[Federal Register: July 30, 1999 (Volume 64, Number 146)]
[Rules and Regulations]               
[Page 41539-41588]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jy99-22]                         
 
[[pp. 41539-41588]] Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2000 Rates


[[Continued from page 41538]]

[[Page 41539]]

number after it is calculated. We agree that the absence of an explicit 
instruction, in and of itself, does not necessarily mean that the 
Secretary cannot implement a wage adjustment. However, Congressional 
"silence" on this issue must be construed in light of the statutory 
scheme and the legislative history, as well as policy considerations.
    With regard to the statutory scheme, we stated that in requiring 
that we calculate a separate number for each class of hospitals, the 
Congress established a scheme that directs us to recognize differences 
across types of hospitals, but does not direct us to recognize 
differences in wages. In addition to the scheme of section 4414 itself, 
we considered this section in light of other statutory provisions. We 
concluded that, because the Congress explicitly requires wage 
adjustments in some contexts, failure to require a wage adjustment in 
this context reflects a judgement by the Congress that we should not 
make one under section 4414. In terms of the legislative history, we 
noted that there is no reference in the Conference Report to a wage 
adjustment to the TEFRA caps.
    Finally, we asserted that while from a broad policy perspective a 
wage adjustment might be appropriate, policy considerations do not 
dictate a wage adjustment. A payment cap is different from a payment 
rate in that a cap only affects hospitals that are above the cap, while 
a payment rate affects all hospitals. Thus, we believe that while a 
wage adjustment might be preferable policy, the lack of a wage 
adjustment is not unreasonable. We stated that we would support a 
hospital-sponsored legislative change to permit wage adjustments and we 
will continue to do so; however, our decision, as expressed in the May 
12, 1998 final rule, remains unchanged.

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

    Recommendations: The Congress should require that disproportionate 
share payments be distributed according to each hospital's share of 
low-income patient costs, defined broadly to include all care to the 
poor. The measure of low-income costs should reflect: (1) Medicare 
patients eligible for Supplemental Security Income, Medicaid patients, 
patients sponsored by other indigent care programs, and uninsured and 
underinsured patients as represented by uncompensated care (both 
charity and bad debts); and (2) services provided in both inpatient and 
outpatient settings.
    As under current policy, disproportionate share payment should be 
made in the form of an adjustment to the per-case payment rate. In this 
way, the total payment each hospital receives will reflect its volume 
of Medicare patients.
    Through a minimum threshold for low-income share, the formula for 
distributing disproportionate share payments should concentrate 
payments among hospitals with the highest shares of poor patients. A 
reasonable range for this threshold would be levels that make between 
50 percent and 60 percent of hospitals eligible for a payment. However, 
the size of the payment adjustment should increase gradually from zero 
at the threshold. The same distribution formula should apply to all 
hospitals covered by prospective payment.
    The Secretary should collect the data necessary to revise the 
disproportionate share payment system from all hospitals paid under the 
prospective payment system.
    Response in the Proposed Rule: We continue to give careful 
consideration to MedPAC's recommendations concerning the DSH adjustment 
made to operating payments under the prospective payment system.
    We are in the process of preparing a report to the Congress on the 
Medicare DSH adjustment that includes several options for amending the 
statutory disproportionate share adjustment formula. We believe that 
any adjustment to the DSH formula or data sources should be directed 
and supported by the Congress.
    The MedPAC option involves collecting data on uncompensated care, 
that is, charity and bad debts. Ideally, this would be a direct measure 
of a hospital's indigent care burden. However, there are problems 
associated with verification of such data and consistency of reporting 
nationally. We appreciate the Commission's recommendations about and 
assistance with the Medicare DSH adjustment as we formulate our 
legislative proposal and await Congressional action.
    Comment: MedPAC commented that it does not believe that the 
verification process for uncompensated care (charity and bad debt) data 
needs to be burdensome. It recommends that HCFA keep reporting 
requirements to a minimum to limit data collection problems. 
Specifically, MedPAC recommends that HCFA collect only total 
uncompensated care data rather than separate data on the two components 
of uncompensated care--bad debts and charity care. HCFA should publish 
guidelines specifying the types of unpaid charges that can be included 
so that reporting problems are minimal.
    Response: As we noted in our response to this recommendation in the 
proposed rule, we are preparing a Report to Congress on the revision of 
the DSH adjustment formula and have taken into consideration the 
inclusion of a recommendation to collect uncompensated care charge data 
by payer category (inpatient and outpatient) for our analysis. We 
believe it is important to promote the consistent reporting of data to 
the extent possible. We plan to minimize reporting problems by 
collecting only total uncompensated care data, thereby avoiding the 
problem of different definitions of bad debts, indigent care, and 
uncompensated care among States. However, we continue to anticipate 
other reporting problems such as hospital recordkeeping of these data.

VIII. Other Required Information


Requests for Data from the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have set up a process under which 
commenters can gain access to the raw data on an expedited basis. 
Generally, the data are available in computer tape or cartridge format; 
however, some files are available on diskette as well as on the 
Internet at HTTP://WWW.HCFA.GOV/STATS/PUBFILES.HTML. In our May 7, 1999 
proposed rule, we published a list of data files that are available for 
purchase (64 FR 24746 and 24747).

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 483

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

42 CFR Part 485

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


[[Page 41540]]


    42 CFR Chapter IV is amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

    2. In Sec. 412.2, the introductory text of paragraph (e) is 
republished and paragraph (e)(4) is revised to read as follows:


Sec. 412.2  Basis of payment.

* * * * *
    (e) Excluded costs. The following inpatient hospital costs are 
excluded from the prospective payment amounts and are paid on a 
reasonable cost basis:
* * * * *
    (4) Heart, kidney, liver, lung, and pancreas acquisition costs 
incurred by approved transplantation centers.
* * * * *
    3. Section 412.22 is amended by adding a new paragraph (h) to read 
as follows:


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

* * * * *
    (h) Satellite facilities. (1) For purposes of paragraphs (h)(2) 
through (h)(4) of this section, a satellite facility is a part of a 
hospital that provides inpatient services in a building also used by 
another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital.
    (2) Except as provided in paragraph (h)(3) of this section, 
effective for cost reporting periods beginning on or after October 1, 
1999, a hospital that has a satellite facility must meet the following 
criteria in order to be excluded from the prospective payment systems 
for any period:
    (i) In the case of a hospital (other than a children's hospital) 
that was excluded from the prospective payment systems for the most 
recent cost reporting period beginning before October 1, 1997, the 
hospital's number of State-licensed and Medicare-certified beds, 
including those at the satellite facilities, does not exceed the 
hospital's number of State-licensed and Medicare-certified beds on the 
last day of the hospital's last cost reporting period beginning before 
October 1, 1997.
    (ii) The satellite facility independently complies with--
    (A) For psychiatric hospitals, the requirements under 
Sec. 412.23(a);
    (B) For rehabilitation hospitals, the requirements under 
Sec. 412.23(b)(2);
    (C) For children's hospitals, the requirements under 
Sec. 412.23(d)(2); or
    (D) For long-term care hospitals, the requirements under 
Secs. 412.23(e)(1) through (e)(3)(i).
    (iii) The satellite facility meets all of the following 
requirements:
    (A) It maintains admission and discharge records that are 
separately identified from those of the hospital in which it is located 
and are readily available.
    (B) It has beds that are physically separate from (that is, not 
commingled with) the beds of the hospital in which it is located.
    (C) It is serviced by the same fiscal intermediary as the hospital 
of which it is a part.
    (D) It is treated as a separate cost center of the hospital of 
which it is a part.
    (E) For cost reporting and apportionment purposes, it uses an 
accounting system that properly allocates costs and maintains adequate 
statistical data to support the basis of allocation.
    (F) It reports its costs on the cost report of the hospital of 
which it is a part, covering the same fiscal period and using the same 
method of apportionment as the hospital of which it is a part.
    (3) Except as provided in paragraph (h)(4) of this section, the 
provisions of paragraph (h)(2) of this section do not apply to--
    (i) Any hospital structured as a satellite facility on September 
30, 1999, and excluded from the prospective payment systems on that 
date, to the extent the hospital continues operating under the same 
terms and conditions, including the number of beds and square footage 
considered, for purposes of Medicare participation and payment, to be 
part of the hospital, in effect on September 30, 1999; or
    (ii) Any hospital excluded from the prospective payment systems 
under Sec. 412.23(e)(2).
    (4) In applying the provisions of paragraph (h)(3) of this section, 
any hospital structured as a satellite facility on September 30, 1999, 
may increase or decrease the square footage of the satellite facility 
or may decrease the number of beds in the satellite facility if these 
changes are made necessary by relocation of a facility--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.
    4. Section 412.25 is amended by revising paragraphs (b) and (c) and 
adding a new paragraph (e) to read as follows:


Sec. 412.25  Excluded hospital units: Common requirements.

* * * * *
    (b) Changes in the size of excluded units. For purposes of 
exclusions from the prospective payment systems under this section, 
changes in the number of beds and square footage considered to be part 
of each excluded unit are allowed as specified in paragraphs (b)(1) 
through (b)(3) of this section.
    (1) Increase in size. Except as described in paragraph (b)(3) of 
this section, the number of beds and square footage of an excluded unit 
may be increased only at the start of a cost reporting period.
    (2) Decrease in size. Except as described in paragraph (b)(3) of 
this section, the number of beds and square footage of an excluded unit 
may be decreased at any time during a cost reporting period if the 
hospital notifies its fiscal intermediary and the HCFA Regional Office 
in writing of the planned decrease at least 30 days before the date of 
the decrease, and maintains the information needed to accurately 
determine costs that are attributable to the excluded unit. Any 
decrease in the number of beds or square footage considered to be part 
of an excluded unit made during a cost reporting period must remain in 
effect for the rest of that cost reporting period.
    (3) Exception to changes in square footage and bed size. The number 
of beds in an excluded unit may be decreased, and the square footage 
considered to be part of the unit may be either increased or decreased, 
at any time, if these changes are made necessary by relocation of a 
unit--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law affecting the physical 
facility; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.
    (c) Changes in the status of hospital units. For purposes of 
exclusions from the prospective payment systems under this section, the 
status of each hospital unit (excluded or not excluded) is determined 
as specified in paragraphs (c)(1) and (c)(2) of this section.
    (1) The status of a hospital unit may be changed from not excluded 
to excluded only at the start of the cost reporting period. If a unit 
is added to a

[[Page 41541]]

hospital after the start of a cost reporting period, it cannot be 
excluded from the prospective payment systems before the start of a 
hospital's next cost reporting period.
    (2) The status of a hospital unit may be changed from excluded to 
not excluded at any time during a cost reporting period, but only if 
the hospital notifies the fiscal intermediary and the HCFA Regional 
Office in writing of the change at least 30 days before the date of the 
change, and maintains the information needed to accurately determine 
costs that are or are not attributable to the excluded unit. A change 
in the status of a unit from excluded to not excluded that is made 
during a cost reporting period must remain in effect for the rest of 
that cost reporting period.
* * * * *
    (e) Satellite facilities. (1) For purposes of paragraphs (e)(2) 
through (e)(4) of this section, a satellite facility is a part of a 
hospital unit that provides inpatient services in a building also used 
by another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital.
    (2) Except as provided in paragraph (e)(3) of this section, 
effective for cost reporting periods beginning on or after October 1, 
1999, a hospital unit that establishes a satellite facility must meet 
the following requirements in order to be excluded from the prospective 
payment systems for any period:
    (i) In the case of a unit excluded from the prospective payment 
systems for the most recent cost reporting period beginning before 
October 1, 1997, the unit's number of State-licensed and Medicare-
certified beds, including those at the satellite facility, does not 
exceed the unit's number of State-licensed and Medicare-certified beds 
on the last day of the unit's last cost reporting period beginning 
before October 1, 1997.
    (ii) The satellite facility independently complies with--
    (A) For a rehabilitation unit, the requirements under 
Sec. 412.23(b)(2); or
    (B) For a psychiatric unit, the requirements under Sec. 412.27(a).
    (iii) The satellite facility meets all of the following 
requirements:
    (A) It maintains admission and discharge records that are 
separately identified from those of the hospital in which it is located 
and are readily available.
    (B) It has beds that are physically separate from (that is, not 
commingled with) the beds of the hospital in which it is located.
    (C) It is serviced by the same fiscal intermediary as the hospital 
unit of which it is a part.
    (D) It is treated as a separate cost center of the hospital unit of 
which it is a part.
    (E) For cost reporting and apportionment purposes, it uses an 
accounting system that properly allocates costs and maintains adequate 
statistical data to support the basis of allocation.
    (F) It reports its costs on the cost report of the hospital of 
which it is a part, covering the same fiscal period and using the same 
method of apportionment as the hospital of which it is a part.
    (3) Except as specified in paragraph (e)(4) of this section, the 
provisions of paragraph (e)(2) of this section do not apply to any unit 
structured as a satellite facility on September 30, 1999, and excluded 
from the prospective payment systems on that date, to the extent the 
unit continues operating under the same terms and conditions, including 
the number of beds and square footage considered to be part of the 
unit, in effect on September 30, 1999.
    (4) In applying the provisions of paragraph (h)(3) of this section, 
any unit structured as a satellite facility as of September 30, 1999, 
may increase or decrease the square footage of the satellite facility 
or may decrease the number of beds in the satellite facility at any 
time, if these changes are made necessary by relocation of the 
facility--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law affecting the physical 
facility; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.


