
(A) The product of the highest number of residents in any program
year during the third year of the first program's existence for all new
residency training programs and the number of years in which residents
are expected to complete the programs based on the minimum accredited
length for each type of program; or
(B) The number of accredited slots available to the hospital for
each year of the programs.
(ii) If the medical residency training programs sponsored by the
newly constructed hospital have been in existence for 3 years or more
by the time the residents begin training at the newly constructed
hospital, the newly constructed hospital's cap will be based on the
number of residents training in the third year of the first of those
programs begun at the temporary training site.
(iii) If the medical residency training programs sponsored by the
newly constructed hospital have been in existence for less than 3 years
by the time the residents begin training at the newly constructed
hospital, the newly constructed hospital's cap will be based on the
number of residents training at the newly constructed hospital in the
third year of the first of those programs (including the years at the
temporary training site).
(iv) The provisions of this paragraph (g)(7) are applicable during
portions of cost reporting periods occurring on or after October 1,
1999.
(8) A hospital may receive a temporary adjustment to its FTE cap to
reflect residents added because of another hospital's closure if the
hospital meets the following criteria:
(i) The hospital is training additional residents from a hospital
that closed on or after July 1, 1996.
(ii) At least 60 days before the hospital begins to train the
residents, the hospital submits a request to its fiscal intermediary
for a temporary adjustment to its FTE cap, documents that the hospital
is eligible for this temporary adjustment by identifying the residents
who have come from the closed hospital and have caused the hospital to
exceed its cap, and specifies the length of time the adjustment is
needed.
* * * * *

[[Page 24751]]

PART 483--REQUIREMENTS FOR STATES AND LONG-TERM CARE FACILITIES

C. Part 483 is amended as set forth below:
1. The authority citation for Part 483 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

2. In Sec. 483.20, the introductory text of paragraph (b)(2) is
revised to read as follows:

Sec. 483.20 Resident assessment.

* * * * *
(b) Comprehensive assessments. * * *
(2) When required. Subject to the timeframes prescribed in
Sec. 413.343(b) of this chapter, a facility must conduct a
comprehensive assessment of a resident in accordance with the
timeframes specified in paragraphs (b)(2)(i) through (iii). However,
the timeframes prescribed in Sec. 413.343(b) of this chapter do not
apply to CAHs.
* * * * *

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

D. Part 485 is amended as follows:
1. The authority citation for Part 485 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

2. Section 485.618 is amended by revising paragraph (d) to read as
follows:

Sec. 485.618 Conditions of participation: Emergency services.

* * * * *
(d) Standard: Personnel. There must be a doctor of medicine or
osteopathy, a physician assistant, or a nurse practitioner with
training or experience in emergency care on call and immediately
available by telephone or radio contact, and available on site within
the following timeframes:
(1) Within 30 minutes, on a 24-hour a day basis, if the CAH is
located in an area other than an area described in paragraph (d)(2) of
this section; or
(2) Within 60 minutes, on a 24-hour a day basis, if the following
requirements are met:
(i) The CAH is located in an area designated as frontier (that is,
an area having fewer than six residents per square mile based on the
latest population data published by the Bureau of the Census) or in an
area that meets criteria for a remote location adopted by the State in
its rural health care plan, and approved by HCFA, under section 1820(b)
of the Act;
(ii) The State has determined under criteria in its rural health
care plan that allowing an emergency response time longer than 30
minutes is the only feasible method of providing emergency care to
residents of the area served by the CAH; and
(iii) The State maintains documentation showing that the response
time of up to 60 minutes at a particular CAH it designates are
justified because other available alternatives would increase the time
needed to stabilize a patient in an emergency.
* * * * *
3. In Sec. 485.645, the introductory text of paragraph (d) is
republished and paragraph (d)(6) is revised to read as follows:

Sec. 485.645 Special requirements for CAH providers of long-term care
services ("swing beds").

* * * * *
(d) SNF services. CAH is substantially in compliance with the
following SNF requirements contained in subpart B of part 483 of this
chapter:
* * * * *
(6) Comprehensive assessment, comprehensive care plan, and
discharge planning (Sec. 483.20(b), (d), and (e) of this chapter,
except that the CAH is not required to comply with the requirements for
frequency, scope and number of assessments prescribed in
Sec. 413.343(b)).
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance)

Dated: April 9, 1999.
Nancy Ann DeParle,
Administrator, Health Care Financing Administration.

Dated: April 26, 1999.
Donna E. Shalala,
Secretary.

(Editorial Note: The following addendum and appendixes will not
appear in the Code of Federal Regulations.)

Addendum--Proposed Schedule of Standardized Amounts Effective With
Discharges Occurring On or After October 1, 1999; Payment Amounts
for Blood Clotting Factor Effective for Discharges Occurring On or
After October 1, 1999; and Update Factors and Rate-of-Increase
Percentages Effective With Cost Reporting Periods Beginning On or
After October 1, 1999

I. Summary and Background

In this addendum, we are setting forth the proposed amounts and
factors for determining prospective payment rates for Medicare
inpatient operating costs and Medicare inpatient capital-related costs.
We are also setting forth proposed rate-of-increase percentages for
updating the target amounts for hospitals and hospital units excluded
from the prospective payment system.
For discharges occurring on or after October 1, 1999, except for
sole community hospitals, Medicare-dependent, small rural hospitals,
and hospitals located in Puerto Rico, each hospital's payment per
discharge under the prospective payment system will be based on 100
percent of the Federal national rate.
Sole community hospitals are paid based on whichever of the
following rates yields the greatest aggregate payment: the Federal
national rate, the updated hospital-specific rate based on FY 1982 cost
per discharge, or the updated hospital-specific rate based on FY 1987
cost per discharge. Medicare-dependent, small rural hospitals are paid
based on the Federal national rate or, if higher, the Federal national
rate plus 50 percent of the difference between the Federal national
rate and the updated hospital-specific rate based on FY 1982 or FY 1987
cost per discharge, whichever is higher. For hospitals in Puerto Rico,
the payment per discharge is based on the sum of 50 percent of a Puerto
Rico rate and 50 percent of a national rate.
As discussed below in section II, we are proposing to make changes
in the determination of the prospective payment rates for Medicare
inpatient operating costs for FY 2000. The changes, to be applied
prospectively, would affect the calculation of the Federal rates. In
section III of this addendum, we are proposing updates to the payments
per unit for blood clotting factor provided to hospital inpatients who
have hemophilia. We also are proposing to add another product (clotting
factor, porcine (HCPCS code J7191)) to the list of clotting factors
that would be paid under this benefit.
In section IV of this addendum, we discuss our proposed changes for

[[Page 24752]]

determining the prospective payment rates for Medicare inpatient
capital-related costs for FY 2000. Section V of this addendum sets
forth our proposed changes for determining the rate-of-increase limits
for hospitals excluded from the prospective payment system for FY 2000.
The tables to which we refer in the preamble to the proposed rule are
presented at the end of this addendum in section VI.

II. Proposed Changes to Prospective Payment Rates for Inpatient
Operating Costs for FY 2000

The basic methodology for determining prospective payment rates for
inpatient operating costs is set forth at Sec. 412.63 for hospitals
located outside of Puerto Rico. The basic methodology for determining
the prospective payment rates for inpatient operating costs for
hospitals located in Puerto Rico is set forth at Secs. 412.210 and
412.212. Below, we discuss the proposed factors used for determining
the prospective payment rates. The Federal and Puerto Rico rate
changes, once issued as final, would be effective with discharges
occurring on or after October 1, 1999. As required by section
1886(d)(4)(C) of the Act, we must also adjust the DRG classifications
and weighting factors for discharges in FY 2000.
In summary, the proposed standardized amounts set forth in Tables
1A and 1C of section VI of this addendum reflect--
<bullet> Updates of 0.9 percent for all areas (that is, the market
basket percentage increase of 2.7 percent minus 1.8 percentage points);
<bullet> An adjustment to ensure budget neutrality as provided for
in sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act by applying new
budget neutrality adjustment factors to the large urban and other
standardized amounts;
<bullet> An adjustment to ensure budget neutrality as provided for
in section 1886(d)(8)(D) of the Act by removing the FY 1999 budget
neutrality factor and applying a revised factor;
<bullet> An adjustment to apply the revised outlier offset by
removing the FY 1999 outlier offsets and applying a new offset; and
<bullet> An adjustment in the Puerto Rico standardized amounts to
reflect the application of a Puerto Rico-specific wage index.

