Medicare Program; Proposed Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2006 Payment Rates

Federal RegisterJul 25, 2005

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 419 and 485

[CMS-1501-P]

RIN 0938-AN46

Medicare Program; Proposed Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2006 Payment Rates

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would revise the Medicare hospital outpatient prospective payment system to implement applicable statutory requirements and changes arising from our continuing experience with this system and to implement certain related provisions of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003. In addition, the proposed rule describes proposed changes to the amounts and factors used to determine the payment rates for Medicare hospital outpatient services paid under the prospective payment system. This proposed rule would also change the requirement for physician oversight of mid-level practitioners in critical access hospitals (CAHs). These changes would be applicable to services furnished on or after January 1, 2006.

DATES:

To be ensured consideration, comments must be received at one of the addresses provided in the

ADDRESSES

section, no later than 5 p.m. on September 16, 2005.

ADDRESSES:

In commenting, please refer to file code CMS-1501-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of three ways (no duplicates, please):

Electronically.

You may submit electronic comments on specific issues in this proposed rule to

http://www.cms.hhs.gov/regulations/ecomments.

(Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word).

By regular mail.

You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1501-P, P.O. Box 8016, Baltimore, MD 21244-8018.

By express or overnight mail.

You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1501-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

By hand or courier.

If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

Submission of Comments on Paperwork Requirements:

For comments that relate to information collection requirements, mail a copy of comments to the following addresses: Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Security and Standards Group, Office of Issuances, Room C4-24-02, 7500 Security Boulevard, Baltimore, MD 21244-1850, Attn: James Wickliffe, CMS-1501-P; and, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 3001, New Executive Office Building, Washington, DC 20503, Christopher Martin, CMS Desk Officer, CMS-1501-P.

Comments submitted to OMB may also be e-mailed to the following address:

Christopher_Martin@omb.eop.gov,

or faxed to OMB at (202) 395-6974.

Submitting Comments:

We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1501-P and the specific “issue identifier” that precedes the section on which you choose to comment.

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. CMS posts all electronic comments received before the close of the comment period on its public Web site as soon as possible after they have been received. Hard copy comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244-1850, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

FOR FURTHER INFORMATION, CONTACT:

Rebecca Kane, (410) 786-0378, Outpatient prospective payment issues, and Suzanne Asplen, (410) 786-4558, Partial hospitalization and community mental health center issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

This

Federal Register

document is available from the

Federal Register

online database through

GPO Access,

a service of the U.S. Government Printing Office. The Web site address is:

http://www.gpoaccess.gov/fr/index.html.

Alphabetical List of Acronyms Appearing in the Proposed Rule

ACEP American College of Emergency Physicians

AHA American Hospital Association

AHIMA American Health Information Management Association

AMA American Medical Association

APC Ambulatory payment classification

AMP Average manufacturer price

ASP Average sales price

ASC Ambulatory surgical center

AWP Average wholesale price

BBA Balanced Budget Act of 1997, Pub. L. 105-33

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. 106-554

BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. 106-113

CAH Critical access hospital

CBSA Core-Based Statistical Areas

CCR (Cost center specific) cost-to-charge ratio

CMHC Community mental health center

CMS Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration)

CORF Comprehensive outpatient rehabilitation facility

CPT [Physicians'] Current Procedural Terminology, Fourth Edition, 2005, copyrighted by the American Medical Association

CRNA Certified registered nurse anesthetist

CY Calendar year

DMEPOS Durable medical equipment, prosthetics, orthotics, and supplies

DMERC Durable medical equipment regional carrier

DRG Diagnosis-related group

DSH Disproportionate share hospital

EACH Essential Access Community Hospital

E/M Evaluation and management

EPO Erythropoietin

ESRD End-stage renal disease

FACA Federal Advisory Committee Act, Pub. L. 92-463

FDA Food and Drug Administration

FI Fiscal intermediary

FSS Federal Supply Schedule

FY Federal fiscal year

GAO Government Accountability Office

HCPCS Healthcare Common Procedure Coding System

HCRIS Hospital Cost Report Information System

HHA Home health agency

HIPAA Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191

ICD-9-CM International Classification of Diseases, Ninth Edition, Clinical Modification

IME Indirect medical education

IPPS (Hospital) inpatient prospective payment system

IVIG Intravenous immune globulin

LTC Long-term care

MedPAC Medicare Payment Advisory Commission

MDH Medicare-dependent hospital

MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173

MSA Metropolitan Statistical Area

NCCI National Correct Coding Initiative

NCD National Coverage Determination

OCE Outpatient code editor

OMB Office of Management and Budget

OPD (Hospital) outpatient department

OPPS (Hospital) outpatient prospective payment system

PHP Partial hospitalization program

PM Program memorandum

PPI Producer Price Index

PPS Prospective payment system

PPV Pneumococcal pneumonia (virus)

PRA Paperwork Reduction Act

QIO Quality Improvement Organization

RFA Regulatory Flexibility Act

RRC Rural referral center

SBA Small Business Administration

SCH Sole community hospital

SDP Single drug pricer

SI Status indicator

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248

TOPS Transitional outpatient payments

USPDI United States Pharmacopoeia Drug Information

To assist readers in referencing sections contained in this document, we are providing the following outline of contents:

Outline of Contents

I. Background

A. Legislative and Regulatory Authority for the Hospital Outpatient Prospective Payment System

B. Excluded OPPS Services and Hospitals

C. Prior Rulemaking

D. APC Advisory Panel

1. Authority for the APC Panel

2. Establishment of the APC Panel

3. APC Panel Meetings and Organizational Structure

E. Provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 To Be Implemented Beginning in CY 2006

1. Hold Harmless Provisions

2. Study and Authorization of Adjustment for Rural Hospitals

3. Payment for “Specified Covered Outpatient Drugs”

4. Adjustment in Payment Rates for “Specified Covered Outpatient Drugs” for Overhead Costs

5. Budget Neutrality Adjustment

F. CMS' Commitment to New Technologies

G. Summary of the Major Content of This Proposed Rule

II. Proposed Updates Affecting Payments for CY 2006

A. Recalibration of APC Relative Weights for CY 2006

1. Database Construction

a. Database Source and Methodology

b. Proposed Use of Single and Multiple Procedure Claims

2. Proposed Calculation of Median Costs for CY 2006

3. Proposed Calculation of Scaled OPPS Payment Weights

4. Proposed Changes to Packaged Services

B. Proposed Payment for Partial Hospitalization

1. Background

2. Proposed PHP APC Update for CY 2006

3. Proposed Separate Threshold for Outlier Payments to CMHCs

C. Proposed Conversion Factor Update for CY 2006

D. Proposed Wage Index Changes for CY 2006

E. Proposed Statewide Average Default Cost-to-Charge Ratios

F. Expiring Hold Harmless Provision for Transitional Corridor Payments for certain Rural Hospitals

G. Proposed Adjustment for Rural Hospitals

1. Factors Contributing to Unit Cost Differences Between Rural Hospitals and Urban Hospitals

2. Explanatory Variables

3. Results

H. Proposed Hospital Outpatient Outlier Payments

I. Calculation of Proposed National Unadjusted Medicare Payment

J. Proposed Beneficiary Copayments for CY 2006

1. Background

2. Proposed Copayment for CY 2006

3. Calculation of the Proposed Unadjusted Copayment Amount for CY 2006

III. Proposed Ambulatory Payment Classification (APC) Group Policies

A. Background

B. Proposed Changes—Variations Within APCs

1. Application of the 2 Times Rule

a. APC 0146: Level I Sigmoidoscopy

b. APC 0342: Level I Pathology

2. Proposed Exceptions to the 2 Times Rule

C. New Technology APCs

1. Background

2. Proposed Refinement of New Technology Cost Bands

3. Proposed Requirements for Assigning Services to New Technology APCs

4. Proposed Movement of Procedures from New Technology APCs to Clinically Appropriate APCs

a. Proton Beam Therapy

b. Stereotactic Radiosurgery

c. Other Services in New Technology APCs

D. Proposed APC-Specific Policies

1. Hyperbaric Oxygen Therapy

2. Allergy Testing

3. Stretta Procedure

4. Vascular Access Procedures

E. Proposed Addition of New Procedure Codes

IV. Proposed Payment Changes for Devices

A. Device-Dependent APCs

B. APC Panel Recommendations Pertaining to APC 0107 and APC 0108

C. Pass-Through Payments for Devices

1. Expiration of Transitional Pass-Through Payments for Certain Devices

2. Proposed Policy for CY 2006

D. Other Policy Issues Relating to Pass-Through Device Categories

1. Provisions for Reducing Transitional Pass-Through Payments to Offset Costs Packaged into APC Groups

a. Background

b. Proposed Policy for CY 2006

2. Criteria for Establishing New Pass-Through Device Categories

a. Surgical Insertion and Implantation Criterion

b. Public Comments Received and Our Responses

c. Existing Device Category Criterion

V. Proposed Payment Changes for Drugs, Biologicals, and Radiopharmaceutical Agents

A. Transitional Pass-Through Payment for Additional Costs of Drugs and Biologicals

1. Background

2. Expiration in CY 2005 of Pass-Through Status for Drugs and Biologicals

3. Drugs and Biologicals with Proposed Pass-Through Status in CY 2006

B. Proposed Payment for Drugs, Biologicals, and Radiopharmaceuticals Without Pass-Through Status

1. Background

2. Proposed Criteria for Packaging Payment for Drugs, Biologicals, and Radiopharmaceuticals

3. Proposed Payment for Drugs, Biologicals, and Radiopharmaceuticals Without Pass-Through Status That Are Not Packaged

a. Proposed Payment for Specified Covered Outpatient Drugs

(1) Background

(2) Proposed Changes for CY 2006 Related to Pub. L. 108-173

(3) Data Sources Available for Setting CY 2006 Payment Rates

(4) CY 2006 Proposed Payment Policy for Radiopharmaceutical Agents

(5) MedPAC Report on APC Payment Rate Adjustment of Specified Covered Outpatient Drugs

b. Proposed CY 2006 Payment for Nonpass-Through Drugs, Biologicals, and Radiopharmaceuticals with HCPCS Codes But Without OPPS Hospital Claims Data

C. Proposed Coding and Billing Changes for Specified Covered Outpatient Drugs

1. Background

2. Proposed Policy for CY 2006

D. Proposed Payment for New Drugs, Biologicals, and Radiopharmaceuticals Before HCPCS Codes Are Assigned

1. Background

2. Proposed Policy for CY 2006

E. Proposed Payment for Vaccines

F. Proposed Changes in Payments for Single Indication Orphan Drugs

VI. Estimate of Transitional Pass-Through Spending in CY 2006 for Drugs, Biologicals, and Devices

A. Total Allowed Pass-Through Spending

B. Estimate of Pass-Through Spending for CY 2006

VII. Proposed Brachytherapy Payment Changes

A. Background

B. Proposed Changes Related to Pub. L. 108-173

VIII. Proposed Coding and Payment for Drug Administration

A. Background

B. Proposed Changes for CY 2006

C. Proposed Changes to Vaccine Administration

IX. Hospital Coding for Evaluation and Management (E/M) Services

X. Proposed Payment for Blood and Blood Products

A. Background

B. Proposed Changes for CY 2006

XI. Proposed Payment for Observation Services

A. Background

B. Proposed CY 2006 Coding Changes for Observation Services

C. Proposed Criteria for Separately Payable Observation Services

1. Diagnosis Requirements

2. Observation Time

3. Additional Hospital Services

4. Physician Evaluation

D. Separate Payment for Direct Admission to Observation Care (APC 0600)

XII. Procedures That Will Be Paid Only as Inpatient Procedures

A. Background

B. Proposed Changes to the Inpatient List

C. Ancillary Outpatient Services When Patient Expires

XIII. Proposed Indicator Assignments

A. Proposed Status Indicator Assignments

B. Proposed Comment Indicators for the CY 2006 OPPS Final Rule

XIV. Proposed Nonrecurring Policy Changes

A. Proposed Payment for Multiple Diagnostic Imaging Procedures

B. Interrupted Procedure Payment Policies (Modifiers -52, -73, and -74)

XV. OPPS Policy and Payment Recommendations

A. MedPAC Recommendations

B. APC Panel Recommendations

C. GAO Recommendations

XVI. Physician Oversight of Mid-Level Practitioners in Critical Access Hospitals

A. Background

B. Proposed Policy Change

XVII. Files Available to the Public via the Internet

XVIII. Collection of Information Requirements

XIX. Response to Public Comments

XX. Regulatory Impact Analysis

A. OPPS: General

1. Executive Order 12866

2. Regulatory Flexibility Act (RFA)

3. Small Rural Hospitals

4. Unfunded Mandates

5. Federalism

B. Impact of Proposed Changes in this Proposed Rule

C. Alternatives Considered

1. Option Considered for Proposed Payment Policy for Separately Payable Drugs and Biologicals

2. Payment Adjustment for Rural Sole Community Hospitals

3. Change in the Percentage of Total OPPS Payments Dedicated to Outlier Payments

D. Limitations of Our Analysis

E. Estimated Impacts of this Proposed Rule on Hospitals

F. Estimated Impacts of this Proposed Rule on Beneficiaries

Regulation Text

Addenda

Addendum A—List of Ambulatory Payment Classification (APCs) with Status Indicators, Relative Weights, Payment Rates, and Copayment Amounts for CY 2006

Addendum B—Payment Status by HCPCS Code and Related Information—CY 2006

Addendum C—Healthcare Common Procedure Coding System (HCPCS) Codes by Ambulatory Payment Classification (APC) (Available only on CMS Web site via Internet. Refer to section XVII. of the preamble of this proposed rule.)

Addendum D1—Payment Status Indicators for the Hospital Outpatient Prospective Payment System

Addendum D2—Comment Indicators

Addendum E—CPT Codes That Are Paid Only as Inpatient Procedures

Addendum H—Wage Index for Urban Areas

Addendum I—Wage Index for Rural Areas

Addendum J—Wage Index for Hospitals That Are Reclassified

Addendum K—Puerto Rico Wage Index by CBSA

Addendum L—Out-Migration Wage Adjustment—CY 2006

Addendum M—Hospital Reclassifications and Redesignations by Individual Hospitals and CBSA

Addendum N—Hospital Reclassifications and Redesignations by Individual Hospitals under Section 508 of Pub. L. 108-173

Addendum O—Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act

I. Background

A. Legislative and Regulatory Authority for the Hospital Outpatient Prospective Payment System

When the Medicare statute was originally enacted, Medicare payment for hospital outpatient services was based on hospital-specific costs. In an effort to ensure that Medicare and its beneficiaries pay appropriately for services and to encourage more efficient delivery of care, the Congress mandated replacement of the reasonable cost-based payment methodology with a prospective payment system (PPS). The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on August 5, 1997, added section 1833(t) to the Social Security Act (the Act) authorizing implementation of a PPS for hospital outpatient services. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), enacted on November 29, 1999, made major changes that affected the hospital outpatient PPS (OPPS). The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554), enacted on December 21, 2000, made further changes in the OPPS. Section 1833(t) of the Act was also amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Pub. L. 108-173, enacted on December 8, 2003. (Discussion of provisions related specifically to the CY 2006 OPPS is included in sections V. and VII. of this proposed rule.) The OPPS was first implemented for services furnished on or after August 1, 2000. Implementing regulations for the OPPS are located at 42 CFR part 419.

Under the OPPS, we pay for hospital outpatient services on a rate-per-service basis that varies according to the ambulatory payment classification (APC) group to which the service is

assigned. We use Healthcare Common Procedure Coding System (HCPCS) codes (which include certain Current Procedural Terminology (CPT) codes) and descriptors to identify and group the services within each APC group. The OPPS includes payment for most hospital outpatient services, except those identified in section I.B. of this proposed rule. Section 1833(t)(1)(B)(ii) of the Act provides for Medicare payment under the OPPS for certain services designated by the Secretary that are furnished to inpatients who have exhausted their Part A benefits or who are otherwise not in a covered Part A stay. Section 611 of Pub. L. 108-173 provided for Medicare coverage of an initial preventive physical examination, subject to the applicable deductible and coinsurance, as an outpatient department service, payable under the OPPS. In addition, the OPPS includes payment for partial hospitalization services furnished by community mental health centers (CMHCs).