Sec. 412.105  [Amended]

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


Sec. 412.256  [Amended]

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


Sec. 412.276  Timing of MGCRB decision and its appeal.

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

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

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

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

    2. Section 413.40 is amended by adding a sentence containing 
paragraphs (A) and (B) at the end of the definition of "ceiling" in 
paragraph (a)(3) and revising paragraphs (b)(1)(iii), (c)(4)(v), 
(f)(2)(ii)(A), and (g)(1) to read as follows:


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

    (a) Introduction. * * *
    (3) Definitions. * * *
    Ceiling * * * For a hospital-within-a-hospital, as described in 
Sec. 412.22(e) of this chapter, the number of Medicare discharges in a 
cost reporting period does not include discharges of a patient to 
another hospital in the same building on or on the same campus, if--
    (A) The patient is subsequently readmitted to the hospital-within-
a-hospital directly from the other hospital; and
    (B) The hospital-within-a-hospital has discharged to the other 
hospital and subsequently readmitted more than 5 percent (that is, in 
excess of 5.0 percent) of the total number of inpatients discharged 
from the hospital-within-a-hospital in that cost reporting period.
* * * * *
    (b) Cost reporting periods subject to the rate-of-increase ceiling. 
(1) Base period. * * *
    (iii) When the operational structure of a hospital or unit changes 
(that is, a freestanding hospital becomes an excluded unit or an 
excluded unit becomes a freestanding hospital, or an entity of a 
multicampus hospital becomes a newly created hospital or unit or a 
hospital or unit becomes a part of a multicampus hospital), the base 
period for the hospital or unit that

[[Page 41542]]

changed its operational structure is the first cost reporting period of 
at least 12 months effective with the revised Medicare certification 
classification.
* * * * *
    (c) Cost subject to the ceiling. * * *
    (4) Target amounts. * * *
    (v) In the case of a hospital that received payments under 
paragraph (f)(2)(ii) of this section as a newly created hospital or 
unit, to determine the hospital's target amount for the hospital's 
third 12-month cost reporting period, the payment amount determined 
under paragraph (f)(2)(ii) of this section for the preceding cost 
report period is updated to the third cost reporting period.
* * * * *
    (f) Comparison to the target amount for new hospitals and units. * 
* *
    (2) Comparison. * * *
    (ii) Median target amount. (A) For cost reporting periods beginning 
on or after October 1, 1997, the amount of payment for a new 
psychiatric hospital or unit, a new rehabilitation hospital or unit, or 
a new long-term care hospital that was not paid as an excluded hospital 
prior to October 1, 1997, is the lower of the hospital's net inpatient 
operating cost per case or 110 percent of the national median of the 
target amounts for the class of excluded hospitals and units 
(psychiatric, rehabilitation, long-term care) as adjusted for 
differences in wage levels and updated to the first cost reporting 
period in which the hospital receives payment. The second cost 
reporting period is subject to the same target amount as the first cost 
reporting period.
* * * * *
    (g) Adjustment. (1) General rules. (i) HCFA adjusts the amount of 
the operating costs considered in establishing the rate-of-increase 
ceiling for one or more cost reporting periods, including both periods 
subject to the ceiling and the hospital's base period, under the 
circumstances specified in paragraphs (g)(2), (g)(3), and (g)(4) of 
this section.
    (ii) When the hospital requests an adjustment, HCFA makes an 
adjustment only to the extent that the hospital's operating costs are 
reasonable, attributable to the circumstances specified separately, 
identified by the hospital, and verified by the intermediary.
    (iii) When the hospital requests an adjustment, HCFA makes an 
adjustment only if the hospital's operating costs exceed the rate-of-
increase ceiling imposed under this section.
    (iv) In the case of a psychiatric hospital or unit, rehabilitation 
hospital or unit, or long-term care hospital, the amount of payment 
under paragraph (g)(3) of this section may not exceed the payment 
amount based on the target amount determined under paragraph 
(c)(4)(iii) of this section.
    (v) In the case of a hospital or unit that received a revised FY 
1998 target amount under the rebasing provisions of paragraph 
(b)(1)(iv) of this section, the amount of an adjustment payment for a 
cost reporting period is based on a comparison of the hospital's 
operating costs for the cost reporting period to the average costs and 
statistics for the cost reporting periods used to determine the FY 1998 
rebased target amount.
* * * * *


Sec. 413.86  [Amended]

    3. Section 413.86 is amended as follows:
    a. In paragraph (b), the definition of "approved geriatric 
program" is revised to read as set forth below.
    b. In paragraph (b), under paragraph (1) of the definition of 
"approved medical residency program", the reference "Sec. 415.200(a) 
of this chapter" is revised to read "Sec. 415.152 of this chapter".
    c. In paragraph (e)(1)(ii)(C), the reference "paragraph (j)(2) of 
this section" is revised to read "paragraph (k)(1) of this section".
    d. In paragraph (e)(1)(iv), the reference, "paragraph (j)(1) of 
this section", is revised to read "paragraph (k)(1) of this 
section".
    e. A new paragraph (f)(4)(iii) is added, paragraphs (g)(1)(i), 
(ii), and (iii), (g)(6) introductory text, (g)(6)(i) and (ii), and the 
first sentence of paragraph (g)(6)(iii) are revised, paragraph (g)(7) 
is redesignated as paragraph (g)(9), and new paragraphs (g)(7) and 
(g)(8) are added to read as follows:


Sec. 413.86  Direct graduate medical education payments.

* * * * *
    (b) * * *
    Approved geriatric program means a fellowship program of one or 
more years in length that is approved by one of the national 
organizations listed in Sec. 415.152 of this chapter under that 
respective organization's criteria for geriatric fellowship programs.
* * * * *
    (f) Determining the total number of FTE residents. * * *
    (4) * * *
    (iii) The hospital must incur all or substantially all of the costs 
for the training program in the nonhospital setting in accordance with 
the definition in paragraph (b) of this section.
    (g) Determining the weighted number of FTE residents. * * *
    (1) * * *
    (i) For residency programs other than those specified in paragraphs 
(g)(1)(ii) and (g)(1)(iii) of this section, the initial residency 
period is the minimum number of years of formal training necessary to 
satisfy the requirements for initial board eligibility in the 
particular specialty for which the resident is training, as specified 
in the most recently published edition of the Graduate Medical 
Education Directory.
    (ii) For residency programs in osteopathy, dentistry, and podiatry, 
the minimum requirement for certification in a specialty or 
subspecialty is the minimum number of years of formal training 
necessary to satisfy the requirements of the appropriate approving body 
listed in Sec. 415.152 of this chapter.
    (iii) For residency programs in geriatric medicine, accredited by 
the appropriate approving body listed in 415.152 of this chapter, these 
programs are considered approved programs on the later of--
    (A) The starting date of the program within a hospital; or
    (B) The hospital's cost reporting periods beginning on or after 
July 1, 1985.
* * * * *
    (6) If a hospital establishes a new medical residency training 
program as defined in paragraph (g)(9) of this section on or after 
January 1, 1995, the hospital's FTE cap described under paragraph 
(g)(4) of this section may be adjusted as follows:
    (i) If a hospital had no allopathic or osteopathic residents in its 
most recent cost reporting period ending on or before December 31, 
1996, and it establishes a new medical residency training program on or 
after January 1, 1995, the hospital's unweighted FTE resident cap under 
paragraph (g)(4) of this section may be adjusted based on the product 
of the highest number of residents in any program year during the third 
year of the first program's existence for all new residency training 
programs and the number of years in which residents are expected to 
complete the program based on the minimum accredited length for the 
type of program. The adjustment to the cap may not exceed the number of 
accredited slots available to the hospital for the new program.
    (A) If the residents are spending an entire program year (or years) 
at one hospital and the remainder of the program at another hospital, 
the adjustment to each respective hospital's

[[Page 41543]]