A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
Section 1886(d)(2)(A) of the Act required the establishment of
base-year cost data containing allowable operating costs per discharge
of inpatient hospital services for each hospital. The preamble to the
September 1, 1983 interim final rule (48 FR 39763) contains a detailed
explanation of how base-year cost data were established in the initial
development of standardized amounts for the prospective payment system
and how they are used in computing the Federal rates.
Section 1886(d)(9)(B)(i) of the Act required us to determine the
Medicare target amounts for each hospital located in Puerto Rico for
its cost reporting period beginning in FY 1987. The September 1, 1987
final rule contains a detailed explanation of how the target amounts
were determined and how they are used in computing the Puerto Rico
rates (52 FR 33043, 33066).
The standardized amounts are based on per discharge averages of
adjusted hospital costs from a base period or, for Puerto Rico,
adjusted target amounts from a base period, updated and otherwise
adjusted in accordance with the provisions of section 1886(d) of the
Act. Sections 1886(d)(2)(B) and (C) of the Act required us to update
base-year per discharge costs for FY 1984 and then standardize the cost
data in order to remove the effects of certain sources of variation in
cost among hospitals. These effects include case mix, differences in
area wage levels, cost-of-living adjustments for Alaska and Hawaii,
indirect medical education costs, and payments to hospitals serving a
disproportionate share of low-income patients.
Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, in making
payments under the prospective payment system, the Secretary estimates
from time to time the proportion of costs that are wages and wage-
related costs. Since October 1, 1997, when the market basket was last
revised, we have considered 71.1 percent of costs to be labor-related
for purposes of the prospective payment system. The average labor share
in Puerto Rico is 71.3 percent. We are proposing to revise the
discharge-weighted national standardized amount for Puerto Rico to
reflect the proportion of discharges in large urban and other areas
from the FY 1998 MedPAR file.
2. Computing Large Urban and Other Area Averages
Sections 1886(d)(2)(D) and (3) of the Act require the Secretary to
compute two average standardized amounts for discharges occurring in a
fiscal year: one for hospitals located in large urban areas and one for
hospitals located in other areas. In addition, under sections
1886(d)(9)(B)(iii) and (C)(i) of the Act, the average standardized
amount per discharge must be determined for hospitals located in urban
and other areas in Puerto Rico. Hospitals in Puerto Rico are paid a
blend of 50 percent of the applicable Puerto Rico standardized amount
and 50 percent of a national standardized payment amount.
Section 1886(d)(2)(D) of the Act defines "urban area" as those
areas within a Metropolitan Statistical Area (MSA). A "large urban
area" is defined as an urban area with a population of more than
1,000,000. In addition, section 4009(i) of Public Law 100-203 provides
that a New England County Metropolitan Area (NECMA) with a population
of more than 970,000 is classified as a large urban area. As required
by section 1886(d)(2)(D) of the Act, population size is determined by
the Secretary based on the latest population data published by the
Bureau of the Census. Urban areas that do not meet the definition of a
"large urban area" are referred to as "other urban areas." Areas
that are not included in MSAs are considered "rural areas" under
section 1886(d)(2)(D) of the Act. Payment for discharges from hospitals
located in large urban areas will be based on the large urban
standardized amount. Payment for discharges from hospitals located in
other urban and rural areas will be based on the other standardized
amount.
Based on 1997 population estimates published by the Bureau of the
Census, 61 areas meet the criteria to be defined as large urban areas
for FY 2000. These areas are identified by a footnote in Table 4A.
3. Updating the Average Standardized Amounts
Under section 1886(d)(3)(A) of the Act, we update the area average
standardized amounts each year. In accordance with section
1886(d)(3)(A)(iv) of the Act, we are proposing to update the large
urban areas' and the other areas' average standardized amounts for FY
2000 using the applicable percentage increases specified in section
1886(b)(3)(B)(i) of the Act. Section 1886(b)(3)(B)(i)(XV) of the Act
specifies that, for hospitals in all areas, the update factor for the
standardized amounts for FY 2000 is equal to the market basket
percentage increase minus 1.8 percentage points.
The percentage change in the market basket reflects the average
change in the price of goods and services purchased by hospitals to
furnish inpatient care. The most recent forecast of the proposed
hospital market basket increase for FY 2000 is 2.7 percent. Thus, for
FY 2000,

[[Page 24753]]

the proposed update to the average standardized amounts equals 0.9
percent.
As in the past, we are adjusting the FY 1999 standardized amounts
to remove the effects of the FY 1999 geographic reclassifications and
outlier payments before applying the FY 2000 updates. That is, we are
increasing the standardized amounts to restore the reductions that were
made for the effects of geographic reclassification and outliers. We
then apply the new offsets to the standardized amounts for outliers and
geographic reclassifications for FY 2000.
Although the update factor for FY 2000 is set by law, we are
required by section 1886(e)(3) of the Act to report to the Congress on
our initial recommendation of update factors for FY 2000 for both
prospective payment hospitals and hospitals excluded from the
prospective payment system. For general information purposes, we have
included the report to Congress as Appendix C to this proposed rule.
Our proposed recommendation on the update factors (which is required by
sections 1886(e)(4)(A) and (e)(5)(A) of the Act), as well as our
responses to MedPAC's recommendation concerning the update factor, are
set forth as Appendix D to this proposed rule.
4. Other Adjustments to the Average Standardized Amounts
a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment. Section 1886(d)(4)(C)(iii) of the Act specifies
that beginning in FY 1991, the annual DRG reclassification and
recalibration of the relative weights must be made in a manner that
ensures that aggregate payments to hospitals are not affected. As
discussed in section II of the preamble, we normalized the recalibrated
DRG weights by an adjustment factor, so that the average case weight
after recalibration is equal to the average case weight prior to
recalibration.
Section 1886(d)(3)(E) of the Act requires us to update the hospital
wage index on an annual basis beginning October 1, 1993. This provision
also requires us to make any updates or adjustments to the wage index
in a manner that ensures that aggregate payments to hospitals are not
affected by the change in the wage index.
To comply with the requirement of section 1886(d)(4)(C)(iii) of the
Act that DRG reclassification and recalibration of the relative weights
be budget neutral, and the requirement in section 1886(d)(3)(E) of the
Act that the updated wage index be budget neutral, we used historical
discharge data to simulate payments and compared aggregate payments
using the FY 1999 relative weights and wage index to aggregate payments
using the proposed FY 2000 relative weights and wage index. The same
methodology was used for the FY 1999 budget neutrality adjustment. (See
the discussion in the September 1, 1992 final rule (57 FR 39832).)
Based on this comparison, we computed a budget neutrality adjustment
factor equal to 0.997393. We also adjust the Puerto Rico-specific
standardized amounts for the effect of DRG reclassification and
recalibration. We computed a budget neutrality adjustment factor for
Puerto Rico-specific standardized amounts equal to 0.999910. These
budget neutrality adjustment factors are applied to the standardized
amounts without removing the effects of the FY 1999 budget neutrality
adjustments. We do not remove the prior budget neutrality adjustment
because estimated aggregate payments after the changes in the DRG
relative weights and wage index should equal estimated aggregate
payments prior to the changes. If we removed the prior year adjustment,
we would not satisfy this condition.
In addition, we are proposing to apply these same adjustment
factors to the hospital-specific rates that are effective for cost
reporting periods beginning on or after October 1, 1999. (See the
discussion in the September 4, 1990 final rule (55 FR 36073).)
b. Reclassified Hospitals--Budget Neutrality Adjustment. Section
1886(d)(8)(B) of the Act provides that certain rural hospitals are
deemed urban effective with discharges occurring on or after October 1,
1988. In addition, section 1886(d)(10) of the Act provides for the
reclassification of hospitals based on determinations by the Medicare
Geographic Classification Review Board (MGCRB). Under section
1886(d)(10) of the Act, a hospital may be reclassified for purposes of
the standardized amount or the wage index, or both.
Under section 1886(d)(8)(D) of the Act, the Secretary is required
to adjust the standardized amounts so as to ensure that total aggregate
payments under the prospective payment system after implementation of
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the
Act are equal to the aggregate prospective payments that would have
been made absent these provisions. To calculate this budget neutrality
factor, we used historical discharge data to simulate payments, and
compared total prospective payments (including IME and DSH payments)
prior to any reclassifications to total prospective payments after
reclassifications. Based on these simulations, we are applying an
adjustment factor of 0.994453 to ensure that the effects of
reclassification are budget neutral.
The adjustment factor is applied to the standardized amounts after
removing the effects of the FY 1999 budget neutrality adjustment
factor. We note that the proposed FY 2000 adjustment reflects wage
index and standardized amount reclassifications approved by the MGCRB
or the Administrator as of February 26, 1999. The effects of any
additional reclassification changes resulting from appeals and reviews
of the MGCRB decisions for FY 2000 or from a hospital's request for the
withdrawal of a reclassification request will be reflected in the final
budget neutrality adjustment required under section 1886(d)(8)(D) of
the Act and published in the final rule for FY 2000.
c. Outliers. Section 1886(d)(5)(A) of the Act provides for payments
in addition to the basic prospective payments for "outlier" cases,
cases involving extraordinarily high costs (cost outliers). Section
1886(d)(3)(B) of the Act requires the Secretary to adjust both the
large urban and other area national standardized amounts by the same
factor to account for the estimated proportion of total DRG payments
made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act
requires the Secretary to adjust the large urban and other standardized
amounts applicable to hospitals in Puerto Rico to account for the
estimated proportion of total DRG payments made to outlier cases.
Furthermore, under section 1886(d)(5)(A)(iv) of the Act, outlier
payments for any year must be projected to be not less than 5 percent
nor more than 6 percent of total payments based on DRG prospective
payment rates.
For FY 1999, the fixed loss cost outlier threshold is equal to the
prospective payment for the DRG plus $11,100 ($10,129 for hospitals
that have not yet entered the prospective payment system for capital-
related costs). The marginal cost factor for cost outliers (the percent
of costs paid after costs for the case exceed the threshold) is 80
percent. We applied an outlier adjustment to the FY 1999 standardized
amounts of 0.948740 for the large urban and other areas rates and
0.9392 for the capital Federal rate.
In accordance with section 1886(d)(5)(A)(iv) of the Act, we
calculated proposed outlier thresholds for FY 2000 so that outlier
payments are projected to equal 5.1 percent of total payments based on
DRG prospective

[[Page 24754]]

payment rates. In accordance with section 1886(d)(3)(E), we reduced the
proposed FY 2000 standardized amounts by the same percentage to account
for the projected proportion of payments paid to outliers. To calculate
FY 2000 outlier thresholds, we simulated payments by applying FY 2000
rates and policies to the December 1998 update of the FY 1998 MedPAR
file and the December 1998 update of the provider-specific file. As we
have explained in the past, to calculate outlier thresholds we apply a
cost inflation factor to update costs for the cases used to simulate
payments. For FY 1998, we used a cost inflation factor of minus 2.005
percent (a cost per case decrease of 2.005 percent). For FY 1999, we
used a cost inflation factor of minus 1.724 percent. To set the
proposed FY 2000 outlier thresholds, we used a cost inflation factor
(or cost adjustment factor) of zero percent. This factor reflects our
analysis of the best available cost report data as well as calculations
(using the best available data) indicating that the percentage of
actual outlier payments for FY 1998, is higher than we projected before
the beginning of FY 1998, and that the percentage of actual outlier
payments for FY 1999 will likely be higher than we projected before the
beginning of FY 1999. The calculations of "actual" outlier payments
are discussed further below. Based on these simulations, we are
proposing a fixed loss cost outlier threshold in FY 2000 equal to the
prospective payment rate for the DRG plus $14,575 ($13,309 for
hospitals that have not yet entered the prospective payment system for
capital-related costs). In addition, we are proposing to maintain the
marginal cost factor for cost outliers at 80 percent.
As stated in the September 1, 1993 final rule (58 FR 46348), we
establish outlier thresholds that are applicable to both inpatient
operating costs and inpatient capital-related costs. When we modeled
the combined operating and capital outlier payments, we found that
using a common set of thresholds resulted in a higher percentage of
outlier payments for capital-related costs than for operating costs. We
project that the proposed thresholds for FY 2000 will result in outlier
payments equal to 5.1 percent of operating DRG payments and 6.0 percent
of capital payments based on the Federal rate.
The proposed outlier adjustment factors applied to the standardized
amounts for FY 2000 are as follows:

------------------------------------------------------------------------
Operating Capital
standardized Federal
amounts rate
------------------------------------------------------------------------
National..................................... 0.948934 0.9397
Puerto Rico.................................. 0.969184 0.9334
------------------------------------------------------------------------

We apply the proposed outlier adjustment factors after removing the
effects of the FY 1999 outlier adjustment factors on the standardized
amounts.
Table 8A in section VI of this addendum contains the updated
Statewide average operating cost-to-charge ratios for urban hospitals
and for rural hospitals to be used in calculating cost outlier payments
for those hospitals for which the intermediary is unable to compute a
reasonable hospital-specific cost-to-charge ratio. These Statewide
average ratios would replace the ratios published in the July 31, 1998
final rule (63 FR 41099), effective October 1, 1999. Table 8B contains
comparable Statewide average capital cost-to-charge ratios. These
average ratios would be used to calculate cost outlier payments for
those hospitals for which the intermediary computes operating cost-to-
charge ratios lower than 0.212473 greater than 1.280336 and capital
cost-to-charge ratios lower than 0.0130310 or greater than 0.17166.
This range represents 3.0 standard deviations (plus or minus) from the
mean of the log distribution of cost-to-charge ratios for all
hospitals. We note that the cost-to-charge ratios in Tables 8A and 8B
would be used during FY 2000 when hospital-specific cost-to-charge
ratios based on the latest settled cost report are either not available
or outside the three standard deviations range.
In the July 31, 1998 final rule (63 FR 41009), we stated that,
based on available data, we estimated that actual FY 1998 outlier
payments would be approximately 5.4 percent of actual total DRG
payments. This was computed by simulating payments using actual FY 1997
bill data available at the time. That is, the estimate of actual
outlier payments did not reflect actual FY 1998 bills but instead
reflected the application of FY 1998 rates and policies to available FY
1997 bills. Our current estimate, using available FY 1998 bills, is
that actual outlier payments for FY 1998 were approximately 6.5 percent
of actual total DRG payments. We note that the MedPAR file for FY 1998
discharges continues to be updated. Thus, the data indicate that, for
FY 1998, the percentage of actual outlier payments relative to actual
total payments is higher than we projected before FY 1998 (and thus
exceeds the percentage by which we reduced the standardized amounts for
FY 1998). In fact, the data indicate that the proportion of actual
outlier payments for FY 1998 exceeds 6 percent. Nevertheless,
consistent with the policy and statutory interpretation we have
maintained since the inception of the prospective payment system, we do
not plan to recoup money and make retroactive adjustments to outlier
payments for FY 1998.
We currently estimate that actual outlier payments for FY 1999 will
be approximately 6.2 percent of actual total DRG payments, higher than
the 5.1 percent we projected in setting outlier policies for FY 1999.
This estimate is based on simulations using the December 1998 update of
the provider-specific file and the December 1998 update of the FY 1998
MedPAR file (discharge data for FY 1998 bills). We used these data to
calculate an estimate of the actual outlier percentage for FY 1999 by
applying FY 1999 rates and policies to available FY 1998 bills.
5. FY 2000 Standardized Amounts
The adjusted standardized amounts are divided into labor and
nonlabor portions. Table 1A contains the two national standardized
amounts that we are proposing to be applicable to all hospitals, except
for hospitals in Puerto Rico. Under section 1886(d)(9)(A)(ii) of the
Act, the Federal portion of the Puerto Rico payment rate is based on
the discharge-weighted average of the national large urban standardized
amount and the national other standardized amount (as set forth in
Table 1A). The labor and nonlabor portions of the national average
standardized amounts for Puerto Rico hospitals are set forth in Table
1C. This table also includes the Puerto Rico standardized amounts.

B. Adjustments for Area Wage Levels and Cost of Living

Tables 1A and 1C, as set forth in this addendum, contain the
proposed labor-related and nonlabor-related shares that would be used
to calculate the prospective payment rates for hospitals located in the
50 States, the District of Columbia, and Puerto Rico. This section
addresses two types of adjustments to the standardized amounts that are
made in determining the prospective payment rates as described in this
addendum.
1. Adjustment for Area Wage Levels
Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act requires
that we make an adjustment to the labor-related portion of the
prospective payment rates to account for area differences in hospital
wage levels. This

[[Page 24755]]

adjustment is made by multiplying the labor-related portion of the
adjusted standardized amounts by the appropriate wage index for the
area in which the hospital is located. In section III of this preamble,
we discuss the data and methodology for the proposed wage index. The
proposed wage index is set forth in Tables 4A through 4F of this
addendum.
2. Adjustment for Cost-of-Living in Alaska and Hawaii
Section 1886(d)(5)(H) of the Act authorizes an adjustment to take
into account the unique circumstances of hospitals in Alaska and
Hawaii. Higher labor-related costs for these two States are taken into
account in the adjustment for area wages described above. For FY 2000,
we propose to adjust the payments for hospitals in Alaska and Hawaii by
multiplying the nonlabor portion of the standardized amounts by the
appropriate adjustment factor contained in the table below. If the
Office of Personnel Management releases revised cost-of-living
adjustment factors before July 1, 1999, we will publish them in the
final rule and use them in determining FY 2000 payments.

Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals
------------------------------------------------------------------------

------------------------------------------------------------------------
Alaska--All areas............................................. 1.25
Hawaii:
County of Honolulu.......................................... 1.25
County of Hawaii............................................ 1.15
County of Kauai............................................. 1.225
County of Maui.............................................. 1.225
County of Kalawao........................................... 1.225
------------------------------------------------------------------------
(The above factors are based on data obtained from the U.S. Office of
Personnel Management.)

C. DRG Relative Weights

As discussed in section II of the preamble, we have developed a
classification system for all hospital discharges, assigning them into
DRGs, and have developed relative weights for each DRG that reflect the
resource utilization of cases in each DRG relative to Medicare cases in
other DRGs. Table 5 of section VI of this addendum contains the
relative weights that we propose to use for discharges occurring in FY
2000. These factors have been recalibrated as explained in section II
of the preamble.

D. Calculation of Prospective Payment Rates for FY 2000

General Formula for Calculation of Prospective Payment Rates for FY
2000
Prospective payment rate for all hospitals located outside of
Puerto Rico except sole community hospitals and Medicare-dependent,
small rural hospitals = Federal rate.
Prospective payment rate for sole community hospitals = Whichever
of the following rates yields the greatest aggregate payment: 100
percent of the Federal rate, 100 percent of the updated FY 1982
hospital-specific rate, or 100 percent of the updated FY 1987 hospital-
specific rate.
Prospective payment rate for Medicare-dependent, small rural
hospitals = 100 percent of the Federal rate, or, if the greater of the
updated FY 1982 hospital-specific rate or the updated FY 1987 hospital-
specific rate is higher than the Federal rate, 100 percent of the
Federal rate plus 50 percent of the difference between the applicable
hospital-specific rate and the Federal rate.
Prospective payment rate for Puerto Rico = 50 percent of the Puerto
Rico rate + 50 percent of a discharge-weighted average of the national
large urban standardized amount and the national other standardized
amount.
1. Federal Rate
For discharges occurring on or after October 1, 1999 and before
October 1, 2000, except for sole community hospitals, Medicare-
dependent, small rural hospitals, and hospitals in Puerto Rico, the
hospital's payment is based exclusively on the Federal national rate.
The payment amount is determined as follows:
Step 1--Select the appropriate national standardized amount
considering the type of hospital and designation of the hospital as
large urban or other (see Table 1A in section VI of this addendum).
Step 2--Multiply the labor-related portion of the standardized
amount by the applicable wage index for the geographic area in which
the hospital is located (see Tables 4A, 4B, and 4C of section VI of
this addendum).
Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
Step 4--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount (adjusted, if appropriate, under Step 3).
Step 5--Multiply the final amount from Step 4 by the relative
weight corresponding to the appropriate DRG (see Table 5 of section VI
of this addendum).
2. Hospital-Specific Rate (Applicable Only to Sole Community Hospitals
and Medicare-Dependent, Small Rural Hospitals)
Sections 1886(d)(5)(D)(i) and (b)(3)(C) of the Act provide that
sole community hospitals are paid based on whichever of the following
rates yields the greatest aggregate payment: the Federal rate, the
updated hospital-specific rate based on FY 1982 cost per discharge, or
the updated hospital-specific rate based on FY 1987 cost per discharge.
Sections 1886(d)(5)(G) and (b)(3)(D) of the Act provide that
Medicare-dependent, small rural hospitals are paid based on whichever
of the following rates yields the greatest aggregate payment: the
Federal rate or the Federal rate plus 50 percent of the difference
between the Federal rate and the greater of the updated hospital-
specific rate based on FY 1982 and FY 1987 cost per discharge.
Hospital-specific rates have been determined for each of these
hospitals based on both the FY 1982 cost per discharge and the FY 1987
cost per discharge. For a more detailed discussion of the calculation
of the FY 1982 hospital-specific rate and the FY 1987 hospital-specific
rate, we refer the reader to the September 1, 1983 interim final rule
(48 FR 39772); the April 20, 1990 final rule with comment (55 FR
15150); and the September 4, 1990 final rule (55 FR 35994).
a. Updating the FY 1982 and FY 1987 Hospital-Specific Rates for FY
2000. We are proposing to increase the hospital-specific rates by 0.9
percent (the hospital market basket percentage increase of 2.7 percent
minus 1.8 percentage points) for sole community hospitals and Medicare-
dependent, small rural hospitals located in all areas for FY 2000.
Section 1886(b)(3)(C)(iv) of the Act provides that the update factor
applicable to the hospital-specific rates for sole community hospitals
equals the update factor provided under section 1886(b)(3)(B)(iv) of
the Act, which, for FY 2000, is the market basket rate of increase
minus 1.8 percentage points. Section 1886(b)(3)(D) of the Act provides
that the update factor applicable to the hospital-specific rates for
Medicare-dependent, small rural hospitals equals the update factor
provided under section 1886(b)(3)(B)(iv) of the Act, which, for FY
2000, is the market basket rate of increase minus 1.8 percentage
points.
b. Calculation of Hospital-Specific Rate. For sole community
hospitals and