The OPPS rate is an unadjusted national payment amount that includes the Medicare payment and the beneficiary copayment. This rate is divided into a labor-related amount and a nonlabor-related amount. The labor-related amount is adjusted for area wage differences using the inpatient hospital wage index value for the locality in which the hospital or CMHC is located.

All services and items within an APC group are comparable clinically and with respect to resource use (section 1833(t)(2)(B) of the Act). In accordance with section 1833(t)(2) of the Act, subject to certain exceptions, services and items within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the APC group is more than 2 times greater than the lowest median cost for an item or service within the same APC group (referred to as the “2 times rule”). In implementing this provision, we use the median cost of the item or service assigned to an APC group.

Special payments under the OPPS may be made for new technology items and services in one of two ways. Section 1833(t)(6) of the Act provides for temporary additional payments or “transitional pass-through payments” for certain drugs, biological agents, brachytherapy devices used for the treatment of cancer, and categories of medical devices for at least 2 but not more than 3 years. For new technology services that are not eligible for pass-through payments and for which we lack sufficient data to appropriately assign them to a clinical APC group, we have established special APC groups based on costs, which we refer to as “APC cost bands.” These cost bands allow us to price these new procedures more appropriately and consistently. Similar to pass-through payments, these special payments for new technology services are also temporary; that is, we retain a service within a new technology APC group until we acquire adequate data to assign it to a clinically appropriate APC group.

B. Excluded OPPS Services and Hospitals

Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to designate the hospital outpatient services that are paid under the OPPS. While most hospital outpatient services are payable under the OPPS, section 1833(t)(1)(B)(iv) of the Act excluded payment for ambulance, physical and occupational therapy, and speech-language pathology services, for which payment is made under a fee schedule. Section 614 of Pub. L. 108-173 amended section 1833(t)(1)(B)(iv) of the Act to exclude OPPS payment for screening and diagnostic mammography services. The Secretary exercised the broad authority granted under the statute to exclude from the OPPS those services that are paid under fee schedules or other payment systems. Such excluded services include, for example, the professional services of physicians and nonphysician practitioners paid under the Medicare Physician Fee Schedule (MPFS); laboratory services paid under the clinical diagnostic laboratory fee schedule; services for beneficiaries with end-stage renal disease (ESRD) that are paid under the ESRD composite rate; and services and procedures that require an inpatient stay that are paid under the hospital inpatient prospective payment system (IPPS). We set forth the services that are excluded from payment under the OPPS in § 419.22 of the regulations.

Under § 419.20 of the regulations, we specify the types of hospitals and entities that are excluded from payment under the OPPS. These excluded entities include Maryland hospitals, but only for services that are paid under a cost containment waiver in accordance with section 1814(b)(3) of the Act; critical access hospitals (CAHs); hospitals located outside of the 50 States, the District of Columbia, and Puerto Rico; and Indian Health Service hospitals.

C. Prior Rulemaking

On April 7, 2000, we published in the

Federal Register

a final rule with comment period (65 FR 18434) to implement a prospective payment system for hospital outpatient services. The hospital OPPS was first implemented for services furnished on or after August 1, 2000. Section 1833(t)(9) of the Act requires the Secretary to review certain components of the OPPS not less often than annually and to revise the groups, relative payment weights, and other adjustments to take into account changes in medical practice, changes in technology, and the addition of new services, new cost data, and other relevant information and factors. Since implementing the OPPS, we have published final rules in the

Federal Register

annually to implement statutory requirements and changes arising from our experience with this system. For a full discussion of the changes to the OPPS, we refer readers to these

Federal Register

final rules.

Interim final rule with comment period, August 3, 2000 (65 FR 47670); interim final rule with comment period, November 13, 2000 (65 FR 67798); final rule and interim final rule with comment period, November 2, 2001 (66 FR 55850 and 55857); final rule, November 30, 2001 (66 FR 59856); final rule, December 31, 2001 (66 FR 67494); final rule, March 1, 2002 (67 FR 9556); final rule, November 1, 2002 (67 FR 66718); final rule with comment period, November 7, 2003 (68 FR 63398); correction of the November 7, 2003 final rule with comment period, December 31, 2003 (68 FR 75442); interim final rule with comment period, January 6, 2004 (69 FR 820); and final rule with comment period, November 15, 2004 (69 FR 65681).

On November 15, 2004, we published in the

Federal Register

a final rule with comment period (69 FR 65681) that revised the OPPS to update the payment weights and conversion factor for services payable under the calendar year (CY) 2005 OPPS on the basis of claims data from January 1, 2003 through December 31, 2003, and to implement certain provisions of Pub. L. 108-173. In addition, we responded to public comments received on the January 6, 2004 interim final rule with comment period relating to Pub. L. 108-173 provisions that were effective January 1, 2004, and finalized those policies. Further, we responded to public comments received on the November 7, 2003 final rule with comment period pertaining to the APC assignment of HCPCS codes identified in Addendum B of that rule with the new interim (NI) comment indicators; and public comments received on the August 16, 2004 OPPS proposed rule (69 FR 50448).

Subsequent to publishing the November 15, 2004 final rule with comment period, we published a correction of final rule with comment period on December 30, 2004 (69 FR 78315). This document corrected technical errors that appeared in the November 15, 2004 final rule with

comment period. It also provided additional information about the CY 2005 wage indices for the OPPS that was not published in the November 15, 2004 final rule with comment period.

D. APC Advisory Panel

1. Authority of the APC Panel

Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of the BBRA of 1999, requires that we consult with an outside panel of experts to review the clinical integrity of the payment groups and weights under the OPPS. The Advisory Panel on Ambulatory Payment Classification (APC) Groups (the APC Panel), discussed under section I.D.2. of this preamble, fulfills this requirement. The Act further specifies that the APC Panel will act in an advisory capacity. This expert panel, which is to be composed of 15 representatives of providers subject to the OPPS (currently employed full-time, not consultants, in their respective areas of expertise), reviews and advises us about the clinical integrity of the APC groups and their weights. The APC Panel is not restricted to using our data and may use data collected or developed by organizations outside the Department in conducting its review.

2. Establishment of the APC Panel

On November 21, 2000, the Secretary originally signed the charter establishing the APC Panel. The APC Panel is technical in nature and is governed by the provisions of the Federal Advisory Committee Act (FACA), as amended (Pub. L. 92-463). Since its initial chartering, the Secretary has twice renewed the APC Panel's charter: On November 1, 2002, and on November 8, 2004. The renewed charter indicates that the APC Panel continues to be technical in nature; is governed by the provisions of the FACA with a Designated Federal Official (DEO) to oversee the day-to-day administration of the FACA requirements and to provide to the Committee Management Officer all committee reports for forwarding to the Library of Congress; may convene up to three meetings per year; and is chaired by a Federal official who also serves as a CMS medical officer.

Originally, in establishing the APC Panel, we solicited members in a notice published in the

Federal Register

on December 5, 2000 (65 FR 75943). We received applications from more than 115 individuals who nominated either colleagues or themselves. After carefully reviewing the applications, we chose 15 highly qualified individuals to serve on the APC Panel. Because of the loss of four APC Panel members due to the expiration of terms of office on March 31, 2004, we published a

Federal Register

notice on January 23, 2004 (69 FR 3370) that solicited nominations for APC Panel membership. From the 24 nominations that we received, we chose four new members. Six members' terms expired on March 31, 2005; therefore, a

Federal Register

notice was published on February 25, 2005, requesting nominations to the APC Panel. We received only 13 nominations before the nomination period closed on March 15, 2005. Therefore, we extended the deadline for nominations to May 9, 2005, and announced the extension in the

Federal Register

on April 8, 2005 (70 FR 18028). The entire APC Panel membership and information pertaining to it, including

Federal Register

notices, meeting dates, agenda topics, and meeting reports are identified on the CMS Web site:

http://www.cms.hhs.gov/faca/apc/apcmem.asp

3. APC Panel Meetings and Organizational Structure

The APC Panel first met on February 27, February 28, and March 1, 2001. Since that initial meeting, the APC Panel has held six subsequent meetings, with the last meeting taking place on February 23 and 24, 2005. (The APC Panel did not meet on February 25, 2004, as announced in the meeting notice published on December 30, 2004, (69 FR 78464).) Prior to each of these biennial meetings, we published a notice in the

Federal Register

to announce each meeting and, when necessary, to solicit and announce nominations for APC Panel membership. For a more detailed discussion about these announcements, refer to the following

Federal Register

notices: December 5, 2000 (65 FR 75943), December 14, 2001 (66 FR 64838), December 27, 2002 (67 FR 79107), July 25, 2003 (68 FR 44089), December 24, 2003 (68 FR 74621), August 5, 2004 (69 FR 47446), and December 30, 2004 (69 FR 78464).

During these meetings, the APC Panel established its operational structure that, in part, includes the use of three subcommittees to facilitate its required APC review process. Currently, the three subcommittees are the Data Subcommittee, the Observation Subcommittee, and the Packaging Subcommittee. The Data Subcommittee is responsible for studying the data issues confronting the APC Panel and for recommending viable options for resolving them. This subcommittee was initially established on April 23, 2001, as the Research Subcommittee and reestablished as the Data Subcommittee on April 13, 2004, and February 11, 2005. The Observation Subcommittee, which was established on June 24, 2003, and reestablished with new members on March 8, 2004, and February 11, 2005, reviews and makes recommendations to the APC Panel on all issues pertaining to observation services paid under the OPPS, such as coding and operational issues. The Packaging Subcommittee, which was established on March 8, 2004 and reestablished with new members on February 11, 2005, studies and makes recommendations on issues pertaining to services that are not separately payable under the OPPS but are bundled or packaged APC payments. Each of these subcommittees was established by a majority vote of the APC Panel during a scheduled APC Panel meeting. All subcommittee recommendations are discussed and voted upon by the full APC Panel.

For a detailed discussion of the APC Panel meetings, refer to the hospital OPPS final rules cited in section I.C. of this preamble. Full discussion of the recommendations resulting from the APC Panel's February 2005 meeting are included in the sections of this preamble that are specific to each recommendation.

E. Provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 To Be Implemented Beginning in CY 2006

On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Pub. L. 108-173, was enacted. Pub. L. 108-173 made changes to the Act relating to the Medicare OPPS. In the January 6, 2004 interim final rule with comment period and the November 15, 2004 final rule with comment period, we implemented provisions of Pub. L. 108-173 relating to the OPPS that were effective for CY 2004 and CY 2005, respectively. Provisions of Pub. L. 108-173 that were implemented in CY 2004 or CY 2005, and that are continuing in CY 2006, are discussed throughout this proposed rule. Moreover, in this proposed rule, we are proposing to implement the following provisions of Pub. L. 108-173 that affect the OPPS beginning in CY 2006:

1. Hold Harmless Provisions

Section 411 of Pub. L. 108-173 amended section 1833(t)(7)(D)(i) of the Act and extended the hold harmless provision for small rural hospitals having 100 or fewer beds through December 31, 2005. Section 411 of Pub. L. 108-173 further amended section 1833(t)(7) of the Act to provide that hold-harmless transitional corridor payments shall apply through December

31, 2005 to sole community hospitals (SCHs) (as defined in section 1886(d)(5)(D)(iii) of the Act) located in a rural area. In accordance with these provisions, effective January 1, 2006, we are proposing to discontinue transitional corridor payments for small rural hospitals having 100 or fewer beds and for SCHs located in a rural area.

2. Study and Authorization of Adjustment for Rural Hospitals

Section 411(b) of Pub. L. 108-173 added a new paragraph (13) to section 1833(t) of the Act to authorize an “Adjustment for Rural Hospitals”. This provision requires us to conduct a study to determine if costs incurred by hospitals located in rural areas by APCs exceed those costs incurred by hospitals located in urban areas. This provision further requires us to provide for an appropriate adjustment by January 1, 2006, if we find that the costs incurred by hospitals located in rural areas exceed those costs incurred by hospitals located in urban areas.

3. Payment for “Specified Covered Outpatient Drugs”

Section 621(a)(1) of Pub. L. 108-173 added section 1833(t)(14) to the Act that specifies payments for certain “specified covered outpatient drugs” beginning in 2006. Specifically, section 1833(t)(14)(A)(iii)(I) of the Act states that such payment shall be equal to what we determine to be the average acquisition cost for the drug, taking into account hospital acquisition cost survey data furnished by the Government Accountability Office (GAO). Section 1833(t)(14)(A)(iii)(II) of the Act further notes that if hospital acquisition cost data are not available, payment for specified covered outpatient drugs shall equal the average price for the drug established under section 1842(o), section 1847(A), or section 1847(B) of the Act as calculated and adjusted by the Secretary as necessary. Both payment approaches are subject to adjustments under section 1833(t)(14)(E) of the Act as discussed below.

4. Adjustment in Payment Rates for “Specified Covered Outpatient Drugs” for Overhead Costs

Section 621(a)(1) of Pub. L. 108-173 added section 1833(t)(14)(E) to the Act. Section 1833(t)(14)(E)(ii) of the Act authorizes us to make an adjustment to payments for “specified covered outpatient drugs” to take into account overhead and related expenses such as pharmacy services and handling costs, based on recommendations contained in a report prepared by the Medicare Payment Advisory Commission (MedPAC).

5. Budget Neutrality Adjustment

Section 621(a)(1) of Pub. L. 108-173 amended the Act by adding section 1833(t)(14)(H), which requires that additional expenditures resulting from adjustments in APC payment rates for specified covered outpatient drugs be taken into account beginning in CY 2006 and continuing in subsequent years, in establishing the OPPS conversion, weighting, and other adjustment factors.

F. CMS' Commitment to New Technologies

(If you choose to comment on issues in this section, please include the caption “Commitment to New Technologies” at the beginning of your comment.)

CMS is committed to ensuring that Medicare beneficiaries will have timely access to new medical treatments and technologies that are well-evaluated and demonstrated to be effective. We launched the Council on Technology and Innovation (CTI) to provide the Agency with improved methods for developing practical information about the clinical benefits of new medical technologies to result in faster and more efficient coverage and payment of these medical technologies. The CTI supports CMS efforts to develop better evidence on the safety, effectiveness, and cost of new and approved technologies to help promote their more effective use.

We want to provide doctors and patients with better information about the benefits of new medical treatments and/or technologies, especially compared to other treatment options. We also want beneficiaries to have access to valuable new medical innovations as quickly and efficiently as possible. We note there are a number of payment mechanisms in the OPPS and the IPPS designed to achieve appropriate payment of promising new technologies. In the OPPS, qualifying new medical devices may be paid on a cost basis by means of transitional pass-through payments, in addition to the APC payments for the procedures which utilize the devices. In addition, qualifying new services may be assigned for payment to New Technology APCs or, if appropriate, to regular clinical APCs. In the IPPS, qualifying new technologies may receive add-on payments to the standard diagnosis-related group (DRG) payments. We also note that collaborative efforts are underway to facilitate coordination between the Food and Drug Administration (FDA) and CMS with regard to streamlining the CMS coverage process by which new technologies come to the marketplace.

To promote timely access to new medical treatments and technologies, in this proposed rule we are proposing enhancements to both the OPPS pass-through payment criteria for devices as discussed in section IV.D.2. of this preamble and the qualifying process for assignment of new services to New Technology APCs or regular clinical APCs discussed in section III.C.3. of this preamble. We are proposing to make device pass-through eligibility available to a broader range of qualifying devices. We are also proposing to change the application and review process for assignment of new services to New Technology APCs to promote thoughtful review of the coding, clinical use and efficacy of new services by the wider medical community, encouraging appropriate dissemination of new technologies. These enhancements are explained in this proposed rule.

G. Summary of the Major Content of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the Medicare hospital OPPS for CY 2006. These changes would be effective for services furnished on or after January 1, 2006. The following is a summary of the major changes that we are proposing to make:

1. Proposed Updates to Payments for CY 2006

In section II. of this preamble, we set forth—

• The methodology used to recalibrate the proposed APC relative payment weights and the proposed recalibration of the relative payment weights for CY 2006.

• The proposed payment for partial hospitalization, including the proposed separate threshold for outlier payments for CMCHs.

• The proposed update to the conversion factor used to determine payment rates under the OPPS for CY 2006.

• The proposed retention of our current policy to apply the IPPS wage indices to wage adjust the APC median costs in determining the OPPS payment rate and the copayment standardized amount for CY 2006.

• The proposed update of statewide average default cost-to-charge ratios.