cap is equal to the product of the highest number of residents in any 
program year during the third year of the first program's existence and 
the number of years the residents are training at each respective 
hospital.
    (B) Prior to the implementation of the hospital's adjustment to its 
FTE cap beginning with the fourth year of the hospital's residency 
program(s), the hospital's cap may be adjusted during each of the first 
3 years of the hospital's new residency program using the actual number 
of residents participating in the new program. The adjustment may not 
exceed the number of accredited slots available to the hospital for 
each program year.
    (C) Except for rural hospitals, the cap will not be adjusted for 
new programs established more than 3 years after the first program 
begins training residents.
    (D) An urban hospital that qualifies for an adjustment to its FTE 
cap under paragraph (g)(6)(i) of this section is not permitted to be 
part of an affiliated group for purposes of establishing an aggregate 
FTE cap.
    (E) A rural hospital that qualifies for an adjustment to its FTE 
cap under paragraph (g)(6)(i) of this section is permitted to be part 
of an affiliated group for purposes of establishing an aggregate FTE 
cap.
    (ii) If a hospital had allopathic or osteopathic residents in its 
most recent cost reporting period ending on or before December 31, 
1996, the hospital's unweighted FTE cap may be adjusted for new medical 
residency training programs established on or after January 1, 1995 and 
on or before August 5, 1997. The adjustment to the hospital's FTE 
resident limit for the new program is based on the product of the 
highest number of residents in any program year during the third year 
of the newly established program and the number of years in which 
residents are expected to complete each program based on the minimum 
accredited length for the type of program.
    (A) If the residents are spending an entire program year (or years) 
at one hospital and the remainder of the program at another hospital, 
the adjustment to each respective hospital's cap is equal to the 
product of the highest number of residents in any program year during 
the third year of the first program's existence and the number of years 
the residents are training at each respective hospital.
    (B) Prior to the implementation of the hospital's adjustment to its 
FTE cap beginning with the fourth year of the hospital's residency 
program, the hospital's cap may be adjusted during each of the first 3 
years of the hospital's new residency program, using the actual number 
of residents in the new programs. The adjustment may not exceed the 
number of accredited slots available to the hospital for each program 
year.
    (iii) If a hospital with allopathic or osteopathic residents in its 
most recent cost reporting period ending on or before December 31, 
1996, is located in a rural area (or other hospitals located in rural 
areas that added residents under paragraph (g)(6)(i) of this section), 
the hospital's unweighted FTE limit may be adjusted in the same manner 
described in paragraph (g)(6)(ii) of this section to reflect the 
increase for residents in the new medical residency training programs 
established after August 5, 1997. * * *
    (7) A hospital that began construction of its facility prior to 
August 5, 1997, and sponsored new medical residency training programs 
on or after January 1, 1995 and on or before August 5, 1997, that 
either received initial accreditation by the appropriate accrediting 
body or temporarily trained residents at another hospital(s) until the 
facility was completed, may receive an adjustment to its FTE cap.
    (i) The newly constructed hospital's FTE cap is equal to the lesser 
of:
    (A) The product of the highest number of residents in any program 
year during the third year of the newly established program and the 
number of years in which residents are expected to complete the 
programs based on the minimum accredited length for each type of 
program; or
    (B) The number of accredited slots available to the hospital for 
each year of the programs.
    (ii) If the new medical residency training programs sponsored by 
the newly constructed hospital have been in existence for 3 years or 
more by the time the residents begin training at the newly constructed 
hospital, the newly constructed hospital's cap will be based on the 
number of residents training in the third year of the programs begun at 
the temporary training site.
    (iii) If the new medical residency training programs sponsored by 
the newly constructed hospital have been in existence for less than 3 
years by the time the residents begin training at the newly constructed 
hospital, the newly constructed hospital's cap will be based on the 
number of residents training at the newly constructed hospital in the 
third year of the programs (including the years at the temporary 
training site).
    (iv) A hospital that qualifies for an adjustment to its FTE cap 
under paragraph (g)(7) of this section may be part of an affiliated 
group for purposes of establishing an aggregate FTE cap.
    (v) The provisions of this paragraph (g)(7) are applicable during 
portions of cost reporting periods occurring on or after October 1, 
1999.
    (8) A hospital may receive a temporary adjustment to its FTE cap to 
reflect residents added because of another hospital's closure if the 
hospital meets the following criteria:
    (i) The hospital is training additional residents from a hospital 
that closed on or after July 1, 1996.
    (ii) No later than 60 days after the hospital begins to train the 
residents, the hospital submits a request to its fiscal intermediary 
for a temporary adjustment to its FTE cap, documents that the hospital 
is eligible for this temporary adjustment by identifying the residents 
who have come from the closed hospital and have caused the hospital to 
exceed its cap, and specifies the length of time the adjustment is 
needed.
    (iii) For purposes of paragraph (g)(8) of this section, "closure" 
means the hospital terminates its Medicare agreement under the 
provisions of Sec. 489.52 of this chapter.
* * * * *

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

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

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

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


Sec. 483.20  Resident assessment.

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

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

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


[[Page 41544]]


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

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


Sec. 485.618  Conditions of participation: Emergency services.

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


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

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

    Dated: July 21, 1999.
Michael M. Hash,
Deputy Administrator, Health Care Financing Administration.
    Dated: July 22, 1999.
Donna E. Shalala,
Secretary.

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

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

I. Summary and Background

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

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

    The basic methodology for determining prospective payment rates for 
inpatient operating costs is set forth at Sec. 412.63 for hospitals 
located outside of Puerto Rico. The basic methodology for determining 
the prospective payment rates for inpatient operating costs for 
hospitals located in Puerto Rico is set forth at Secs. 412.210 and 
412.212. Below, we discuss the factors used for determining the 
prospective payment rates. The Federal and Puerto Rico rate changes, 
once issued as final, will be effective with discharges occurring on or 
after October 1, 1999. As required by section 1886(d)(4)(C) of the Act, 
we must also adjust the DRG classifications and weighting factors for 
discharges in FY 2000.
    In summary, the standardized amounts set forth in Tables 1A and 1C 
of section VI of this addendum reflect--
    <bullet> Updates of 1.1 percent for all areas (that is, the market 
basket percentage increase of 2.9 percent minus 1.8 percentage points);
    <bullet> An adjustment to ensure budget neutrality as provided for 
in sections 1886 (d)(4)(C)(iii) and (d)(3)(E) of the Act by applying 
new budget neutrality adjustment factors to the large urban and other 
standardized amounts;
    <bullet> An adjustment to ensure budget neutrality as provided for 
in section 1886(d)(8)(D) of the Act by removing the FY 1999 budget 
neutrality factor and applying a revised factor;

[[Page 41545]]

    <bullet> An adjustment to apply the revised outlier offset by 
removing the FY 1999 outlier offsets and applying a new offset; and
    <bullet> An adjustment in the Puerto Rico standardized amounts to 
reflect the application of a Puerto Rico-specific wage index.

A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
    Section 1886(d)(2)(A) of the Act required the establishment of 
base-year cost data containing allowable operating costs per discharge 
of inpatient hospital services for each hospital. The preamble to the 
September 1, 1983 interim final rule (48 FR 39763) contains a detailed 
explanation of how base-year cost data were established in the initial 
development of standardized amounts for the prospective payment system 
and how they are used in computing the Federal rates.
    Section 1886(d)(9)(B)(i) of the Act required us to determine the 
Medicare target amounts for each hospital located in Puerto Rico for 
its cost reporting period beginning in FY 1987. The September 1, 1987 
final rule contains a detailed explanation of how the target amounts 
were determined and how they are used in computing the Puerto Rico 
rates (52 FR 33043, 33066).
    The standardized amounts are based on per discharge averages of 
adjusted hospital costs from a base period or, for Puerto Rico, 
adjusted target amounts from a base period, updated and otherwise 
adjusted in accordance with the provisions of section 1886(d) of the 
Act. Sections 1886(d)(2) (B) and (C) of the Act required us to update 
base-year per discharge costs for FY 1984 and then standardize the cost 
data in order to remove the effects of certain sources of variation in 
cost among hospitals. These effects include case mix, differences in 
area wage levels, cost-of-living adjustments for Alaska and Hawaii, 
indirect medical education costs, and payments to hospitals serving a 
disproportionate share of low-income patients.
    Under sections 1886 (d)(2)(H) and (d)(3)(E) of the Act, in making 
payments under the prospective payment system, the Secretary estimates 
from time to time the proportion of costs that are wages and wage-
related costs. Since October 1, 1997, when the market basket was last 
revised, we have considered 71.1 percent of costs to be labor-related 
for purposes of the prospective payment system. The average labor share 
in Puerto Rico is 71.3 percent. We are revising the discharge-weighted 
national standardized amount for Puerto Rico to reflect the proportion 
of discharges in large urban and other areas from the FY 1998 MedPAR 
file.
2. Computing Large Urban and Other Area Averages
    Sections 1886(d) (2)(D) and (3) of the Act require the Secretary to 
compute two average standardized amounts for discharges occurring in a 
fiscal year: one for hospitals located in large urban areas and one for 
hospitals located in other areas. In addition, under sections 
1886(d)(9) (B)(iii) and (C)(i) of the Act, the average standardized 
amount per discharge must be determined for hospitals located in urban 
and other areas in Puerto Rico. Hospitals in Puerto Rico are paid a 
blend of 50 percent of the applicable Puerto Rico standardized amount 
and 50 percent of a national standardized payment amount.
    Section 1886(d)(2)(D) of the Act defines "urban area" as those 
areas within a Metropolitan Statistical Area (MSA). A "large urban 
area" is defined as an urban area with a population of more than 
1,000,000. In addition, section 4009(i) of Public Law 100-203 provides 
that a New England County Metropolitan Area (NECMA) with a population 
of more than 970,000 is classified as a large urban area. As required 
by section 1886(d)(2)(D) of the Act, population size is determined by 
the Secretary based on the latest population data published by the 
Bureau of the Census. Urban areas that do not meet the definition of a 
"large urban area" are referred to as "other urban areas." Areas 
that are not included in MSAs are considered "rural areas" under 
section 1886(d)(2)(D) of the Act. Payment for discharges from hospitals 
located in large urban areas will be based on the large urban 
standardized amount. Payment for discharges from hospitals located in 
other urban and rural areas will be based on the other standardized 
amount.
    Based on 1997 population estimates published by the Bureau of the 
Census, 61 areas meet the criteria to be defined as large urban areas 
for FY 2000. These areas are identified by a footnote in Table 4A. We 
note that on July 6, 1999, the Office of Management and Budget 
announced the designation of the Corvallis, Oregon and the Auburn-
Opelika, Alabama MSAs. We have incorporated these changes in this final 
rule.
3. Updating the Average Standardized Amounts
    Under section 1886(d)(3)(A) of the Act, we update the area average 
standardized amounts each year. In accordance with section 
1886(d)(3)(A)(iv) of the Act, we are updating the large urban areas' 
and the other areas' average standardized amounts for FY 2000 using the 
applicable percentage increases specified in section 1886(b)(3)(B)(i) 
of the Act. Section 1886(b)(3)(B)(i)(XV) of the Act specifies that, for 
hospitals in all areas, the update factor for the standardized amounts 
for FY 2000 is equal to the market basket percentage increase minus 1.8 
percentage points.
    The percentage change in the market basket reflects the average 
change in the price of goods and services purchased by hospitals to 
furnish inpatient care. The most recent forecast of the hospital market 
basket increase for FY 2000 is 2.9 percent. Thus, for FY 2000, the 
update to the average standardized amounts equals 1.1 percent.
    As in the past, we are adjusting the FY 1999 standardized amounts 
to remove the effects of the FY 1999 geographic reclassifications and 
outlier payments before applying the FY 2000 updates. That is, we are 
increasing the standardized amounts to restore the reductions that were 
made for the effects of geographic reclassification and outliers. We 
then apply the new offsets to the standardized amounts for outliers and 
geographic reclassifications for FY 2000.
    Although the update factor for FY 2000 is set by law, we are 
required by section 1886(e)(3) of the Act to report to the Congress on 
our final recommendation of update factors for FY 2000 for both 
prospective payment hospitals and hospitals excluded from the 
prospective payment system. We have included our final recommendations 
in Appendix C to this final rule.
4. Other Adjustments to the Average Standardized Amounts
    a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment.
    Section 1886(d)(4)(C)(iii) of the Act specifies that beginning in 
FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. As discussed in section II of 
the preamble, we normalized the recalibrated DRG weights by an 
adjustment factor, so that the average case weight after recalibration 
is equal