[[Page 24756]]

Medicare-dependent, small rural hospitals, the applicable FY 2000
hospital-specific rate would be calculated by increasing the hospital's
hospital-specific rate for the preceding fiscal year by the applicable
update factor (0.9 percent), which is the same as the update for all
prospective payment hospitals. In addition, the hospital-specific rate
would be adjusted by the budget neutrality adjustment factor (that is,
0.997393) as discussed in section II.A.4.a of this Addendum. This
resulting rate would be used in determining under which rate a sole
community hospital or Medicare-dependent, small rural hospital is paid
for its discharges beginning on or after October 1, 1999, based on the
formula set forth above.
3. General Formula for Calculation of Prospective Payment Rates for
Hospitals Located in Puerto Rico Beginning On or After October 1, 1999
and Before October 1, 2000.
a. Puerto Rico Rate. The Puerto Rico prospective payment rate is
determined as follows:
Step 1--Select the appropriate adjusted average standardized amount
considering the large urban or other designation of the hospital (see
Table 1C of section VI of the addendum).
Step 2--Multiply the labor-related portion of the standardized
amount by the appropriate Puerto Rico-specific wage index (see Table 4F
of section VI of the addendum).
Step 3--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount.
Step 4--Multiply the result in Step 3 by 50 percent.
Step 5--Multiply the amount from Step 4 by the appropriate DRG
relative weight (see Table 5 of section VI of the addendum).
b. National Rate. The national prospective payment rate is
determined as follows:
Step 1--Multiply the labor-related portion of the national average
standardized amount (see Table 1C of section VI of the addendum) by the
appropriate national wage index (see Tables 4A and 4B of section VI of
the addendum).
Step 2--Add the amount from Step 1 and the nonlabor-related portion
of the national average standardized amount.
Step 3--Multiply the result in Step 2 by 50 percent.
Step 4--Multiply the amount from Step 3 by the appropriate DRG
relative weight (see Table 5 of section VI of the addendum).
The sum of the Puerto Rico rate and the national rate computed
above equals the prospective payment for a given discharge for a
hospital located in Puerto Rico.

III. Proposed Changes to the Payment Rates for Blood Clotting
Factor for Hemophilia Inpatients

As discussed in our August 29, 1997 final rule with comment period
(62 FR 46002) and our May 12, 1998 final rule (63 FR 26327), section
4452 of Public Law 105-33 amended section 6011(d) of Public Law 101-239
to reinstate the add-on payment for the costs of administering blood
clotting factor to Medicare beneficiaries who have hemophilia and who
are hospital inpatients for discharges occurring on or after October 1,
1997.
We are proposing to calculate the add-on payment for FY 2000 using
the same methodology we described in the August 29, 1997 and May 12,
1998 final rules. That is, we are proposing to establish a price per
unit of clotting factor based on the average wholesale price (AWP). To
identify the AWP, we are using the most recent data available from
First DataBank, a commercial source of AWPs in electronic format. The
add-on payment amount for each clotting factor, as described by HCFA's
Common Procedure Coding System (HCPCS), is based on the median AWP of
the several products available in that category of factor, discounted
by 15 percent.
We also are proposing to add HCPCS code J7191 (clotting factor,
porcine) to the list of clotting factors that will be paid under this
benefit. This code was recently reestablished in the HCPCS coding
system because it represents a unique product that is different from
the other clotting factors listed.
Based on the methodology described above, we are proposing the
following prices per unit of factor for FY 2000:

J7190 Factor VIII (antihemophilic factor, human)................ 0.79
J7191 Factor VIII (antihemophilic factor, porcine).............. 1.87
J7192 Factor VIII (antihemophilic factor, recombinant).......... 1.03
J7194 Factor IX (complex)....................................... 0.45
J7196 Other hemophilia clotting factors (for example, anti- 1.43
inhibitors).....................................................
Q0160 Factor IX (antihemophilic factor, purified, 0.97
nonrecombinant).................................................
Q0161 Factor IX (antihemophilic factor, purified, recombinant).. 1.00

These prices for blood clotting factor administered to inpatients
who have hemophilia would be effective for discharges beginning on or
after October 1, 1999 through September 30, 2000. Payment will be made
for blood clotting factor only if there is an ICD-9-CM diagnosis code
for hemophilia included on the bill.

IV. Proposed Changes to Payment Rates for Inpatient Capital-Related
Costs for FY 2000

The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on
or after October 1, 1991. Effective with that cost reporting period and
during a 10-year transition period extending through FY 2001, hospital
inpatient capital-related costs are paid on the basis of an increasing
proportion of the capital prospective payment system Federal rate and a
decreasing proportion of a hospital's historical costs for capital.
The basic methodology for determining Federal capital prospective
rates is set forth at Secs. 412.308 through 412.352. Below we discuss
the factors that we used to determine the proposed Federal rate and the
hospital-specific rates for FY 2000. The rates would be effective for
discharges occurring on or after October 1, 1999.
For FY 1992, we computed the standard Federal payment rate for
capital-related costs under the prospective payment system by updating
the FY 1989 Medicare inpatient capital cost per case by an actuarial
estimate of the increase in Medicare inpatient capital costs per case.
Each year after FY 1992, we update the standard Federal rate, as
provided in Sec. 412.308(c)(1), to account for capital input price
increases and other factors. Also, Sec. 412.308(c)(2) provides that the
Federal rate is adjusted annually by a factor equal to the estimated
proportion of outlier payments under the Federal rate to total capital
payments under the Federal rate. In addition, Sec. 412.308(c)(3)
requires that the Federal rate be reduced by an adjustment factor equal
to the estimated proportion of payments for exceptions under
Sec. 412.348. Furthermore, Sec. 412.308(c)(4)(ii) requires that the
Federal rate be adjusted so that the annual DRG reclassification and
the recalibration of DRG weights and changes in the geographic
adjustment factor are budget neutral. For FYs 1992 through 1995,
Sec. 412.352 required that the Federal rate also be adjusted by a
budget neutrality factor so that aggregate payments for inpatient
hospital capital costs were projected to equal 90 percent of the
payments that would have been made for capital-related costs on a
reasonable cost basis during the fiscal year. That provision expired in
FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to
the rate that was made in FY 1994, and Sec. 412.308(b)(3) describes the
0.28 percent reduction to the rate made in FY 1996 as a result of

[[Page 24757]]

the revised policy of paying for transfers. In the FY 1998 final rule
with comment period (62 FR 45966) we implemented section 4402 of the
BBA, which requires that for discharges occurring on or after October
1, 1997, and before October 1, 2002, the unadjusted standard Federal
rate is reduced by 17.78 percent. A small part of that reduction will
be restored effective October 1, 2002. As a result of the February 25,
1999 final rule (64 FR 9378), the Federal rate changed effective March
1, 1999, because of revisions to the GAF.
For each hospital, the hospital-specific rate was calculated by
dividing the hospital's Medicare inpatient capital-related costs for a
specified base year by its Medicare discharges (adjusted for
transfers), and dividing the result by the hospital's case mix index
(also adjusted for transfers). The resulting case-mix adjusted average
cost per discharge was then updated to FY 1992 based on the national
average increase in Medicare's inpatient capital cost per discharge and
adjusted by the exceptions payment adjustment factor and the budget
neutrality adjustment factor to yield the FY 1992 hospital-specific
rate. Since FY 1992, the hospital-specific rate has been updated
annually for inflation and for changes in the exceptions payment
adjustment factor. For FYs 1992 through 1995, the hospital-specific
rate was also adjusted by a budget neutrality adjustment factor. For
discharges occurring on or after October 1, 1997, and before October 1,
2002, the unadjusted hospital-specific rate is reduced by 17.78
percent. A small part of this reduction will be restored effective
October 1, 2002.
To determine the appropriate budget neutrality adjustment factor
and the exceptions payment adjustment factor, we developed a dynamic
model of Medicare inpatient capital-related costs, that is, a model
that projects changes in Medicare inpatient capital-related costs over
time. With the expiration of the budget neutrality provision, the model
is still used to estimate the exceptions payment adjustment and other
factors. The model and its application are described in greater detail
in Appendix B of this proposed rule.
In accordance with section 1886(d)(9)(A) of the Act, under the
prospective payment system for inpatient operating costs, hospitals
located in Puerto Rico are paid for operating costs under a special
payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a
blended rate that consisted of 75 percent of the applicable
standardized amount specific to Puerto Rico hospitals and 25 percent of
the applicable national average standardized amount. However, effective
October 1, 1998, as a result of section 4406 of the BBA, operating
payments to hospitals in Puerto Rico are based on a blend of 50 percent
of the applicable standardized amount specific to Puerto Rico hospitals
and 50 percent of the applicable national average standardized amount.
In conjunction with this change to the operating blend percentage,
effective with discharges on or after October 1, 1997, we compute
capital payments to hospitals in Puerto Rico based on a blend of 50
percent of the Puerto Rico rate and 50 percent of the Federal rate.
Section 412.374 provides for the use of this blended payment system for
payments to Puerto Rico hospitals under the prospective payment system
for inpatient capital-related costs. Accordingly, for capital-related
costs we compute a separate payment rate specific to Puerto Rico
hospitals using the same methodology used to compute the national
Federal rate for capital.

