Final Federal Rules and Regulations - July 30, 1999

[Federal Register: July 30, 1999 (Volume 64, Number 146)]
[Rules and Regulations]
[Page 41639-41641]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jy99-24]

[[pp. 41639-41641]] Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2000 Rates

[[Continued from page 41638]]

[[Page 41639]]

an incremental budget neutrality adjustment of 0.99857 for FY 2000
should be applied to the previous cumulative FY 1999 adjustment of
1.00294, yielding a cumulative adjustment of 1.00151 through FY
2000. For the Puerto Rico geographic adjustment factor, an
incremental budget neutrality adjustment of 0.99910 for FY 2000
should be applied to the previous cumulative FY 1999 adjustment of
1.00233, yielding a cumulative adjustment of 1.00143 through FY
2000. We apply these new adjustments, then compare estimated
aggregate Federal rate payments based on the FY 1999 DRG relative
weights and the FY 2000 geographic adjustment factors to estimated
aggregate Federal rate payments based on the FY 2000 DRG relative
weights and the FY 2000 geographic adjustment factors. The
incremental adjustment for DRG classifications and changes in
relative weights would be 0.99991 nationally and for Puerto Rico.
The cumulative adjustments for DRG classifications and changes in
relative weights and for changes in the geographic adjustment
factors through FY 2000 would be 1.00142 nationally, and 1.00134 for
Puerto Rico. The following table summarizes the adjustment factors
for each fiscal year:

Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Puerto Rico
--------------------------------------------------------------------------------------------------------------
Incremental adjustment Incremental adjustment
Fiscal year -------------------------------------------- ------------------------------------------
Geographic DRG Cumulative Geographic DRG Cumulative
adjustment reclassifications Combined adjustment reclassifications Combined
factor and recalibration factor and recalibration
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992..................................... .......... ................. ........... 1.00000 .......... ................. ......... ..........
1993..................................... .......... ................. 0.99800 0.99800 .......... ................. ......... ..........
1994..................................... .......... ................. 1.00531 1.00330 .......... ................. ......... ..........
1995..................................... .......... ................. 0.99980 1.00310 .......... ................. ......... ..........
1996..................................... .......... ................. 0.99940 1.00250 .......... ................. ......... ..........
1997..................................... .......... ................. 0.99873 1.00123 .......... ................. ......... ..........
1998..................................... .......... ................. 0.99892 1.00015 .......... ................. ......... 1.00000
1999..................................... 0.99944 1.00335 1.00279 1.00294 0.99898 1.00335 1.00233 1.00233
2000..................................... 0.99857 0.99991 0.99848 1.00142 0.99910 0.99991 0.99901 1.00134
--------------------------------------------------------------------------------------------------------------------------------------------------------

The methodology used to determine the recalibration and
geographic (DRG/GAF) budget neutrality adjustment factor is similar
to that used in establishing budget neutrality adjustments under the
prospective payment system for operating costs. One difference is
that, under the operating prospective payment system, the budget
neutrality adjustments for the effect of geographic
reclassifications are determined separately from the effects of
other changes in the hospital wage index and the DRG relative
weights. Under the capital prospective payment system, there is a
single DRG/GAF budget neutrality adjustment factor (the national
rate and the Puerto Rico rate are determined separately) for changes
in the geographic adjustment factor (including geographic
reclassification) and the DRG relative weights. In addition, there
is no adjustment for the effects that geographic reclassification
has on the other payment parameters, such as the payments for
serving low-income patients or the large urban addon payments.
In addition to computing the DRG/GAF budget neutrality
adjustment factor, we used the model to simulate total payments
under the prospective payment system.
Additional payments under the exceptions process are accounted
for through a reduction in the Federal and hospital-specific rates.
Therefore, we used the model to calculate the exceptions reduction
factor. This exceptions reduction factor ensures that aggregate
payments under the capital prospective payment system, including
exceptions payments, are projected to equal the aggregate payments
that would have been made under the capital prospective payment
system without an exceptions process. Since changes in the level of
the payment rates change the level of payments under the exceptions
process, the exceptions reduction factor must be determined through
iteration.
In the August 30, 1991 final rule (56 FR 43517), we indicated
that we would publish each year the estimated payment factors
generated by the model to determine payments for the next 5 years.
The table below provides the actual factors for FYs 1992 through
1999, the final factors for FY 2000, and the estimated factors that
would be applicable through FY 2004. We caution that these are
estimates for FYs 2001 and later, and are subject to revisions
resulting from continued methodological refinements, receipt of
additional data, and changes in payment policy. We note that in
making these projections, we have assumed that the cumulative
national DRG/GAF budget neutrality adjustment factor will remain at
1.00142 (1.00134 for Puerto Rico) for FY 2000 and later because we
do not have sufficient information to estimate the change that will
occur in the factor for years after FY 2000.
The projections are as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal
Update Exceptions Budget DRG/GAF Outlier Federal rate (after
Fiscal year factor reduction neutrality adjustment adjustment rate outlier)
factor factor factor 1 factor adjustment reduction)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992......................................................... N/A 0.9813 0.9602 ........... .9497 ........... 415.59
1993......................................................... 6.07 .9756 .9162 .9980 .9496 ........... 417.29
1994......................................................... 3.04 .9485 .8947 1.0053 .9454 2 .9260 378.34
1995......................................................... 3.44 .9734 .8432 .9998 .9414 ........... 376.83
1996......................................................... 1.20 .9849 N/A .9994 .9536 3 .9972 461.96
1997......................................................... 0.70 .9358 N/A .9987 .9481 ........... 438.92
1998......................................................... 0.90 .9659 N/A .9989 .9382 4 .8222 371.51
1999......................................................... 0.10 .9783 N/A 1.0028 .9392 ........... 378.10
2000......................................................... 0.30 .9730 N/A .9985 .9402 ........... 377.03
2001......................................................... 0.50 .9636 N/A 5 1.0000 5 .9402 ........... 375.26
2002......................................................... 0.50 6 1.0000 N/A 1.0000 .9402 ........... 391.38
2003......................................................... 0.50 6 1.0000 N/A 1.0000 .9402 4 1.0255 403.38