[[Page 41546]]

to the average case weight prior to recalibration.
    Section 1886(d)(3)(E) of the Act requires us to update the hospital 
wage index on an annual basis beginning October 1, 1993. This provision 
also requires us to make any updates or adjustments to the wage index 
in a manner that ensures that aggregate payments to hospitals are not 
affected by the change in the wage index.
    To comply with the requirement of section 1886(d)(4)(C)(iii) of the 
Act that DRG reclassification and recalibration of the relative weights 
be budget neutral, and the requirement in section 1886(d)(3)(E) of the 
Act that the updated wage index be budget neutral, we used historical 
discharge data to simulate payments and compared aggregate payments 
using the FY 1999 relative weights and wage index to aggregate payments 
using the FY 2000 relative weights and wage index. The same methodology 
was used for the FY 1999 budget neutrality adjustment. (See the 
discussion in the September 1, 1992 final rule (57 FR 39832).) Based on 
this comparison, we computed a budget neutrality adjustment factor 
equal to 0.997808. We also adjust the Puerto Rico-specific standardized 
amounts for the effect of DRG reclassification and recalibration. We 
computed a budget neutrality adjustment factor for Puerto Rico-specific 
standardized amounts equal to 0.999745. These budget neutrality 
adjustment factors are applied to the standardized amounts without 
removing the effects of the FY 1999 budget neutrality adjustments. We 
do not remove the prior budget neutrality adjustment because estimated 
aggregate payments after the changes in the DRG relative weights and 
wage index should equal estimated aggregate payments prior to the 
changes. If we removed the prior year adjustment, we would not satisfy 
this condition.
    In addition, we will continue to apply these same adjustment 
factors to the hospital-specific rates that are effective for cost 
reporting periods beginning on or after October 1, 1999. (See the 
discussion in the September 4, 1990 final rule (55 FR 36073).)
    b. Reclassified Hospitals--Budget Neutrality Adjustment.
    Section 1886(d)(8)(B) of the Act provides that certain rural 
hospitals are deemed urban effective with discharges occurring on or 
after October 1, 1988. In addition, section 1886(d)(10) of the Act 
provides for the reclassification of hospitals based on determinations 
by the Medicare Geographic Classification Review Board (MGCRB). Under 
section 1886(d)(10) of the Act, a hospital may be reclassified for 
purposes of the standardized amount or the wage index, or both.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required 
to adjust the standardized amounts so as to ensure that total aggregate 
payments under the prospective payment system after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. To calculate this budget neutrality 
factor, we used historical discharge data to simulate payments, and 
compared total prospective payments (including IME and DSH payments) 
prior to any reclassifications to total prospective payments after 
reclassifications. In the May 7, 1999 proposed rule, we applied an 
adjustment factor of 0.994453 to ensure that the effects of 
reclassification are budget neutral. The final budget neutrality 
adjustment factor is 0.993799.
    The adjustment factor is applied to the standardized amounts after 
removing the effects of the FY 1999 budget neutrality adjustment 
factor. We note that the proposed FY 2000 adjustment reflects wage 
index and standardized amount reclassifications approved by the MGCRB 
or the Administrator as of February 26, 1999. The effects of any 
additional reclassification changes resulting from appeals and reviews 
of the MGCRB decisions for FY 2000 or from a hospital's request for the 
withdrawal of a reclassification request are reflected in the final 
budget neutrality adjustment required under section 1886(d)(8)(D) of 
the Act and published in this final rule.
    c. Outliers.
    Section 1886(d)(5)(A) of the Act provides for payments in addition 
to the basic prospective payments for "outlier" cases, cases 
involving extraordinarily high costs (cost outliers). Section 
1886(d)(3)(B) of the Act requires the Secretary to adjust both the 
large urban and other area national standardized amounts by the same 
factor to account for the estimated proportion of total DRG payments 
made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act 
requires the Secretary to adjust the large urban and other standardized 
amounts applicable to hospitals in Puerto Rico to account for the 
estimated proportion of total DRG payments made to outlier cases. 
Furthermore, under section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year must be projected to be not less than 5 percent 
nor more than 6 percent of total payments based on DRG prospective 
payment rates.
    i. FY 2000 outlier thresholds. For FY 1999, the fixed loss cost 
outlier threshold is equal to the prospective payment for the DRG plus 
$11,100 ($10,129 for hospitals that have not yet entered the 
prospective payment system for capital-related costs). The marginal 
cost factor for cost outliers (the percent of costs paid after costs 
for the case exceed the threshold) is 80 percent. We applied an outlier 
adjustment to the FY 1999 standardized amounts of 0.948740 for the 
large urban and other areas rates and 0.9392 for the capital Federal 
rate.
    For FY 2000, we proposed to establish a fixed loss cost outlier 
threshold equal to the prospective payment rate for the DRG plus the 
IME and DSH payments plus $14,575 ($13,309 for hospitals that have not 
yet entered the prospective payment system for capital related costs). 
In addition, we proposed to maintain the marginal cost factor for cost 
outliers at 80 percent. In setting the final FY 2000 outlier 
thresholds, we used updated data. In this final rule, we are 
establishing a fixed loss cost outlier threshold for FY 2000 equal to 
the prospective payment rate for the DRG plus the IME and DSH payments 
plus $14,050 ($12,827 for hospitals that have not yet entered the 
prospective payment system for capital related costs). In addition, we 
are maintaining the marginal cost factor for cost outliers at 80 
percent. As we have explained in the past, to calculate outlier 
thresholds we apply a cost inflation factor to update costs for the 
cases used to simulate payments. For FY 1998, we used a cost inflation 
factor of minus 2.005 percent (a cost per case decrease of 2.005 
percent). For FY 1999, we used a cost inflation factor of minus 1.724 
percent. To set the proposed FY 2000 outlier thresholds, we used a cost 
inflation factor (or cost adjustment factor) of zero percent. We are 
using a cost inflation factor of zero percent to set the final FY 2000 
outlier thresholds. This factor reflects our analysis of the best 
available cost report data as well as calculations (using the best 
available data) indicating that the percentage of actual outlier 
payments for FY 1998 is higher than we projected before the beginning 
of FY 1998, and that the percentage of actual outlier payments for FY 
1999 will likely be higher than we projected before the beginning of FY 
1999. The calculations of "actual" outlier payments are discussed 
further below.
    ii. Other changes concerning outliers. In accordance with section 
1886(d)(5)(A)(iv) of the Act, we calculated outlier thresholds so that 
outlier payments are projected to equal 5.1 percent of total payments 
based on DRG prospective payment rates. In

[[Page 41547]]

accordance with section 1886(d)(3(E), we reduced the FY 2000 
standardized amounts by the same percentage to account for the 
projected proportion of payments paid to outliers.
    As stated in the September 1, 1993 final rule (58 FR 46348), we 
establish outlier thresholds that are applicable to both inpatient 
operating costs and inpatient capital-related costs. When we modeled 
the combined operating and capital outlier payments, we found that 
using a common set of thresholds resulted in a higher percentage of 
outlier payments for capital-related costs than for operating costs. We 
project that the thresholds for FY 2000 will result in outlier payments 
equal to 5.1 percent of operating DRG payments and 6.0 percent of 
capital payments based on the Federal rate.
    The proposed outlier adjustment factors applied to the standardized 
amounts for FY 2000 were as follows:

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

    The final outlier adjustment factors applied to the standardized 
amounts for FY 2000 are as follows:

------------------------------------------------------------------------
                                                   Operating    Capital
                                                 standardized   federal
                                                    amounts       rate
------------------------------------------------------------------------
National.......................................     0.948859      0.9402
Puerto Rico....................................     0.968581      0.9331
------------------------------------------------------------------------

    As in the proposed rule, we apply the outlier adjustment factors 
after removing the effects of the FY 1999 outlier adjustment factors on 
the standardized amounts.
    Table 8A in section VI of this addendum contains the updated 
Statewide average operating cost-to-charge ratios for urban hospitals 
and for rural hospitals to be used in calculating cost outlier payments 
for those hospitals for which the fiscal intermediary is unable to 
compute a reasonable hospital-specific cost-to-charge ratio. Effective 
October 1, 1999, these Statewide average ratios replace the ratios 
published in the July 31, 1998 final rule (63 FR 41099). Table 8B 
contains comparable Statewide average capital cost-to-charge ratios. 
These average ratios would be used to calculate cost outlier payments 
for those hospitals for which the fiscal intermediary computes 
operating cost-to-charge ratios lower than 0.209551 OR greater than 
1.284349 and capital cost-to-charge ratios lower than 0.01290 or 
greater than 0.17205. This range represents 3.0 standard deviations 
(plus or minus) from the mean of the log distribution of cost-to-charge 
ratios for all hospitals. We note that the cost-to-charge ratios in 
Tables 8A and 8B will be used during FY 2000 when hospital-specific 
cost-to-charge ratios based on the latest settled cost report are 
either not available or outside the three standard deviations range.
    iii. FY 1998 and FY 1999 outlier payments. In the July 31, 1998 
final rule (63 FR 41009), we stated that, based on available data, we 
estimated that actual FY 1998 outlier payments would be approximately 
5.4 percent of actual total DRG payments. This was computed by 
simulating payments using actual FY 1997 bill data available at the 
time. That is, the estimate of actual outlier payments did not reflect 
FY 1998 bills but instead reflected the application of FY 1998 rates 
and policies to available FY 1997 bills. Our current estimate, using 
available FY 1998 bills, is that actual outlier payments for FY 1998 
were approximately 6.5 percent of actual total DRG payments. We note 
that the MedPAR file for FY 1998 discharges continues to be updated. 
Thus, the data indicate that, for FY 1998, the percentage of actual 
outlier payments relative to actual total payments is higher than we 
projected before FY 1998 (and thus exceeds the percentage by which we 
reduced the standardized amounts for FY 1998). In fact, the data 
indicate that the proportion of actual outlier payments for FY 1998 
exceeds 6 percent. Nevertheless, consistent with the policy and 
statutory interpretation we have maintained since the inception of the 
prospective payment system, we do not plan to recoup money and make 
retroactive adjustments to outlier payments for FY 1998.
    We currently estimate that actual outlier payments for FY 1999 will 
be approximately 6.3 percent of actual total DRG payments, higher than 
the 5.1 percent we projected in setting outlier policies for FY 1999. 
This estimate is based on simulations using the March 1999 update of 
the provider-specific file and the March 1999 update of the FY 1998 
MedPAR file (discharge data for FY 1998 bills). We used these data to 
calculate an estimate of the actual outlier percentage for FY 1999 by 
applying FY 1999 rates and policies to available FY 1998 bills.
    Comment: Several commenters indicated that the proposed 30-percent 
increase in the cost outlier threshold is too great and implementing 
that threshold will cause significant revenue losses for hospitals with 
large numbers of high-cost cases. They observed that the proposed 
increase in the fixed loss threshold may be reasonable to reach the 5.1 
percent level of outlier payments, but suggested an increase in funding 
for outlier cases from the current level of 5.1 percent to 5.5 percent, 
or even 6.0 percent, with a corresponding reduction in the fixed loss 
threshold.
    Response: Outlier payments are meant to protect hospitals against 
the financial effects of treating extraordinarily high-cost cases. 
Increasing the level of outlier payments to 5.5 percent would result in 
a corresponding offset to the standardized amounts, proportionally 
reducing payments for typical cases. We believe that it is in the best 
interest of hospitals and the program to maintain the level of outliers 
at 5.1 percent, thereby providing all hospitals with somewhat larger 
rates for typical cases.
    We also note that we estimate that actual outlier payments for FY 
1998 were equal to 6.5 percent of actual total DRG payments, and 6.3 
percent for FY 1999. We believe that outlier payments are greater than 
expected for these years in part because actual hospital costs may be 
higher than reflected in the methodology used to set outlier thresholds 
for those years. While we are attempting to improve our estimate of 
payments for FY 2000 by using a cost inflation factor of zero percent 
rather than a negative inflation factor, we believe it would be 
imprudent to raise the estimated level of outlier payments at a time 
when actual outlier payments have exceeded our estimates by more than 
one percentage point for the past 2 years.
    Comment: One commenter expressed concern that, in the proposed 
rule, we referenced our longstanding policy regarding overpayments and 
underpayments and retroactive adjustments to outlier payments. The 
commenter stated that this reference appears to be necessitated by a 
large number of hospital appeals and questioned whether we intend to 
provide a clarification instead of what appears to be a new 
interpretation.
    Response: As we stated in the proposed rule, our statement that 
"we do not plan to recoup money and make retroactive adjustments to 
outlier payments for FY 1998," because the actual outlier payments 
exceed 6 percent of total payments, is consistent with the policy and 
statutory interpretation we have maintained since the inception of the 
prospective payment system. We have publicly stated our policy on 
several occasions. For example, in the January 3, 1984 final rule (49 
FR 234, 265), we stated:

[[Page 41548]]

"Using data we had available, we set the outlier criteria so that an 
estimated 6 percent of total payments would be made for outliers. 
Nevertheless, there is no necessary connection between the amount of 
estimated outlier payments and the actual payments made to hospitals 
for cases that actually meet the outlier criteria. While we expect that 
under these criteria, outlier payments will approximate 6 percent of 
total payments, we will pay for any outlier that meets the criteria, 
even if aggregate outlier payments result in more than 6 percent of 
total payments." Also, in the September 1, 1992 final rule (57 FR 
39784), we stated that "* * * in light of the nature of the 
prospective payment system, and our attempts to estimate outlier 
payments as accurately as possible, we believe that we have satisfied 
the statute and that no retroactive adjustment is warranted." In the 
same rule, we also stated that "* * * retroactive adjustment of system 
wide elements would be contrary to the nature of the prospective 
payment system." Therefore, our comment in the proposed rule 
concerning the overpayment or underpayment of outliers was a 
restatement of our longstanding policy.
5. FY 2000 Standardized Amounts
    The adjusted standardized amounts are divided into labor and 
nonlabor portions. Table 1A contains the two national standardized 
amounts that are applicable to all hospitals, except for hospitals in 
Puerto Rico. Under section 1886(d)(9)(A)(ii) of the Act, the Federal 
portion of the Puerto Rico payment rate is based on the discharge-
weighted average of the national large urban standardized amount and 
the national other standardized amount (as set forth in Table 1A). The 
labor and nonlabor portions of the national average standardized 
amounts for Puerto Rico hospitals are set forth in Table 1C. This table 
also includes the Puerto Rico standardized amounts.