A. Determination of Federal Inpatient Capital-Related Prospective
Payment Rate Update

In the July 31, 1998 final rule (63 FR 41011) we established a
capital Federal rate of $378.05 for FY 1999. As of the March 1, 1999
revision, the Federal rate for FY 1999 is $378.10. As a result of the
changes we are proposing to the factors used to establish the Federal
rate in this preamble, the proposed FY 2000 Federal rate is $374.31.
In the discussion that follows, we explain the factors that were
used to determine the proposed FY 2000 capital Federal rate. In
particular, we explain why the proposed FY 2000 Federal rate has
decreased 1.00 percent compared to the FY 1999 Federal rate. Even
though the proposed FY 2000 Federal capital rate is less than the FY
1999 Federal rate, we estimate aggregate capital payments will increase
by 2.66 percent during this same period. This increase is primarily due
to the increase in the Federal blend percentage from 80 to 90 percent
for fully prospective payment hospitals.
Total payments to hospitals under the prospective payment system
are relatively unaffected by changes in the capital prospective
payments. Since capital payments constitute about 10 percent of
hospital payments, a 1 percent change in the capital Federal rate
yields only about 0.1 percent change in actual payments to hospitals.
Aggregate payments under the capital prospective payment transition
system are estimated to increase in FY 2000 compared to FY 1999.
1. Standard Federal Rate Update
a. Description of the Update Framework. Under section
412.308(c)(1), the standard Federal rate is updated on the basis of an
analytical framework that takes into account changes in a capital input
price index and other factors. The update framework consists of a
capital input price index (CIPI) and several policy adjustment factors.
Specifically, we have adjusted the projected CIPI rate of increase as
appropriate each year for case-mix index related changes, for
intensity, and for errors in previous CIPI forecasts. The proposed
update factor for FY 2000 under that framework is -0.6 percent. This
proposal is based on a projected 0.5 percent increase in the CIPI, a
-0.7 percent adjustment for the FY 1998 DRG reclassification and
recalibration, and a forecast error correction of -0.4 percent. We
explain the basis for the FY 2000 CIPI projection in section II.D of
this addendum. Here we describe the policy adjustments that have been
applied.
The case-mix index is the measure of the average DRG weight for
cases paid under the prospective payment system. Because the DRG weight
determines the prospective payment for each case, any percentage
increase in the case-mix index corresponds to an equal percentage
increase in hospital payments.
The case-mix index can change for any of several reasons:
<bullet> The average resource use of Medicare patients changes
("real" case-mix change);
<bullet> Changes in hospital coding of patient records result in
higher weight DRG assignments ("coding effects"); and
<bullet> The annual DRG reclassification and recalibration changes
may not be budget neutral ("reclassification effect").
We define real case-mix change as actual changes in the mix (and
resource requirements) of Medicare patients as opposed to changes in
coding behavior that result in assignment of cases to higher-weighted
DRGs but do not reflect higher resource requirements. In the update
framework for the prospective payment system for operating costs, we
adjust the update upwards to allow for real case-mix change, but remove
the effects of coding changes on the case-mix index. We also remove the
effect on total payments of prior changes to the DRG classifications
and relative weights, in order to retain budget neutrality for all
case-mix index-related changes other than patient severity. (For
example, we adjusted for the effects of the FY 1998 DRG
reclassification and

[[Page 24758]]

recalibration as part of our FY 2000 update recommendation.) We have
adopted this case-mix index adjustment in the capital update framework
as well.
For FY 2000, we are projecting a 0.5 percent increase in the case-
mix index. We estimate that real case-mix increase will equal 0.5
percent in FY 2000. Therefore, the proposed net adjustment for case-mix
change in FY 2000 is 0.0 percentage points.
We estimate that FY 1998 DRG reclassification and recalibration
resulted in a 0.7 percent change in the case mix when compared with the
case-mix index that would have resulted if we had not made the
reclassification and recalibration changes to the DRGs. Therefore, we
are making a -0.7 percent adjustment for DRG reclassification and
recalibration in the proposed update for FY 2000.
The capital update framework contains an adjustment for forecast
error. The input price index forecast is based on historical trends and
relationships ascertainable at the time the update factor is
established for the upcoming year. In any given year there may be
unanticipated price fluctuations that may result in differences between
the actual increase in prices and the forecast used in calculating the
update factors. In setting a prospective payment rate under the
framework, we make an adjustment for forecast error only if our
estimate of the change in the capital input price index for any year is
off by 0.25 percentage points or more. There is a 2-year lag between
the forecast and the measurement of the forecast error. A forecast
error of -0.4 percentage points was calculated for the FY 1998 update.
That is, current historical data indicate that the FY 1998 CIPI used in
calculating the forecasted FY 1998 update factor overstated realized
price increases by 0.4 percent. Therefore, we are making a -0.4 percent
adjustment for forecast error in the proposed update for FY 2000.
Under the capital prospective payment system update framework, we
also make an adjustment for changes in intensity. We calculate this
adjustment using the same methodology and data as in the framework for
the operating prospective payment system. The intensity factor for the
operating update framework reflects how hospital services are utilized
to produce the final product, that is, the discharge. This component
accounts for changes in the use of quality-enhancing services, changes
in within-DRG severity, and expected modification of practice patterns
to remove cost-ineffective services.
We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI
hospital component), and changes in real case mix. The use of total
charges in the calculation of the proposed intensity factor makes it a
total intensity factor, that is, charges for capital services are

already built into the calculation of the factor. Therefore, we have
incorporated the intensity adjustment from the operating update
framework into the capital update framework. Without reliable estimates
of the proportions of the overall annual intensity increases that are
due, respectively, to ineffective practice patterns and to the
combination of quality-enhancing new technologies and within-DRG
complexity, we assume, as in the revised operating update framework,
that one-half of the annual increase is due to each of these factors.
The capital update framework thus provides an add-on to the input price
index rate of increase of one-half of the estimated annual increase in
intensity to allow for within-DRG severity increases and the adoption
of quality-enhancing technology.
For FY 2000, we have developed a Medicare-specific intensity
measure based on a 5-year average using FY 1994-1998 data. In
determining case-mix constant intensity, we found that observed case-
mix increase was 0.8 percent in FY 1994, 1.7 percent in FY 1995, 1.6
percent in FY 1996, 0.3 percent in FY 1997, and -0.4 percent in FY
1998. For FY 1995 and FY 1996, we estimate that real case-mix increase
was 1.0 to 1.4 percent each year. The estimate for those years is
supported by past studies of case-mix change by the RAND Corporation.
The most recent study was "Has DRG Creep Crept Up? Decomposing the
Case Mix Index Change Between 1987 and 1988" by G. M. Carter, J.P.
Newhouse, and D.A. Relles, R-4098-HCFA/ProPAC (1991). The study
suggested that real case-mix change was not dependent on total change,
but was usually a fairly steady 1.0 to 1.5 percent per year. We use 1.4
percent as the upper bound because the RAND study did not take into
account that hospitals may have induced doctors to document medical
records more completely in order to improve payment. Following that
study, we consider up to 1.4 percent of observed case-mix change as
real for FY 1994 through FY 1998. Based on this analysis, we believe
that all of the observed case-mix increase for FY 1994, FY 1997 and FY
1998 is real. The increases for FY 1995 and FY 1996 were in excess of
our estimate of real case mix increase.
We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI
hospital component), and changes in real case-mix. Given estimates of
real case mix of 0.8 percent for FY 1994, 1.0 percent for FY 1995, 1.0
percent for FY 1996, 0.3 percent for FY 1997, and -0.4 for FY 1998, we
estimate that case-mix constant intensity declined by an average 1.3
percent during FYs 1994 through 1998, for a cumulative decrease of 6.3
percent. If we assume that real case-mix increase was 0.8 percent for
FY 1994, 1.4 percent for FY 1995, 1.4 percent for FY 1996, 0.3 percent
for FY 1997, and -0.4 for FY 1998, we estimate that case-mix constant
intensity declined by an average 1.5 percent during FYs 1994 through
1998, for a cumulative decrease of 7.1 percent. Since we estimate that
intensity has declined during that period, we are recommending a 0.0
percent intensity adjustment for FY 2000.
b. Comparison of HCFA and MedPAC Update Recommendations. MedPAC
recommends a -1.1 to 1.8 percent update to the standard capital Federal
rate and we are recommending a -0.6 percent update. There are some
significant differences between the HCFA and MedPAC update frameworks,
which account for the difference in the respective update
recommendations. A major difference is the input price index that each
framework uses as a beginning point to estimate the change in input
prices since the previous year. The HCFA capital input price index (the
CIPI) includes price measures for interest expense, which are an
indicator of the interest rates facing hospitals during their capital
purchasing decisions. The MedPAC capital market basket does not include
interest expense; instead the MedPAC update framework includes a
financing policy adjustment when necessary to account for the prolonged
changes in interest rates. HCFA's CIPI is vintage-weighted, meaning
that it takes into account price changes from past purchases of capital
when determining the current period update. MedPAC's capital market
basket is not vintage-weighted, accounting only for the current year
price changes. This year, due to the difference between HCFA's and
MedPAC's input price index, the percentage change in HCFA's CIPI is 0.5
percent, and the percentage change in MedPAC's market basket is 1.9
percent.
MedPAC and HCFA also differ in the adjustments they make to their
price indices. (See Table 1 for a comparison

[[Page 24759]]