• Proposed changes relating to the expiring hold harmless payment provision.

• Proposed changes to payment for rural sole community hospitals for CY 2006.

• Proposed changes in the way we calculate hospital outpatient outlier payments for CY 2006.

• Calculation of the proposed national unadjusted Medicare OPPS payment.

• The proposed beneficiary copayment for OPPS services for CY 2006.

2. Proposed Ambulatory Payment Classification (APC) Group Policies

In section III. of this preamble, we discuss our proposal to establish a number of new APCs and to make changes to the assignment of HCPCS codes under a number of existing APCs based on our analyses of Medicare claims data and recommendations of the APC Panel. We also discuss in section III. of this preamble, the application of the 2 times rule and proposed exceptions to it; proposed changes for specific APCs; the proposed refinement of the New Technology cost bands; the proposed movement of procedures from the New Technology APCs; and the proposed additions of new procedure codes to the APC groups.

3. Proposed Payment Changes for Devices

In section IV. of this preamble, we discuss proposed changes to the device-dependent APCs and to the pass-through payment for three categories of devices.

4. Proposed Payment Changes for Drugs, Biologicals, and Radiopharmaceutical Agents

In section V. of this preamble, we discuss proposed changes for drugs, biologicals, radiopharmaceutical agents, and vaccines.

5. Estimate of Transitional Pass-Through Spending in CY 2006 for Drugs, Biologicals, and Devices

In section VI. of this preamble, we discuss the proposed methodology for estimating total pass-through spending and whether there should be a pro rata reduction for transitional pass-through drugs, biologicals, radiopharmacials, and categories of devices for CY 2006.

6. Proposed Brachytherapy Payment Changes

In section VII. of this preamble, we include a discussion of our proposal concerning coding and payment for the sources of brachytherapy.

7. Proposed Coding and Payment for Drug Administration

In section VIII. of this preamble, we discuss our proposed coding and payment changes for drug administration services.

8. Hospital Coding for Evaluation and Management (E/M) Services

In section IX. of this preamble, we include a discussion of our proposal for developing the coding guidelines for evaluation and management services.

9. Proposed Payment for Blood and Blood Products

In section X. of this preamble, we discuss our proposed payment changes for blood and blood products.

10. Proposed Payment for Observation Services

In section XI. of this preamble, we discuss our proposed criteria and coding changes for separately payable observation services.

11. Procedures That Will Be Paid Only as Inpatient Services

In section XII. of this preamble, we discuss the procedures that we are proposing to remove from the inpatient list and assign to APCs.

12. Proposed Indicator Assignments

In section XIII. of this preamble, we discuss the proposed changes to the list of status indicators assigned to APCs and present our proposed comment indicators for the CY 2006 OPPS final rule.

13. Proposed Nonrecurring Policy Changes

In section XIV. of this preamble, we discuss proposed changes in payments for multiple diagnostic imaging procedures and in the interrupted procedures payment policies.

14. OPPS Policy and Payment Recommendations

In section XV. of this preamble, we address recommendations made by MedPAC, the APC Panel, and the GAO regarding the OPPS for CY 2006.

15. Physician Oversight in Critical Access Hospitals

In section XVI. of this preamble, we address physician oversight for services provided by nonphysician practitioners such as physician assistants, nurse practitioners, and clinical nurse specialists in critical access hospitals (CAHs).

II. Proposed Updates Affecting Payments for CY 2006

A. Recalibration of APC Relative Weights for CY 2006

(If you choose to comment on the issues in this section, please include the caption “APC Relative Weights” at the beginning of your comment.)

1. Database Construction

a. Database Source and Methodology

Section 1833(t)(9)(A) of the Act requires that the Secretary review and revise the relative payment weights for APCs at least annually. In the April 7, 2000 OPPS final rule (65 FR 18482), we explained in detail how we calculated the relative payment weights that were implemented on August 1, 2000, for each APC group. Except for some reweighting due to a small number of APC changes, these relative payment weights continued to be in effect for CY 2001. This policy is discussed in the November 13, 2000 interim final rule (65 FR 67824 through 67827).

We are proposing to use the same basic methodology that we described in the April 7, 2000 final rule to recalibrate the APC relative payment weights for services furnished on or after January 1, 2006, and before January 1, 2007. That is, we would recalibrate the relative payment weights for each APC based on claims and cost report data for outpatient services. We are proposing to use the most recent available data to construct the database for calculating APC group weights. For the purpose of recalibrating APC relative payment weights for CY 2006, we used approximately 127 million final action claims for hospital OPD services furnished on or after January 1, 2004, and before January 1, 2005. Of the 127 million final action claims for services provided in hospital outpatient settings, 102 million claims were of the type of bill potentially appropriate for use in setting rates for OPPS services (but did not necessarily contain services payable under the OPPS). Of the 102 million claims, we were able to use 49 million whole claims to set the proposed OPPS APC relative weights for CY 2006 OPPS. From the 49 million whole claims, we created 81 million single records, of which 50 million were “pseudo” single claims (created from multiple procedure claims using the process we discuss in this section).

The proposed APC relative weights and payments in Addenda A and B to this proposed rule were calculated using claims from this period that had been processed before January 1, 2005. We selected claims for services paid under the OPPS and matched these claims to the most recent cost report filed by the individual hospitals represented in our claims data. We are proposing that the APC relative payment weights for CY 2006 under the OPPS would continue to be based on the median hospital costs for services in the APC groups. For the CY 2006 OPPS final rule, we are proposing to base APC median costs on

claims for services furnished in CY 2004 and processed before June 30, 2005.

b. Proposed Use of Single and Multiple Procedure Claims

For CY 2006, we are proposing to continue to use single procedure claims to set the medians on which the APC relative payment weights would be based. As noted in the November 15, 2004 final rule with comment period, we have received many requests asking that we ensure that the data from claims that contain charges for multiple procedures are included in the data from which we calculate the relative payment weights (69 FR 65730 through 65731). Requesters believe that relying solely on single procedure claims to recalibrate APC relative payment weights fails to take into account data for many frequently performed procedures, particularly those commonly performed in combination with other procedures. They believe that, by depending upon single procedure claims, we base relative payment weights on the least-costly services, thereby introducing downward bias to the medians on which the weights are based.

We agree that, optimally, it is desirable to use the data from as many claims as possible to recalibrate the APC relative payment weights, including those with multiple procedures. We generally use single procedure claims to set the median costs for APCs because we are, so far, unable to ensure that packaged costs can be appropriately allocated across multiple procedures performed on the same date of service. However, by bypassing specified codes that we believe do not have significant packaged costs, we are able to use more data from multiple procedure claims. In many cases this enables us to create multiple “pseudo” single claims from claims that, as submitted, contained multiple separately paid procedures on the same claim. We have used the date of service on the claims and a list of codes to be bypassed to create “pseudo” single claims from multiple procedure claims the same as we did in recalibrating the CY 2005 APC relative payment weights. We refer to these newly created single procedure claims as “pseudo” singles because they were submitted by providers as multiple procedure claims.

For CY 2003, we created “pseudo” single claims by bypassing HCPCS codes 93005 (Electrocardiogram, tracing), 71010 (Chest x-ray), and 71020 (Chest x-ray) on a submitted claim. However, we did not use claims data for the bypassed codes in the creation of the median costs for the APCs to which these three codes were assigned because the level of packaging that would have remained on the claim after we selected the bypass code was not apparent and, therefore, it was difficult to determine if the medians for these codes would be correct.

For CY 2004, we created “pseudo” single claims by bypassing these three codes and also by bypassing an additional 269 HCPCS codes in APCs. We selected these codes based on a clinical review of the services and because it was presumed that these codes had only very limited packaging and could appropriately be bypassed for the purpose of creating “pseudo” single claims. The APCs to which these codes were assigned were varied and included mammography, cardiac rehabilitation, and Level I plain film x-rays. To derive more “pseudo” single claims, we also split the claims where there were dates of service for revenue code charges on that claim that could be matched to a single procedure code on the claim on the same date.

As in CY 2003, we did not include the claims data for the bypassed codes in the creation of the APCs to which the 269 codes were assigned because, again, we had not established that such an approach was appropriate and would aid in accurately estimating the median cost for that APC. For CY 2004, from about 16.3 million otherwise unusable claims, we used about 9.5 million multiple procedure claims to create about 27 million “pseudo” single claims. For CY 2005, we created 383 bypass codes and from approximately 24 million otherwise unusable claims, we used about 18 million multiple procedure claims to create about 52 million “pseudo” single claims.

For CY 2006, we are proposing to continue using date of service matching as a tool for creation of “pseudo” single claims and to continue the use of a bypass list to create “pseudo” single claims. The process we are proposing for CY 2006 OPPS results in our being able to use some part of 90 percent of the total claims that are eligible for use in OPPS ratesetting and modeling in developing this proposed rule. This process enabled us to use, for CY 2006, 81 million single bills for ratesetting: 50 million “pseudo” singles and 31 million “natural” single bills (bills that were submitted containing only one separately payable major HCPCS code).

We are proposing to bypass the 404 codes identified in Table 1 to create new single claims and to use the line-item costs associated with the bypass codes on these claims in the creation of the median costs for the APCs into which they are assigned. Of the codes on this list, 345 were used for bypass in CY 2005. We are proposing to continue the use of the codes on the CY 2005 OPPS bypass list and expand it by adding 46 codes that, using data presented to the APC Panel at its February 2005 meeting, meet the same empirical criteria as those used in CY 2005 to create the bypass list. Our examination of the data against the criteria for inclusion on the bypass list, as discussed below for the addition of new codes, shows that the empirically selected codes used for bypass for the CY 2005 OPPS generally continue to meet the criteria or come very close to meeting the criteria, and we have received no comments against bypassing them.

To facilitate comment, Table 1 indicates the list of codes we are proposing to bypass for creation of “pseudo” singles for CY 2006 OPPS and indicates those used in the CY 2005 OPPS for bypass and those proposed to be added for the CY 2006 OPPS. Bypass codes shown in Table 1 with an asterisk indicate the HCPCs codes we are proposing to add to the list for the CY 2006 OPPS. The criteria we are proposing to use to determine the additional codes to add to the CY 2005 OPPS bypass list in order to create the bypass list for CY 2006 OPPS are discussed below.

The following empirical criteria were developed by reviewing the frequency and magnitude of packaging in the single claims for payable codes other than drugs and biologicals. We assumed that the representation of packaging on the single claims for any given code is comparable to packaging for that code in the multiple claims:

• There were 100 or more single claims for the code. This number of single claims ensured that observed outcomes were sufficiently representative of packaging that might occur in the multiple claims.

• Five percent or fewer of the single claims for the code had packaged costs on that single claim for the code. This criterion results in limiting the amount of packaging being redistributed to the payable procedure remaining on the claim after the bypass code is removed and ensures that the costs associated with the bypass code represent the cost of the bypassed service.

• The median cost of packaging observed in the single claim was equal to or less than $50. This limits the amount of error in redistributed costs.

• The code is not a code for an unlisted service.

We also added to the bypass list three codes (CPT codes 51701, 51702, and 51703 for bladder catheterization) which do not meet these criteria. These

codes have been packaged and have never been paid separately. For that reason, when these were the only services provided to the beneficiary, no payment was made to the hospital. The APC Panel's packaging subcommittee recommends that we make separate payment when they are the only service on the claim. See section II.A.4. of this preamble for further discussion of our proposal to pay them separately. We are proposing to add them to the bypass list because changing them from packaged to separately paid would result in the reduction of the number of single bills on which we could base median costs for other major separately paid procedures which are billed on the same claim with these procedure codes. Single bills which contain other procedures would become multiple procedure claims when these bladder catheterization codes were converted from packaged to separately paid status.

We examined the packaging on the single procedure claims in the CY 2004 data used for this proposed rule for these codes. We found that none of these codes met the empirical standards for the bypass list. However, we believe that when these services are performed on the same date as another separately paid procedure, any packaging that appears on the claim would appropriately be associated with the other procedures and not with these codes. Therefore, we believe that bypassing them does not adversely affect the medians for other procedures. Moreover, future separate payment for these codes does not harm the hospitals that furnish these services, in view of the historical absence of separate payment for them under the OPPS in the past. Hence, we propose to pay separately for these codes and to add them to the bypass list for the CY 2006 OPPS.

We specifically invite public comment on the “pseudo” single process, including the bypass list and the criteria.

Table 1.—Proposed CY 2006 HCPCS Bypass Codes for Creating “Pseudo” Single Claims for Calculating Median Costs

HCPCS code

Short description

Status

indicator

11056*

Trim skin lesions, 2 to 4

11057*

Trim skin lesions, over 4

11719

Trim nail(s)

11720

Debride nail, 1-5

11721

Debride nail, 6 or more

17003*

Destroy lesions, 2-14

31231*

Nasal endoscopy, dx

31579

Diagnostic laryngoscopy

51701*

Insert bladder catheter

51702*

Insert temp bladder catheter

51703*

Insert bladder catheter, complex

51798*

Us urine capacity measure

54240

Penis study

67820*

Revise eyelashes

70030*

X-ray eye for foreign body

70100

X-ray exam of jaw

70110

X-ray exam of jaw

70130

X-ray exam of mastoids

70140

X-ray exam of facial bones

70150

X-ray exam of facial bones

70160

X-ray exam of nasal bones

70200

X-ray exam of eye sockets

70210

X-ray exam of sinuses

70220

X-ray exam of sinuses

70250

X-ray exam of skull

70260

X-ray exam of skull

70328

X-ray exam of jaw joint

70330

X-ray exam of jaw joints

70336*

Magnetic image, jaw joint

70355

Panoramic x-ray of jaws

70360

X-ray exam of neck

70370*

Throat x-ray & fluoroscopy

70371

Speech evaluation, complex

70450

Ct head/brain w/o dye

70480

Ct orbit/ear/fossa w/o dye

70486

Ct maxillofacial w/o dye

70544

Mr angiography head w/o dye

70551*

Mri brain w/o dye

71010

Chest x-ray

71015

Chest x-ray

71020

Chest x-ray

71021

Chest x-ray

71022

Chest x-ray

71023*

Chest x-ray and fluoroscopy

71030

Chest x-ray

71034

Chest x-ray and fluoroscopy

71090

X-ray & pacemaker insertion

71100

X-ray exam of ribs

71101

X-ray exam of ribs/chest

71110

X-ray exam of ribs

71111

X-ray exam of ribs/chest

71120

X-ray exam of breastbone

71130

X-ray exam of breastbone

71250

Ct thorax w/o dye

72040

X-ray exam of neck spine

72050

X-ray exam of neck spine

72052

X-ray exam of neck spine

72069*

X-ray exam of trunk spine

72070

X-ray exam of thoracic spine

72072

X-ray exam of thoracic spine

72074

X-ray exam of thoracic spine

72080

X-ray exam of trunk spine

72090

X-ray exam of trunk spine

72100

X-ray exam of lower spine

72110

X-ray exam of lower spine

72114

X-ray exam of lower spine

72120

X-ray exam of lower spine

72125

Ct neck spine w/o dye

72128*

Ct chest spine w/o dye

72141

Mri neck spine w/o dye

72146

Mri chest spine w/o dye

72148

Mri lumbar spine w/o dye

72170

X-ray exam of pelvis

72190

X-ray exam of pelvis

72192

Ct pelvis w/o dye

72220

X-ray exam of tailbone

73000

X-ray exam of collar bone

73010

X-ray exam of shoulder blade

73020

X-ray exam of shoulder

73030

X-ray exam of shoulder

73050

X-ray exam of shoulders

73060

X-ray exam of humerus

73070

X-ray exam of elbow

73080

X-ray exam of elbow

73090

X-ray exam of forearm

73100

X-ray exam of wrist

73110

X-ray exam of wrist

73120

X-ray exam of hand

73130

X-ray exam of hand

73140

X-ray exam of finger(s)

73218

Mri upper extremity w/o dye

73221

Mri joint upr extrem w/o dye

73510

X-ray exam of hip

73520

X-ray exam of hips

73540

X-ray exam of pelvis & hips

73550

X-ray exam of thigh

73560

X-ray exam of knee, 1 or 2

73562

X-ray exam of knee, 3

73564

X-ray exam, knee, 4 or more

73565

X-ray exam of knees

73590

X-ray exam of lower leg

73600

X-ray exam of ankle

73610

X-ray exam of ankle

73620

X-ray exam of foot

73630

X-ray exam of foot

73650

X-ray exam of heel

73660

X-ray exam of toe(s)