B. Adjustments for Area Wage Levels and Cost of Living

    Tables 1A and 1C, as set forth in this addendum, contain the labor-
related and nonlabor-related shares used to calculate the prospective 
payment rates for hospitals located in the 50 States, the District of 
Columbia, and Puerto Rico. This section addresses two types of 
adjustments to the standardized amounts that are made in determining 
the prospective payment rates as described in this addendum.
1. Adjustment for Area Wage Levels
    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act requires 
that we make an adjustment to the labor-related portion of the 
prospective payment rates to account for area differences in hospital 
wage levels. This adjustment is made by multiplying the labor-related 
portion of the adjusted standardized amounts by the appropriate wage 
index for the area in which the hospital is located. In section III of 
this preamble, we discuss the data and methodology for the FY 2000 wage 
index. The wage index is set forth in Tables 4A through 4F of this 
addendum.
2. Adjustment for Cost of Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take 
into account the unique circumstances of hospitals in Alaska and 
Hawaii. Higher labor-related costs for these two States are taken into 
account in the adjustment for area wages described above. For FY 2000, 
we are adjusting the payments for hospitals in Alaska and Hawaii by 
multiplying the nonlabor portion of the standardized amounts by the 
appropriate adjustment factor contained in the table below.

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

------------------------------------------------------------------------
Alaska--All areas................................................  1.25
Hawaii:
    County of Honolulu...........................................  1.25
    County of Hawaii.............................................  1.15
    County of Kauai..............................................  1.225
    County of Maui...............................................  1.225
    County of Kalawao............................................  1.225

(The above factors are based on data obtained from the U.S. Office of
 Personnel Management.)
------------------------------------------------------------------------

C. DRG Relative Weights

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

D. Calculation of Prospective Payment Rates for FY 2000

General Formula for Calculation of Prospective Payment Rates for FY 
2000
    Prospective payment rate for all hospitals located outside of 
Puerto Rico except sole community hospitals and Medicare-dependent, 
small rural hospitals = Federal rate.
    Prospective payment rate for sole community hospitals = Whichever 
of the following rates yields the greatest aggregate payment: 100 
percent of the Federal rate, 100 percent of the updated FY 1982 
hospital-specific rate, or 100 percent of the updated FY 1987 hospital-
specific rate.
    Prospective payment rate for Medicare-dependent, small rural 
hospitals = 100 percent of the Federal rate, or, if the greater of the 
updated FY 1982 hospital-specific rate or the updated FY 1987 hospital-
specific rate is higher than the Federal rate, 100 percent of the 
Federal rate plus 50 percent of the difference between the applicable 
hospital-specific rate and the Federal rate.
    Prospective payment rate for Puerto Rico = 50 percent of the Puerto 
Rico rate + 50 percent of a discharge-weighted average of the national 
large urban standardized amount and the national other standardized 
amount.
1. Federal Rate
    For discharges occurring on or after October 1, 1999 and before 
October 1, 2000, except for sole community hospitals, Medicare-
dependent, small rural hospitals, and hospitals in Puerto Rico, the 
hospital's payment is based exclusively on the Federal national rate.
    The payment amount is determined as follows:
    Step 1--Select the appropriate national standardized amount 
considering the type of hospital and designation of the hospital as 
large urban or other (see Table 1A in section VI of this addendum).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located (see Tables 4A, 4B, and 4C of section VI of 
this addendum).
    Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount (adjusted, if appropriate, under Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight

[[Page 41549]]

corresponding to the appropriate DRG (see Table 5 of section VI of this 
addendum).
2. Hospital-Specific Rate (Applicable Only to Sole Community Hospitals 
and Medicare-Dependent, Small Rural Hospitals)
    Sections 1886(d)(5)(D)(i) and (b)(3)(C) of the Act provide that 
sole community hospitals are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal rate, the 
updated hospital-specific rate based on FY 1982 cost per discharge, or 
the updated hospital-specific rate based on FY 1987 cost per discharge.
    Sections 1886(d)(5)(G) and (b)(3)(D) of the Act provide that 
Medicare-dependent, small rural hospitals are paid based on whichever 
of the following rates yields the greatest aggregate payment: the 
Federal rate or the Federal rate plus 50 percent of the difference 
between the Federal rate and the greater of the updated hospital-
specific rate based on FY 1982 and FY 1987 cost per discharge.
    Hospital-specific rates have been determined for each of these 
hospitals based on both the FY 1982 cost per discharge and the FY 1987 
cost per discharge. For a more detailed discussion of the calculation 
of the FY 1982 hospital-specific rate and the FY 1987 hospital-specific 
rate, we refer the reader to the September 1, 1983 interim final rule 
(48 FR 39772); the April 20, 1990 final rule with comment (55 FR 
15150); and the September 4, 1990 final rule (55 FR 35994).
    a. Updating the FY 1982 and FY 1987 Hospital-Specific Rates for FY 
2000.
    We are increasing the hospital-specific rates by 1.1 percent (the 
hospital market basket percentage increase of 2.9 percent minus 1.8 
percentage points) for sole community hospitals and Medicare-dependent, 
small rural hospitals located in all areas for FY 2000. Section 
1886(b)(3)(C)(iv) of the Act provides that the update factor applicable 
to the hospital-specific rates for sole community hospitals equals the 
update factor provided under section 1886(b)(3)(B)(iv) of the Act, 
which, for FY 2000, is the market basket rate of increase minus 1.8 
percentage points. Section 1886(b)(3)(D) of the Act provides that the 
update factor applicable to the hospital-specific rates for Medicare-
dependent, small rural hospitals equals the update factor provided 
under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2000, is the 
market basket rate of increase minus 1.8 percentage points.
    b. Calculation of Hospital-Specific Rate.
    For sole community hospitals and Medicare-dependent, small rural 
hospitals, the applicable FY 2000 hospital-specific rate is calculated 
by increasing the hospital's hospital-specific rate for the preceding 
fiscal year by the applicable update factor (1.1 percent), which is the 
same as the update for all prospective payment hospitals. In addition, 
the hospital-specific rate is adjusted by the budget neutrality 
adjustment factor (that is, 0.997808) as discussed in section II.A.4.a 
of this Addendum. The resulting rate is used in determining under which 
rate a sole community hospital or Medicare-dependent, small rural 
hospital is paid for its discharges beginning on or after October 1, 
1999, based on the formula set forth above.
3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning On or After October 1, 1999 
and Before October 1, 2000
    a. Puerto Rico Rate. The Puerto Rico prospective payment rate is 
determined as follows:
    Step 1--Select the appropriate adjusted average standardized amount 
considering the large urban or other designation of the hospital (see 
Table 1C of section VI of the addendum).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the appropriate Puerto Rico-specific wage index (see Table 4F 
of section VI of the addendum).
    Step 3--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount.
    Step 4--Multiply the result in Step 3 by 50 percent.
    Step 5--Multiply the amount from Step 4 by the appropriate DRG 
relative weight (see Table 5 of section VI of the addendum).
    b. National Rate. The national prospective payment rate is 
determined as follows:
    Step 1--Multiply the labor-related portion of the national average 
standardized amount (see Table 1C of section VI of the addendum) by the 
appropriate national wage index (see Tables 4A and 4B of section VI of 
the addendum).
    Step 2--Add the amount from Step 1 and the nonlabor-related portion 
of the national average standardized amount.
    Step 3--Multiply the result in Step 2 by 50 percent.
    Step 4--Multiply the amount from Step 3 by the appropriate DRG 
relative weight (see Table 5 of section VI of the addendum).
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico.
    Comment: One commenter asked if the temporary relief payment 
provision of the Balanced Budget Act of 1997 (BBA) would continue into 
FY 2000. The commenter suggested that, in light of reports that 
implementation of the hospital-related provisions of the BBA provided 
larger than expected savings, we consider extending the provision into 
next year and increasing the amount of relief.
    Response: Under section 4401(b) of the BBA, the temporary special 
payment for certain hospitals that did not receive IME or DSH payments 
and that did not qualify as Medicare-dependent, small rural hospitals 
is limited to FY 1998 and FY 1999. The statute does not provide for the 
special payment in later fiscal years. We believe that the temporary 
special payment provided under section 4401(b) of the BBA was meant to 
partially protect qualifying hospitals from the initial effects of the 
reduced updates to hospital payment rates enacted by the BBA. We 
believe that two years of relief payments is adequate to allow 
hospitals to adjust to the reduced payment updates under the BBA.

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

    As discussed in our May 7, 1999 proposed rule (64 FR 24756), 
section 4452 of the BBA amended section 6011(d) of Public Law 101-239 
to reinstate the add-on payment for the costs of administering blood 
clotting factor to Medicare beneficiaries who have hemophilia and who 
are hospital inpatients for discharges occurring on or after October 1, 
1997. The add-on payment amount for each clotting factor, as described 
in HCFA's Common Procedure Coding System (HCPCS), is based on the 
median average wholesale price (AWP) of the several products available 
in that category of factor, discounted by 15 percent.
    Also, we are adding HCPCS code J7191 (clotting factor, porcine) to 
the list of clotting factors that will be paid under this benefit. This 
code was recently reestablished in the HCPCS coding system because it 
represents a unique product that is different from the other clotting 
factors listed.
    Based on the methodology described above, the prices per unit of 
factor for FY 2000 are as follows:

J7190 Factor VIII (antihemophilic factor, human).................   0.79

[[Page 41550]]


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


    These prices for blood clotting factor administered to inpatients 
who have hemophilia will be effective for discharges beginning on or 
after October 1, 1999 through September 30, 2000. Payment will be made 
for the blood clotting factor only if there is an ICD-9-CM diagnosis 
code for hemophilia included on the bill.
    We received one comment on this proposed provision.
    Comment: One commenter indicated that there is a new clotting 
factor product, recombinant coagulation Factor VIIa, that is covered by 
this benefit, but was not mentioned in the proposed rule. Because this 
product is unique and packaged and dosed per microgram, and not per IU 
as the other clotting factor products listed in the HCPCS, the 
commenter requested a separate temporary code and price to be added to 
the final rule.
    Response: We agree that recombinant coagulation Factor VIIa is 
covered by this benefit. We also agree that no appropriate HCPCS code 
exists for this product. Because of constraints on Year 2000 computer 
systems changes, we are not able to establish a new HCPCS code or a 
claims process to pay for this product at this time. Therefore, any 
providers furnishing recombinant coagulation Factor VIIa to hospital 
inpatients who have hemophilia should hold their billings for Factor 
VIIa until we announce by instructions to our fiscal intermediaries 
that a new code and claims process have been established. These 
hospitals should continue to submit claims for all other covered items 
and services furnished to these Medicare beneficiaries in accordance 
with established program procedures. The price for recombinant 
coagulation Factor VIIa for FY 2000 will be $1.19 per microgram.