of HCFA and MedPAC's update recommendations.) MedPAC makes an
adjustment for productivity, while HCFA has not adopted an adjustment
for capital productivity or efficiency. MedPAC employs the same
productivity adjustment in its operating and capital framework. We have
identified a total intensity factor but have not identified an adequate
total productivity measure. For the FY 2000 update, the Commission is
also including a site-of-care substitution adjustment to account for
the decline in the average length of Medicare acute inpatient stays.
This adjustment is designed to shift funding along with associated
costs when Medicare patients are discharged to postacute settings that
replace acute impatient days. Other factors, such as technological
advances that allow for a decreased need in follow-up care and BBA
mandated policy on payment for transfer cases that limits payments
within certain DRGs, are reflected in the site-of-care substitution
adjustment as well. A negative intensity adjustment would capture the
site of care substitution accounted for in MedPAC's update framework.
However, we did not make a negative adjustment for intensity this year.
We may examine the appropriateness of adopting a negative intensity
adjustment at a later date.
MedPAC recommends a -1.8 to a -0.9 adjustment for site-of-care
substitutions for FY 2000. For FY 2000, MedPAC recommends a -1.0 to a
0.0 adjustment for productivity. We recommend a 0.0 intensity
adjustment. Additionally, since long-term interest rates are low by
historical standards, MedPAC recommends a -0.3 to a 0.0 adjustment to
the update for FY 2000, to reflect changes in the real interest rates.
We recommend a 0.0 total case mix adjustment since we are
projecting a 0.5 percent increase in the case mix index and we estimate
that real case-mix increase will equal 0.5 percent in FY 2000. MedPAC
makes a two-part adjustment for case mix changes, which takes into
account changes in case mix in the past year. They recommend a 0.0
adjustment for coding change and an 0.0 to 0.2 adjustment for within-
DRG complexity change. We recommend a -0.4 adjustment for forecast
error correction, and MedPAC recommends a -0.4 adjustment for forecast
error correction.
The net result of these adjustments is that MedPAC has recommended
a -1.1 to 1.8 percent update to the capital Federal rate for FY 2000.
MedPAC believes that the annual updates to the capital and operating
payments under the prospective payment system should not differ
substantially, even though they are determined separately, since they
correspond to costs generated by providing the same inpatient hospital
services to the same Medicare patients. This range for the capital
update is consistent with the prospective payment system operating
update range of 0.0 to 2.6 recommended by the Commission. We describe
the basis for our proposed -0.6 percent total update in the preceding
section. Our recommendation is within the range recommended by MedPAC.
Also, MedPAC argued that the distinction between inpatient
operating and capital payment rates is arbitrary and does not foster
efficient overall decision making about the allocation of resources.
Accordingly, MedPAC recommended that once the transition to fully
perspective capital payment is completed, a single PPS payment rate
should be developed for hospital inpatient services to Medicare
beneficiaries. MedPAC indicated that a single PPS payment rate for both
operating and capital PPS costs would be consistent with the way that
hospitals purchase a majority of goods and services.
We responded to a similar comment in the July 31, 1998 final rule
(63 FR 41013) and in the September 1, 1995 final rule (60 FR 45816). In
those rules, we stated that our long-term goal was to develop a single
update framework for operating and capital prospective payments and
that we would begin development of a unified framework. We indicated
that, in the meantime, we would maintain as much consistency as
possible between the current operating and capital frameworks in order
to facilitate the eventual development of a unified framework. In
addition, we stated that because of the similarity of the update
frameworks, the update frameworks could be combined without too much
difficulty. We maintain our goal of combining the update frameworks at
the end of the capital transition period and may examine combining the
payment systems after the conclusion of the capital prospective payment
transition period.

Table 1.--HCFA's FY 2000 Update Factor and MedPAC's Recommendation
------------------------------------------------------------------------
HCFA's
update MedPAC's
factor recommendation
------------------------------------------------------------------------
Capital Input Price Index Financing Policy 0.5 1.9
Adjustment..................................
Financing Policy Adjustment.............. ......... -0.3 to 0.0
Policy Adjustment Factors:
Productivity............................. ......... -1.0 to 0.0
Intensity................................ 0.0 ..............
Science and Technology............... ......... 0.5 to 1.0
Intensity............................ ......... (1)
Real within DRG Change............... ......... (2)
Site-of-Care Substitution................ ......... -1.8 to -0.9
--------------------------
Subtotal......................... 0.0 -2.3 to 0.1
Case-Mix Adjustment Factors: ......... ..............
Projected Case-Mix Change................ -0.5 ..............
Real Across DRG Change................... 0.5 ..............
Coding Change............................ ......... 0.0
Real within DRG Change................... (3) 0.0 to 0.2
--------------------------
Subtotal......................... 0.0 0.0 to 0.2
Effect of FY 1998 Reclassification and 0.7 ..............
Recalibration...............................
Forecast Error Correction.................... -0.4 -0.4
==========================

[[Page 24760]]

Total Update..................... -0.6 -1.1 to 1.8
------------------------------------------------------------------------

1 Included in MedPAC's productivity measure.
2 Included in MedPAC's case-mix adjustment.
3 Included in HCFA's intensity factor.

2. Outlier Payment Adjustment Factor
Section 412.312(c) establishes a unified outlier methodology for
inpatient operating and inpatient capital-related costs. A single set
of thresholds is used to identify outlier cases for both inpatient
operating and inpatient capital-related payments. Outlier payments are
made only on the portion of the Federal rate that is used to calculate
the hospital's inpatient capital-related payments (for example, 90
percent for cost reporting periods beginning in FY 2000 for hospitals
paid under the fully prospective payment methodology). Section
412.308(c)(2) provides that the standard Federal rate for inpatient
capital-related costs be reduced by an adjustment factor equal to the
estimated proportion of outlier payments under the Federal rate to
total inpatient capital-related payments under the Federal rate. The
outlier thresholds are set so that operating outlier payments are
projected to be 5.1 percent of total operating DRG payments. The
inpatient capital-related outlier reduction factor reflects the
inpatient capital-related outlier payments that would be made if all
hospitals were paid 100 percent of the Federal rate. For purposes of
calculating the outlier thresholds and the outlier reduction factor, we
model payments as if all hospitals were paid 100 percent of the Federal
rate because, as explained above, outlier payments are made only on the
portion of the Federal rate that is included in the hospital's
inpatient capital-related payments.
In the July 31, 1998 final rule, we estimated that outlier payments
for capital in FY 1999 would equal 6.08 percent of inpatient capital-
related payments based on the Federal rate (63 FR 41013). Accordingly,
we applied an outlier adjustment factor of 0.9392 to the Federal rate.
Based on the thresholds as set forth in section II.A.4.d of this
Addendum, we estimate that outlier payments for capital will equal 6.03
percent of inpatient capital-related payments based on the Federal rate
in FY 2000. Therefore, we are proposing an outlier adjustment factor of
0.9397 to the Federal rate. Thus, estimated capital outlier payments
for FY 2000 represent a lower percentage of total capital standard
payments than in FY 1999.
The outlier reduction factors are not built permanently into the
rates; that is, they are not applied cumulatively in determining the
Federal rate. Therefore, the proposed net change in the outlier
adjustment to the Federal rate for FY 2000 is 1.0005 (0.9397/0.9392).
The outlier adjustment increases the FY 2000 Federal rate by 0.05
percent compared with the FY 1999 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the Geographic Adjustment Factor
Section 412.308(c)(4)(ii) requires that the Federal rate be
adjusted so that aggregate payments for the fiscal year based on the
Federal rate after any changes resulting from the annual DRG
reclassification and recalibration and changes in the GAF are projected
to equal aggregate payments that would have been made on the basis of
the Federal rate without such changes. We use the actuarial model,
described in Appendix B of this proposed rule, to estimate the
aggregate payments that would have been made on the basis of the
Federal rate without changes in the DRG classifications and weights and
in the GAF. We also use the model to estimate aggregate payments that
would be made on the basis of the Federal rate as a result of those
changes. We then use these figures to compute the adjustment required
to maintain budget neutrality for changes in DRG weights and in the
GAF.
For FY 1999, we calculated a GAF/DRG budget neutrality factor of
1.0027. In the February 25, 1999 final rule (64 FR 9381), we adopted an
incremental GAF/DRG budget neutrality factor of 1.0028 for discharges
on or after March 1, 1999. For FY 2000, we are proposing a GAF/DRG
budget neutrality factor of 0.9986. The GAF/DRG budget neutrality
factors are built permanently into the rates; that is, they are applied
cumulatively in determining the Federal rate. This follows from the
requirement that estimated aggregate payments each year be no more than
they would have been in the absence of the annual DRG reclassification
and recalibration and changes in the GAF. The proposed incremental
change in the adjustment from FY 1999 to FY 2000 is 0.9986. The
proposed cumulative change in the rate due to this adjustment is 1.0015
(the product of the incremental factors for FY 1993, FY 1994, FY 1995,
FY 1996, FY 1997, FY 1998, FY 1999, and the proposed incremental factor
for FY 2000: 0.9980 x 1.0053 x 0.9998 x 0.9994 x 0.9987 x
0.9989 x 1.0028 x 0.9986 = 1.0015).
This proposed factor accounts for DRG reclassifications and
recalibration and for changes in the GAF. It also incorporates the
effects on the GAF of FY 2000 geographic reclassification decisions
made by the MGCRB compared to FY 1999 decisions. However, it does not
account for changes in payments due to changes in the DSH and IME
adjustment factors or in the large urban add-on.
4. Exceptions Payment Adjustment Factor
Section 412.308(c)(3) requires that the standard Federal rate for
inpatient capital-related costs be reduced by an adjustment factor
equal to the estimated proportion of additional payments for exceptions
under Sec. 412.348 relative to total payments under the hospital-
specific rate and Federal rate. We use the model originally developed
for determining the budget neutrality adjustment factor to determine
the exceptions payment adjustment factor. We describe that model in
Appendix B to this proposed rule.
For FY 1999, we estimated that exceptions payments would equal 2.17
percent of aggregate payments based on the Federal rate and the
hospital-specific rate. Therefore, we applied an exceptions reduction
factor of 0.9783 (1-0.0217) in determining the Federal rate. For this
proposed rule, we estimate that exceptions payments for FY 2000 will
equal 2.48 percent of aggregate payments based on the Federal rate and
the hospital-specific rate. Therefore, we are proposing an exceptions
payment reduction factor of 0.9752 to the Federal rate for FY 2000. The
proposed

[[Page 24761]]

exceptions reduction factor for FY 2000 is 0.32 percent lower than the
factor for FY 1999.
The exceptions reduction factors are not built permanently into the
rates; that is, the factors are not applied cumulatively in determining
the Federal rate. Therefore, the proposed net adjustment to the FY 2000
Federal rate is 0.9752/0.9783, or 0.9968.
5. Standard Capital Federal Rate for FY 2000
For FY 1999 (effective March 1, 1999), the capital Federal rate was
$378.10. As a result of changes we are proposing to the factors used to
establish the Federal rate, the proposed FY 2000 Federal rate is
$374.31. The proposed Federal rate for FY 2000 was calculated as
follows:
<bullet> The proposed FY 2000 update factor is 0.9940; that is, the
proposed update is -0.60 percent.
<bullet> The proposed FY 2000 budget neutrality adjustment factor
that is applied to the standard Federal payment rate for changes in the
DRG relative weights and in the GAF is 0.9986.
<bullet> The proposed FY 2000 outlier adjustment factor is 0.9397.
<bullet> The proposed FY 2000 exceptions payments adjustment factor
is 0.9752.
Since the Federal rate has already been adjusted for differences in
case mix, wages, cost of living, indirect medical education costs, and
payments to hospitals serving a disproportionate share of low-income
patients, we propose to make no additional adjustments in the standard
Federal rate for these factors other than the budget neutrality factor
for changes in the DRG relative weights and the GAF.
We are providing a chart that shows how each of the factors and
adjustments for FY 2000 affected the computation of the proposed FY
2000 Federal rate in comparison to the FY 1999 Federal rate. The
proposed FY 2000 update factor has the effect of decreasing the Federal
rate by 0.60 percent compared to the rate in FY 1999, while the
proposed geographic and DRG budget neutrality factor has the effect of
decreasing the Federal rate by 0.14 percent. The proposed FY 2000
outlier adjustment factor has the effect of increasing the Federal rate
by 0.05 percent compared to FY 1999. The proposed FY 2000 exceptions
reduction factor has the effect of decreasing the Federal rate by 0.32
percent compared to the exceptions reduction for FY 1999. The combined
effect of all the proposed changes is to decrease the proposed Federal
rate by 1.00 percent compared to the Federal rate for FY 1999.