73700

Ct lower extremity w/o dye

73718*

Mri lower extremity w/o dye

73721

Mri jnt of lwr extre w/o dye

74000

X-ray exam of abdomen

74010*

X-ray exam of abdomen

74210

Contrst x-ray exam of throat

74220

Contrast x-ray, esophagus

74230

Cine/vid x-ray, throat/esoph

74235

Remove esophagus obstruction

74240

X-ray exam, upper gi tract

74245

X-ray exam, upper gi tract

74246

Contrst x-ray uppr gi tract

74247

Contrst x-ray uppr gi tract

74249

Contrst x-ray uppr gi tract

74250

X-ray exam of small bowel

74300

X-ray bile ducts/pancreas

74301

X-rays at surgery add-on

74305

X-ray bile ducts/pancreas

74327

X-ray bile stone removal

74340

X-ray guide for GI tube

74350

X-ray guide, stomach tube

74355

X-ray guide, intestinal tube

74360

X-ray guide, GI dilation

74363

X-ray, bile duct dilation

74475

X-ray control, cath insert

74480

X-ray control, cath insert

74485

X-ray guide, GU dilation

74742

X-ray, fallopian tube

75894

X-rays, transcath therapy

75898

Follow-up angiography

75901

Remove cva device obstruct

75902

Remove cva lumen obstruct

75945

Intravascular us

75946

Intravascular us add-on

75960

Transcatheter intro, stent

75961

Retrieval, broken catheter

75962

Repair arterial blockage

75964

Repair artery blockage, each

75966

Repair arterial blockage

75968

Repair artery blockage, each

75970

Vascular biopsy

75978

Repair venous blockage

75980

Contrast xray exam bile duct

75982

Contrast xray exam bile duct

75984

Xray control catheter change

75992

Atherectomy, x-ray exam

75993

Atherectomy, x-ray exam

75994

Atherectomy, x-ray exam

75995

Atherectomy, x-ray exam

75996

Atherectomy, x-ray exam

76012

Percut vertebroplasty fluor

76013

Percut vertebroplasty, ct

76040

X-rays, bone evaluation

76061

X-rays, bone survey

76062

X-rays, bone survey

76066

Joint survey, single view

76070*

CT scan, bone density study

76075

Dexa, axial skeleton study

76076

Dexa, peripheral study

76078

Radiographic absorptiometry

76095

Stereotactic breast biopsy

76096

X-ray of needle wire, breast

76100

X-ray exam of body section

76101

Complex body section x-ray

76360

Ct scan for needle biopsy

76380

CAT scan follow-up study

76393

Mr guidance for needle place

76511

Echo exam of eye

76512

Echo exam of eye

76516

Echo exam of eye

76519

Echo exam of eye

76536

Us exam of head and neck

76645

Us exam, breast(s)

76700

Us exam, abdom, complete

76705

Echo exam of abdomen

76770

Us exam abdo back wall, comp

76775

Us exam abdo back wall, lim

76778*

Us exam kidney transplant

76801*

Ob us < 14 wks, single fetus

76811*

Ob us, detailed, sngl fetus

76817*

Transvaginal us, obstetric

76830

Transvaginal us, non-ob

76856

Us exam, pelvic, complete

76857

Us exam, pelvic, limited

76870

Us exam, scrotum

76880

Us exam, extremity

76941

Echo guide for transfusion

76945

Echo guide, villus sampling

76946

Echo guide for amniocentesis

76948

Echo guide, ova aspiration

76950*

Echo guidance radiotherapy

76970*

Ultrasound exam follow-up

76977

Us bone density measure

77280

Set radiation therapy field

77285

Set radiation therapy field

77295*

Set radiation therapy field

77300

Radiation therapy dose plan

77301

Radiotherapy dose plan, imrt

77315

Teletx isodose plan complex

77326

Radiation therapy dose plan

77327

Brachytx isodose calc interm

77328

Brachytx isodose plan compl

77331

Special radiation dosimetry

77332

Radiation treatment aid(s)

77333

Radiation treatment aid(s)

77334

Radiation treatment aid(s)

77336

Radiation physics consult

77370

Radiation physics consult

77402*

Radiation treatment delivery

77403

Radiation treatment delivery

77404*

Radiation treatment delivery

77408*

Radiation treatment delivery

77409

Radiation treatment delivery

77411

Radiation treatment delivery

77412

Radiation treatment delivery

77413

Radiation treatment delivery

77414

Radiation treatment delivery

77416

Radiation treatment delivery

77417

Radiology port film(s)

77418

Radiation tx delivery, imrt

77470

Special radiation treatment

78350

Bone mineral, single photon

80502

Lab pathology consultation

85060

Blood smear interpretation

86585

TB tine test

86850

RBC antibody screen

86870

RBC antibody identification

86880

Coombs test, direct

86885

Coombs test, indirect, qual

86886

Coombs test, indirect, titer

86890

Autologous blood process

86900

Blood typing, ABO

86901

Blood typing, Rh (D)

86905

Blood typing, RBC antigens

86906

Blood typing, Rh phenotype

86930

Frozen blood prep

86970

RBC pretreatment

88104

Cytopathology, fluids

88106

Cytopathology, fluids

88107

Cytopathology, fluids

88108

Cytopath, concentrate tech

88160

Cytopath smear, other source

88161

Cytopath smear, other source

88172

Cytopathology eval of fna

88182

Cell marker study

88300

Surgical path, gross

88304

Tissue exam by pathologist

88305

Tissue exam by pathologist

88311

Decalcify tissue

88312

Special stains

88313

Special stains

88321

Microslide consultation

88323

Microslide consultation

88325

Comprehensive review of data

88331

Path consult intraop, 1 bloc

88342

Immunohistochemistry

88346

Immunofluorescent study

88347

Immunofluorescent study

90801

Psy dx interview

90804*

Psytx, office, 20-30 min

90805

Psytx, off, 20-30 min w/e&m

90806

Psytx, off, 45-50 min

90807

Psytx, off, 45-50 min w/e&m

90808

Psytx, office, 75-80 min

90809

Psytx, off, 75-80, w/e&m

90810

Intac psytx, off, 20-30 min

90818

Psytx, hosp, 45-50 min

90826

Intac psytx, hosp, 45-50 min

90845

Psychoanalysis

90846

Family psytx w/o patient

90847

Family psytx w/patient

90853

Group psychotherapy

90857

Intac group psytx

90862

Medication management

92002

Eye exam, new patient

92004

Eye exam, new patient

92012

Eye exam established pat

92014

Eye exam & treatment

92020*

Special eye evaluation

92081*

Visual field examination(s)

92082

Visual field examination(s)

92083

Visual field examination(s)

92135

Opthalmic dx imaging

92136

Ophthalmic biometry

92225

Special eye exam, initial

92226

Special eye exam, subsequent

92230

Eye exam with photos

92250

Eye exam with photos

92275

Electroretinography

92285

Eye photography

92286

Internal eye photography

92520

Laryngeal function studies

92541*

Spontaneous nystagmus test

92546

Sinusoidal rotational test

92548

Posturography

92552

Pure tone audiometry, air

92553

Audiometry, air & bone

92555

Speech threshold audiometry

92556

Speech audiometry, complete

92557*

Comprehensive hearing test

92567

Tympanometry

92582

Conditioning play audiometry

92585

Auditor evoke potent, compre

92604*

Reprogram cochlear implt 7 >

93005

Electrocardiogram, tracing

93225

ECG monitor/record, 24 hrs

93226

ECG monitor/report, 24 hrs

93231

Ecg monitor/record, 24 hrs

93232

ECG monitor/report, 24 hrs

93236

ECG monitor/report, 24 hrs

93270

ECG recording

93278

ECG/signal-averaged

93303

Echo transthoracic

93307

Echo exam of heart

93320

Doppler echo exam, heart

93731

Analyze pacemaker system

93732*

Analyze pacemaker system

93733

Telephone analy, pacemaker

93734

Analyze pacemaker system

93735*

Analyze pacemaker system

93736

Telephonic analy, pacemaker

93741*

Analyze ht pace device sngl

93743

Analyze ht pace device dual

93797

Cardiac rehab

93798

Cardiac rehab/monitor

93875

Extracranial study

93880

Extracranial study

93882

Extracranial study

93886

Intracranial study

93888

Intracranial study

93922

Extremity study

93923

Extremity study

93924

Extremity study

93925

Lower extremity study

93926

Lower extremity study

93930*

Upper extremity study

93931

Upper extremity study

93965

Extremity study

93970

Extremity study

93971

Extremity study

93975

Vascular study

93976

Vascular study

93978

Vascular study

93979

Vascular study

93990

Doppler flow testing

94015

Patient recorded spirometry

95115

Immunotherapy, one injection

95117*

Immunotherapy injections

95165

Antigen therapy services

95805

Multiple sleep latency test

95806*

Sleep study, unattended

95807

Sleep study, attended

95812

Electroencephalogram (EEG)

95813

Eeg, over 1 hour

95816

Electroencephalogram (EEG)

95819

Electroencephalogram (EEG)

95822

Sleep electroencephalogram

95864

Muscle test, 4 limbs

95867*

Muscle test, head or neck

95872

Muscle test, one fiber

95900

Motor nerve conduction test

95921

Autonomic nerv function test

95925*

Somatosensory testing

95926

Somatosensory testing

95930

Visual evoked potential test

95937

Neuromuscular junction test

95950

Ambulatory eeg monitoring

95953

EEG monitoring/computer

95970*

Analyze neurostim, no prog

95972*

Analyze neurostim, complex

95974*

Cranial neurostim, complex

96000

Motion analysis, video/3d

96100

Psychological testing

96115

Neurobehavior status exam

96117*

Neuropsych test battery

96900

Ultraviolet light therapy

96910

Photochemotherapy with UV-B

96912

Photochemotherapy with UV-A

96913

Photochemotherapy, UV-A or B

98925*

Osteopathic manipulation

98940

Chiropractic manipulation

99213

Office/outpatient visit, est

99214

Office/outpatient visit, est

99241

Office consultation

99242*

Office consultation

99243

Office consultation

99244

Office consultation

99245

Office consultation

99273

Confirmatory consultation

99274

Confirmatory consultation

99275

Confirmatory consultation

D0473

Micro exam, prep & report

G0101

CA screen; pelvic/breast exam

G0127

Trim nail(s)

G0166

Extrnl counterpulse, per tx

G0175

OPPS Service, sched team conf

HCPCS

Descriptor

Q0091

Obtaining screen pap smear

HCPCS codes shown with an asterisk are bypass codes we are proposing to add to the list for CY 2006.

2. Proposed Calculation of Median Costs for CY 2006

In this section of the preamble, we discuss the use of claims to calculate the proposed OPPS payment rates for CY 2006. The hospital outpatient prospective payment page on the CMS Web site on which this proposed rule is posted provides an accounting of claims used in the development of the proposed rates:

http://www.cms.hhs.gov/providers/hopps

. The accounting of claims used in the development of the proposed rule is included on the Web site under supplemental materials for the CY 2006 proposed rule. That accounting provides additional detail regarding the number of claims derived at each stage of the process. In addition, below we discuss the files of claims that comprise the data sets that are available for purchase under a CMS data user contract. Our CMS Web site,

http://www.cms.hhs.gov/providers/hopps

, includes information about purchasing the following two OPPS data files: “OPPS Limited Data Set” and “OPPS Identifiable Data Set.”

We are proposing to use the following methodology to establish the relative weights to be used in calculating the proposed OPPS payment rates for CY 2006 shown in Addenda A and B to this proposed rule. This methodology is as follows:

We used outpatient claims for full CY 2004 to set the proposed relative weights for CY 2006. To begin the calculation of the relative weights for CY 2006, we pulled all claims for outpatient services furnished in CY 2004 from the national claims history file. This is not the population of claims paid under the OPPS, but all outpatient claims (including, for example, CAH claims, and hospital claims for clinical laboratory services for persons who are neither inpatients nor outpatients of the hospital).

We then excluded claims with condition codes 04, 20, 21, and 77. These are claims that providers submitted to Medicare knowing that no payment will be made. For example, providers submit claims with a condition code 21 to elicit an official denial notice from Medicare and document that a service is not covered. We then excluded claims for services furnished in Maryland, Guam, and the U.S. Virgin Islands because hospitals in those geographic areas are not paid under the OPPS.

We divided the remaining claims into the three groups shown below. Groups 2 and 3 comprise the 102 million claims that contain hospital bill types paid under the OPPS.

1. Claims that were not bill types 12X, 13X, 14X (hospital bill types), or 76X (CMHC bill types). Other bill types, such as ambulatory surgical centers (ASCs), bill type 83, are not paid under the OPPS and, therefore, these claims were not used to set OPPS payment.

2. Claims that were bill types 12X, 13X, or 14X (hospital bill types). These claims are hospital outpatient claims.

3. Claims that were bill type 76X (CMHC). (These claims are later combined with any claims in item 2 above with a condition code 41 to set the per diem partial hospitalization rate determined through a separate process.)

For the cost-to-charge ratio (CCR) calculation process, we used the same approach as that used in developing the final APC rates for CY 2005 (69 FR 65744). That is, we first limited the population of cost reports to only those for hospitals that filed outpatient claims in CY 2004 before determining whether the CCRs for such hospitals were valid. This initial limitation changed the distribution of CCRs used during the trimming process discussed below.

We then calculated the CCRs at a departmental level and overall for each hospital for which we had claims data. We did this using hospital-specific data from the Hospital Cost Report Information System (HCRIS). We used the most recent available cost report data, in most cases, cost reports for CY 2002 or CY 2003. We used the most recent cost report available whether submitted or settled. If the most recent available cost report was submitted but not settled, we looked at the last settled cost report to determine the ratio of submitted to settled cost, and we then adjusted the most recent available submitted but not settled cost report using that ratio. We propose to use the most recently submitted cost reports to calculate the CCRs to be used to calculate median costs for the OPPS CY 2006 final rule.

We then flagged CAHs, which are not paid under the OPPS, and hospitals with invalid CCRs. These included claims from hospitals without a CCR; those from hospitals paid an all-inclusive rate; those from hospitals with obviously erroneous CCRs (greater than 90 or less than .0001); and those from hospitals with CCRs that were identified as outliers (3 standard deviations from the geometric mean after removing error CCRs). In addition, we trimmed the CCRs at the departmental level by removing the CCRs for each cost center as outliers if they exceeded +/−3 standard deviations of the geometric mean. This is the same methodology that we used in developing the final CY 2005 CCRs. For CY 2006, we are proposing to trim at the departmental CCR level to eliminate aberrant CCRs that, if found in high volume hospitals, could skew the medians. We used a four-tiered hierarchy of cost center CCRs to match a cost center to a revenue code with the top tier being the most common cost center and the last tier being the default CCR. If a hospital's departmental CCR was deleted by trimming, we set the departmental CCR for that cost center to “missing,” so that another departmental CCR in the revenue center hierarchy could apply. If no other departmental CCR could apply to the revenue code on the claim, we used the hospital's overall CCR for the revenue code in question. The hierarchy of CCRs is available for inspection and comment at the CMS Web site:

http://www.cms.hhs.gov/providers/hopps/default.asp

We then converted the charges on the claim by applying the CCR that we believed was best suited to the revenue

code indicated on the line with the charge. Table 2 below in this preamble contains a list of the allowed revenue codes. Revenue codes not included in Table 2 are those not allowed under the OPPS because their services cannot be paid under the OPPS (for example, inpatient room and board charges) and, thus charges with those revenue codes were not packaged for creation of the OPPS median costs. If a hospital did not have a CCR that was appropriate to the revenue code reported for a line-item charge (for example, a visit reported under the clinic revenue code, but the hospital did not have a clinic cost center), we applied the hospital-specific overall CCR, except as discussed in section X. of this preamble, for calculation of costs for blood.

Thus, we applied CCRs as described above to claims with bill types 12X, 13X, or 14X, excluding all claims from CAHs and hospitals in Maryland, Guam, and the U.S. Virgin Islands, and flagged hospitals with invalid CCRs. We excluded claims from all hospitals for which CCRs were flagged as invalid.

We identified claims with condition code 41 as partial hospitalization services of CMHCs and moved them to another file. These claims were combined with the 76X claims identified previously to calculate the proposed partial hospitalization per diem rate.