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

    The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on 
or after October 1, 1991. Effective with that cost reporting period and 
during a 10-year transition period extending through FY 2001, hospital 
inpatient capital-related costs are paid on the basis of an increasing 
proportion of the capital prospective payment system Federal rate and a 
decreasing proportion of a hospital's historical costs for capital.
    The basic methodology for determining Federal capital prospective 
rates is set forth at Secs. 412.308 through 412.352. Below we discuss 
the factors that we used to determine the Federal rate and the 
hospital-specific rates for FY 2000. The rates would be effective for 
discharges occurring on or after October 1, 1999.
    For FY 1992, we computed the standard Federal payment rate for 
capital-related costs under the prospective payment system by updating 
the FY 1989 Medicare inpatient capital cost per case by an actuarial 
estimate of the increase in Medicare inpatient capital costs per case. 
Each year after FY 1992, we update the standard Federal rate, as 
provided in Sec. 412.308(c)(1), to account for capital input price 
increases and other factors. Also, Sec. 412.308(c)(2) provides that the 
Federal rate is adjusted annually by a factor equal to the estimated 
proportion of outlier payments under the Federal rate to total capital 
payments under the Federal rate. In addition, Sec. 412.308(c)(3) 
requires that the Federal rate be reduced by an adjustment factor equal 
to the estimated proportion of payments for exceptions under 
Sec. 412.348. Furthermore, Sec. 412.308(c)(4)(ii) requires that the 
Federal rate be adjusted so that the annual DRG reclassification and 
the recalibration of DRG weights and changes in the geographic 
adjustment factor are budget neutral. For FYs 1992 through 1995, 
Sec. 412.352 required that the Federal rate also be adjusted by a 
budget neutrality factor so that aggregate payments for inpatient 
hospital capital costs were projected to equal 90 percent of the 
payments that would have been made for capital-related costs on a 
reasonable cost basis during the fiscal year. That provision expired in 
FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to 
the rate that was made in FY 1994, and Sec. 412.308(b)(3) describes the 
0.28 percent reduction to the rate made in FY 1996 as a result of the 
revised policy of paying for transfers. In the FY 1998 final rule with 
comment period (62 FR 45966), we implemented section 4402 of the BBA, 
which requires that for discharges occurring on or after October 1, 
1997, and before October 1, 2002, the unadjusted standard Federal rate 
is reduced by 17.78 percent. A small part of that reduction will be 
restored effective October 1, 2002. As a result of the February 25, 
1999 final rule (64 FR 9378), the Federal rate changed effective March 
1, 1999, because of revisions to the GAF.
    For each hospital, the hospital-specific rate was calculated by 
dividing the hospital's Medicare inpatient capital-related costs for a 
specified base year by its Medicare discharges (adjusted for 
transfers), and dividing the result by the hospital's case-mix index 
(also adjusted for transfers). The resulting case-mix adjusted average 
cost per discharge was then updated to FY 1992 based on the national 
average increase in Medicare's inpatient capital cost per discharge and 
adjusted by the exceptions payment adjustment factor and the budget 
neutrality adjustment factor to yield the FY 1992 hospital-specific 
rate. Since FY 1992, the hospital-specific rate has been updated 
annually for inflation and for changes in the exceptions payment 
adjustment factor. For FYs 1992 through 1995, the hospital-specific 
rate was also adjusted by a budget neutrality adjustment factor. For 
discharges occurring on or after October 1, 1997, and before October 1, 
2002, the unadjusted hospital-specific rate is reduced by 17.78 
percent. A small part of this reduction will be restored effective 
October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the exceptions payment adjustment factor, we developed a dynamic 
model of Medicare inpatient capital-related costs, that is, a model 
that projects changes in Medicare inpatient capital-related costs over 
time. With the expiration of the budget neutrality provision, the model 
is still used to estimate the exceptions payment adjustment and other 
factors. The model and its application are described in greater detail 
in Appendix B of this final rule.
    In accordance with section 1886(d)(9)(A) of the Act, under the 
prospective payment system for inpatient operating costs, hospitals 
located in Puerto Rico are paid for operating costs under a special 
payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a 
blended rate that consisted of 75 percent of the applicable 
standardized amount specific to Puerto Rico hospitals and 25 percent of 
the applicable national average standardized amount. However, effective 
October 1, 1998, as a result of enactment of section 4406 of the BBA, 
operating payments to hospitals in Puerto Rico are based on a blend of 
50 percent of the applicable standardized amount specific to Puerto 
Rico hospitals and 50 percent of the applicable national average 
standardized amount. In conjunction with this change to the

[[Page 41551]]

operating blend percentage, effective with discharges on or after 
October 1, 1997, we compute capital payments to hospitals in Puerto 
Rico based on a blend of 50 percent of the Puerto Rico rate and 50 
percent of the Federal rate. Section 412.374 provides for the use of 
this blended payment system for payments to Puerto Rico hospitals under 
the prospective payment system for inpatient capital-related costs. 
Accordingly, for capital-related costs we compute a separate payment 
rate specific to Puerto Rico hospitals using the same methodology used 
to compute the national Federal rate for capital.

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

    In the July 31, 1998 final rule (63 FR 41011), we established a 
capital Federal rate of $378.05 for FY 1999. As of the March 1, 1999 
revision, the Federal rate for FY 1999 is $378.10. In the proposed 
rule, we stated that the proposed FY 2000 Federal rate was $374.31. In 
this final rule, we are establishing a FY 2000 Federal rate of $377.03.
    In the discussion that follows, we explain the factors that were 
used to determine the FY 2000 capital Federal rate. In particular, we 
explain why the FY 2000 Federal rate has decreased 0.28 percent 
compared to the FY 1999 Federal rate. Even though the FY 2000 Federal 
capital rate is less than the FY 1999 Federal rate, we estimate 
aggregate capital payments will increase by 3.64 percent during this 
same period. This increase is primarily due to the increase in the 
Federal blend percentage from 80 to 90 percent for fully prospective 
payment hospitals.
    Total payments to hospitals under the prospective payment system 
are relatively unaffected by changes in the capital prospective 
payments. Since capital payments constitute about 10 percent of 
hospital payments, a 1 percent change in the capital Federal rate 
yields only about 0.1 percent change in actual payments to hospitals. 
Aggregate payments under the capital prospective payment transition 
system are estimated to increase in FY 2000 compared to FY 1999.
1. Standard Federal Rate Update
    a. Description of the Update Framework.
    Under section 412.308(c)(1), the standard Federal rate is updated 
on the basis of an analytical framework that takes into account changes 
in a capital input price index and other factors. The update framework 
consists of a capital input price index (CIPI) and several policy 
adjustment factors. Specifically, we have adjusted the projected CIPI 
rate of increase as appropriate each year for case-mix index related 
changes, for intensity, and for errors in previous CIPI forecasts. The 
proposed rule reflected an update factor of -0.6 percent, based on the 
data available at that time. Under the update framework, the final 
update factor for FY 2000 is 0.3 percent. This update factor is based 
on a projected 0.6 percent increase in the CIPI, a 0.1 percent 
adjustment for the FY 1998 DRG reclassification and recalibration, and 
a forecast error correction of -0.4 percent. We explain the basis for 
the FY 2000 CIPI projection in section II.D of this addendum.
    Below we describe the policy adjustments that have been applied to 
the FY 2000 capital payment rates update.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the prospective payment system. Because the DRG weight 
determines the prospective payment for each case, any percentage 
increase in the case-mix index corresponds to an equal percentage 
increase in hospital payments.
    The case-mix index can change for any of several reasons:
    <bullet> The average resource use of Medicare patients changes 
("real" case-mix change).
    <bullet> Changes in hospital coding of patient records result in 
higher weight DRG assignments ("coding effects").
    <bullet> The annual DRG reclassification and recalibration changes 
may not be budget neutral ("reclassification effect").
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
coding behavior that result in assignment of cases to higher-weighted 
DRGs but do not reflect higher resource requirements. In the update 
framework for the prospective payment system for operating costs, we 
adjust the update upwards to allow for real case-mix change, but remove 
the effects of coding changes on the case-mix index. We also remove the 
effect on total payments of prior changes to the DRG classifications 
and relative weights, in order to retain budget neutrality for all 
case-mix index-related changes other than patient severity. (For 
example, we adjusted for the effects of the FY 1998 DRG 
reclassification and recalibration as part of our FY 2000 update 
recommendation.) We have adopted this case-mix index adjustment in the 
capital update framework as well.
    For FY 2000, we are projecting a 0.5 percent increase in the case-
mix index. We estimate that real case-mix increase will equal 0.5 
percent in FY 2000. Therefore, the net adjustment for case-mix change 
in FY 2000 is 0.0 percentage points.
    We estimate that FY 1998 DRG reclassification and recalibration 
resulted in a -0.1 percent change in the case mix when compared with 
the case-mix index that would have resulted if we had not made the 
reclassification and recalibration changes to the DRGs. In the 
framework, we make an adjustment for DRG reclassification and 
recalibration to account for the 2-year lag on the available data used 
to estimate the effect of DRG changes. A DRG reclassification and 
recalibration adjustment of 0.1 percentage points was calculated for 
the FY 2000 update as the percent change in the case mix when compared 
with the case-mix index that would have resulted if we had not made the 
reclassification and recalibration changes to the DRGs based on FY 1998 
data. That is, in determining the effect of DRG reclassification and 
recalibration using FY 1998 data, the actual effect of DRG 
reclassification and recalibration was understated by -0.1 percent. 
Therefore, we are making a 0.1 percent adjustment for DRG 
reclassification and recalibration in the update for FY 2000.
    Comment: One commenter noted that the magnitude of the -0.7 
adjustment for FY 1998 Reclassification and Recalibration (GROUPER 
Effect) in the proposed capital (and operating) update framework 
appears to be inconsistent with past numbers published by HCFA. 
Accordingly, the commenter requested that HCFA review the data and 
computation of that adjustment in the capital update framework.
    Response: In the May 7, 1999 proposed rule (64 FR 24578), we 
estimated that FY 1998 DRG reclassification and recalibration resulted 
in a 0.7 percent change in the case-mix index when compared with the 
case-mix index that would have resulted if we had not made the 
reclassification and recalibration changes to the DRGs. Therefore, we 
proposed making a -0.7 percent adjustment for DRG reclassification and 
recalibration in the proposed capital update recommendation for FY 
2000.
    Upon review, we have discovered that incorrect data were used in 
estimating the proposed -0.7 adjustment for the effect of FY 1998 
reclassification and recalibration. We have recalculated the adjustment 
based on correct and updated data and the revised adjustment for the 
effect of FY 1998 reclassification and recalibration for the FY 2000 
capital update is +0.1.
    The capital update framework contains an adjustment for forecast