Comparison of Factors and Adjustments: FY 1999 Federal Rate and Proposed FY 2000 Federal Rate
----------------------------------------------------------------------------------------------------------------
Proposed FY Percent
FY 1999 2000 Change change
----------------------------------------------------------------------------------------------------------------
Update factor 1............................................. 1.0010 0.9940 0.9940 -0.60
GAF/DRG Adjustment Factor 1................................. 1.0028 0.9986 0.9986 -0.14
Outlier Adjustment Factor 2................................. 0.9392 0.9397 1.0005 0.05
Exceptions Adjustment Factor 2.............................. 0.9783 0.9752 0.9968 -0.32
Federal Rate................................................ $378.10 $374.31 0.9900 -1.00
----------------------------------------------------------------------------------------------------------------

1 The update factor and the GAF/DRG budget neutrality factors are built permanently into the rates. Thus, for
example, the incremental change from FY 1999 to FY 2000 resulting from the application of the 0.9986 GAF/DRG
budget neutrality factor for FY 2000 is 0.9986.
2 The outlier reduction factor and the exceptions reduction factor are not built permanently into the rates;
that is, these factors are not applied cumulatively in determining the rates. Thus, for example, the net
change resulting from the application of the FY 2000 outlier reduction factor is 0.9397/0.9392, or 1.0005.

6. Special Rate for Puerto Rico Hospitals
As explained at the beginning of section IV of this Addendum,
hospitals in Puerto Rico are paid based on 50 percent of the Puerto
Rico rate and 50 percent of the Federal rate. The Puerto Rico rate is
derived from the costs of Puerto Rico hospitals only, while the Federal
rate is derived from the costs of all acute care hospitals
participating in the prospective payment system (including Puerto
Rico). To adjust hospitals' capital payments for geographic variations
in capital costs, we apply a geographic adjustment factor (GAF) to both
portions of the blended rate. The GAF is calculated using the operating
PPS wage index and varies depending on the MSA or rural area in which
the hospital is located. We use the Puerto Rico wage index to determine
the GAF for the Puerto Rico part of the capital blended rate and the
national wage index to determine the GAF for the national part of the
blended rate.
Since we implemented a separate GAF for Puerto Rico in 1998, we
also propose to apply separate budget neutrality adjustments for the
national GAF and for the Puerto Rico GAF. We apply the same budget
neutrality factor for DRG reclassifications and recalibration
nationally and for Puerto Rico. The Puerto Rico GAF budget neutrality
factor is 1.0015, while the DRG adjustment is 1.0001, for a combined
cumulative adjustment of 1.0016.
In computing the payment for a particular Puerto Rico hospital, the
Puerto Rico portion of the rate (50 percent) is multiplied by the
Puerto Rico-specific GAF for the MSA in which the hospital is located,
and the national portion of the rate (50 percent) is multiplied by the
national GAF for the MSA in which the hospital is located (which is
computed from national data for all hospitals in the United States and
Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to
the Puerto Rico rate as a result of the BBA. For FY 1999, before
application of the GAF, the special rate for Puerto Rico hospitals was
$181.10. With the changes we are proposing to the factors used to
determine the rate, the proposed FY 2000 special rate for Puerto Rico
is $174.15.

B. Determination of Hospital-Specific Rate Update

Section 412.328(e) of the regulations provides that the hospital-
specific rate for FY 2000 be determined by adjusting the FY 1999
hospital-specific rate by the following factors:
1. Hospital-Specific Rate Update Factor
The hospital-specific rate is updated in accordance with the update
factor for the standard Federal rate determined under
Sec. 412.308(c)(1). For FY 2000, we are proposing that the hospital-
specific rate be updated by a factor of 0.9940.
2. Exceptions Payment Adjustment Factor
For FYs 1992 through FY 2001, the updated hospital-specific rate is
multiplied by an adjustment factor to account for estimated exceptions
payments for capital-related costs under Sec. 412.348, determined as a
proportion of the total amount of payments under the hospital-specific
rate and the Federal rate. For FY 2000, we estimate that

[[Page 24762]]

exceptions payments will be 2.48 percent of aggregate payments based on
the Federal rate and the hospital-specific rate. Therefore, we propose
that the updated hospital-specific rate be reduced by a factor of
0.9752. The exceptions reduction factors are not built permanently into
the rates; that is, the factors are not applied cumulatively in
determining the hospital-specific rate. The proposed net adjustment to
the FY 2000 hospital-specific rate is 0.9752/0.9783, or 0.9968.
3. Net Change to Hospital-Specific Rate
We are providing a chart to show the net change to the hospital-
specific rate. The chart shows the factors for FY 1999 and FY 2000 and
the net adjustment for each factor. It also shows that the proposed
cumulative net adjustment from FY 1999 to FY 2000 is 0.9908, which
represents a proposed decrease of 0.92 percent to the hospital-specific
rate. For each hospital, the proposed FY 2000 hospital-specific rate is
determined by multiplying the FY 1999 hospital-specific rate by the
cumulative net adjustment of 0.9908.

Proposed FY 2000 Update and Adjustments to Hospital-Specific Rates
----------------------------------------------------------------------------------------------------------------
Proposed FY Net Percent
FY 1999 2000 adjustment change
----------------------------------------------------------------------------------------------------------------
Update Factor............................................... 1.0010 0.9940 0.9940 -0.60
Exceptions Payment Adjustment Factor........................ 0.9783 0.9752 0.9968 -0.32
Cumulative Adjustments...................................... 0.9793 0.9703 0.9908 -0.92
----------------------------------------------------------------------------------------------------------------
Note: The update factor for the hospital-specific rate is applied cumulatively in determining the rates. Thus,
the incremental increase in the update factor from FY 1999 to FY 2000 is 0.9940. In contrast, the exceptions
payment adjustment factor is not applied cumulatively. Thus, for example, the incremental increase in the
exceptions reduction factor from FY 1999 to FY 2000 is 0.9752/0.9783, or 0.9968.

C. Calculation of Inpatient Capital-Related Prospective Payments for FY
2000

During the capital prospective payment system transition period, a
hospital is paid for the inpatient capital-related costs under one of
two payment methodologies--the fully prospective payment methodology or
the hold-harmless methodology. The payment methodology applicable to a
particular hospital is determined when a hospital comes under the
prospective payment system for capital-related costs by comparing its
hospital-specific rate to the Federal rate applicable to the hospital's
first cost reporting period under the prospective payment system. The
applicable Federal rate was determined by making adjustments as
follows:
<bullet> For outliers by dividing the standard Federal rate by the
outlier reduction factor for that fiscal year; and,
<bullet> For the payment adjustment factors applicable to the
hospital (that is, the hospital's GAF, the disproportionate share
adjustment factor, and the indirect medical education adjustment
factor, when appropriate).
If the hospital-specific rate is above the applicable Federal rate,
the hospital is paid under the hold-harmless methodology. If the
hospital-specific rate is below the applicable Federal rate, the
hospital is paid under the fully prospective methodology.
For purposes of calculating payments for each discharge under both
the hold-harmless payment methodology and the fully prospective payment
methodology, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban
Add-on, if applicable) x
(COLA adjustment for hospitals located in Alaska and Hawaii) x (1 +
Disproportionate Share Adjustment Factor + IME Adjustment Factor, if
applicable).

The result is the adjusted Federal rate.
Payments under the hold-harmless methodology are determined under
one of two formulas. A hold-harmless hospital is paid the higher of the
following:
<bullet> 100 percent of the adjusted Federal rate for each
discharge; or
<bullet> An old capital payment equal to 85 percent (100 percent
for sole community hospitals) of the hospital's allowable Medicare
inpatient old capital costs per discharge for the cost reporting period
plus a new capital payment based on a percentage of the adjusted
Federal rate for each discharge. The percentage of the adjusted Federal
rate equals the ratio of the hospital's allowable Medicare new capital
costs to its total Medicare inpatient capital-related costs in the cost
reporting period.
Once a hospital receives payment based on 100 percent of the
adjusted Federal rate in a cost reporting period beginning on or after
October 1, 1994 (or the first cost reporting period after obligated
capital that is recognized as old capital under Sec. 412.302(c) is put
in use for patient care, if later), the hospital continues to receive
capital prospective payment system payments on that basis for the
remainder of the transition period.
Payment for each discharge under the fully prospective methodology
is the sum of the following:
<bullet> The hospital-specific rate multiplied by the DRG relative
weight for the discharge and by the applicable hospital-specific
transition blend percentage for the cost reporting period; and
<bullet> The adjusted Federal rate multiplied by the Federal
transition blend percentage.
The blend percentages for cost reporting periods beginning in FY
2000 are 90 percent of the adjusted Federal rate and 10 percent of the
hospital-specific rate.
Hospitals may also receive outlier payments for those cases that
qualify under the thresholds established for each fiscal year. Section
412.312(c) provides for a single set of thresholds to identify outlier
cases for both inpatient operating and inpatient capital-related
payments. Outlier payments are made only on that portion of the Federal
rate that is used to calculate the hospital's inpatient capital-related
payments. For fully prospective hospitals, that portion is 90 percent
of the Federal rate for discharges occurring in cost reporting periods
beginning during FY 2000. Thus, a fully prospective hospital will
receive 90 percent of the capital-related outlier payment calculated
for the case for discharges occurring in cost reporting periods
beginning in FY 2000. For hold-harmless hospitals paid 85 percent of
their reasonable costs for old inpatient capital, the portion of the
Federal rate that is included in the hospital's outlier payments is
based on the hospital's ratio of Medicare inpatient costs for new
capital to total Medicare inpatient capital costs. For hold-harmless
hospitals that are paid 100 percent of the Federal rate, 100 percent of
the Federal rate is included in the hospital's outlier payments.
The proposed outlier thresholds for FY 2000 are in section II.A.4.c
of this

