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 purpos