[[Page 41552]]

error. The input price index forecast is based on historical trends and 
relationships ascertainable at the time the update factor is 
established for the upcoming year. In any given year, there may be 
unanticipated price fluctuations that may result in differences between 
the actual increase in prices and the forecast used in calculating the 
update factors. In setting a prospective payment rate under the 
framework, we make an adjustment for forecast error only if our 
estimate of the change in the capital input price index for any year is 
incorrect by 0.25 percentage points or more. There is a 2-year lag 
between the forecast and the measurement of the forecast error. A 
forecast error of -0.4 percentage points was calculated for the FY 1998 
update. That is, current historical data indicate that the FY 1998 CIPI 
used in calculating the forecasted FY 1998 update factor overstated 
realized price increases by 0.4 percent. Therefore, we are making a 
-0.4 percent adjustment for forecast error in the update for FY 2000.
    Under the capital prospective payment system update framework, we 
also make an adjustment for changes in intensity. We calculate this 
adjustment using the same methodology and data as in the framework for 
the operating prospective payment system. The intensity factor for the 
operating update framework reflects how hospital services are utilized 
to produce the final product, that is, the discharge. This component 
accounts for changes in the use of quality-enhancing services, changes 
in within-DRG severity, and expected modification of practice patterns 
to remove cost-ineffective services.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI 
hospital component), and changes in real case mix. The use of total 
charges in the calculation of the intensity factor makes it a total 
intensity factor; that is, charges for capital services are already 
built into the calculation of the factor. Therefore, we have 
incorporated the intensity adjustment from the operating update 
framework into the capital update framework. Without reliable estimates 
of the proportions of the overall annual intensity increases that are 
due, respectively, to ineffective practice patterns and to the 
combination of quality-enhancing new technologies and within-DRG 
complexity, we assume, as in the revised operating update framework, 
that one-half of the annual increase is due to each of these factors. 
The capital update framework thus provides an add-on to the input price 
index rate of increase of one-half of the estimated annual increase in 
intensity to allow for within-DRG severity increases and the adoption 
of quality-enhancing technology.
    For FY 2000, we have developed a Medicare-specific intensity 
measure based on a 5-year average using FY 1994 through FY 1998 data. 
In determining case-mix constant intensity, we found that observed 
case-mix increase was 0.8 percent in FY 1994, 1.7 percent in FY 1995, 
1.6 percent in FY 1996, 0.3 percent in FY 1997, and -0.4 percent in FY 
1998. For FY 1995 and FY 1996, we estimate that real case-mix increase 
was 1.0 to 1.4 percent each year. The estimate for those years is 
supported by past studies of case-mix change by the RAND Corporation. 
The most recent study was "Has DRG Creep Crept Up? Decomposing the 
Case Mix Index Change Between 1987 and 1988" by G.M. Carter, J.P. 
Newhouse, and D.A. Relles, R-4098-HCFA/ProPAC (1991). The study 
suggested that real case-mix change was not dependent on total change, 
but was usually a fairly steady 1.0 to 1.5 percent per year. We use 1.4 
percent as the upper bound because the RAND study did not take into 
account that hospitals may have induced doctors to document medical 
records more completely in order to improve payment. Following that 
study, we consider up to 1.4 percent of observed case-mix change as 
real for FY 1994 through FY 1998. Based on this analysis, we believe 
that all of the observed case-mix increase for FY 1994, FY 1997, and FY 
1998 is real. The increases for FY 1995 and FY 1996 were in excess of 
our estimate of real case-mix increase.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI 
hospital component), and changes in real case-mix. Given estimates of 
real case mix of 0.8 percent for FY 1994, 1.0 percent for FY 1995, 1.0 
percent for FY 1996, 0.3 percent for FY 1997, and -0.4 for FY 1998, we 
estimate that case-mix constant intensity declined by an average 1.3 
percent during FYs 1994 through 1998, for a cumulative decrease of 6.3 
percent. If we assume that real case-mix increase was 0.8 percent for 
FY 1994, 1.4 percent for FY 1995, 1.4 percent for FY 1996, 0.3 percent 
for FY 1997, and -0.4 for FY 1998, we estimate that case-mix constant 
intensity declined by an average 1.5 percent during FYs 1994 through 
1998, for a cumulative decrease of 7.1 percent. Since we estimate that 
intensity has declined during that period, we are making a 0.0 percent 
intensity adjustment for FY 2000.
    In summary, the FY 2000 final capital update under our framework is 
0.3 percent. This update is based on a projected 0.6 increase in the 
CIPI, policy adjustment factors of 0.0, a 0.1 adjustment for the effect 
of FY 1998 reclassification and recalibration, and a forecast error 
correction of -0.4.
    b. Comparison of HCFA and MedPAC Update Recommendations.
    As discussed in the proposed rule, MedPAC recommended a -1.1 to 1.8 
percent update to the standard capital Federal rate and we recommended 
a -0.6 percent update. (See the May 7, 1999 proposed rule for the 
differences between the MedPAC and HCFA update frameworks (64 FR 
24758)). In this final rule, as discussed in the previous section, we 
are implementing a 0.3 percent update to the capital Federal rate.
    Comment: MedPAC noted that our update recommendation of -0.6 
percent was within the range of the -1.1 to 1.8 percent that they 
recommended. They also asserted that the distinction between inpatient 
operating and capital payment rates is arbitrary and does not foster 
efficient overall decision making about the allocation of resources. 
Accordingly, MedPAC recommended that once the transition to fully 
prospective capital payment is completed, a single prospective payment 
rate should be developed for hospital inpatient services to Medicare 
beneficiaries. MedPAC indicated that a single prospective payment rate 
for both operating and capital costs would be consistent with the way 
that hospitals purchase a majority of goods and services. MedPAC plans 
to investigate options for coordinating the capital and operating 
updates and would be pleased to work with HCFA on this effort.
    Response: We responded to a similar comment in the May 7, 1999 
proposed rule (64 FR 24759), the July 31, 1998 final rule (63 FR 
41013), and in the September 1, 1995 final rule (60 FR 45816). In those 
rules, we stated that our long-term goal was to develop a single update 
framework for operating and capital prospective payments and that we 
would begin development of a unified framework. We indicated that, in 
the meantime, we would maintain as much consistency as possible between 
the current operating and capital frameworks in order to facilitate the 
eventual development of a unified framework. In addition, we stated 
that because of the similarity of the update frameworks, the update 
frameworks could be combined without too much difficulty. We maintain 
our goal of combining the update frameworks and

[[Page 41553]]

may examine combining the payment systems after the conclusion of the 
capital prospective payment transition period. While we welcome 
MedPAC's assistance in the eventual development of a unified operating 
and capital update framework, we believe that developing a unified 
operating and capital update framework would become a higher priority 
if the actual operating update was no longer determined by Congress 
through the statute and the unified update would be appropriately 
applied directly to a combined payment rate for operating and capital 
costs.
2. Outlier Payment Adjustment Factor
    Section 412.312(c) establishes a unified outlier methodology for 
inpatient operating and inpatient capital-related costs. A single set 
of thresholds is used to identify outlier cases for both inpatient 
operating and inpatient capital-related payments. Outlier payments are 
made only on the portion of the Federal rate that is used to calculate 
the hospital's inpatient capital-related payments (for example, 90 
percent for cost reporting periods beginning in FY 2000 for hospitals 
paid under the fully prospective payment methodology). Section 
412.308(c)(2) provides that the standard Federal rate for inpatient 
capital-related costs be reduced by an adjustment factor equal to the 
estimated proportion of outlier payments under the Federal rate to 
total inpatient capital-related payments under the Federal rate. The 
outlier thresholds are set so that operating outlier payments are 
projected to be 5.1 percent of total operating DRG payments. The 
inpatient capital-related outlier reduction factor reflects the 
inpatient capital-related outlier payments that would be made if all 
hospitals were paid 100 percent of the Federal rate. For purposes of 
calculating the outlier thresholds and the outlier reduction factor, we 
model payments as if all hospitals were paid 100 percent of the Federal 
rate because, as explained above, outlier payments are made only on the 
portion of the Federal rate that is included in the hospital's 
inpatient capital-related payments.
    In the July 31, 1998 final rule, we estimated that outlier payments 
for capital in FY 1999 would equal 6.08 percent of inpatient capital-
related payments based on the Federal rate (63 FR 41013). Accordingly, 
we applied an outlier adjustment factor of 0.9392 to the Federal rate. 
For FY 2000, we estimate that outlier payments for capital will equal 
5.98 percent of inpatient capital-related payments based on the Federal 
rate. Therefore, we are establishing an outlier adjustment factor of 
0.9402 to the Federal rate. Thus, estimated capital outlier payments 
for FY 2000 represent a lower percentage of total capital standard 
payments than in FY 1999.
    The outlier reduction factors are not built permanently into the 
rates; that is, they are not applied cumulatively in determining the 
Federal rate. Therefore, the net change in the outlier adjustment to 
the Federal rate for FY 2000 is 1.0011 (0.9402/0.9392). The outlier 
adjustment increases the FY 2000 Federal rate by 0.11 percent compared 
with the FY 1999 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the Geographic Adjustment Factor
    Section 412.308(c)(4)(ii) requires that the Federal rate be 
adjusted so that aggregate payments for the fiscal year based on the 
Federal rate after any changes resulting from the annual DRG 
reclassification and recalibration and changes in the GAF are projected 
to equal aggregate payments that would have been made on the basis of 
the Federal rate without such changes. We use the actuarial model, 
described in Appendix B, to estimate the aggregate payments that would 
have been made on the basis of the Federal rate without changes in the 
DRG classifications and weights and in the GAF. We also use the model 
to estimate aggregate payments that would be made on the basis of the 
Federal rate as a result of those changes. We then use these figures to 
compute the adjustment required to maintain budget neutrality for 
changes in DRG weights and in the GAF.
    For FY 1999, we calculated a GAF/DRG budget neutrality factor of 
1.0027. In the February 25, 1999 final rule (64 FR 9381), we adopted an 
incremental GAF/DRG budget neutrality factor of 1.0028 for discharges 
on or after March 1, 1999. In the proposed rule for FY 2000, we 
proposed a GAF/DRG budget neutrality factor of 0.9986. In this final 
rule, based on calculations using updated data, we are applying a 
factor of 0.9985. The GAF/DRG budget neutrality factors are built 
permanently into the rates; that is, they are applied cumulatively in 
determining the Federal rate. This follows from the requirement that 
estimated aggregate payments each year be no more than they would have 
been in the absence of the annual DRG reclassification and 
recalibration and changes in the GAF. The incremental change in the 
adjustment from FY 1999 to FY 2000 is 0.9985. The cumulative change in 
the rate due to this adjustment is 1.0014 (the product of the 
incremental factors for FY 1993, FY 1994, FY 1995, FY 1996, FY 1997, FY 
1998, FY 1999, and FY 2000: 0.9980  x  1.0053  x  0.9998  x  0.9994  x  
0.9987  x  0.9989  x  1.0028  x  0.9985 = 1.0014).
    This factor accounts for DRG reclassifications and recalibration 
and for changes in the GAF. It also incorporates the effects on the GAF 
of FY 2000 geographic reclassification decisions made by the MGCRB 
compared to FY 1999 decisions. However, it does not account for changes 
in payments due to changes in the DSH and IME adjustment factors or in 
the large urban add-on.
4. Exceptions Payment Adjustment Factor
    Section 412.308(c)(3) requires that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated proportion of additional payments for exceptions 
under Sec. 412.348 relative to total payments under the hospital-
specific rate and Federal rate. We use an actuarial model described in 
Appendix B to determine the exceptions payment adjustment factor.
    For FY 1999, we estimated that exceptions payments would equal 2.17 
percent of aggregate payments based on the Federal rate and the 
hospital-specific rate. Therefore, we applied an exceptions reduction 
factor of 0.9783 (1--0.0217) in determining the Federal rate. In the 
May 7, 1999 proposed rule, we estimated that exceptions payments for FY 
2000 would equal 2.48 percent of aggregate payments based on the 
Federal rate and the hospital-specific rate. Therefore, we proposed an 
exceptions payment reduction factor of 0.9752 to the Federal rate for 
FY 2000. For this final rule, based on updated data, we estimate that 
exceptions payments for FY 2000 will equal 2.70 percent of aggregate 
payments based on the Federal rate and hospital-specific rate. We are, 
therefore, applying an exceptions payment reduction factor of 0.9730 
(1--0.0270) to the Federal rate for FY 2000. The final exceptions 
reduction factor for FY 2000 is 0.54 percent lower than the factor for 
FY 1999 and 0.23 percent lower than the factor in the FY 2000 proposed 
rule.
    The exceptions reduction factors are not built permanently into the 
rates; that is, the factors are not applied cumulatively in determining 
the Federal rate. Therefore, the net adjustment to the FY 2000 Federal 
rate is 0.9730/0.9783, or 0.9946.