We then excluded claims without a HCPCS code. We also moved claims for observation services to another file. We moved to another file claims that contained nothing but flu and pneumococcal pneumonia (“PPV”) vaccine. Influenza and PPV vaccines are paid at reasonable cost and, therefore, these claims are not used to set OPPS rates. We note that the two above mentioned separate files containing partial hospitalization claims and the observation services claims are included in the files that are available for purchase as discussed above.

We next copied line-item costs for drugs, blood, and devices (the lines stay on the claim, but are copied off onto another file) to a separate file. No claims were deleted when we copied these lines onto another file. These line-items are used to calculate the per unit median for drugs, radiopharmaceuticals, and blood and blood products. The line-item costs were also used to calculate the per administration cost of drugs, radiopharmaceuticals, and biologicals (other than blood and blood products).

We then divided the remaining claims into five groups.

Single Major Claims:

Claims with a single separately payable procedure, all of which would be used in median setting.

Multiple Major Claims:

Claims with more than one separately payable procedure or multiple units for one payable procedure. As discussed below, some of these can be used in median setting.

Single Minor Claims:

Claims with a single HCPCS code that is not separately payable. These claims may have a single packaged procedure or a drug code.

Multiple Minor Claims:

Claims with multiple HCPCS codes that are not separately payable without examining dates of service. For example, pathology codes are not used unless the pathology service is the single code on the bill or unless the pathology code is on a separate date of service from the other procedure on the claim. The multiple minor file has claims with multiple occurrences of pathology codes, with packaged costs that cannot be appropriately allocated across the multiple pathology codes. However, by matching dates of service for the code and the reported costs through the “pseudo” single creation process discussed earlier, a claim with multiple pathology codes may become several “pseudo” single claims with a unique pathology code and its associated costs on each day. These “pseudo” singles for the pathology codes would then be considered a separately payable code and would be used the same as claims in the single major claim file.

Non-OPPS Claims:

Claims that contain no services payable under the OPPS. These claims are excluded from the files used for the OPPS. Non-OPPS claims have codes paid under other fee schedules, for example, durable medical equipment or clinical laboratory.

We note that the claims listed in numbers 1, 2, and 4 above are included in the data files that can be purchased as described above.

We set aside the single minor claims and the non-OPPS claims (numbers 3 and 5 above) because we did not use either in calculating median cost. We then examined the multiple major and multiple minor claims (numbers 2 and 4 above) to determine if we could convert any of them to single major claims using the process described previously. We first grouped items on the claims by date of service. If each major procedure on the claim had a different date of service and if the line-items for packaged HCPCS and packaged revenue codes had dates of service, we split the claim into multiple “pseudo” single claims based on the date of service.

After those single claims were created, we used the list of “bypass codes” in Table 1 of this preamble to remove separately payable procedures that we determined contain limited costs or no packaged costs from a multiple procedure bill. A discussion of the creation of the list of bypass codes used for the creation of “pseudo” single claims is contained in section II.A.1.b. of this preamble.

When one of the two separately payable procedures on a multiple procedure claim was on the bypass code list, we split the claim into two single procedure claims records. The single procedure claim record that contained the bypass code did not retain packaged services. The single procedure claim record that contained the other separately payable procedure (but no bypass code) retained the packaged revenue code charges and the packaged HCPCS charges. This enables us to use a claim that would otherwise be a multiple procedure claim and could not be used.

We excluded those claims that we were not able to convert to singles even after applying both of the techniques for creation of “pseudo” singles. We then packaged the costs of packaged HCPCS codes (codes with status indicator “N” listed in Addendum B to this proposed rule) and packaged revenue codes into the cost of the single major procedure remaining on the claim. The list of packaged revenue codes is shown in Table 2 below.

After removing claims for hospitals with error CCRs, claims without HCPCS codes, claims for immunizations not covered under the OPPS, and claims for services not paid under the OPPS, 55 million claims were left. Of these 55 million claims, we were able to use some portion of 49 million whole claims (90 percent of the potentially usable claims) to create the 81 million single and “pseudo” single claims for use in the CY 2006 median payment ratesetting.

We also excluded (1) claims that had zero costs after summing all costs on the claim; (2) claims for which CMS lacked an appropriate provider wage index; and (3) claims containing token charges (charges of less than $1.01) or for which intermediary systems had allocated charges as if the charges were submitted on the claim. We are proposing to delete claims containing token charges. We do not believe that a charge of less than $1.01 would yield a cost that would be valid to set weights for a significant separately paid service. Moreover, effective for services furnished on or after July 1, 2004, the OCE assigns payment flag number 3 to claims on which hospitals submitted token charges for a service with status

indicator “S” or “T” (a major separately paid service under OPPS) for which the intermediary is required to allocate the sum of charges for services with a status indicator equaling “S” or “T” based on the weight for the APC to which each code is assigned. We do not believe that these charges, which were token charges as submitted by the hospital, are valid reflections of hospital resource and that they should not be used to set median costs. Therefore, we are proposing to delete these claims.

For the remaining claims, we then wage adjusted 60 percent of the cost of the claim (which we have previously determined to be the labor-related portion), as has been our policy since the initial implementation of the OPPS, to adjust for geographic variation in labor-related costs. We made this adjustment by determining the wage index that applied to the hospital that furnished the service and dividing the cost for the separately paid HCPCS code furnished by the hospital by that wage index. As has been our policy since the inception of the OPPS, we are proposing to use the pre-reclassified wage indices for standardization because we believe that they better reflect the true costs of items and services in the area in which the hospital is located than the post-reclassification wage indices, and would result in the most accurate adjusted median costs.

We then excluded claims that were outside 3 standard deviations from the geometric mean cost for each HCPCS code. We used the remaining claims to calculate median costs for each separately payable HCPCS code; first, to determine the applicability of the “2 times” rule, and second, to determine APC medians based on the claims containing the HCPCS codes assigned to each APC. As stated previously, section 1833(t)(2) of the Act provides that, subject to certain exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the group is more than 2 times greater than the lowest median cost for an item or service within the same group (“the 2 times rule”). Finally, we reviewed the medians and reassigned HCPCS codes to different APCs as deemed appropriate. Section III.B. of this preamble includes a discussion of the HCPCS code assignment changes that resulted from examination of the medians and for other reasons. The APC medians were recalculated after we reassigned the affected HCPCS codes.

A detailed discussion of the medians for blood and blood products is included in section X. of this preamble. A discussion of the medians for APCs that require one or more devices when the service is performed is included in section IV.A. of this preamble. A discussion of the median for observation services is included in section XI. of this preamble and a discussion of the median for partial hospitalization is included below in section II.B. of this preamble.

Table 2.—CY 2006 Proposed Packaged Services by Revenue Code

Revenue code

Description

250

PHARMACY.

251

GENERIC.

252

NONGENERIC.

254

PHARMACY INCIDENT TO OTHER DIAGNOSTIC.

255

PHARMACY INCIDENT TO RADIOLOGY.

257

NONPRESCRIPTION DRUGS.

258

IV SOLUTIONS.

259

OTHER PHARMACY.

260

IV THERAPY, GENERAL CLASS.

262

IV THERAPY/PHARMACY SERVICES.

263

SUPPLY/DELIVERY.

264

IV THERAPY/SUPPLIES.

269

OTHER IV THERAPY.

270

M&S SUPPLIES.

271

NONSTERILE SUPPLIES.

272

STERILE SUPPLIES.

274

PROSTHETIC/ORTHOTIC DEVICES.

275

PACEMAKER DRUG.

276

INTRAOCULAR LENS SOURCE DRUG.

278

OTHER IMPLANTS.

279

OTHER M&S SUPPLIES.

280

ONCOLOGY.

289

OTHER ONCOLOGY.

290

DURABLE MEDICAL EQUIPMENT.

343

DIAGNOSTIC RADIOPHARMS.

344

THERAPEUTIC RADIOPHARMS.

370

ANESTHESIA.

371

ANESTHESIA INCIDENT TO RADIOLOGY.

372

ANESTHESIA INCIDENT TO OTHER DIAGNOSTIC.

379

OTHER ANESTHESIA.

390

BLOOD STORAGE AND PROCESSING.

399

OTHER BLOOD STORAGE AND PROCESSING.

560

MEDICAL SOCIAL SERVICES.

569

OTHER MEDICAL SOCIAL SERVICES.

621

SUPPLIES INCIDENT TO RADIOLOGY.

622

SUPPLIES INCIDENT TO OTHER DIAGNOSTIC.

624

INVESTIGATIONAL DEVICE (IDE).

630

DRUGS REQUIRING SPECIFIC IDENTIFICATION, GENERAL CLASS.

631

SINGLE SOURCE.

632

MULTIPLE.

633

RESTRICTIVE PRESCRIPTION.

681

TRAUMA RESPONSE, LEVEL I.

682

TRAUMA RESPONSE, LEVEL II.

683

TRAUMA RESPONSE, LEVEL III.

684

TRAUMA RESPONSE, LEVEL IV.

689

TRAUMA RESPONSE, OTHER.

700

CAST ROOM.

709

OTHER CAST ROOM.

710

RECOVERY ROOM.

719

OTHER RECOVERY ROOM.

720

LABOR ROOM.

721

LABOR.

762

OBSERVATION ROOM.

810

ORGAN ACQUISITION.

819

OTHER ORGAN ACQUISITION.

942

EDUCATION/TRAINING.

3. Proposed Calculation of Scaled OPPS Payment Weights

Using the median APC costs discussed previously, we calculated the proposed relative payment weights for each APC for CY 2006 shown in Addenda A and B to this proposed rule. As in prior years, we scaled all the relative payment weights to APC 0601 (Mid Level Clinic Visit) because it is one of the most frequently performed services in the hospital outpatient setting. We assigned APC 0601 a relative payment weight of 1.00 and divided the median cost for each APC by the median cost for APC 0601 to derive the relative payment weight for each APC. Using CY 2004 data, the median cost for APC 0601 is $60.57 for CY 2006.

Section 1833(t)(9)(B) of the Act requires that APC reclassification and recalibration changes, wage index changes, and other adjustments be made in a manner that assures that aggregate payments under the OPPS for CY 2006 are neither greater than nor less than the aggregate payments that would have been made without the changes. To comply with this requirement concerning the APC changes, we compared aggregate payments using the CY 2005 relative weights to aggregate payments using the CY 2006 proposed relative weights. Based on this comparison, we are proposing to make an adjustment to the relative weights for purposes of budget neutrality. The unscaled relative payment weights were adjusted by .999207669 for budget neutrality. The proposed relative payment weights are listed in Addenda A and B to this proposed rule. The proposed relative payment weights incorporate the recalibration adjustments discussed in sections II.A.1. and 2.

Section 1833(t)(14)(H) of the Act, as added by section 621(a)(1) of Pub. L. 108-173, states that “Additional expenditures resulting from this paragraph shall not be taken into account in establishing the conversion factor, weighting and other adjustment factors for 2004 and 2005 under paragraph (9) but shall be taken into account for subsequent years.” Section 1833(t)(14) of the Act provides the payment rates for certain “specified covered outpatient drugs.” Therefore, the incremental cost of those specified covered outpatient drugs (as discussed in section V. of this preamble) is included in the budget neutrality calculations.

Under section 1833(t)(16)(C) of the Act, as added by section 621(b)(1) of Pub. L. 108-173, payment for devices of brachytherapy consisting of a seed or seeds (or radioactive source) is to be made at charges adjusted to cost for services furnished on or after January 1, 2004, and before January 1, 2006. As we stated in our January 6, 2004 interim final rule, charges for the brachytherapy sources will not be used in determining outlier payments and payments for these items will be excluded from budget neutrality calculations. (We provide a discussion of brachytherapy payment issues at section VII. of this proposed rule.)

4. Proposed Changes to Packaged Services

Payments for packaged services under the OPPS are bundled into the payments providers receive for separately payable services provided on the same day. Packaged services are identified by the status indicator “N.” Hospitals include charges for packaged services on their claims, and the costs associated with these packaged services are then bundled into the costs for separately payable procedures on the claims for purposes of median cost calculations. Hospitals may use CPT codes to report any packaged services that were performed, consistent with CPT coding guidelines.

As a result of requests from the public, a Packaging Subcommittee to the APC Panel was established to review all the procedural CPT codes with a status indicator of “N.”

Providers have often suggested that many packaged services could be provided alone, without any other separately payable services on the claim, and requested that these codes not be assigned status indicator “N.” The Packaging Subcommittee reviewed every code that was packaged in the CY 2004 OPPS. Based on comments we have received and their own expert judgment, the subcommittee identified a set of packaged codes that are often provided separately and subsequently reviewed utilization and median cost data for these codes. One of the main criteria utilized by the Packaging Subcommittee to determine whether a code should become unpackaged was how likely it was for the code to be billed without any other separately payable services on the claim. The Packaging Subcommittee also examined median costs from hospital claims for packaged services that were billed alone.

The Packaging Subcommittee identified areas for change for some packaged CPT codes that they believe could frequently be provided to patients as the sole service on a given date and that require significant hospital resources as determined from hospital claims data. During the February 2005 meeting, the APC Panel accepted the report of the Packaging Subcommittee and made the following recommendations:

(1) That packaged codes be reviewed by the Panel individually.

(2) That the Packaging Subcommittee continue to meet throughout the year to discuss problematic packaged codes.

(3) That CMS assign a modifier to CPT codes 36540 (Collect blood, venous device); 36600 (Withdrawal of arterial blood); and 51701 (Insertion of non-indwelling bladder catheter), for use when there are no other separately payable codes on the claim. The modifier would flag the outpatient code editor (OCE) to assign payment to the claim.

(4) That CMS maintain the current packaged status indicator for CPT code 76937 (Ultrasound guidance for vascular access).

(5) That CMS change the status indicators for CPT immunization administration codes 90471 and 90472 to allow separate payment and ensure consistency with other injection codes.

(6) That CMS gather more data on CPT code 94762 (Overnight pulse oximetry) to determine how often this code is billed without any other separately payable codes and whether it is performed more frequently alone in rural settings than other settings.

(7) No changes to the packaged status of CPT codes 77790 (radiation source handling) and 94760 and 94761 (both codes measure blood oxygen levels).

(8) That CMS provide education and consistent guidelines to providers and fiscal intermediaries on correct billing procedures for packaged codes in general and in particular for CPT codes 36540, 36600, and 51701 and the recommended modifier, if approved.

(9) That the Packaging Subcommittee review CPT codes 42550 (Injection for salivary x-ray) and 38792 (Sentinel node imaging).

(10) That CPT code 97602 (Nonselective wound care) be referred to the Physician Payment Group within CMS for evaluation of its bundled status as it relates to services provided under the OPPS and that the Physician Payment Group report its conclusions back to the APC Panel.

For CY 2006, we are proposing to maintain CPT codes 36540 (Collect blood venous device) and 36600 (Withdrawal of arterial blood) as packaged services and not adopt the APC Panel's recommendation to add a modifier. We note CPT code 36540 is also bundled under the Medicare Physician Fee Schedule (MPFS), and our data demonstrate that the service is generally billed with other separately payable services. We also have relatively few single claims for CPT code 36600, compared to the procedure's overall frequency. Both of these codes have relatively low resource utilization. As these procedures are almost always provided with other separately payable services, hospitals' payments for those other services include the costs of CPT codes 36540 and 36600.

For CY 2006, we are proposing to pay separately for CPT code 51701 (Insertion of non-indwelling bladder catheter), and to map it to APC 0340 (Minor Ancillary Procedures), with status indicator “X”, and a median cost of $38.52. The APC Panel recommended that we pay separately for this code only when there are no other separately payable services on the claim. However, we are proposing to pay separately for this code every time it is billed. We believe that it is more appropriate to make payment for each procedure rather than increase hospitals' administrative burden by requiring specific coding changes to indicate that there are no other separately payable procedures on the claim. Based on our review of the data, the cost for this procedure is not insignificant, and the volume of single and multiple claims is modest. When we reviewed related codes, including CPT code 51702 (Insertion of temporary indwelling bladder catheter, simple) and CPT code 51703 (Insertion of temporary indwelling bladder catheter, complicate), we noted that these codes also had substantial median costs and a moderate volume of single claims. Therefore, for CY 2006, we are also proposing to pay separately for CPT codes 51702 and 51703, mapping them to APC 0340 with a median cost of $38.52 and APC 0164 (Level I Urinary

and Anal Procedures) with a median cost of $71.54, respectively. CPT codes 51701, 51702, and 51703 will be placed on the bypass list, as discussed in section II.A.1.b. of this proposed rule.