[[Page 24763]]

Addendum. For FY 2000, a case qualifies as a cost outlier if the cost
for the case (after standardization for the indirect teaching
adjustment and disproportionate share adjustment) is greater than the
prospective payment rate for the DRG plus $14,575.
During the capital prospective payment system transition period, a
hospital may also receive an additional payment under an exceptions
process if its total inpatient capital-related payments are less than a
minimum percentage of its allowable Medicare inpatient capital-related
costs. The minimum payment level is established by class of hospital
under Sec. 412.348. The proposed minimum payment levels for portions of
cost reporting periods occurring in FY 2000 are:
<bullet> Sole community hospitals (located in either an urban or
rural area), 90 percent;
<bullet> Urban hospitals with at least 100 beds and a
disproportionate share patient percentage of at least 20.2 percent; and
<bullet> Urban hospitals with at least 100 beds that qualify for
disproportionate share payments under Sec. 412.106(c)(2), 80 percent;
and
<bullet> All other hospitals, 70 percent.
Under Sec. 412.348(d), the amount of the exceptions payment is
determined by comparing the cumulative payments made to the hospital
under the capital prospective payment system to the cumulative minimum
payment levels applicable to the hospital for each cost reporting
period subject to that system. Any amount by which the hospital's
cumulative payments exceed its cumulative minimum payment is deducted
from the additional payment that would otherwise be payable for a cost
reporting period.
New hospitals are exempted from the capital prospective payment
system for their first 2 years of operation and are paid 85 percent of
their reasonable costs during that period. A new hospital's old capital
costs are its allowable costs for capital assets that were put in use
for patient care on or before the later of December 31, 1990 or the
last day of the hospital's base year cost reporting period, and are
subject to the rules pertaining to old capital and obligated capital as
of the applicable date. Effective with the third year of operation, we
will pay the hospital under either the fully prospective methodology,
using the appropriate transition blend in that Federal fiscal year, or
the hold-harmless methodology. If the hold-harmless methodology is
applicable, the hold-harmless payment for assets in use during the base
period would extend for 8 years, even if the hold-harmless payments
extend beyond the normal transition period.

D. Capital Input Price Index

1. Background
Like the prospective payment hospital operating input price index,
the Capital Input Price Index (CIPI) is a fixed-weight price index that
measures the price changes associated with costs during a given year.
The CIPI differs from the operating input price index in one important
aspect--the CIPI reflects the vintage nature of capital, which is the
acquisition and use of capital over time. Capital expenses in any given
year are determined by the stock of capital in that year (that is,
capital that remains on hand from all current and prior capital
acquisitions). An index measuring capital price changes needs to
reflect this vintage nature of capital. Therefore, the CIPI was
developed to capture the vintage nature of capital by using a weighted-
average of past capital purchase prices up to and including the current
year.
Using Medicare cost reports, AHA data, and Securities Data
Corporation data, a vintage-weighted price index was developed to
measure price increases associated with capital expenses. We
periodically update the base year for the operating and capital input
prices to reflect the changing composition of inputs for operating and
capital expenses. Currently, the CIPI is based to FY 1992 and was last
rebased in 1997. The most recent explanation of the CIPI was discussed
in the final rule with comment period for FY 1998 published in the
August 29, 1997 Federal Register (62 FR 46050). The following Federal
Register documents also describe development and revisions of the
methodology involved with the construction of the CIPI: September 1,
1992 (57 FR 40016), May 26, 1993 (58 FR 30448), September 1, 1993 (58
FR 46490), May 27, 1994 (59 FR 27876), September 1, 1994 (59 FR 45517),
June 2, 1995 (60 FR 29229), and September 1, 1995 (60 FR 45815), May
31, 1996 (61 FR 27466), August 30, 1996 (61 FR 46196), June 2, 1997 (62
FR 29953), August 29, 1997 (62 FR 46050), May 8, 1998 (63 FR 25619),
and July 31, 1998 (63 FR 41017).
2. Forecast of the CIPI for Federal Fiscal Year 2000
We are forecasting the CIPI to increase 0.5 percent for FY 2000.
This reflects a projected 1.6 percent increase in vintage-weighted
depreciation prices (building and fixed equipment, and movable
equipment) and a 3.2 percent increase in other capital expense prices
in FY 2000, partially offset by a 3.2 percent decline in vintage-
weighted interest rates in FY 2000. The weighted average of these three
factors produces the 0.5 percent increase for the CIPI as a whole.

V. Proposed Changes to Payment Rates for Excluded Hospitals and
Hospital Units: Rate-of-Increase Percentages

A. Rate-of-Increase Percentages for Excluded Hospitals and Hospital
Units

The inpatient operating costs of hospitals and hospital units
excluded from the prospective payment system are subject to rate-of-
increase limits established under the authority of section 1886(b) of
the Act, which is implemented in regulations at Sec. 413.40. Under
these limits, a hospital-specific target amount (expressed in terms of
the inpatient operating cost per discharge) is set for each hospital,
based on the hospital's own historical cost experience trended forward
by the applicable rate-of-increase percentages (update factors). In the
case of a psychiatric hospital or hospital unit, rehabilitation
hospital or hospital unit, or long-term care hospital, the target
amount may not exceed the updated figure for the 75th percentile of
target amounts for hospitals and units in the same class (psychiatric,
rehabilitation, and long-term care) for cost reporting periods ending
during FY 1996. The target amount is multiplied by the number of
Medicare discharges in a hospital's cost reporting period, yielding the
ceiling on aggregate Medicare inpatient operating costs for the cost
reporting period.
Each hospital-specific target amount is adjusted annually, at the
beginning of each hospital's cost reporting period, by an applicable
update factor.
Section 1886(b)(3)(B) of the Act, which is implemented in
regulations at Sec. 413.40(c)(3)(vii), provides that for cost reporting
periods beginning on or after October 1, 1999 and before October 1,
2000, the update factor depends on the hospital's or hospital unit's
costs in relation to the ceiling. For hospitals with costs exceeding
the ceiling by 10 percent or more, the update factor is the market
basket increase. For hospitals with costs exceeding the ceiling by less
than 10 percent, the update factor is the market basket minus .25
percent for each percentage point by which costs are less than 10
percent over the ceiling. For hospitals with costs equal to or less
than the ceiling but greater than 66.7 percent of the ceiling, the
update factor is the greater of 0 percent or the market basket minus
2.5 percent. For hospitals with costs that do not exceed 66.7

[[Page 24764]]

percent of the ceiling, the update factor is 0.
The most recent forecast of the market basket increase for FY 2000
for hospitals and hospital units excluded from the prospective payment
system is 2.6 percent. Therefore, the update to a hospital's target
amount for its cost reporting period beginning in FY 2000 would be
between 0 and 2.6 percent.
In addition, Sec. 413.40(c)(4)(iii) requires that for cost
reporting periods beginning on or after October 1, 1999 and before
October 1, 2000, the target amount for each psychiatric hospital or
hospital unit, rehabilitation hospital or hospital unit, and long-term
care hospital cannot exceed a cap on the target amounts for hospitals
in the same class. For cost reporting periods beginning in FY 2000, the
proposed caps are $11,076 for psychiatric hospitals and hospital units,
$20,071 for rehabilitation hospitals and hospital units, and $39,596
for long-term care hospitals. Regulations at Sec. 413.40(d) specify the
formulas for determining bonus and relief payments for excluded
hospitals and specify established criteria for an additional bonus
payment for continuous improvement. Regulations at
Sec. 413.40(f)(2)(ii) specify the payment methodology for new hospitals
and hospital units (psychiatric, rehabilitation, and long-term care)
effective October 1, 1997.

VI. Tables

This section contains the tables referred to throughout the
preamble to this proposed rule and in this Addendum. For purposes of
this proposed rule, and to avoid confusion, we have retained the
designations of Tables 1 through 5 that were first used in the
September 1, 1983 initial prospective payment final rule (48 FR 39844).
Tables 1A, 1C, 1D, 3C, 4A, 4B, 4C, 4D, 4E, 4F, 5, 7A, 7B, 8A, and 8B
are presented below. The tables presented below are as follows:

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 3C--Hospital Case Mix Indexes for Discharges Occurring in Federal
Fiscal Year 1998 and Hospital Average Hourly Wage for Federal Fiscal
Year 2000 Wage Index
Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Urban Areas
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Rural Areas
Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Hospitals That Are Reclassified
Table 4D--Average Hourly Wage for Urban Areas
Table 4E--Average Hourly Wage for Rural Areas
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment
Factor (GAF)
Table 5--List of Diagnosis Related Groups (DRGs), Relative Weighting
Factors, Geometric Mean Length of Stay, and Arithmetic Mean Length of
Stay Points Used in the Prospective Payment System
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 98 MEDPAR Update 12/98 GROUPER V16.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 98 MEDPAR Update 12/98 GROUPER V17.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for Urban
and Rural Hospitals (Case Weighted) March 1999

Table 1A.--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
------------------------------------------------------------------------
Large urban areas Other areas
------------------------------------------------------------------------
Labor-related Nonlabor-related Labor-related Nonlabor-related
------------------------------------------------------------------------
2,804.51 1,139.95 2,760.12 1,121.90
------------------------------------------------------------------------

Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
Large urban areas Other areas
---------------------------------------------------------------
Labor Nonlabor Labor Nonlabor
----------------------------------------------------------------------------------------------------------------
National........................................ 2,780.77 1,130.30 2,780.77 1,130.30
Puerto Rico..................................... 1,335.82 537.70 1,314.67 529.19
----------------------------------------------------------------------------------------------------------------

Table 1D.--Capital Standard Federal Payment Rate
------------------------------------------------------------------------
Rate
------------------------------------------------------------------------
National................................................... 374.31
Puerto Rico................................................ 174.15
------------------------------------------------------------------------

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