[[Page 41554]]

5. Standard Capital Federal Rate for FY 2000
    For FY 1999 (effective March 1, 1999), the capital Federal rate was 
$378.10. As a result of changes we proposed to the factors used to 
establish the Federal rate, we proposed that the FY 2000 Federal rate 
would be $374.31. In this final rule, we are establishing a FY 2000 
Federal rate of $377.03. The Federal rate for FY 2000 was calculated as 
follows:
    <bullet> The FY 2000 update factor is 1.0030; that is, the update 
is 0.30 percent.
    <bullet> The FY 2000 budget neutrality adjustment factor that is 
applied to the standard Federal payment rate for changes in the DRG 
relative weights and in the GAF is 0.9985.
    <bullet> The FY 2000 outlier adjustment factor is 0.9402.
    <bullet> The FY 2000 exceptions payments adjustment factor is 
0.9730.
    Since the Federal rate has already been adjusted for differences in 
case mix, wages, cost of living, indirect medical education costs, and 
payments to hospitals serving a disproportionate share of low-income 
patients, we have made no additional adjustments in the standard 
Federal rate for these factors other than the budget neutrality factor 
for changes in the DRG relative weights and the GAF.
    We are providing a chart that shows how each of the factors and 
adjustments for FY 2000 affected the computation of the FY 2000 Federal 
rate in comparison to the FY 1999 Federal rate. The FY 2000 update 
factor has the effect of increasing the Federal rate by 0.30 percent 
compared to the rate in FY 1999, while the final geographic and DRG 
budget neutrality factor has the effect of decreasing the Federal rate 
by 0.15 percent. The FY 2000 outlier adjustment factor has the effect 
of increasing the Federal rate by 0.11 percent compared to FY 1999. The 
FY 2000 exceptions reduction factor has the effect of decreasing the 
Federal rate by 0.54 percent compared to the exceptions reduction for 
FY 1999. The combined effect of all the changes is to decrease the 
Federal rate by 0.28 percent compared to the Federal rate for FY 1999.

              Comparison of Factors and Adjustments: FY 1999 Federal Rate and FY 2000 Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                                                                       Percent
                                                                FY 1999      FY 2000       Change       change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...........................................       1.0010       1.0030       1.0030         0.30
GAF/DRG Adjustment Factor \1\...............................       1.0028       0.9985       0.9985        -0.15
Outlier Adjustment Factor \2\...............................       0.9392       0.9402       1.0011         0.11
Exceptions Adjustment Factor \2\............................       0.9783       0.9730       0.9946        -0.54
Federal Rate................................................      $378.10      $377.03       0.9972       -0.28
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the rates. Thus, for
  example, the incremental change from FY 1999 to FY 2000 resulting from the application of the 0.9985 GAF/DRG
  budget neutrality factor for FY 2000 is 0.9985.
\2\ The outlier reduction factor and the exceptions reduction factor are not built permanently into the rates;
  that is, these factors are not applied cumulatively in determining the rates. Thus, for example, the net
  change resulting from the application of the FY 2000 outlier reduction factor is 0.9402/0.9392, or 1.0011.

    As stated previously in this section, the FY 2000 Federal rate has 
decreased 0.28 percent compared to the FY 1999 Federal rate, even 
though the capital rate update factor has increased from 0.1 percent in 
FY 1999 to 0.3 percent in FY 2000. The 0.28 percent decrease in the 
Federal capital rate is a result of the combination of the FY 2000 
factors and adjustments applied to the Federal rate. Specifically, the 
exceptions reduction factor decreased 0.54 percent from 0.9783 for FY 
1999 to 0.9730 for FY 2000, which results in a larger reduction to the 
Federal capital rate for FY 2000 compared to FY 1999. Also, the GAF/DRG 
adjustment factor decreased 0.42 percent from 1.0027 for FY 1999 to 
0.9985 for FY 2000, which results in a decrease the Federal capital 
rate for FY 2000 compared to FY 1999. The outlier adjustment factor 
increased 0.11 percent from 0.9392 for FY 1999 to 0.9402 for FY 2000, 
which results in an increase to the Federal capital rate for FY 2000 
compared to FY 1999. The effect of all of these changes is a -0.28 
percent decrease in the FY 2000 Federal rate compared to FY 1999.
    Even though the FY 2000 Federal capital rate is less than the FY 
1999 Federal rate, we estimate that aggregate capital payments will 
increase 3.64 percent during this same period, primarily due to the 
increase in the Federal blend percentage (from 80 to 90 percent) for 
fully prospective payment hospitals.
    We are also providing a chart that shows how the final FY 2000 
Federal rate differs from the proposed FY 2000 Federal rate.

       Comparison of Factors and Adjustments: FY 2000 Proposed Federal Rate and FY 2000 Final Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                              Proposed FY    Final FY                  Percent
                                                                  2000         2000        Change       change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...........................................       0.9940       1.0030       1.0091         0.91
GAF/DRG Adjustment Factor...................................       0.9986       0.9985       0.9999        -0.01
Outlier Adjustment Factor...................................       0.9397       0.9402       1.0005         0.05
Exceptions Adjustment Factor................................       0.9752       0.9730       0.9977        -0.23
Federal Rate................................................      $374.31      $377.03       1.0073        0.73
----------------------------------------------------------------------------------------------------------------
\1\ As noted previously in section IV.A.1.a of this addendum, upon review we discovered that incorrect data were
  used in estimating the proposed adjustment for the effect of FY 1998 reclassification and recalibration in the
  proposed rule. As a result, the revised adjustment for the effect of FY 1998 reclassification and
  recalibration for the capital update for FY 2000 is +0.1 (compared to the proposed -0.7). Accordingly, the FY
  2000 final update is 0.30 (compared to the proposed -0.06), which accounts for the 0.73 increase in the
  Federal rate from the FY 2000 proposed to FY 2000 final rule.


[[Page 41555]]

6. Special Rate for Puerto Rico Hospitals
    As explained above, hospitals in Puerto Rico are paid based on 50 
percent of the Puerto Rico rate and 50 percent of the Federal rate. The 
Puerto Rico rate is derived from the costs of Puerto Rico hospitals 
only, while the Federal rate is derived from the costs of all acute 
care hospitals participating in the prospective payment system 
(including Puerto Rico). To adjust hospitals' capital payments for 
geographic variations in capital costs, we apply a geographic 
adjustment factor (GAF) to both portions of the blended rate. The GAF 
is calculated using the operating prospective payment system wage index 
and varies depending on the MSA or rural area in which the hospital is 
located. We use the Puerto Rico wage index to determine the GAF for the 
Puerto Rico part of the capital blended rate and the national wage 
index to determine the GAF for the national part of the blended rate. 
Since we implemented a separate GAF for Puerto Rico in 1998, we also 
applied separate budget neutrality adjustments for the national GAF and 
for the Puerto Rico GAF. We applied the same budget neutrality factor 
for DRG reclassifications and recalibration nationally and for Puerto 
Rico. The Puerto Rico GAF budget neutrality factor is 0.9991, while the 
DRG adjustment is 0.9999, for a combined cumulative adjustment of 
0.9990.
    In computing the payment for a particular Puerto Rico hospital, the 
Puerto Rico portion of the rate (50 percent) is multiplied by the 
Puerto Rico-specific GAF for the MSA in which the hospital is located, 
and the national portion of the rate (50 percent) is multiplied by the 
national GAF for the MSA in which the hospital is located (which is 
computed from national data for all hospitals in the United States and 
Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to 
the Puerto Rico rate as required by the BBA. For FY 1999, before 
application of the GAF, the special rate for Puerto Rico hospitals was 
$181.10. With the changes we proposed to the factors used to determine 
the rate, the proposed FY 2000 special rate for Puerto Rico was 
$174.15. In this final rule, the FY 2000 capital rate for Puerto Rico 
is $174.81.

B. Determination of Hospital-Specific Rate Update

    Section 412.328(e) of the regulations provides that the hospital-
specific rate for FY 2000 be determined by adjusting the FY 1999 
hospital-specific rate by the following factors:
1. Hospital-Specific Rate Update Factor
    The hospital-specific rate is updated in accordance with the update 
factor for the standard Federal rate determined under 
Sec. 412.308(c)(1). For FY 2000, we are updating the hospital-specific 
rate by a factor of 1.0030.
2. Exceptions Payment Adjustment Factor
    For FYs 1992 through FY 2001, the updated hospital-specific rate is 
multiplied by an adjustment factor to account for estimated exceptions 
payments for capital-related costs under Sec. 412.348, determined as a 
proportion of the total amount of payments under the hospital-specific 
rate and the Federal rate. For FY 2000, we estimated in the proposed 
rule that exceptions payments would be 2.48 percent of aggregate 
payments based on the Federal rate and the hospital-specific rate. 
Therefore, we proposed that the updated hospital-specific rate be 
reduced by a factor of 0.9752. In this final rule, we estimate that 
exceptions payments will be 2.70 percent of aggregate payments based on 
the Federal rate and hospital-specific rate. Accordingly, for FY 2000, 
we are applying an exceptions reduction factor of 0.9730 to the 
hospital-specific rate. The exceptions reduction factors are not built 
permanently into the rates; that is, the factors are not applied 
cumulatively in determining the hospital-specific rate. The net 
adjustment to the FY 2000 hospital-specific rate is 0.9730/0.9783, or 
0.9946.
3. Net Change to Hospital-Specific Rate
    We are providing a chart to show the net change to the hospital-
specific rate. The chart shows the factors for FY 1999 and FY 2000 and 
the net adjustment for each factor. It also shows that the cumulative 
net adjustment from FY 1999 to FY 2000 is 0.9976, which represents a 
decrease of 0.24 percent to the hospital-specific rate. For each 
hospital, the FY 2000 hospital-specific rate is determined by 
multiplying the FY 1999 hospital-specific rate by the cumulative net 
adjustment of 0.9976.

                            FY 2000 Update and Adjustments to Hospital-Specific Rates
----------------------------------------------------------------------------------------------------------------
                                                                             Final FY       Net        Percent
                                                                FY 1999        2000      adjustment     change
----------------------------------------------------------------------------------------------------------------
Update Factor...............................................       1.0010       1.0030       1.0030         0.30
Exceptions Payment Adjustment Factor........................       0.9783       0.9730       0.9946        -0.54
Cumulative Adjustments......................................       0.9793       0.9769       0.9976       -0.24
----------------------------------------------------------------------------------------------------------------
Note: The update factor for the hospital-specific rate is applied cumulatively in determining the rates. Thus,
  the incremental increase in the update factor from FY 1999 to FY 2000 is 1.0030. In contrast, the exceptions
  payment adjustment factor is not applied cumulatively. Thus, for example, the incremental increase in the
  exceptions reduction factor from FY 1999 to FY 2000 is 0.9730/0.9783, or 0.9946.

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

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

[[Page 41556]]

the standard Federal rate is adjusted as follows: (Standard Federal 
Rate)  x  (DRG weight)  x  (GAF)  x  (Large Urban Add-on, if 
applicable)  x  (COLA adjustment for hospitals located in Al