For CY 2006, we are proposing to accept the APC Panel recommendation that CPT code 76937 (Ultrasound guidance for vascular access) remain packaged. We are concerned that there may be unnecessary overuse of this procedure if it is separately payable. In addition, we believe that the service would always be provided with another separately payable procedure, so its costs would be appropriately bundled with the definitive vascular access service. As stated in the CY 2005 final rule with comment period (69 FR 65697), CMS and the Packaging Subcommittee reviewed CY 2004 claims data for CPT code 76937 and determined that this code should remain packaged.

For CY 2006, see section VIII. of this preamble on drug administration regarding CPT codes 90471 and 90472.

For CY 2006, we are proposing to accept the APC Panel recommendations that CPT codes 77790 (Radiation handling), 94760 (Pulse oximetry for oxygen saturation, single determination), and 94761 (Pulse oximetry for oxygen saturation, multiple determinations) remain packaged. We believe that CPT code 77790 is integral to the provision of brachytherapy and should always be billed on the same day with brachytherapy sources and their loading, ensuring that the provider would receive appropriate payment for the radiation source handling and loading bundled with the payment for the brachytherapy service. The small number of single claims for this code in our data verifies that this code is rarely billed alone without other payable services on the claim, and those few single claims may be miscoded claims. Our data review of CPT codes 94760 and 94761 revealed that these codes have low resource utilization, and are most frequently provided with other services. Similar to CPT code 77790, there are many fewer single claims for CPT codes 94760 and 94761 than multiple procedure claims that include CPT codes 94760 and 94761. CPT codes 94760 and 94761 describe services that are very commonly performed in the hospital outpatient setting, and unpackaging these codes would likely significantly decrease the number of single claims available for use in calculating median costs for other services.

For CY 2006, we are proposing to accept the APC Panel recommendation to gather data and review CPT codes 94762, 42550, and 38792 with the Packaging Subcommittee. We will analyze single and multiple procedure claims' volumes and resource utilization data, and review these studies with the Packaging Subcommittee.

We referred CPT code 97602 (non-selective wound care) for MPFS evaluation of its bundled status as CPT code 97602 relates to services provided under the OPPS. CPT code 97602 is assigned status indicator “A” in this OPPS proposed rule, meaning that while it is no longer payable under the OPPS, it is payable under a fee schedule other than OPPS. Under the MPFS, the nonselective wound care services described by CPT code 97602 are “bundled” into the selective wound care debridement codes (CPT codes 97597 and 97598). Under the MPFS, a separate payment is never made for “bundled” services and, because of this designation, the provider does not receive separate payment for non-selective wound care described by CPT code 97602. While this code now falls under the MPFS rules, payment policy for this “bundled” service has not changed and separate payment is not made.

The APC Panel Packaging Subcommittee remains active, and additional issues and new data concerning the packaging status of codes will be shared for its consideration as information becomes available. We continue to encourage submission of common clinical scenarios involving currently packaged HCPCS codes to the Packaging Subcommittee for its ongoing review. Additional detailed suggestions for the Packaging Subcommittee should be submitted to

APCPanel@cms.hhs.gov,

with “Packaging Subcommittee” in the subject line.

B. Proposed Payment for Partial Hospitalization

(If you choose to comment on issues in this section, please include the caption “Partial Hospitalization” at the beginning of your comment.)

1. Background

Partial hospitalization is an intensive outpatient program of psychiatric services provided to patients as an alternative to inpatient psychiatric care for beneficiaries who have an acute mental illness. A partial hospitalization program (PHP) may be provided by a hospital to its outpatients or by a Medicare-certified CMHC. Section 1833(t)(1)(B)(i) of the Act provides the Secretary with the authority to designate the hospital outpatient services to be covered under the OPPS. Section 419.21(c) of the Medicare regulations that implement this provision specifies that payments under the OPPS will be made for partial hospitalization services furnished by CMHCs. Section 1883(t)(2)(C) of the Act requires that we establish relative payment weights based on median (or mean, at the election of the Secretary) hospital costs determined by 1996 claims data and data from the most recent available cost reports. Payment to providers under the OPPS for PHPs represents the provider's overhead costs associated with the program. Because a day of care is the unit that defines the structure and scheduling of partial hospitalization services, we established a per diem payment methodology for the PHP APC, effective for services furnished on or after August 1, 2000. For a detailed discussion, refer to the April 7, 2000 OPPS final rule (65 FR 18452).

2. Proposed PHP APC Update for CY 2006

To calculate the proposed CY 2006 PHP per diem payment, we used the same methodology that was used to compute the CY 2005 PHP per diem payment. For CY 2005, the per diem amount was based on 12 months of hospital and CMHC PHP claims data (for services furnished from January 1, 2003 through December 31, 2003). We used data from all hospital bills reporting condition code 41, which identifies the claim as partial hospitalization, and all bills from CMHCs because CMHCs are Medicare providers only for the purpose of providing partial hospitalization services. We used CCRs from the most recently available hospital and CMHC cost reports to convert each provider's line-item charges as reported on bills, to estimate the provider's cost for a day of PHP services. Per diem costs were then computed by summing the line-item costs on each bill and dividing by the number of days on the bill.

In a Program Memorandum issued on January 17, 2003 (Transmittal A-03-004), we directed fiscal intermediaries to recalculate hospital and CMHC CCRs using the most recently settled cost reports by April 30, 2003. Following the initial update of CCRs, fiscal intermediaries were further instructed to continue to update a provider's CCR and enter revised CCRs into the outpatient provider specific file. Therefore, for CMHCs, we use CCRs from the outpatient provider specific file.

Historically, the median per diem cost for CMHCs has greatly exceeded the median per diem cost for hospital-based PHPs and has fluctuated significantly

from year to year while the median per diem cost for hospital-based PHPs has remained relatively constant ($200-$225). Medicare providers are required to maintain uniform charges for all payers. We believe that hospitals have multiple payers and are far less likely to significantly change their charges for PHP from year to year. However, many CMHCs have indicated that Medicare is their only payer. As a result, we believe that these providers may have increased and decreased their charges in response to Medicare payment policies. As discussed in more detail in the next section and in the final rule establishing the CY 2004 OPPS (68 FR 63470), we believe that some CMHCs manipulated their charges in order to inappropriately receive outlier payments.

In the CY 2003 update, the difference in median per diem cost for CMHCs and hospital-based PHPs was so great, $685 for CMHCs and $225 for hospital-based PHPs, that we applied an adjustment factor of .583 to CMHC costs to account for the difference between “as submitted” and “final settled” cost reports. By doing so, the CMHC median per diem cost was reduced to $384, resulting in a combined hospital-based and CMHC PHP median per diem cost of $273. As with all APCs in the OPPS, the median cost for each APC was scaled to be relative to the cost of a mid-level office visit and the conversion factor was applied. The resulting per diem rate for PHP for CY 2003 was $240.03.

In the CY 2004 OPPS update, the median per diem cost for CMHCs grew to $1038, while the median per diem cost for hospital-based PHPs was again $225. After applying the .583 adjustment factor to the median CMHC per diem cost, the median CMHC per diem cost was $605. As the CMHC median per diem cost exceeded the average per diem cost of inpatient psychiatric care, we proposed a per diem rate for CY 2004 based solely on hospital-based PHP data. The proposed PHP per diem for CY 2004, after scaling, was $208.95. However, by the time we published the OPPS final rule for CY 2004, we had received updated CCRs for CMHCs. Using the updated CCRs significantly lowered the CMHC median per diem cost to $440. As a result, we determined that the higher per diem cost for CMHCs was not due to the difference between “as submitted” and “final settled” cost reports, but were the result of excessive increases in charges which may have been done in order to receive higher outlier payments. Therefore, in calculating the PHP median per diem cost for CY 2004, we did not apply the .583 adjustment factor to CMHC costs to compute the PHP APC. Using the updated CCRs for CMHCs, the combined hospital-based and CMHC median per diem cost for PHP was $303. After scaling, we established the CY 2004 PHP APC of $286.82.

Then, in the CY 2005 OPPS update, the CMHC median per diem cost was $310 and the hospital-based PHP median per diem cost was $215. No adjustments were determined to be necessary and, after scaling, the combined median per diem cost of $289 was reduced to $281.33. We believed that the reduction in the CMHC median per diem cost indicated that the use of updated CCRs had accounted for the previous increase in CMHC charges, and represented a more accurate estimate of CMHC per diem costs for PHP.

For CY 2006, we analyzed 12 months of data for hospital and CMHC PHP claims for services furnished between January 1, 2004, and December 31, 2004. The data indicated that the median per diem cost for CMHCs had dropped to $143, while the median per diem cost for hospital-based PHPs was $209. It appears that CMHCs significantly reduced their charges in CY 2004. The average charge per day for CMHCs in CY 2003 was $1,184 and the average cost per day was $335. In CY 2004, the CMHC average charge per day dropped to $765 and the average cost per day was $167. We have determined that a combination of lower charges and slightly lower CCRs for CMHCs resulted in a significant decline in the CMHC median per diem cost.

Following the methodology used for the CY 2005 OPPS update, the combined hospital-based and CMHC median per diem cost would be $149, a decrease of 48 percent compared to the CY 2005 combined median per diem amount. We believe that after scaling this amount to the cost of a mid-level office visit, the resulting APC rate would be too low to cover the per diem cost for all PHPs.

We are considering an alternative update methodology for the PHP APC for CY 2006 that would mitigate this drastic reduction in payment for PHP. One alternative would be to base the PHP APC on hospital-based PHP data alone. The median per diem cost of hospital-based PHPs has remained in the $200-225 range over the last 5 years, while the median per diem cost for CMHC PHPs has fluctuated significantly from a high of $1,037 to a low of $143. Under this alternative, we would use $209, the median per diem cost for hospital-based PHPs during CY 2004 to establish the PHP APC for CY 2006. However, we believe using this amount would also result in an unacceptable drop in Medicare payments for all PHPs in CY 2006 compared to payments in CY 2005.

Another alternative we are considering is to apply a different trimming methodology to CMHC costs in an effort to eliminate the effect of data for those CMHCs that appeared to have excessively increased their charges in order to receive outlier payments. We compared CMHC per diem costs in CY 2003 to CMHC per diem costs in CY 2004 and determined the percentage change. Initially, we trimmed CMHCs claims where the CMHC's per diem costs changed by 50 percent or more from CY 2003 to CY 2004. After combining the remaining CMHC claims with the hospital-based PHP claims, we calculated a median per diem cost of $160.75. However, this approach did not eliminate the data for all of the CMHCs with unreasonable per diem costs. We then analyzed the resulting median per diem cost if we trimmed CMHC claims where the difference in CMHC per diem costs from 2003 to 2004 was 25 percent. This trimming approach resulted in a combined CMHC and hospital-based PHP median per diem cost of $176. We also trimmed the CMHC claims from the CY 2003 data to see how trimming aberrant data would affect the combined hospital/CMHC median per diem cost. We found that trimming the claims from the CMHCs with a 25 percent difference in per diem cost from CY 2003 to CY 2004 reduced the $289 median per diem cost to $218.

We believe it is important to eliminate aberrant data and we believe trimming certain CMHC data would provide an incentive for CMHCs to stabilize their charges so that we could use their data in future updates of the PHP APC. However, we believe that the trimming methods described above would also result in an unacceptably large decrease in payment. In addition, the trimming method we used was based on percentage change in cost per day, and may not have identified all the CMHCs that may have manipulated their charges in order to receive more outlier payments, for example, CMHCs with high charges and no reduction in charges compared to CY 2003.

Although we prefer to use both CMHC and hospital data to establish the PHP APC, we continue to be concerned about the volatility of the CMHC data. The analyses we have conducted seem to indicate that eliminating aberrant CMHC data results in a median per diem cost more in line with hospital data. We will continue to analyze the CMHC data in developing payment rates, however, if the data continues to

be unstable, we may use only hospital data in the future.

We are considering an approach that would lessen the PHP payment reduction for CY 2006, yet, ensure an adequate payment amount and continue to ensure access to the partial hospitalization benefit for Medicare beneficiaries. For CY 2006, we are proposing to apply a 15-percent reduction in the combined hospital-based and CMHC median per diem cost that was used to establish the CY 2005 PHP APC. That amount would then be scaled to be relative to the cost of a mid-level office visit to establish the PHP APC for CY 2006. We believe a reduction in the CY 2005 median per diem cost would strike an appropriate balance between using the best available data and providing adequate payment for a program that often spans 5-6 hours a day. We believe 15 percent is an appropriate reduction because it recognizes decreases in median per diem costs in both the hospital data and the CMHC data, and also reduces the risk of any adverse impact on access to these services that might result from a large single-year rate reduction. However, we would propose that the reduction in payments for PHP be a transitional measure, and will continue to monitor CMHC costs and charges for these services and work with CMHCs to improve their reporting so that payments can be calculated based on better empirical data, consistent with the approach we have used to calculate payments in other areas of the OPPS.

To apply the methodology, we would reduce $289 (the CY 2005 combined hospital-based and CMHC median per diem cost) by 15 percent, resulting in a combined median per diem cost of $245.65. After scaling, we are proposing the resulting APC amount for PHP of $240.51 for CY 2006, of which $48.10 is the beneficiary's coinsurance. We will continue to analyze the data to determine whether there is a more targeted approach that would allow use of the CMHC and hospital PHP claims data to establish the final PHP rate for CY 2006.

3. Proposed Separate Threshold for Outlier Payments to CMHCs

In the November 7, 2003 final rule with comment period (68 FR 63469), we indicated that, given the difference in PHP charges between hospitals and CMHCs, we did not believe it was appropriate to make outlier payments to CMHCs using the outlier percentage target amount and threshold established for hospitals. There was a significant difference in the amount of outlier payments made to hospitals and CMHCs for PHP. Further analysis indicated the use of OPPS outlier payments for CMHCs was contrary to the intent of the general OPPS outlier policy. Therefore, for CYs 2004 and 2005, we established a separate outlier threshold for CMHCs. We designated a portion of the estimated 2.0 percent outlier target amount specifically for CMHCs, consistent with the percentage of projected payments to CMHCs under the OPPS in each of those years, excluding outlier payments.

As stated in the November 15, 2004 final rule with comment period, CMHCs were projected to receive 0.6 percent of the estimated total OPPS payments in CY 2005 (69 FR 65848). The CY 2005 CMHC outlier threshold is met when the cost of furnishing services by a CMHC exceeds 3.5 times the PHP APC payment amount. The current outlier payment percentage is 50 percent of the amount of costs in excess of the threshold.

CMS and the Office of the Inspector General are continuing to monitor the excessive outlier payments to CMHCs. As previously stated in section II.B.2. above, we used CY 2004 claims data to calculate the proposed CY 2006 per diem payment. These data show the effect of the separate outlier threshold for CMHCs that was effective January 1, 2004. During CY 2004, the separate outlier threshold for CMHCs resulted in $1.8 million in outlier payments to CMHCs, within the 2.0 percent of total OPPS payments identified for CMHCs. In CY 2003, more than $30 million was paid to CMHCs in outlier payments. We believe this difference in outlier payments indicates that the separate outlier threshold for CMHCs has been successful in keeping outlier payments to CMHCs in line with the percentage of OPPS payments made to CMHCs.

As noted in section II.H. of this preamble, for CY 2006, we are proposing to set the target for hospital outpatient outlier payments at 1.0 percent of total OPPS payments. We are also proposing to allocate a portion of that 1.0 percent, 0.006 percent (or 0.006 percent of total OPPS payments), to CMHCs for PHP services. As discussed in section II.G. below, we are proposing a dollar threshold in addition to an APC multiplier threshold for hospital OPPS outlier payments. However, because PHP is the only APC for which CMHCs may receive payment under the OPPS, we would not expect to redirect outlier payments by imposing a dollar threshold. Therefore, we are not proposing a dollar threshold for CMHC outliers. We are proposing to set the outlier threshold for CMHCs for CY 2006 at 3.45 percent times the APC payment amount and the CY 2006 outlier payment percentage applicable to costs in excess of the threshold at 50 percent. As we did with the hospital outlier threshold, we used hospital charge inflation factor to inflate charges to CY 2006.