[[Page 41640]]

2004......................................................... 0.50 6 1.0000 N/A 1.0000 .9402 ........... 405.40
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1 Note: The incremental change over the previous year.
2 Note: OBRA 1993 adjustment.
3 Note: Adjustment for change in the transfer policy.
4 Note: Balanced Budget Act of 1997 adjustment.

5 Note: Future adjustments are, for purposes of this projection, assumed to remain at the same level.
6 Note: We are unable to estimate exceptions payments for the year under the special exceptions provision (Sec. 412.348(g) of the regulations) because
the regular exceptions provision (Sec. 412.348(e)) expires.

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

I. Background

Several provisions of the Act address the setting of update
factors for inpatient services furnished in FY 2000 by hospitals
subject to the prospective payment system and those excluded from
the prospective payment system. Section 1886(b)(3)(B)(i)(XV) of the
Act sets the FY 2000 percentage increase in the operating cost
standardized amounts equal to the rate of increase in the hospital
market basket minus 1.8 percent for prospective payment hospitals in
all areas. Section 1886(b)(3)(B)(iv) of the Act sets the FY 2000
percentage increase in the hospital-specific rates applicable to
sole community and Medicare-dependent, small rural hospitals equal
to the rate set forth in section 1886(b)(3)(B)(i) of the Act, that
is, the same update factor as all other hospitals subject to the
prospective payment system, or the rate of increase in the market
basket minus 1.8 percentage points. Under section 1886(b)(3)(B)(ii)
of the Act, the FY 2000 percentage increase in the rate of increase
limits for hospitals excluded from the prospective payment system
ranges from the percentage increase in the excluded hospital market
basket to 0 percent, depending on the hospital's costs in relation
to its limit for the most recent cost reporting period for which
information is available.
In accordance with section 1886(d)(3)(A) of the Act, we are
updating the standardized amounts, the hospital-specific rates, and
the rate-of-increase limits for hospitals excluded from the
prospective payment system as provided in section 1886(b)(3)(B) of
the Act. Based on the second quarter 1999 forecast of the FY 2000
market basket increase of 2.9 percent for hospitals subject to the
prospective payment system, the updates in the standardized amounts
are 1.1 percent for hospitals in both large urban and other areas.
The update in the hospital-specific rate applicable to sole
community and Medicare-dependent, small rural hospitals is also 1.1
percent. The update for hospitals excluded from the prospective
payment system can be as high as the percentage increase in the
excluded hospital market basket (currently estimated at 2.9 percent)
or as low as zero, depending on the hospital's costs in relation to
its rate-of-increase limit. (See Section V of the Addendum to this
final rule.)
Section 1886(e)(4) of the Act requires that the Secretary,
taking into consideration the recommendations of the Medicare
Payment Advisory Commission (MedPAC), recommend update factors for
each fiscal year that take into account the amounts necessary for
the efficient and effective delivery of medically appropriate and
necessary care of high quality. In its March 1, 1999 report, MedPAC
stated that the legislated update of market basket increase minus
1.8 percentage points would provide a reasonable level of payment to
hospitals. Although MedPAC suggests that a somewhat lower update
could be justified in light of changes in the utilization and
provision of hospital inpatient care, the Commission does not
believe it is necessary to recommend a lower update for FY 2000.
MedPAC did not make a separate recommendation for the hospital-
specific rates applicable to sole community and Medicare-dependent,
small rural hospitals.
Under section 1886(e)(5) of the Act, we are required to publish
the update factors recommended under section 1886(e)(4) of the Act.
Accordingly, we published the FY 2000 update factors recommended by
the Secretary as Appendix D of the May 7, 1999 proposed rule (64 FR
24852).
Under section 1886(e)(4) of the Act, we recommended that an
appropriate update factor for the standardized amounts was 0.0
percentage points for hospitals located in large urban and other
areas. We also recommended an update of 0.0 percentage points to the
hospital-specific rate for sole community hospitals and Medicare-
dependent, small rural hospitals. These figures are consistent with
the President's FY 2000 budget recommendations. We stated that we
believe our recommended update factors would ensure that Medicare
acts as a prudent purchaser and provide incentives to hospitals for
increased efficiency, thereby contributing to the solvency of the
Medicare Part A Trust Fund.
In the proposed rule, we recommended that hospitals excluded
from the prospective payment system receive an update of between 0
and 2.6 percentage points. The recommended update for excluded
hospitals and units was equal to the increase in the excluded
hospital operating market basket less a percentage between 0 and 2.5
percentage points, or 0 percentage points, depending on the
hospital's or unit's costs in relation to its rate-of-increase
limit. For the proposed rule, the market basket rate of increase was
forecast at 2.6 percent. This recommendation was consistent with the
President's FY 2000 budget, although we noted that the market basket
rate of increase was forecast at 2.7 percent when the budget was
submitted.