C. Proposed Conversion Factor Update for CY 2006

(If you choose to comment on issues in this section, please include the caption “Conversion Factor” at the beginning of your comment.)

Section 1833(t)(3)(C)(ii) of the Act requires us to update the conversion factor used to determine payment rates under the OPPS on an annual basis. Section 1833(t)(3)(C)(iv) of the Act provides that, for CY 2006, the update is equal to the hospital inpatient market basket percentage increase applicable to hospital discharges under section 1886(b)(3)(B)(iii) of the Act.

The forecast of the hospital market basket increase for FY 2006 published in the IPPS proposed rule on May 4, 2005 is 3.2 percent (70 FR 23384). To set the OPPS proposed conversion factor for CY 2006, we increased the CY 2005 conversion factor of $56.983, as specified in the November 15, 2004 final rule with comment period (69 FR 65842), by 3.2 percent.

In accordance with section 1833(t)(9)(B) of the Act, we further adjusted the conversion factor for CY 2005 to ensure that the revisions we are making to our updates by means of the wage index are made on a budget-neutral basis. We calculated a proposed budget neutrality factor of 1.002015212 for wage index changes by comparing total payments from our simulation model using the FY 2006 IPPS proposed wage index values to those payments using the current (FY 2005) IPPS wage index values. In addition, to accommodate the proposed rural adjustment discussed in section II.G. of this preamble, we calculated a proposed budget neutrality factor of 0.99652023 by comparing payments with the rural adjustment to those without. For CY 2006, allowed pass-through payments are estimated to decrease to 0.05 percent of total OPPS payments, down from 0.1 percent in CY 2005. The proposed conversion factor is also adjusted by the difference in estimated pass-through payments of 0.05 percent. Finally, decreasing proposed payments for outliers to 1.0 percent of total payments returned 1.0 percent to the conversion factor.

The proposed market basket increase update factor of 3.2 percent for CY 2006, the required wage index budget neutrality adjustment of approximately 1.002015212, the return of 1.0 percent

in total payments from a reduced outlier target, the 0.05 percent adjustment to the pass-through estimate, and the adjustment for the proposed rural payment adjustment of 0.99652023 result in a proposed conversion factor for CY 2006 of $59.350.

D. Proposed Wage Index Changes for CY 2006

(If you choose to comment on issues in this section, please include the caption “Wage Index” at the beginning of your comment.)

Section 1833(t)(2)(D) of the Act requires the Secretary to determine a wage adjustment factor to adjust, for geographic wage differences, the portion of the OPPS payment rate and the copayment standardized amount attributable to labor and labor-related cost. This adjustment must be made in a budget neutral manner. As we have done in prior years, we are proposing to adopt the IPPS wage indices and extend these wage indices to TEFRA hospitals that participate in the OPPS but not the IPPS.

As discussed in section II.A. of this preamble, we standardize 60 percent of estimated costs (labor-related costs) for geographic area wage variation using the IPPS wage indices that are calculated prior to adjustments for reclassification to remove the effects of differences in area wage levels in determining the OPPS payment rate and the copayment standardized amount.

As published in the original OPPS April 7, 2000 final rule (65 FR 18545), OPPS has consistently adopted the final IPPS wage indices as the wage indices for adjusting the OPPS standard payment amounts for labor market differences. As initially explained in the September 8, 1998 OPPS proposed rule, we believed and continue to believe that using the IPPS wage index as the source of an adjustment factor for OPPS is reasonable and logical, given the inseparable, subordinate status of the hospital outpatient within the hospital overall. In accordance with section 1886(d)(3)(E) of the Act, the IPPS wage index is updated annually. In this proposed rule, we are proposing to use the proposed FY 2006 hospital IPPS wage index published in the

Federal Register

on May 4, 2005 (70 FR 23550 through 23581), and as corrected and posted on the CMS Web site, to determine the wage adjustments for the OPPS payment rate and the copayment standardized amount for CY 2006. In accordance with our established policy, we are proposing to use the FY 2006 final version of these wage indices to determine the wage adjustments and copayment standardized amount that we will publish in our final rule for CY 2006.

We note that the FY 2006 IPPS wage indices continue to reflect a number of changes implemented in FY 2005 as a result of the new OMB standards for defining geographic statistical areas, the implementation of an occupational mix adjustment as part of the wage index, and new wage adjustments provided for under Pub. L. 108-173. The following is a brief summary of the proposed changes in the FY 2005 IPPS wage indices, continued for FY 2006, and any adjustments that we are proposing applying to the OPPS for CY 2006. We refer the reader to the FY 2006 IPPS proposed rule (70 FR 23367 through 23384, May 4, 2005) for a detailed discussion of the changes to the wage indices.)

1. The proposed continued use of the new Core Based Statistical Areas (CBSAs) issued by the Office of Management and Budget (OMB) as revised standards for designating geographical statistical areas based on the 2000 Census data, to define labor market areas for hospitals for purposes of the IPPS wage index. The OMB revised standards were published in the

Federal Register

on December 27, 2000 (65 FR 82235), and OMB announced the new CBSAs on June 6, 2003, through an OMB bulletin. In the FY 2005 hospital IPPS final rule, CMS adopted the new OMB definitions for wage index purposes. In the FY 2006 IPPS proposed rule, we again stated that hospitals located in MSAs would be urban and hospitals that are located in Micropolitan Areas or Outside CBSAs would be rural. To help alleviate the decreased payments for previously urban hospitals that became rural under the new MSA definitions, we allowed these hospitals to maintain their assignment to the MSA where they previously had been located for the 3-year period from FY 2005 through FY 2007. To be consistent with IPPS, we will continue the policy we began in CY 2005 of applying the same criterion to TEFRA hospitals paid under the OPPS but not under the IPPS and to maintain that MSA designation for determining a wage index for the specified period. Beginning in FY 2008, these hospitals will receive their statewide rural wage index, although those hospitals paid under the IPPS will be eligible to apply for reclassification. In addition to this “hold harmless” provision, the FY 2005 IPPS final rule implemented a one-year transition for hospitals that experienced a decrease in their FY 2005 wage index compared to their FY 2004 wage index due solely to the changes in labor market definitions. These hospitals received 50 percent of their wage indices based on the new MSA configurations and 50 percent based on the FY 2004 labor market areas. In the FY 2006 IPPS proposed rule, we discussed the cessation of the one-year transition and proposed that hospitals receive 100 percent of their wage index based upon the new CBSA configurations beginning in FY 2006. Again, for the sake of consistency with IPPS, we also are proposing that TEFRA hospitals would receive 100 percent of their wage index based upon the new CBSA configurations beginning in FY 2006.

2. We again proposed to apply the proposed occupational mix adjustment for FY 2006 IPPS to 10-percent of the average hourly wage and leave 90 percent of the average hourly wage unadjusted for occupational mix. As noted in the FY 2006 IPPS proposed rule, we are, essentially, using the same CMS Wage Index Occupational Mix Survey and Bureau of Labor Statistics data to calculate the adjustment. Because there are no significant differences between the FY 2005 and the FY 2006 occupational mix survey data and results, we believe it is appropriate to adopt the IPPS rule and apply the same occupational mix adjustment to 10 percent of the proposed FY 2006 wage index.

3. The reclassifications of hospitals to geographic areas for purposes of the wage index. For purposes of the OPPS wage index, we are proposing to adopt all of the IPPS reclassifications proposed for FY 2006, including reclassifications that the Medicare Geographic Classification Review Board (MGCRB) approved under the one-time appeal process for hospitals under section 508 of Pub. L. 108-173. We note that section 508 reclassifications will terminate March 31, 2007.

4. The proposed continuation of an adjustment to the wage index to reflect the “out-migration” of hospital employees who reside in one county but commute to work in a different county with a higher wage index, in accordance with section 505 of Pub. L. 108-173 (FY 2006 IPPS proposed rule (70 FR 23381 and 23382, May 4, 2005)). Hospitals paid under the IPPS located in the qualifying section 505 “out-migration” counties receive a wage index increase unless they have already been reclassified under section 1886(d)(10) of the Act, redesignated under section 1886(d)(8)(B) of the Act, or reclassified under section 508. As discussed in the FY 2006 IPPS proposed rule, we proposed that reclassified hospitals not receive the out-migration adjustment unless they waive their reclassified

status. For OPPS purposes, we are continuing our policy from CY 2005 to apply the same 505 criterion to TEFRA hospitals paid under the OPPS but not paid under the IPPS. Because TEFRA hospitals cannot reclassify under sections 1886(d)(8) and 1886(d)(10) of the Act or section 508, they are eligible for the out-migration adjustment. Therefore, TEFRA hospitals located in a qualifying section 505 county will also receive an increase to their wage index under OPPS. Addendum L shows the hospitals, including TEFRA hospitals, that we currently believe will receive the out-migration adjustment. However, because we are proposing to adopt the final FY 2006 IPPS wage index, we will adopt any changes in a hospital's classification status that would make them either eligible or ineligible for the out-migration adjustment.

The following proposed FY 2006 IPPS wage indices that were published in the May 4, 2005

Federal Register

(70 FR 23550 through 2323581) are reprinted as Addenda in this OPPS proposed rule: Addendum H—Wage Index for Urban Areas; Addendum I—Wage Index for Rural Areas; Addendum J—Wage Index for Hospitals That Are Reclassified; Addendum K—Puerto Rico Wage Index by CBSA; Addendum L—Out-Migration Wage Adjustment; Addendum M—Hospital Reclassifications and Redesignations by Individual Hospital and CBSA; Addendum N—Hospital Reclassifications and Redesignations by Individual Hospital under Section 508 of Pub. L. 108-173; and Addendum O—Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act. We are proposing to use these FY 2006 IPPS indices, as they are finalized, to adjust the payment rates and coinsurance amounts that we will publish in the OPPS final rule for CY 2006.

With the exception of reclassifications resulting from the implementation of the one-time appeal process under section 508 of Pub. L. 108-173, all changes to the wage index resulting from geographic labor market area reclassifications or other adjustments must be incorporated in a budget neutral manner. Accordingly, in calculating the OPPS budget neutrality estimates for CY 2006, we have included the wage index changes that result from MGCRB reclassifications, implementation of section 505 of Pub. L. 108-173, and other refinements made in the FY 2006 IPPS proposed rule, such as the hold harmless provision for hospitals changing status from urban to rural under the new CBSA geographic statistical area definitions. However, section 508 set aside $900 million to implement the section 508 reclassifications. We considered the increased Medicare payments that the section 508 reclassifications would create in both the IPPS and OPPS when we determined the impact of the one-time appeal process. Because the increased OPPS payments already counted against the $900 million limit, we did not consider these reclassifications when we calculated the OPPS budget neutrality adjustment.

E. Proposed Statewide Average Default Cost-to-Charge Ratios

(If you choose to comment on issues in this section, please include the caption “Cost-to-Charge Ratios” at the beginning of your comment.)

CMS uses CCRs to determine outlier payments, payments for pass-through devices, and monthly interim transitional corridor payments under the OPPS. Some hospitals do not have a valid CCR. These hospitals include, but are not limited to, hospitals that are new and have not yet submitted a cost report, hospitals that have a CCR that falls outside predetermined floor and ceiling thresholds for a valid CCR, or hospitals that have recently given up their all-inclusive rate status. Last year we updated the default urban and rural CCRs for CY 2005 in our final rule published on November 15, 2004 (69 FR 65821 through 65825). We are proposing to update the default ratios using the most recent cost report data for CY 2006.

We calculated the proposed statewide default CCRs using the same CCRs that we use to adjust charges to costs on claims data. Table 3 lists the proposed CY 2006 default urban and rural CCRs by State. These CCRs are the ratio of total costs to total charges from each provider's most recently submitted cost report, for those cost centers relevant to outpatient services. We also adjusted these ratios to reflect final settled status by applying the differential between settled to submitted costs and charges from the most recent pair of settled to submitted cost reports.

The majority of submitted cost reports, 80.79 percent, were for CY 2003. We only used valid CCRs to calculate these default ratios. That is, we removed the CCRs for all-inclusive hospitals, CAHs, and hospitals in Guam and the U.S. Virgin Islands because these entities are not paid under the OPPS, or in the case of all-inclusive hospitals, because their CCRs are suspect. We further identified and removed any obvious error CCRs and trimmed any outliers. We limited the hospitals used in the calculation of the default CCRs to those hospitals that billed for services under the OPPS during CY 2003.

Finally, we calculated an overall average CCR, weighted by a measure of volume, for each State except Maryland. This measure of volume is the total lines on claims and is the same one that we use in our impact tables. For Maryland, we used an overall weighted average CCR for all hospitals in the nation as a substitute for Maryland CCRs, which appear in Table 3. Very few providers in Maryland are eligible to receive payment under the OPPS, which limits the data available to calculate an accurate and representative CCR. The overall decrease in default statewide CCRs can be attributed to the general decline in the ratio between costs and charges widely observed in the cost report data.

Table 3.—Statewide Average Cost-to-Charge Ratios

State

Urban/rural

default CCR

Default CCR

ALABAMA

RURAL

0.31552

0.26710

ALABAMA

URBAN

0.29860

0.24570

ALASKA

RURAL

0.59388

0.61850

ALASKA

URBAN

0.38555

0.42710

ARIZONA

RURAL

0.39748

0.32760

ARIZONA

URBAN

0.30922

0.26980

ARKANSAS

RURAL

0.35936

0.31750

ARKANSAS

URBAN

0.38278

0.30470

CALIFORNIA

RURAL

0.40335

0.29310

CALIFORNIA

URBAN

0.32427

0.24210

COLORADO

RURAL

0.51041

0.43060

COLORADO

URBAN

0.41863

0.32170

CONNECTICUT

RURAL

0.42702

0.47250

CONNECTICUT

URBAN

0.46592

0.44620

DELAWARE

RURAL

0.36289

0.36300

DELAWARE

URBAN

0.45061

0.45940

DISTRICT OF COLUMBIA

URBAN

0.38690

0.37510

FLORIDA

RURAL

0.31782

0.24300

FLORIDA

URBAN

0.28363

0.22400

GEORGIA

RURAL

0.39829

0.33820

GEORGIA

URBAN

0.40262

0.32100

HAWAII

RURAL

0.44420

0.41020

HAWAII

URBAN

0.34815

0.34470

IDAHO

RURAL

0.49682

0.46450

IDAHO

URBAN

0.51942

0.49170

ILLINOIS

RURAL

0.41825

0.34060

ILLINOIS

URBAN

0.36825

0.29960

INDIANA

RURAL

0.44596

0.36860

INDIANA

URBAN

0.44205

0.37230

IOWA

RURAL

0.50166

0.41990

IOWA

URBAN

0.46963

0.38780

KANSAS

RURAL

0.48065

0.38970

KANSAS

URBAN

0.34698

0.29270

KENTUCKY

RURAL

0.36987

0.31080

KENTUCKY

URBAN

0.37381

0.32470

LOUISIANA

RURAL

0.34317

0.29910

LOUISIANA

URBAN

0.34357

0.27730

MAINE

RURAL

0.47857

0.38800

MAINE

URBAN

0.54084

0.44890

MARYLAND

RURAL

0.70380

0.36521

MARYLAND

URBAN

0.68104

0.32997

MASSACHUSETTS

URBAN

0.44439

0.38810

MICHIGAN

RURAL

0.44890

0.39410

MICHIGAN

URBAN

0.41143

0.37420

MINNESOTA

RURAL

0.48514

0.47130

MINNESOTA

URBAN

0.45259

0.37410

MISSISSIPPI

RURAL

0.34264

0.30290

MISSISSIPPI

URBAN

0.37097

0.29320

MISSOURI

RURAL

0.42187

0.34160

MISSOURI

URBAN

0.38128

0.31080

MONTANA

RURAL

0.51173

0.47890

MONTANA

URBAN

0.49396

0.44810

NEBRASKA

RURAL

0.49386

0.42370

NEBRASKA

URBAN

0.42043

0.33870

NEVADA

RURAL

0.42878

0.50620

NEVADA

URBAN

0.22854

0.22330

NEW HAMPSHIRE

RURAL

0.50083

0.43580

NEW HAMPSHIRE

URBAN

0.39954

0.33220

NEW JERSEY

URBAN

0.49024

0.34030

NEW MEXICO

RURAL

0.44932

0.33890

NEW MEXICO

URBAN

0.50857

0.43310

NEW YORK

RURAL

0.52062

0.43940

NEW YORK

URBAN

0.54625

0.42550

NORTH CAROLINA

RURAL

0.37776

0.35410

NORTH CAROLINA

URBAN

0.42726

0.38110

NORTH DAKOTA

RURAL

0.52829

0.41170

NORTH DAKOTA

URBAN

0.47341

0.36740

OHIO

RURAL

0.42562

0.41160

OHIO

URBAN

0.42718

0.32810

OKLAHOMA

RURAL

0.40628

0.32900

OKLAHOMA

URBAN

0.36264

0.29190

OREGON

RURAL

0.47915

0.42460

OREGON

URBAN

0.49958

0.43760

PENNSYLVANIA

RURAL

0.40582

0.36010

PENNSYLVANIA

URBAN

0.33807

0.28010

PUERTO RICO

URBAN

0.42208

0.41370

RHODE ISLAND

URBAN

0.43930

0.35100

SOUTH CAROLINA

RURAL

0.35996

0.29370

SOUTH CAROLINA

URBAN

0.36961

0.29160

SOUTH DAKOTA

RURAL

0.49599

0.39210

SOUTH DAKOTA

URBAN

0.44259

0.33940

TENNESSEE

RURAL

0.36663

0.30290

TENNESSEE

URBAN

0.36464

0.28310

TEXAS

RURAL

0.41763

0.33640

TEXAS

URBAN

0.33611

0.30300

UTAH

RURAL

0.49748

0.47090

UTAH

URBAN

0.46733

0.45230

VERMONT

RURAL

0.47278

0.46750

VERMONT

URBAN

0.54533

0.44250

VIRGINIA

RURAL

0.39408

0.33500

VIRGINIA

URBAN

0.38604

0.32550

WASHINGTON

RURAL

0.54246

0.43420

WASHINGTON

URBAN

0.54658

0.41360

WEST VIRGINIA

RURAL

0.42671

0.35070

WEST VIRGINIA

URBAN

0.45616

0.40700

WISCONSIN

RURAL

0.50126

0.42300

WISCONSIN

URBAN

0.46268

0.38480

WYOMING

RURAL

0.54596

0.51580

WYOMING

URBAN

0.41265

0.41080

F. Expiring Hold Harmless Provision for Transitional Corridor Payments for Certain Rural Hospitals

When the OPPS was implemented, every provider was eligible to receive an additional payment adjustment (transitional corridor payment) if the payments it received for covered OPD services under the OPPS were less than the payments it would have received for the same services under the prior reasonable cost-based system (section 1833(t)(7) of the Act). Section 1833(t)(7) of the Act provides that the transitional corridor payments are temporary payments for most providers, with two exceptions, to ease their transition from the prior reasonable cost-based payment system to the OPPS system. Cancer hospitals and children's hospitals receive the transitional corridor payments on a permanent basis. Section 1833(t)(7)(D)(i) of the Act originally provided for transitional corridor payments to rural hospitals with 100 or fewer beds for covered OPD services furnished before January 1, 2004. However, section 411 of Pub. L. 108-173 amended section 1833(t)(7)(D)(i) of the Act to extend these payments through December 31, 2005, for rural hospitals with 100 or fewer beds. Section 411 also extended the transitional corridor payments to sole community hospitals located in rural areas for services furnished during the period that begins with the provider's first cost reporting period beginning on or after January 1, 2004, and ends on December 31, 2005. Accordingly, the authority for making transitional corridor payments under section 1833(t)(7)(D)(i) of the Act, as amended by section 411 of Pub . L. 108-173, will expire for rural hospitals having 100 or fewer beds and sole community hospitals located in rural areas on December 31, 2005. For CY 2006, transitional corridor payments will continue to be available to cancer and children's hospitals. (We note that the succeeding section II.G. of this preamble discusses an additional provision of section 411 of Pub. L. 108-173 that related to a study to determine appropriate adjustment to payments for rural hospitals under the OPPS beginning January 2006.)

G. Proposed Adjustment for Rural Hospitals

(If you choose to comment on issues in this section, please include the caption “Rural Hospital Adjustment” at the beginning of your comment.)

Section 411 of Pub. L. 108-173 added a new paragraph (13) to section 1833(t) of the Act. New section 1833(t)(13)(A) specifically instructs the Secretary to conduct a study to determine if rural hospital outpatient costs exceed urban hospital outpatient costs. Moreover, under new section 1833(t)(13)(B) of the Act, the Secretary is given authorization to provide an appropriate adjustment to rural hospitals by January 1, 2006, if rural hospital costs are determined to be greater than urban hospital costs.

To conduct the study required under section 1833(t)(13)(A), as added by section 411 of Pub. L. 108-173, we believe that a simple comparison of unit costs is insufficient because the costs faced by hospitals, whether urban or rural, will be a function of many factors. These include the local labor supply, and the complexity and volume of services provided. Therefore, we used regression analysis to study differences in the outpatient cost per unit between rural and urban hospitals in order to compare costs after accounting for the influence of these other factors.

Our regression analysis included all 4,077 hospitals billing under OPPS for which we could model accurate cost per unit estimates. For each hospital, total outpatient costs and descriptive information were derived from CY 2004 Medicare claims and the hospital's most recently submitted cost report. The description of claims used, our methodology for creating costs from charges, and a description of the specific hospitals included in our modeling are discussed in section II.A. of this preamble. We excluded separately payable drugs and biologicals, and clinical laboratory services paid on a fee schedule from our analysis. We excluded the 49 hospitals in Puerto Rico because their wage indices and unit costs are so different that they would have skewed results. Finally, we excluded facilities whose unit outpatient costs were outside of 3 standard deviations from the geometric mean unit outpatient cost.

Total unit outpatient cost for each hospital was calculated by dividing total outpatient cost by the total number of APC units discounted for the joint performance of multiple procedures. (See section II.G.2. below for a definition of discounted units.) We modeled both explanatory and payment regression models. In an “explanatory model” approach, all variables that are hypothesized to be important determinants of cost are included in the cost regression, whether or not they are going to be used as payment adjustments. In a “payment model” approach, the only independent variables included in the cost regression are those variables that are used as payment adjustments. The regression

equations for both models were specified in double logarithmetic form. The dependent variable in the explanatory regression equation was unit outpatient cost. The dependent variable in the payment regressions was standardized unit outpatient costs, that is, unit outpatient costs adjusted to reflect payment by dividing through by the provider's service-mix index which was adjusted by the provider's wage index. The service-mix index is a measure of the resource intensity of services provided by each hospital. Both regression equation models included quantitative independent variables transformed into natural logarithms and categorical independent variables. Categorical independent (dummy) variables included hospital characteristics such as rural location or type of hospital (short stay or specialty hospital).

1. Factors Contributing to Unit Cost Differences Between Rural Hospitals and Urban Hospitals

In considering potential independent variables that might explain differences in unit outpatient costs between urban and rural hospitals, we determined that several factors would be important:

• First, unit outpatient costs are expected to vary directly with the prices of inputs used to produce outpatient services, especially labor. Wage rates tend to be lower in rural areas than in urban areas.

• Second, there may be economies of scale in producing outpatient services, which imply that unit costs will vary inversely with the volume of outpatient services provided.

• Third, independent of the volume of outpatient services, hospitals that provide more complex outpatient services are expected to have higher unit costs than hospitals with less complex service-mixes. Typically, greater complexity involves a combination of higher equipment and labor costs. Rural hospitals usually have less volume and perform less complex services than urban hospitals.

• Fourth, the size of a hospital may influence the volume and service-mix of outpatient services. Large hospitals generally provide a wider range of more complex services than do small hospitals. Large hospitals may also have larger volumes in ancillary departments that are shared between outpatient and inpatient services, and as a result, benefit from greater economies of scale than do small hospitals. Rural hospitals tend to be smaller than urban hospitals. Our primary measure of outpatient volume is units of APCs, which only reflects the volume of Medicare services paid under the outpatient PPS. This measure does not include the inpatient utilization of shared ancillary departments or non-Medicare outpatient services. For all these reasons, it seems appropriate to include a broader measure of facility size in the explanatory regression model. Therefore, as explained below, we used the total number of facility beds to measure facility size. Unit outpatient costs may be positively or negatively related to facility size depending on whether complexity effects or scale economies are more important.

2. Explanatory Variables

We used the hospital wage index as our measure of labor input prices. To reflect the complexity of outpatient services, we used a service-mix index defined as the ratio of the number of discounted units weighted by APC relative weights divided by the number of unweighted discounted units. Discounted units are the total number of units after we adjust for the multiple procedure reduction of 50 percent that applies to payment for surgical services when two surgical procedures are performed during the same operative session and for selected radiology procedures, as proposed (see section XIV. of the preamble). For example, if a procedure is paid at 100 percent of payment 1,000 times and the same procedure is paid at 50 percent of payment 100 times, the discounted units for that procedure equal 1,050 units (the sum of 1,000 units at full payment plus 100 units at 50 percent payment). We then calculate the total weight for that procedure by multiplying the discounted units by the full weight for the procedure. The service-mix index reflects the average APC weight of each facility's outpatient services. Outpatient service volume was measured as the total number of unweighted discounted units. We used the total number of facility beds as the broader measure of facility size. We also included categorical variables to indicate the types of specialty hospitals that participate in OPPS, specifically cancer, children's, long-term care, rehabilitation, and psychiatric hospitals. Finally, we included a categorical variable for rural/urban location to capture variation unexplained by the other independent variables in the model. For all of the rural dummy variables discussed below, urban hospitals are the reference group. Table 4 provides descriptive statistics for the dependent variable and key independent variables by urban and rural status. Without controlling for the other influences on per unit cost, rural hospitals have lower cost per unit than urban hospitals. However, when standardized for the service-mix wage indices, average unit costs are nearly identical between urban and rural hospitals

Table 4.—Means and Standard Deviations (In Parenthesis) for Key Variables by Urban-Rural Location

Rural

Urban

Unit Outpatient Cost

$163.78

$195.54

($65.69)

($93.59)

Standardized Unit Outpatient Cost

$75.04

$75.15

($26.97)

($45.00)

Wage Index

0.8798

1.0214

(0.0771)

(0.1487)

Service-Mix Index

2.4121

2.7741

(0.8915)

(1.4579)

Outpatient Volume

18,645

35,744

(19,578)

(42,626)

Beds

76.70

198

(55.82)

(169)

Number of Hospitals

1,257

2,820

3. Results

Overall, all rural hospitals give some indication of having higher cost per unit, after controlling for labor input prices, service-mix complexity, volume, facility size, and type of hospital. In an explanatory model regressing unit costs on all independent variables discussed above, the coefficient for the rural categorical variable was 0.024 (p=0.058), which suggests that rural hospitals are approximately 2.4 percent more costly than urban hospitals after accounting for the impact of other explanatory variables. The results of this regression appear in Table 5. This regression demonstrated reasonably good explanatory power with an adjusted R2 of 0.53 (rounded). Adjusted R2 is the percentage of variation in the dependent variable explained by the independent variables and is a standard measure of how well the regression model fits the data. The regression coefficients of the key explanatory variables all move in the expected direction: positive for the wage index, indicating that rural hospitals can be expected to have lower unit outpatient costs because they tend to be located in areas with lower wage rates; positive for the outpatient service-mix index, consistent with the hypothesis that rural hospitals' less complex outpatient service-mixes result in lower unit costs than those of the typical urban hospital; negative for outpatient service volume, implying that, on average, rural hospitals' lower service volumes are a source of higher unit cost compared to urban hospitals; and positive for the facility size variable (beds), suggesting that facility size is more reflective of complexity than any economies of scale. The rural dummy variable has a coefficient of 0.02414. If the unit costs of rural hospitals are the same as the unit costs of urban hospitals, the probability of observing a value as extreme as or more extreme than 2.4 percent would be approximately 6 percent or less. This explanatory regression model provides some evidence that outpatient services provided by rural hospitals are more costly than outpatient services provided by urban hospitals, but the evidence is weak. The payment regression that accompanies this explanatory model indicates an adjustment for all rural hospitals of 3.7 percent.

Table 5.—Regression Results for Unit Outpatient Cost: Rural Versus Urban

Variable

Explanatory

Regression coefficient

t Value

p Value

Payment

Regression coefficient

t Value

p Value

Intercept

4.89665

124.65

<.0001

4.24092

0.00624

<0.0001

Wage Index

0.64435

17.96

<.0001

Service-Mix Index

0.75813

58.51

<.0001

Outpatient Volume

−0.06532

−14.40

<.0001

Beds

0.04475

6.17

<.0001

Rural

0.02414

1.89

0.0582

0.03656

3.25

0.0012

Children's Hospital

0.06497

1.33

0.1824

Psychiatric Hospital

−0.44446

−15.13

<.0001

Long-Term Care Hospital

−0.08759

−2.77

.0.0057

Rehabilitation Hospital

−0.25295

−7.85

<.0001

Cancer Hospital

0.30897

3.45

0.0006

0.5285

Note:

Coefficients of all quantitative variables are elasticities since both the dependent variable, unit outpatient cost, and all quantitative independent variables were in natural logarithms. To calculate percentage differences for categorical variables, their coefficients must be raised to the power, e, the base of natural logarithms.

A t value is an indicator of our degree of confidence that the regression coefficient is different from zero, taking into account the statistical variability of the estimated coefficient.

A p value is the probability of observing the specific t value when the estimated coefficient is zero. The t values greater than 2 and less than −2 indicate a probability less than 5 percent, p-value<0.05, that the estimated coefficient is zero.

In order to assess whether the small difference in costs was uniform across rural hospitals or whether all of the variation was attributable to a specific class of rural hospitals, we included more specific categories of rural hospitals in our explanatory regression analysis. We divided rural hospitals into rural SCHs, rural hospitals with less than 100 beds that are not rural sole community hospitals, and other rural hospitals. The first two categories of rural hospitals are currently eligible for payments under the expiring hold-harmless provision. Because it appears that rural SCHs are responsible for the variation in rural hospital costs, we then collapsed the last remaining categories in an “all other” rural hospital category.

We found that rural SCHs demonstrated significantly higher cost per unit than urban hospitals after controlling for labor input prices, service-mix complexity, volume, facility size, and type of hospital. The results of this regression appear in Table 6. With the exception of the new rural variables, the independent variables have the same sign and significance as in Table 5. Rural SCHs have a positive and significant coefficient; all other rural hospitals do not. The rural SCH “dummy” variable has an explanatory regression coefficient of 0.05668 and an observed probability that the coefficient is zero of less than 0.001. If the unit costs of rural SCHs are the same as those of urban hospitals, the probability of observing a value as extreme or more extreme than 5.8 percent would be less than 0.1 percent. Accordingly, we have determined that rural SCHs are more costly than urban hospitals, holding all other variables constant. Notably, we observed no significant difference between all other rural hospitals and urban hospitals.

Table 6.—Regression Results for Unit Outpatient Cost: Rural Sole Community Hospitals

Variable

Explanatory

Regression coefficient

t Value

pValue

Payment

Regression coefficient

t Value

pValue

Intercept

4.89444

124.70

<.0001

4.24474

768.57

<.0001

Wage Index

0.64022

17.85

<.0001

Service-Mix Index

0.75798

58.56

<.0001

Outpatient Volume

−0.06538

−14.43

<.0001

Beds

0.04533

6.26

<.0001

Rural SCH

0.05668

3.42

0.0006

0.06354

3.94

<.0001

All Other Rural

0.00415

0.29

0.7715

Children's Hospital

0.06475

1.33

0.1835

Psychiatric Hospital

−0.44345

−15.11

<.0001

Long-Term Care Hospital

−0.08644

−2.73

0.0063

Rehabilitation Hospital

−0.25234

−7.83

<.0001

Cancer Hospital

0.30957

3.46

0.0005

0.5295

Note:

Coefficients of all quantitative variables are elasticities since both the dependent variables, unit outpatient cost, and all quantitative independent variables were in natural logarithms. To calculate percentage differences for categorical variables, their coefficients must be raised to the power, e, the base of natural logarithms.

A t value is an indicator of our degree of confidence that the regression coefficient is different from zero, taking into account the statistical variability of the estimated coefficient.

A p value is the probability of observing the specific t value when the estimated coefficient is zero. The t values greater than 2 and less than −2 indicate a probabi

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