II. Secretary's Final Recommendations for Updating the Prospective
Payment System Standardized Amounts

We received seven comments concerning our proposed
recommendations, two of which commented directly on the update
recommendation. Our final recommendations for the operating update
for both prospective and excluded hospitals do not differ from the
proposed. However, the second quarter forecast of the market basket
percentage increase is 2.9 for prospective payment hospitals (up
from 2.7 estimated in the proposed rule) and 2.9 for excluded
hospitals and units (up from 2.6 estimated in the proposed rule).
Comment: Several commenters expressed support for our proposal
to update hospital payment rates on October 1, 1999, rather than
delaying the update because of concerns about "Year 2000" (Y2K)
systems issues. One commenter, while acknowledging that we are
required to use the factors set in current law to update payment
rates, expressed concern that an update to the rates less than the
full market basket rate of increase is inadequate, forcing hospitals
to forego technological advances that may improve quality and
patient outcomes. Another commenter believes that the proposed
updates would place more financial hardship on hospitals, in
particular teaching hospitals, by freezing or reducing payment
rates.
Response: We appreciate the support from commenters. As the one
commenter noted, we are required by section 1886(b)(3) of the Act,
as amended by the Balanced Budget Act of 1997 (BBA), to update rates
for FY 2000 by the estimated increase in the hospital market basket
minus 1.8 percentage points. Our latest available data show that
hospital costs per case are continuing to decline while payments per
case are increasing, resulting in high average Medicare profit
margins across all hospitals. Therefore, we believe that the update
to payment rates specified by law for FY 2000 is sufficient to allow
hospitals to continue providing Medicare beneficiaries with
efficient care of high quality. We will continue to monitor the
financial performance of hospitals as newer data become available
and will adjust our future update recommendations to Congress as
appropriate.
Comment: MedPAC stated that while HCFA's proposed update
recommendation of zero percentage points is within the range that
MedPAC adopted in its own recommendation, the Commission believes

[[Page 41641]]

that the update specified in law is appropriate because the effects
of the BBA are not yet fully evident. Reducing payments below the
level prescribed by law would not be prudent, at least for FY 2000.
MedPAC further stated that it will monitor the financial performance
of hospitals under BBA during the coming year.
Response: As we stated in the proposed rule, we believe that our
recommendation (an update of zero percentage points) is an
appropriate response to current trends in health care delivery,
including the recent decreases in the use of hospital inpatient
services and the corresponding increase in the use of hospital
outpatient and postacute care services. Furthermore, as a prudent
purchaser of health care for Medicare beneficiaries, we believe it
is important that we maintain incentives to hospitals to provide
high quality care efficiently. Like MedPAC, we, too, will continue
to monitor the financial performance of hospitals and adjust future
update recommendations as appropriate.

III. Secretary's Final Recommendation for Updating the Rate-of-Increase
Limits for Excluded Hospitals

We received one comment concerning our proposed recommendation
for updating the rate-of-increase limits for excluded hospitals.
Comment: MedPAC recommended adding 0.4 percentage points to the
market basket forecast before applying the update formula to account
for technical improvements that hospitals must make related to Y2K-
related computer problems. MedPAC believes Y2K-related computer
malfunctions could potentially compromise patient care by
interrupting service continuity, thereby creating substantial
liability exposure for hospitals. Therefore, HCFA should increase
the market basket forecast to account for the additional costs
hospitals will incur in making computer system improvements to avoid
Y2K problems.
Response: Our final recommendation is that hospitals and
hospital units excluded from the prospective payment system receive
an update using a market basket increase estimate of 2.9 percentage
points. This update is consistent with the updates provided to the
prospective payment hospitals. We note that under our update
framework for excluded hospitals and units, the analysis indicates
identical findings to those for prospective payment system hospitals
regarding changes in productivity, scientific and technological
advances, practice patterns, and case-mix for FY 2000. We believe
these updates will ensure that Medicare acts as a prudent purchaser
and will provide incentives to hospitals for increased efficiency.
Thus, using the statutory target amount update formula, the update
factor for an excluded hospital or unit will be between 0.4 percent
and 2.9 percent, or 0.

[FR Doc. 99-19334 Filed 7-29-99; 8:45 am]
BILLING CODE 4120-03-P